-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FRSt561Z8CiUjCFwDwDKm+RaIxgguGsDOf7gTmX1StJQLenR30lBtp1jiBPN6jHD rIbebS5l11P+sdNYyen65A== 0000950144-01-003656.txt : 20010320 0000950144-01-003656.hdr.sgml : 20010320 ACCESSION NUMBER: 0000950144-01-003656 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COX COMMUNICATIONS INC /DE/ CENTRAL INDEX KEY: 0000025305 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 582112288 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-06590 FILM NUMBER: 1571624 BUSINESS ADDRESS: STREET 1: 1400 LAKE HEARN DR NE CITY: ATLANTA STATE: GA ZIP: 30319 BUSINESS PHONE: 4048435000 MAIL ADDRESS: STREET 1: 1400 LAKE HEARN DRIVE CITY: ATLANTA STATE: GA ZIP: 30319 FORMER COMPANY: FORMER CONFORMED NAME: COX COMMUNICATIONS INC/DE DATE OF NAME CHANGE: 19941123 FORMER COMPANY: FORMER CONFORMED NAME: COX CABLE COMMUNICATIONS INC DATE OF NAME CHANGE: 19940614 10-K405 1 g67591e10-k405.txt COX COMMUNICATIONS 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER 1-6590 (COX(R) COMMUNICATIONS LOGO) (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 The principal exchange for the following securities is the New York Stock Exchange: Class A Common Stock, $1.00 par value Income PRIDES Growth PRIDES Exchangeable Subordinated Debentures due 2029 Exchangeable Subordinated Debentures due 2030 Exchangeable Subordinated Discount Debentures due 2020 SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] As of February 28, 2001, the aggregate market value of the Class A Common Stock held by non-affiliates of the registrant was $7.557 billion based on the closing price on the New York Stock Exchange on such date. There were 572,528,517 shares of Class A Common Stock and 27,597,792 shares of Class C Common Stock outstanding as of February 28, 2001. DOCUMENTS INCORPORATED BY REFERENCE Portions of the 2000 Summary Annual Report to Stockholders are incorporated by reference into Part II, and portions of the Proxy Statement for the 2001 Annual Meeting of Stockholders are incorporated by reference into Part III. 2 COX COMMUNICATIONS, INC. 2000 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Item 2. Properties.................................................. 27 Item 3. Legal Proceedings........................................... 28 Item 4. Submission of Matters to a Vote of Security Holders......... 29 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 30 Item 6. Selected Consolidated Financial Data........................ 30 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 32 Item 7A. Quantitative and Qualitative Disclosures about Market Risk...................................................... 39 Item 8. Consolidated Financial Statements and Supplementary Data.... 41 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................. 76 PART III Item 10. Directors and Executive Officers of the Registrant.......... 76 Item 11. Executive Compensation...................................... 76 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................ 76 Item 13. Certain Relationships and Related Transactions.............. 76 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................... 76 SIGNATURES............................................................. 80
i 3 PART I ITEM 1. BUSINESS Cox Communications, Inc. is one of the nation's largest multi-service advanced communications companies with U.S. broadband network operations and investments focused on cable programming, telecommunications and technology. Cox operates in one operating segment, broadband communications. Cox's business strategy is to utilize the technological capabilities of its advanced broadband network, its strong locally and regionally clustered cable systems and its longstanding commitment to superior customer service to provide an array of entertainment and communications services to both residential and commercial customers in its markets. Today, these services primarily include analog and digital video, high-speed Internet access and local and long-distance telephone. Additional services could include video on demand, Internet to the television, targeted advertising and other types of interactive and e-commerce applications. In addition, Cox has sought to utilize its expertise and position as one of the nation's premier broadband communications companies to invest in programming, telecommunications and technology companies which are complementary to Cox's business strategy. Cox believes that these investments have contributed to the growth of its business and that its leadership position in the industry has facilitated the growth of these investments. Cox seeks to utilize insights gained from the integrated operations of its cable systems and related programming, telecommunications and technology investments to continue its leadership in the broadband communications industry by anticipating and capitalizing upon long-term industry trends. Cox is an indirect 67.8% majority-owned subsidiary of Cox Enterprises, Inc. CEI, a privately-held corporation headquartered in Atlanta, Georgia, is one of the largest diversified media companies in the U.S. with consolidated revenues in 2000 approaching $8 billion. CEI, which has a 103-year history in the media and communications industry, also publishes 18 daily newspapers and owns or operates 15 television stations. Through its indirect majority-owned subsidiary, Cox Radio, Inc., CEI will own, operate or provide sales and marketing services for 83 radio stations clustered in 18 markets pending consummation of all announced transactions. CEI is also an operator of wholesale auto auctions through Manheim Auctions, Inc., an indirect wholly-owned subsidiary. BROADBAND NETWORKS BUSINESS STRATEGY Cox believes that aggressive investment in the technological capabilities of its broadband network, the long-term competitive advantages of clustering and its commitment to customer service will enhance its ability to continue to grow its cable operations and offer new services to existing and new customers. TECHNOLOGY AND CAPITAL IMPROVEMENTS. Cox emphasizes high technical standards for its cable systems by continuing to deploy fiber optic cable and upgrading the technical quality of its hybrid fiber-coaxial broadband network. The result has been a significant increase in network capacity, quality and reliability, facilitating the delivery of additional programming and services such as digital video, high-speed Internet access and local and long-distance telephone services. Cox strives to maintain the highest technological standards in the industry. Cox's cable systems have bandwidth capacities ranging from 400 to 750 megahertz (MHz) or greater. At the end of 2000, Cox had upgraded 70% of its networks to a bandwidth capacity of 750 MHz or greater and anticipates that approximately 83% of its networks will have bandwidth capacity of 750 MHz or greater by the end of 2001. 1 4 CLUSTERING. As an integral part of its broadband communications strategy, Cox has continually sought the advantages and efficiencies of operating large local and regional cable system clusters. As of December 31, 2000, approximately 75% of Cox's customers were served by Cox's 15 largest clusters which averaged more than 300,000 customers each. These clusters, represented by location, are: Baton Rouge New England Orange County Fort Walton Beach/Pensacola New Orleans Phoenix Hampton Roads Northern Virginia San Diego Kansas Oklahoma City Tulsa Las Vegas Omaha West Texas
Locally and regionally clustered cable systems enable Cox to reduce expenses through the consolidation of marketing and support functions and to place more experienced management teams at the system level who are better equipped to meet the new competitive and regulatory challenges of today's telecommunications industry. Local and regional clusters will also increase the speed and effectiveness of Cox's new product and services deployment, enhancing its ability to increase both customers and revenues. CUSTOMER AND COMMUNITY SERVICE. Strong customer service is a key element of Cox's business strategy to deliver advanced communications services to its customers. Cox has always been committed to customer service and has been recognized by several industry groups as a leader in providing excellent customer service. Cox believes that its high level of customer satisfaction will help it compete more effectively as it delivers its wide range of communications services, including digital video, high-speed Internet access and local and long-distance telephone, as well as future services. 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 and Telecommunications Association (NCTA) and the Federal Communications Commission (FCC). A key element of Cox's community service is enhancing education through the use of cable technology and programming. Cox participates in many education initiatives in its communities nationwide, but primarily focuses on the following three major programs: 1. "Cox Cable in the Classroom," which provides more than 5,600 schools and 3.5 million students with complimentary basic cable service and more than 540 hours of commercial-free educational cable programming on a monthly basis; 2. "Cox Line to Learning," which provides complimentary high-speed Internet access, exclusive curricula and distance-learning experiences to students in accredited public and private schools in communities where high-speed digital services are available. The program is part of Cox's participation in "Cable's High-Speed Connection," an NCTA initiative in which major broadband communications companies are providing high-speed Internet access to schools free of charge; and 3. "Cox Model Technology Schools," established by Cox in Chula Vista, California; Omaha; Norfolk; Phoenix; New Orleans; and Las Vegas. These schools test future broadband services, such as interactive fiber optic links to local colleges, to determine their value in the classroom. CABLE TELEVISION Cox's cable operations represent the primary element of its integrated broadband communications strategy. As of December 31, 2000, Cox's cable systems passed approximately 9.7 million homes and provided service to approximately 6.2 million customers. Cox's cable systems offer customers packages of basic and expanded programming services that consist of broadcast signals available off-air, a limited number of broadcast signals from so-called "superstations," numerous satellite-delivered non-broadcast channels (such as CNN, MTV, USA Network, ESPN, Arts and Entertainment Channel, The Discovery Channel, The Learning Channel, Turner Network Television and Nickelodeon), displays of information featuring news, weather, stock and financial market reports and public, 2 5 governmental and educational access channels. Cox's cable systems also offer premium cable services for an additional monthly charge. Such services, including Home Box Office, Showtime, Starz and Cinemax, are satellite-delivered channels that consist principally of feature motion pictures presented without commercial interruption, sports events, concerts and other entertainment programming. Customers generally pay initial connection charges and fixed monthly fees for cable programming and premium cable services, which constitute the principal sources of revenues to Cox. OPERATING DATA. The following table indicates the growth of Cox's cable systems by summarizing basic customers, new services, Revenue Generating Units, the number of homes passed, basic penetration levels and premium service units for each of the five years as of December 31:
DECEMBER 31 --------------------------------------------------------- 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- Basic customers(a)................ 6,193,317 5,136,184 3,753,608 3,235,338 3,259,384 New services(b)................... 1,568,424 554,025 169,731 18,941 -- --------- --------- --------- --------- --------- Revenue Generating Units(c)....... 7,761,741 5,690,209 3,923,339 3,254,279 3,259,384 Homes passed(d)................... 9,710,963 8,031,340 5,923,428 5,023,870 5,016,749 Basic penetration(e).............. 63.8% 64.0% 63.4% 64.4% 65.0% Premium service units(f).......... 4,174,447 3,237,013 2,206,833 1,865,184 2,000,673
- --------------- (a) A home with one or more television sets connected to a cable system is counted as one basic service customer. (b) New services include Cox Digital Cable, high-speed Internet access and Cox Digital Telephone. (c) Each basic customer and each new service is a Revenue Generating Unit. In certain locations, a household may purchase more than one new service, each of which is counted as a separate Revenue Generating Unit. (d) A home is deemed to be "passed" if it can be connected to the distribution system without any further extension of the distribution plant. (e) Basic customers as a percentage of homes passed. (f) Premium service units include single or multi-channel services offered for a monthly fee per service. FRANCHISES. Cable systems are constructed and operated under non-exclusive franchises granted by local governmental authorities. These franchise agreements typically contain many conditions, such as time limitations on commencement and completion of system construction, service standards including number of channels, types of programming and the provision of free service to schools and certain other public institutions, and the maintenance of insurance and indemnity bonds. The provisions of local franchise agreements are subject to federal regulation under the Cable Communications Policy Act of 1984 (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 2001, Cox held approximately 877 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 from the provision of cable services and also permits the cable system operator to seek renegotiation and modification of franchise requirements if warranted by changed circumstances. For both 2000 and 1999, franchise fee payments made by Cox averaged approximately 4.9% of gross video 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 franchise authority or a third party acquires the system, then the franchise authority must pay the operator the "fair market value" for the system covered by the franchise, but with no value allocated to the franchise itself. Cox believes that it has satisfactory relationships with its franchising authorities. 3 6 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 DIGITAL CABLE Digital compression technology currently allows up to 12 digital channels to be inserted into the space of only one traditional analog channel. Digital compression enables Cox to increase the channel capacity of its cable systems up to approximately 250 channels. Cox believes that its cable system upgrades, along with the implementation of digital compression technology, will provide its customers with greater programming diversity, better picture quality, improved reliability and enhanced service. A Cox Digital Cable customer can currently receive up to approximately 250 channels, including enhanced pay-per-view service, digital music channels, new networks grouped by genre and an interactive program guide. Below is a summary of Cox Digital Cable operating statistics as of December 31, 2000 and 1999:
DECEMBER 31 --------------------- 2000 1999 --------- --------- Digital cable ready homes passed............................ 7,397,306 4,247,032 Customers................................................... 841,824 265,296 Penetration................................................. 11.4% 6.2%
HIGH-SPEED INTERNET ACCESS The use of computers, online services and the Internet has increased significantly over the last few years. Cox believes in the revenue opportunities of Internet-related services and is taking advantage of these opportunities by providing high-speed Internet access and work-at-home services to residential and commercial customers through its high-speed Internet access services, Cox@Home, Road Runner and Cox Express. These services deliver access to the Internet at speeds of up to 100 times faster than traditional phone modems and provide unique online content that capitalizes on the substantial capacity of Cox's broadband network. Below is a summary of Cox's high-speed Internet access operating statistics as of December 31, 2000 and 1999:
DECEMBER 31 --------------------- 2000 1999 --------- --------- High-speed Internet access ready homes passed............... 7,122,773 3,759,229 Customers................................................... 481,947 186,918 Penetration................................................. 6.8% 5.0%
4 7 COX DIGITAL TELEPHONE Cox utilizes the capacity and reliability of its advanced broadband network, which passes most homes in its markets, by providing local telephone services and reselling long distance services. Below is a summary of Cox Digital Telephone operating statistics as of December 31, 2000 and 1999:
DECEMBER 31 --------------------- 2000 1999 --------- --------- Telephone ready homes passed................................ 2,426,580 1,150,367 Customers................................................... 244,653 101,811 Penetration................................................. 10.1% 8.9% Lines....................................................... 334,589 150,812 Lines per customer.......................................... 1.37 1.48
COX BUSINESS SERVICES Cox delivers telecommunications services to businesses through its competitive local exchange carrier operation, Cox Business Services. Through both its dedicated fiber optic networks and its hybrid fiber coaxial cable networks, Cox Business Services provides business customers video, telephony and high-speed Internet access services. Below is a summary of Cox Business Services operating statistics as of December 31, 2000 and 1999:
DECEMBER 31 ------------------- 2000 1999 --------- ------- Buildings connected on-net.................................. 4,554 1,513 Voice grade equivalent circuits............................. 1,200,684 638,943
ADVERTISING REVENUE In addition to providing entertainment and community services to its residential and commercial customers, Cox derives revenues from the sale of advertising time on satellite-delivered networks such as ESPN, MTV and CNN. Currently, Cox inserts advertising on up to 44 channels in each of its cable systems. Local cable advertising is often more effective and less expensive than alternative local advertising sources. As such, Cox expects continued growth of this revenue source. In addition, Cox participates in the regional and national cable advertising market through its investment in National Cable Communications, L.L.C., a partnership which represents cable companies in connection with the sale of advertising space to advertisers. National Cable Communications is the largest representation firm in spot cable advertising sales. 5 8 INVESTMENTS CABLE PROGRAMMING INVESTMENTS Cox has made substantial investments in cable programming networks. The following table summarizes Cox's significant programming investments as of December 31, 2000:
COX INVESTMENT DESCRIPTION OWNERSHIP INTEREST - ---------- ----------- ------------------ Discovery Communications, Inc..... Advertiser-supported basic cable 24.6% networks, retail and other ancillary businesses In Demand, L.L.C. ................ Pay-per-view programming 11.1% Music Choice...................... Digital audio services 13.6% Outdoor Life Network.............. Outdoor recreation-related 33.0% programming Product Information Network....... Infomercial distribution 45.0% Speedvision Network............... Automotive, marine and aviation- 32.0% related programming
Discovery Communications, Inc. Discovery provides nature, science and technology, history, exploration and adventure programming and is distributed to customers in virtually all cable homes in the U.S. The principal businesses of Discovery are the advertiser-supported basic cable networks The Discovery Channel, The Learning Channel, Animal Planet Network, The Travel Channel and Discovery Europe and the retail businesses of Discovery.com. In addition, through internally generated funding, investments are being made by Discovery in building a documentary programming library. In Demand, L.L.C. In Demand is a cable operator-controlled buying cooperative for pay-per-view programming. Music Choice. Music Choice distributes audio programming in a digital format via coaxial cable to more than one million customers in the U.S. This service allows cable customers to receive compact disc quality sound in diverse music formats. Outdoor Life Network. Outdoor Life Network's programming consists primarily of outdoor recreation, adventure and wildlife themes. Product Information Network. Product Information Network distributes multiple direct response cable commercials, or infomercials, through cable systems and other cable programming outlets. Speedvision Network. Speedvision Network's programming consists of a broad variety of material for automobile, boat and airplane enthusiasts. 6 9 TELECOMMUNICATIONS AND TECHNOLOGY INVESTMENTS Cox has made substantial investments in telecommunications and technology. The following table summarizes Cox's significant telecommunications and technology investments as of December 31, 2000:
COX INVESTMENT DESCRIPTION OWNERSHIP INTEREST - ---------- ----------- ------------------ Cox Interactive Media Joint Ventures...................... Operates and promotes advertising 49.0% supported local Internet content Excite@Home(a).................. Nationwide network providing high- 29,114,600 shares speed Internet access and unique online content via cable modems Liberate Technologies(b)........ Interactive applications software 1,041,666 shares National Cable Communications, L.L.C......................... Cable advertising sales 16.7% Sprint PCS(c)................... Wireless telecommunications 104,696,930 shares TiVo, Inc....................... Developer of consumer electronic 240,153 shares device that stores real-time video on hard disks Worldgate Communications, Inc........................... Technology that enables television- 500,000 shares based Internet service XO Nevada, L.L.C................ Telecommunications services in Las 37.5% Vegas and other areas of Nevada, formerly Nextlink Nevada
- --------------- (a) In January 2001, Cox exercised its right to transfer its ownership in Excite@Home for approximately 64.4 million shares of AT&T common stock. Cox expects to complete this transaction during the first half of 2001. (b) Adjusted for the January 2000 Liberate Technologies two-for-one stock split. Cox also owns warrants which are exercisable for an additional 433,333 common shares. (c) Adjusted for the February 2000 Sprint PCS two-for-one stock split. Cox also owns warrants and convertible preferred stock which are exercisable for or convertible into an additional 10.3 million shares of Sprint PCS common stock -- Series 2. Cox Interactive Media Joint Ventures. Cox has invested in a series of local joint ventures with Cox Interactive Media, Inc., an indirect wholly-owned subsidiary of CEI, to develop, operate and promote advertising supported local Internet content, or City Sites, in the markets where Cox operates cable systems featuring high-speed Internet access. Cox Interactive Media owns the remaining interest in these joint ventures and is responsible for the day-to-day operations. Excite@Home. Excite@Home is both an Internet service provider and a supplier of comprehensive Internet navigation services. Excite@Home provides customers high-speed access to the Internet via a cable-modem and the cable broadband network. In August 2000, Cox consummated an agreement with Excite@Home pursuant to which the ownership, voting control and management of Excite@Home were restructured. As a result, Cox's veto rights and representation on the Excite@Home board were terminated. In addition, Cox agreed to extend its distribution of certain Excite@Home services through June 2006. Cox will receive warrants to purchase two shares of Excite@Home Series A common stock for each home its cable systems pass. Cox also has the right, under certain circumstances, to sell its shares in Excite@Home to AT&T, with a maximum amount payable to Cox of approximately $1.4 billion in cash or shares of AT&T common stock, as elected by Cox. Cox has accounted for this right as an investment, classified as available-for-sale, at its estimated fair value with unrealized gains or losses resulting from changes in the fair value 7 10 between measurement dates as a component of accumulated other comprehensive income. In connection with the consummation of this agreement, Cox recognized a pre-tax gain of approximately $990.5 million. At December 31, 2000, Cox's investment in Excite@Home was comprised of 29.1 million shares of common stock and the right to sell such shares to AT&T. The estimated fair value of Cox's investment in Excite@Home, including the value ascribed to Cox's right to sell its Excite@Home shares to AT&T, was approximately $1.4 billion and $1.25 billion at December 31, 2000 and 1999, respectively. In January 2001, Cox exercised its right under the agreement with AT&T to transfer the corporation that owns its shares of Excite@Home to AT&T for shares of AT&T common stock. Cox anticipates receiving approximately 64.4 million shares of AT&T stock upon consummation of this transaction, which is currently expected to occur during the first half of 2001. Liberate Technologies. Liberate Technologies develops and sells software that enables the delivery of Internet-enhanced content and applications to information appliances, such as television set-top boxes, game consoles and personal digital assistants. National Cable Communications, L.L.C. National Cable Communications is the largest representation firm in cable advertising sales, enabling advertisers to place advertising with selected multiple systems on a regional or national single-source basis. Sprint PCS. Sprint PCS is a personal communications services provider and an indirect wholly-owned subsidiary of Sprint Corporation. Cox holds shares of unregistered Sprint PCS common stock -- Series 2. Each share of Sprint PCS common stock -- Series 2 automatically converts into a share of Sprint PCS common stock -- Series 1, the series traded on the New York Stock Exchange, upon the transfer of the Series 2 shares to any holder other than Cox, Comcast Corporation and AT&T Corp. or their respective affiliates. In February 2000, Sprint PCS split its outstanding shares two-for-one. Accordingly, all references to the number of Sprint PCS shares give effect to this split. Cox has issued three series of exchangeable subordinated debentures which are indexed to and settleable based on the trading price of Sprint PCS common stock. See Note 7. "Debt" in Part II, Item 8. "Consolidated Financial Statements and Supplementary Data." During 2000, Cox sold a total of 28.1 million shares of its Sprint PCS common stock for aggregate proceeds of $1,422.6 million and recognized total pre-tax gains of $1,193.0 million. In January 2001, Cox entered into a series of prepaid forward contracts to sell up to 19.5 million shares of its Sprint PCS common stock -- Series 2 for aggregate proceeds of $389.4 million. These contracts mature at various dates between 2004 and 2006 and, at Cox's election, can be settled in cash or shares of Sprint PCS common stock. See Note 7. "Debt" in Part II, Item 8. "Consolidated Financial Statements and Supplementary Data." TiVo, Inc. TiVo develops a consumer electronic device that acts like a digital personal video recorder, storing real-time video on hard disks. Worldgate Communications, Inc. Worldgate Communications has developed a technology that enables the television, either through analog or digital cable, to be used for Internet service. XO Nevada, L.L.C. XO Nevada, formerly Nextlink Nevada, markets and provides telephony services in the Las Vegas metropolitan area and elsewhere in Nevada through telephone networks owned or leased by XO Nevada. COMPETITION Each of Cox's broadband services operates in a competitive environment. Cable television services, including cable Internet services, compete with other providers of video and entertainment, such as Direct Broadcast Satellite (DBS), private cable Satellite Master Antenna Television (SMATV), Multichannel Multipoint Distribution Service (MMDS), Open Video System (OVS), broadcast television and Digital Subscriber Line (DSL) systems, among others. Telephone services compete with various providers of both 8 11 landline and wireless communications services. Wireless services currently compete with cellular, personal communications services (PCS), specialized mobile radio (SMR) systems and satellite communications services, and will probably face competition in the future from other services using additional spectrum the FCC makes available from time to time in spectrum auctions. CABLE COMPETITION Cox's cable systems compete with a variety of news, information and entertainment providers, including: - DBS and Direct-to-Home program distributors that transmit video programming, data and other information by satellite to receiving dishes of varying sizes located on the customer's property; - SMATV or private cable systems, which serve condominiums, apartments, office complexes and private residential developments without crossing public rights-of-way; - MMDS or wireless cable operators, which use low-power microwave frequencies to transmit video programming and other information over-the-air to subscribers; - OVS and competitive traditional cable systems that have been franchised by local governments to provide cable television services in areas where Cox operates (Overbuilders); - local television broadcast stations providing free off-air programming; - Internet Service Providers (ISPs); - newspapers, magazines and book stores; - movie theaters; - live concerts and sporting events; and - home video products including videotape cassette recorders. DBS is the cable industry's largest competitor, and DBS subscribership continues to grow. According to recent government and industry reports, conventional medium and high-powered satellites typically provide more than 300 channels of digital video and other programming to over 14.4 million individual households, condominiums, apartments and office complexes in the U.S. DBS services are available throughout the country and offer programming comparable to that provided by cable systems, including: - news channels; - movies; - television broadcast stations; - live concerts and sporting events; and - other program services similar to those provided by cable systems, including Internet services. As the result of federal legislation enacted in November 1999, DBS providers are now authorized to provide local television broadcast signals to subscribers residing within a television station's local market. This legislation has permitted satellite carriers to offer programming packages that more closely resemble those offered by cable systems. Congress also imposed on satellite carriers "must carry" obligations with respect to local television stations, which are scheduled to become effective beginning January 1, 2002. These satellite "must-carry" obligations have been appealed, and if the appeal is successful, satellite carriers would have more flexibility to offer only the most popular television stations to their customers and thereby conserve channel capacity to offer additional services. Two major companies, DirecTV and EchoStar Communications Corporation, are currently offering nationwide high-power DBS services and are among the ten largest providers of multichannel video programming service. The growth of noncable video subscribers continues to be primarily attributable to the growth of DBS service, which attracts both former cable subscribers and consumers not previously subscribing 9 12 to video service. Like cable, the DBS industry is marketing advanced services. DBS providers currently offer satellite-delivered high-speed Internet access services using a telephone return path and have future plans for true two-way interactivity. EchoStar also has a 17.6% stake in Starband (formerly called Gilat-2-Home), which has launched a high-speed Internet access service using a single antenna capable of receiving EchoStar's video signal as well as two-way, high-speed Internet access. Another satellite company called WildBlue (formerly iSKY) recently reported that it intends to deliver two-way high-speed Internet access to residential markets beginning late in 2001 using the Ka-band and spot beam technology. The FCC has initiated a DBS rulemaking proceeding, which, among other issues, requests comments on whether the FCC should implement cross-ownership restrictions between DBS and cable operators. The differences between cable and DBS continue to diminish, and the FCC's Annual Report indicates that DBS subscribers continue to report higher levels of satisfaction over cable. These advantages may lessen as cable operators offer digital services that match DBS service in terms of technical quality and channel capacity. Cox is unable to predict the impact DirecTV's and EchoStar's enhanced operations may have on its business and operations. Programming also is currently available to the owners of home satellite dish earth stations through conventional, medium-powered satellites. However, in contrast to the growth of DBS subscribers, the medium-powered or C-Band industry is experiencing a steady decline in subscribers as customers move to DBS services with its smaller antennas. Nevertheless, medium powered service is expected to continue as a viable business for the foreseeable future as a niche distribution medium serving rural subscribers not served by cable. SMATV systems transmit signals by satellite to receiving facilities located on private property such as condominiums, apartments, office complexes and other private residential developments. These systems also are beginning to offer local and long distance telephone service and high-speed Internet access along with video service. SMATV systems, which normally are free of the regulatory burdens imposed on franchised cable systems, often enter into exclusive agreements with property owners or managers that may preclude franchised cable systems from serving their residents, although some states have enacted laws prohibiting such exclusive arrangements. Courts reviewing challenges to these laws have reached varying results. Cox is unable to predict the extent to which additional competition from these services will materialize in the future or the impact such competition would have on its operations. However, Cox is continuing to develop competitive packages of services (Cox Digital Cable, Cox@Home and Cox Digital Telephone) to offer these residential and commercial developments. Cable systems also compete with MMDS or wireless cable systems, which are licensed to serve specific areas using low-power microwave frequencies. The FCC recently amended its regulations to provide wireless systems the flexibility to employ digital technology in delivering two-way communications services, including high-speed Internet access. This development, along with the use of digital compression technology, will enable wireless cable systems to deliver more channels and additional services. Currently, a few wireless operators offer Internet service. However, one such system in Phoenix, Arizona has over 10,000 customers subscribing to its Internet service, and is competing with Cox's cable system and Qwest Communications' (formerly U.S. West) DSL offering discussed below. BellSouth Entertainment, a BellSouth-affiliated company, provides wireless MMDS service in Cox's New Orleans, Louisiana market and offers a basic package of over 160 local, cable, satellite and digital music channels. Cox has introduced new programming services in response to the increasing competitive environment in which the New Orleans system operates. A wireless cable operator also is authorized or has commenced service in several California communities where Cox operates. In addition, the FCC has awarded licenses in the 28 Gigahertz band for a new multichannel wireless video service called Local Multipoint Distribution Service (LMDS), which, like MMDS, is capable of transmitting voice and high-speed Internet access as well as video transmissions. The FCC has authorized, pending technical feasibility studies, the co-sharing of DBS spectrum for a new terrestrial wireless service which could provide video, voice and data transmission services. Cox is unable to predict whether these wireless services will have a material impact on its operations. 10 13 Because Cox's cable systems operate under non-exclusive franchises, overbuilders may obtain permission to operate cable television or OVS systems in Cox's service areas. 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. In an effort to facilitate competition between incumbent cable operators and telephone companies, the 1996 Act repealed the cable television/telephone cross-ownership ban adopted in the 1984 Cable Act. Consequently, communications carriers or other entities may provide multichannel video programming services as either cable television or OVS operators. Although few telephone companies have entered the video distribution market as either cable television or OVS operators, other overbuilders have been authorized to provide service in a few of the areas where Cox operates. The 1996 Act also restricts telephone companies and incumbent cable operators from "buying out" the others' operations within their service area, although exceptions exist for certain suburban and rural markets. See "-- Legislation and Regulation." Pursuant to the 1996 Act, the FCC adopted regulations for the issuance of digital television (DTV) licenses to incumbent television broadcast licensees. DTV is capable of delivering high-definition television pictures, multiple digital program streams, as well as CD-quality audio programming and advanced digital services such as data transfer or subscription video. The FCC recently issued regulations governing the carriage of digital television signals on cable systems. See "-- Legislation and Regulation." In addition, the FCC has 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 offer competitive facilities for the transmission and distribution of data and other non-video services. Other new technologies, including Internet-based services, also compete with cable-delivered services. For example, many of Cox's cable systems offer high-speed Internet services and compete with existing ISPs as well as DBS providers and local and long-distance telephone companies offering DSL service. Real-time (i.e., streaming) and downloadable video accessible over the Internet continue to improve in quality and are becoming more widely available, although streaming Internet video has yet to become a direct competitor to traditional video services. A number of companies, including telephone companies and ISPs, have lobbied vigorously for local, state and federal government regulations that would require cable systems to provide capacity for these companies and others to deliver Internet and other interactive television services directly to cable customers. Cable operators have challenged local government efforts to unilaterally impose these so-called "open access" requirements, and although the reasoning behind the few court decisions dealing with these issues has been inconsistent, each ultimately has invalidated such local "open access" requirements. The FCC recently initiated a regulatory proceeding to consider "open access" and related regulatory issues, and in connection with the AOL-Time Warner merger, imposed, together with the Federal Trade Commission (FTC), certain "open access," technical performance, and other requirements related to the merged company's Internet and Instant Messaging platforms. Whether the policy framework reflected in these agencies' merger reviews will be imposed on an industry-wide basis is uncertain. However, franchise renewals and transfers could become more difficult depending upon the outcome of these issues. See "-- Legislation and Regulation." Telephone companies are accelerating their deployment of Asymmetric Digital Subscriber Line (ADSL) technology. ADSL-type technology, or xDSL, which allows Internet access at peak data transmission speeds equal to or greater than that of cable modems, is the most significant competitor to cable high-speed Internet access services. xDSL technology has certain advantages over cable broadband technology, including the ability to offer simultaneous, high-speed Internet and voice or facsimile capabilities over a single telephone line. Dedicated xDSL lines can guarantee users both a constant, high-speed data transmission rate and security, unlike cable's shared network in which data transfer speeds decrease as the number of users increase. In Phoenix, Qwest uses Very High-Speed Digital Subscriber Line (VDSL) to distribute video, high-speed Internet access and telephone service over existing copper phone lines. However, Qwest recently announced it will cease marketing VDSL and will continue the service only for existing customers. 11 14 Cox expects advances in communications technology, marketplace developments and regulatory and legislative changes to occur in the future. New technologies and services may develop and may compete with services offered by Cox's cable systems. Consequently, Cox is unable to predict the effect that ongoing or future developments might have on its business and operations. TELEPHONY COMPETITION While the current switched voice and data telecommunications market is dominated by local telephone companies, also known as incumbent Local Exchange Carriers (LECs), the 1996 Act presents unprecedented opportunities for new entrants into these markets. Under the 1996 Act, and subject to certain limitations for rural LECs, the FCC may preempt any state or local law or regulation that prohibits or has the effect of prohibiting any entity from providing telecommunications services. 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 telecommunications services over its cable broadband networks. Among the more significant provisions of the 1996 Act are those that: - remove legal barriers to entry in local telephone markets; - require incumbent LECs to "interconnect" with competitors, including the provision of necessary elements for local competition such as telephone number portability; - establish procedures for incumbent LEC entry into new markets such as long distance and cable; - allow for reducing the regulation of telecommunications services provided by incumbent LECs and all other telecommunications service providers; and - direct the FCC to establish an explicit subsidy mechanism for the preservation of universal telephone service. Under the 1996 Act, new wireline entrants are subject to federal regulatory requirements for the provision of local exchange service in any market. The 1996 Act imposes a number of access and interconnection requirements on all LECs, and imposes additional requirements on incumbent LECs. Specifically, the 1996 Act required the FCC to implement rules under which all LECs must provide telephone number portability, dialing parity, reciprocal compensation for transport and termination of local traffic, resale and access to rights-of-way. The 1996 Act also requires state commissions to review and approve voluntarily negotiated interconnection agreements and to arbitrate unresolved compulsory interconnection negotiations between new entrants and incumbent LECs. These requirements also place burdens on new entrants that may benefit their competitors. In particular, the resale requirement means that a company could seek to resell services using the facilities of a new entrant such as Cox without making a similar investment in facilities. In addition to incumbent LECs and existing competitive access providers, new entrants potentially capable of offering switched and non-switched telecommunications services include individual cable companies, electric utilities, long-distance carriers, microwave carriers, terrestrial and satellite wireless service providers, resellers and private networks built by large end-users or groups of these entities in combination. In response to a 1997 Eighth Circuit Court of Appeals decision that overturned many of the FCC's rules adopted to implement the 1996 Act's interconnection requirements, including the FCC's Total Element Long-Run Incremental Cost (TELRIC) pricing methodology, the United States Supreme Court upheld the FCC's interconnection rules in all respects relevant to Cox. The Supreme Court: - upheld the FCC's jurisdiction to set the pricing methodology for the purchase of unbundled network elements and resale, as well as the FCC's right to define unbundled network elements broadly; - affirmed the FCC's power to forbid incumbent LECs from separating network elements that are normally provisioned together; - upheld the FCC's "pick and choose" rule, which allows competitive carriers to require that an incumbent LEC make available any interconnection, service or network element contained in an 12 15 approved agreement to which the LEC was a party under the same terms and conditions, and which thereby allows carriers to adopt provisions found in other interconnection agreements; and - overturned the FCC criteria governing when proprietary network elements must be unbundled by an incumbent LEC. (Because Cox makes use of its existing cable network to offer telecommunications services, it does not make extensive use of unbundled network elements from incumbent LECs. This relative lack of dependence upon incumbent LEC network elements provides Cox with additional flexibility to create innovative services and positions it favorably vis-a-vis non-facilities-based telecommunications providers.) On July 18, 2000, however, the Eighth Circuit vacated the FCC's TELRIC methodology. The Supreme Court agreed to hear an appeal of the Eighth Circuit's decision, which is scheduled for the Supreme Court's October 2001 session. If the Supreme Court does not reinstate the FCC's TELRIC pricing rules, Cox's interconnection costs could increase. In addition, Congress is considering legislation that could modify the current regime of interconnection payments. If the proposed legislation is enacted in its current form, it could reduce Cox's costs for interconnection but also eliminate any revenues Cox may gain from providing interconnection to other LECs, including incumbent LECs. On March 5, 2001, the United States Supreme Court agreed to hear a dispute over whether federal courts can review state public utility commission (PUC) decisions that arise when they arbitrate interconnection disputes between LECs and competitive carriers. The Communications Act permits carriers to appeal PUC decisions to United States District Courts. Several state commissions have challenged whether this provision violated the Eleventh Amendment, which gives states immunity from suits in federal court. Should the Supreme Court determine that states are immune from such suits in federal court, carriers would be limited in their challenges to state arbitration decisions at the federal court level. In July 1996, the FCC released an order promulgating rules implementing the 1996 Act's directive for all LECs to provide their customers with local telephone number portability, which allows customers to maintain an existing telephone number assignment upon switching local exchange service providers. In February 1999, the FCC granted a request to delay implementation of local number portability for broadband commercial mobile radio service providers until November 24, 2002, subject to any later determination by the FCC that earlier implementation would be necessary to conserve telephone numbers. 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. Additionally, the FCC has instituted a range of number conservation measures that apply to all LECs. While not directly required by the 1996 Act, the FCC also adopted an order intended to reform interstate access charges that are generally acknowledged to contain subsidy elements, also known as the Access Reform Order. The Access Reform Order modified the previous access charge system by shifting some costs from per-minute charges to flat charges and through other changes. The FCC also simultaneously adopted an order that reduced access charges under the existing rate regulation regime. The FCC continues to review and revise its access charge regime. For example, on May 31, 2000, the FCC approved an access-charge reform plan proposed by the Coalition for Affordable Local and Long Distance Services (CALLS), which is mandatory for all large incumbent LECs for one year and which calls for: (1) a $3.2 billion reduction in access charges paid by long distance companies; (2) combining the subscriber line charge and pre-subscribed interexchange carrier charge into one consumer charge that would be lower than two separate charges and would eliminate one line item from consumers' phone bills; and (3) removal of $650 million in universal service subsidies from interstate access charges paid by long distance companies. The access-charge reduction could result in significant reductions in customer telephone bills, thereby creating additional competitive pricing pressure on competitors of incumbent LECs, such as Cox. On February 25, 1999, the FCC adopted an order addressing the jurisdictional nature of dial-up traffic delivered to ISPs. The FCC determined that dial-up traffic delivered to ISPs is largely interstate. This order was appealed to the District of Columbia Circuit and remanded back to the FCC. Enforcement of some of Cox's interconnection agreements has been affected by the FCC's decision and the refusal of some incumbent LECs to pay Cox reciprocal compensation for dial-up traffic delivered to ISPs. In light of the FCC's finding 13 16 that the traffic delivered to ISPs is subject to federal jurisdiction, many state commissions have reconsidered their previous decisions to enforce the relevant payment terms of interconnection agreements and are divided on the enforcement of reciprocal compensation provisions in existing interconnection agreements. For example, the Virginia State Corporation Commission refused to assume jurisdiction over the issue of whether Cox was entitled to reciprocal compensation payments from incumbent LECs in Virginia. Cox petitioned the FCC to assume jurisdiction and preempt the Virginia Commission. The FCC granted Cox's petition and has agreed to hear Cox's disputes over reciprocal compensation in Virginia. However, there can be no assurance that Cox will recover reciprocal compensation for traffic delivered to ISPs that it believes it is entitled to under some of its existing contracts with incumbent LECs. Other Related Competitive Matters. In November 1998, AT&T filed a petition requesting that the FCC issue a declaratory ruling confirming that long distance carriers may elect not to purchase switched access service offered under tariff by competitive LECs such as Cox. The FCC denied the petition in August 1999. However, it determined that AT&T's petition demonstrated a need for the FCC to revisit the issue of the scope of its regulation of competitive LEC access rates. The FCC is currently considering and has sought additional comment on whether and how to reform the manner in which competitive LECs may tariff charges for the switched local exchange access services they provide to interexchange carriers. This proceeding is pending at the FCC. LEGISLATION AND REGULATION The cable industry is regulated to varying degrees by the FCC, certain state governments and agencies and most local governments. In addition, various legislative and regulatory proposals under consideration from time to time by Congress and various federal, state and local agencies may materially affect the cable industry. The following is a summary of federal laws and regulations affecting the growth and operation of the cable industry and a brief description of certain state and local laws. The Federal Communications Act of 1934 (the Communications Act), as amended by the 1984 Cable Act, the 1992 Cable Act and the 1996 Act, establishes comprehensive national standards and guidelines for the regulation of cable, telecommunications and broadcasting systems and identifies the boundaries of permissible federal, state and local government regulation. The 1996 Act is intended, in part, to promote substantial competition in the telecommunications, multichannel video and advanced communications markets and, among other things, permits cable operators to enter the local telephone exchange market. Cox's ability to offer telephone services in competition with incumbent LECs and others will be affected by the degree and form of regulatory flexibility ultimately afforded by the FCC to incumbent LECs, and will depend, in part, upon FCC determinations regarding telecommunications markets generally. The telephony provisions of the 1996 Act establish a national policy of promoting local exchange competition by eliminating legal barriers to competition and by setting standards to govern relationships among telecommunications providers, including, among others, the interconnection of competitive carriers and the unbundling of monopoly incumbent LEC services. The statute expressly preempts legal barriers to telecommunications competition under state and local laws. The 1996 Act also establishes new requirements for the maintenance and enhancement of universal telephone service and imposes obligations on telecommunications providers to maintain customer privacy. Various provisions of the 1996 Act affect cable system operators. Among other things, the 1996 Act required the FCC to revise its pole attachment rate formula, and this revision has resulted in increased rates for entities, including cable operators, that provide telecommunication services. In its October 2001 term, the United States Supreme Court will hear a case that will determine whether a cable operator's provision of Internet services disqualifies the cable operator's pole attachments from the protection of the Communications Act and the FCC's regulations. The 1996 Act also contains provisions regulating the content of video programming and computer services. Specifically, the 1996 Act prohibited the use of computer services to transmit "indecent" material to minors and required cable operators to fully scramble or otherwise block any channels "primarily dedicated to sexually oriented programming" or to limit carriage of such channels to late-night hours. The Supreme Court recently held these provisions to be unconstitutional. 14 17 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 of granting, renewing or transferring a cable franchise, and is preempted from regulating telecommunications services provided by cable operators or from requiring them to obtain a cable franchise to provide such services. The 1996 Act also liberalized the standards under which a cable operator would be deemed to be subject to "effective competition," and, beginning in April 1999, eliminated rate regulation of all service tiers other than the "broadcast basic" tier. The 1996 Act required the FCC to undertake numerous rulemaking proceedings to interpret and implement the 1996 Act, many of which are subject to pending petitions for reconsideration, court appeals, or both. Cox is unable to predict the outcome of these proceedings or their effect on Cox in particular or the cable industry in general. Cox expects further court actions and regulatory proceedings, which will define the rights and obligations of various parties, including the government, under the Communications Act. The results of these judicial and administrative proceedings may materially affect the cable industry and Cox's business and operations. In the following paragraphs, the federal laws and regulations materially affecting the growth and operation of the cable industry are summarized, and a brief description of certain state and local proceedings is also provided. CABLE REGULATION The Communications Act and the regulations and policies of the FCC affect significant aspects of Cox's cable system operations, including: - subscriber rates; - the content of programming Cox offers to subscribers, as well as the manner in which Cox markets its program packages to subscribers; - the use of Cox's cable system facilities by local franchising authorities, the public and other unrelated companies; - the use of utility poles and conduit; - cable system and programming ownership limitations and prohibitions; - franchise agreements with local governmental authorities; - compliance with technical standards; and - customer service standards. RATE REGULATION. The Communications Act authorizes FCC-certified local franchising authorities to regulate rates for basic tier cable services and associated customer equipment and installations in communities where the cable operator is not subject to "effective competition," as defined by federal law. Until April 1, 1999, the rates for certain non-basic "cable programming service tiers" were also subject to FCC regulation. The Communications Act and the FCC's regulations prohibit the regulation of cable rates where the operator establishes that it is subject to "effective competition." Under the Communications Act, effective competition exists where: (1) the cable operator serves less than thirty percent (30%) of the households in its franchise area (low penetration); (2) other unaffiliated multichannel video programming distributors serve a combined total of more than fifteen percent (15%) of the households in the franchise area, provided that at least two such distributors, including the cable operator, offer service to at least fifty percent (50%) of the households in the franchise area (competing provider); (3) the franchising authority operates as a multichannel video programming distributor and offers service to at least fifty percent (50%) of the households in the franchise area; or (4) a telephone company, its affiliate, or another distributor using their facilities offers comparable video programming services by any means other than direct-to-home satellite in the franchise area of an unaffiliated cable operator. Under the effective competition standard adopted in the 1992 Cable Act, most cable systems became subject to rate regulation. 15 18 In accordance with the 1992 Cable Act, the FCC adopted detailed rate regulations, guidelines and rate forms that Cox and local franchising authorities are required to use in calculating regulated basic service and equipment rates. The FCC also adopted comprehensive regulations that allow cable systems to modify regulated rates on a quarterly or annual basis to account for changes in the number of regulated channels, inflation and certain "external" costs such as franchise and other governmental fees, copyright and retransmission consent fees, taxes, programming fees and franchise-related obligations. Cox cannot predict whether the FCC will modify these rate regulations in the future. If a local franchising authority concludes that Cox's basic service and equipment rates are too high under the FCC's rate rules, the local franchising authority may require Cox to reduce its rates and refund overcharges to subscribers with interest. Cox may appeal adverse local rate decisions to the FCC, and the FCC may reverse any rate decision made by a local franchising authority if the decision is inconsistent with the FCC's rules and policies. Approximately 243 communities served by Cox's cable systems representing approximately 45% of total communities served currently regulate Cox's basic service and equipment rates. The Communications Act also: - prohibits the regulation of cable rates for programming offered on a per-channel or per-program basis; - requires operators to establish a uniform rate structure throughout each franchise area that is not subject to effective competition, while allowing operators to offer non-predatory bulk discount rates for subscribers in commercial and residential developments; and - permits regulated basic equipment and installation rates to be computed by aggregating costs of broad categories of equipment at the franchise, system, regional and company level. Franchising authorities in a number of communities in which Cox operates cable systems initiated basic service and equipment rate regulation pursuant to the Communications Act and FCC regulations. In addition, certain subscribers and franchising authorities filed complaints challenging the reasonableness of Cox's rates for cable programming service tiers under former statutory and regulatory provisions that were in effect prior to April 1, 1999. 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 tier and cable programming service tier rates, and the FCC is processing several complaints regarding cable programming service tier rate increases implemented prior to April 1, 1999 by Cox or cable systems Cox has acquired. CARRIAGE OF BROADCAST TELEVISION SIGNALS. The Communications Act allows local commercial television broadcast stations to elect once every three years either: - mandatory carriage by a cable system located within the station's designated market area (subject to certain exceptions); or - a "retransmission consent" agreement negotiated between the station and the cable system regarding the terms under which the station may be carried. The Communications Act requires a cable operator to devote as much as one-third of its activated channel capacity for the mandatory carriage of local commercial television stations. The Communications Act also gives local non-commercial television stations mandatory carriage rights; however, such stations are not given the option to negotiate retransmission consent for the carriage of their signals by cable systems. Cable systems must negotiate retransmission consent for any additional "distant" commercial television stations (except for certain commercial satellite-delivered independent "superstations" such as WGN), commercial radio stations or certain low-power television stations the cable system wishes to carry. The FCC also initiated an administrative proceeding to consider the requirements for mandatory carriage of digital television signals. In the first phase of this proceeding, the FCC implemented technical and operational standards for the carriage of digital television signals, determined that a digital-only television station and a digital station that has surrendered its analog channel have mandatory carriage rights on cable systems in their local service areas, and determined that a digital-only station has the discretion to elect 16 19 carriage in either a digital or converted analog format. The FCC declined to order the carriage of both the analog and digital format of television stations. However, the FCC requested additional comments and information to determine whether cable systems have enough channel capacity to carry both the broadcasters' analog and digital formats, and whether requiring the carriage of both formats would constitute an impermissible First Amendment burden on a cable operator. Cox cannot predict the ultimate outcome of this proceeding, which could have a material effect on the number of services that Cox will be required to carry on its cable systems. USE OF CABLE SYSTEMS BY THE GOVERNMENT AND UNRELATED THIRD PARTIES. The Communications Act allows local franchising authorities and unrelated third parties to have access to cable systems' channel capacity for their own use. For example, the Communications Act: - permits franchising authorities to require that cable operators provide channel capacity for public, educational and governmental access programming; and - requires cable systems with 36 or more activated channels to designate a significant portion of their channel capacity for programming provided by unaffiliated third parties under regulated lease arrangements (commercial leased access). The FCC also regulates various aspects of commercial leased access on cable systems, including the rates and certain terms and conditions of the commercial use. In connection with franchise transfers, renewals or general regulation of cable operations, a few local franchising authorities have imposed or attempted to impose so-called "open access" conditions under which cable operators would be required to provide ISPs with non-discriminatory access to the operator's system. In the few instances where local franchising authorities have imposed such requirements, federal courts have struck them down as violations of the Communications Act or the United States Constitution, although the rationales for each decision have varied. The ultimate regulatory classification of Internet services provided by cable operators -- whether an information service, telecommunications service or cable service under the Communications Act -- will affect Cox's operations, including but not limited to whether Cox will be required to pay local government franchise fees on cable Internet revenues. Two federal district courts have classified cable Internet service as a cable service, whereas one federal appellate court classified it as a service with both information and telecommunications service components. Another federal appellate court concluded that Internet service is neither a cable service nor a telecommunications service, but rather an information service. See "-- Pole Attachments." These conflicting rulings increase the possibility that the classification of cable Internet service could be decided by the Supreme Court. In addition, the FCC recently initiated an administrative proceeding to gather information about various regulatory and policy issues concerning cable Internet services. Cox cannot predict the ultimate outcome of these judicial and administrative proceedings. Late in September 1999, the City of Fairfax, Virginia enacted an ordinance that purported to condition the transfer of a cable franchise from Media General, Inc. to a subsidiary of Cox permitting any requesting ISP access to its cable system on the same basis that it provides access to its affiliated ISP. Although the City has only 6,000 customers out of a total of 223,000 customers in Fairfax County, the City and County systems are integrated operationally. Cox accepted the franchise transfer, but rejected the open access condition and reserved its right to challenge the legality of the purported requirement. As noted above, the FCC recently initiated an administrative proceeding to gather information about various regulatory and policy issues relating to cable Internet services, including among other things whether the FCC can and should consider mandating ISP access to cable operators' high-speed broadband facilities. The FCC initiated this proceeding, in part, due to the conflicting federal court decisions noted above, which have addressed the appropriate regulatory classification of cable Internet services. In connection with their review of the recent AOL-Time Warner merger, the FCC and the FTC did impose certain open access, technical performance and other requirements related to the merged company's Internet and Instant Messaging platforms. After the United States Court of Appeals for the Ninth Circuit decided that Internet over cable was not a cable service, Cox determined that it was at legal risk in California, Nevada and Arizona by continuing to 17 20 collect cable franchise fees on revenue derived from Internet service. Cox therefore notified affected local franchising authorities in those states that it could no longer collect and remit cable franchise fees on its Internet service revenues pending a final determination by the FCC and the courts of whether Internet over cable constitutes a cable service under the Communications Act. Although the Ninth Circuit's decision is only applicable in certain western states, plaintiffs recently filed a class action lawsuit in federal district court in Virginia claiming that Cox should cease collecting franchise fees for cable Internet services as it has done in California, Nevada and Arizona. In addition, following the Ninth Circuit decision, Verizon Communications filed a lawsuit in federal district court in San Diego, California, alleging that Cox's Internet service is a telecommunications service and that Cox has unlawfully refused to provide broadband transmission service and interconnection to Verizon's competitive LEC and Internet service provider affiliates. A consumer class action suit also was filed in federal district court in Los Angeles against Cox and all the major Multiple System Operator's (MSOs) who have Internet affiliations with @Home and Road Runner. The lawsuit alleges unlawful product tying and seeks damages on behalf of consumers unable to access their ISP of choice through cable systems without paying for both the bundled cable ISP service and the other ISPs' services. Legislation was introduced last year in Congress which, among other things, would have required cable operators to offer interconnection to unaffiliated ISPs on terms and conditions that are fair, reasonable and non-discriminatory, and would have permitted the FCC to set the rates, terms and conditions of such interconnection. Although the legislation was not enacted and has yet to be introduced in the current congressional session, its sponsors have stated that it will soon be re-introduced. Cox cannot predict if similar proposals will be introduced or adopted in the future or whether such proposals, administrative proceedings or litigation will have a material impact on the business and operations of Cox. POLE ATTACHMENTS. The Communications Act requires the FCC to regulate the rates, terms and conditions imposed by public utilities for use of utility poles and conduit space unless state authorities have certified to the FCC that they adequately regulate pole attachment rates, as is the case in certain states Cox operates. In the absence of state certification, the FCC regulates pole attachment rates, terms and conditions only in response to a formal complaint. The 1996 Act modified the FCC's pole attachment regulatory scheme by: - requiring that the FCC adopt new regulations, which became effective in February 2001, governing pole attachment rates for companies, including cable operators, that provide telecommunications services; and - requiring that utilities provide cable systems and telecommunications carriers with nondiscriminatory access to any pole, conduit or right-of-way controlled by the utility. The FCC's original cable pole attachment rate formula governs the maximum rate certain utilities may charge cable operators providing only cable services for attachments to the utility's poles and conduits. The FCC also adopted a higher telecommunications rate formula effective February 2001, which governs the maximum attachment rate for companies providing telecommunications services, including cable operators. The resulting increase in attachment rates due to the FCC's new rate formula will be phased in equal increments over a five-year period. Several parties requested that the FCC reconsider its new regulations and several parties challenged the new rules in court. A federal appellate court upheld the constitutionality of the new statutory provision requiring utilities to provide cable systems and telecommunications carriers with nondiscriminatory access to any pole, conduit or right-of-way controlled by the utility. However, based upon its conclusion that Internet over cable was neither a cable service nor a telecommunications service, the same court determined in a separate case that the FCC had no authority to regulate pole attachments used to provide both high-speed Internet access and cable services. Although this decision has been stayed pending review by the United States Supreme Court in its October 2001 term, a number of utilities controlling poles in Cox's service areas have unilaterally implemented significant changes in contract terms and increases in pole attachment rates. Cox has joined in complaints filed at the FCC by various state cable associations challenging these rate 18 21 increases and new contract terms. If the United States Supreme Court does not reverse this adverse appellate court decision, however, the rates, terms and conditions imposed by utilities for pole attachments will likely become more onerous. Cox is unable to predict the outcome of this litigation, the ultimate impact of any revised FCC rate formula, or the effect of any new pole attachment regulations on its business and operations. OWNERSHIP. The FCC's rules generally prohibit direct or indirect common ownership, operation, control or interests between a cable system 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 system. For purposes of the cross-ownership rules, "control" of licensee companies is attributed to all 5% or greater stockholders, other than passive investors such as mutual funds, banks and insurance companies, which may own less than 20% without attribution of control, as well as to entities holding 33% or more of a company's combined equity plus debt. This rule prohibits Cox from owning or operating a cable system in the same area in which CEI or one of CEI's subsidiaries owns or operates a television broadcast station. In 1999, the FCC modified its cable attribution rules that identify when the ownership or management by Cox or third parties of other communications businesses -- including cable systems, television broadcast stations and local telephone companies -- may be imputed to Cox for purposes of determining compliance with the FCC's ownership restrictions. In March 2001, however, the United States Court of Appeals for the District of Columbia Circuit reversed and remanded certain aspects of the FCC's cable attribution rules. In particular, the court: (1) reversed the FCC's elimination of the "single majority shareholder" exemption, which exempted from attribution minority shareholder interests in companies with a single majority shareholder; and (2) reversed the FCC's policy barring a limited partner from securing an attribution exemption when the limited partner also sells programming to the partnership. Cox is unable to predict the ultimate outcome of the litigation, or of any revised attribution rules the FCC may adopt, on Cox's business or operations. The 1996 Act also eliminated the statutory ban on the cross-ownership of a cable system and a television station, and permitted the FCC to amend or revise its own regulations regarding the cross-ownership ban. The FCC repealed its broadcast network/cable system cross-ownership ban but retained its prohibition, described above, governing cable broadcast station cross-ownership. The cross-ownership prohibitions could preclude investors from holding ownership interests in Cox if they simultaneously served as officers or directors of, or held an attributable ownership interest in, these other businesses. These prohibitions could also preclude Cox from acquiring a cable system if Cox's officers or directors served as officers or directors of, or held an attributable ownership in, these other businesses operating within the same area as the cable system to be acquired. The 1996 Act generally restricts common carriers and cable operators from holding more than a 10% financial interest or any management interest in the other's operations within their service area or from entering joint ventures or partnerships with cable operators in the same market. These "buy-out" restrictions are subject to four general exceptions, which include population density and competitive market tests. The FCC may waive the buyout restrictions if it determines that: - the cable operator or LEC would be subject to undue economic distress by enforcement of the restrictions; - the cable system or LEC facilities would not be economically viable if the provisions were enforced; - the anticompetitive effects of the proposed transaction clearly would be outweighed by the public interest in serving the community; and - the local franchising authority approves the waiver. GENERAL OWNERSHIP LIMITATIONS. The Communications Act generally prohibits Cox from owning and/or operating a SMATV or a wireless cable system in any area where Cox provides franchised cable service. However, the cable/SMATV and the cable/wireless cable cross-ownership rules are inapplicable in any franchise area where the operator faces "effective competition," or where the cable operator owned the SMATV system prior to the 1992 Cable Act. In addition, the FCC's rules permit a cable operator to offer 19 22 service through SMATV systems in the operator's existing franchise area so long as the service is offered according to the terms and conditions of the cable operator's local franchise agreement. Pursuant to the 1992 Cable Act, the FCC adopted rules establishing a 30% horizontal limit on the number of subscribers a cable operator is permitted to serve nationwide, and a 40% vertical limit on the amount of cable operator channel capacity that may be occupied by video programmers in which the operator has an attributable interest. On March 2, 2001, however, the United States Court of Appeals for the District of Columbia Circuit reversed and remanded the FCC's horizontal and vertical ownership rules. The FCC will likely commence a new administrative proceeding to re-evaluate these ownership rules in light of the court's opinion. Cox is unable to predict the outcome of this proceeding or the impact any revised FCC ownership rules may have on Cox's business and operations. LOCAL TELEPHONE COMPANY OWNERSHIP OF CABLE SYSTEMS. Prior to the 1996 Act, federal cross-ownership restrictions limited entry into the cable business by potentially strong competitors such as telephone companies. The 1996 Act made far-reaching changes in the regulation of local telephone companies that provide cable services. The 1996 Act: - eliminated federal legal barriers to competition in the local telephone and cable communications businesses, including repeal of the statutory telephone company/cable television cross-ownership prohibition (thereby allowing local telephone companies to offer video services in their local telephone service areas); - preempted legal barriers to competition that previously existed in state and local laws and regulations; - set basic standards for relationships between telecommunications providers; and - limited acquisitions among cable systems and telephone companies in the same market and prohibited certain joint ventures between local telephone companies and cable operators in the same market. Under the 1996 Act, local telephone companies and other entities may provide video programming services as traditional cable operators or, among other things, as OVS operators, subject to certain conditions. OVS operators are exempt from several of the regulatory obligations that currently apply to cable operators. However, certain restrictions and requirements remain applicable to OVS operators, including without limitation the obligation to obtain a franchise if required by a franchising authority and the obligation to comply with the FCC's sports blackout, network non-duplication, syndicated exclusivity and mandatory carriage rules. Those companies that elect to provide video services over an open video system may do so upon obtaining certification by the FCC. The Copyright Office has yet to determine the manner in which OVS operators will be treated for purposes of copyright liability. Upon compliance with such requirements and FCC rules that mirror statutory requirements, an OVS operator will be exempt from various statutory restrictions which apply to cable operators, such as broadcast-cable ownership restrictions, commercial leased access requirements, rate regulation and consumer electronics compatibility requirements. OVS operators are, however, subject to "franchise" fees charged by local franchising authorities or other governmental entities, but such fees may not exceed those imposed on cable operators. Under the 1996 Act, common carriers providing cable service through cable systems or open video systems are not bound by the interconnection obligations of Title II, which otherwise would require the carrier to make available on a nondiscriminatory basis capacity for the provision of cable service directly to subscribers. In addition, common carriers are not required to obtain a certification under Section 214 of the Communications Act to establish or operate a video programming delivery system. The FCC has ruled that cable operators may elect to operate OVS, but only if they are subject to effective competition. The FCC's rules prohibit a cable operator from terminating an existing franchise agreement to become OVS operator. 20 23 OTHER STATUTORY PROVISIONS. One of the underlying competitive policy goals of the 1992 Cable Act is to limit the ability of vertically integrated program suppliers from favoring affiliated cable operators over unaffiliated program distributors. Consequently, with certain limitations, federal law generally: - precludes any satellite video programmer affiliated with a cable company, or with a common carrier providing video programming directly to its subscribers, from favoring an affiliated company over competitors; - requires such programmers to sell their programming to other multichannel video distributors; and - limits the ability of such programmers to offer exclusive programming arrangements to their affiliates. The Communications Act requires cable operators, upon the request of a subscriber, to scramble or otherwise fully block any channel the subscriber does not wish to receive. The Communications Act also contains restrictions on the transmission by cable operators of obscene or indecent programming. A three- judge federal district court determined that certain statutory restrictions regarding channels primarily dedicated to sexually oriented programming were unconstitutional, and the United States Supreme Court recently affirmed the lower court's ruling. The Communications Act and the FCC's rules also include provisions concerning, among other things: - customer service; - subscriber privacy; - marketing practices; - equal employment opportunity; and - the regulation of technical standards and equipment compatibility. OTHER FCC REGULATIONS. The FCC adopted cable inside wiring rules to provide specific procedures for the disposition of residential home wiring and internal building wiring where a subscriber terminates service or where an incumbent cable operator is forced by a building owner to terminate service in a multiple dwelling unit (MDU) building. The FCC is also considering additional rules relating to inside wiring that, if adopted, may disadvantage incumbent cable operators. Unless operators retain rights under state statutory or common law to maintain ownership rights in the wiring, MDU owners could use these new rules to coerce cable operators without MDU service contracts to either sell, abandon or remove internal wiring carrying voice as well as video communications and to terminate service to MDU subscribers. CONSUMER EQUIPMENT. The FCC adopted regulations to implement provisions of the 1992 Cable Act regarding compatibility between cable systems and consumer electronics equipment. The 1996 Act directed the FCC to establish only minimal standards regarding compatibility between television sets, video cassette recorders and cable systems. Pursuant to this statutory mandate, the FCC adopted rules to assure the competitive availability of customer premises equipment, such as set-top converters or other navigation devices, which are used to access services offered by cable systems and other multichannel video programming distributors. The FCC's rules allow consumers to attach compatible equipment to Cox's cable facilities, so long as the equipment does not harm Cox's network, does not interfere with the services purchased by other subscribers and is not used to receive unauthorized services. Effective July 1, 2000, cable operators were required to separate security from non-security functions in subscriber premises equipment by making available modular security components that would function in set-top units purchased or leased from retail outlets. The FCC granted Cox and certain other cable operators a limited waiver of this requirement for some systems using hybrid analog-digital navigation devices until no later than December 31, 2001. The requirement to separate security and non-security functions is inapplicable to equipment that uses only an analog conditional access mechanism and that is incapable of providing access to any digital transmission or other digital service. Effective January 1, 2005, Cox will be prohibited from selling or leasing new navigation devices or converter boxes that integrate both security and non-security functions. Cox, however, will not be required to discontinue the leasing of older converters that include integrated security functions if those converters were provided to subscribers before January 1, 2005. 21 24 The FCC also regulates various other aspects of Cox's cable operations, including but not limited to: - the hiring and promotion of employees and the use of outside vendors; - consumer protection and customer service standards; - technical standards and testing of cable facilities; - program carriage and limitations dealing with exclusivity of syndicated and network programs, local sports broadcast programming, advertising in children's programming, political advertising, origination cablecasting, sponsorship identification and the "closed captioning" of video programming; - the registration of cable systems and the filing of informational reports; - maintenance of various records and public inspection files; - microwave frequency usage; - antenna structure notification, marking, and lighting; and - emergency alert system requirements. The FCC may enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and the imposition of other administrative sanctions such as the revocation of FCC licenses needed to operate certain transmission facilities often used in cable operations. Local franchising authorities are also permitted to enforce the FCC's technical and consumer protection standards. Pending FCC rulemaking proceedings may change existing rules or lead to new regulations. Cox is unable to predict the impact that any further FCC rule changes may have on its business and operations. REGULATORY FEES AND OTHER MATTERS. Pursuant to the Communications Act, the FCC requires the payment of annual "regulatory fees" by the various industries it regulates, including the cable industry. Cable systems are currently required to pay annual regulatory fees of $0.47 per subscriber, which may be passed on to subscribers as an "external cost" adjustment to regulated basic cable service rates. The FCC also assesses fees for other licenses, including licenses for business radio and cable television microwave relay systems. Those fees, however, may not be collected directly from subscribers. In addition, the FCC adopted regulations pursuant to the 1992 Cable Act that require cable systems not subject to effective competition to permit subscribers to purchase programming provided on a per-channel or a per-event basis without 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. COPYRIGHT. Cable systems utilize local and distant television and radio broadcast signals in their channel line-ups. This programming is protected by federal copyright law. Cox, however, generally does not obtain licenses to display this programming directly from its owner or owners. Consequently, Cox must comply with a federal compulsory licensing process that covers television and radio broadcast signals. In exchange for filing certain reports and contributing a percentage of its revenues to a federal copyright royalty pool, Cox obtains blanket permission to retransmit the copyrighted material carried on broadcast signals. The nature and amount of future copyright payments for broadcast signal carriage cannot be predicted at this time. Increases in such payments may be passed through to subscribers as external costs under the FCC's cable rate regulations. The Copyright Office has recommended that Congress revise both the cable and satellite compulsory copyright licenses: - to simplify their administration; - to fully compensate copyright owners for the use of their works; and - to treat all multichannel video delivery systems equally, except to the extent that technological differences or differences in the regulatory burdens placed upon the delivery system justify different copyright treatment. 22 25 Congress recently modified the satellite compulsory license in a manner that permits DBS providers to be more competitive with cable operators such as Cox. The possible simplification, modification or elimination of the compulsory copyright license is the subject of continuing legislative review. The elimination or substantial modification of the cable compulsory license could adversely affect Cox's ability to obtain suitable programming and could substantially increase the cost of programming that remains available for distribution to Cox's subscribers. Cox cannot predict the outcome of this legislative activity. Cox distributes programming and advertising that use music controlled by the two principal major music performing rights organizations, the American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music, Inc. (BMI). In October 1989, the special rate court of the United States District Court for the Southern District of New York imposed interim rates on the cable industry's use of ASCAP-controlled music. The same federal district court established a special rate court for BMI. BMI and cable industry representatives concluded negotiations for a standard licensing agreement covering the performance of BMI music contained in advertising and other information inserted by operators into cable programming and on certain local access and origination channels carried on cable systems. ASCAP and cable industry representatives have also met to develop a standard licensing agreement covering the use of ASCAP-controlled music in local origination and access channels and pay-per-view programming. Although Cox cannot predict the ultimate outcome of these industry negotiations or the amount of any license fees Cox may be required to pay for past and future use of ASCAP-controlled music, Cox does not believe such license fees will be significant to its financial position, operations or liquidity. FRANCHISE MATTERS. Because cable systems use local streets and rights-of-way, they are subject to state and local regulation, which typically is implemented through the franchising process. Consistent with the Communications Act, state and/or local officials are usually involved in franchisee selection, system design and construction, safety and insurance, service rates, consumer relations, billing practices and community-related programming and services. Although franchising matters normally are resolved at the local level through a franchise agreement and/or a local ordinance, the Communications Act provides certain guidelines and requirements that govern a cable operator's relationship with its local franchising authority. For example, the Communications Act: - generally prohibits a cable system from operating without a franchise, except where a system operated without a franchise prior to July 1984 and the franchising authority has not required a cable operator to obtain a franchise; - encourages competition with existing cable systems by: - allowing municipalities to operate their own cable systems without franchises; - preventing franchising authorities from granting exclusive franchises or from unreasonably refusing to award additional franchises covering an existing cable system's service area; and - prohibiting (with certain exceptions) the common ownership of cable systems and co-located wireless cable or SMATV systems; - permits local authorities, when granting or renewing franchises, to establish requirements for cable-related facilities and equipment; - permits local authorities, in granting or reviewing a cable franchise, to require the provision of channel capacity for public, educational and governmental channels, and to require the construction of institutional networks; - prohibits franchising authorities from establishing requirements for specific video programming or information services other than in broad categories; - permits modification franchise requirements by the franchise authority or by judicial action if changed circumstances warrant the modification; 23 26 - generally prohibits franchising authorities from: - imposing requirements in the grant or renewal of a cable franchise that require, prohibit or restrict the provision of telecommunications services; - imposing cable franchise fees on revenues derived from providing telecommunications services over the cable system; or - restricting the use of any type of subscriber equipment or transmission technology; - limits franchise fees to 5% of gross revenues derived from providing cable services over the cable systems; - establishes formal and informal procedures for renewal of cable franchises that are designed to protect cable operators from arbitrary denials of renewal; and - permits state or local franchising authorities to adopt certain additional conditions regarding the transfer of cable system ownership. Cox has franchises covering approximately 877 communities. The franchises typically require the periodic payment of fees to franchising authorities of up to 5% of "gross revenues" (as defined by each franchise agreement). Under the Communications Act and FCC rules, these franchise fees may be passed on to subscribers and separately itemized on subscriber bills. In 1997, a federal appellate court overturned an FCC order that had exempted franchise fees from the calculation of an operator's gross revenue upon which the payment of local franchise fees usually is based. Instead, the court concluded that a cable operator's gross revenue includes all revenue received from subscribers, without deduction. The FCC subsequently determined that cable operators may "pass through" on subscriber bills any additional franchise fee payments that local authorities may require for previous periods during which a cable operator relied upon the FCC's earlier decision. Various municipal groups requested that the FCC reconsider its decision. Cox is unable to predict the ultimate resolution of these matters, but does not expect that any additional franchise fees it may be required to pay will be material to Cox's business and operations. The Communications Act contains renewal procedures designed to protect cable operators against arbitrary denials of renewal. Even if a franchise is renewed, however, the franchising authority may seek to impose as a condition of renewal new and more onerous requirements, such as significant upgrades in facilities and services or increased franchise fees. Some franchising authorities may also attempt to impose so-called "open access" regulations as a condition of renewal. See "-- Use of Cable Systems by the Government and Unrelated Third Parties." Similarly, if a franchising authority's consent is required for the purchase or sale of a cable system or franchise, the franchising authority may attempt to impose burdensome or onerous franchise requirements as a condition for such consent, including open access or other requirements. Historically, cable operators providing satisfactory services to their subscribers and complying with the terms of their franchises typically have obtained franchise renewals. Cox believes it generally has met the terms of its franchises and has provided quality levels of service. Cox therefore anticipates that its future franchise renewal prospects generally will be favorable. Nevertheless, although the 1984 Cable Act provides certain procedural protections, no assurance can be given that franchise renewals will be granted or that renewals will be made on similar terms and conditions. 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 system's business. Franchise terms and conditions vary materially from jurisdiction to jurisdiction, and even from city to city within the same state. Historically, these terms and conditions range from reasonable to highly restrictive or burdensome. The 1984 Cable Act placed certain limitations on a franchising authority's ability to control cable system operation, 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 allowed franchising authorities to exercise greater control over the operation of cable 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 24 27 cable systems. Moreover, franchising authorities are immune from monetary damage awards arising from their regulation of cable systems or decisions regarding franchise grants, renewals, transfers and amendments. A number of states subject cable systems to the jurisdiction of centralized state governmental agencies, some of which impose public utility-type regulation on cable operators. Attempts in other states to regulate cable systems are continuing and can be expected to increase. To date, the states in which Cox operates that have enacted such state level regulation are Connecticut, Massachusetts and Rhode Island. State and local franchising jurisdiction is not unlimited, however, and must be exercised in accordance with federal law. TELECOMMUNICATIONS REGULATION The telecommunications services currently offered by Cox affiliates 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 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 incumbent LECs, the 1996 Act presents unprecedented opportunities for new entrants into these markets, such as Cox. Because LECs historically have had exclusive state franchises to provide telephone services, they have established monopoly relationships with their customers. Under the 1996 Act, and subject to certain limited exemptions for rural telephone companies, the FCC may preempt any state law or regulation that prohibits or has the effect of prohibiting any entity from providing telecommunications services. The 1996 Act also imposes access and interconnection requirements on incumbent LECs to open their networks to competitors. The FCC adopted rules implementing those requirements in August 1996. State regulators are responsible for arbitrating interconnection disputes that arise between incumbent LECs and new entrants. In addition, the 1996 Act specifies procedures for state commissions to review and approve interconnection agreements entered into between new entrants and incumbent LECs. The FCC adopted interconnection rules establishing pricing standards and negotiation and arbitration guidelines that the states must follow in reviewing interconnection agreements between incumbent LECs and their competitors. In 1997, the United States Court of Appeals for the Eighth Circuit vacated certain portions of the FCC's rules, but in January 1999, the Supreme Court reversed the Eighth Circuit and upheld, for the most part, the FCC's interconnection rules. See "-- Telephony Competition." The Supreme Court, however, instructed the FCC to reconsider its determination regarding the extent to which incumbent LECs are required to unbundle elements of their networks and provide those elements to competitors. On November 5, 1999, the FCC issued an order that reconsidered the unbundling obligations contained in the 1996 Act. The FCC eliminated several items from its previous list of unbundled network elements and provided a framework for the phase-out of other network elements. The FCC stated that its revised unbundling rules are designed to advance the development of facilities-based competition and to provide incentives for incumbent and competitive carriers to invest in their own facilities and to innovate. On July 18, 2000, however, the Eighth Circuit Court of Appeals vacated the FCC's TELRIC pricing rules for incumbent LEC pricing of unbundled network elements and interconnections. The FCC's TELRIC pricing rules for interconnection are scheduled for review by the United States Supreme Court during its October 2001 term. REGULATORY REQUIREMENTS FOR ALL LECS INCLUDING NEW ENTRANTS. Under the 1996 Act, new landline entrants are subject to federal regulatory requirements when they provide local exchange service in any market. The 1996 Act imposes a number of access and interconnection requirements on all LECs, with additional requirements imposed on incumbent LECs. Specifically, the 1996 Act: - requires the FCC to implement rules under which all LECs must provide telephone number portability, dialing parity, reciprocal compensation for transport and termination of local traffic, resale and access to rights-of-way; and - specifies procedures for state commissions to review and approve both voluntary and compulsory interconnection agreements entered into between new entrants and incumbent LECs. 25 28 These requirements also place burdens on new entrants that may benefit their competitors. In particular, the resale requirement means that a company can seek to resell services using the facilities of a new entrant, such as Cox, without making a similar investment in facilities. One of the goals of the Communications Act as originally passed was to extend telephone service to all citizens of the United States, or, to provide universal service. This goal was achieved primarily by state commissions maintaining the rates for basic local exchange service at an affordable level. Prior to AT&T's divestiture of its local exchange affiliates pursuant to the Modified Final Judgment, most observers accepted that incumbent LECs were able to maintain relatively low local rates by subsidizing them with revenues from business and long-distance toll services, and by subsidizing rural service at the expense of urban customers. The extent of these subsidies has been widely disputed and the incumbent LECs that possess this information generally have not made it available for review and verification. The 1996 Act continues the goal of preserving and advancing universal service by requiring the FCC to establish an explicit mechanism for subsidizing service to those who might otherwise drop local telephone service. The rules adopted by the FCC in its Universal Service orders require telecommunications carriers generally (subject to limited exemptions) to contribute to funding existing universal service programs for high-cost carriers and low income customers and to new universal service programs for schools, libraries and rural health care providers. The FCC has put in place a program to fund high-cost service areas that preserves many of the existing subsidies. The FCC is currently considering recommendations of the Rural Task Force, as submitted by the Federal-State Joint Board on Universal Service, for implementing a rural universal service program. Among other recommendations, the proposal calls for an expansion of the services covered by the Universal Service Fund. If adopted, this recommendation could substantially increase carrier contributions to the Universal Service Fund. Funding for the federal universal service subsidiaries will come from mandatory payments imposed on all telecommunications carriers (with limited exceptions). Under the proposed contribution factors for the second quarter of 2001, Cox will be required to contribute an amount equal to approximately 6.8% of its interstate telecommunications revenues to the federal Universal Service Fund. In addition to the federal universal service plan, most or all states likely will adopt their own universal service support mechanisms. Depending upon how the FCC completes the implementation of its statutory mandate to preserve and promote universal service and how states adjust their existing programs or create new programs, this subsidy mechanism may provide an additional source of revenue to those LECs or other carriers (e.g., wireless providers) willing and able to provide service to markets that are less financially desirable either due to the high cost of providing service or the limited revenues that might be available from serving a particular subset of customers in an area, such as residential customers. Another goal of the 1996 Act is to increase competition in the telecommunications services market, 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 refrain from regulating particular classes of telecommunications services or providers. In an August 1999 order, the FCC established a framework for granting certain LECs relief from the FCC's rate level, rate structure and tariffing rules once these LECs satisfy certain competitive criteria. The FCC's August 1999 order was affirmed by the District of Columbia Circuit on February 2, 2001. In November, 1999, however, the FCC denied Bell Operating Company petitions for forbearance from dominant carrier regulation for special access and high capacity transport services. The FCC concluded that the state of competition in the market for these services was not sufficiently developed to support a conclusion that the Bell Operating Company petitioners lack market power and, thus, qualify for non-dominant treatment in the provision of these services. A qualifying incumbent LEC, however, may file a petition with the FCC in accordance with the procedures outlined in the August 1999 order, identifying the relief it seeks and demonstrating that it has satisfied certain specified "triggers." The LEC must demonstrate that sufficient competition has developed in a market for special access and high capacity dedicated transport services to warrant relaxation of the FCC rules for that market. There continues to be activity at both the FCC and the Courts by incumbent LECs requesting increased pricing flexibility for special access and high-capacity transport services. 26 29 The 1996 Act eliminates the requirement that incumbent LECs obtain FCC authorization prior to constructing facilities for interstate services. The 1996 Act also limits the FCC's ability to review incumbent LEC tariff filings. These changes will increase the speed with which incumbent LECs are able to introduce new service offerings and new pricing of existing services, thereby increasing their flexibility to respond to new entrants. The FCC is also examining ways to further streamline the periodic accounting filings required of large incumbent LECs. In addition to incumbent LECs and existing competitive access providers, new entrants potentially capable of offering switched and non-switched services include individual cable companies, electric utilities, long distance carriers, microwave carriers, wireless service providers, resellers and private networks built by large end-users, or any combination of these entities. STATE TELECOMMUNICATIONS REGULATION. In addition to federal rules and regulations that apply to Cox's telephony operations, state commissions regulate, to varying degrees, the intrastate services of landline telecommunications providers including those of Cox's landline affiliates. New entrants providing local exchange services typically must apply for and receive state certification and operate in accordance with state commission pricing, terms and quality-of-service regulations. Under the 1996 Act, state commissions also must review interconnection agreements entered into between incumbent LECs and new entrants, as well as enforce the terms of disputed agreements. Over the course of this past year, Cox along with several other competitive carriers have brought interconnection disputes addressing reciprocal compensation provisions of interconnection agreements with GTE and Bell Atlantic (now Verizon) before the Virginia State Corporation Commission. The Virginia Commission refused to exercise jurisdiction over these disputes. Cox and others petitioned the FCC for review. The FCC granted the petitions and agreed to assume jurisdiction over the interconnection disputes. State commissions may also choose to assess universal service funding contributions from new carriers provided that a state's program is consistent with the FCC's universal service rules. State commissions also are playing an increasing role in telephone number assignment and number conservation policies. The foregoing does not purport to describe all present and proposed federal, state and local regulations and legislation relating to the cable 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 that could alter, in varying degrees, the manner in which cable or telephony systems operate. Neither the outcome of these proceedings nor their impact upon the cable or telecommunications industries can be predicted at this time. EMPLOYEES At December 31, 2000, Cox had nearly 19,000 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 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 systems. The signal receiving apparatus typically includes a tower, antenna, ancillary electronic equipment and earth stations for reception of satellite signals. Headends, consisting of associated electronic equipment necessary for the reception, amplification and modulation of signals, are located near the receiving devices. Cox's distribution system consists primarily of coaxial and fiber optic cables and related electronic equipment. Customer devices consist of decoding converters, cable modems and telephone network interface units. The physical components of cable 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 27 30 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 markets and leases most of its service vehicles. Cox believes that its properties, both owned and leased, taken as a whole, are in good operating condition and are suitable and adequate for Cox's business operations. ITEM 3. LEGAL PROCEEDINGS Cox and certain subsidiaries are defendants in two putative subscriber class action suits in state courts in Louisiana and Texas initiated between October 17, 1997 and December 17, 1998. The suits challenge the propriety of late fees charged by the subsidiaries to customers who fail to pay for services in a timely manner. The suits seek injunctive relief and various formulations of damages under certain claimed causes of action under various bodies of state law. These actions are in various stages of defense. The actions are being defended vigorously. The outcome of these matters cannot be predicted at this time. Five similar suits that had been pending in Nevada, Indiana, Arizona and Florida have been settled and dismissed; one similar suit that had been pending in Nebraska was dismissed with prejudice. On November 10, 1999, Fred and Roberta Lipschutz, Arthur Simon and John Galley III, on behalf of themselves and all persons similarly situated, filed a putative class action suit against Cox and thirteen other defendants in the United States District Court for the Central District of California. The action alleges that a putative class defined as all persons who since November 10, 1995, have purchased broadband Internet data transmission services from a "cable company defendant" has been injured because alleged agreements among the "cable company defendants" and/or the "cable company defendants" and defendants @Home Corporation, also referred to as Excite@Home, and Road Runner have required the putative class to purchase both Internet data transmission services and interface/content services from @Home or Road Runner. The complaint asserts claims under Section 1 of the Sherman Antitrust Act, the California Cartwright Act, and California unfair competition law and seeks injunctive relief and compensatory and treble damages. An amended complaint adding additional named plaintiffs was filed on December 30, 1999, and Cox filed its answer to the amended complaint on January 19, 2000. On January 29, 2001, the court denied plaintiffs' motion to certify a nationwide class with leave to amend. Hearing on plaintiffs' motion for reconsideration of the court's denial of class certification is March 19, 2001. Discovery is pending. Cox intends to defend the remaining actions vigorously, though the outcome cannot be predicted at this time. Cox's subsidiary Cox California Telcom, L.L.C. is a defendant in three putative class action lawsuits and one additional non-class action suit that were filed in state and federal courts in California relating to the unauthorized publication of information pertaining to approximately 11,400 Cox telephone customers in the PacBell 2000 White Pages and 411 directory and in the Cox TelTrust information directory. The lawsuits assert various causes of action for breach of contract, invasion of privacy, negligence, commission of fraudulent or unfair business acts and practices in violation of California Business & Professions Code Section 17-200 and violation of California Public Utilities Code Section 2891 and 2891.1. The suits seek damages and injunctive relief. Cox Telcom, along with PacBell, has commenced reclaiming tainted PacBell White Pages and reprinting and redistributing corrected books. The parties to two of the class action lawsuits have entered into a stipulation of settlement, which is pending preliminary court approval on March 30, 2001. The third class action was dismissed in substantial part with leave to amend on February 20, 2001. Cox intends to defend the remaining actions vigorously, though the outcome cannot be predicted at this time. Jerrold Schaffer and Kevin J. Yourman, on May 26, 2000 and May 30, 2000, respectively, filed class action lawsuits in the Superior Court of the State of California for the County of San Mateo on behalf of themselves and all other shareholders of @Home Corporation as of March 28, 2000 except for defendants seeking (a) to enjoin consummation of a March 28, 2000 letter agreement among Excite@Home's principal cable partners, including Cox, and (b) unspecified compensatory damages. Cox and David Woodrow, Cox's former Executive Vice President, Business Development, among others, are named defendants in both lawsuits. Mr. Woodrow formerly served as Cox's representative on the Excite@Home board of directors. See Note 5. "Investments" in Part II, Item 8. "Consolidated Financial Statements and Supplementary Data." The plaintiffs, who continue to seek unspecified compensatory damages, assert that the defendants breached purported fiduciary duties of care, candor and loyalty to the plaintiffs by entering into the letter agreement 28 31 and/or taking certain actions to facilitate the consummation of the transactions contemplated by the letter agreement. Pursuant to an agreement with the plaintiffs, the defendants have yet to answer the complaint. Defendants moved to dismiss the case on various jurisdiction grounds and, on February 26, 2001, the court stayed the case on the grounds of forum non conveniens. Plaintiffs have 30 days to appeal the stay or they may refile the case in another jurisdiction. Cox intends to defend the remaining actions vigorously, though the outcome cannot be predicted at this time. On November 14, 2000, GTE.NET, L.L.C. d/b/a Verizon Internet Solutions and Verizon Select Services, Inc. filed suit against Cox in the District Court for the Southern District of California. Verizon alleged that Cox has violated various sections of the Communications Act of 1934 by allegedly refusing to provide Verizon with broadband telecommunications service and interconnection, among other things. On November 29, Verizon amended its Complaint to add CoxCom, Inc., a subsidiary of Cox, as an additional defendant. Verizon seeks various forms of relief, including injunctive relief and damages. Cox and CoxCom intend to defend vigorously the action and, on January 8, 2001 filed a Motion to Dismiss or in the Alternative to Stay on Primary Jurisdiction Grounds. Cox also filed a Motion to Dismiss for Lack of Personal Jurisdiction. Prior to filing its responses to the Motions, Verizon filed a Motion for Summary Judgment on Prayers for Declaratory and Injunctive Relief. The Court granted defendants' ex parte Motion for an order continuing the hearing on the Summary Judgment Motion pending a ruling on the jurisdictional motions. The court has indicated its intent to rule on the jurisdictional motions on the basis of the parties' submissions. An early case evaluation conference is scheduled for March 21, 2001. Cox intends to defend the remaining actions vigorously, though the outcome cannot be predicted at this time. On February 6, 2001, plaintiffs Kimberly D. and William L. Bova, on behalf of themselves individually and a putative class of subscribers, sued Cox in United States District Court for the Western District of Virginia. The putative class includes persons outside of California, Nevada, Arizona and Idaho who on or after November 1, 2000 purchased broadband Internet access services from Cox and paid a franchise fee on those services. The suit asserts that the collection of franchise fees by Cox from its broadband Internet access service subscribers outside of the Ninth Circuit is unlawful under the Telecommunications Act of 1996 and seeks restitution of all such fees collected. Cox's response to the complaint is due March 19, 2001. Cox intends to defend the remaining actions vigorously, though the outcome cannot be predicted at this time. Cox and its subsidiaries are parties to various other legal proceedings which are ordinary and incidental to their businesses. Management does not expect that any of these other currently pending legal proceedings will have a material adverse impact on Cox's consolidated financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 29 32 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this Item is incorporated by reference to the section entitled "Shareholder Information" of Cox's 2000 Summary Annual Report to Shareholders. See Exhibit 13. "Portions of the 2000 Summary Annual Report." ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The following historical selected consolidated financial data for each of the five years for the period ended December 31, 2000 has been derived from and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7. and the "Consolidated Financial Statements and Supplementary Data" in Item 8.
YEAR ENDED DECEMBER 31 ------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 --------- -------------- --------------- -------------- ---------- (MILLIONS OF DOLLARS, EXCLUDING PER SHARE DATA) STATEMENTS OF OPERATIONS DATA Revenues......................... $ 3,506.9 $ 2,318.1 $ 1,716.8 $ 1,610.4 $1,460.3 Operating income................. 140.8 262.9 201.4 257.1 221.7 Interest expense................. 550.8 305.7 223.3 202.1 146.1 Equity in net losses of affiliated companies.......... 7.3 90.5 547.2 404.4 170.4 Gain on investments, net......... 3,282.0 1,569.4 2,484.2 64.7 4.6 Gain on issuance of stock by affiliated companies.......... -- -- 165.3 90.8 50.1 Dividend income.................. 12.7 46.6 12.2 -- -- Net income (loss)................ 1,925.3 881.9 1,270.7 (136.5) (51.6) Basic net income (loss) per share(a)...................... $ 3.20 $ 1.54 $ 2.33 $ (0.25) $ (0.10) Diluted net income (loss) per share(a)...................... 3.16 1.51 2.30 (0.25) (0.10) OTHER OPERATING AND FINANCIAL DATA Operating cash flow(b)........... $ 1,377.3 $ 901.2 $ 659.1 $ 609.8 $ 556.9 Operating cash flow margin(b).... 39.3% 38.9% 38.4% 37.9% 38.1% Ratio of debt to operating cash flow(b)....................... 6.2x(c) 7.1x(c) 6.2x(c) 5.2x(c) 5.2x Cash flows provided by operating activities.................... $ 306.2 $ 402.0 $ 667.2 $ 553.6 $ 309.1 Cash flows used in investing activities.................... (2,077.0) (3,849.6) (1,600.4) (1,108.0) (522.2) Cash flows provided by financing activities.................... 1,815.9 3,450.3 935.6 540.3 246.2 BALANCE SHEET DATA As of December 31 Total assets..................... $24,720.8 $26,614.5 $12,878.1 $ 6,556.6 $5,784.6 Debt (including amounts due to CEI).......................... 8,543.8 6,375.8 4,090.8 3,148.8 2,881.0 Cox-obligated capital and preferred securities of subsidiary trusts............. 1,155.4 1,150.6 -- -- --
30 33
AS OF DECEMBER 31 --------------------------------------------------------- 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- CUSTOMER DATA Basic customers(d)...................... 6,193,317 5,136,184 3,753,608 3,235,338 3,259,384 New services(e)......................... 1,568,424 554,025 169,731 18,941 -- --------- --------- --------- --------- --------- Revenue Generating Units(f)............. 7,761,741 5,690,209 3,923,339 3,254,279 3,259,384 Homes passed(g)......................... 9,710,963 8,031,340 5,923,428 5,023,870 5,016,749 Basic penetration(h).................... 63.8% 64.0% 63.4% 64.4% 65.0% Premium service units(i)................ 4,174,447 3,237,013 2,206,833 1,865,184 2,000,673
- --------------- (a) All historical per share amounts have been restated to reflect Cox's two-for-one stock split which was effective on May 21, 1999. (b) Operating cash flow is not a measure of performance defined in accordance with generally accepted accounting principles. However, Cox believes that operating cash flow is useful to investors in evaluating its performance because it is a commonly used financial analysis tool for measuring and comparing cable companies in several areas of liquidity, operating performance and leverage. Cox defines operating cash flow as operating income before depreciation, amortization and gain on sale and exchange of cable systems. Operating cash flow should not be considered as an alternative to net income as an indicator of Cox's performance or as an alternative to net cash provided by operating activities as a measure of liquidity and may not be comparable to similarly titled measures used by other companies. (c) Using the fourth quarter annualized operating cash flow, the ratio would have been 5.5x, 5.5x, 5.1x and 4.6x at December 31, 2000, 1999, 1998 and 1997, respectively. (d) A home with one or more television sets connected to a cable system is counted as one basic customer. (e) New services include Cox Digital Cable, high-speed Internet access and Cox Digital Telephone. (f) Each basic customer and each new service is a Revenue Generating Unit. In certain locations, a household may purchase more than one new service, each of which is counted as a separate Revenue Generating Unit. (g) A home is deemed to be "passed" if it can be connected to the distribution system without any further extension of the distribution plant. (h) Basic customers as a percentage of homes passed. (i) Premium service units include single or multi-channel services offered for a monthly fee per service. 31 34 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RECENT CABLE SYSTEM TRANSACTIONS 2000 Acquisitions and Transactions In January 2000, Cox completed the acquisition of cable systems serving 522,000 customers in Kansas, Oklahoma and North Carolina from Multimedia Cablevision, Inc., a subsidiary of Gannett Co., Inc., for $2.7 billion. In March 2000, Cox and AT&T Corp. exchanged Cox's 50.3 million shares of AT&T common stock for the stock of AT&T subsidiaries that own certain cable systems serving approximately 495,000 customers and certain other assets and liabilities, including cash. Cox received: cable systems serving Oklahoma and Louisiana; the remaining 20% ownership interest in a partnership in which Cox acquired an 80% interest through its merger with TCA Cable TV, Inc.; Peak Cablevision LLC, which has customers in Oklahoma, Arkansas, Utah and Nevada; and approximately $798.0 million in other assets and liabilities, including cash. Cox recognized a pre-tax gain of $775.9 million in connection with this transaction. These transactions are collectively referred to as the 2000 transactions. 1999 Acquisitions and Transactions In August 1999, Cox completed its merger with TCA, a cable television operator serving approximately 883,000 customers in Texas, Arkansas, Louisiana and four other states for $1.6 billion in cash, 38.3 million shares of Cox common stock and assumed indebtedness of $540.0 million. Upon completion of the merger, Cox repaid $340.0 million of the assumed TCA debt. Cox also acquired VPI Communications, Inc., an affiliate of TCA, and TCA's interest in two majority-owned partnerships in connection with the TCA merger. Also in August 1999, Cox exchanged its cable systems in Massachusetts, serving more than 54,000 customers, for MediaOne properties in Connecticut and Rhode Island, serving 51,000 customers, and cash. Cox recognized a pre-tax gain of $77.4 million in connection with this transaction. In October 1999, Cox completed the acquisition of cable systems serving more than 260,000 customers in northern Virginia from Media General, Inc. for $1.4 billion. Also in October 1999, Cox reorganized its partnership with Time Warner Entertainment Company, L.P., under which Cox acquired control of the cable system serving Fort Walton Beach, Florida and received $104.5 million, and Time Warner acquired control of the cable system serving Staten Island, New York. Cox recognized a pre-tax gain of $94.8 million in connection with this reorganization. These transactions are collectively referred to as the 1999 transactions. 1998 Acquisitions and Transactions In June 1998, Cox completed the acquisition of a cable system serving approximately 115,000 customers in Arizona from Tele-Communications, Inc. for $250.2 million. In October 1998, Cox completed the acquisition of a cable system serving approximately 293,000 residential customers and 105,000 hotel units in the greater Las Vegas area and certain related businesses owned by Prime South Diversified, Inc. for a combination of common and convertible preferred stock and cash with an aggregate value of approximately $1.3 billion, including the refinancing of certain Prime South indebtedness. These transactions are collectively referred to as the 1998 transactions. INVESTMENTS See "Investments" in Part I, Item 1. "Business" and Note 5. "Investments" in Part II, Item 8. "Consolidated Financial Statement Statements and Supplementary Data." 32 35 RESULTS OF OPERATIONS 2000 COMPARED WITH 1999 The results of operations include the effects of the 2000 and 1999 transactions as of their respective acquisition dates. Total revenues for the year ended December 31, 2000 were $3,506.9 million, a 51% increase over revenues of $2,318.1 million for the year ended December 31, 1999. Of this increase, 36% relates to the 2000 and 1999 transactions. The remaining 15% increase includes the effects of: - residential basic and digital video customer growth; - rate increases implemented primarily in the first quarter of 2000 resulting from increased programming costs and inflation, as well as increased channel availability; - growth in both residential and commercial high-speed Internet access and telephony customers; and - growth in local and national advertising sales; - partially offset by a decrease in residential pay-per-view revenues resulting from fewer national boxing events in 2000. Programming costs were $855.8 million for the year ended December 31, 2000, an increase of 52% over the same period in 1999. Of this increase, 39% relates to the 2000 and 1999 transactions. The remaining 13% is due to basic and digital customer growth at existing cable systems, channel additions and programming rate increases offset by fewer national pay-per-view events during 2000. Selling, general and administrative expenses for the year ended December 31, 2000 increased 49% to $1,273.9 million due primarily to: - increased employee headcount; - marketing costs related to campaigns aimed at enhancing customer awareness of new services and bundling alternatives; - other costs associated with the continued rollout of residential and commercial digital video, high-speed Internet access and telephony services; and - integration expenses associated with the cable systems acquired during 1999 and 2000. Depreciation and amortization increased to $1,236.5 million from $715.7 million for the comparable period in 1999 due to the 2000 and 1999 transactions. Operating income for the year ended December 31, 2000 was $140.8 million, a decrease of 46% compared to 1999. Interest expense increased to $550.8 million primarily due to an increase in the total debt outstanding. Equity in net losses of affiliated companies decreased to $7.3 million from $90.5 million for the comparable period in 1999 primarily due to prior year losses associated with Cox Communications PCS, L.P. (Cox PCS). Net gain on investments for the year ended December 31, 2000 of $3,282.0 million includes: - $1,193.0 million pre-tax gain on the aggregate sale of 28.1 million shares of Sprint PCS common stock; - $318.9 million pre-tax gain on the sale of Cox's entire interest in Flextech; - $775.9 million pre-tax gain in connection with the March 2000 exchange with AT&T; and - $990.5 million pre-tax gain in connection with the August 2000 transaction among Excite@Home and its principal cable partners, including Cox, as described below; - partially offset by a $22.8 million decline in the fair value of certain investments considered to be other than temporary. In August 2000, Cox consummated an agreement with Excite@Home pursuant to which the ownership, voting control and management of Excite@Home were restructured. As a result, Cox's veto rights and representation on the Excite@Home board were terminated. In addition, Cox agreed to extend its distribution 33 36 of certain Excite@Home services through June 2006. Cox will receive warrants to purchase two shares of Excite@Home Series A common stock for each home its cable systems pass. Cox also has the right, under certain circumstances, to sell its shares in Excite@Home to AT&T, with a maximum amount payable to Cox of approximately $1.4 billion in cash or shares of AT&T common stock, as elected by Cox. In connection with the consummation of this agreement, Cox recognized a pre-tax gain of approximately $990.5 million. In January 2001, Cox exercised its right under the agreement with AT&T to transfer the corporation that owns its shares of Excite@Home to AT&T for shares of AT&T common stock. Cox anticipates receiving approximately 64.4 million shares of AT&T stock upon consummation of this transaction, which is currently expected to occur during the first half of 2001. Minority interest, net of tax, of $69.8 million primarily represents distributions, net of tax, on Cox's obligated capital and preferred securities of subsidiary trusts, referred to as FELINE PRIDES and RHINOS. Net income for the year ended December 31, 2000 was $1,925.3 million as compared to $881.9 million for the year ended December 31, 1999. Operating cash flow is not a measure of performance defined in accordance with generally accepted accounting principles. However, Cox believes that operating cash flow is useful to investors in evaluating its performance because it is a commonly used financial analysis tool for measuring and comparing cable companies in several areas of liquidity, operating performance and leverage. Cox defines operating cash flow as operating income before depreciation, amortization and gain on sale and exchange of cable systems. Operating cash flow increased 53% to $1,377.3 million for the year ended December 31, 2000. The operating cash flow margin (operating cash flow as a percentage of revenues) for the year ended December 31, 2000 was 39.3%, an increase from 38.9% over the year ended December 31, 1999. Operating cash flow, as Cox defines this term, should not be considered as an alternative to net income as an indicator of Cox's performance or as an alternative to net cash provided by operating activities as a measure of liquidity and may not be comparable to similarly titled measures used by other companies. 1999 COMPARED WITH 1998 The results of operations include the effects of the 1999 and 1998 transactions as of their respective acquisition dates. Total revenues for the year ended December 31, 1999 were $2,318.1 million, a 35% increase over revenues of $1,716.8 million for the year ended December 31, 1998. Of this increase, 23% relates to the 1999 and 1998 transactions. The remaining 12% increase is due primarily to customer growth in video, high-speed Internet access and telephony services at existing cable systems and increased pay-per-view and advertising sales. Programming costs were $561.3 million for the year ended December 31, 1999, an increase of 38% over the same period in 1998. Of this increase, 25% relates to the 1999 and 1998 transactions. The remaining 13% increase is due to basic and digital customer growth at existing cable systems, channel additions, 1999 programming rate increases and pay-per-view events. Selling, general and administrative expenses for the year ended December 31, 1999 increased 31% to $855.6 million due primarily to increased marketing and integration costs relating to the 1999 and 1998 transactions, plant maintenance and other costs associated with the rollout of digital video, high-speed Internet access and telephony services. Depreciation and amortization increased to $715.7 million from $457.7 million for the comparable period in 1998 due to the 1999 and 1998 transactions and the continued upgrade and rebuild of Cox's broadband network. Gain on sale and exchange of cable systems reflects the $77.4 million pre-tax gain on the August 1999 exchange of cable systems with MediaOne. Operating income for the year ended December 31, 1999 was $262.9 million, an increase of 31% compared to 1998. Interest expense increased to $305.7 million primarily due to an increase in the total debt outstanding. Equity in net losses of affiliated companies was $90.5 million primarily due to losses associated with Cox PCS. 34 37 Net gain on investments for the year ended December 31, 1999 of $1,569.4 million primarily includes: - $433.1 million pre-tax gain on the sale of Cox's interest in Telewest; - $908.5 million pre-tax gain on the transfer of Cox's remaining interest in Cox PCS to Sprint Corporation in exchange for approximately 38.1 million shares of unregistered Sprint PCS common stock -- Series 2; - $94.8 million pre-tax gain in connection with the reorganization of Cox's partnership with Time Warner under which Cox acquired control of the cable system serving Fort Walton Beach, Florida; and - $165.6 million pre-tax gain on the sale of 3.9 million shares of Sprint PCS common stock. Minority interest, net of tax, of $18.6 million primarily represents distributions, net of tax, on FELINE PRIDES and RHINOS. Net income for the year ended December 31, 1999 was $881.9 million as compared to $1,270.7 million for the year ended December 31, 1998. Operating cash flow increased 37% to $901.2 million for the year ended December 31, 1999. The operating cash flow margin for the year ended December 31, 1999 was 38.9%, an increase from 38.4% over the year ended December 31, 1998. LIQUIDITY AND CAPITAL RESOURCES USES OF CASH As part of Cox's ongoing strategic plan, Cox has invested, and will continue to invest, significant amounts of capital to enhance the reliability and capacity of its broadband network in preparation for the offering of new services and to make investments in companies primarily focused on cable programming, technology and telecommunications. During 2000, Cox made capital expenditures of $2.2 billion. These expenditures were primarily directed at upgrading and rebuilding its broadband network to allow for the delivery of advanced broadband communications services, including digital video, high-speed Internet access, telephony and video-on-demand. Capital expenditures for 2001 and 2002 are expected to range between $1.8 billion and $2.0 billion each year. In addition to improvements of existing systems, Cox made strategic investments in businesses focused on cable programming, technology and telecommunications. Investments in affiliated companies of $83.3 million included debt and equity funding. Future funding requirements are expected to total approximately $50.0 million over the next two years. These funding requirements may vary significantly from the amounts stated above and will depend on numerous factors as many of these investments are growing businesses and specific financing requirements will change depending on the evolution of these businesses. Payments for the purchases of cable systems of $2.8 billion primarily represents cash paid in connection with the acquisition of cable systems from Multimedia. During 2000, Cox repaid approximately $1.5 billion of debt, which primarily consisted of $525.0 million aggregate principal amount of floating rate notes due August 2000, $425.0 million aggregate principal amount of 6.375% notes due June 2000 and a $500.0 million floating rate bridge loan. Repurchase of Class A common stock represents the aggregate cost of repurchasing 5.5 million shares of Cox's Class A common stock for an aggregate cost of $211.9 million in connection with Cox's stock repurchase program, which was announced in April 2000 and authorizes Cox to purchase up to $500.0 million of its outstanding Class A common stock on the open market or through private transactions. Distributions paid on capital and preferred securities of subsidiary trusts of $82.3 million consist of quarterly payments on the FELINE PRIDES and RHINOS. 35 38 SOURCES OF CASH During 2000, Cox generated $306.2 million from operations. Proceeds from the sale and exchange of investments of $2.9 billion primarily include: - $1.4 billion from the aggregate sale of 28.1 million shares of Sprint PCS common stock; - $522.3 million from the sale of Cox's entire interest in Flextech; and - $798.0 million of consideration received in connection with the AT&T exchange. Net revolving credit and commercial paper borrowings increased $1.0 billion for the year ended December 31, 2000 due to net borrowings on Cox's commercial paper program. Proceeds from the issuance of debt and capital and preferred securities of subsidiary trusts of $2.5 billion, net of debt issuance costs, underwriting commissions, discounts and premiums, primarily include: - the issuance of a floating rate bridge loan for aggregate proceeds of $500.0 million; - the issuance of exchangeable subordinated debentures due 2030, referred to as Premium PHONES, for net proceeds of $269.5 million; - the issuance of exchangeable subordinated discount debentures due 2020, referred to as the Discount Debentures, for net proceeds of $764.0 million; - the issuance of 7.75% Notes due November 2010 for net proceeds of $792.5 million; and - the issuance of floating-rate debt instruments, referred to as MOPPRS/CHEERS, due November 2012 for net proceeds of $206.3 million. OTHER At December 31, 2000, Cox had approximately $8.5 billion and $1.2 billion of outstanding indebtedness and Cox-obligated capital and preferred securities of subsidiary trusts, respectively. In addition, Cox had approximately $1.6 billion of total available financing capacity under its revolving credit facilities, shelf registration statements and commercial paper program at December 31, 2000. In January 2001, Cox exercised its right under the agreement with AT&T to transfer the corporation that owns its shares of Excite@Home to AT&T for shares of AT&T common stock. Cox anticipates receiving approximately 64.4 million shares of AT&T stock upon consummation of this transaction, which is currently expected to occur during the first half of 2001. Also in January 2001, Cox entered into a series of prepaid forward contracts to sell up to 19.5 million shares of its Sprint PCS common stock -- Series 2 with an aggregate fair value of $502.0 million for proceeds of $389.4 million, which was net of an original issue discount of $112.6 million. These contracts mature at various dates between 2004 and 2006 and, at Cox's election, can be settled in cash or shares of Sprint PCS common stock. Cox will account for these contracts as zero-coupon debt and will accrete the $112.6 million original issue discount through the respective contract maturity dates using the effective interest method. Also in January 2001, Cox filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (SEC) under which Cox may from time to time offer and issue various debt and equity instruments for a maximum aggregate amount up to $2.0 billion. This registration statement was declared effective in February 2001 and increased Cox's total available financing capacity to approximately $3.2 billion. In February 2001, Cox issued a series of convertible senior notes due February 2021 with an aggregate principal amount of $685.0 million at maturity for proceeds of $466.6 million, net of an original issue discount of $208.9 million and underwriting commissions. In March 2001, Cox issued an additional $85.8 million aggregate principal amount at maturity of the convertible notes upon the partial exercise of the initial purchasers' over-allotment option. Cox received additional proceeds of $58.5 million, net of underwriting commissions, an original issue discount and cash interest accrued since February 23, 2001. Accretion of the 36 39 original issue discount plus the semi-annual cash interest payments represents a yield to maturity of 2.25%. Holders may elect to convert at any time, upon which Cox may elect to deliver cash or shares of Class A common stock. For a more detailed description of the terms of the convertible notes, see Note 18. "Subsequent Events" in Part II, Item 8. "Consolidated Financial Statements and Supplementary Data." In March 2001, Cox issued a series of 6.75% Notes due March 15, 2011 in an offering under its shelf registration statement with an aggregate principal amount of $500.0 million, less offering costs and underwriting commissions of $3.3 million. The 6.75% Notes are unsecured and rank equally with Cox's other senior unsecured indebtedness. In addition, the 6.75% Notes may be redeemed by Cox in whole or in part at any time prior to maturity at 100% of the principal amount plus accrued and unpaid interest and a make-whole premium, if any, and interest is payable on a semi-annual basis beginning September 15, 2001. Cox expects that the cost of its network upgrades and investment activity will exceed Cox's cash flow from operations and, therefore, additional capital will be necessary. Cox believes it will be able to meet its capital needs for the next twelve months with unused amounts available under existing revolving agreements, the shelf registration statements and the commercial paper program. In addition, Cox is pursuing alternatives to monetize certain unconsolidated investments. Certain of Cox's debt instruments and credit agreements contain covenants which, among other provisions, restrict the payment of cash dividends or the repurchase of capital stock if certain requirements are not met as to the ratio of debt to operating cash flow. Historically, Cox has not paid dividends nor does Cox intend to pay dividends in the foreseeable future but to reinvest future earnings, consistent with its business strategy. Although Cox was in compliance with its credit facility covenants at December 31, 2000, Cox was prevented from paying dividends. Cox believes its operations are not materially affected by inflation. All historical weighted average share, per share and historical balance sheet amounts have been restated to reflect Cox's two-for-one stock split which was effective May 21, 1999. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In December 1999, the SEC issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements. SAB No. 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB No. 101, as amended by SAB No. 101B, became effective in the fourth quarter of fiscal years beginning after December 15, 1999. Accordingly, Cox adopted SAB No. 101 on October 1, 2000. There was no significant impact on Cox's consolidated financial statements upon adoption of SAB No. 101. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, which is effective for Cox as of January 1, 2001. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities measured at fair value. In addition, all derivatives used in hedging relationships must be designated, reassessed and documented pursuant to the provisions of SFAS No. 133. Under SFAS No. 133, the accounting for changes in the fair value of a derivative will depend on the use of the derivative. Changes in fair values of undesignated derivatives will be recognized in earnings. Changes in fair values of derivatives designated as hedges of assets, liabilities and firm commitments will be recognized in earnings as offsets to the changes in fair value of the related hedged assets, liabilities and firm commitments. Changes in fair values of derivatives designated as hedges of forecasted transactions will be deferred and recorded as a component of accumulated other comprehensive income until the hedged forecasted transactions occur and are recognized in earnings. 37 40 Cox's adoption of SFAS No. 133 on January 1, 2001 is expected to result in an after-tax transition adjustment to increase earnings by approximately $718.7 million and an after-tax transition adjustment to reduce accumulated other comprehensive income by approximately $194.0 million in the first quarter of 2001. In addition, the adoption is expected to impact assets and liabilities recorded on the consolidated balance sheet. SFAS No. 133 also permits a one-time transfer of an available-for-sale security into the trading category. Accordingly, Cox elected to reclassify approximately 19.5 million shares of its investment in Sprint PCS common stock -- Series 2 from available-for-sale to trading on January 1, 2001. As a result of this reclassification, Cox will recognize a pre-tax gain of approximately $230.2 million during the first quarter of 2001, representing the accumulated unrealized gain on investment in Sprint PCS common stock -- Series 2, previously recorded as a component of accumulated other comprehensive income. RISK FACTORS This Form 10-K includes "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, among others, statements concerning our outlook for the future and information about our strategic plans and objectives, expectations as to subscriber and revenue growth, anticipated rates of subscriber penetration, and other statements of expectations, beliefs, future plans and strategies, anticipated events or trends and similar projections, as well as any facts or assumptions underlying these statements or projections. Actual results may differ materially from those in the forward-looking statements, and may be affected by known and unknown risks, uncertainties and other factors. Many of these risks and uncertainties have been discussed in our prior filings with the SEC. Factors to consider in connection with any of our forward-looking statements include, but are not limited to: - Our ability to implement successfully our growth strategies and the level of success of our operating initiatives, including integration and upgrades of recently acquired cable properties, future expenditures on capital projects, terms and availability of capital, the actual level of revenue growth, adverse changes in the price of telephony interconnection or cable programming and disruptions in the supply of services and equipment. In addition, material changes in the cost of equipment or significant unanticipated capital expenditures could disrupt our business plan and adversely affect our business operations. - Trends in our businesses, particularly trends in the market for existing and new communications services and changes in our business strategy and development plans. - Our ability to increase penetration in existing markets, as well as those we enter through acquisitions or other business combinations, including our ability to continue to control costs and maintain high standards of customer service, the extent to which consumer demand for voice, video and data services increases, subscriber availability, retention and growth, subscriber demand and competition. - Our ability to generate sufficient cash flow to meet our debt service obligations and to finance ongoing operations. Cox has historically reported net losses, and we operate with a significant level of indebtedness. Cash generated from operating activities and borrowing has been sufficient to fund our debt service, working capital obligations and capital expenditure requirements. We believe that Cox will continue to generate cash and obtain financing sufficient to meet these requirements. However, if Cox were unable to meet these requirements, we would have to consider refinancing our indebtedness or obtaining new financing. Although in the past we have been able to refinance our indebtedness and obtain new financing, there can be no assurance that we will be able to do so in the future or that, if we were able to do so, the terms available would be acceptable to us. In addition, we must manage exposure to interest rate risk due to variable rate debt instruments. - Changes in our relationship with, the performance of, and the market value of companies in which we have significant investments, especially investments in telecommunications and technology, including Sprint PCS. 38 41 - Competition from alternative methods of receiving and distributing signals and from other sources of news, information and entertainment, such as newspapers, movie theaters, online computer services and home video products. Because our franchises are generally non-exclusive, there is potential for competition from other operators of cable systems and other distribution systems capable of delivering programming to homes or businesses, including direct broadcast satellite systems and multichannel multipoint distribution services. In addition, we face general competitive factors, such as the introduction of new technologies (such as Internet-based services), changes in prices or demand for our products as a result of competitive actions or economic factors and competitive pressures within the broadband communications industry. - Our ability to obtain the necessary FCC, as well as state and local, authorizations for new services, and our response to adverse regulatory changes. The cable industry is subject to extensive regulation by federal, local and, in some instances, state governmental agencies. Advances in communications technology as well as changes in the marketplace and the regulatory and legislative environment are constantly occurring. As a result, it is not possible to predict the effect that ongoing developments might have on the broadband communications industry or on our operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Cox has estimated the fair value of its financial instruments as of December 31, 2000 and 1999 using available market information or other appropriate valuation methodologies. Considerable judgment, however, is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that Cox would realize in a current market exchange. The carrying amount of cash, accounts and other receivables, accounts and other payables and amounts due to/from CEI approximates fair value because of the short maturity of those instruments. The fair value of Cox's investments stated at fair value are estimated and recorded based on quoted market prices as discussed in Note 5. "Investments" in Part II, Item 8. "Consolidated Financial Statement Statements and Supplementary Data." The fair value of Cox's equity method investments and investments stated at cost cannot be estimated without incurring excessive costs. Cox is exposed to market price risk volatility with respect to investments in publicly traded and privately held entities. Additional information pertinent to the value of those investments is discussed in Note 5. "Investments" in Part II, Item 8. "Consolidated Financial Statement Statements and Supplementary Data." The fair value of interest rate swaps used for hedging purposes was approximately $35.2 million at December 31, 2000 and represents the estimated amount that Cox would receive upon termination of the swap agreements. Cox's outstanding commercial paper, revolving credit facilities, RHINOS and floating rate notes and debentures bear interest at current market rates and, thus, approximate fair value at December 31, 2000 and 1999. Cox is exposed to interest rate volatility with respect to these variable-rate instruments. 39 42 The estimated fair value of Cox's fixed-rate notes and debentures, exchangeable subordinated debentures and FELINE PRIDES at December 31, 2000 and 1999 are based on quoted market prices or a discounted cash flow analysis using Cox's incremental borrowing for similar types of borrowings arrangements and dealer quotations. A summary of the carrying value, estimated fair value and the effect of a hypothetical one percentage point decrease in interest rates on the foregoing fixed-rate instruments at December 31, 2000 and 1999 is as follows:
DECEMBER 31, 2000 DECEMBER 31, 1999 ---------------------------------------- ---------------------------------------- FAIR VALUE FAIR VALUE CARRYING FAIR (1% DECREASE CARRYING FAIR (1% DECREASE VALUE VALUE IN INTEREST RATES) VALUE VALUE IN INTEREST RATES) -------- -------- ------------------ -------- -------- ------------------ (MILLIONS OF DOLLARS) Fixed-rate notes and debentures......... $4,460.3 $4,459.6 $4,701.9 $4,064.1 $3,858.3 $4,065.3 FELINE PRIDES........ 647.3 806.0 808.0 642.3 884.0 886.0 Exchangeable subordinated debentures......... 2,351.8 1,564.0 1,651.0 1,272.2 1,400.0 1,417.0
40 43 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA COX COMMUNICATIONS, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ------------------------- 2000 1999 ----------- ----------- (THOUSANDS OF DOLLARS) ASSETS Cash........................................................ $ 78,442 $ 33,313 Accounts and notes receivable, less allowance for doubtful accounts of $25,636 and $14,783........................... 358,348 260,518 Net plant and equipment..................................... 5,916,425 4,038,236 Investments................................................. 3,896,412 11,769,610 Intangible assets........................................... 13,951,246 10,174,034 Amounts due from Cox Enterprises, Inc. (CEI)................ 5,808 114,821 Other assets................................................ 514,143 223,965 ----------- ----------- Total assets...................................... $24,720,824 $26,614,497 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses....................... $ 714,191 $ 477,134 Deferred income taxes....................................... 4,592,655 6,670,521 Other liabilities........................................... 372,085 209,211 Debt........................................................ 8,543,762 6,375,795 ----------- ----------- Total liabilities................................. 14,222,693 13,732,661 ----------- ----------- Commitments and contingencies (Note 16) Minority interest in equity of consolidated subsidiaries.... 126,447 195,616 Cox-obligated capital and preferred securities of subsidiary trusts.................................................... 1,155,411 1,150,636 Shareholders' equity Series A convertible preferred stock -- liquidation preference of $22.1375 per share, $1 par value; 10,000,000 shares authorized; shares issued and outstanding: 4,836,372................................. 4,836 4,836 Class A common stock, $1 par value; 671,000,000 shares authorized; shares issued: 577,725,528 and 576,168,914; shares outstanding: 572,227,128 and 576,168,914........ 577,726 576,169 Class C common stock, $1 par value; 62,000,000 shares authorized; shares issued and outstanding: 27,597,792............................................. 27,598 27,598 Additional paid-in capital................................ 3,872,726 3,835,639 Retained earnings......................................... 4,157,460 2,232,205 Accumulated other comprehensive income.................... 787,816 4,859,137 Class A common stock in treasury, at cost: 5,498,400 shares................................................. (211,889) -- ----------- ----------- Total shareholders' equity........................ 9,216,273 11,535,584 ----------- ----------- Total liabilities and shareholders' equity........ $24,720,824 $26,614,497 =========== ===========
See notes to consolidated financial statements. 41 44 COX COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 --------------------------------------------- 2000 1999 1998 ------------- ------------- ------------- (THOUSANDS OF DOLLARS, EXCLUDING SHARE DATA) REVENUES............................................. $ 3,506,931 $ 2,318,135 $ 1,716,757 COSTS AND EXPENSES Programming costs.................................. 855,757 561,343 406,748 Selling, general and administrative................ 1,273,852 855,603 650,933 Depreciation....................................... 873,405 550,651 373,462 Amortization....................................... 363,082 165,049 84,209 Gain on sale and exchange of cable systems......... -- (77,361) -- ------------ ------------ ------------ OPERATING INCOME..................................... 140,835 262,850 201,405 Interest expense..................................... (550,824) (305,736) (223,326) Equity in net losses of affiliated companies......... (7,294) (90,477) (547,202) Gain on investments, net............................. 3,281,986 1,569,389 2,484,162 Gain on issuance of stock by affiliated companies.... -- -- 165,342 Dividend income...................................... 12,733 46,646 12,164 Other, net........................................... (5,322) (2,184) 942 ------------ ------------ ------------ INCOME BEFORE INCOME TAXES AND MINORITY INTEREST..... 2,872,114 1,480,488 2,093,487 Income tax expense................................... 877,031 579,965 822,815 ------------ ------------ ------------ INCOME BEFORE MINORITY INTEREST...................... 1,995,083 900,523 1,270,672 Minority interest, net of tax........................ (69,828) (18,595) -- ------------ ------------ ------------ NET INCOME........................................... $ 1,925,255 $ 881,928 $ 1,270,672 ============ ============ ============ SHARE DATA Basic net income per share......................... $ 3.20 $ 1.54 $ 2.33 Diluted net income per share....................... 3.16 1.51 2.30 Basic weighted-average shares outstanding.......... 601,951,744 572,608,878 545,626,528 Diluted weighted-average shares outstanding........ 608,548,749 583,081,565 552,421,730
See notes to consolidated financial statements. 42 45 COX COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CLASS A ACCUMULATED COMMON SERIES A COMMON STOCK ADDITIONAL OTHER STOCK IN PREFERRED ------------------ PAID-IN RETAINED COMPREHENSIVE TREASURY, STOCK CLASS A CLASS C CAPITAL EARNINGS INCOME (LOSS) AT COST --------- -------- ------- ---------- ---------- ------------- --------- (THOUSANDS OF DOLLARS) DECEMBER 31, 1997... -- $514,552 $27,598 $1,519,758 $ 79,605 $ 215,799 -- Net income........ 1,270,672 Issuance of stock related to stock compensation plans (including tax benefit on stock options exercised)...... 1,224 10,888 Issuance of Class A common stock and Series A convertible preferred stock related to the acquisition of Prime South..... $4,836 11,336 341,831 Change in net accumulated unrealized gain on securities... Other comprehensive income.......... 1,378,467 Comprehensive income.......... ------ -------- ------- ---------- ---------- ----------- --------- DECEMBER 31, 1998... 4,836 527,112 27,598 1,872,477 1,350,277 1,594,266 -- Net income........ 881,928 Issuance of stock related to stock compensation plans (including tax benefit on stock options exercised)...... 634 14,054 Issuance of stock related to the TCA merger...... 38,323 1,607,051 Issuance of common stock related to public offering........ 10,100 327,784 Fair value of forward purchase contracts, less the present value of contract adjustment payments issued as a part of FELINE PRIDES... 14,273 Change in net accumulated unrealized gain on securities... Other comprehensive income.......... 3,264,871 Comprehensive income.......... ------ -------- ------- ---------- ---------- ----------- --------- DECEMBER 31, 1999... 4,836 576,169 27,598 3,835,639 2,232,205 4,859,137 -- Net income........ 1,925,255 Issuance of stock related to stock compensation plans (including tax benefit on stock options exercised)...... 1,557 30,713 Purchase of 5,498,400 shares of Class A common stock for treasury, at cost............ $(211,889) Proceeds from issuance of put options......... 6,374 Change in net accumulated unrealized gain on securities... Other comprehensive loss............ (4,071,321) Comprehensive loss............ ------ -------- ------- ---------- ---------- ----------- --------- DECEMBER 31, 2000... $4,836 $577,726 $27,598 $3,872,726 $4,157,460 $ 787,816 $(211,889) ====== ======== ======= ========== ========== =========== ========= COMPREHENSIVE TOTAL INCOME (LOSS) ----------- ------------- (THOUSANDS OF DOLLARS) DECEMBER 31, 1997... $ 2,357,312 Net income........ 1,270,672 $ 1,270,672 ----------- Issuance of stock related to stock compensation plans (including tax benefit on stock options exercised)...... 12,112 Issuance of Class A common stock and Series A convertible preferred stock related to the acquisition of Prime South..... 358,003 Change in net accumulated unrealized gain on securities... 1,378,467 ----------- Other comprehensive income.......... 1,378,467 1,378,467 ----------- Comprehensive income.......... $ 2,649,139 ----------- =========== DECEMBER 31, 1998... 5,376,566 Net income........ 881,928 $ 881,928 ----------- Issuance of stock related to stock compensation plans (including tax benefit on stock options exercised)...... 14,688 Issuance of stock related to the TCA merger...... 1,645,374 Issuance of common stock related to public offering........ 337,884 Fair value of forward purchase contracts, less the present value of contract adjustment payments issued as a part of FELINE PRIDES... 14,273 Change in net accumulated unrealized gain on securities... 3,264,871 ----------- Other comprehensive income.......... 3,264,871 3,264,871 ----------- Comprehensive income.......... $ 4,146,799 ----------- =========== DECEMBER 31, 1999... 11,535,584 Net income........ 1,925,255 $ 1,925,255 ----------- Issuance of stock related to stock compensation plans (including tax benefit on stock options exercised)...... 32,270 Purchase of 5,498,400 shares of Class A common stock for treasury, at cost............ (211,889) Proceeds from issuance of put options......... 6,374 Change in net accumulated unrealized gain on securities... (4,071,321) ----------- Other comprehensive loss............ (4,071,321) (4,071,321) ----------- Comprehensive loss............ $(2,146,066) ----------- =========== DECEMBER 31, 2000... $ 9,216,273 ===========
See notes to consolidated financial statements. 43 46 COX COMMUNICATIONS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 --------------------------------------- 2000 1999 1998 ----------- ----------- ----------- (THOUSANDS OF DOLLARS) CASH FLOWS FROM OPERATING ACTIVITIES Net income.............................................. $ 1,925,255 $ 881,928 $ 1,270,672 Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions: Depreciation and amortization......................... 1,236,487 715,700 457,671 Equity in net losses of affiliated companies.......... 7,294 90,477 547,202 Deferred income taxes................................. 451,004 366,579 972,663 Gain on sale and exchange of cable systems, net....... -- (77,361) -- Gain on investments, net.............................. (3,281,986) (1,569,389) (2,484,162) Gain on issuance of stock by affiliated companies..... -- -- (165,342) Minority interest, net of dividends paid.............. 63,227 15,845 -- (Increase) decrease in accounts and notes receivable.... (156,278) 28,719 (17,348) (Increase) decrease in prepaid expenses................. 28,629 (117,076) 8,744 Increase in accounts payable and accrued liabilities.... 204,009 104,864 9,122 Increase (decrease) in other liabilities................ 65,297 (43,673) 49,797 Increase (decrease) in taxes payable.................... (231,631) 33,436 13,619 Other, net.............................................. (5,060) (28,087) 4,534 ----------- ----------- ----------- Net cash provided by operating activities.......... 306,247 401,962 667,172 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures.................................... (2,188,168) (1,154,527) (808,902) Investments in affiliated companies..................... (83,252) (30,955) (169,102) Proceeds from the sale and exchange of investments...... 2,859,872 987,084 353,159 Restricted cash invested................................ -- -- 204,210 Payments for purchases of cable systems................. (2,777,717) (3,522,412) (1,230,453) (Increase) decrease in amounts due from CEI............. 109,013 (114,821) 50,856 Other, net.............................................. 3,235 (13,938) (187) ----------- ----------- ----------- Net cash used in investing activities.............. (2,077,017) (3,849,569) (1,600,419) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Revolving credit and commercial paper borrowings (repayments), net..................................... 1,013,672 (862,443) (106,914) Proceeds from issuance of debt, net of debt issuance costs, and capital and preferred securities of subsidiary trusts..................................... 2,539,747 4,330,323 841,892 Repayment of debt....................................... (1,504,010) (196,875) (17,689) Increase (decrease) in amounts due to CEI............... -- (170,596) 170,596 Proceeds from issuance of Class A common stock, net of offering costs........................................ 21,954 347,240 12,112 Repurchase of Class A common stock...................... (211,889) -- -- Distributions paid on capital and preferred securities of subsidiary trusts.................................. (82,260) -- -- Other, net.............................................. 38,685 2,667 35,595 ----------- ----------- ----------- Net cash provided by financing activities.......... 1,815,899 3,450,316 935,592 ----------- ----------- ----------- Net increase in cash.................................... 45,129 2,709 2,345 Cash at beginning of period............................. 33,313 30,604 28,259 ----------- ----------- ----------- Cash at end of period................................... $ 78,442 $ 33,313 $ 30,604 =========== =========== ===========
See notes to consolidated financial statements. 44 47 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BASIS OF PRESENTATION Cox Communications, Inc. (Cox), an indirect 67.8% majority-owned subsidiary of Cox Enterprises, Inc. (CEI), is one of the nation's largest multi-service advanced communications companies, serving more than 6.2 million customers as of December 31, 2000. Cox owns U.S. broadband network operations and investments focused on cable programming, telecommunications and technology. Cox operates in one operating segment, broadband communications. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER ITEMS Basis of Consolidation The consolidated financial statements include the accounts of Cox and all wholly-owned, majority-owned or controlled subsidiaries. All significant intercompany accounts and transactions among consolidated entities have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of deposits with banks and financial institutions which are unrestricted as to withdrawal or use and which have maturities of three months or less. Plant and Equipment Plant and equipment are stated at cost less accumulated depreciation. Additions to cable plant generally include material, labor and overhead. Depreciation is computed using the straight-line method over estimated useful lives as follows: five to 20 years for buildings and building improvements; five to 12 years for cable systems; and three to 10 years for other plant and equipment. The costs associated with the construction of cable transmission and distribution facilities and new cable service installations are capitalized. Costs include all direct labor and materials as well as certain indirect costs. Expenditures for maintenance and repairs are charged to operating expense as incurred. At the time of retirements, sales or other dispositions of property, the original cost and related accumulated depreciation are removed from the respective accounts, and the gains or losses are presented as a component of operating income. Investments Investments in affiliated entities are accounted for either under the equity method or are stated at cost depending on Cox's ability to exercise significant influence over the operating and financial policies of the investee. Equity method investments are recorded at cost and adjusted periodically to recognize Cox's proportionate share of the investee's income or loss, additional contributions made and dividends received. When Cox's cumulative proportionate share of loss exceeds the carrying amount of the equity method investment, application of the equity method is suspended and Cox's proportionate share of the investees' loss is not recognized unless Cox is committed to provide further financial support to the investee. Cox will resume application of the equity method when the investee becomes profitable and Cox's proportionate share of the investees' earnings equals its cumulative proportionate share of losses that were not recognized during the 45 48 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) period the application of the equity method was suspended. Investments stated at cost are adjusted for any known diminution in value determined to be to be other than temporary. Investments in publicly traded entities are classified as available-for-sale under Statement of Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities, and are recorded at their fair value, with unrealized gains and losses resulting from changes in fair value between measurement dates recognized as a component of accumulated other comprehensive income. Realized losses for any decline in market value considered to be other than temporary are recognized in earnings. Realized gains and losses on investments sold or impaired are recognized using the first-in first-out method. Intangible Assets Franchise value and license acquisition costs are derived from the value ascribed to an acquired subscriber base for which Cox is granted a non-exclusive cable system franchise. Generally, Cox is able to renew its franchises which, as an incumbent franchisee, are assessed by the local franchising authority on its own merit and not as part of a comparative process with competing applications. A local franchising authority may not unreasonably withhold the renewal of a franchise. Accordingly, franchise and license acquisition costs are amortized using the straight-line method over their legal or estimated useful lives not to exceed 40 years. The excess cost over the fair value of net assets acquired is amortized using the straight-line method over its estimated useful life not to exceed 40 years. Cox assesses on an on-going basis the recoverability of certain intangible assets based on estimates of future undiscounted cash flows for the applicable business acquired compared to net book value. If the future undiscounted cash flow estimate is less than net book value, net book value is then reduced to the undiscounted cash flow estimate. Cox also evaluates the amortization periods of intangible assets to determine whether events or circumstances warrant revised estimates of useful lives. Valuation of Long-Lived Assets Cox evaluates the recoverability of long-lived assets, including plant and equipment and intangible assets, for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, with any impairment losses being reported in the period in which the recognition criteria are first applied based on the fair value of the asset. Long-lived assets and certain intangible assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. Income Taxes Prior to October 1998, the accounts of Cox were included in the consolidated federal income tax return and certain state income tax returns of CEI. Current federal and state income tax expenses and benefits were allocated on a separate return basis to Cox based on the current year tax effects of the inclusion of its income, expenses and credits in the consolidated income tax returns of CEI or based on separate state income tax returns. In connection with Cox's acquisition of the Las Vegas, Nevada cable system in October 1998, CEI's ownership interest in Cox was reduced and as such, effective October 1998, Cox was no longer included in the consolidated federal income tax return of CEI. See Note 4. "Acquisitions, Dispositions and Exchanges of Businesses." Cox provides for income taxes using the liability method in accordance with SFAS No. 109, Accounting for Income Taxes. SFAS No. 109 requires an asset and liability based approach in accounting for income taxes. Deferred income taxes reflect the net tax effect on future years of temporary differences between the carrying amount of assets and liabilities for financial statement and income tax purposes. Valuation allowances reduce deferred tax assets to an amount that represents management's best estimate of such deferred tax 46 49 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) assets that more likely than not will be realized. The financial effect of changes in tax laws or rates is accounted for in the period of enactment. Debt Issuance Costs Costs associated with the refinancing and issuance of debt as well as debt discounts, if any, are deferred and expensed as interest over the term of the related debt agreement. Revenue Recognition Revenue is recognized as broadband communications services are provided as persuasive evidence of an arrangement exists, when the price to the customer is fixed and determinable and collectability is reasonably assured. Credit risk is managed by disconnecting services to customers who are delinquent. Other revenues are recognized as services are provided. Revenues obtained from the connection of customers to the broadband network are less than related direct selling costs, therefore, such revenues are recognized as received. Pension, Postretirement and Postemployment Benefits Cox provides defined pension benefits to substantially all employees based on years of service and compensation during those years. Cox provides certain health care and life insurance benefits to substantially all employees and retirees through certain CEI plans. Expense related to the CEI plans is allocated to Cox through the intercompany account. The amount of the allocations is based on actuarial determinations of the effects of Cox employees' participation in the plans. Stock Compensation Plans Cox accounts for employee equity-based compensation using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and discloses the pro forma effect on net income and earnings per share of using the fair value method as required by SFAS No. 123, Accounting for Stock-Based Compensation. Gain on Issuance of Stock by Affiliated Companies Gains recognized on the issuance of stock by affiliated entities are reflected as income in the Consolidated Statements of Operations in accordance with Staff Accounting Bulletin (SAB) No. 51, Accounting for Sales of Stock by a Subsidiary. Net Income Per Share Cox computes earnings per share in accordance with SFAS No. 128, Earnings per Share. Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is computed in the same manner, but also includes the dilutive effect of common stock equivalents and other financial instruments which are convertible or exercisable for Cox Class A common stock as further described in Note 12. "Shareholders' Equity." Derivative Financial Instruments Cox is exposed to fluctuations in the fair value of certain assets, liabilities, equity and forecasted transactions. Cox uses derivative financial instruments such as interest rate swap agreements to manage exposure to the fair value of its fixed-rate debt instruments; a right to sell agreement to manage exposure to fluctuations in the fair value of Cox's investment in shares of Excite@Home common stock; and equity collar agreements to manage exposure to fluctuations in the fair value of Cox's investment in shares of unregistered 47 50 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Sprint PCS common stock -- Series 2. Cox also manages exposure to fluctuations in the fair value of its investment in Sprint PCS common stock through the issuance of certain exchangeable subordinated debentures whose value, in part, is derived from the fair value of Sprint PCS common stock. From time to time, Cox invests in warrants to purchase shares of publicly traded and privately held entities' common stock. Interest rate swaps are designated as hedges of certain fixed rate debt instruments and periodic cash payments are accrued on a settlement basis as an adjustment to interest expense. Changes in fair value between measurement dates of Cox's right to sell its shares of Excite@Home common stock and investments in warrants to purchase shares of publicly traded entities are recorded as a component of accumulated other comprehensive income. Changes in fair value between measurement dates of the equity collar agreements are recognized in earnings or recorded as a component of accumulated other comprehensive income depending on the nature of the hedging relationship. Changes in fair value between measurement dates of the derivative instruments embedded in the exchangeable subordinated debentures are recognized in earnings. Cox does not hold or issue any derivative financial instruments for trading purposes and is not a party to leveraged instruments. The credit risks associated with Cox's derivative financial instruments are controlled through the evaluation and monitoring of the creditworthiness of the counterparties. Although Cox may be exposed to losses in the event of nonperformance by the counterparties, Cox does not expect such losses, if any, to be significant. Recently Issued Accounting Pronouncements In December 1999, the Securities and Exchange Commission (SEC) issued SAB No. 101, Revenue Recognition in Financial Statements. SAB No. 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. SAB No. 101, as amended by SAB No. 101B, became effective in the fourth quarter of fiscal years beginning after December 15, 1999. Accordingly, Cox adopted SAB No. 101 on October 1, 2000. There was no significant impact on Cox's consolidated financial statements upon adoption of SAB No. 101. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities -- Deferral of the Effective Date of FASB Statement No. 133, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, which is effective for Cox as of January 1, 2001. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities measured at fair value. In addition, all derivatives used in hedging relationships must be designated, reassessed and documented pursuant to the provisions of SFAS No. 133. Under SFAS No. 133, the accounting for changes in the fair value of a derivative will depend on the use of the derivative. Changes in fair values of undesignated derivatives will be recognized in earnings. Changes in fair values of derivatives designated as hedges of assets, liabilities and firm commitments will be recognized in earnings as offsets to the changes in fair value of the related hedged assets, liabilities and firm commitments. Changes in fair values of derivatives designated as hedges of forecasted transactions will be deferred and recorded as a component of accumulated other comprehensive income until the hedged forecasted transactions occur and are recognized in earnings. Cox's adoption of SFAS No. 133 on January 1, 2001 is expected to result in an after-tax transition adjustment to increase earnings by approximately $718.7 million and an after-tax transition adjustment to reduce accumulated other comprehensive income by approximately $194.0 million in the first quarter of 2001. In addition, the adoption is expected to impact assets and liabilities recorded on the consolidated balance sheet. SFAS No. 133 also permits a one-time transfer of an available-for-sale security into the trading category. Accordingly, Cox elected to reclassify approximately 19.5 million shares of its investment in Sprint PCS common stock -- Series 2 from available-for-sale to trading on January 1, 2001. As a result of this 48 51 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) reclassification, Cox will recognize a pre-tax gain of approximately $230.2 million during the first quarter of 2001, representing the accumulated unrealized gain on investment in Sprint PCS common stock -- Series 2, previously recorded as a component of accumulated other comprehensive income. Reclassifications Certain amounts in the 1999 and 1998 consolidated financial statements have been reclassified for comparative purposes with 2000. 3. CASH MANAGEMENT SYSTEM Cox participates in CEI's cash management program, whereby CEI transfers funds from Cox's depository accounts and transfers funds to financial institutions upon daily notification of checks presented for payment. Book overdrafts of $104.2 million and $71.9 million existed at December 31, 2000 and 1999, respectively, as a result of checks outstanding. These book overdrafts are reclassified as accounts payable and are considered financing activities in the Consolidated Statements of Cash Flows. 4. ACQUISITIONS, DISPOSITIONS AND EXCHANGES OF BUSINESSES 2000 Acquisitions and Transactions In January 2000, Cox completed the acquisition of cable systems serving 522,000 customers in Kansas, Oklahoma and North Carolina from Multimedia Cablevision, Inc., a subsidiary of Gannett Co., Inc., for $2.7 billion. In March 2000, Cox and AT&T Corp. (AT&T) exchanged Cox's 50.3 million shares of AT&T common stock for the stock of AT&T subsidiaries that own certain cable systems serving approximately 495,000 customers and certain other assets and liabilities, including cash. Cox received: cable systems serving Oklahoma and Louisiana; the remaining 20% ownership interest in a partnership in which Cox acquired an 80% interest through its merger with TCA Cable TV, Inc. (TCA); Peak Cablevision LLC, which has customers in Oklahoma, Arkansas, Utah and Nevada; and approximately $798.0 million in other assets and liabilities, including cash. Cox recognized a pre-tax gain of $775.9 million in connection with this transaction. 1999 Acquisitions and Transactions In August 1999, Cox completed its merger with TCA, a cable television operator serving approximately 883,000 customers in Texas, Arkansas, Louisiana and four other states for $1.6 billion in cash, 38.3 million shares of Cox common stock and assumed indebtedness of $540.0 million. Upon completion of the merger, Cox repaid $340.0 million of the assumed TCA debt. Cox also acquired VPI Communications, Inc., an affiliate of TCA, and TCA's interest in two majority-owned partnerships in connection with the TCA merger. Also in August 1999, Cox exchanged its cable systems in Massachusetts, serving more than 54,000 customers, for MediaOne properties in Connecticut and Rhode Island, serving 51,000 customers, and cash. Cox recognized a pre-tax gain of $77.4 million in connection with this transaction. In October 1999, Cox completed the acquisition of cable systems serving more than 260,000 customers in northern Virginia from Media General, Inc. for $1.4 billion. Also in October 1999, Cox reorganized its partnership with Time Warner Entertainment Company, L.P., under which Cox acquired control of the cable system serving Fort Walton Beach, Florida and received $104.5 million, and Time Warner acquired control of the cable system serving Staten Island, New York. Cox recognized a pre-tax gain of $94.8 million in connection with this reorganization. 49 52 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 1998 Acquisitions and Transactions In June 1998, Cox completed the acquisition of a cable system serving approximately 115,000 customers in Arizona from Tele-Communications, Inc. (TCI) for $250.2 million. In October 1998, Cox completed the acquisition of a cable system serving approximately 293,000 residential customers and 105,000 hotel units in the greater Las Vegas area and certain related businesses owned by Prime South Diversified, Inc. for a combination of common and convertible preferred stock and cash with an aggregate value of approximately $1.3 billion, including the refinancing of certain Prime South indebtedness. See Note 12. "Shareholders' Equity." The purchase price of each of the acquisitions was allocated to the assets purchased and liabilities assumed based on their estimated fair market value at the date of acquisition in accordance with APB Opinion No. 16, Business Combinations. The purchase price allocations of each acquisition are finalized as independent appraisals of certain tangible and intangible assets acquired are received. No material adjustments to the initial purchase price allocations are expected. The excess of purchase price over the fair value of net assets acquired has been recorded as franchise value and license acquisition costs and is being amortized on a straight-line basis over 40 years. The following summarized unaudited pro forma combined financial information for the years ended December 31, 2000 and 1999 assumes the acquisitions of cable systems from Multimedia and AT&T occurred on January 1 of each year and also that the TCA merger and the acquisition of cable systems from Media General occurred on January 1, 1999.
PRO FORMA YEAR ENDED DECEMBER 31 -------------------------------- 2000 1999 ------------ ------------ (THOUSANDS OF DOLLARS, EXCLUDING EARNINGS PER SHARE) (UNAUDITED) Revenue............................................... $3,573,339 $3,050,938 Operating income...................................... 142,023 289,954 Net income............................................ 1,153,350 773,879 Earnings per share Basic net income per share.......................... $ 1.92 $ 1.28 Diluted net income per share........................ 1.90 1.26
5. INVESTMENTS
DECEMBER 31 ------------------------ 2000 1999 ---------- ----------- (THOUSANDS OF DOLLARS) Equity method investments................................... $ 86,394 $ 77,945 Investments stated at fair value............................ 3,784,799 11,685,786 Investments stated at cost.................................. 25,219 5,879 ---------- ----------- Total investments...................................... $3,896,412 $11,769,610 ========== ===========
EQUITY METHOD INVESTMENTS Discovery Communications, Inc. The principal businesses of Discovery are the advertiser-supported basic cable networks The Discovery Channel, The Learning Channel, Animal Planet Network, The Travel Channel and Discovery Europe and the retail businesses of Discovery.com. In 2000, Cox ceased applying the equity method on its investment in Discovery as Cox's cumulative proportionate share of equity in net losses exceeded the carrying amount of the investment. During the years ended December 31, 1999 and 1998, Cox 50 53 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) recognized equity in net losses in affiliated companies of $11.8 million and $22.0 million, respectively, related to its investment in Discovery. Cox Communications PCS, L.P. In May 1999, Cox transferred its remaining 32.0% equity interest in Cox Communications PCS, L.P. (Cox PCS) to Sprint Corporation in exchange for approximately 38.1 million shares of unregistered Sprint PCS common stock -- Series 2. As a result of this transaction, Cox recognized a pre-tax gain of $908.5 million. During the years ended December 31, 1999 and 1998, Cox recognized equity in net losses in affiliated companies of $65.1 million and $107.8 million, respectively, related to its investment in Cox PCS. TWC Cable Partners. In October 1999, Cox reorganized its partnership with Time Warner Entertainment Company, L.P., under which Cox acquired control of the cable system serving Fort Walton Beach, Florida and received $104.5 million, and Time Warner acquired control of the cable system serving Staten Island, New York. Cox recognized a pre-tax gain of $94.8 million in connection with this reorganization. Cox's share of equity in net losses were nominal for the years ended December 31, 1999 and 1998 related to its investment in TWC Cable Partners. Summarized combined unaudited financial information for all equity method investments and Cox's proportionate share (determined using Cox's ownership interest in each investment) for 2000, 1999 and 1998 is as follows:
COMBINED FINANCIAL INFORMATION COX'S PROPORTIONATE SHARE YEAR ENDED DECEMBER 31 YEAR ENDED DECEMBER 31 ------------------------------------- -------------------------------- 2000 1999 1998 2000 1999 1998 ---------- ---------- ----------- -------- --------- --------- (THOUSANDS OF DOLLARS) (UNAUDITED) Revenues................... $1,917,649 $1,732,838 $ 3,358,790 $494,137 $ 470,331 $ 731,670 Operating income (loss).... 210,339 (350,062) (2,269,529) 49,958 (94,911) (419,453) Net loss................... (221,894) (450,654) (2,774,548) (56,930) (121,861) (516,256)
COMBINED FINANCIAL INFORMATION DECEMBER 31 ----------------------- 2000 1999 ---------- ---------- (THOUSANDS OF DOLLARS) (UNAUDITED) Current assets.............................................. $ 805,318 $ 853,678 Noncurrent assets........................................... 2,270,890 1,566,648 Current liabilities......................................... 753,099 398,736 Noncurrent liabilities...................................... 2,862,272 2,236,958
Cox's proportionate share of the net losses as stated above is not equal to the equity in net losses of affiliated companies as reported in the Consolidated Statements of Operations primarily due to discontinuing the application of equity method accounting for certain investments when aggregate net losses from the investments have exceeded their carrying value and amortization of other expenses. At December 31, 2000, the aggregate unamortized excess of Cox's investments over its equity in the underlying net assets of the affiliates was approximately $23.2 million and is being amortized over 35 years. The investment balances and supplemental financial information above include the effects of the Cox PCS stock transaction, AT&T/Teleport merger and the Sprint PCS reorganization, as described herein. Additionally, the above balances include investments in and advances to affiliated companies. The advances are generally interest-bearing long-term notes receivable, which total $36.5 million and $30.8 million at December 31, 2000 and 1999, respectively. Interest income recognized on notes receivable was $4.0 million, $3.6 million and $0.4 million in 2000, 1999 and 1998, respectively. 51 54 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INVESTMENTS STATED AT FAIR VALUE The aggregate cost of Cox's investments stated at fair value at December 31, 2000 and 1999 was $2,499.0 million and $3,784.8 million, respectively. Gross unrealized gains and losses on investments were $1,322.2 million and $36.4 million, respectively, at December 31, 2000 and $7,901.0 million and zero, respectively, at December 31, 1999. Sprint PCS. Sprint PCS is a personal communications services provider and an indirect wholly-owned subsidiary of Sprint. Prior to November 1998, Cox owned a 15% interest in Sprint Spectrum L.P., a partnership that held 29 broadband personal communications services licenses. Cox recorded $330.0 million of equity in net losses in affiliated companies for the year ended December 31, 1998 related to its investment in Sprint Spectrum. Cox also owned a 17.6% interest in PhillieCo L.P., a partnership that held a broadband personal communications services license for the Philadelphia MTA and was affiliated with the Sprint PCS nationwide network. Cox's share of equity in net losses was nominal for the year ended December 31, 1998 related to its investment in PhillieCo. In November 1998, as a result of a reorganization by Sprint Corporation, both the Sprint Spectrum and PhillieCo partnerships were combined into a new publicly traded tracking stock of Sprint, Sprint PCS. Cox's equity ownership in both Sprint Spectrum and PhillieCo was converted into unregistered shares of Sprint PCS common stock -- Series 2 and convertible preferred stock and warrants which are convertible into and exercisable for Sprint PCS common stock -- Series 2. Each share of Cox's Sprint PCS common stock -- Series 2 automatically converts into a share of Sprint PCS common stock -- Series 1, the series traded on the New York Stock Exchange, upon transfer of the Series 2 shares to any holder other than Cox, Comcast Corporation and AT&T Corp. or their respective affiliates. Cox recognized a $769.5 million pre-tax gain in connection with this reorganization in fourth quarter 1998 based on the fair market value of the common stock, convertible preferred stock and warrants received and has accounted for these instruments at fair value. During 2000, Cox sold a total of 28.1 million shares of its Sprint PCS common stock for aggregate proceeds of $1,422.6 million and recognized total pre-tax gains of $1,193.0 million. Also during 2000, Cox issued exchangeable subordinated debentures which are indexed to and settleable based on the trading price of Sprint PCS common stock and are exchangeable for cash and/or shares of Cox's Sprint PCS common stock as further described in Note 7. "Debt." In addition, in January 2001, Cox entered into a series of prepaid forward contracts to sell up to 19.5 million shares of its Sprint PCS common stock -- Series 2 as further described in Note 7. "Debt." At December 31, 2000, Cox's investment in Sprint PCS, was comprised of 104.7 million shares of Sprint PCS common stock -- Series 2, as adjusted for Sprint PCS's two-for-one stock split in February 2000, and warrants and convertible preferred stock which are exercisable for or convertible into approximately 10.3 million shares of Sprint PCS common stock -- Series 2. The estimated fair value of Cox's investment in Sprint PCS was $2,330.3 million and $7,285.3 million at December 31, 2000 and 1999, respectively. Flextech plc. In March 2000, Cox sold its entire interest in Flextech, an English publicly held programming company, for proceeds of $522.3 million and recognized a pre-tax gain of $318.9 million. Excite@Home. Excite@Home is both an Internet service provider and supplier of comprehensive Internet navigation services. In August 2000, Cox consummated an agreement with Excite@Home pursuant to which the ownership, voting control and management of Excite@Home were restructured. As a result, Cox's veto rights and representation on the Excite@Home board were terminated. In addition, Cox agreed to extend its distribution of certain Excite@Home services through June 2006. Cox will receive warrants to purchase two shares of Excite@Home Series A common stock for each home its cable systems pass. Cox also has the right, under certain circumstances, to sell its shares in Excite@Home to AT&T, with a maximum amount payable to Cox of approximately $1.4 billion in cash or shares of AT&T common stock, as elected by Cox. Cox has accounted for this right as an investment, classified as available-for-sale, at its estimated fair 52 55 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) value with unrealized gains or losses resulting from changes in the fair value between measurement dates as a component of accumulated other comprehensive income. In connection with the consummation of this agreement, Cox recognized a pre-tax gain of approximately $990.5 million. At December 31, 2000, Cox's investment in Excite@Home was comprised of 29.1 million shares of common stock and the right to sell such shares to AT&T. The estimated fair value of Cox's investment in Excite@Home, including the value ascribed to Cox's right to sell its Excite@Home shares to AT&T, was approximately $1.4 billion and $1.25 billion at December 31, 2000 and 1999, respectively. In January 2001, Cox exercised its right under the agreement with AT&T to transfer the corporation that owns its shares of Excite@Home to AT&T for shares of AT&T common stock. Cox anticipates receiving approximately 64.4 million shares of AT&T stock upon consummation of this transaction, which is currently expected to occur during the first half of 2001. AT&T. Prior to July 1998, Cox owned a 22.4% interest in Teleport Communications Group, Inc. (Teleport). During 1998, Cox recognized a pre-tax gain in accordance with SAB No. 51 of $150.4 million in connection with an issuance of stock by Teleport. In July 1998, Cox exchanged its interest in Teleport for 55.3 million shares of AT&T common stock, as adjusted for AT&T's three-for-two stock split in April 1999. As a result of the exchange, Cox recognized a pre-tax gain of $1.7 billion in September 1998 and accounted for the AT&T common stock at fair value. Cox sold 5.0 million of these shares in December 1998 for aggregate proceeds of $215.6 million and recognized a pre-tax gain of $30.4 million. In March 2000, Cox's remaining 50.3 million shares were exchanged for the stock of AT&T subsidiaries that own certain cable systems. See Note 4. "Acquisitions, Disposals and Exchanges of Businesses." Telewest Communications plc. Telewest Communications plc (Telewest) is a company that operates and constructs cable television and telephony systems in the United Kingdom. In January 1999, Cox sold its entire interest in Telewest for $727.9 million and recognized a pre-tax gain of $433.1 million. INVESTMENTS STATED AT COST PrimeStar Partners, L.P. In April 1998, Cox contributed its 10.4% partnership interest and net assets in and operations of PrimeStar Partners, L.P., a provider of direct broadband satellite services, to a newly formed entity, PrimeStar, Inc., in exchange for a 9.43% interest and $74.0 million in cash. As a result, Cox recorded a $37.3 million pre-tax gain based on the estimated fair market value of the common stock received. In December 1998, however, Cox concluded, after careful analysis, that it would not recover its investment and recognized $131.4 million in charges related to its investment in PrimeStar, Inc. OTHER During 2000, Cox recorded an aggregate pre-tax loss of $22.8 million on certain of its investments as a result of a decline in market value that was considered other than temporary. These losses are included in net gain on investments in Cox's Consolidated Statement of Operations. Cox has several other fair value, equity and cost method investments which are not, individually or in the aggregate, significant in relation to the Consolidated Balance Sheets at December 31, 2000 and 1999. 53 56 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 6. INCOME TAXES Current and deferred income tax expenses (benefits) are as follows:
YEAR ENDED DECEMBER 31 ------------------------------- 2000 1999 1998 -------- -------- --------- (THOUSANDS OF DOLLARS) CURRENT Federal............................................. $381,276 $164,338 $(179,684) State............................................... 44,751 49,048 29,836 -------- -------- --------- Total current.................................... 426,027 213,386 (149,848) -------- -------- --------- DEFERRED Federal............................................. 362,498 318,672 885,064 State............................................... 88,506 47,907 87,599 -------- -------- --------- Total deferred................................... 451,004 366,579 972,663 -------- -------- --------- Net income tax expense........................... $877,031 $579,965 $ 822,815 ======== ======== =========
The difference between net income tax expense and income taxes expected at the U.S. statutory federal income tax rate of 35% are as indicated below:
YEAR ENDED DECEMBER 31 -------------------------------- 2000 1999 1998 ---------- -------- -------- (THOUSANDS OF DOLLARS) Federal tax expense at statutory rates on income before income taxes................................. $1,005,240 $518,171 $732,720 State income taxes, net of federal benefit............ 86,617 63,021 76,333 Amortization of acquisition adjustments............... 33,377 26,104 18,450 Gain on exchange of cable system...................... (271,567) -- -- Other, net............................................ 23,364 (27,331) (4,688) ---------- -------- -------- Net income tax expense.............................. $ 877,031 $579,965 $822,815 ========== ======== ========
Significant components of Cox's net deferred tax liability are as follows:
DECEMBER 31 ------------------------- 2000 1999 ----------- ----------- (THOUSANDS OF DOLLARS) Depreciation and amortization............................... $(3,029,006) $(2,324,083) Equity in net losses of affiliated companies................ (1,066,904) (1,339,886) Unrealized gain on securities............................... (493,184) (3,041,343) Other, net.................................................. (3,561) 34,791 ----------- ----------- Net deferred tax liability................................ $(4,592,655) $(6,670,521) =========== ===========
Cox is currently subject to various federal and state income tax return audits. Cox does not believe that current income tax audits will have a material impact on its financial statements. 54 57 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. DEBT
DECEMBER 31 ----------------------- 2000 1999 ---------- ---------- (THOUSANDS OF DOLLARS) Revolving credit facilities................................. $ -- $ -- Commercial paper............................................ 1,524,772 514,516 Medium-term notes........................................... 424,065 423,938 Notes and debentures........................................ 4,110,409 4,052,902 Exchangeable Subordinated Debentures due November 15, 2029...................................................... 1,272,188 1,272,188 Exchangeable Subordinated Debentures due March 14, 2030..... 274,996 -- Exchangeable Subordinated Discount Debentures due April 19, 2020...................................................... 804,646 -- Capitalized lease obligations............................... 105,516 91,176 Other....................................................... 27,170 21,075 ---------- ---------- Total debt................................................ $8,543,762 $6,375,795 ========== ==========
Shelf Registrations Cox had approximately $1.3 billion available under its existing shelf registration statements at December 31, 2000, of which $575.0 million is reserved pursuant to the underwriting agreement in connection with the issuance of RHINOS, as described in Note 8. "Cox-Obligated Capital and Preferred Securities of Subsidiary Trusts." In January 2001, Cox filed a new shelf registration statement with the SEC under which Cox, or certain wholly-owned Cox financing trusts, may from time to time offer and issue various debt and equity instruments for a maximum aggregate amount up to $2.0 billion. Of the $2.0 billion registered under this registration statement, $444.8 million represents a transfer of the remaining amount available under Cox's July 1999 shelf registration statement. The new registration statement was declared effective by the SEC in February 2001 and, including the amount reserved for the RHINOS, increased the total available to Cox under its shelf registration statements to approximately $2.9 billion. Revolving Credit Agreements Cox has a $1.5 billion 364-day credit agreement available through September 25, 2001 and a $0.9 billion 5-year credit agreement available through September 26, 2005. At Cox's election, the interest rate on these credit agreements is based on London Interbank Offered Rate (LIBOR), the certificate of deposit rate plus varying percentages or an alternate base rate. These credit agreements also impose a commitment fee on the unused portion of the total amount available based on a ratio of debt to operating cash flow, a non-GAAP measure of performance, and a utilization fee based on the level of borrowings. Cox had no borrowings outstanding under either credit agreement at December 31, 2000 and 1999. Commercial Paper Cox had outstanding commercial paper of approximately $1.5 billion at December 31, 2000 and $0.5 billion at December 31, 1999. This commercial paper is backed by amounts available under Cox's revolving credit agreements. The weighted-average interest rates for outstanding commercial paper were 6.7% and 5.4% for the years ended December 31, 2000 and 1999, respectively. Medium Term Notes At December 31, 2000 and 1999, Cox had outstanding borrowings under several fixed rate medium term notes due in varying amounts through 2028 which pay interest in cash at fixed rates ranging from 6.7% to 7.2% per annum. 55 58 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Notes and Debentures Cox had outstanding borrowings under several fixed-rate notes and debentures of approximately $3.9 and $3.5 billion at December 31, 2000 and 1999, respectively. The fixed-rate notes and debentures are due in varying amounts through 2033 and pay interest in cash at rates ranging from 6.375% to 7.875% per annum. In January 2000, Cox borrowed $500.0 million under a floating-rate bridge loan, which was subsequently repaid in March 2000. In March 2000, Cox called and redeemed all $525.0 million aggregate principal amount of its floating-rate notes due August 15, 2000. In June 2000, Cox repaid its 6.375% notes with an aggregate principal amount of $425.0 million upon their maturity. In November 2000, Cox issued two series of senior debt securities in an offering under its shelf registration statement with an aggregate principal amount of $1.0 billion, less offering costs and underwriting commissions of $5.9 million. Both securities are unsecured and rank equally with Cox's other unsecured senior indebtedness. The first series of securities, referred to as the 7.75% Notes, was issued with an aggregate principal amount of $800.0 million and is due November 1, 2010. The 7.75% Notes may be redeemed by Cox in whole or in part at any time prior to maturity at 100% of the principal amount plus accrued and unpaid interest and a make-whole premium, if any, and interest is payable on a semi-annual basis beginning May 1, 2001. The second series of securities, referred to as the MOPPRS/CHEERS, was issued with an aggregate principal amount of $200.0 million and is due November 7, 2012. The MOPPRS/CHEERS are subject to mandatory tender to the remarketing dealers on November 7, 2002 at 100% of the principal amount, if the remarketing dealers elect to remarket the MOPPRS/CHEERS. Otherwise, Cox will be required to repurchase the MOPPRS/CHEERS from the beneficial owners at 100% of the principal amount plus accrued interest, if any, if the remarketing dealers do not purchase the tendered MOPPRS/CHEERS or do not elect to remarket all or a portion of the MOPPRS/CHEERS. Unless maturity is extended under certain circumstances pursuant to a remarketing, the MOPPRS/CHEERS will mature on November 7, 2012. In addition, Cox may not redeem the MOPPRS/CHEERS prior to November 7, 2002. Interest on the MOPPRS/CHEERS is payable and reset quarterly at a floating rate of three month LIBOR plus 70 basis points. Thereafter, in the event the MOPPRS/CHEERS are remarketed, the interest rate on the MOPPRS/CHEERS will be reset in accordance with the terms of the remarketing. Exchangeable Subordinated Debentures Exchangeable Subordinated Debentures due November 15, 2029. In November 1999, Cox issued 14,375,000 PRIZES, under its shelf registration statement, for aggregate proceeds of approximately $1.3 billion, less offering costs and underwriting commissions of approximately $35.0 million. Interest on the PRIZES is payable quarterly at a rate of 7.75% per year on the original principal amount through November 15, 2002, and thereafter at a rate of 2% per year on the original principal amount. The original principal amount of each PRIZES is indexed to the trading price of Sprint PCS common stock. The maximum number of shares of Sprint PCS common stock attributable to each PRIZES is currently two shares, and the minimum number is equal to 1.7242 shares. The maximum and minimum number of reference shares will be redetermined on November 15, 2002, or in the case of a redemption of the PRIZES on a date which is between November 6 and November 15, 2002, effective on such redemption date. The payment upon maturity of the PRIZES is dependent upon the current market value of the maximum number of reference shares attributable to each PRIZES, plus a final period distribution premium, as defined. Prior to maturity, the PRIZES are exchangeable at the holders' option at any time at an amount dependent upon the current market value of the minimum number of reference shares attributable to each PRIZES, subject to adjustment under certain circumstances. In addition, the PRIZES are redeemable by Cox at any 56 59 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) time at a redemption price dependent upon the current market value of the maximum number of reference shares attributable to each PRIZES, plus the final period distribution and a make-whole premium until November 2002. Cox will have to pay an additional amount of premium if redeemed prior to November 15, 2002. Exchangeable Subordinated Debentures due March 14, 2030. In March 2000, Cox issued $275.0 million aggregate principal amount of Premium PHONES under its shelf registration statement, for net proceeds of approximately $269.5 million. Interest on the Premium PHONES is payable semi-annually at a rate of 3% per year on the original principal amount. Each Premium PHONES is indexed to the trading price of 16.28 shares of Sprint PCS common stock. Prior to March 14, 2002, the Premium PHONES are exchangeable at the holders' option initially for cash based on the market value of the shares underlying each Premium PHONES. On and after that date, the Premium PHONES can be exchanged by the holder based on the market value of the underlying shares for cash, shares of Sprint PCS common stock or a combination of both. In addition, on or after March 17, 2004, Cox may redeem the Premium PHONES for cash based on the market value of the underlying shares, plus accrued and unpaid interest and a final period distribution premium, as defined. At maturity, holders of the Premium PHONES are entitled to receive, at Cox's election, cash, equal to the then exchange market value of the underlying shares plus accrued and unpaid interest and a final period distribution, as defined, or the underlying shares themselves. Exchangeable Subordinated Discount Debentures due April 19, 2020. In April 2000, Cox issued $1.8 billion aggregate principal amount at maturity of Discount Debentures under its shelf registration statement for proceeds of approximately $764.0 million, net of offering costs and underwriting commissions of $18.7 million and original issue discount of $1.1 billion. The issue price of each Discount Debenture was $425.89 (or 42.589% of the $1,000 original principal amount due at maturity) and the issue price, plus accrued and unpaid original discount, is referred to as the adjusted principal amount. The adjusted principal amount will be reduced by any special cash payments and any cash reorganization event distributions, as defined, but will never be less than zero. The amount payable upon maturity is the adjusted principal amount, plus any accrued and unpaid cash interest. Interest on the Discount Debentures is payable semi-annually at a rate of 1% per annum on the original issue price of each debenture. The accretion of the original issue discount plus the 1% interest payments result in an annualized yield to maturity of 5%. On or after April 19, 2005, Cox may irrevocably elect to increase the semi-annual cash interest payments, in lieu of future accrual of the original issue discount, to an amount that represents an annualized yield to maturity of 5% on the adjusted principal amount on the effective date of the election. Thereafter, the original issue discount would cease to accrue. Each Discount Debenture is indexed to the trading price of 7.5908 shares of Sprint PCS common stock with an initial value of $56.11 per share. Prior to April 19, 2002, the Discount Debentures are exchangeable at the holders' option for cash based on the market value of the shares underlying each Discount Debenture. On and after that date, the Discount Debentures can be exchanged by the holder based on the market value of the underlying shares for cash, shares of Sprint PCS common stock or a combination of both. The holders may also require Cox to repurchase these securities on certain dates prior to maturity at a purchase price equal to the adjusted principal amount plus any accrued and unpaid cash interest. Cox may pay in cash, shares of Sprint PCS common stock or a combination of both. On or after April 19, 2005, Cox may redeem some or all of the Discount Debentures for cash at a redemption price per debenture equal to the adjusted principal amount, plus any accrued and unpaid cash interest. 57 60 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The PRIZES, Premium PHONES and Discount Debentures are unsecured, subordinated obligations, ranking junior in right of payment to all of Cox's existing and future senior indebtedness and have been accounted for as indexed debt instruments pursuant to Emerging Issues Task Force Issue No. 86-28, Accounting Implications of Indexed Debt Instruments, since the payment obligation at maturity or on redemption or exchange by the holders is dependent upon the market value of the Sprint PCS common stock. Accordingly, the carrying value of these indexed debt instruments shall be adjusted to market value through earnings in Cox's Consolidated Statement of Operations as the fair value of the Sprint PCS common stock increases or decreases such that Cox would be required to pay an amount of contingent principal in excess of the original principal amount. No contingent principal was owed on any of the three exchangeable subordinated debentures at December 31, 2000 and 1999. Zero-Coupon Debt In January 2001, Cox entered into a series of prepaid forward contracts to sell up to 19.5 million shares of its Sprint PCS common stock -- Series 2 with an aggregate fair value of approximately $502.0 million on the date of pricing for proceeds of $389.4 million, which was net of an original issue discount of $112.6 million. One-third of the contracts mature in January 2004, another third mature in January 2005 and the remaining third mature in January 2006. Embedded in the contracts is an equity collar agreement, which will allow Cox to manage its exposure to fluctuations in the fair value of the Sprint PCS common stock through the contract maturity dates. The collar provides Cox with downside protection and upside participation for the three-year, four-year and five-year contracts. The contracts may be settled, at Cox's election, in cash or shares of Sprint PCS common stock. Cox will account for the contracts as zero-coupon debt and will accrete the $112.6 million original issue discount through the respective contract maturity dates using the effective interest rate method. In addition, the collar agreements embedded in the contracts will be accounted as derivative financial instruments in accordance with the requirements of SFAS No. 133 and the change in fair value of these derivatives between measurement dates shall be recognized through earnings. Interest Rate Swaps In March 2000, Cox entered into an interest rate swap agreement expiring on August 15, 2004 with a notional principal amount of $375.0 million to convert the 7.5% fixed rate on certain senior debt securities due August 15, 2004 with an aggregate principal amount of $375.0 million to a variable rate. In May 2000, Cox entered into another interest rate swap agreement expiring on June 15, 2005 with a notional principal amount of $375.0 million to convert the 6.875% fixed rate on certain senior debt securities due June 15, 2005 with an aggregate principal amount of $375.0 million to a variable rate. The variable rates with respect to both interest rate swaps are adjusted quarterly based on LIBOR and the notional amounts do not quantify risk or represent assets or liabilities of Cox, but are used in the determination of cash settlements under the interest rate swap agreements. At December 31, 2000, Cox was receiving a fixed interest rate of 7.16% for the $375.0 million notional amount on the senior debt securities due August 15, 2004 and paying a weighted-average variable interest rate of 6.72%, and was receiving a fixed interest rate of 6.875% for the $375.0 million notional amount on the senior debt securities due June 15, 2005 and paying a variable interest rate of 6.19%. As a result of the settlements under these agreements, interest expense was reduced by $3.1 million during the year ended December 31, 2000. Other Certain of Cox's debt instruments and credit agreements contain covenants which, among other provisions, restrict the payment of cash dividends or the repurchase of capital stock if certain requirements are not met as to the ratio of debt to operating cash flow. Historically, Cox has not paid dividends nor does Cox 58 61 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) intend to pay dividends in the foreseeable future but to reinvest future earnings, consistent with its business strategy. Although Cox was in compliance with its credit facility covenants at December 31, 2000, Cox was prevented from paying dividends. Maturities of long-term debt for each of the five years subsequent to December 31, 2000, are $370.5 million, $229.9 million, $49.2 million, $491.7 million and $376.1 million, respectively. Commercial paper outstanding at December 31, 2000 is considered long-term as Cox intends to rollover or refinance these borrowings on a long-term basis, either through continued commercial paper borrowings or utilization of other available credit facilities. Included in the maturities of long-term debt are obligations under capital leases of $29.2 million, $26.6 million, $22.2 million, $17.6 million and $9.4 million for each of the five years subsequent to December 31, 2000, respectively. 8. COX-OBLIGATED CAPITAL AND PREFERRED SECURITIES OF SUBSIDIARY TRUSTS Cox Trust II (the Trust), a statutory business trust formed under the laws of the State of Delaware and a wholly-owned consolidated subsidiary of Cox, issued 13 million FELINE PRIDES and 1.3 million Trust capital securities in August 1999 for aggregate proceeds of $650.0 million, less offering costs of $19.5 million. The Trust invested the proceeds in 7% Senior Debentures due 2004 (the Debentures) issued by Cox, which represent the sole assets of the Trust. The Debentures are unsecured, bear interest at a rate of 7% per year payable in cash on a quarterly basis and mature in August 2004. The obligations of the Trust related to the FELINE PRIDES and the Trust capital securities are guaranteed by Cox to the extent Cox makes payments pursuant to the Debentures. The FELINE PRIDES consist of 11.7 million Income PRIDES and 1.3 million Growth PRIDES. Each Income PRIDES consists of a capital security of the Trust and a forward purchase contract under which the holder is required to purchase Class A common stock from Cox on August 16, 2002. The Trust capital securities forming a part of the Income PRIDES and the stand-alone Trust capital securities bear interest, in the form of distributions, at an annual rate of 7% payable in cash on a quarterly basis. On or prior to the fifth business day preceding August 16, 2002, the holders of Income PRIDES may elect to participate in a remarketing of the Trust capital securities in order to satisfy the holders' obligations under the related forward purchase contracts forming a part of the Income PRIDES in lieu of satisfying their obligations in cash. The holders of the stand-alone Trust capital securities may also elect to participate in this remarketing. Each Growth PRIDES consists of a 5% undivided beneficial ownership in a zero-coupon U.S. Treasury security, having a principal amount at maturity equal to $1,000, and a forward purchase contract under which the holder is required to purchase Class A common stock from Cox on August 16, 2002. The forward purchase contracts forming a part of the Growth PRIDES entitle the holders to unsecured contract adjustment payments of .25% of $50 per year payable in cash on a quarterly basis. The zero-coupon U.S. Treasury securities are pledged to Cox to secure the holders' obligations under the forward purchase contracts forming a part of the Growth PRIDES. The forward purchase contracts forming a part of the Income and Growth PRIDES require the holder to purchase a minimum of 1.1962 shares and a maximum of 1.4414 shares of Cox Class A common stock per forward purchase contract depending upon the average closing price per share of Cox's Class A common stock for a 20 consecutive day period ending on the third trading day immediately preceding August 16, 2002. Interest on the Debentures, and therefore the distribution rate on the Trust capital securities, will be reset on August 16, 2002 to a rate whereby the Trust capital securities have an approximate market value of 100.5% per security on the third business day immediately preceding August 16, 2002, subject to a maximum reset rate equal to the two-year benchmark U.S. Treasury rate plus 200 basis points. The Debentures and, thus, the Trust capital securities, are redeemable at Cox's option upon the occurrence of certain events based on a stated liquidation equal to the unpaid principal amount plus accumulated and unpaid distributions. Following 59 62 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) any redemption prior to August 16, 2002, holders of the Income PRIDES will own a portfolio of U.S. Treasury securities as a component of their Income PRIDES. Cox RHINOS Trust (the RHINOS Trust), a statutory business trust formed under the laws of the State of Delaware and a wholly-owned consolidated subsidiary of Cox, issued 500,000 RHINOS to a special purpose entity in October 1999 for aggregate proceeds of $500.0 million, less offering costs of $11.3 million. The RHINOS are long-term auction rate reset preferred securities, representing undivided beneficial interests in the assets of the RHINOS Trust. The RHINOS Trust invested the proceeds in Senior Notes due 2029 (the Notes) issued by Cox, which represent the sole assets of the RHINOS Trust. The obligations of the RHINOS Trust related to the RHINOS are unconditionally guaranteed by Cox to the extent Cox makes payments pursuant to the Notes. The Notes bear interest and, thus, the RHINOS pay distributions, at a floating rate based on LIBOR plus 75 points per year payable in cash on a quarterly basis and mature in October 2029. The weighted-average interest rate for the Notes was 7.19% and 6.87% for the years ended December 31, 2000 and 1999, respectively. The RHINOS are redeemable at Cox's option with the proceeds from one or more public offerings of its Class A common stock. If the RHINOS remain outstanding on or after October 6, 2002 or if the closing price of Cox's Class A common stock falls below $28 per share, subject to adjustment upon the occurrence of certain events, Cox may be required to remarket the RHINOS in a private auction to qualified institutional investors. The interest rate and maturity date of the RHINOS will be reset upon completion of the remarketing. Pursuant to the terms of the RHINOS underwriting agreement, Cox has reserved $575.0 million of availability under its existing shelf registration statement. The FELINE PRIDES, stand-alone Trust capital securities and RHINOS have been presented as mezzanine equity in Cox's Consolidated Balance Sheets at December 31, 2000 and 1999. The corresponding distributions on these securities, as well as the contract adjustment payments described above, totaled $57.5 million and $29.0 million, net of tax, for the years ended December 31, 2000 and 1999, respectively, and have been presented as minority interest, net of tax, in the Consolidated Statements of Operations. 9. FAIR VALUE OF FINANCIAL INSTRUMENTS Cox has estimated the fair value of its financial instruments as of December 31, 2000 and 1999 using available market information or other appropriate valuation methodologies. Considerable judgment, however, is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that Cox would realize in a current market exchange. The carrying amount of cash, accounts and other receivables, accounts and other payables and amounts due to/from CEI approximates fair value because of the short maturity of those instruments. The fair value of Cox's investments stated at fair value are estimated and recorded based on quoted market prices as discussed in Note 5. "Investments." The fair value of Cox's equity method investments and investments stated at cost cannot be estimated without incurring excessive costs. Cox is exposed to market price risk volatility with respect to investments in publicly traded and privately held entities. Additional information pertinent to the value of those investments is discussed in Note 5. "Investments." The fair value of interest rate swaps used for hedging purposes was approximately $35.2 million at December 31, 2000 and represents the estimated amount that Cox would receive upon termination of the swap agreements. Cox's outstanding commercial paper, revolving credit facilities, RHINOS and floating rate notes and debentures bear interest at current market rates and, thus, approximate fair value at December 31, 2000 and 1999. Cox is exposed to interest rate volatility with respect to these variable-rate instruments. 60 63 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The estimated fair value of Cox's fixed-rate notes and debentures, exchangeable subordinated debentures and FELINE PRIDES at December 31, 2000 and 1999 are based on quoted market prices or a discounted cash flow analysis using Cox's incremental borrowing for similar types of borrowings arrangements and dealer quotations. A summary of the carrying value and fair value of the fixed-rate instruments at December 31, 2000 and 1999 is as follows:
DECEMBER 31 ----------------------------------------- 2000 1999 ------------------- ------------------- CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE -------- -------- -------- -------- (MILLIONS OF DOLLARS) Fixed-rate notes and debentures................. $4,460.3 $4,459.6 $4,064.1 $3,858.3 FELINE PRIDES................................... 647.3 806.0 642.3 884.0 Exchangeable subordinated debentures............ 2,351.8 1,564.0 1,272.2 1,400.0
10. RETIREMENT PLANS Qualified Pension Plan Cox maintains a qualified noncontributory defined benefit pension plan. Plan assets consist primarily of common stock, investment-grade corporate bonds, cash and cash equivalents and U.S. government obligations. The pension plan calls for benefits to be paid to eligible employees at retirement based primarily upon years of service with Cox and compensation rates near retirement. Current policy is to fund the plan in an amount that falls between the minimum contribution required by ERISA and maximum tax deductible contribution. Total pension expense was $8.8 million, $5.7 million and $5.3 million for the years ended December 31, 2000, 1999 and 1998, respectively. 61 64 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The changes in the projected benefit obligations and changes in plan assets and funded status of the pension plan for the periods ended December 31, 2000 and 1999 are as follows:
YEAR ENDED DECEMBER 31 ---------------------- 2000 1999 --------- --------- (THOUSANDS OF DOLLARS) CHANGE IN PROJECTED BENEFIT OBLIGATION Projected benefit obligation at beginning of year......... $100,818 $ 95,219 Service cost.............................................. 11,380 10,215 Interest cost............................................. 9,407 7,683 Plan amendments........................................... 603 -- Actuarial loss (gain)..................................... 13,832 (9,457) Benefits paid............................................. (1,446) (2,842) -------- -------- Projected benefit obligation at end of the year........... 134,594 100,818 -------- -------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year............ 134,874 109,131 Actual return on plan assets.............................. 9,097 16,765 Employer contributions.................................... 8,100 11,820 Benefits paid............................................. (1,446) (2,842) -------- -------- Fair value of plan assets at end of year.................. 150,625 134,874 -------- -------- Funded status of plan....................................... 16,031 34,056 Unrecognized actuarial losses............................... (15,029) (31,138) Unrecognized prior service cost............................. 1,053 577 Unrecognized net transition obligation...................... (391) (630) -------- -------- Prepaid benefit cost........................................ $ 1,664 $ 2,865 ======== ========
The components of net periodic benefit cost and the weighted-average pension assumptions used in accounting for pension benefits are as follows:
YEAR ENDED DECEMBER 31 ------------------------------ 2000 1999 1998 -------- ------- ------- (THOUSANDS OF DOLLARS) COMPONENTS OF NET PERIODIC BENEFIT COST Service cost....................................... $ 11,380 $10,215 $ 7,480 Interest cost...................................... 9,407 7,683 6,141 Expected return on plan assets..................... (11,239) (9,289) (7,873) Prior service cost amortization.................... 127 80 80 Actuarial gain..................................... (135) -- -- Transition amount amortization..................... (239) (239) (239) -------- ------- ------- Net periodic total cost............................ $ 9,301 $ 8,450 $ 5,589 ======== ======= ======= WEIGHTED-AVERAGE PENSION ASSUMPTIONS Discount rate...................................... 7.50% 8.00% 6.75% Expected return on plan assets..................... 9.00 9.00 9.00 Rate of compensation increase...................... 5.25 5.75 4.50
Nonqualified Pension Plan Certain key employees of Cox participate in an unfunded, nonqualified supplemental pension plan of CEI which has generally the same benefit payout formula as the pension plan. Total pension expense recorded by 62 65 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Cox for the nonqualified CEI plan was $3.1 million for the year ended December 31, 2000 and $1.8 million for the years ended December 31, 1999 and 1998, respectively. Other Retirement Plans CEI provides certain health care and life insurance benefits to substantially all retirees of Cox. Post-retirement expense allocated to Cox by CEI was $2.6 million, $1.7 million and $1.6 million for the years ended December 31, 2000, 1999 and 1998, respectively. The accumulated post-retirement benefit obligation (APBO) attributable to Cox employees and retirees was $26.3 million and $12.9 million at December 31, 2000 and 1999, respectively. The funded status of the post-retirement plan covering the employees of Cox is not determinable. The APBO for the post-retirement plan of CEI substantially exceeded the fair value of assets held in the plan at December 31, 2000 and 1999. Actuarial assumptions used to determine the APBO include a discount rate of 7.50%, 8.00%, and 6.75% for the years ended December 31, 2000, 1999 and 1998 respectively, and an expected long-term rate of return on plan assets of 9.0% for all three years. For the years ended December 31, 2000, 1999 and 1998, the assumed health care cost trend rate for retirees is 9.0%, 9.5%, and 10.0%, respectively. For participants prior to age 65, the trend rate gradually decreases to 5.5% by year 2007 and remains level thereafter. For retirees at age 65 or older, this rate decreases to 5.0% by year 2008. A 1% change in assumed health care cost trend rates would have the following effects as of December 31, 2000:
1% INCREASE 1% DECREASE ----------- ----------- (THOUSANDS OF DOLLARS) Effect on service and interest cost components.............. $ 319 $ (304) Effect on other post-retirement benefit obligations......... 4,552 (4,011)
In addition, substantially all of Cox's employees are eligible to participate in the Savings and Investment plan. Under the terms of the plan, Cox matches 50% of employee contributions up to a maximum of 6% of the employee's base salary. Cox's expense under the plan was $11.9 million, $7.6 million and $5.3 million for the years ended December 31, 2000, 1999 and 1998, respectively. 11. STOCK COMPENSATION PLANS At December 31, 2000, Cox had two stock-based compensation plans for employees: a Long-Term Incentive Plan (LTIP) and an Employee Stock Purchase Plan (ESPP). Since the grant price of each LTIP award equals or exceeds the market price at the LTIP grant date, no compensation cost was recognized in 2000, 1999, and 1998. Further, the ESPP qualifies as a noncompensatory plan under APB Opinion No. 25, and, as such, no compensation cost is recognized for ESPP awards. Had compensation cost for the LTIP and ESPP been determined based on the fair value at the grant dates for awards in 2000, 1999 and 1998 consistent with the provisions of SFAS No. 123, Cox's as reported and pro forma net income and basic and diluted net income per share would have been as indicated below:
YEAR ENDED DECEMBER 31 ------------------------------------------ 2000 1999 1998 ------------ ---------- ------------ (THOUSANDS OF DOLLARS, EXCLUDING PER SHARE DATA) As reported Net income.................................... $1,925,255 $881,928 $1,270,672 Basic net income per share.................... $ 3.20 $ 1.54 $ 2.33 Diluted net income per share.................. 3.16 1.51 2.30 Pro forma Net income.................................... $1,920,163 $872,928 $1,265,037 Basic net income per share.................... $ 3.19 $ 1.52 $ 2.32 Diluted net income per share.................. 3.16 1.50 2.29
63 66 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Long-Term Incentive Plan The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants made in 2000, 1999 and 1998: expected volatility at each grant date averaging 32.1%, 32.6% and 30.0%, no payment of dividends, expected life of six years and risk-free interest rates calculated at each grant date and averaging 6.4%, 5.5% and 5.7%. Under the LTIP, executive officers and selected key employees are eligible to receive awards of various forms of equity-based incentive compensation, including stock options, stock appreciation rights, stock bonuses, restricted stock awards, performance units and phantom stock. Cox has reserved 24,000,000 shares of Class A common stock for issuance under the LTIP. The LTIP is to be administered by the Compensation Committee of the Board of Directors or its designee. Options granted may be "Incentive Stock Options" or "Nonqualified Stock Options." The exercise prices of the options are determined by the Compensation Committee when the options are granted, subject to a minimum price of the fair market value of the Class A common stock on the date of grant. These options vest over a period of three to five years from the date of grant and expire 10 years from the date of grant. For all options granted prior to July 1, 1999, an accelerated vesting schedule was provided such that the options become fully vested if the market value of the shares exceeded the exercise price by 140% for ten consecutive trading days. All options granted prior to February 1, 1999 met the acceleration provisions and became fully vested. The terms of options granted on and after July 1, 1999 do not contain an accelerated vesting provision. A summary of the status of Cox's stock options granted under the LTIP as of December 31, 2000, 1999 and 1998 and changes during the years then ended is presented below:
2000 1999 1998 --------------------- --------------------- ---------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- --------- --------- --------- ---------- --------- Outstanding at beginning of year........................... 4,945,831 $16.40 4,519,002 $12.20 4,625,666 $ 9.79 Granted........................ 1,954,728 50.31 1,041,018 34.62 1,109,134 19.64 Exercised...................... (674,156) 13.68 (535,525) 13.89 (1,185,906) 9.56 Canceled....................... (250,611) 48.60 (78,664) 33.61 (29,892) 19.16 --------- --------- ---------- Outstanding at end of year....... 5,975,792 26.45 4,945,831 16.40 4,519,002 12.20 ========= ========= ========== Options exercisable at year-end....................... 4,057,265 $15.74 4,722,377 $15.38 4,473,366 $12.15 Weighted-average grant date fair value of options granted during the year....................... $ 21.97 $ 14.48 $ 8.06
64 67 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information about stock options outstanding and exercisable at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------- ------------------------------------- WEIGHTED- WEIGHTED- AVERAGE WEIGHTED- AVERAGE WEIGHTED- REMAINING AVERAGE REMAINING AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER CONTRACTUAL EXERCISE EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE LIFE PRICE - --------------- ----------- ----------- --------- ----------- ----------- --------- $ 8.49 -- 10.22 1,040,326 4.3 years $ 8.49 1,040,326 4.3 years $ 8.49 10.47 -- 11.31 1,560,804 5.5 10.90 1,560,804 5.5 10.90 19.50 -- 22.05 793,003 7.0 19.64 793,003 7.0 19.64 33.59 -- 39.66 850,444 8.1 34.48 651,740 8.0 33.60 40.06 -- 42.78 48,346 8.9 41.47 -- -- -- 45.31 -- 51.44 1,682,869 9.0 50.68 11,392 9.1 46.25 --------- --------- 5,975,792 6.8 $26.45 4,057,265 5.9 $15.74 ========= =========
Options to purchase 2,524,594 shares of Class A common stock at $46.22 per share were granted on January 2, 2001. Employee Stock Purchase Plans In January 1998, Cox began administering their second ESPP, which had been adopted in April of 1997 (the 1997 ESPP), under which Cox was authorized to issue purchase rights totaling 2,500,000 shares of Class A common stock to substantially all employees who had completed six months of service. Purchase rights totaling 1,116,002 shares were issued under the 1997 ESPP. Under the terms of the 1997 ESPP plan, the purchase price was 85% of the fair market value of the Class A common stock on October 31, 1997 and employees were allowed to purchase the shares via payroll deductions through January 31, 2000, at which time the shares were issued to the employees. As of January 31, 2000, the 1997 ESPP was completed and 883,269 shares were issued to employees. During 2000, no shares were issued to employees resulting from cancellation of employees' participation in the 1997 ESPP or termination of employment. The fair value of the employees' purchase rights granted in 1998 was estimated using the Black-Scholes model with the following assumptions: expected volatility of 30.0%, no payment of dividends, expected life of 2.08 years and risk-free interest rate of 5.7%. The weighted average fair value of each purchase right granted in 1998 was $8.67. In April 2000, Cox began administering their third ESPP (the 2000 ESPP), under which Cox is authorized to issue purchase rights totaling 2,000,000 shares of Class A common stock. The 2000 ESPP has four offering periods, two of which commenced in 2000. Employees are eligible to participate in one of the four offering periods as long as they are regularly scheduled to work at least 20 hours per week and are employed as of the grant date corresponding to one of the offering periods. Under the terms of the Plan, the purchase price is the lower of 85% of the fair market value of the Class A common stock (the initial purchase price) or 90% of the fair market value of the Class A common stock on March 31, 2002, the end of the Plan. The initial purchase price was set at $42.67 and $34.72 for the first and second offering periods, respectively. Purchase rights totaling 741,457 and 98,833 shares were issued under the plan for the first and second offering periods, respectively. Employees are allowed to purchase the shares via payroll deductions through March 31, 2002, at which time the shares will be issued. The fair value of the employees' purchase rights granted in 2000 was determined using the Black-Scholes model with the following assumptions for the first and second offering periods: expected volatility of 30% and 34%, respectively, no payment of dividends, expected life of 2.08 years and 1.54 years, respectively, and risk-free interest rate of 6.46% and 5.83%, respectively. The weighted-average fair value of each purchase right granted in 2000 was $13.18 and $7.96, for the first and second offering, respectively. During 2000, 1,420 shares were issued under the plan due to cancellation of employees' participation or termination of employment. 65 68 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 12. SHAREHOLDERS' EQUITY In May 1999, Cox effected a two-for-one stock split with respect to stockholders of record on May 14, 1999 and amended its certificate of incorporation to increase the authorized convertible preferred stock to 10,000,000 shares, the authorized Class A common stock to 671,000,000 shares and the authorized Class C common stock to 62,000,000 shares. All references to number of shares and per share information in the consolidated financial statements and notes herein have been restated to give effect to this stock split. Convertible Preferred Stock In October 1998, Cox issued approximately 11.3 million registered shares of Class A common stock with an aggregate fair value of $251.0 million and 4.8 million unregistered shares of Series A convertible preferred stock with an aggregate fair value of $107.1 million in conjunction with Cox's acquisition of a cable system located in Las Vegas, Nevada from Prime South, as further described in Note 4. "Acquisitions, Disposals and Exchanges of Businesses." The shares of Series A convertible preferred stock are entitled to one vote per share on all matters upon which holders of Class A common stock are entitled to vote and pay dividends to the extent declared by Cox's Board of Directors. In addition, any time after October 1, 2028 or upon the occurrence of certain events, as defined, Cox may redeem the Series A convertible preferred stock at the original issue price of $22.14 per share, plus accrued and unpaid dividends. The Series A convertible preferred stock are convertible into registered shares of Class A common stock at the option of the holder, based upon a predetermined conversion formula, only after October 1, 2003, a change in control of Cox or notification of liquidation. Also, these shares may automatically convert upon the occurrence of certain events, including the sale of substantially all of Cox's assets, as defined. Cox expects to account for any appreciation realized upon conversion of the Series A convertible preferred stock as contingent purchase price in accordance with APB Opinion No. 16. Common Stock Cox's Class A common stock and Class C common stock are identical except with respect to certain voting, transfer and conversion rights. Holders of Class A common stock are entitled to one vote per share and holders of Class C common stock are entitled to ten votes per share. The Class C common stock is subject to significant transfer restrictions and is convertible on a share for share basis into Class A common stock at the option of the holder. In August 1999, Cox issued 38.3 million shares of Class A common stock with a fair value of $1.6 billion to TCA shareholders in connection with the TCA merger, as described in Note 4. "Acquisitions, Dispositions and Exchanges of Businesses." In August 1999, Cox issued 10,100,000 shares of Class A common stock under an existing shelf registration for aggregate proceeds of $350.3 million, less offering costs of $12.4 million. 66 69 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net Income Per Share The following table reconciles the numerator and the denominator of the basic and diluted per share computations for the years ended December 31, 2000, 1999 and 1998:
YEAR ENDED DECEMBER 31, 2000 -------------------------------------------- INCOME SHARES NET INCOME (NUMERATOR) (DENOMINATOR) PER SHARE --------------- ------------- ---------- Net income........................................... $ 1,925,255,000 --------------- BASIC NET INCOME PER SHARE........................... 1,925,255,000 601,951,744 $3.20 ===== EFFECT OF DILUTIVE SECURITIES Employee stock options............................. -- 1,228,335 Employee stock purchase plan....................... -- 16,655 Convertible preferred stock........................ -- 4,997,207 Forward purchase contracts forming a part of the FELINE PRIDES................................... -- 354,808 --------------- ------------ DILUTED NET INCOME PER SHARE......................... $ 1,925,255,000 608,548,749 $3.16 =============== ============ =====
YEAR ENDED DECEMBER 31, 1999 ----------------------------------------- INCOME SHARES NET INCOME (NUMERATOR) (DENOMINATOR) PER SHARE ------------ ------------- ---------- Net income.............................................. $881,928,000 ------------ BASIC NET INCOME PER SHARE.............................. 881,928,000 572,608,878 $1.54 ===== EFFECT OF DILUTIVE SECURITIES Employee stock options................................ -- 2,943,253 Employee stock purchase plan.......................... -- 1,022,560 Convertible preferred stock........................... -- 4,114,169 Forward purchase contracts forming a part of the FELINE PRIDES...................................... -- 2,392,705 ------------ ----------- DILUTED NET INCOME PER SHARE............................ $881,928,000 583,081,565 $1.51 ============ =========== =====
YEAR ENDED DECEMBER 31, 1998 ------------------------------------------- INCOME SHARES NET INCOME (NUMERATOR) (DENOMINATOR) PER SHARE -------------- ------------- ---------- Net income............................................. $1,270,672,000 -------------- BASIC NET INCOME PER SHARE............................. 1,270,672,000 545,626,528 $2.33 ===== EFFECT OF DILUTIVE SECURITIES Employee stock options............................... -- 2,183,774 Employee stock purchase plan......................... -- 768,974 Convertible preferred stock.......................... -- 3,842,454 -------------- ----------- DILUTED NET INCOME PER SHARE........................... $1,270,672,000 552,421,730 $2.30 ============== =========== =====
Diluted earnings per share for the year ended December 31, 2000 excludes the effect of 10.7 million shares of common stock that may be issued upon redemption of the RHINOS because such effect would be antidilutive. 67 70 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock Repurchase Program In April 2000, Cox approved a stock repurchase program whereby Cox is authorized to purchase up to $500.0 million of its outstanding Class A common stock on the open market or through private transactions. During the year ended December 31, 2000, Cox repurchased 5.5 million shares of its Class A common stock on the open market for an aggregate cost of $211.9 million. During 2000, Cox issued a series of put options to purchase up to 1.3 million shares of its Class A common stock in connection with the stock repurchase program for an aggregate premium of $6.4 million. The premium was recorded as an increase in additional paid-in capital. The put options expired unexercised at various dates through December 15, 2000. Other At December 31, 2000 and 1999, CEI owned approximately 67.8% and 67.4%, respectively, of the outstanding shares of Cox common stock and held 77.2% and 76.9%, respectively, of the voting power of Cox. 13. TRANSACTIONS WITH AFFILIATED COMPANIES CEI performs day to day cash management services for Cox. In addition, CEI provides certain other management services to Cox including legal, corporate secretarial, tax, cash management, internal audit, risk management, benefits administration including self-insured health and other insured plans and other support services. Cox was allocated expenses for the years ended December 31, 2000, 1999 and 1998 of approximately $3.9 million, $3.3 million and $3.0 million, respectively, related to these services. Cox pays rent and certain other occupancy costs to CEI for its home office facilities, which amounts approximated $6.1 million, $5.6 million and $5.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. Allocated expenses are based on CEI's estimate of expenses relative to the services provided to Cox in relation to those provided to other divisions of CEI. Rent and occupancy expense is allocated based on occupied space. Management believes that these allocations were made on a reasonable basis. However, the allocations are not necessarily indicative of the level of expenses that might have been incurred had Cox contracted directly with third parties. Management has not made a study or any attempt to obtain quotes from third parties to determine what the cost of obtaining such services from third parties would have been. The fees and expenses to be paid by Cox to CEI are subject to change. The amounts due to CEI are generally due on demand and represent the net of various transactions, including those described above. Outstanding amounts due from CEI bear interest equal to CEI's current commercial paper borrowing rate, which was 7.6% and 6.8% at December 31, 2000 and 1999, respectively. Included in amounts due (to) from CEI are the following transactions:
(THOUSANDS OF DOLLARS) ---------------------- Intercompany due to CEI, December 31, 1998.................. $(170,596) Cash transferred to CEI................................... 389,476 Net operating expense allocations......................... (104,059) --------- Intercompany due from CEI, December 31, 1999................ 114,821 Cash transferred from CEI................................. (16,039) Net operating expense allocations......................... (92,974) --------- Intercompany due from CEI, December 31, 2000................ $ 5,808 =========
Cox pays fees to certain entities in which it has an ownership interest in exchange for cable programming. Programming fees paid to such affiliates for the years ended December 31, 2000, 1999 and 1998 were approximately $64.0 million, $47.0 million and $34.1 million, respectively. 68 71 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. OTHER COMPREHENSIVE INCOME The following represents the components of other comprehensive income and related tax effects for the years ended December 31, 2000, 1999 and 1998:
TAX BEFORE-TAX (EXPENSE) NET-OF-TAX AMOUNT OR BENEFIT AMOUNT ----------- ----------- ----------- (THOUSANDS OF DOLLARS) FOR THE YEAR ENDED DECEMBER 31, 1998 Unrealized gains on securities Unrealized holding gains arising during the period.... $ 2,267,809 $ (870,681) $ 1,397,128 Less: reclassification adjustment for gains realized in net income...................................... (30,343) 11,682 (18,661) ----------- ----------- ----------- OTHER COMPREHENSIVE INCOME, DECEMBER 31, 1998........... $ 2,237,466 $ (858,999) $ 1,378,467 =========== =========== =========== FOR THE YEAR ENDED DECEMBER 31, 1999 Unrealized gains on securities Unrealized holding gains arising during the period.... $ 6,006,535 $(2,307,149) $ 3,699,386 Less: reclassification adjustment for gains realized in net income...................................... (706,528) 272,013 (434,515) ----------- ----------- ----------- OTHER COMPREHENSIVE INCOME, DECEMBER 31, 1999........... $ 5,300,007 $(2,035,136) $ 3,264,871 =========== =========== =========== FOR THE YEAR ENDED DECEMBER 31, 2000 Unrealized losses on securities Unrealized holding losses arising during the period... $(4,321,955) $ 1,660,910 $(2,661,045) Less: reclassification adjustment for gains realized in net income...................................... (2,293,132) 882,856 (1,410,276) ----------- ----------- ----------- OTHER COMPREHENSIVE INCOME, DECEMBER 31, 2000........... $(6,615,087) $ 2,543,766 $(4,071,321) =========== =========== ===========
Components of accumulated other comprehensive income consisted of net unrealized gain on securities of $1,285.8 million ($787.8 million, net of tax) and $7,901.0 million ($4,859.1 million, net of tax) at December 31, 2000 and 1999, respectively. 69 72 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION Supplemental Consolidated Balance Sheet Information
DECEMBER 31 ------------------------- 2000 1999 ----------- ----------- (THOUSANDS OF DOLLARS) PLANT AND EQUIPMENT Land........................................................ $ 84,240 $ 57,033 Buildings and building improvements......................... 375,192 234,757 Transmission and distribution plant......................... 6,619,231 4,516,654 Other equipment............................................. 776,776 514,907 Construction in progress.................................... 514,005 210,015 ----------- ----------- Plant and equipment, at cost.............................. 8,369,444 5,533,366 Less accumulated depreciation............................... (2,453,019) (1,495,130) ----------- ----------- Net plant and equipment................................... $ 5,916,425 $ 4,038,236 =========== =========== INTANGIBLE ASSETS Franchise value and license acquisition costs and excess cost over fair value of net assets acquired............... $13,745,968 $10,738,101 Other....................................................... 1,263,065 17,335 ----------- ----------- Total..................................................... 15,009,033 10,755,436 Less accumulated amortization............................... (1,057,787) (581,402) ----------- ----------- Net intangible assets..................................... $13,951,246 $10,174,034 =========== ===========
Supplemental Disclosure of Non-cash Investing and Financing Activities
YEAR ENDED DECEMBER 31 ------------------------------------ 2000 1999 1998 ---------- ---------- ---------- (THOUSANDS OF DOLLARS) SIGNIFICANT NON-CASH TRANSACTIONS AT&T cable system exchange............................... $2,658,233 $ -- $ -- Gain on right to sell Excite@Home common stock to AT&T... 990,456 -- -- Fort Walton Beach cable system acquisition............... -- 79,457 -- MediaOne cable system exchange........................... -- 93,050 -- Cox Class A common stock issued in TCA merger............ -- 1,645,373 -- Assumed TCA indebtedness and other liabilities........... -- 598,369 -- Cox PCS stock transaction................................ -- 794,546 -- PrimeStar merger stock exchange.......................... -- -- 94,696 Teleport stock issuance.................................. -- -- 150,386 Teleport merger stock exchange........................... -- -- 2,076,861 Sprint PCS stock exchange................................ -- -- 899,077 Prime South acquisition Cox Series A convertible preferred stock issued....... -- -- 107,065 Cox Class A common stock issued....................... -- -- 250,938 ADDITIONAL CASH FLOW INFORMATION Cash paid for interest................................... $ 507,196 $ 244,559 $ 197,197 Cash paid (refunded) for income taxes.................... 663,639 179,950 (163,467)
70 73 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. COMMITMENTS AND CONTINGENCIES Cox leases land, office facilities and various items of equipment under noncancellable operating leases. Rental expense under operating leases amounted to $17.8 million, $9.3 million and $7.6 million in 2000, 1999 and 1998, respectively. Future minimum lease payments for each of the five years subsequent to December 31, 2000 are $20.6 million, $17.6 million, $15.5 million, $12.3 million and $8.7 million, respectively, and $15.4 million thereafter for all noncancellable operating leases. At December 31, 2000, Cox had outstanding purchase commitments totaling approximately $236.4 million for additions to plant and equipment and $456.5 million to rebuild certain existing cable systems. In addition, Cox has unused letters of credit outstanding totaling $28.8 million at December 31, 2000. Cox and certain subsidiaries are defendants in two putative subscriber class action suits in state courts in Louisiana and Texas initiated between October 17, 1997 and December 17, 1998. The suits challenge the propriety of late fees charged by the subsidiaries to customers who fail to pay for services in a timely manner. The suits seek injunctive relief and various formulations of damages under certain claimed causes of action under various bodies of state law. These actions are in various stages of defense. The actions are being defended vigorously. The outcome of these matters cannot be predicted at this time. Five similar suits that had been pending in Nevada, Indiana, Arizona and Florida have been settled and dismissed; one similar suit that had been pending in Nebraska was dismissed with prejudice. On November 10, 1999, Fred and Roberta Lipschutz, Arthur Simon and John Galley III, on behalf of themselves and all persons similarly situated, filed a putative class action suit against Cox and thirteen other defendants in the United States District Court for the Central District of California. The action alleges that a putative class defined as all persons who since November 10, 1995, have purchased broadband Internet data transmission services from a "cable company defendant" has been injured because alleged agreements among the "cable company defendants" and/or the "cable company defendants" and defendants @Home Corporation, also referred to as Excite@Home, and Road Runner have required the putative class to purchase both Internet data transmission services and interface/content services from @Home or Road Runner. The complaint asserts claims under Section 1 of the Sherman Antitrust Act, the California Cartwright Act, and California unfair competition law and seeks injunctive relief and compensatory and treble damages. An amended complaint adding additional named plaintiffs was filed on December 30, 1999, and Cox filed its answer to the amended complaint on January 19, 2000. On January 29, 2001, the court denied plaintiffs' motion to certify a nationwide class with leave to amend. Hearing on plaintiffs' motion for reconsideration of the court's denial of class certification is March 19, 2001. Discovery is pending. Cox intends to defend the remaining actions vigorously, though the outcome cannot be predicted at this time. Cox's subsidiary Cox California Telcom, L.L.C. is a defendant in three putative class action lawsuits and one additional non-class action suit that were filed in state and federal courts in California relating to the unauthorized publication of information pertaining to approximately 11,400 Cox telephone customers in the PacBell 2000 White Pages and 411 directory and in the Cox TelTrust information directory. The lawsuits assert various causes of action for breach of contract, invasion of privacy, negligence, commission of fraudulent or unfair business acts and practices in violation of California Business & Professions Code Section 17-200 and violation of California Public Utilities Code Section 2891 and 2891.1. The suits seek damages and injunctive relief. Cox Telcom, along with PacBell, has commenced reclaiming tainted PacBell White Pages and reprinting and redistributing corrected books. The parties to two of the class action lawsuits have entered into a stipulation of settlement, which is pending preliminary court approval on March 30, 2001. The third class action was dismissed in substantial part with leave to amend on February 20, 2001. Cox intends to defend the remaining actions vigorously, though the outcome cannot be predicted at this time. Jerrold Schaffer and Kevin J. Yourman, on May 26, 2000 and May 30, 2000, respectively, filed class action lawsuits in the Superior Court of the State of California for the County of San Mateo on behalf of 71 74 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) themselves and all other shareholders of @Home Corporation as of March 28, 2000 except for defendants seeking (a) to enjoin consummation of a March 28, 2000 letter agreement among Excite@Home's principal cable partners, including Cox, and (b) unspecified compensatory damages. Cox and David Woodrow, Cox's former Executive Vice President, Business Development, among others, are named defendants in both lawsuits. Mr. Woodrow formerly served as Cox's representative on the Excite@Home board of directors. See Note 5. "Investments." The plaintiffs, who continue to seek unspecified compensatory damages, assert that the defendants breached purported fiduciary duties of care, candor and loyalty to the plaintiffs by entering into the letter agreement and/or taking certain actions to facilitate the consummation of the transactions contemplated by the letter agreement. Pursuant to an agreement with the plaintiffs, the defendants have yet to answer the complaint. Defendants moved to dismiss the case on various jurisdiction grounds and, on February 26, 2001, the court stayed the case on the grounds of forum non conveniens. Plaintiffs have 30 days to appeal the stay or they may refile the case in another jurisdiction. Cox intends to defend the remaining actions vigorously, though the outcome cannot be predicted at this time. On November 14, 2000, GTE.NET, L.L.C. d/b/a Verizon Internet Solutions and Verizon Select Services, Inc. filed suit against Cox in the District Court for the Southern District of California. Verizon alleged that Cox has violated various sections of the Communications Act of 1934 by allegedly refusing to provide Verizon with broadband telecommunications service and interconnection, among other things. On November 29, Verizon amended its Complaint to add CoxCom, Inc., a subsidiary of Cox, as an additional defendant. Verizon seeks various forms of relief, including injunctive relief and damages. Cox and CoxCom intend to defend vigorously the action and, on January 8, 2001 filed a Motion to Dismiss or in the Alternative to Stay on Primary Jurisdiction Grounds. Cox also filed a Motion to Dismiss for Lack of Personal Jurisdiction. Prior to filing its responses to the Motions, Verizon filed a Motion for Summary Judgment on Prayers for Declaratory and Injunctive Relief. The Court granted defendants' ex parte Motion for an order continuing the hearing on the Summary Judgment Motion pending a ruling on the jurisdictional motions. The court has indicated its intent to rule on the jurisdictional motions on the basis of the parties' submissions. An early case evaluation conference is scheduled for March 21, 2001. Cox intends to defend the remaining actions vigorously, though the outcome cannot be predicted at this time. On February 6, 2001, plaintiffs Kimberly D. and William L. Bova, on behalf of themselves individually and a putative class of subscribers, sued Cox in United States District Court for the Western District of Virginia. The putative class includes persons outside of California, Nevada, Arizona and Idaho who on or after November 1, 2000 purchased broadband Internet access services from Cox and paid a franchise fee on those services. The suit asserts that the collection of franchise fees by Cox from its broadband Internet access service subscribers outside of the Ninth Circuit is unlawful under the Telecommunications Act of 1996 and seeks restitution of all such fees collected. Cox's response to the complaint is due March 19, 2001. Cox intends to defend the remaining actions vigorously, though the outcome cannot be predicted at this time. Cox and its subsidiaries are parties to various other legal proceedings which are ordinary and incidental to their businesses. Management does not expect that any of these other currently pending legal proceedings will have a material adverse impact on Cox's consolidated financial position, results of operations or cash flows. 17. UNAUDITED QUARTERLY FINANCIAL INFORMATION The following table sets forth selected historical quarterly financial information for Cox. This information is derived from unaudited quarterly financial statements of Cox and includes, in the opinion of management, only normal and recurring adjustments that management considers necessary for a fair presentation of the results for such periods. 72 75 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2000 ------------------------------------------------- 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ---------- --------- --------- --------- (MILLIONS OF DOLLARS, EXCLUDING PER SHARE DATA) Revenues.............................................. $ 779.8 $879.0 $902.2 $945.9 Programming costs..................................... 195.6 217.7 216.8 225.7 Selling, general and administrative................... 284.5 324.3 331.2 333.8 Depreciation.......................................... 178.8 211.4 227.4 255.8 Amortization.......................................... 78.9 92.5 92.0 99.7 -------- ------ ------ ------ Operating income...................................... $ 42.0 $ 33.1 $ 34.8 $ 30.9 ======== ====== ====== ====== Net income (loss)..................................... $1,067.5 $ 91.2 $838.1 $(71.5) ======== ====== ====== ====== Basic net income (loss) per share..................... $ 1.77 $ 0.15 $ 1.39 $(0.12) ======== ====== ====== ====== Diluted net income (loss) per share................... $ 1.74 $ 0.15 $ 1.37 $(0.12) ======== ====== ====== ======
1999 ------------------------------------------------ 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER --------- --------- --------- --------- (MILLIONS OF DOLLARS, EXCLUDING PER SHARE DATA) Revenues................................................ $498.5 $509.9 $587.9 $721.8 Programming costs....................................... 128.8 122.3 141.0 169.2 Selling, general and administrative..................... 181.2 191.7 221.2 261.5 Depreciation............................................ 96.6 133.3 148.4 172.4 Amortization............................................ 26.7 26.1 45.4 66.8 Gain on sale and exchange of cable systems, net......... -- -- (77.4) -- ------ ------ ------ ------ Operating income........................................ $ 65.2 $ 36.5 $109.3 $ 51.9 ====== ====== ====== ====== Net income.............................................. $251.2 $505.8 $ 11.9 $113.0 ====== ====== ====== ====== Basic net income per share.............................. $ 0.45 $ 0.91 $ 0.02 $ 0.19 ====== ====== ====== ====== Diluted net income per share............................ $ 0.45 $ 0.90 $ 0.02 $ 0.18 ====== ====== ====== ======
18. SUBSEQUENT EVENTS In February 2001, Cox issued a series of Convertible Senior Notes due 2021 (Convertible Notes) with an aggregate principal amount of $685.0 million at maturity in a transaction exempt from the registration requirements of the Securities Act of 1933. Proceeds from the issuance of the Convertible Notes were $466.6 million, net of underwriting commissions of $9.5 million and original issue discount of $208.9 million. The Convertible Notes pay interest in cash on a semi-annual basis in arrears at a rate of 0.348% per annum on the principal amount at maturity. Accretion of the original issue discount plus the 0.348% cash interest payments represents a yield to maturity of 2.25% per annum. The Convertible Notes are convertible at the option of the holders at any time prior to maturity and upon conversion, Cox may deliver, at its option, 11.8135 shares of Cox Class A common stock per Convertible Note or the cash equivalent thereof. Cox may redeem the Convertible Notes on or after February 23, 2002 for an amount of cash equal to the accreted value of the Convertible Notes on the date of redemption, plus accrued and unpaid interest. Holders may require Cox to purchase the Convertible Notes at various dates through 2016 for an amount of cash equal to the accreted value of the Convertible Notes on the date of purchase, plus accrued and unpaid interest, or, on any purchase date other than the first purchase date, an equivalent amount in shares of Cox Class A common stock or a combination thereof. Cox has agreed to file a shelf registration statement to register the resale of the Convertible Notes and the shares of Class A common stock issuable upon conversion on or before May 24, 73 76 COX COMMUNICATIONS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 2001 and to use reasonable efforts to have this resale registration statement declared effective by the SEC on or before August 22, 2001. In March 2001, Cox issued a series of 6.75% Notes due March 15, 2011 in an offering under its shelf registration statement with an aggregate principal amount of $500.0 million, less offering costs and underwriting commissions of $3.3 million. The 6.75% Notes are unsecured and rank equally with Cox's other senior unsecured indebtedness. In addition, the 6.75% Notes may be redeemed by Cox in whole or in part at any time prior to maturity at 100% of the principal amount plus accrued and unpaid interest and a make-whole premium, if any, and interest is payable on a semi-annual basis beginning September 15, 2001. 74 77 To the Board of Directors and Shareholders of Cox Communications, Inc. We have audited the accompanying consolidated balance sheets of Cox Communications, Inc. (Cox) as of December 31, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of Cox's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cox Communications, Inc. at December 31, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Atlanta, Georgia February 6, 2001 (March 6, 2001 as to Note 18) 75 78 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 2001 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 2001 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 2001 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 2001 Annual Meeting of Stockholders. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents incorporated by reference or filed with this Report (1) Listed below are the financial statements which are filed as part of this report: - Consolidated Balance Sheets at December 31, 2000 and 1999; - Consolidated Statements of Income for the Years Ended December 31, 2000, 1999 and 1998; - Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2000, 1999 and 1998; - Consolidated Statements of Cash Flows for the Years Ended December 31, 2000, 1999 and 1998; and - Notes to Consolidated Financial Statements. (2) No financial statement schedules are required to be filed by Items 8 and 14(d) of this report because they are not required or are not applicable, or the required information is set forth in the applicable financial statements or notes thereto. 76 79 (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 -- Asset Purchase Agreement between Multimedia Cablevision, Inc. and Cox Communications, Inc. (Incorporated by reference to Exhibit 2.1 to Cox's Current Report on Form 8-K dated and filed with the Commission on July 27, 1999). 2.2 -- Agreement and Plan of Reorganization among Cox Teleport Partners, Inc., TCI Holdings, Inc. and United Cable Television Corporation, dated as of July 6, 1999. (Incorporated by reference to Exhibit 2.1 to Cox's Current Report on Form 8-K/A dated July 7, 1999 and filed with the Commission on July 28, 1999). 3.1 -- Amended Certificate of Incorporation of Cox Communications, Inc. (Incorporated by reference to Exhibit 3.1 to Cox's Quarterly Report on Form 10-Q, filed with the Commission on November 14, 2000.) 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 (Incorporated by reference to Exhibit 4.1 to Cox's Registration Statement on Form S-1, File No. 33-99116, filed with the Commission on November 8, 1995.) 4.2 -- First Supplemental Indenture, dated as of August 12, 1999, between Cox Communications, Inc. and The Bank of New York, as Trustee. (Incorporated by reference to Exhibit 4.4 to Cox's Current Report on Form 8-K filed with the Commission on August 23, 1999.) 4.3 -- Form of Preferred Securities Guarantee Agreement. (Incorporated by reference to Exhibit 4.5 to Cox's Registration Statement on Form S-3, File No. 333-82575, filed with the Commission on July 28, 1999.) 4.4 -- Form of Capital Securities Guarantee Agreement. (Incorporated by reference to Exhibit 4.6 to Cox's Registration Statement on Form S-3, File No. 333-82575, filed with the Commission on August 6, 1999.) 4.5 -- Indenture, dated as of January 30, 1998, between TCA Cable TV, Inc. and Chase Bank of Texas, National Association, as Trustee (Incorporated by reference to Exhibit 4(a) of TCA's Registration Statement on Form S-3, File No. 333-32015). 4.6 -- First Supplemental Indenture, dated as of August 12, 1999, among TCA Cable TV, Inc., Cox Classic Cable, Inc. and Chase Bank of Texas, National Association, as Trustee. (Incorporated by reference to Exhibit 4.2 to Cox's Current Report on Form 8-K filed with the Commission on August 25, 1999.) 4.7 -- Second Supplemental Indenture, dated as of October 6, 1999, by and between Cox Communications, Inc., as Issuer and The Bank of New York, as Trustee. (Incorporated by reference to Exhibit 4.1 to Cox's Quarterly Report on Form 10-Q filed with the Commission on November 8, 1999.) 4.8 -- Guarantee Agreement, dated as of October 6, 1999, by and between Cox Communications, Inc., as Guarantor and The Bank of New York, as Guarantee Trustee. (Incorporated by reference to Exhibit 4.2 to Cox's Quarterly Report on Form 10-Q filed with the Commission on November 8, 1999.) 4.9 -- Second Supplemental Indenture, dated as of March 14, 2000, between Cox Communications, Inc. and The Bank of New York, as Trustee. (Incorporated by reference to Exhibit 4.9 to the Annual Report on Form 10-K for Cox Communications, Inc., filed with the Commission on March 23, 2000.)
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EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4.10 -- Third Supplemental Indenture, dated as of April 19, 2000, by and between Cox Communications, Inc. and The Bank of New York, as Trustee. (Incorporated by reference to Exhibit 4.2 of Cox's Current Report on Form 8-K, filed with the Commission on April 24, 2000.) 4.11 -- Registration Rights Agreement, dated as of February 23, 2001, by and among Cox Communications, Inc. and Salomon Smith Barney Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, Credit Suisse First Boston Corporation, Morgan Stanley & Co. Incorporated, ABN AMRO Rothschild LLC, Fleet Securities, Inc., J.P. Morgan Securities Inc. and SG Cowen Securities Corporation (Incorporated by reference to Exhibit 4.1 to Cox's Current Report on Form 8-K/A filed with the Commission on March 8, 2001). 4.12 -- Registration Rights Agreement, dated as of February 23, 2001, by and among Cox Enterprises, Inc., Cox Communications, Inc. and Salomon Smith Barney Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, Credit Suisse First Boston Corporation, Morgan Stanley & Co. Incorporated, ABN AMRO Rothschild LLC, Fleet Securities, Inc., J.P. Morgan Securities Inc. and SG Cowen Securities Corporation (Incorporated by reference to Exhibit 4.2 to Cox's Current Report on Form 8-K/A filed with the Commission on March 8, 2001). 4.13 -- Fourth Supplemental Indenture, dated as of February 23, 2001, between Cox Communications, Inc. and The Bank of New York, as Trustee. 10.1 -- 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.) 10.2 -- 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.) (Management contract or compensatory plan.) 10.3 -- 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.) (Management contract or compensatory plan.) 10.4 -- 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.) (Management contract or compensatory plan.) 10.5 -- Merger and Contribution Agreement, dates as of February 6, 1998, among TCI Satellite Entertainment, Inc., PrimeStar Inc., Time Warner Entertainment Company L.P., Advance/Newhouse Partnership, Comcast Corporation, Cox Communications, Inc., MediaOne of Delaware, Inc., GE American Communications, Inc. (Incorporated by reference to Exhibit 10.24 to the Annual Report on Form 10-K of Cox Communications, Inc., filed with the Commission on March 19, 1999.) 10.6 -- 364-Day Credit Agreement, dated as of September 26, 2000, by and among Cox Communications, Inc., The Chase Manhattan Bank, as Administrative Agent, Bank of America National Trust and Savings Association, as Syndication Agent, The Bank of New York and Wachovia Bank, N.A., as Co-Documentation Agents, and Chase Securities, Inc., as Sole Advisor, Arranger and Book Manager, and the other banks a party thereto. (Incorporated by reference to Exhibit 10.1 to Cox's Quarterly Report on Form 10-Q, filed with the Commission on November 14, 2000.)
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EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.7 -- Five Year Credit Agreement, dated as of September 26, 2000, by and among Cox Communications, Inc., the banks party thereto, The Chase Manhattan Bank, as Administrative Agent, Bank of America National Trust and Savings Association, as Syndication Agent, The Bank of New York and Wachovia Bank, N.A., as Co-Documentation Agents, and Chase Securities, Inc., as Sole Advisor, Arranger and Book Manager, and the other banks a party thereto. (Incorporated by reference to Exhibit 10.2 to Cox's Quarterly Report on Form 10-Q, filed with the Commission on November 14, 2000.) 10.8 -- Purchase Contract Agreement, dated as of August 12, 1999, between Cox Communications, Inc. and The First National Bank of Chicago, as Purchase Contract Agent. (Incorporated by reference to Exhibit 4.1 to Cox's Current Report on Form 8-K filed with the Commission on August 23, 1999.) 10.9 -- Remarketing Agreement, dated as of August 12, 1999, among Cox Communications, Inc., Cox Trust II, The First National Bank of Chicago, as Purchase Contract Agent, and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Remarketing Agent. (Incorporated by reference to Exhibit 4.2 to Cox's Current Report on Form 8-K filed with the Commission on August 23, 1999.) 10.10 -- Pledge Agreement, dated as of August 12, 1999, among Cox Communications, Inc., The Bank of New York, as Collateral Agent, Custodial Agent and Securities Intermediary, and The First National Bank of Chicago, as Purchase Contract Agent. (Incorporated by reference to Exhibit 4.3 to Cox's Current Report on Form 8-K filed with the Commission on August 23, 1999.) 10.11 -- Remarketing Agreement, dated as of October 6, 1999, by and among Cox Communications, Inc., Cox RHINOS Trust and Banc of America Securities LLC. (Incorporated by reference to Exhibit 10.1 to Cox's Quarterly Report on Form 10-Q, filed with the Commission on November 8, 1999.) 10.12 -- Letter Agreement and Term Sheets, dated March 28, 2000, among At Home Corporation, AT&T Corp., Comcast Corporation and Cox Communications, Inc. (Incorporated by reference to Exhibit 1 to Schedule 13D/A filed by AT&T Corp. on March 31, 2000 with respect to At Home Corporation). 13 -- Portions of the 2000 Summary Annual Report to Shareholders (expressly incorporated by reference in Part II, Item 5. of this Report). 21 -- Subsidiaries of Cox Communications, Inc. 23 -- Consent of Deloitte & Touche LLP. 24 -- Power of Attorney (included on the signatures page to this Report)
(b) Reports on Form 8-K Cox filed one report on Form 8-K, dated November 9, 2000, during the fourth quarter of the year ended December 31, 2000 to incorporate by reference certain documents into Cox's registration statement on Form S-3 (Registration No. 333-82575) in connection with the sale by Cox on November 7, 2000 of $800,000,000 aggregate principal amount of 7.75% Notes due 2010 and $200,000,000 aggregate principal amount of Floating Rate MOPPRS/CHEERS. 79 82 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 19, 2001 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 19, 2001 - ----------------------------------------------------- Directors James C. Kennedy /s/ JAMES O. ROBBINS President and Chief Executive March 19, 2001 - ----------------------------------------------------- Officer; Director James O. Robbins (principal executive officer) /s/ JIMMY W. HAYES Executive Vice President, March 19, 2001 - ----------------------------------------------------- Finance and Administration Jimmy W. Hayes Chief Financial Officer (principal financial officer) /s/ HOWARD B. TIGERMAN Vice President of Accounting March 19, 2001 - ----------------------------------------------------- & Financial Planning Howard B. Tigerman (principal accounting officer) /s/ JANET MORRISON CLARKE Director March 19, 2001 - ----------------------------------------------------- Janet Morrison Clarke
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SIGNATURE TITLE DATE --------- ----- ---- /s/ DAVID E. EASTERLY Director March 19, 2001 - ----------------------------------------------------- David E. Easterly /s/ RODNEY W. SCHROCK Director March 19, 2001 - ----------------------------------------------------- Rodney W. Schrock /s/ ROBERT C. O'LEARY Director March 19, 2001 - ----------------------------------------------------- Robert C. O'Leary
81 84 (COX(R) COMMUNICATIONS LOGO) WWW.COX.COM EX-4.13 2 g67591ex4-13.txt FOURTH SUPPLEMENTAL INDENTURE 1 Exhibit 4.13 COX COMMUNICATIONS, INC. THE BANK OF NEW YORK, as Trustee ------------------------------------------ FOURTH SUPPLEMENTAL INDENTURE Dated as of February 23, 2001 ------------------------------------------- Supplemental to Indenture Dated as of June 27, 1995 ------------------------------------------- Creating a series of Debt Securities designated Convertible Senior Notes due 2021 2 FOURTH SUPPLEMENTAL INDENTURE, dated as of the 23rd day of February, 2001 between COX COMMUNICATIONS, INC., a corporation existing under the laws of the State of Delaware, having its principal executive office located at 1400 Lake Hearn Drive, NE, Atlanta, Georgia 30319 (the "Company"), and THE BANK OF NEW YORK, a New York banking corporation, having its Corporate Trust Office located at 101 Barclay Street, Floor 21 West, New York, New York 10286, as trustee (the "Trustee"); WHEREAS, the Company has heretofore executed and delivered to the Trustee an Indenture, dated as of June 27, 1995 (the "Original Indenture" and, as amended by this Supplemental Indenture, the "Indenture"), providing for the issuance by the Company from time to time of its debentures, notes, bonds or other evidences of indebtedness (in the Original Indenture and herein called the "Debt Securities"), unlimited as to principal amount, to be issued in one or more series; WHEREAS, the Company, in the exercise of the power and authority conferred upon and reserved to it under the provisions of the Original Indenture and pursuant to appropriate resolutions of the Executive Committee of the Board of Directors, has duly determined to make, execute and deliver to the Trustee this Supplemental Indenture to the Original Indenture in order to establish the form and terms of, and to provide for the creation and issuance of, a new series of Debt Securities designated as its "Convertible Senior Notes due 2021" in the aggregate Principal Amount at Maturity (as defined herein) of up to $793,000,000; WHEREAS, Section 9.01 of the Original Indenture provides, among other things, that the Company, when authorized by Board Resolution, and the Trustee, at any time and from time to time, without the consent of any Holders, may enter into an indenture supplemental to the Original Indenture (a) to establish the form or terms of Debt Securities of any series as permitted by Sections 2.01 and 2.03 of the Original Indenture and (b) to cure any ambiguity or to correct or supplement any provision in the Original Indenture which may be defective or inconsistent with any other provision of the Original Indenture, or to make any other change that does not adversely affect the rights of any Holders of Debt Securities of any series or any related coupon; WHEREAS, all things necessary to make the Convertible Senior Notes due 2021, when executed by the Company and authenticated and delivered by the Trustee or any Authenticating Agent and issued upon the terms and subject to the conditions hereinafter and in the Original Indenture set forth against payment therefor, the valid, binding and legal obligations of the Company and to make this Supplemental Indenture a valid, binding and legal agreement of the Company, have been done; NOW, THEREFORE, THIS FOURTH SUPPLEMENTAL INDENTURE WITNESSETH that, in order to establish the form and terms of the series of Debt Securities designated as the "Convertible Senior Notes due 2021" and for and in consideration of the premises and of the covenants contained in the Original Indenture and in this Supplemental Indenture and for other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders, as follows: 3 ARTICLE 1 DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101 Definitions. For all purposes of the Original Indenture and this Supplemental Indenture relating to the series of Debt Securities (consisting of Notes) created hereby, except as otherwise expressly provided or unless the context otherwise requires, the terms defined in this Article have the meanings assigned to them in this Article. Each capitalized term that is used in the Original Indenture and this Supplemental Indenture but not defined herein shall have the meaning specified in the Original Indenture. "Agent Members" has the meaning specified in Section 207(e)(v). "Applicable Procedures" means, with respect to any transfer or transaction involving a Global Note or beneficial interest therein, the rules and procedures of the Depositary for such Note, in each case to the extent applicable to such transaction and as in effect from time to time. "Average Sale Price" has the meaning specified in Section 301. "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions or trust companies in The City of New York are authorized or required by law, regulation or executive order to close. "Capital Stock" of any Person means any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any preferred stock, but excluding any debt securities convertible into such equity. "cash" means U.S. legal tender. "Certificated Notes" means Notes that are in the form of the Note attached hereto as Exhibit A-2. "Class A Common Stock" means shares of Class A common stock, par value $1.00 per share, of the Company as it exists on the date of this Supplemental Indenture or any other shares of Capital Stock of the Company into which the Class A Common Stock shall be reclassified or changed. "Clearstream" means Clearstream Banking, societe anonyme (formerly Cedelbank). "Company Notice" has the meaning specified in Section 501(d). "Company Notice Date" has the meaning specified in Section 501(d). 2 4 "Conversion Agent" means the Trustee or such other office or agency designated by the Company where Notes may be presented for conversion. "Conversion Date" has the meaning specified in Section 302. "Conversion Rate" has the meaning specified in Section 301. "Debt Securities" has the meaning specified in the first recital hereof. "Defaulted Interest" has the meaning specified in Section 402(b). "Depositary" means, with respect to the Notes issuable in whole or in part in global form, DTC and any nominee thereof, until a successor shall have been appointed and become such pursuant to the applicable provisions of the Indenture, and thereafter "Depositary" shall mean or include such successor and any nominee thereof. "DTC" means The Depository Trust Company. "Euroclear" means the Euroclear System. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Ex-Dividend Date" has the meaning specified in Section 308(b). "Ex-Dividend Time" has the meaning specified in Section 301. "Extraordinary Cash Dividend" has the meaning specified in Section 308(a). "Fundamental Change" has the meaning specified in Section 501(d). "Fundamental Change Notice" has the meaning specified in Section 501(d). "Fundamental Change Notice Date" has the meaning specified in Section 501(d). "Fundamental Change Repurchase Date" has the meaning specified in Section 501(d). "Fundamental Change Repurchase Notice" has the meaning specified in Section 501(d). "Fundamental Change Repurchase Price" has the meaning specified in Section 501(d). "Global Note" means a Note issued in global form and deposited with or on behalf of the Depositary. "Holder" and "Noteholder," in the case of any Note, means the Person in whose name such Note is registered in the Debt Security Register. 3 5 "Institutional Accredited Investor" means an institutional "accredited investor" as defined in Rule 501(a)(1), (2), (3) and (7) under the Securities Act. "Interest Payment Date" has the meaning specified in Section 204. "Issue Date" means February 23, 2001. "Issue Price" of any Note means, in connection with the original issuance of such Note, the initial issue price as set forth on the face of the Note. "Legend" has the meaning specified in Section 205(c). "Market Price" means the average of the Sale Prices of the Class A Common Stock for the five trading day period ending on the third Business Day (if the third Business Day prior to the applicable Purchase Date is a trading day or, if not, then on the last trading day) prior to the applicable Purchase Date, appropriately adjusted to take into account the occurrence, during the period commencing on the first of such trading days during such five trading day period and ending on such Purchase Date, of any event described in Section 306, 307 or 308 of this Supplemental Indenture; subject, however, to the conditions set forth in Sections 309 and 310 of this Supplemental Indenture. "Measurement Period" has the meaning specified in Section 308(a). "Notes" means the Convertible Senior Notes due 2021 created hereby and "Note" means one of them. "Option Exercise Date" has the meaning specified in Section 401. "Original Issue Discount" of any Note means the difference between the Issue Price and the Principal Amount at Maturity of the Note as set forth on the face of the Note, which shall accrue as set forth in the form of Note. "Permitted Holders" has the meaning specified in Section 501(d). "Post-Distribution Price" has the meaning specified in Section 308(b). "Principal Amount at Maturity" of a Note means the principal amount at maturity as set forth on the face of the Note. "Purchase Agreement" means the Purchase Agreement dated February 15, 2001, among the Company and Salomon Smith Barney Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, Credit Suisse First Boston Corporation, Morgan Stanley & Co. Incorporated, ABN AMRO Rothschild LLC, Fleet Securities, Inc., J.P. Morgan Securities Inc. and SG Cowen Securities Corporation. "Purchase Date" has the meaning specified in Section 501(d). "Purchase Notice" has the meaning specified in Section 501(d). 4 6 "Purchase Price" has the meaning specified in Section 501(d). "Qualified Institutional Buyer" has the meaning specified in Rule 144A. "Redemption Date", with respect to any Note or portion thereof to be redeemed, means the date fixed for redemption in accordance with the terms of the Notes and Article III of the Indenture. "Redemption Price", with respect to any Note or portion thereof to be redeemed, means the price at which such Note or portion thereof is to be redeemed as specified in paragraph 5 of the Notes. "Regular Record Date" means, with respect to the interest payable on any Interest Payment Date, the close of business on the February 8 or August 8 (whether or not a Business Day), as the case may be, immediately preceding such Interest Payment Date. "Regulation S" means Regulation S under the Securities Act. "Regulation S Global Note" means a permanent Global Note in the form of the Note attached hereto as Exhibit A-1, and that is deposited with and registered in the name of the Depositary, representing Notes sold in offshore transactions in reliance on Regulation S under the Securities Act. "Relevant Cash Dividends" has the meaning specified in Section 308(a). "Resale Restriction Termination Date" has the meaning specified in Section 205(c). "Restated Principal Amount" has the meaning specified in Section 401. "Restricted Note" means a Note required to bear the restrictive Legends set forth on the forms of Note attached as Exhibits A-1 and A-2 to this Supplemental Indenture. "Rights" has the meaning specified in Section 319. "Rights Agreement" has the meaning specified in Section 319. "Rule 144A" means Rule 144A under the Securities Act (or any successor provision), as it may be amended from time to time. "Rule 144A Information" has the meaning specified in Section 601. "Sale Price" of the Class A Common Stock on any date means the closing sale price per share (or, if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and average ask prices) on such date as reported in the composite transactions for the principal United States securities exchange on which the Class A Common Stock is traded or, if the Class A Common Stock is 5 7 not listed on a United States national or regional securities exchange, as reported by the National Association of Securities Dealers Automated Quotation System. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Special Record Date" means, for the payment of any Defaulted Interest, the date fixed by the Trustee pursuant to Section 402(b). "Stated Maturity," when used with respect to any Note, means the date specified in such Note as the fixed date on which an amount equal to the Principal Amount at Maturity of such Note or any installment of interest thereon is due and payable or, if the Notes have been converted into semi-annual coupon notes, the date specified in such Note as the fixed date on which the Restated Principal Amount thereof or any installment of interest thereon is due and payable. "Supplemental Indenture" means this Fourth Supplemental Indenture. "Tax Event" means that the Company shall have received an opinion from independent tax counsel experienced in such matters to the effect that, on or after February 15, 2001, as a result of (a) any amendment to, or change (including any announced prospective change) in, the laws (or rules or regulations thereunder) of the United States or any political subdivision or taxing authority thereof or therein or (b) any amendment to, or change in, an interpretation or application of such laws, rules or regulations by any legislative body, court, governmental agency or regulatory authority, in each case which amendment or change is enacted, promulgated, issued or announced or which interpretation is issued or announced or which action is taken, on or after February 15, 2001, there is more than an insubstantial risk that interest (including Original Issue Discount) payable on the Notes either (i) would not be deductible on a current accrual basis or (ii) would not be deductible under any other method, in either case in whole or in part, by the Company (by reason of deferral, disallowance, or otherwise) for United States Federal income tax purposes. "Tax Event Date" has the meaning specified in Section 401. "Time of Determination" has the meaning specified in Section 301. "trading day" means each day on which the securities exchange or quotation system that is used to determine the Sale Price is open for trading or quotation. "Uniform Commercial Code" means the New York Uniform Commercial Code as in effect from time to time. "US Global Note" means a permanent Global Note in the form of the Note attached hereto as Exhibit A-1, and that is deposited with and registered in the name of the Depositary, representing Notes sold in reliance on Rule 144A under the Securities Act. 6 8 SECTION 102 Section References. Each reference to a particular section set forth in this Supplemental Indenture shall, unless the context otherwise requires, refer to this Supplemental Indenture. ARTICLE 2 THE NOTES SECTION 201 Title of the Notes. The Debt Securities shall be known and designated as the "Convertible Senior Notes due 2021" of the Company. SECTION 202 Amount. The aggregate Principal Amount at Maturity of Notes that may be authenticated and delivered under this Supplemental Indenture is limited to $793,000,000, except for Notes authenticated and delivered upon registration of transfer of, or exchange for, or in lieu of, other Notes pursuant to Section 2.07, 2.08, 2.09, 3.06 or 9.04 of the Indenture, upon repayment in part of any Note pursuant to Article III of the Indenture, and upon surrender in part of any Note for conversion into Class A Common Stock pursuant to the terms of the Notes and Article 3 of this Supplemental Indenture. SECTION 203 Stated Maturity. The Stated Maturity of the Notes shall be February 23, 2021. SECTION 204 Interest. The Principal Amount at Maturity of the Notes shall bear cash interest from February 23, 2001 or from the most recent date to which cash interest has been paid or duly provided for, payable semiannually in arrears on February 23 and August 23 of each year (each, an "Interest Payment Date"), commencing August 23, 2001, to the Persons in whose names the Notes (or one or more Predecessor Securities) are registered at the close of business on the Regular Record Date for such interest, which shall be the February 8 or August 8 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Cash interest on the Notes will accrue at the rate of 0.348% per annum until the Principal Amount at Maturity thereof is paid or made available for payment, subject to Article 3 hereof. SECTION 205 Forms; Denominations. The Notes shall be Registered Securities. The certificates for the Notes shall be in substantially the forms attached hereto as Exhibits A-1 and A-2. The Notes are being offered and sold by the Company pursuant to the Purchase Agreement. (a) Global Notes. (i) Notes offered and sold in reliance on Rule 144A as provided in the Purchase Agreement shall be issued initially in the form of one or more US Global Notes in definitive fully registered form without interest coupons, deposited on behalf of the subscribers for the Notes represented thereby with The Bank of New York, at its Corporate Trust Office, as custodian for the Depositary and registered in the name of DTC or a nominee thereof, duly executed by the Company and authenticated by the Trustee as provided in the 7 9 Indenture. The aggregate Principal Amount at Maturity of the US Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary as hereinafter provided. Notes offered and sold in offshore transactions in reliance on Regulation S as provided in the Purchase Agreement shall be issued initially in the form of one or more Regulation S Global Notes in definitive fully registered form without interest coupons, deposited on behalf of the subscribers for the Notes represented thereby with The Bank of New York, at its Corporate Trust Office, as custodian for the Depositary, for the accounts of Euroclear and Clearstream and registered in the name of DTC or a nominee thereof, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate Principal Amount at Maturity of the Regulation S Global Notes may from time to time be increased or decreased by adjustments made on the records of the Trustee and the Depositary as hereinafter provided. Each Global Note shall represent such of the Outstanding Notes as shall be specified therein and each shall provide that it shall represent the aggregate Principal Amount at Maturity of Outstanding Notes from time to time endorsed thereon and that the aggregate Principal Amount at Maturity of Outstanding Notes represented thereby may from time to time be reduced or increased, as appropriate, to reflect conversions and redemptions. Any adjustment of the aggregate Principal Amount at Maturity of a Global Note to reflect the amount of any increase or decrease in the Principal Amount at Maturity of Outstanding Notes represented thereby shall be made by the Trustee in accordance with instructions given by the Holder thereof as required by Section 207 hereof and shall be made on the records of the Trustee and the Depositary. (ii) Book-Entry Provisions. This Section 205(a)(ii) shall apply only to Global Notes. The Company shall execute and the Trustee shall, in accordance with this Section 205(a)(ii) and Section 2.02 of the Indenture, authenticate and deliver initially one or more Global Notes that (a) shall be registered in the name of the Depositary, (b) shall be delivered by the Trustee to the Depositary or pursuant to the Depositary's instructions and (c) shall bear legends substantially to the following effect: "UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO.), ANY TRANSFER, 8 10 PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS, IN WHOLE BUT NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN ARTICLE TWO OF THE FOURTH SUPPLEMENTAL INDENTURE REFERRED TO ON THE REVERSE HEREOF." (b) Certificated Notes. Except as otherwise set forth in this Supplemental Indenture, owners of beneficial interests in Global Notes will not be entitled to receive physical delivery of Certificated Notes. Beneficial interests in a Global Note transferred in accordance with Section 207(a)(ii) to an Institutional Accredited Investor who is not a Qualified Institutional Buyer and beneficial interests in a Global Note transferred to the beneficial holders thereof pursuant to Section 207(e) will be issued in certificated, registered form without interest coupons. (c) Restrictive Legends. Until the Resale Restriction Termination Date, all Global Notes and all Certificated Notes shall bear a legend (the "Legend") in substantially the following form, unless such Notes have been sold pursuant to a registration statement that has been declared effective under the Securities Act: THIS SECURITY AND THE SHARES OF CLASS A COMMON STOCK OF COX COMMUNICATIONS, INC. (THE "COMPANY") ISSUABLE UPON CONVERSION OF THIS SECURITY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY, THE SHARES OF CLASS A COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE REOFFERED, RESOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS SECURITY OR ANY BENEFICIAL INTEREST HEREIN WILL BE ABLE TO EXERCISE THE CONVERSION RIGHT ONLY IF THE HOLDER CERTIFIES THAT IT (A) IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED BELOW) (B) IS AN INSTITUTIONAL ACCREDITED 9 11 INVESTOR (AS DEFINED BELOW) OR (C) IS NOT A U.S. PERSON (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT) AND IS NOT EXERCISING SUCH EXCHANGE RIGHT ON BEHALF OF A U.S. PERSON. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY OR ANY BENEFICIAL INTEREST HEREIN PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE"), WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY BENEFICIAL INTEREST HEREIN (OR ANY PREDECESSOR SECURITY) ONLY (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A "QUALIFIED INSTITUTIONAL BUYER" TO WHICH NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (D) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (E) OUTSIDE THE UNITED STATES TO NON-U.S. PERSONS IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, INCLUDING UNDER RULE 144, IF AVAILABLE, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (C), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION 10 12 SATISFACTORY TO EACH OF THEM, AND IN EACH OF THE FOREGOING CASES, A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. IN ANY CASE, THE HOLDER HEREOF WILL NOT, DIRECTLY OR INDIRECTLY, ENGAGE IN ANY HEDGING TRANSACTIONS WITH REGARD TO THIS SECURITY OR ANY SHARES OF CLASS A COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SECURITY EXCEPT AS PERMITTED BY THE SECURITIES ACT. Until the Resale Restriction Termination Date, the Company covenants that any stock certificate representing shares of Class A Common Stock issued by the Company upon conversion of any Notes will bear a legend in substantially the following form, unless such shares have been sold pursuant to a registration statement that has been declared effective under the Securities Act: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, RESOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS SECURITY, BY ITS ACCEPTANCE HEREOF, AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE OF THE NOTE UPON CONVERSION OF WHICH THIS SECURITY WAS ISSUED BY COX COMMUNICATIONS, INC. (THE "COMPANY") AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF SUCH NOTE, THIS SECURITY OR ANY BENEFICIAL INTEREST THEREIN OR HEREIN (OR ANY PREDECESSOR OF SUCH SECURITIES) ONLY (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) FOR SO LONG AS THE SHARES OF CLASS A COMMON STOCK OF THE COMPANY ("CLASS A COMMON STOCK") REPRESENTED BY THIS SECURITY ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A "QUALIFIED INSTITUTIONAL BUYER" TO WHICH 11 13 NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) IF SUCH HOLDER IS A "QUALIFIED INSTITUTIONAL BUYER" OR AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT, TO SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR" THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR" FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (D) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, (E) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, INCLUDING UNDER RULE 144, IF AVAILABLE, SUBJECT TO THE RIGHT OF THE COMPANY AND THE TRANSFER AGENT FOR THE CLASS A COMMON STOCK PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (C), (D) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN EACH OF THE FOREGOING CASES, A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRANSFER AGENT FOR THE CLASS A COMMON STOCK. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. IN ANY CASE, THE HOLDER HEREOF WILL NOT, DIRECTLY OR INDIRECTLY, ENGAGE IN ANY HEDGING TRANSACTIONS WITH REGARD TO THIS SECURITY EXCEPT AS PERMITTED BY THE SECURITIES ACT. (d) U.S. Tax Legend. All Notes shall bear the following legend: THIS SECURITY WAS ISSUED WITH ORIGINAL ISSUE DISCOUNT, FOR PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED, THE ISSUE PRICE OF THIS SECURITY IS $695.03 PER $1,000 OF PRINCIPAL AMOUNT AT MATURITY, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $304.97 PER $1,000 OF PRINCIPAL AMOUNT AT MATURITY, THE ISSUE DATE IS FEBRUARY 23, 2001 AND THE YIELD TO MATURITY IS 2.25% COMPOUNDED SEMI-ANNUALLY. SECTION 206 Transfer and Exchange. (a) Notwithstanding any provision to the contrary herein, so long as a Global Note remains Outstanding and is held by or on behalf of the Depositary, transfers of a Global Note, in whole or in part, shall be made only in accordance with Section 207 and this Section 206(a). 12 14 (b) Transfers of a Global Note shall be limited to transfers of such Global Note in whole, or in part, to nominees of the Depositary or to a successor of the Depositary or such successor's nominee. (c) If Notes are issued upon the transfer, exchange or replacement of Notes subject to restrictions on transfer and bearing the Legend, or if a request is made to remove the Legend on a Note, the Notes so issued shall bear the Legend, or the Legend shall not be removed, as the case may be, unless there is delivered to the Company and the Registrar such satisfactory evidence, which shall include an Opinion of Counsel, as may be reasonably required by the Company and the Registrar, that neither the Legend nor the restrictions on transfer set forth therein are required to ensure that transfers thereof comply with the provisions of Rule 144A, Rule 144 or Regulation S under the Securities Act or that such Notes are not "restricted" within the meaning of Rule 144 under the Securities Act. Upon (i) provision of such satisfactory evidence, or (ii) notification by the Company to the Trustee and the Registrar of the sale of such Notes pursuant to a registration statement that is effective at the time of such sale, the Trustee, at the written direction of the Company, shall authenticate and deliver a Note that does not bear the Legend. If the Legend is removed from the face of a Note and the Note is subsequently held by an Affiliate of the Company, the Legend shall be reinstated. The Trustee and the Registrar shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Supplemental Indenture or under applicable law with respect to any transfer of any interest in any Note (including transfers between or among the Depositary's participants or beneficial owners of interest in any Global Note) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by the terms of, this Supplemental Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. SECTION 207 Global Notes. (a) Notwithstanding any other provisions of this Supplemental Indenture or the Notes, (A) transfers of a Global Note, in whole or in part, shall be made only in accordance with Section 2.07 of the Indenture and Sections 206 and 207(a)(i), (B) transfer of a beneficial interest in a Global Note for a Certificated Note shall comply with Section 2.07 of the Indenture and Section 207(a)(ii) below, and (C) transfers of a Certificated Note shall comply with Section 2.07 of the Indenture and Section 207(a)(iii) and (iv) below. (i) Transfer of Global Note. A Global Note may not be transferred, in whole or in part, to any Person other than the Depositary or a nominee thereof, and no such transfer to any such other Person may be registered; provided that this clause (i) shall not prohibit any transfer of a Note that is issued in exchange for a Global Note but is not itself a Global Note. No transfer of a Note to any Person shall be effective under the Indenture or the Notes unless and until such Note has been registered in the name of such Person. Nothing in this Section 207(a)(i) shall prohibit or render ineffective any transfer of a beneficial interest in a Global Note effected in accordance with the other provisions of this Section 207(a). (ii) Restrictions on Transfer of a Beneficial Interest in a Global Note for a Certificated Note. A beneficial interest in a Global Note may not be exchanged for a Certificated Note except upon satisfaction of the requirements set forth 13 15 below. Upon receipt by the Trustee of a request for transfer of a beneficial interest in a Global Note in accordance with Applicable Procedures for a Certificated Note in the form satisfactory to the Trustee, together with: (a) so long as the Notes are Restricted Securities, certification, in the form set forth in Exhibit B-1, and, if requested by the Company or the Registrar, certification in the form set forth in Exhibit B-2, that such beneficial interest in the Global Note is being transferred to an Institutional Accredited Investor; (b) written instructions to the Trustee to make, or direct the Registrar to make, an adjustment on its books and records with respect to such Global Note to reflect a decrease in the aggregate Principal Amount at Maturity of the Notes represented by the Global Note, such instructions to contain information regarding the Depositary account to be credited with such decrease; and (c) if the Company or Registrar so requests, an opinion of counsel or other evidence reasonably satisfactory to them as to compliance with the restrictions set forth in the Legend, then the Trustee shall cause, or direct the Registrar to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Registrar, the aggregate Principal Amount at Maturity of Notes represented by the Global Note to be decreased by the aggregate Principal Amount at Maturity of the Certificated Note to be issued, shall issue such Certificated Note and shall debit or cause to be debited to the account of the Person specified in such instructions a beneficial interest in the Global Note equal to the Principal Amount at Maturity of the Certificated Note so issued. (iii) Transfer and Exchange of Certificated Notes. When Certificated Notes are presented to the Registrar with a request: (x) to register the transfer of such Certificated Notes; or (y) to exchange such Certificated Notes for an equal Principal Amount at Maturity of Certificated Notes of other authorized denominations, the Registrar shall register the transfer or make the exchange as requested if its reasonable requirements for such transaction are met; provided, however, that the Certificated Notes surrendered for transfer or exchange: (a) shall be duly endorsed or accompanied by a written instrument of transfer in form reasonably satisfactory to the Company and the Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing; and (b) so long as such Notes are Restricted Notes, such Notes are being transferred or exchanged pursuant to clause (A), (B) or (C) below, and are accompanied by the following additional information and documents, as applicable: 14 16 (A) if such Certificated Notes are being delivered to the Registrar by a Holder for registration in the name of such Holder, without transfer, a certification from such Holder to that effect; or (B) if such Certificated Notes are being transferred to the Company, a certification to that effect; or (C) if such Certificated Notes are being transferred pursuant to an exemption from registration, (i) a certification to that effect (in the form set forth in Exhibit B-1 and B-2, if applicable) and (ii) if the Company or Registrar so requests, an Opinion of Counsel or other evidence reasonably satisfactory to them as to the compliance with the restrictions set forth in the Legend. (iv) Restrictions on Transfer of a Certificated Note for a Beneficial Interest in a Global Note. A Certificated Note may not be exchanged for a beneficial interest in a Global Note except upon satisfaction of the requirements set forth below. Upon receipt by the Trustee of a Certificated Note, duly endorsed or accompanied by appropriate instruments of transfer, in form satisfactory to the Trustee, together with: (a) so long as the Notes are Restricted Notes, certification, in the form set forth in Exhibit B-1, that such Certificated Note is being transferred to a Qualified Institutional Buyer in accordance with Rule 144A; and (b) written instructions directing the Trustee to make, or to direct the Registrar to make, an adjustment on its books and records with respect to such Global Note to reflect an increase in the aggregate Principal Amount at Maturity of the Notes represented by the Global Note, such instructions to contain information regarding the Depositary account to be credited with such increase, then the Trustee shall cancel such Certificated Note and cause, or direct the Registrar to cause, in accordance with the standing instructions and procedures existing between the Depositary and the Registrar, the aggregate Principal Amount at Maturity of Notes represented by the Global Note to be increased by the aggregate Principal Amount at Maturity of the Certificated Note to be exchanged, and shall credit or cause to be credited to the account of the Person specified in such instructions a beneficial interest in the Global Note equal to the Principal Amount at Maturity of the Certificated Note so cancelled. If no Global Notes are then outstanding, the Company shall issue and the Trustee shall authenticate, upon receipt of a Company Order, a new Global Note in the appropriate Principal Amount at Maturity. (b) Subject to the succeeding paragraph, every Note shall be subject to the restrictions on transfer provided in the Legend including the delivery of an Opinion of Counsel, if so provided. Whenever any Restricted Note is presented or surrendered for registration of transfer or for exchange for a Note registered 15 17 in a name other than that of the Holder, such Note must be accompanied by a certificate in substantially the form set forth in Exhibit B-1, dated the date of such surrender and signed by the Holder of such Note, as to compliance with such restrictions on transfer. The Registrar shall not be required to accept for such registration of transfer or exchange any Note not so accompanied by a properly completed certificate. (c) The restrictions imposed by the Legend upon the transferability of any Note shall cease and terminate when such Note has been sold pursuant to an effective registration statement under the Securities Act or transferred in compliance with Rule 144 under the Securities Act (or any successor provision thereto) or, if earlier, upon the expiration of the holding period applicable to sales thereof under Rule 144(k) under the Securities Act (or any successor provision). Any Note as to which such restrictions on transfer shall have expired in accordance with their terms or shall have terminated may, upon a surrender of such Note for exchange to the Registrar in accordance with the provisions of this Section 207 (accompanied, in the event that such restrictions on transfer have terminated by reason of a transfer in compliance with Rule 144 or any successor provision, by an Opinion of Counsel having substantial experience in practice under the Securities Act and otherwise reasonably acceptable to the Company, addressed to the Company, the Trustee and the Registrar and in form acceptable to the Company, to the effect that the transfer of such Note has been made in compliance with Rule 144 or such successor provision), be exchanged for a new Note, of like tenor and aggregate Principal Amount at Maturity, which shall not bear the restrictive Legend. The Company shall inform the Trustee of the effective date of any registration statement registering the Notes under the Securities Act. The Trustee shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the aforementioned Opinion of Counsel. (d) As used in the preceding two paragraphs of this Section 207, the term "transfer" encompasses any sale, pledge, transfer, hypothecation or other disposition of any Note. (e) The provisions of clauses (i), (ii), (iii), (iv), and (v) below shall apply only to Global Notes: (i) Notwithstanding any other provisions of the Indenture or the Notes, except as provided in Section 207(a)(ii), a Global Note shall not be exchanged in whole or in part for a Note registered in the name of any Person other than the Depositary or one or more nominees thereof, provided that a Global Note may be exchanged for Notes registered in the names of any person designated by the Depositary in the event that (i) the Depositary has notified the Company that it is unwilling or unable to continue as depositary for such Global Note or the Depositary has ceased to be a "clearing agency" registered under the Exchange Act, and a successor Depositary is not appointed by the Company within 90 days or (ii) an Event of Default has occurred and is continuing with respect to the Notes. Any Global Note exchanged pursuant to clause (i) above shall be so exchanged in whole and not in part, and any Global Note exchanged pursuant to clause (ii) above may be exchanged in whole or from time to time in part as directed by the Depositary. In the event that Certificated Notes are issued in respect of beneficial interests in a Regulation S Global Note at any time prior to one year after the date of this Supplemental Indenture (other than in a transaction subject to Rule 144A), the Company shall as promptly as practicable, 16 18 institute procedures, including appropriate certifications, reasonably designed to ensure that any transfer of such Certificated Notes prior to the end of such one year is made only in accordance with the provisions of Regulation S, pursuant to registration under the Securities Act or pursuant to an exemption from such registration. (ii) Notes issued in exchange for a Global Note or any portion thereof shall be issued in definitive, fully registered form, without interest coupons, shall have an aggregate Principal Amount at Maturity equal to that of such Global Note or portion thereof to be so exchanged, shall be registered in such names and be in such authorized denominations as the Depositary shall designate and shall bear the applicable legends provided for herein. Any Global Note to be exchanged in whole shall be surrendered by the Depositary to the Trustee, as Registrar. With regard to any Global Note to be exchanged in part, either such Global Note shall be so surrendered for exchange or, if the Trustee is acting as custodian for the Depositary or its nominee with respect to such Global Note, the Principal Amount at Maturity thereof shall be reduced, by an amount equal to the portion thereof to be so exchanged, by means of an appropriate adjustment made on the records of the Trustee. Upon any such surrender or adjustment, the Trustee shall authenticate and deliver the Note issuable on such exchange to or upon the order of the Depositary or an authorized representative thereof. (iii) Subject to the provisions of clause (v) below, the registered Holder may grant proxies and otherwise authorize any Person, including Agent Members (as defined below) and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under the Indenture or the Notes. (iv) In the event of the occurrence of any of the events specified in clause (i) above, the Company will promptly make available to the Trustee a reasonable supply of Certificated Notes. (v) Neither any members of, or participants in, the Depositary (collectively, the "Agent Members") nor any other Persons on whose behalf Agent Members may act shall have any rights under the Indenture with respect to any Global Note registered in the name of the Depositary or any nominee thereof, or under any such Global Note, and the Depositary or such nominee, as the case may be, may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner and holder of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or such nominee, as the case may be, or impair, as between the Depositary, its Agent Members and any other person on whose behalf an Agent Member may act, the operation of customary practices of such Persons governing the exercise of the rights of a Holder of any Note. 17 19 ARTICLE 3 CONVERSION SECTION 301 Conversion Privilege. Except as provided in this Article 3, a Holder of a Note may convert such Note into Class A Common Stock at any time before the close of business on February 23, 2021. The number of shares of Class A Common Stock issuable upon conversion of a Note per $1,000 of Principal Amount at Maturity thereof (the "Conversion Rate") shall be that set forth in paragraph 8 of the Notes, subject to adjustment as herein set forth. The Holders' right to convert Notes into shares of Class A Common Stock is subject to the Company's right to elect instead to pay such Holder the amount of cash set forth in the next succeeding sentence, in lieu of delivering such shares of Class A Common Stock; provided, however, that if an Event of Default (other than a default in a cash payment upon conversion of the Notes) shall have occurred and be continuing, the Company shall deliver shares of Class A Common Stock (and cash in lieu of fractional shares of Class A Common Stock) in accordance with this Article 3, whether or not the Company has delivered a notice pursuant to Section 3.04 of the Indenture or Section 302 hereof to the effect that the Notes would be paid in cash. The amount of cash to be paid pursuant to Section 302 hereof for each $1,000 of Principal Amount at Maturity of a Note upon conversion shall be equal to the average Sale Price of the Class A Common Stock for the five consecutive trading days immediately following (i) the date of the Company's notice of its election to deliver cash upon conversion, if the Company shall not have given a notice of redemption pursuant to Section 3.04 of the Indenture, or (ii) the Conversion Date, in the case of a conversion following such a notice of redemption specifying an intent to deliver cash upon conversion, in either case multiplied by the Conversion Rate in effect on such Conversion Date. The Company shall not pay cash in lieu of delivering shares of Class A Common Stock upon the conversion of any Note pursuant to the terms of this Article 3 (other than cash in lieu of fractional shares pursuant to Section 303 hereof) if there has occurred (prior to, on or after, as the case may be, the Conversion Date or the date on which the Company delivers its notice of whether such Note shall be converted into shares of Class A Common Stock or cash pursuant to Section 302 hereof) and is continuing an Event of Default (other than a default in a cash payment upon conversion of such Notes). A Holder may convert a portion of the Principal Amount at Maturity of a Note if the portion is $1,000 or an integral multiple of $1,000. Provisions of this Supplemental Indenture that apply to the conversion of all of a Note also apply to the conversion of a portion of a Note. "Average Sale Price" means the average of the Sale Prices of the Class A Common Stock for the shorter of (i) 30 consecutive trading days ending on the last full trading day prior to the Time of Determination with respect to the rights, warrants or options or distribution in respect of which the Average Sale Price is being calculated, or 18 20 (ii) the period (x) commencing on the date next succeeding the first public announcement of (a) the issuance of rights, warrants or options or (b) the distribution, in each case, in respect of which the Average Sale Price is being calculated and (y) proceeding through the last full trading day prior to the Time of Determination with respect to the rights, warrants or options or distribution in respect of which the Average Sale Price is being calculated (excluding days within such period, if any, which are not trading days), or (iii) the period, if any, (x) commencing on the date next succeeding the Ex-Dividend Time with respect to the next preceding (a) issuance of rights, warrants or options or (b) distribution, in each case, for which an adjustment is required by the provisions of Section 306(4), 307 or 308 and (y) proceeding through the last full trading day prior to the Time of Determination with respect to the rights, warrants or options or distribution in respect of which the Average Sale Price is being calculated (excluding days within such period, if any, which are not trading days). In the event that the Ex-Dividend Time (or in the case of a subdivision, combination or reclassification, the effective date with respect thereto), with respect to a dividend, subdivision, combination or reclassification to which Section 306(1), (2), (3) or (5) applies, occurs during the period applicable for calculating "Average Sale Price" pursuant to the definition in the preceding sentence, "Average Sale Price" shall be calculated for such period in a manner determined by the Board of Directors to reflect the impact of such dividend, subdivision, combination or reclassification on the Sale Price of the Class A Common Stock during such period. "Time of Determination" means the time and date of the earlier of (i) the determination of stockholders entitled to receive rights, warrants or options or a distribution, in each case, to which Section 307 or 308 applies and (ii) the time ("Ex-Dividend Time") immediately prior to the commencement of "ex-dividend" trading for such rights, warrants or options or distribution on the New York Stock Exchange or such other national or regional exchange or market on which the Class A Common Stock is then listed or quoted. SECTION 302 Conversion Procedure. To convert a Note, a Holder must satisfy the requirements set forth in paragraph 8 of the Notes. The date on which the Holder satisfies all those requirements is the conversion date (the "Conversion Date"). The Conversion Agent shall notify the Company of the Conversion Date within one Business Day of the Conversion Date. Within two Business Days following the Conversion Date, the Company shall deliver to the Holder, through the Conversion Agent, written notice of whether such Note shall be converted into shares of Class A Common Stock or paid in cash, unless the Company shall have delivered such notice previously pursuant to Section 3.04 of the Indenture. If the Company shall have notified the Holder that all of such Note shall be converted into shares of Class A Common Stock, the Company shall deliver to the Holder through the Conversion Agent, as promptly as practicable but in any event no later than the fifth Business Day following the date of the Company's notice of its election to deliver shares of Class A Common Stock a certificate for the number of full shares of Class A Common Stock issuable upon the conversion and cash in lieu of any fractional share determined pursuant to Section 303 hereof. Except as provided in the last sentence in the second paragraph of Section 301 hereof, if the Company shall have notified the Holder that all or a portion of 19 21 such Note shall be paid in cash, the Company shall deliver to the Holder surrendering such Note the amount of cash payable with respect to such Note no later than the tenth Business Day following such Conversion Date, together with a certificate for the number of full shares of Class A Common Stock issuable upon the conversion and cash in lieu of any fractional share determined pursuant to Section 303 hereof. Except as provided in the last sentence in the second paragraph of Section 301 hereof, the Company may not change its election with respect to the consideration to be delivered upon conversion of a Note once the Company has notified the Holder in accordance with this paragraph. If shares of Class A Common Stock are delivered as consideration, then the Person in whose name the certificate representing such shares is registered shall be treated as a stockholder of record on and after the Conversion Date; provided, however, that no surrender of a Note on any date when the stock transfer books of the Company shall be closed shall be effective to constitute the Person or Persons entitled to receive the shares of Class A Common Stock upon such conversion as the record holder or holders of such shares of Class A Common Stock on such date, but such surrender shall be effective to constitute the Person or Persons entitled to receive such shares of Class A Common Stock as the record holder or holders thereof for all purposes at the close of business on the next succeeding day on which such stock transfer books are open; such conversion shall be at the Conversion Rate in effect on the date that such Note shall have been surrendered for conversion, as if the stock transfer books of the Company had not been closed. Upon conversion of a Note, such Person shall no longer be a Holder of such Note and such Note shall be cancelled and no longer Outstanding. No payment or adjustment will be made for accrued interest or dividends on, or other distributions with respect to, any Class A Common Stock except as provided in this Article 3. On conversion of a Note, that portion of accrued Original Issue Discount attributable to the period from the Issue Date to, but excluding, the Conversion Date and (except as provided below) that portion of accrued cash interest attributable to the period from the last Interest Payment Date (or, if no Interest Payment Date has occurred, from the Issue Date) to, but excluding, the Conversion Date (or, if the Company has exercised the option provided for in Section 401, that portion of accrued interest attributable to the period from the later of (x) the date of such exercise and (y) the most recent Interest Payment Date following the date of such exercise to, but excluding, the Conversion Date) with respect to the converted Note shall not be cancelled, extinguished or forfeited, but rather shall be deemed to be paid in full to the Holder thereof through delivery of the Class A Common Stock (together with the cash payment, if any, in lieu of fractional shares) and/or cash, if any, in exchange for the Note being converted pursuant to the provisions hereof; and such cash, if any, and/or the fair market value of such shares of Class A Common Stock (together with any such cash payment in lieu of fractional shares) shall be treated as delivered pro rata, to the extent thereof, first in exchange for Original Issue Discount and cash interest (or interest, if the Company has exercised its option provided for in Section 401) accrued to, but excluding, the Conversion Date, and the balance, if any, of such cash and/or the fair market value of such Class A Common Stock (together with any such cash payment in lieu of fractional shares) shall be treated as delivered in exchange for the Issue Price of the Note being converted pursuant to the provisions hereof. Notwithstanding the foregoing, accrued but unpaid cash interest will be payable upon conversion of Notes made concurrently with or after acceleration of Notes following an Event of Default. 20 22 If the Holder converts more than one Note at the same time, the number of shares of Class A Common Stock issuable or cash paid upon the conversion shall be based on the total Principal Amount at Maturity of the Notes converted. Notes surrendered for conversion by a Holder during the period from the close of business on any Regular Record Date to the opening of business on the next Interest Payment Date, except for Notes to be redeemed on a date within this period or on the next Interest Payment Date, must be accompanied by payment of an amount equal to the interest that the Holder is to receive on the Notes surrendered for conversion. Except where Notes surrendered for exchange must be accompanied by payment as described above, the Company will not pay interest on any Interest Payment Date subsequent to the Conversion Date. Upon surrender of a Note that is converted in part, the Company shall execute, and the Trustee shall authenticate and deliver to the Holder, a new Note in an authorized denomination equal in Principal Amount at Maturity to the unconverted portion of the Note surrendered. SECTION 303 Fractional Shares. The Company will not issue a fractional share of Class A Common Stock upon conversion of a Note. Instead, the Company will deliver cash for the current market value of the fractional share. The current market value of a fractional share shall be determined, to the nearest 1/1,000th of a share, by multiplying the Sale Price, on the last trading day prior to the Conversion Date, of a full share by the fractional amount and rounding the product to the nearest whole cent. SECTION 304 Taxes on Conversion. If a Holder converts a Note and the Company elects to deliver shares of Class A Common Stock upon conversion, the Company will pay any and all documentary, stamp or similar issue or transfer tax due on the issue of shares of Class A Common Stock upon the conversion. However, the Holder shall pay any such tax which is due because the Holder requests the shares to be issued in a name other than the Holder's name. The Conversion Agent may refuse to deliver the certificates representing the Class A Common Stock until the Conversion Agent receives a sum that the Company deems to be sufficient to pay any tax which will be due. Nothing herein shall preclude any tax withholding required by law or regulations. SECTION 305 Company to Provide Stock. The Company shall, prior to issuance of any Notes under this Article 3, and from time to time as may be necessary, reserve out of its authorized but unissued Class A Common Stock a sufficient number of shares of Class A Common Stock to permit the conversion of the Notes. All Shares of Class A Common Stock delivered upon conversion of the Notes shall be newly issued shares or treasury shares, shall be duly and validly issued and fully paid and nonassessable and shall be free from preemptive rights and free of any lien or adverse claim created by the Company. The Company shall endeavor promptly to comply with all federal and state securities laws regulating the offer and delivery of shares of Class A Common Stock upon conversion of Notes, if any, including the addition of any and all restrictive legends that are required to appear on the face of the Class A Common Stock, and shall cause to have listed or quoted such shares of Class A Common Stock on each United States national securities exchange or in the automated over-the-counter market in the United States on which the Class A Common Stock is then listed or quoted. 21 23 SECTION 306 Adjustment for Change in Capital Stock. If, after the Issue Date of the Notes, the Company: (1) pays a dividend or makes a distribution on its Class A Common Stock in shares of Class A Common Stock; (2) subdivides its outstanding shares of Class A Common Stock into a greater number of shares; (3) combines its outstanding shares of Class A Common Stock into a smaller number of shares; (4) pays a dividend or makes a distribution on its Class A Common Stock in shares of its Capital Stock (other than Class A Common Stock or rights, warrants or options for its Capital Stock); or (5) issues by reclassification of its Class A Common Stock any shares of its Capital Stock (other than rights, warrants or options for its Capital Stock), then the conversion privilege and the Conversion Rate in effect immediately prior to such action shall be adjusted so that the Holder of a Note thereafter converted may receive the number of shares of Capital Stock of the Company which such Holder would have owned immediately following such action if such Holder had converted the Note for Class A Common Stock immediately prior to such action. The adjustment shall become effective immediately after the record date in the case of a dividend or distribution and immediately after the effective date in the case of a subdivision, combination or reclassification. If after an adjustment a Holder of a Note upon conversion of such Note may receive shares of two or more classes of Capital Stock of the Company, the Conversion Rate shall thereafter be subject to adjustment upon the occurrence of an action taken with respect to any such class of Capital Stock as is contemplated by this Article 3 with respect to the Class A Common Stock, on terms comparable to those applicable to Class A Common Stock in this Article 3. SECTION 307 Adjustment for Rights Issue. If after the Issue Date of the Notes, the Company distributes any rights, warrants or options to all holders of its Common Stock entitling them, for a period expiring within 60 days after the record date for such distribution, to subscribe for or purchase shares of Class A Common Stock at a price per share less than the Sale Price of the Class A Common Stock as of the Time of Determination, the Conversion Rate shall be adjusted, subject to the provisions of the last paragraph of this Section 307, in accordance with the formula: R' = R x O + N ------------------------ (O + (N x P)/M) where: 22 24 R' = the adjusted Conversion Rate. R = the current Conversion Rate. O = the number of shares of Class A Common Stock outstanding on the record date for the distribution to which this Section 307 is being applied. N = the number of additional shares of Class A Common Stock offered pursuant to the distribution. P = the offering price per share of the additional shares. M = the Average Sale Price, minus, in the case of (i) a distribution to which Section 306(4) applies or (ii) a distribution to which Section 308 applies, for which, in each case, (x) the record date shall occur on or before the record date for the distribution to which this Section 307 applies and (y) the Ex-Dividend Time shall occur on or after the date of the Time of Determination for the distribution to which this Section 307 applies, the fair market value (on the record date for the distribution to which this Section 307 applies) of the (1) Capital Stock of the Company distributed in respect of each share of Class A Common Stock in such Section 306(4) distribution and (2) assets of the Company or debt securities or any rights, warrants or options to purchase securities of the Company distributed in respect of each share of Class A Common Stock in such Section 308 distribution. The Board of Directors shall determine fair market values for the purposes of this Section 307. The adjustment shall become effective immediately after the record date for the determination of shareholders entitled to receive the rights, warrants or options to which this Section 307 applies. If all of the shares of Class A Common Stock subject to such rights, warrants or options have not been issued when such rights, warrants or options expire, then the Conversion Rate shall promptly be readjusted to the Conversion Rate which would then be in effect had the adjustment upon the issuance of such rights, warrants or options been made on the basis of the actual number of shares of Class A Common Stock issued upon the exercise of such rights, warrants or options. No adjustment shall be made under this Section 307 if the application of the formula stated above in this Section 307 would result in a value of R' that is equal to or less than the value of R. SECTION 308 Adjustment for Other Distributions. (a) If, after the Issue Date of the Notes, the Company distributes to all holders of its Class A Common Stock any of its assets excluding distributions of Capital Stock or equity interests referred to in Section 308(b), or debt securities or any rights, 23 25 warrants or options to purchase securities of the Company (including securities or cash, but excluding (x) distributions of Capital Stock referred to in Section 306 and distributions of rights, warrants or options referred to in Section 307 and (y) cash dividends or other cash distributions that are paid out of consolidated current net earnings or earnings retained in the business as shown on the books of the Company unless such cash dividends or other cash distributions are Extraordinary Cash Dividends) the Conversion Rate shall be adjusted, subject to the provisions of Section 308(c), in accordance with the formula: R' = R x M M - F where: R' = the adjusted Conversion Rate. R = the current Conversion Rate. M = the Average Sale Price, minus, in the case of a distribution to which Section 306(4) applies, for which (i) the record date shall occur on or before the record date for the distribution to which this Section 308(a) applies and (ii) the Ex-Dividend Time shall occur on or after the date of the Time of Determination for the distribution to which this Section 308(a) applies, the fair market value (on the record date for the distribution to which this Section 308(a) applies) of any Capital Stock of the Company distributed in respect of each share of Class A Common Stock in such Section 306(4) distribution. F = the fair market value (on the record date for the distribution to which this Section 308(a) applies) of the assets, securities, rights, warrants or options to be distributed in respect of each share of Class A Common Stock in the distribution to which this Section 308(a) is being applied (including, in the case of cash dividends or other cash distributions giving rise to an adjustment, all such cash distributed concurrently). The Board of Directors shall determine fair market values for the purposes of this Section 308(a). The adjustment shall become effective immediately after the record date for the determination of shareholders entitled to receive the distribution to which this Section 308(a) applies. For purposes of this Section 308(a), the term "Extraordinary Cash Dividend" shall mean any cash dividend with respect to the Class A Common Stock the amount of which, together with the aggregate amount of cash dividends on the Class A Common Stock to be aggregated with such cash dividend in accordance with the provisions of this paragraph, equals or exceeds the 24 26 threshold percentage set forth in item (i) below. For purposes of item (i) below, the "Measurement Period" with respect to a cash dividend on the Class A Common Stock shall mean the 365 consecutive day period ending on the date prior to the Ex-Dividend Time with respect to such cash dividend, and the "Relevant Cash Dividends" with respect to a cash dividend on the Class A Common Stock shall mean the cash dividends on the Class A Common Stock with Ex-Dividend Times occurring in the Measurement Period. (i) If, upon the date prior to the Ex-Dividend Time with respect to a cash dividend on the Class A Common Stock, the aggregate amount of such cash dividend together with the amounts of all Relevant Cash Dividends equals or exceeds on a per share basis 5% of the Sale Price of the Class A Common Stock on the last trading day preceding the date of declaration by the Board of Directors of the cash dividend with respect to which this provision is being applied, then such cash dividend together with all Relevant Cash Dividends, shall be deemed to be an Extraordinary Cash Dividend and for purposes of applying the formula set forth above in this Section 308(a), the value of "F" shall be equal to (y) the aggregate amount of such cash dividend together with the amount of all Relevant Cash Dividends, minus (z) the aggregate amount of all Relevant Cash Dividends for which a prior adjustment in the Conversion Rate was previously made under this Section 308(a). In making the determinations required by item (i) above, the amount of cash dividends paid on a per share basis and the amount of any Relevant Cash Dividends specified in item (i) above, shall be appropriately adjusted to reflect the occurrence during such period of any event described in Section 306. (b) If, after the Issue Date of the Notes, the Company pays a dividend or makes a distribution to all holders of its Class A Common Stock consisting of Capital Stock of any class or series, or similar equity interests, of or relating to a Subsidiary or other business unit of the Company, the Conversion Rate shall be adjusted in accordance with the formula: R' = R x (1 + F/M) where: R' = the adjusted Conversion Rate. R = the current Conversion Rate. M = the average of the Post-Distribution Prices of the Class A Common Stock for the 10 trading days commencing on and including the fifth trading day after the date on which "ex-dividend trading" commences for such dividend or distribution on the principal United States securities exchange or market on which the Class A Common Stock is then listed or quoted (the "Ex-Dividend Date"). F = the fair market value of the securities paid or distributed in respect of each share of Class A Common Stock in the dividend or distribution to which this Section 308(b) 25 27 applies, which shall equal the number of securities paid or distributed in respect of each share of Class A Common Stock in the dividend or distribution to which this Section 308(b) applies multiplied by the average of the Post-Distribution Prices of those securities so paid or distributed for the 10 trading days commencing on and including the fifth trading day after the Ex-Dividend Date. "Post-Distribution Price" of Capital Stock or any similar equity interest on any date means the closing per unit sale price (or, if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average ask prices) on such date for trading of such units on a "when issued" basis without due bills (or similar concept) as reported in the composite transactions for the principal United States securities exchange on which such Capital Stock or equity interest is traded or, if the Capital Stock or equity interest, as the case may be, is not listed on a United States national or regional securities exchange, as reported by the National Association of Securities Dealers Automated Quotation System or by the National Quotation Bureau Incorporated; provided that if on any date such units have not traded on a "when issued" basis, the Post-Distribution Price shall be the closing per unit sale price (or, if no closing sale price is reported, the average of the bid and ask prices or, if more than one in either case, the average of the average bid and the average ask prices) on such date for trading of such units on a "regular way" basis without due bills (or similar concept) as reported in the composite transactions for the principal United States securities exchange on which such Capital Stock or equity interest is traded or, if the Capital Stock or equity interest, as the case may be, is not listed on a United States national or regional securities exchange, as reported by the National Association of Securities Dealers Automated Quotation System or by the National Quotation Bureau Incorporated. In the absence of such quotation, the Board of Directors shall be entitled to determine the Post-Distribution Price on the basis of such quotations which reflect the post-distribution value of the Capital Stock or equity interests as it considers appropriate. (c) In the event that, with respect to any distribution to which Section 308(a) would otherwise apply, the difference "M-F" as defined in the formula set forth in Section 308(a) is less than $1.00 or "F" is equal to or greater than "M", then the adjustment provided by Section 308(a) shall not be made and in lieu thereof the provisions of Section 314 shall apply to such distribution. SECTION 309 When Adjustment May Be Deferred. No adjustment in the Conversion Rate need be made unless the adjustment would require an increase or decrease of at least 1% in the Conversion Rate. Any adjustments that are not made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article 3 shall be made to the nearest cent or to the nearest 1/1,000th of a share, as the case may be. SECTION 310 When No Adjustment Required. No adjustment need be made for a transaction referred to in Section 306, 307, 308 or 314 if Noteholders are to participate in the transaction on a basis and with notice that the Board of 26 28 Directors determines to be fair and appropriate in light of the basis and notice on which holders of Class A Common Stock participate in the transaction. Such participation by Noteholders may include participation upon conversion provided that an adjustment shall be made at such time as the Noteholders are no longer entitled to participate. No adjustment need be made for rights to purchase Class A Common Stock pursuant to a stock purchase, stock option or other equity based incentive plans for the benefit of the employees or directors of the Company or its Subsidiaries or a plan for reinvestment of dividends or interest of the Company. No adjustment need be made for a change in the par value or no par value of the Class A Common Stock. To the extent the Notes become convertible pursuant to this Article 3 into cash, no adjustment need be made thereafter as to the cash. Interest will not accrue on the cash. SECTION 311 Notice of Adjustment. Whenever the Conversion Rate is adjusted, the Company shall promptly mail to Noteholders by first-class mail a notice of the adjustment. The Company shall file with the Trustee and the Conversion Agent such notice and a certificate from the Company's independent public accountants briefly stating the facts requiring the adjustment and the manner of computing it. The certificate shall be conclusive evidence that the adjustment is correct. Neither the Trustee nor any Conversion Agent shall be under any duty or responsibility with respect to any such certificate except to exhibit the same to any Holder desiring inspection thereof upon reasonable request during normal business hours. SECTION 312 Voluntary Increase. The Company from time to time may increase the Conversion Rate by any amount for any period of time. Whenever the Conversion Rate is increased, the Company shall mail to Noteholders by first-class mail and file with the Trustee and the Conversion Agent a notice of the increase. The Company shall mail the notice at least 15 days before the date the increased Conversion Rate takes effect. The notice shall state the increased Conversion Rate and the period it will be in effect. A voluntary increase of the Conversion Rate does not change or adjust the Conversion Rate otherwise in effect for purposes of Section 306, 307 or 308. SECTION 313 Notice of Certain Transactions. If: (1) the Company takes any action that would require an adjustment in the Conversion Rate pursuant to Section 306, 307 or 308 (unless no adjustment is to occur pursuant to Section 310) or that would require a supplemental indenture pursuant to Section 314; or (2) the Company elects to make a distribution described in Section 308 which has a per share value equal to more than 15% of the Sale Price of the Class A Common Stock on the day preceding the declaration date for such distribution; or (3) there is a liquidation or dissolution of the Company; 27 29 then the Company shall mail to Noteholders by first-class mail and file with the Trustee and the Conversion Agent a notice stating the proposed record date for a dividend or distribution or the proposed effective date of a subdivision, combination, reclassification, consolidation, merger, binding share exchange, transfer, liquidation or dissolution. The Company shall file and mail the notice at least 15 days before such date, except in the case of paragraph (2) in which case the Company shall file and mail the notice at least 20 days before the Ex-Dividend Date for such distribution. Failure to file or mail the notice or any defect in it shall not affect the validity of the transaction. SECTION 314 Reorganization of the Company; Special Distributions. If the Company is a party to a transaction subject to Section 10.01 of the Indenture (other than a sale of all or substantially all of the assets of the Company in a transaction in which the holders of the Class A Common Stock immediately prior to such transaction do not receive securities, cash or other assets of the Company or any other Person) or a merger or binding share exchange which reclassifies or changes the outstanding Class A Common Stock, the person obligated to deliver securities, cash or other assets upon conversion of Notes shall enter into a supplemental indenture. If the issuer of securities deliverable upon conversion of Notes is an Affiliate of the successor company, that issuer shall join in the supplemental indenture. The supplemental indenture shall provide that the Holder of a Note may convert it into the kind and amount of securities, cash or other assets which such Holder would have received immediately after the consolidation, merger, binding share exchange or transfer if such Holder had converted the Note into Class A Common Stock immediately before the effective date of the transaction, assuming (to the extent applicable) that such Holder (i) was not a constituent Person or an Affiliate of a constituent Person to such transaction; (ii) made no election with respect thereto; and (iii) was treated alike with the plurality of non-electing Holders. The supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practical to the adjustments provided for in this Article 3. The Company shall mail to Holders a notice briefly describing the supplemental indenture. If this Section 314 applies, neither Section 306 nor Section 307 shall apply. If the Company makes a distribution to all holders of Class A Common Stock of any of its assets, or debt securities or any rights, warrants or options to purchase securities of the Company that, but for the provisions of Section 308(c), would otherwise result in an adjustment in the Exchange Rate pursuant to the provisions of Section 308, then, from and after the record date for determining the holders of Class A Common Stock entitled to receive the distribution, a Holder of a Note that converts such Note in accordance with the provisions of this Supplemental Indenture shall upon such conversion be entitled to receive, in addition to the shares of Class A Common Stock into which the Note is convertible, the kind and amount of securities, cash or other assets comprising the distribution that such Holder would have received if such Holder had converted the Note immediately prior to the record date for determining the holders of Class A Common Stock entitled to receive the distribution. SECTION 315 Company Determination Final. Any determination that the Company or the Board of Directors must make pursuant to Section 303, 306, 307, 308, 309, 310, 314 or 317 is conclusive in the absence of manifest error. 28 30 SECTION 316 Trustee's Adjustment Disclaimer. The Trustee has no duty to determine when an adjustment under this Article 3 should be made, how it should be made or what it should be. The Trustee has no duty to determine whether a supplemental indenture under Section 314 need be entered into or whether any provisions of any supplemental indenture are correct. The Trustee shall not be accountable for and makes no representation as to the validity or value of any securities or assets issued upon conversion of Notes. The Trustee shall not be responsible for the Company's failure to comply with this Article 3. Each Conversion Agent shall have the same protection under this Section 316 as the Trustee. SECTION 317 Simultaneous Adjustments. In the event that this Article 3 requires adjustments to the Conversion Rate under more than one of Sections 306(4), 307 or 308, and the record dates for the distributions giving rise to such adjustments shall occur on the same date, then such adjustments shall be made by applying, first, the provisions of Section 306, second, the provisions of Section 308 and, third, the provisions of Section 307. SECTION 318 Successive Adjustments. After an adjustment to the Conversion Rate under this Article 3, any subsequent event requiring an adjustment under this Article 3 shall cause an adjustment to the Conversion Rate as so adjusted. SECTION 319 Rights Issued in Respect of Class A Common Stock Issued upon Conversion. Each share of Class A Common Stock issued upon conversion of Notes pursuant to this Article 3 shall be entitled to receive the appropriate number of preferred stock purchase rights (the "Rights"), if any, that all shares of Class A Common Stock are entitled to receive and the certificates representing the Class A Common Stock issued upon such conversion shall bear such legends, if any, in each case as may be provided by the terms of any shareholder rights agreement adopted by the Company, as the same may be amended from time to time (in each case, a "Rights Agreement"). Provided that such Rights Agreement requires that each share of Class A Common Stock issued upon conversion of Notes at any time prior to the distribution of separate certificates representing the Rights be entitled to receive such Rights, then, notwithstanding anything else to the contrary in this Article 3, there shall not be any adjustment to the Conversion Rate as a result of the issuance of Rights, the distribution of separate certificates representing the Rights, the exercise or redemption of such Rights in accordance with any such Rights Agreement, or the termination or invalidation of such Rights. ARTICLE 4 SPECIAL TAX EVENT CONVERSION SECTION 401 Optional Conversion to Semi-Annual Coupon Note upon Tax Event. From and after (i) the date of the occurrence of a Tax Event (the "Tax Event Date") and (ii) the date the Company exercises its option set forth in this Section 401, whichever is later (the "Option Exercise Date"), at the option of the Company, interest in lieu of future Original Issue Discount and regular cash interest shall accrue at the rate of 2.25% per annum on a restated principal amount per $1,000 original Principal Amount at Maturity (the "Restated Principal Amount") equal to the Issue Price plus Original Issue Discount accrued to the Option Exercise Date and shall be payable semi-annually on each Interest Payment Date to Holders of record at the close of business on the Regular Record Date immediately preceding such Interest Payment Date. Interest will be computed on 29 31 the basis of a 360-day year comprised of twelve 30-day months and will accrue from the most recent date on which interest (in lieu of Original Issue Discount and regular cash interest) has been paid or, if no interest (in lieu of Original Issue Discount and regular cash interest) has been paid, from the Option Exercise Date. Within 15 days of the occurrence of a Tax Event, the Company shall deliver a written notice of such Tax Event by facsimile and first-class mail to the Trustee, and within 15 days of its exercise of such option, the Company shall deliver a written notice of the Option Exercise Date by facsimile and first-class mail to the Trustee and by first-class mail to the Holders of the Notes. From and after the Option Exercise Date, (i) the Company shall be obligated to pay at Stated Maturity, in lieu of the Principal Amount at Maturity of a Note, the Restated Principal Amount thereof plus accrued and unpaid interest, if any, on such Note and (ii) "Issue Price and accrued Original Issue Discount," "Issue Price plus Original Issue Discount" or similar words, as used herein, shall mean Restated Principal Amount plus accrued and unpaid interest with respect to any Note. Notes authenticated and delivered after the Option Exercise Date may, and shall if required by the Trustee, bear a notation in a form approved by the Trustee as to the conversion of the Notes to semi-annual coupon Notes. No other changes to this Supplemental Indenture or the Original Indenture shall result as a result of the events described in this Section 401. In the event the Company exercises its option pursuant to this Section 401 to have interest in lieu of Original Issue Discount accrue and regular cash interest on the Notes following a Tax Event, the Holder shall be entitled on conversion into Class A Common Stock to receive the same number of shares of Class A Common Stock as such Holder would have received if the Company had not exercised such option. If the Company exercises such option, Notes surrendered for conversion during the period from the close of business on any Regular Record Date to the opening of business on the next Interest Payment Date (except Notes to be redeemed on a date within such period) must be accompanied by payment of an amount equal to the interest thereon that the registered Holder is entitled to receive. Except where Notes surrendered for conversion must be accompanied by payment as described above, no interest on converted Notes shall be payable by the Company on any Interest Payment Date subsequent to the date of conversion. SECTION 402 Payment of Cash Interest; Interest Rights Preserved. (a) Cash interest on any Note that is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the person in whose name that Note is registered at the close of business on the Regular Record Date for such interest payment at the office or agency of the Company maintained for such purpose. Each installment of cash interest on any Note shall be paid in same-day funds by transfer to an account maintained by the payee located inside the United States. In the case of a permanent Global Note, any cash interest payable on any Interest Payment Date will be paid to the Depositary, with respect to that portion of such permanent Global Note held for its account by Cede & Co. for the purpose of permitting such party to credit the cash interest received by it in respect of such permanent Global Note to the accounts of the beneficial owners thereof. (b) Except as otherwise specified with respect to the Notes, any cash interest on any Note that is payable on any Interest Payment Date, but is not punctually paid or duly provided for within 30 days following such Interest Payment Date (herein called "Defaulted Interest," which term shall include any accrued and unpaid interest that has accrued on such defaulted amount in 30 32 accordance with the terms of the Notes), shall forthwith cease to be payable to the registered Holder thereof on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the persons in whose names the Notes are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Note and the date of the proposed payment (which shall not be less than 20 days after such notice is received by the Trustee), and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit on or prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first-class postage prepaid, to each Holder of Notes at his address as it appears on the list of Noteholders maintained pursuant to Section 5.01 of the Indenture, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been mailed as aforesaid, such Defaulted Interest shall be paid to the persons in whose names the Notes are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (2). (2) The Company may make payment of any Defaulted Interest on the Notes in any other lawful manner not inconsistent with the requirements of any securities exchange on which such Notes may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section and Section 2.07 of the Indenture, each Note delivered under this Supplemental Indenture upon registration of transfer of or in exchange for or in lieu of any other Note shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Note. 31 33 ARTICLE 5 AMENDMENT OF CERTAIN PROVISIONS OF THE ORIGINAL INDENTURE SECTION 501 Amendments Relating to the Notes. The Original Indenture is hereby amended, solely with respect to the Notes, as follows: (a) Section 2.08 of the Original Indenture is hereby amended by replacing the words therein "principal amount" with "Principal Amount at Maturity." (b) Section 2.09 of the Original Indenture is hereby amended by replacing therein "principal amount" with "Principal Amount at Maturity" and "bona fide purchaser" with "protected purchaser." (c) Section 2.15 of the Original Indenture is hereby deleted in its entirety. (d) Article III of the Original Indenture is hereby amended by replacing it in its entirety with the following: "ARTICLE III Redemption and Repurchases of Notes SECTION 3.01. Right to Redeem. The Company, at its option, may elect to redeem Notes in accordance with the provisions thereof and of this Indenture. SECTION 3.02. Election to Redeem; Notices to Trustee. If the Company elects to redeem Notes, it shall notify the Trustee in writing of the Redemption Date, the Principal Amount at Maturity of Notes to be redeemed and the Redemption Price. The Company shall give each notice to the Trustee provided for in this Section 3.02 at least 45 days before the Redemption Date unless the Trustee consents to a shorter period. Such notice shall be accompanied by an Officers' Certificate and an Opinion of Counsel from the Company to the effect that such redemption will comply with the conditions herein. SECTION 3.03. Selection by Trustee of Notes To Be Redeemed. If fewer than all the Notes held in definitive form are to be redeemed, the Trustee shall select the Notes to be redeemed pro rata or by lot or by a method that complies with applicable legal and securities exchange requirements, if any, and that the Trustee in its sole discretion shall deem to be fair and appropriate and in accordance with methods generally used at the time of selection by fiduciaries in similar circumstances. The Trustee shall make the selection at least 30 days but no more than 60 days before the Redemption Date from Outstanding Notes not previously called for redemption. Notes and portions thereof that the Trustee selects shall be in Principal Amount at Maturity of $1,000 or integral multiples of $1,000. Provisions of this Indenture that apply to Notes called for 32 34 redemption also apply to portions of Notes called for redemption. The Trustee shall promptly notify the Company of the Notes or portions thereof to be redeemed. If any Note selected for partial redemption is converted in part before termination of the conversion right with respect to the portion of the Notes so selected, the converted portion of such Note shall be deemed (so far as may be) to be the portion selected for redemption. Notes that have been converted during a selection of Notes to be redeemed shall be treated by the Trustee as Outstanding for the purpose of such selection. SECTION 3.04. Notice of Redemption. Notice of redemption shall be given in the manner provided in Section 13.03, not less than 30 days nor more than 60 days prior to the Redemption Date, to the Holders of Notes to be redeemed. Failure to give notice by mailing in the manner herein provided to the Holder of any Notes designated for redemption as a whole or in part, or any defect in the notice to any such Holder, shall not affect the validity of the proceedings for the redemption of any other Notes or portion thereof. Any notice that is mailed to the Holder of any Notes in the manner herein provided shall be conclusively presumed to have been duly given, whether or not such Holder receives the notice. All notices of redemption shall identify the Notes to be redeemed and shall state: (1) the Redemption Date; (2) the Redemption Price and the Conversion Rate; (3) the name and address of the Paying Agent and Conversion Agent; (4) that Notes called for redemption must be surrendered to the Paying Agent to collect the Redemption Price; (5) that Notes called for redemption may be converted at any time before the close of business on the Business Day immediately preceding the Redemption Date; (6) that Holders who want to convert Notes must satisfy the requirements set forth therein and in this Indenture; (7) if fewer than all the Outstanding Notes are to be redeemed, the certificate numbers and Principal Amounts at Maturity of the particular Notes to be redeemed; (8) that, unless the Company defaults in making payment of such Redemption Price or the Paying Agent is prohibited from making such payment pursuant to the terms of this Indenture, Original Issue Discount and any other interest on Notes (or portions thereof) called for redemption, will cease to accrue on and after the Redemption Date; (9) the CUSIP number or the Euroclear or the Clearstream Banking reference numbers of such Notes, if any, or any other numbers used by a Depositary to identify such Notes; 33 35 (10) that no representation is made as to the correctness or accuracy of the CUSIP number or other reference number, if any, listed in such notice or printed on the Notes; and (11) the election of the Company (which, subject to the provisions of Article 3 of the Supplemental Indenture, shall be irrevocable) to deliver shares of Class A Common Stock or to pay cash in lieu of delivery of such shares with respect to any Notes that may be converted after the mailing of such notice and prior to the Redemption Date." At the Company's request delivered at least 15 days prior to the date of the mailing of the notice of redemption (unless a shorter period shall be acceptable to the Trustee), the Trustee shall give the notice of redemption in the Company's name and at the Company's expense. In such event, the Company shall provide the Trustee with the information required by this Section 3.04. SECTION 3.05 Effect of Notice of Redemption. Once notice of redemption is mailed, Notes called for redemption become due and payable on the Redemption Date and at the Redemption Price stated in the notice except for Notes which are converted in accordance with the terms of this Indenture. Upon surrender to the Paying Agent, such Notes shall be paid at the Redemption Price stated in the notice. The Paying Agent shall initially be the Trustee. SECTION 3.06 Deposit of Redemption Price. Prior to 10:00 a.m. (New York City time) on the Redemption Date, the Company shall deposit with the Paying Agent (or, if the Company or a Subsidiary of the Company is the Paying Agent, shall segregate and hold in trust) money sufficient to pay the Redemption Price of all Notes to be redeemed on that date other than Notes or portions of Notes called for redemption that have been delivered by the Company to the Trustee for cancellation or have been converted. The Paying Agent shall as promptly as practicable return to the Company any money not required for that purpose because of conversion of Notes pursuant to Article 3 of the Supplemental Indenture. If such money is then held by the Company in trust and is not required for such purpose it shall be discharged from such trust. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee and to account for any funds disbursed by the Paying Agent. Upon complying with this Section, the Paying Agent shall have no further liability for the money delivered to the Trustee. SECTION 3.07 Notes Redeemed in Part. Upon surrender of a Note that is redeemed in part, the Company shall execute and the Trustee shall authenticate and deliver to the Holder (at the Company's expense) a new Note equal in Principal Amount at Maturity to the unredeemed portion of the Note surrendered. SECTION 3.08 Conversion Arrangement on Call for Redemption. In connection with any redemption of Notes, the Company may arrange for the purchase and conversion of any Notes called for redemption by an agreement with one or more investment banks or other purchasers to purchase such Notes by paying to the Trustee in trust for the Holders of Notes, on or prior to 11:00 a.m. (New York City time) on the Redemption Date, an amount that, together with any amounts deposited with the Trustee by the Company for the redemption of such Notes, is not less than the Redemption Price of such Notes. Notwithstanding anything to the contrary contained in this Article 3, the obligation of the 34 36 Company to pay the Redemption Price of such Notes shall be deemed to be satisfied and discharged to the extent such amount is so paid by such purchasers. If such an agreement is entered into, any Notes not duly surrendered for conversion by the Holders thereof may, at the option of the Company, be deemed, to the fullest extent permitted by law, acquired by such purchasers from such Holders and (notwithstanding anything to the contrary contained in Article 3 of the Supplemental Indenture) surrendered by such purchasers for conversion, all as of immediately prior to the close of business on the Business Day prior to the Redemption Date, subject to payment of the above amount as aforesaid. The Trustee shall hold and pay to the Holders whose Notes are selected for redemption any such amount paid to it for purchase and conversion in the same manner as it would moneys deposited with it by the Company for the redemption of Notes. Without the Trustee's prior written consent, no arrangement between the Company and such purchasers for the purchase and conversion of any Notes shall increase or otherwise affect any of the powers, duties, responsibilities or obligations of the Trustee as set forth in this Indenture, and the Company agrees to indemnify the Trustee from, and hold it harmless against, any loss, liability or expense arising out of or in connection with any such arrangement for the purchase and conversion of any Notes between the Company and such purchasers, including the costs and expenses incurred by the Trustee in the defense of any claim or liability arising out of or in connection with the exercise or performance of any of its powers, duties, responsibilities or obligations under this Indenture. SECTION 3.09 Purchase of Notes at Option of the Holder. (a) General. Securities shall be purchased by the Company pursuant to the terms thereof as of February 23, 2002, February 23, 2003, February 23, 2004, February 23, 2005, February 23, 2006, February 23, 2011, and February 23, 2016 (each, a "Purchase Date"), at the applicable purchase price specified in the Notes (each, a "Purchase Price," as applicable), at the option of the Holder thereof, upon: (1) delivery to the Paying Agent by the Holder of a written notice of purchase (a "Purchase Notice"), at any time from the opening of business on the date that is 20 Business Days prior to a Purchase Date until the close of business on such Purchase Date stating: (A) the certificate number of the Note which the Holder will deliver to be purchased, (B) the portion of the Principal Amount at Maturity of the Notes which the Holder will deliver to be purchased, which portion must be in a Principal Amount at Maturity of $1,000 or an integral multiple thereof, (C) that such Note shall be purchased as of the Purchase Date pursuant to the terms and conditions specified therein and in the Indenture, and (D) in the event the Company elects, pursuant to Section 3.09(b), to pay the Purchase Price to be paid as of such Purchase Date, in whole or in part, in shares of Class A Common Stock but such portion of the Purchase Price shall ultimately be payable to such Holder entirely in cash because 35 37 any of the conditions to payment of the Purchase Price in Class A Common Stock is not satisfied prior to the close of business on such Purchase Date, as set forth in Section 3.09(d), whether such Holder elects (i) to withdraw such Purchase Notice as to some or all of the Notes to which such Purchase Notice relates (stating the Principal Amount at Maturity and certificate numbers of the Notes as to which such withdrawal shall relate), or (ii) to receive cash in respect of the entire Purchase Price for all Notes (or portions thereof) to which such Purchase Notice relates; and (2) book-entry transfer or delivery of such Notes to the Paying Agent for cancellation prior to, on or after the Purchase Date (together with all necessary endorsements) at the offices of the Paying Agent, such delivery being a condition to receipt by the Holder of the Purchase Price therefor; provided, however, that such Purchase Price shall be so paid pursuant to this Section 3.09 only if the Note so delivered to the Paying Agent shall conform in all respects to the description thereof in the related Purchase Notice. If a Holder, in such Holder's Purchase Notice and in any written notice of withdrawal delivered by such Holder pursuant to the terms of Section 3.11, fails to indicate such Holder's choice with respect to the election set forth in clause (D) of Section 3.09(a)(1), such Holder shall be deemed to have elected to receive cash in respect of the Purchase Price for all Notes subject to such Purchase Notice in the circumstances set forth in such clause (D). The Company shall purchase from the Holder thereof, pursuant to this Section 3.09, a portion of a Note if the Principal Amount at Maturity of such portion is $1,000 or an integral multiple of $1,000. Provisions of this Indenture that apply to the purchase of all of a Note also apply to the purchase of such portion of such Note. Any purchase by the Company contemplated pursuant to the provisions of this Section 3.09 shall be consummated by the delivery of the consideration to be received by the Holder promptly following the later of the Purchase Date and the time of delivery of the Note. Notwithstanding anything herein to the contrary, any Holder delivering to the Paying Agent the Purchase Notice contemplated by this Section 3.09(a) shall have the right to withdraw such Purchase Notice at any time prior to the close of business on the Purchase Date by delivery of a written notice of withdrawal to the Paying Agent in accordance with Section 3.11. The Paying Agent shall promptly notify the Company of the receipt by it of any Purchase Notice or written notice of withdrawal thereof. (b) Company's Right to Elect Manner of Payment of Purchase Price. The Notes to be purchased pursuant to Section 3.09(a) on February 23, 2002 shall be paid for in cash only, but the Notes to be purchased on the other six Purchase Dates may be paid for, at the election of the Company, in cash or in Class A Common Stock valued at the Market Price, or in any combination of cash and Class A Common Stock, subject to the conditions set forth in Sections 3.09(c) and (d). The Company shall designate, in the Company's Notice delivered 36 38 pursuant to Section 3.09(e), whether the Company will purchase the Notes for cash or Class A Common Stock, or, if a combination thereof, the percentages or amounts of the Purchase Price of Notes in respect of which it will pay in cash or Class A Common Stock; provided that the Company shall pay cash for fractional shares of Class A Common Stock. For purposes of determining the existence of potential fractional shares, all Notes subject to purchase by the Company held by a Holder shall be considered together (no matter how many separate certificates are to be presented). Each Holder whose Notes are purchased pursuant to this Section 3.09 shall receive the same percentage of cash or Class A Common Stock in payment of the Purchase Price for such Notes, except (i) as provided in Section 3.09(d) with regard to the payment of cash in lieu of fractional shares of Class A Common Stock and (ii) in the event that the Company is unable to purchase the Notes of a Holder or Holders for Class A Common Stock because any necessary qualifications or registrations of the Class A Common Stock under applicable state or foreign securities laws cannot be obtained, the Company may purchase the Notes of such Holder or Holders for cash. The Company may not change its election with respect to the consideration (or components or percentages of components thereof) to be paid once the Company has given the Company Notice to Noteholders except pursuant to this Section 3.09(b) or pursuant to Section 3.09(d) in the event of a failure to satisfy, prior to the close of business on the Purchase Date, any condition to the payment of the Purchase Price, in whole or in part, in Class A Common Stock. At least one Business Day before the Company Notice Date (as defined herein), the Company shall deliver an Officers' Certificate to the Trustee specifying: (i) the manner of payment to be made by the Company, (ii) the information required by Section 3.09(e), (iii) if the Company elects to pay the Purchase Price, or a specified percentage thereof, in Class A Common Stock on the Purchase Date in 2003, 2004, 2005, 2006, 2011 or 2016, that the conditions to such manner of payment set forth in Section 3.09(d) have been or will be complied with, and (iv) whether the Company desires the Trustee to give the Company Notice required by Section 3.09(e). (c) Purchase with Cash. On the initial Purchase Date, the Purchase Price of all Notes in respect of which a Purchase Notice pursuant to Section 3.09(a) has been given shall be paid by the Company with cash equal to the aggregate Purchase Price of such Notes. On each other Purchase Date, at the option of the Company, the Purchase Price of Notes in respect of which a Purchase Notice pursuant to Section 3.09(a) has been given, or a specified percentage thereof, may be paid by the Company with cash equal to the aggregate Purchase Price of such Notes. (d) Payment by Issuance of Class A Common Stock. On each Purchase Date other than the initial one, at the option of the Company, the Purchase Price of Notes in respect of which a Purchase Notice pursuant to Section 3.09(a) has been given, or a specified percentage thereof, may be paid by the Company by the issuance of a number of shares of Class A Common Stock 37 39 equal to the quotient obtained by dividing (i) the amount of cash to which the Noteholders would have been entitled had the Company elected to pay all or such specified percentage, as the case may be, of the Purchase Price of such Notes in cash by (ii) the Market Price of a share of Class A Common Stock, subject to the next succeeding paragraph. The Company may not issue a fractional share of Class A Common Stock in payment of the Purchase Price. Instead the Company shall pay cash for the current market value of the fractional share. The current market value of a fraction of a share shall be determined, to the nearest 1/1,000th of a share, by multiplying the Market Price of a share of Class A Common Stock by such fraction and rounding the product to the nearest whole cent. It is understood that if a Holder elects to have more than one Note purchased, the number of shares of Class A Common Stock shall be based on the aggregate amount of Notes to be purchased. If the Company elects to purchase the Notes by delivering shares of Class A Common Stock, the Company Notice, as provided in Section 3.09(e), shall be sent to the Holders (and to beneficial owners as required by applicable law) not later than the Company Notice Date. The Company's right to exercise its election to purchase the Notes pursuant to Section 309 through the issuance of shares of Class A Common Stock on the Purchase Date in 2003, 2004, 2005, 2006, 2011 or 2016 shall be conditioned upon: (i) the Company's not having given its Company Notice of an election to pay entirely in cash and its giving of timely Company Notice of election to purchase all or a specified percentage of the Notes with Class A Common Stock as provided herein; (ii) the shares of Class A Common Stock having been admitted for listing or admitted for listing subject to notice of issuance on the principal United States securities exchange on which the Class A Common Stock is then listed or, if the Class A Common Stock is not then listed on a national or regional securities exchange, as quoted on the National Association of Securities Dealers Automated Quotation System; (iii) the registration of the shares of Class A Common Stock to be issued in respect of the payment of the Purchase Price under the Securities Act and the Exchange Act, in each case if required; (iv) any necessary qualification or registration under applicable state securities laws or the availability of an exemption from such qualification and registration; and (v) the receipt by the Trustee of an Officers' Certificate and an Opinion of Counsel, each stating that (A) the terms of the issuance of the Class A Common Stock are in conformity with this Indenture and (B) the shares of Class A Common Stock to be issued by the Company in payment of the Purchase Price in respect of Notes have been duly authorized and, when issued and delivered pursuant to the terms of this Indenture in payment of the Purchase Price in respect of the Notes, will be validly issued, fully paid and non-assessable and, to the best of such counsel's knowledge, free from preemptive rights, and, in the case of such Officers' Certificate, stating that conditions (i), (ii), (iii) and (iv) above and the condition set forth in the second 38 40 succeeding sentence have been satisfied and, in the case of such Opinion of Counsel, stating that conditions (ii) and (iii) above has been satisfied. Such Officers' Certificate shall also set forth the number of shares of Class A Common Stock to be issued for each $1,000 Principal Amount at Maturity of Notes and the Sale Price of a share of Class A Common Stock on each trading day during the period during which the Market Price is calculated. The Company may pay the Purchase Price (or any portion thereof) in Class A Common Stock only if the information necessary to calculate the Market Price is published in a daily newspaper of national circulation. If the foregoing conditions are not satisfied with respect to a Holder or Holders prior to the close of business on the Purchase Date and the Company has elected to purchase the Notes pursuant to this Section 3.09 through the issuance of shares of Class A Common Stock, the Company shall pay the entire Purchase Price of the Notes of such Holder or Holders in cash. The Company may not change the form or components or percentages of components of consideration to be paid for the Notes once the Company Notice has been given to the Holders, except as described in the preceding sentence. (e) Notice of Election. The Company's notice of election to pay the Purchase Price with cash or Class A Common Stock or any combination thereof shall be sent to the Holders (and to beneficial owners as required by applicable law) in the manner provided in Section 13.03 of this Indenture at the time specified in Section 3.09(c) or (d), as applicable (the "Company Notice"). The Company Notice shall be sent to Holders (and to beneficial owners as required by applicable law) not less than 20 Business Days prior to such Purchase Date (the "Company Notice Date"). The Company Notice shall state the manner of payment and shall contain the following information: In the event the Company has elected to pay the Purchase Price (or a specified percentage thereof) with Class A Common Stock on the Purchase Date in either 2003, 2004, 2005, 2006, 2011 or 2016, the Company Notice shall: (1) state that each Holder will receive Class A Common Stock in respect of the specified percentage of the Purchase Price of the Notes held by such Holder (except any cash amount to be paid in lieu of fractional shares); (2) state that the total number of shares of Class A Common Stock to be issued to Holders will be equal to the quotient obtained by dividing (i) the amount of cash to which the Noteholders would have been entitled had the Company elected to pay all or such specified percentage, as the case may be, of the Purchase Price of such Notes in cash by (ii) the Market Price of the Class A Common Stock determined as of a specified date; (3) set forth the method of calculating the Market Price of the Class A Common Stock; and (4) state that because the Market Price of Class A Common Stock will be determined prior to the Purchase Date, Holders will bear the market risk with respect to the value of the Class A Common Stock to be received from the date such Market Price is determined to the Purchase Date. 39 41 In any case, each Company Notice shall include a form of Purchase Notice to be completed by a Noteholder and shall state: (i) the Purchase Price and the Conversion Rate applicable on the Company Notice Date; (ii) the name and address of the Paying Agent and the Conversion Agent; (iii) that Notes as to which a Purchase Notice has been given may be converted pursuant to Article 3 of the Supplemental Indenture only if the applicable Purchase Notice has been withdrawn in accordance with the terms of the Supplemental Indenture; (iv) that Notes must be surrendered to the Paying Agent for cancellation to collect payment; (v) that the Purchase Price for any Note as to which a Purchase Notice has been given and not withdrawn will be paid promptly following the later of the Purchase Date and the time of surrender of such Note as described in (iv); (vi) the procedures the Holder must follow to exercise rights under this Section 3.09; (vii) briefly, the conversion rights of the Notes; (viii) the procedures for withdrawing a Purchase Notice (including, without limitation, for a conditional withdrawal pursuant to the terms of Section 3.09(a)(1)(D) or Section 3.11); (ix) that, unless the Company defaults in making payment of such Purchase Price, Original Issue Discount and any other interest on Notes covered by any Purchase Notice, will cease to accrue on and after the Purchase Date; and (x) the CUSIP number or the Euroclear or the Clearstream Banking reference numbers of such Notes, if any, (or any other numbers used by a Depositary to identify such Notes). At the Company's request delivered at least 15 days prior to the date of the mailing of the Company Notice (unless a shorter period shall be acceptable to the Trustee), the Trustee shall give such Company Notice in the name of the Company and at the Company's expense; provided, however, that, in all cases, the text of such Company Notice shall be prepared by the Company. Upon determination of the actual number of shares of Class A Common Stock to be delivered for each $1,000 Principal Amount at Maturity of Notes, the Company will publish such determination in The Wall Street Journal or another daily newspaper of national circulation. (f) Covenants of the Company. All shares of Class A Common Stock delivered upon purchase of the Notes shall be newly issued shares or 40 42 treasury shares, shall be duly authorized, validly issued, fully paid and nonassessable, and shall be free from preemptive rights and free of any lien or adverse claim within the meaning of the Uniform Commercial Code. The Company shall use its best efforts to cause to have listed or quoted any shares of Class A Common Stock to be issued in payment of the Purchase Price of Notes on each United States national securities exchange or automated over-the-counter trading market in the United States on which the Class A Common Stock is then listed or quoted. (g) Procedure upon Purchase. The Company shall deposit cash (in respect of a cash purchase under Section 3.09(c) or for fractional interests, as applicable) or shares of Class A Common Stock, or a combination thereof, as applicable, at the time and in the manner as provided in Section 3.12, sufficient to pay the aggregate Purchase Price of all Notes to be purchased pursuant to this Section 3.09. As soon as practicable after the Purchase Date, the Company shall deliver to each Holder entitled to receive Class A Common Stock through its stock transfer agent, a certificate for the number of full shares of Class A Common Stock issuable in payment of the Purchase Price. The Person in whose name the certificate for Class A Common Stock is registered shall be treated as a holder of record of shares of Class A Common Stock on the Business Day following the Purchase Date. Subject to Section 3.09(d), no payment or adjustment will be made for dividends on any Class A Common Stock delivered in payment of the Purchase Price the record date for which occurred on or prior to the Purchase Date. (h) Taxes. If a Holder of a Note is paid in Class A Common Stock, the Company shall pay any documentary, stamp or similar issue or transfer tax due on such issue of shares of Class A Common Stock. However, the Holder shall pay any such tax which is due because the Holder requests the shares of Class A Common Stock to be issued in a name other than the Holder's name. The Paying Agent may refuse to deliver the certificates representing the Class A Common Stock being issued in a name other than the Holder's name until the Paying Agent receives a sum that the Company deems to be sufficient to pay any tax which will be due because the shares of Class A Common Stock are to be issued in a name other than the Holder's name. Nothing herein shall preclude any income tax withholding required by law or regulations. SECTION 3.10 Repurchase of Notes at Option of the Holder upon Fundamental Change. (a) General. If on or prior to February 26, 2003 there shall have occurred a Fundamental Change, Notes shall be repurchased by the Company for cash, at the option of the Holder thereof, at a repurchase price specified in the Notes (the "Fundamental Change Repurchase Price"), as of the date that is 35 Business Days after the occurrence of the Fundamental Change (the "Fundamental Change Repurchase Date"), subject to satisfaction by or on behalf of the Holder of the requirements set forth in Section 3.10(c). A "Fundamental Change" shall be deemed to have occurred at such time as any of the following events shall occur: (i) any person (for purposes of this Section 3.10 only, as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act), including its Affiliates and Associates, other than Permitted Holders, files a Schedule 13D or TO (or any successor schedule, form or report under the Exchange Act) disclosing that such 41 43 person has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of 50% or more of the total voting power in the aggregate of all classes of Capital Stock of the Company then outstanding normally entitled to vote in elections of directors; or (ii) there shall be consummated any consolidation or merger of the Company pursuant to which the Class A Common Stock would be converted into cash, securities or other property, in each case other than a consolidation or merger of the Company in which the holders of all classes of Common Stock immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the total voting power in the aggregate of all classes of Capital Stock of the continuing or surviving corporation normally entitled to vote in elections of directors immediately after the consolidation or merger; or (iii) the Company sells, conveys, transfers or leases all or substantially all of its properties and assets to any Person other than a Permitted Holder. "Permitted Holders" means (A) the Company, Cox Enterprises, Inc. and their respective subsidiaries and employee benefit plans, (B) those certain trusts commonly referred to as the Dayton-Cox Trust A, the Barbara Cox Anthony Atlanta Trust and the Anne Cox Chambers Atlanta Trust, the Estate of James M. Cox, Jr., Barbara Cox Anthony, Garner Anthony, Anne Cox Chambers, and the estates, executors and administrators, and lineal descendants of the above-named individuals, and the estates, executors and administrators of any of such lineal descendants, and (C) any corporation, partnership, limited liability company, trust or other entity in which the trusts, individuals or lineal descendants referred to in clause (B) in the aggregate have either a direct or indirect beneficial interest or voting control of greater than 50%. Notwithstanding the foregoing provisions of this Section 310, a Fundamental Change shall not be deemed to have occurred by virtue of the Company, any Subsidiary, any employee stock ownership plan or any of the employee benefit plan of the Company or any Subsidiary, or any person holding Class A Common Stock for or pursuant to the terms of any such employee benefit plan, filing or becoming obligated to file a report under or in response to Schedule 13D or Schedule TO (or any successor schedule, form or report) under the Exchange Act disclosing beneficial ownership by it of shares of Class A Common Stock, whether in excess of 50% or otherwise. "Associate" shall have the meaning ascribed to such term in Rule 12b-2 of the General Rules and Regulations under the Exchange Act, as in effect on the date hereof. (b) Notice of Fundamental Change. No later than 20 Business Days before the Fundamental Change Repurchase Date, which notice may be delivered in anticipation of a Fundamental Change, the Company shall mail a written notice of the Fundamental Change (the "Fundamental Change Notice") by first-class mail to the Trustee and to each Holder (and to beneficial owners as required by applicable law). The notice shall include a form of Fundamental Change Repurchase Notice to be completed by the Noteholder and shall state: 42 44 (1) briefly, the events causing a Fundamental Change and the date of such Fundamental Change; (2) the date by which the Fundamental Change Repurchase Notice pursuant to this Section 3.10 must be given; (3) the Fundamental Change Repurchase Date; (4) the Fundamental Change Repurchase Price; (5) the name and address of the Paying Agent and the Conversion Agent; (6) the Conversion Rate and any adjustments thereto applicable on the Fundamental Change Notice Date; (7) that Notes as to which a Fundamental Change Repurchase Notice has been given may be converted pursuant to Article 3 of the Supplemental Indenture only if the Fundamental Change Repurchase Notice has been withdrawn in accordance with the terms of this Indenture; (8) that Notes must be surrendered to the Paying Agent for cancellation to collect payment of the Fundamental Change Repurchase Price; (9) that the Fundamental Change Repurchase Price for any Note as to which a Fundamental Change Repurchase Notice has been duly given and not withdrawn will be paid promptly following the later of the Fundamental Change Repurchase Date and the time of surrender of such Note as described in (8); (10) briefly, the procedures the Holder must follow to exercise rights under this Section 310; (11) briefly, the conversion rights of the Notes; (12) the procedures for withdrawing a Fundamental Change Repurchase Notice; (13) that, unless the Company defaults in making payment of such Fundamental Change Repurchase Price, Original Issue Discount and any other interest on Notes surrendered for repurchase by the Company will cease to accrue on and after the Fundamental Change Repurchase Date; and (14) the CUSIP number or the Euroclear or the Clearstream Banking reference numbers of such Notes, if any, (or any other numbers used by a Depositary to identify such Notes). At the Company's request delivered at least 15 days prior to the date of the mailing of the Fundamental Change Notice (unless a shorter period shall be acceptable to the Trustee), the Trustee shall give such Fundamental Change Notice in the name of the Company and at the 43 45 Company's expense; provided, however, that, in all cases, the text of such Fundamental Change Notice shall be prepared by the Company. (c) A Holder may exercise its rights specified in Section 310(a) upon delivery to the Paying Agent of a written notice of repurchase (a "Fundamental Change Repurchase Notice") at any time until the close of business on the Fundamental Change Repurchase Date, stating: (1) the certificate number of the Notes which the Holder will deliver to be repurchased; (2) the portion of the Principal Amount at Maturity of the Notes which the Holder will deliver to be repurchased, which portion must be $1,000 or an integral multiple thereof; and (3) that such Notes shall be repurchased as of the Fundamental Change Repurchase Date pursuant to the terms and conditions specified in the Notes and in this Indenture. The book-entry transfer or delivery of such Notes to the Paying Agent for cancellation prior to, on or after the Fundamental Change Repurchase Date (together with all necessary endorsements) at the offices of the Paying Agent shall be a condition to the receipt by the Holder of the Fundamental Change Repurchase Price therefor; provided, however, that such Fundamental Change Repurchase Price shall be so paid pursuant to this Section 3.10 only if the Notes so delivered to the Paying Agent shall conform in all respects to the description thereof set forth in the related Fundamental Change Repurchase Notice. The Company shall repurchase from the Holder thereof, pursuant to this Section 3.10, a portion of a Note if the Principal Amount at Maturity of such portion is $1,000 or an integral multiple of $1,000 if so requested by the Holder. Provisions of this Indenture that apply to the repurchase of all of a Note also apply to the repurchase of such portion of such Note. Any repurchase by the Company contemplated pursuant to the provisions of this Section 3.10 shall be consummated by the delivery of the consideration to be received by the Holder promptly following the later of the Fundamental Change Repurchase Date and the time of delivery of the Note. Notwithstanding anything herein to the contrary, any Holder delivering to the Paying Agent the Fundamental Change Repurchase Notice contemplated by this Section 3.10(c) shall have the right to withdraw such Fundamental Change Repurchase Notice at any time prior to the close of business on the Fundamental Change Repurchase Date by delivery of a written notice of withdrawal to the Paying Agent in accordance with Section 3.11. The Paying Agent shall promptly notify the Company of the receipt by it of any Fundamental Change Repurchase Notice or written notice of withdrawal thereof. The Company shall not be required to comply with this Section 3.10 if a third party mails a written notice of Fundamental Change in the 44 46 manner, at the time and otherwise in compliance with this Section 3.10 and repurchases all Notes for which a Fundamental Change Repurchase Notice shall be delivered and not withdrawn. SECTION 3.11. Effect of Purchase Notice or Fundamental Change Repurchase Notice. Upon receipt by the Paying Agent of the Purchase Notice or Fundamental Change Repurchase Notice specified in Section 3.09(a) or Section 3.10(c), as applicable, the Holder of a Note in respect of which such Purchase Notice or Fundamental Change Repurchase Notice, as the case may be, was given shall (unless such Purchase Notice or Fundamental Change Repurchase Notice is withdrawn as specified in the fourth and fifth paragraphs of this Section 3.11) thereafter be entitled to receive solely the Purchase Price or Fundamental Change Repurchase Price, as the case may be, with respect to such Note. Such Purchase Price or Fundamental Change Repurchase Price shall be paid to such Holder, subject to receipt of funds and/or securities by the Paying Agent, promptly following the later of (x) the Purchase Date or the Fundamental Change Repurchase Date, as the case may be, with respect to such Note (provided the conditions in Section 3.09(a) or Section 3.10(c), as applicable, have been satisfied) and (y) the time of delivery of such Note to the Paying Agent by the Holder thereof in the manner required by Section 3.09(a) or Section 3.10(c), as applicable. Notes in respect of which a Purchase Notice or Fundamental Change Repurchase Notice, as the case may be, has been given by the Holder thereof may not be converted pursuant to Article 3 of the Supplemental Indenture on or after the date of the delivery of such Purchase Notice or Fundamental Change Repurchase Notice, as the case may be, unless such Purchase Notice or Fundamental Change Repurchase Notice, as the case may be, has first been validly withdrawn as specified in the fourth and fifth paragraphs of this Section 3.11. Notwithstanding the foregoing, payment of the Purchase Price or Fundamental Change Repurchase Price, as the case may be, for a Note for which a Purchase Notice or Fundamental Change Repurchase Notice, as the case may be, has been delivered and not validly withdrawn is conditioned upon book-entry transfer or delivery of the Note, together with all necessary endorsements, to the Paying Agent at any time after delivery of the Purchase Notice or Fundamental Change Repurchase Notice, as the case may be. Payment of the Purchase Price or the Fundamental Change Repurchase Price, as the case may be, for the Note will be made promptly following the later of the Purchase Date or Fundamental Change Repurchase Date, as the case may be, or the time of book-entry transfer or physical delivery of the Note. If the Paying Agent holds money or securities sufficient to pay the Purchase Price or the Fundamental Change Repurchase Price, as the case may be, of a Note on the Business Day following the Purchase Date or Fundamental Change Repurchase Date, as the case may be, in accordance with the terms of the Indenture then, immediately after the Purchase Date or Fundamental Change Repurchase Date, the Note will cease to be Outstanding, whether or not book-entry transfer is made or the Note is delivered to the Paying Agent. Thereafter, all other rights of the Holder shall terminate, other than the right to receive the Purchase Price or Fundamental Change Repurchase Price, as the case may be, upon book-entry transfer or delivery of the Note. A Purchase Notice or Fundamental Change Repurchase Notice, as the case may be, may be withdrawn by means of a written notice of withdrawal delivered to the office of the Paying Agent in accordance with the Purchase Notice or Fundamental Change Repurchase Notice, as the case may be, at any time 45 47 prior to the close of business on the Purchase Date or the Fundamental Change Repurchase Date, as the case may be, specifying: (1) the certificate number of the Note in respect of which such notice of withdrawal is being submitted; (2) the Principal Amount at Maturity of the Note with respect to which such notice of withdrawal is being submitted; and (3) the Principal Amount at Maturity, if any, of such Note which remains subject to the original Purchase Notice or Fundamental Change Repurchase Notice, as the case may be, and which has been or will be delivered for purchase by the Company. A written notice of withdrawal of a Purchase Notice or Fundamental Change Repurchase Notice may be in the form set forth in the preceding paragraph or may be in the form of (i) a conditional withdrawal contained in a Purchase Notice pursuant to the terms of Section 3.09(a)(1)(D) or (ii) a conditional withdrawal containing the information set forth in Section 3.09(a)(1)(D) and the preceding paragraph and contained in a written notice of withdrawal delivered to the Paying Agent as set forth in the preceding paragraph. There shall be no purchase of any Notes pursuant to Section 3.09 (other than through the issuance of Class A Common Stock in payment of the Purchase Price, including cash in lieu of fractional shares) or 3.10 if there has occurred (prior to, on or after, as the case may be, the giving, by the Holders of such Notes, of the required Purchase Notice or Fundamental Change Repurchase Notice, as the case may be) and is continuing an Event of Default (other than a default in the payment of the Purchase Price or Fundamental Change Repurchase Price, as the case may be, with respect to such Notes). The Paying Agent will promptly return to the respective Holders thereof any Notes (x) with respect to which a Purchase Notice or Fundamental Change Repurchase Notice, as the case may be, has been withdrawn in compliance with this Indenture, or (y) held by it during the continuance of an Event of Default (other than a default in the payment of the Purchase Price or Fundamental Change Repurchase Price, as the case may be, with respect to such Notes) in which case, upon such return, the Purchase Notice or Fundamental Change Repurchase Notice with respect thereto shall be deemed to have been withdrawn. SECTION 3.12 Deposit of Purchase Price or Fundamental Change Repurchase Price. Prior to 11:00 a.m. (New York City time) on the Business Day following the Purchase Date or the Fundamental Change Repurchase Date, as the case may be, the Company shall deposit with the Trustee or with the Paying Agent (or, if the Company or a Subsidiary of the Company is the Paying Agent, shall segregate and hold in trust an amount of money (in immediately available funds if deposited on such Business Day) sufficient to pay the cash portion of the aggregate Purchase Price or Fundamental Change Repurchase Price, as the case may be, of all the Notes or portions thereof which are to be purchased as of the Purchase Date or Fundamental Change Repurchase Date, as the case may be, and shall instruct its stock transfer agent to deliver the number of full shares of Class A Common Stock issuable in payment of the remaining portion of the aggregate Purchase Price. The Company shall promptly notify the Trustee in 46 48 writing of the amount of any deposits of cash or deliveries of Class A Common Stock made pursuant to this Section. SECTION 3.13 Notes Purchased or Repurchased in Part. Any Note which is to be purchased or repurchased only in part shall be surrendered at the office of the Paying Agent (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing) and the Company shall execute and the Trustee shall authenticate and deliver to the Holder of such Note, without service charge, a new Note or Notes, of any authorized denomination as requested by such Holder in aggregate Principal Amount at Maturity equal to, and in exchange for, the portion of the Principal Amount at Maturity of the Note so surrendered which is not purchased. SECTION 3.14 Covenant to Comply with Securities Laws upon Purchase or Repurchase of Notes. In connection with any offer to purchase or repurchase or purchase or repurchase of Notes under Section 3.09 or 3.10 hereof (provided that such offer or purchase or repurchase constitutes an "issuer tender offer" for purposes of Rule 13e-4 (which term, as used herein, includes any successor provision thereto) under the Exchange Act at the time of such offer or purchase), the Company shall (i) comply with Rule 13e-4 and Rule 14e-1 under the Exchange Act, (ii) file the related Schedule 13D or TO (or any successor schedule, form or report) under the Exchange Act, and (iii) otherwise comply with all federal and state securities laws so as to permit the rights and obligations under Sections 3.09 and 3.10 to be exercised in the time and in the manner specified in Sections 3.09 and 3.10. SECTION 3.15. Repayment to the Company. The Trustee and the Paying Agent shall return to the Company any cash or shares of Class A Common Stock that remain unclaimed, together with interest or dividends, if any, thereon (subject to the provisions of Section 7.05 hereof), held by them for the payment of the Purchase Price or Fundamental Change Repurchase Price, as the case may be; provided, however, that to the extent that the aggregate amount of cash or shares of Class A Common Stock deposited by the Company pursuant to Section 3.12 exceeds the aggregate Purchase Price or Fundamental Change Repurchase Price, as the case may be, of the Notes or portions thereof which the Company is obligated to purchase as of the Purchase Date or Fundamental Change Repurchase Date, as the case may be, then promptly after the Business Day following the Purchase Date or Fundamental Change Repurchase Date, as the case may be, the Trustee shall return any such excess to the Company together with interest or dividends, if any, thereon (subject to the provisions of Section 7.05 hereof)." (e) Section 4.01 of the Original Indenture is hereby amended by replacing it in its entirety with the following: "Section 4.01. Payment of Notes. The Company shall promptly make all payments in respect of the Notes on the dates and in the manner provided in the Notes or pursuant to this Indenture or the Supplemental Indenture. Any amounts to be given to the Trustee or Paying Agent, shall be deposited with the Trustee or Paying Agent by 10:00 a.m. New York City time by the Company. Principal Amount at Maturity, Restated Principal Amount, Issue Price plus accrued Original Issue Discount, Redemption Price, Purchase Price, Fundamental Change Repurchase Price and cash interest shall be considered paid on the applicable date due if on such date (or, in the case of a Purchase Price or Fundamental Change Repurchase Price, on the Business Day following the 47 49 applicable Purchase Date or Fundamental Change Repurchase Date, as the case may be) the Trustee or the Paying Agent holds, in accordance with this Indenture or the Supplemental Indenture, money or securities, if permitted hereunder, sufficient to pay all such amounts then due. The Company shall, to the extent permitted by law, pay cash interest on overdue amounts at the rate per annum set forth in paragraph 1 of the Notes, compounded semiannually, which interest shall accrue from the date such overdue amount was originally due to the date payment of such amount, including interest thereon, has been made or duly provided for. All such interest shall be payable on demand. The accrual of such interest on overdue amounts shall be in lieu of, and not in addition to, the continued accrual of Original Issue Discount." (f) Section 4.04 of the Original Indenture is hereby amended as follows: (i) Section 4.04(a)(i) of the Original Indenture is hereby amended by replacing the phrase therein "payment of the principal of, and premium, if any, or interest on," with "payment in respect of." (ii) Section 4.04(a)(ii) of the Original Indenture is hereby amended by replacing the phrase therein "payment of the principal of, and premium, if any, or interest on," with "payment in respect of." (iii) Section 4.04(b) of the Original Indenture is hereby amended by (i) replacing the phrase on the third line therein "the principal of, and premium, if any, or interest on," with "payments in respect of", (ii) replacing the phrase on the eighth line therein "pay such principal, premium, if any, or interest" with "make such payments" and (iii) replacing the phrase on the twelfth line therein "any payment of the principal of, and premium, if any, or interest on," with "any payment in respect of." (iv) Section 4.04(d) of the Original Indenture is hereby amended by (i) replacing the phrase on the third line therein "the principal of, and premium, if any, or interest on," with "payments in respect of" and (ii) replacing the phrase on the sixth line therein "pay the principal, premium or interest" with "make such payments." (g) Section 4.11 of the Original Indenture is hereby amended by replacing the words therein "principal amount" with "aggregate Principal Amount at Maturity." (h) Article VI of the Original Indenture is hereby amended by replacing it in its entirety with the following: "ARTICLE VI DEFAULTS AND REMEDIES SECTION 6.01. Events of Default. An "Event of Default" occurs if: 48 50 (a) the Company defaults in the payment of any cash interest upon any Note when such interest becomes due and payable, and such default in payment of interest shall continue for 30 days; (b) the Company defaults in the payment of the Principal Amount at Maturity (or, if the Notes have been converted to semiannual coupon debentures following a Tax Event, the Restated Principal Amount), Issue Price plus accrued Original Issue Discount, Redemption Price, Purchase Price or Fundamental Change Repurchase Price on any Note when the same becomes due and payable at its Stated Maturity, upon redemption, upon declaration, when due for purchase by the Company or otherwise; (c) the Company fails to deliver shares of Class A Common Stock, together with cash in lieu of fractional shares, or fails to deliver cash instead if the Company so elects, when such Class A Common Stock and cash in lieu of fractional shares, or cash instead, is required to be delivered upon conversion of a Note and continuance of such default for 10 days; (d) the Company fails to comply with Article X of the Original Indenture; (e) the Company fails to comply with any of its other covenants or agreements contained in the Notes or this Indenture or the Supplemental Indenture, continuing for a period of 60 days after receipt by the Company of a Notice of Default; provided that this paragraph (e) does not apply to Defaults in covenants for which this Indenture or the Supplemental Indenture specifically provides otherwise; (f) Indebtedness of the Company or any Restricted Subsidiary is not paid within any applicable grace period after final maturity or is accelerated by its holders because of a default and the total amount of such Indebtedness unpaid or accelerated exceeds 5% of the aggregate outstanding principal amount of all Indebtedness of the Company and the Restricted Subsidiaries at the time and such default remains uncured or such acceleration is not rescinded; (g) the Company pursuant to or under or within the meaning of any Bankruptcy Law: (A) commences a voluntary case or proceeding; (B) consents to the entry of an order for relief against it in an involuntary case or proceeding or the commencement of any case against it; (C) consents to the appointment of a Custodian of it or for any substantial part of its property; (D) makes a general assignment for the benefit of its creditors; (E) files a petition in bankruptcy or answer or consent seeking reorganization or relief; or 49 51 (F) consents to the filing of such a petition or the appointment of or taking possession by a Custodian; or (h) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against the Company in an involuntary case or proceeding, or adjudicates the Company insolvent or bankrupt; (B) appoints a Custodian of the Company or for any substantial part of its properties; or (C) orders the winding up or liquidation of the Company; and the order or decree remains unstayed and in effect for 60 days. "Bankruptcy Law" means Title 11, United States Code, or any similar Federal or state law for the relief of debtors. "Custodian" means any receiver, trustee, assignee, liquidator, custodian or similar official under any Bankruptcy Law. A Default under clause (e) above is not an Event of Default until the Trustee notifies the Company, or the Holders of at least 25% in aggregate Principal Amount at Maturity of the Notes at the time outstanding notify the Company and the Trustee, of the Default and the Company does not cure such Default (and such Default is not waived) within the time specified in clause (e) above after actual receipt of such notice. Any such notice must specify the Default, demand that it be remedied and state that such notice is a "Notice of Default." The Company will deliver to the Trustee, within 30 days of becoming aware of the occurrence of an Event of Default, written notice thereof. In addition, the Company shall deliver to the Trustee, within 30 days after it becomes aware of the occurrence thereof, written notice of any event which with the giving of notice or the lapse of time, or both, would become an Event of Default under clause (d), (e) or (f) above, its status and what action the Company is taking or proposes to take with respect thereto. SECTION 6.02. Acceleration. If an Event of Default (other than an Event of Default specified in Section 6.01(g) or (h)) occurs and is continuing, the Trustee by Notice to the Company, or the Holders of at least 25% in aggregate Principal Amount at Maturity of the Notes at the time outstanding by written notice to the Company and the Trustee, may declare the Issue Price plus accrued Original Issue Discount and any accrued and unpaid cash interest (or if the Notes have been converted to semiannual coupon Notes following a Tax Event, the Restated Principal Amount, plus accrued and unpaid interest) through the date of declaration (in the case of an Event of Default specified in Section 6.01(a) through (f)) on all the Notes to be immediately due and payable. Upon such a declaration, such Issue Price plus accrued Original Issue Discount and any accrued and unpaid cash interest (or, if the Notes have been converted to semiannual coupon Notes following a Tax Event, the Restated Principal Amount, plus accrued and unpaid interest) shall be due and payable immediately. If an Event of Default specified in Section 6.01(g) or (h) occurs and is continuing, 50 52 the Issue Price plus accrued Original Issue Discount and any accrued and unpaid cash interest (or, if the Notes have been converted to semiannual coupon Notes following a Tax Event, the Restated Principal Amount, plus accrued and unpaid interest) on all the Notes shall become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Noteholders. The Holders of a majority in aggregate Principal Amount at Maturity of the Notes at the time outstanding, by notice to the Trustee (and without notice to any other Noteholder) may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of the Issue Price plus accrued Original Issue Discount and any accrued and unpaid cash interest (or, if the Notes have been converted to semiannual coupon Notes following a Tax Event, the Restated Principal Amount, plus accrued and unpaid interest) that have become due solely as a result of acceleration and if all amounts due to the Trustee under Section 7.06 have been paid. No such rescission shall affect any subsequent Default or impair any right consequent thereto. SECTION 6.03. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of the Issue Price plus accrued Original Issue Discount and any accrued and unpaid cash interest (or, if the Notes have been converted to semiannual coupon notes following a Tax Event, the Restated Principal Amount, plus accrued and unpaid interest) on the Notes or to enforce the performance of any provision of the Notes or this Indenture or the Supplemental Indenture. The Trustee may maintain a proceeding even if the Trustee does not possess any of the Notes or does not produce any of the Notes in the proceeding. A delay or omission by the Trustee or any Noteholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of, or acquiescence in, the Event of Default. No remedy is exclusive of any other remedy. All available remedies are cumulative to the extent permitted by law. SECTION 6.04. Waiver of Past Defaults. The Holders of a majority in aggregate Principal Amount at Maturity of the Notes at the time outstanding, by notice to the Trustee (and without notice to any other Noteholder), may waive an existing Default and its consequences except (i) an Event of Default described in Section 6.01(a) or (b), (ii) a Default in respect of a provision that under Section 9.02 of this Indenture cannot be amended without the consent of each Noteholder affected or (iii) a Default which constitutes a failure to convert any Note in accordance with the terms of Article 3 of the Supplemental Indenture. When a Default is waived, it is deemed cured, but no such waiver shall extend to any subsequent or other Default or impair any consequent right. This Section 6.04 shall be in lieu of Section 316(a)1(B) of the TIA and such Section 316(a)1(B) is hereby expressly excluded from this Indenture or the Supplemental Indenture, as permitted by the TIA. SECTION 6.05. Control by Majority. The Holders of a majority in aggregate Principal Amount at Maturity of the Notes at the time outstanding may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law, this Indenture or the Supplemental Indenture or that the Trustee determines in good faith is unduly prejudicial to the rights of other 51 53 Noteholders or would involve the Trustee in personal liability unless the Trustee is offered indemnity satisfactory to it against loss, liability or expense. This Section 6.05 shall be in lieu of Section 316(a)1(A) of the TIA and such Section 316(a)1(A) is hereby expressly excluded from this Indenture or the Supplemental Indenture, as permitted by the TIA. SECTION 6.06. Limitation on Suits. A Noteholder may not pursue any remedy with respect to this Indenture, the Supplemental Indenture or the Notes unless: (1) the Holder gives to the Trustee written notice stating that an Event of Default is continuing; (2) the Holders of at least 25% in aggregate Principal Amount at Maturity of the Notes at the time outstanding make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer to the Trustee reasonable security or indemnity satisfactory to the Trustee against any loss, liability or expense; (4) the Trustee does not comply with the request within 60 days after receipt of such notice, request and offer of security or indemnity; and (5) the Holders of a majority in aggregate Principal Amount at Maturity of the Notes at the time outstanding do not give the Trustee a direction inconsistent with the request during such 60-day period. A Noteholder may not use this Indenture or the Supplemental Indenture to prejudice the rights of any other Noteholder or to obtain a preference or priority over any other Noteholder. SECTION 6.07. Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture or the Supplemental Indenture, the right of any Holder to receive payment of the Principal Amount at Maturity (or, if the Notes have been converted to semiannual coupon notes following a Tax Event, the Restated Principal Amount), Issue Price plus accrued Original Issue Discount, Redemption Price, Purchase Price, Fundamental Change Repurchase Price or any accrued cash interest (or, if the Notes have been converted to semiannual coupon notes following a Tax Event, the Restated Principal Amount, plus accrued interest) in respect of the Notes held by such Holder, on or after the respective due dates expressed in the Notes or any Redemption Date, and to convert the Notes in accordance with Article 3 of the Supplemental Indenture, or to bring suit for the enforcement of any such payment on or after such respective dates or the right to convert, shall not be impaired or affected adversely without the consent of such Holder. SECTION 6.08. Collection Suit by Trustee. If an Event of Default described in Section 6.01(a) or (b) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount owing with respect to the Notes and the amounts provided for in Section 7.06 of this Indenture. SECTION 6.09. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, 52 54 reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Notes or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the Principal Amount at Maturity, Issue Price plus accrued Original Issue Discount, Redemption Price, Purchase Price, Fundamental Change Repurchase Price or any accrued and unpaid cash interest (or, if the Notes have been converted to semiannual coupon notes following a Tax Event, the Restated Principal Amount, plus accrued and unpaid interest) in respect of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of any such amount) shall be entitled and empowered, by intervention in such proceeding or otherwise, (a) to file and prove a claim for the whole amount of the Principal Amount at Maturity, Issue Price plus accrued Original Issue Discount, Redemption Price, Purchase Price, Fundamental Change Repurchase Price, or any accrued and unpaid cash interest (or, if the Notes have been converted to semiannual coupon notes following a Tax Event, the Restated Principal Amount, plus accrued and unpaid interest) and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel or any other amounts due the Trustee under Section 7.06 of this Indenture) and of the Holders allowed in such judicial proceeding, and (b) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.06 of this Indenture. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 6.10. Priorities. If the Trustee collects any money pursuant to this Article 6, it shall pay out the money in the following order: FIRST: to the Trustee for amounts due under Section 7.06 of this Indenture; SECOND: to Noteholders for amounts due and unpaid on the Notes for the Principal Amount at Maturity, Issue Price plus accrued Original Issue Discount, Redemption Price, Purchase Price, Fundamental Change Repurchase Price or any accrued and unpaid cash interest (or, if the Notes have been converted to semiannual coupon notes following a Tax Event, the Restated Principal Amount, plus accrued and unpaid interest) as the case may be, ratably, without 53 55 preference or priority of any kind, according to such amounts due and payable on the Notes; and THIRD: the balance, if any, to the Company. The Trustee may fix a record date and payment date for any payment to Noteholders pursuant to this Section 6.10. At least 15 days before such record date, the Trustee shall mail to each Noteholder and the Company a notice that states the record date, the payment date and the amount to be paid. SECTION 6.11. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or the Supplemental Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant (other than the Trustee) in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees and expenses, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 of this Indenture or a suit by Holders of more than 10% in aggregate Principal Amount at Maturity of the Notes at the time outstanding. This Section 6.11 shall be in lieu of Section 315(e) of the TIA and such Section 315(e) is hereby expressly excluded from this Indenture or the Supplemental Indenture, as permitted by the TIA. SECTION 6.12. Waiver of Stay, Extension or Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law or any usury or other law wherever enacted, now or at any time hereafter in force, which would prohibit or forgive the Company from paying all or any portion of the Principal Amount at Maturity, Issue Price plus accrued Original Issue Discount, Redemption Price, Purchase Price, Fundamental Change Repurchase Price or any accrued cash interest (or, if the Notes have been converted to semiannual coupon notes following a Tax Event, the Restated Principal Amount, plus accrued interest) in respect of Notes, or which may affect the covenants or the performance of this Indenture or the Supplemental Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted." (i) Section 7.01(d) of the Original Indenture is hereby amended by replacing the words therein "principal amount" with "Principal Amount at Maturity." (j) Section 7.08 of the Original Indenture is hereby amended by replacing the words in the first and second paragraphs therein "principal amount" with "Principal Amount at Maturity." (k) Section 8.01 of the Original Indenture is hereby amended by replacing the words therein "principal amount" with "Principal Amount at Maturity." 54 56 (l) Section 8.03 of the Original Indenture is hereby amended by replacing the phrase therein "payment of or on account of the principal of and premium, if any, and (subject to Section 2.03) interest on" with "payments in respect of." (m) Section 8.04 of the Original Indenture is hereby amended by replacing the words therein "principal amount" with "Principal Amount at Maturity." (n) Section 9.01(b) of the Original Indenture is hereby amended by replacing the words therein "principal amount" with "Principal Amount at Maturity." (o) Section 9.02 of the Original Indenture is hereby amended by replacing it in its entirety with the following: "SECTION 9.02. Modification of Indenture with Consent of Holders of Debt Notes. With the written consent of the Holders of at least a majority in aggregate Principal Amount at Maturity of the Notes at the time outstanding, the Company and the Trustee may amend this Indenture, the Supplemental Indenture or the Notes. However, without the consent of each Noteholder affected, an amendment to this Indenture, the Supplemental Indenture or the Notes may not: (a) reduce the percentage in Principal Amount at Maturity of Notes whose Holders must consent to an amendment; (b) make any change in the manner or rate of accrual in connection with Original Issue Discount or cash interest, reduce the rate of cash interest referred to in paragraph 1 of the Notes, reduce the rate of interest referred to in Section 401 of the Supplemental Indenture upon the occurrence of a Tax Event, or extend the time for payment of Original Issue Discount or cash interest on any Note; (c) reduce the Principal Amount at Maturity, Restated Principal Amount or the Issue Price of or extend the Stated Maturity of any Note; (d) reduce the Redemption Price, Purchase Price or Fundamental Change Repurchase Price of any Note; (e) make any Note payable in money or securities other than that stated in the Note; (f) make any change in Section 6.04 or 6.07 of this Indenture or this Section 9.02, except to increase any percentage set forth therein; (g) make any change that adversely affects the right to convert any Note; (h) make any change that adversely affects the right to require the Company to purchase the Notes in accordance with the terms thereof and this Indenture or the Supplemental Indenture; (i) release any security that may have been granted in respect of the Notes; or 55 57 (j) impair the right to institute suit for the enforcement of any payment with respect to, or conversion of, the Notes. It shall not be necessary for the consent of the Holders under this Section 9.02 to approve the particular form of any proposed amendment, but it shall be sufficient if such consent approves the substance thereof. After an amendment under this Section 9.02 becomes effective, the Company shall mail to each Holder a notice briefly describing the amendment." (p) Article XI of the Original Indenture is hereby amended by replacing it in its entirety with the following: "ARTICLE XI DISCHARGE OF INDENTURE SECTION 11.01. Discharge of Liability on Notes. When (i) the Company delivers to the Trustee all outstanding Notes (other than Notes replaced pursuant to Section 2.07) for cancellation or (ii) all outstanding Notes have become due and payable and the Company deposits with the Trustee cash or, if expressly permitted by the terms of the Notes, Class A Common Stock sufficient to pay all amounts due and owing on all outstanding Notes (other than Notes replaced pursuant to Section 2.09 of this Indenture), and if in either case the Company pays all other sums payable hereunder by the Company, then this Indenture and the Supplemental Indenture shall, subject to Section 7.06 of this Indenture, cease to be of further effect with respect to the Notes. The Trustee shall join in the execution of a document prepared by the Company acknowledging satisfaction and discharge of this Indenture and the Supplemental Indenture on demand of the Company accompanied by an Officers' Certificate and Opinion of Counsel and at the cost and expense of the Company. SECTION 11.02. Repayment to the Company. The Trustee and the Paying Agent shall return to the Company upon written request any money or securities held by them for the payment of any amount with respect to the Notes that remains unclaimed for two years, subject to applicable unclaimed property law. After return to the Company, Holders entitled to the money or securities must look to the Company for payment as general creditors unless an applicable abandoned property law designates another person and the Trustee and the Paying Agent shall have no further liability to the Noteholders with respect to such money or securities for that period commencing after the return thereof." (q) Article XII of the Original Indenture is hereby deleted in its entirety. SECTION 502 Interpretation of Original Indenture. Except as otherwise specifically provided in this Supplemental Indenture, whenever in the Original Indenture there is mentioned, in any context, the principal of or principal amount of any Debt Security of any series or a percentage in principal amount of the Outstanding Debt Securities of any series, such mention shall be deemed to be, solely with respect to the Notes, the Principal Amount at Maturity of the Notes or a percentage of the aggregate Principal Amount at Maturity of the Notes at the time Outstanding. 56 58 ARTICLE 6 Additional Covenant SECTION 601 Delivery of Certain Information. At any time the Company is not subject to Section 13 or 15(d) of the Exchange Act, upon the request of a Holder or any beneficial holder of Notes or shares of Class A Common Stock which are restricted securities issued upon conversion thereof, the Company will promptly furnish or cause to be furnished Rule 144A Information (as defined below) to such Holder or any beneficial holder of Notes or holder of shares of Class A Common Stock issued upon conversion of Notes, or to a prospective purchaser of any such security designated by any such holder, as the case may be, to the extent required to permit compliance by such Holder or holder with Rule 144A in connection with the resale of any such security. "Rule 144A Information" shall be such information as is specified pursuant to Rule 144A(d)(4) under the Securities Act. ARTICLE 7 MISCELLANEOUS PROVISIONS The Trustee makes no undertaking or representations in respect of, and shall not be responsible in any manner whatsoever for and in respect of, the validity or sufficiency of this Supplemental Indenture or the proper authorization or the due execution hereof by the Company or for or in respect of the recitals and statements contained herein, all of which recitals and statements are made solely by the Company. Except as expressly amended hereby, the Original Indenture shall continue in full force and effect in accordance with the provisions thereof and the Original Indenture is in all respects hereby ratified and confirmed. This Supplemental Indenture and all its provisions shall be deemed a part of the Original Indenture in the manner and to the extent herein and therein provided. This Supplemental Indenture shall be governed by, and construed in accordance with, the laws of the State of New York. This Supplemental Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. 57 59 IN WITNESS WHEREOF, the parties have caused this Fourth Supplemental Indenture to be duly executed. Cox Communications, Inc. By: /s/ Mark W. Major ------------------------------ Name: Mark W. Major Title: Treasurer The Bank of New York, as Trustee By: /s/ Mary LaGumina ------------------------------ Name: Mary LaGumina Title: Vice President 58 60 EXHIBIT A-1 [FORM OF FACE OF SECURITY] THIS SECURITY WAS ISSUED WITH ORIGINAL ISSUE DISCOUNT, FOR PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED, THE ISSUE PRICE OF THIS SECURITY IS $695.03 PER $1,000 OF PRINCIPAL AMOUNT AT MATURITY, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $304.97 PER $1,000 OF PRINCIPAL AMOUNT AT MATURITY, THE ISSUE DATE IS FEBRUARY 23, 2001 AND THE YIELD TO MATURITY IS 2.25% COMPOUNDED SEMI-ANNUALLY. THIS SECURITY AND THE SHARES OF CLASS A COMMON STOCK OF THE COMPANY ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY, THE SHARES OF CLASS A COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE REOFFERED, RESOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS SECURITY OR ANY BENEFICIAL INTEREST HEREIN WILL BE ABLE TO EXERCISE THE CONVERSION RIGHT ONLY IF THE HOLDER CERTIFIES THAT IT (A) IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED BELOW) (B) IS AN INSTITUTIONAL ACCREDITED INVESTOR (AS DEFINED BELOW) OR (C) IS NOT A U.S. PERSON (AS DEFINED IN REGULATION S) AND IS NOT EXERCISING SUCH CONVERSION RIGHT ON BEHALF OF A U.S. PERSON. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY OR ANY BENEFICIAL INTEREST HEREIN PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE"), WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY BENEFICIAL INTEREST HEREIN (OR ANY PREDECESSOR SECURITY) ONLY (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A "QUALIFIED INSTITUTIONAL BUYER" TO WHICH NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR," FOR A-1-1 61 INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (D) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (E) OUTSIDE THE UNITED STATES TO NON-U.S. PERSONS IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, INCLUDING UNDER RULE 144, IF AVAILABLE, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (C), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN EACH OF THE FOREGOING CASES, A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. IN ANY CASE, THE HOLDER HEREOF WILL NOT, DIRECTLY OR INDIRECTLY, ENGAGE IN ANY HEDGING TRANSACTIONS WITH REGARD TO THIS SECURITY OR ANY SHARES OF CLASS A COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE EXCEPT AS PERMITTED BY THE SECURITIES ACT. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO.), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS, IN WHOLE BUT NOT IN PART, TO NOMINEES OF THE DEPOSITORY TRUST COMPANY OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN ARTICLE TWO OF THE FOURTH SUPPLEMENTAL INDENTURE REFERRED TO ON THE REVERSE HEREOF. A-1-2 62 COX COMMUNICATIONS, INC. Convertible Senior Notes due 2021 No. R-__ CUSIP: 224044 BA 4 Issue Date: February 23, 2001 Original Issue Discount: $304.97 Issue Price: $695.03 (for each $1,000 Principal (for each $1,000 Principal Amount at Maturity) Amount at Maturity) Cox Communications, Inc., a Delaware corporation (the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to Cede & Co., or registered assigns, the Principal Amount at Maturity of [___________________________] ($[____________]) on February 23, 2021. This Note shall not bear interest except as specified on the other side of this Note. Original Issue Discount will accrue as specified on the other side of this Note. This Note is convertible as specified on the other side of this Note. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. A-1-3 63 IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. COX COMMUNICATIONS, INC. By: ------------------------- Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Debt Securities of the series designated therein referred to in the within-mentioned Indenture. Dated: THE BANK OF NEW YORK, as Trustee By ------------------------- Authorized Signatory A-1-4 64 [REVERSE SIDE OF NOTE] Convertible Senior Notes Due 2021 1. Cash Interest; Original Issue Discount. The Company promises to pay interest in cash on the Principal Amount at Maturity of this Note at the rate per annum of 0.348%. The Company will pay cash interest semiannually in arrears on February 23 and August 23 of each year (each an "Interest Payment Date") to Holders of record at the close of business on each February 8 or August 8 (whether or not a business day) (each a "Regular Record Date") immediately preceding such Interest Payment Date. Cash interest on the Notes will accrue from the most recent date to which interest has been paid or duly provided or, if no interest has been paid, from the Issue Date. Cash interest will be computed on the basis of a 360-day year of twelve 30-day months. Original Issue Discount (the difference between the Issue Price and the Principal Amount at Maturity of the Note), in the period during which a Note remains outstanding, together with regular cash interest, shall accrue at 2.25% per annum, on a semiannual bond equivalent basis using a 360-day year composed of twelve 30-day months, from the Issue Date of this Note. 2. Method of Payment. Subject to the terms and conditions of the Indenture, the Company will make payments in respect of the principal of, premium, if any, and cash interest on this Note and in respect of Redemption Prices, Purchase Prices and Fundamental Change Repurchase Prices to Holders who surrender Notes to a Paying Agent to collect such payments in respect of the Notes. The Company will pay cash amounts in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may make such cash payments by check payable in such money. Any payment required to be made on any day that is not a Business Day will be made on the next succeeding Business Day. 3. Paying Agent, Conversion Agent and Registrar. Initially, The Bank of New York, a New York banking association (the "Trustee"), will act as Paying Agent, Conversion Agent and Registrar. The Company may appoint and change any Paying Agent, Conversion Agent, Registrar or co-registrar without notice, other than notice to the Trustee except that the Company will maintain at least one Paying Agent in the State of New York, City of New York, Borough of Manhattan, which shall initially be an office or agency of the Trustee. The Company or any of its Subsidiaries or any of their Affiliates may act as Paying Agent, Conversion Agent, Registrar or co-registrar. 4. Indenture. The Company issued the Notes under an Indenture dated as of June 27, 1995 (the "Original Indenture"), as supplemented by a fourth supplemental indenture, dated as of February 23, 2001 (the "Supplemental Indenture," and together with the Original Indenture, the "Indenture") between the Company and the Trustee. The terms of the Notes include those stated in the Indenture and A-1-5 65 those made part of the Indenture by reference to the Trust Indenture Act of 1939, as in effect from time to time (the "TIA"). Capitalized terms used herein and not defined herein have the meanings ascribed thereto in the Indenture. The Notes are subject to all such terms, and Noteholders are referred to the Indenture and the TIA for a statement of those terms. The Notes are general unsecured obligations of the Company limited to $793,000,000 aggregate Principal Amount at Maturity (subject to Article 2 of the Supplemental Indenture). 5. Redemption at the Option of the Company. No sinking fund is provided for the Notes. The Notes are redeemable as a whole, or from time to time in part, at any time at the option of the Company at the Redemption Prices set forth below, provided that the Notes are not redeemable prior to February 26, 2003. The table below shows Redemption Prices of a Note per $1,000 Principal Amount at Maturity on the dates shown below and at Stated Maturity, which prices reflect accrued Original Issue Discount calculated to each such date. The Redemption Price of a Note redeemed between such dates shall include an additional amount reflecting the additional Original Issue Discount accrued since the immediately preceding date in the table. In addition, the Company shall pay accrued and unpaid cash interest on Notes to be redeemed to, but excluding, the Redemption Date.
(1) (2) (3) Note Accrued Original Redemption Price Redemption Date Issue Price Issue Discount (1) + (2) - ------------------------------------- ------------- ------------------- ----------------- February 26, 2003.................... $695.03 $24.83 $719.86 February 23, 2004.................... $695.03 $37.52 $732.55 February 23, 2005.................... $695.03 $50.59 $745.62 February 23, 2006.................... $695.03 $63.96 $758.99 February 23, 2007.................... $695.03 $77.64 $772.67 February 23, 2008.................... $695.03 $91.62 $786.65 February 23, 2009.................... $695.03 $105.92 $800.95 February 23, 2010.................... $695.03 $120.54 $815.57 February 23, 2011.................... $695.03 $135.50 $830.53 February 23, 2012.................... $695.03 $150.79 $845.82 February 23, 2013.................... $695.03 $166.43 $861.46 February 23, 2014.................... $695.03 $182.42 $877.45 February 23, 2015.................... $695.03 $198.77 $893.80 February 23, 2016.................... $695.03 $215.50 $910.53 February 23, 2017.................... $695.03 $232.60 $927.63 February 23, 2018.................... $695.03 $250.09 $945.12 February 23, 2019.................... $695.03 $267.98 $963.01 February 23, 2020.................... $695.03 $286.27 $981.30 At Stated Maturity................... $695.03 $304.97 $1,000.00
A-1-6 66 If converted to a semiannual coupon note following the occurrence of a Tax Event, the Redemption Price will equal the Restated Principal Amount plus accrued and unpaid interest from the date of such conversion through the Redemption Date, but in no event will this Note be redeemable before February 26, 2003. 6. Purchase By the Company at the Option of the Holder. Subject to the terms and conditions of the Indenture, the Company shall become obligated to purchase, at the option of the Holder, the Notes held by such Holder on the following Purchase Dates and at the following Purchase Prices per $1,000 Principal Amount at Maturity (plus accrued and unpaid cash interest on the Notes to, but excluding, the applicable Purchase Date), upon delivery of a Purchase Notice containing the information set forth in the Indenture, at any time from the opening of business on the date that is 20 Business Days prior to such Purchase Date until the close of business on such Purchase Date and upon delivery of the Notes to the Paying Agent by the Holder as set forth in the Indenture.
Purchase Date Purchase Price ------------- -------------- February 23, 2002 $707.26 February 23, 2003 $719.76 February 23, 2004 $732.55 February 23, 2005 $745.62 February 23, 2006 $758.99 February 23, 2011 $830.53 February 23, 2016 $910.53
The Purchase Price, plus any accrued and unpaid cash interest to, but excluding, the Purchase Date, for all Notes purchased on February 23, 2002 will be paid in cash but on the later six Purchase Dates it may be paid, at the option of the Company, in cash or shares of Class A Common Stock or any combination thereof. If prior to a Purchase Date this Note has been converted to a semiannual coupon note following the occurrence of a Tax Event, the Purchase Price will be equal to the Restated Principal Amount plus accrued and unpaid interest from the date of conversion to, but excluding, the Purchase Date. At the option of the Holder and subject to the terms and conditions of the Indenture, the Company shall become obligated to purchase all or a portion of the Notes held by such Holder 35 Business Days after the occurrence of a Fundamental Change occurring on or prior to February 26, 2003 for a Fundamental Change Repurchase Price equal to the Issue Price plus accrued Original Issue Discount and accrued and unpaid cash interest to, but excluding, the Fundamental Change Repurchase Date, which Fundamental Change Repurchase Price shall be paid in cash. If prior to a Fundamental Change Repurchase Date this Note has been converted to a semiannual coupon note following the occurrence of a Tax Event, the Fundamental Change Repurchase Price shall be equal to the Restated Principal A-1-7 67 Amount plus accrued and unpaid interest from the date of conversion to, but excluding, the Fundamental Change Repurchase Date. Holders have the right to withdraw any Purchase Notice or Fundamental Change Repurchase Notice, as the case may be, by delivering to the Paying Agent a written notice of withdrawal in accordance with the provisions of the Indenture. If cash (and/or securities if permitted under the Indenture) sufficient to pay the Purchase Price or Fundamental Change Repurchase Price, as the case may be, of all Notes or portions thereof to be purchased as of the Purchase Date or repurchased as of the Fundamental Change Repurchase Date, as the case may be, is deposited with the Paying Agent on the Business Day following the Purchase Date or the Fundamental Change Repurchase Date, as the case may be, Original Issue Discount and cash interest shall cease to accrue on such Notes (or portions thereof) immediately after such Purchase Date or Fundamental Change Repurchase Date, as the case may be, whether or not such Notes have been delivered to the Paying Agent, and the Holder thereof shall have no other rights as such (other than the right to receive the Purchase Price or Fundamental Change Repurchase Price, as the case may be, upon surrender of such Note). 7. Notice of Redemption. Notice of redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at the Holder's registered address. If money sufficient to pay the Redemption Price of all Notes (or portions thereof) to be redeemed on the Redemption Date is deposited with the Paying Agent prior to or on the Redemption Date, immediately after such Redemption Date Original Issue Discount ceases to accrue on such Notes or portions thereof. Notes in denominations larger than $1,000 of Principal Amount at Maturity may be redeemed in part but only in integral multiples of $1,000 of Principal Amount at Maturity. 8. Conversion. Subject to the next two succeeding sentences, a Holder of a Note may convert it into Class A Common Stock of the Company at any time before the close of business on February 23, 2021. If the Note is called for redemption, the Holder may convert it at any time before the close of business on the Redemption Date. A Note in respect of which a Holder has delivered a Purchase Notice or Fundamental Change Repurchase Notice exercising the option of such Holder to require the Company to purchase such Note may be converted only if such notice of exercise is withdrawn in accordance with the terms of the Indenture. The initial Conversion Rate is 11.8135 shares of Class A Common Stock per $1,000 Principal Amount at Maturity, subject to adjustment in certain events described in the Indenture. The Company will deliver cash or a check in lieu of any fractional share of Class A Common Stock. In the event the Company exercises its option pursuant to the Indenture to have interest in lieu of Original Issue Discount and cash interest accrue on the Note following a Tax Event, the Holder will be entitled on conversion to receive the same number of shares of Class A Common Stock such Holder would have received if the Company had not exercised such option. If the Company exercises A-1-8 68 such option, Notes surrendered for conversion during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business of such Interest Payment Date (except Notes to be redeemed on a date within such period or on the next Interest Payment Date) must be accompanied by payment of an amount equal to the interest thereon that the registered Holder is to receive. Except where Notes surrendered for conversion must be accompanied by payment as described above, no interest on converted Notes will be payable by the Company on any Interest Payment Date subsequent to the date of conversion. To convert a Note, a Holder must (1) complete and manually sign the conversion notice below (or complete and manually sign a facsimile of such notice) and deliver such notice to the Conversion Agent, (2) surrender the Note to the Conversion Agent, (3) furnish appropriate endorsements and transfer documents if required by the Conversion Agent, the Company or the Trustee, if required and (4) pay any transfer or similar tax, if required. A Holder may convert a portion of a Note if the Principal Amount at Maturity of such portion is $1,000 or an integral multiple of $1,000. No payment or adjustment will be made for dividends on, or other distributions with respect to, the Class A Common Stock except as provided in the Indenture. On conversion of a Note, that portion of accrued Original Issue Discount attributable to the period from the Issue Date to, but excluding, the Conversion Date and (except as provided below) that portion of accrued cash interest attributable to the period from the last Interest Payment Date (or, if no Interest Payment Date has occurred, from the Issue Date) to, but excluding, the Conversion Date (or, if the Company has exercised the option provided for in paragraph 10 hereof, that portion of accrued interest attributable to the period from the later of (x) the date of such exercise and (y) the most recent Interest Payment Date following the date of such exercise to, but excluding, the Conversion Date) with respect to the converted Note shall not be cancelled, extinguished or forfeited, but rather shall be deemed to be paid in full to the Holder thereof through the delivery of the Class A Common Stock (together with the cash payment, if any, in lieu of fractional shares) and/or cash, if any, in exchange for the Note being converted pursuant to the terms hereof; and such cash, if any, and the fair market value of such shares of Class A Common Stock (together with any such cash payment in lieu of fractional shares) shall be treated as issued, to the extent thereof, first in exchange for Original Issue Discount and cash interest (or interest, if the Company has exercised its option provided for in paragraph 10 hereof) accrued to, but excluding, the Conversion Date, and the balance, if any, of such cash and/or the fair market value of such Class A Common Stock (together with any such cash payment in lieu of fractional shares) shall be treated as issued in exchange for the Issue Price of the Note being converted pursuant to the provisions hereof. Notwithstanding the foregoing, accrued but unpaid interest will be payable upon conversion of Notes made concurrently with or after acceleration of Notes following an Event of Default. The Conversion Rate will be adjusted for dividends or distributions on Class A Common Stock payable in Class A Common Stock or other Capital Stock; subdivisions, combinations or certain reclassifications of Class A Common Stock; distributions to all holders of Class A Common Stock of certain rights to purchase Class A Common Stock for a period expiring within 60 days at a price per share less than the Sale Price at the Time of Determination; and distributions to such holders of assets or debt securities of the Company or certain rights to purchase securities of the Company (excluding certain cash A-1-9 69 dividends or distributions). However, no adjustment need be made if Noteholders may participate in the transaction or in certain other cases. The Company from time to time may voluntarily increase the Conversion Rate. If the Company is a party to a consolidation, merger or binding share exchange or a transfer of all or substantially all of its assets, or upon certain distributions described in the Indenture, the right to convert a Note into Class A Common Stock may be changed into a right to convert it into securities, cash or other assets of the Company or another person. 9. Conversion Arrangement on Call for Redemption. Any Notes called for redemption, unless surrendered for conversion before the close of business on the Redemption Date, may be deemed to be purchased from the Holders of such Notes at an amount not less than the Redemption Price, by one or more investment bankers or other purchasers who may agree with the Company to purchase such Notes from the Holders, to convert them into Class A Common Stock of the Company and to make payment for such Notes to the Trustee in trust for such Holders. 10. Tax Event. (a) From and after (i) the date (the "Tax Event Date") of the occurrence of a Tax Event and (ii) the date the Company exercises such option, whichever is later (the "Option Exercise Date"), at the option of the Company, interest in lieu of future Original Issue Discount and regular cash interest shall accrue at the rate of 2.25% per annum on a principal amount per Note (the "Restated Principal Amount") equal to the Issue Price plus Original Issue Discount accrued through the Option Exercise Date and shall be payable semiannually on each Interest Payment Date to Holders of record at the close of business on the Regular Record Date immediately preceding such Interest Payment Date. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months and will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the Option Exercise Date. (b) Cash interest on any Note that is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the person in whose name that Note is registered at the close of business on the Regular Record Date for such cash interest at the office or agency of the Company maintained for such purpose. Each installment of cash interest on any Note shall be paid in same-day funds by transfer to an account maintained by the payee located inside the United States. (c) Except as otherwise specified with respect to the Notes, any Defaulted Interest on any Note shall forthwith cease to be payable to the registered Holder thereof on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company as provided for in Section 402 of the Supplemental Indenture and Section 2.17 of the Original Indenture. 11. Denominations; Transfer; Exchange. The Notes are in fully registered form, without coupons, in denominations of $1,000 of Principal Amount at Maturity and integral multiples of $1,000. A Holder may transfer or exchange Notes in accordance with the A-1-10 70 Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not transfer or exchange any Notes selected for redemption (except, in the case of a Note to be redeemed in part, the portion of the Note not to be redeemed) or any Notes in respect of which a Purchase Notice or Fundamental Change Repurchase Notice has been given and not withdrawn (except, in the case of a Note to be purchased in part, the portion of the Note not to be purchased) or any Notes for a period of 15 days before the mailing of a notice of redemption of Notes to be redeemed. 12. Persons Deemed Owners. The registered Holder of this Note may be treated as the owner of this Note for all purposes. 13. Unclaimed Money or Securities. The Trustee and the Paying Agent shall return to the Company upon written request any money or securities held by them for the payment of any amount with respect to the Notes that remains unclaimed for two years, subject to applicable unclaimed property law. After return to the Company, Holders entitled to the money or securities must look to the Company for payment as general creditors unless an applicable abandoned property law designates another person. 14. Amendment; Waiver. Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Notes may be amended with the written consent of the Holders of at least a majority in aggregate Principal Amount at Maturity of the Notes at the time Outstanding and (ii) certain Defaults may be waived with the written consent of the Holders of a majority in aggregate Principal Amount at Maturity of the Notes at the time Outstanding. Subject to certain exceptions set forth in the Indenture, without the consent of any Noteholder, the Company and the Trustee may amend the Indenture or the Notes to cure any ambiguity, omission, defect or inconsistency, or to comply with certain provisions of the Indenture, to provide for uncertificated Notes in addition to or in place of certificated Notes or to make any change that does not adversely affect the rights of any Noteholder, or to comply with any requirement of the SEC in connection with the qualification of the Indenture under the TIA, or as necessary in connection with the registration of the Notes under the Securities Act or to make any change that does not adversely affect the rights of any Holders. 15. Defaults and Remedies. Under the Indenture, Events of Default include (i) default in the payment of the Principal Amount at Maturity (or, if the Notes have been converted to semiannual coupon Notes following a Tax Event, the Restated Principal Amount), Issue Price plus accrued Original Issue Discount, Redemption Price, Purchase Price or Fundamental Change Repurchase Price on any Note when the same becomes due and payable at its Stated Maturity, upon redemption, upon declaration, when due for purchase by the Company or otherwise; (ii) default in A-1-11 71 the payment of any cash interest upon any Note when such interest becomes due and payable, and such default in payment of interest shall continue for 30 days; (iii) failure by the Company to deliver shares of Class A Common Stock (together with cash in lieu of fractional shares), or cash instead, when such Class A Common Stock (or cash in lieu of fractional shares), or cash instead, is required to be delivered upon conversion of a Note and such failure continues for 10 days; (iv) failure by the Company to comply with any of its agreements in the Notes or the Indenture covering mergers and sales of assets; (v) failure by the Company to comply with any of its obligations or agreements under the Indenture with respect to the Notes and such failure continues for 60 days after receipt by the Company of a Notice of Default, provided that this provision does not apply where the Indenture specifically provides otherwise; (vi) nonpayment of the Indebtedness of the Company or any Restricted Subsidiary within any applicable grace period after final maturity or acceleration of such Indebtedness by its holders because of a default and the total amount of such unpaid or accelerated Indebtedness exceeds 5% of the aggregate outstanding principal amount of all Indebtedness of the Company and the Restricted Subsidiaries; and (vii) certain events of bankruptcy, insolvency or reorganization affecting the Company. If an Event of Default occurs and is continuing, the Trustee, or the Holders of at least 25% in aggregate Principal Amount at Maturity of the Notes at the time Outstanding, may declare all the Notes to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Notes becoming due and payable immediately upon the occurrence of such Events of Default. Noteholders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in aggregate Principal Amount at Maturity of the Notes at the time Outstanding may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Noteholders notice of any continuing Default (except a Default in payment of amounts specified in clause (i) or (ii) above) if it determines that withholding notice is in their interests. 16. Trustee Dealings with the Company. Subject to certain limitations imposed by the TIA, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Company or its Affiliates and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. 17. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Noteholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. 18. Authentication. This Note shall not be valid until an authorized signatory of the Trustee manually signs the Trustee's Certificate of Authentication on the other side of this Note. A-1-12 72 19. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with right of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act). 20. GOVERNING LAW. THE INDENTURE AND THIS NOTE WILL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. The Company will furnish to any Noteholder upon written request and without charge a copy of the Indenture which has in it the text of this Note in larger type. Requests may be made to: Cox Communications, Inc. Treasurer 1400 Lake Hearn Drive NE Atlanta, Georgia 30319 A-1-13 73 ASSIGNMENT FORM If you want to assign this Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Note to: ================================================================================ - -------------------------------------------------------------------------------- (Print or type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint _____________________________________ agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date: Signed: ------------------------------ (Sign exactly as your name appears on the other side of this Note) Signature Guarantee:________________________________ FORM OF CONVERSION NOTICE If you want to convert this Note for Class A Common Stock, check the box: [ ] To convert only part of this Note, state the Principal Amount at Maturity to be converted (which must be $1,000 or an integral multiple of $1,000): $---------------------------------- If you want the Class A Common Stock certificate made out in another person's name, fill in the form below: - -------------------------------------------------------------------------------- (Insert other person's social security or tax ID no.) ================================================================================ - -------------------------------------------------------------------------------- (Print or type other person's name, address and zip code) 1. The undersigned understands and acknowledges (or if the undersigned is acting for the account of another person, such person has confirmed to the undersigned that it acknowledges) that the shares of Class A Common Stock issuable upon conversion of the Notes have not been registered under the Securities Act of 1933 (the "Act") or any other applicable securities law, are being offered for resale in transactions not requiring registration under the Act and, unless so registered, may not be offered, sold or otherwise A-1-14 74 transferred except in compliance with the registration requirements of the Act or any other applicable securities law, pursuant to an exemption therefrom or in a transaction not subject thereto and in each case in compliance with the conditions for transfer set forth in paragraph (3) below. 2. The undersigned certifies that either: A. it is a qualified institutional buyer (as defined in Rule 144A under the Act), and at the time of issuance of the shares of Class A Common Stock referred to above, the undersigned (or one or more qualified institutional buyers for whose account the undersigned is acting) will be the beneficial owner of the shares of Class A Common Stock, OR B. the undersigned is a broker-dealer acting for the account of its customer; its customer has confirmed to the undersigned that it is a qualified institutional buyer and either (i) at the time of issuance of the shares of Class A Common Stock referred to above, it will be the beneficial owner of the shares of Class A Common Stock, or (ii) it is acting for the account of a qualified institutional buyer that, at the time of issuance of the shares of Class A Common Stock referred to above, will be the beneficial owner of the shares of Class A Common Stock, OR C. the undersigned is outside the United States and is not a U.S. person (as defined in Regulation S) and is not acting for the account or benefit of a U.S. person. OR D. the undersigned is an institutional "accredited investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Act and is acquiring the shares of Series A Common Stock referred to above for its own account, or for the account of such an institutional "accredited investor," for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Act and agrees to provide the Transfer Agent and Registrar with respect to the Class A Common Stock and Cox Communications, Inc. with such opinions and further certifications as they may require. 3. The undersigned agrees (or if it is acting for the account of another person, such person has confirmed to it that such person agrees) that the undersigned (or such person) will offer, sell, pledge or otherwise transfer the shares of Class A Common Stock prior to the Resale Restriction Termination Date only (a) to the Company or any subsidiary thereof, (b) for so long as shares of Class A Common Stock are eligible for resale pursuant to Rule 144A, to a person A-1-15 75 the undersigned reasonably believes (or such person and anyone acting on such person's behalf reasonably believes) is a qualified institutional buyer as defined in Rule 144A under the Act that purchases for its own account or for the account of a qualified institutional buyer to which notice is given that the transfer is being made in reliance on Rule 144A, (c) if the undersigned is a qualified institutional buyer or an institutional "accredited investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Act, to such an institutional "accredited investor" that is acquiring the Note for its own account, or for the account of such an institutional "accredited investor," for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Act, (d) in an offshore transaction in accordance with Rule 904 of Regulation S under the Act, (e) pursuant to a registration statement which has been declared effective under the Act or (f) pursuant to any other available exemption from registration under the Act, including under Rule 144, if available, subject to the Company's and the Transfer Agent and Registrar's right prior to any such offer, sale or transfer pursuant to clause (c), (d) or (f) to require the delivery of an opinion of counsel, certification and/or other information satisfactory to each of them. The undersigned agrees not to, directly or indirectly, engage in any hedging transactions with regard to the shares of Class A Common Stock except as permitted by the Securities Act. Date: Signed: -------------------- ----------------------- (Sign exactly as your name appears on the other side of this Note) Signature Guarantee:________________________________ A-1-16 76 EXHIBIT A-2 [FORM OF FACE OF SECURITY] THIS SECURITY WAS ISSUED WITH ORIGINAL ISSUE DISCOUNT, FOR PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE UNITED STATES INTERNAL REVENUE CODE OF 1986, AS AMENDED, THE ISSUE PRICE OF THIS SECURITY IS $695.03 PER $1,000 OF PRINCIPAL AMOUNT AT MATURITY, THE AMOUNT OF ORIGINAL ISSUE DISCOUNT IS $304.97 PER $1,000 OF PRINCIPAL AMOUNT AT MATURITY, THE ISSUE DATE IS FEBRUARY 23, 2001 AND THE YIELD TO MATURITY IS 2.25% COMPOUNDED SEMI-ANNUALLY. THIS SECURITY AND THE SHARES OF CLASS A COMMON STOCK OF THE COMPANY ISSUABLE UPON CONVERSION OF THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY, THE SHARES OF CLASS A COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE REOFFERED, RESOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS SECURITY OR ANY BENEFICIAL INTEREST HEREIN WILL BE ABLE TO EXERCISE THE CONVERSION RIGHT ONLY IF THE HOLDER CERTIFIES THAT IT (A) IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED BELOW) (B) IS AN INSTITUTIONAL ACCREDITED INVESTOR (AS DEFINED BELOW) OR (C) IS NOT A U.S. PERSON (AS DEFINED IN REGULATION S) AND IS NOT EXERCISING SUCH CONVERSION RIGHT ON BEHALF OF A U.S. PERSON. BY ITS ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER AGREES TO OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY OR ANY BENEFICIAL INTEREST HEREIN PRIOR TO THE DATE (THE "RESALE RESTRICTION TERMINATION DATE"), WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY BENEFICIAL INTEREST HEREIN (OR ANY PREDECESSOR SECURITY) ONLY (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A "QUALIFIED INSTITUTIONAL BUYER" TO WHICH NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (C) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPH (A)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR," FOR A-2-1 77 INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (D) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (E) OUTSIDE THE UNITED STATES TO NON-U.S. PERSONS IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT, OR (F) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, INCLUDING UNDER RULE 144, IF AVAILABLE, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (C), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN EACH OF THE FOREGOING CASES, A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE. IN ANY CASE, THE HOLDER HEREOF WILL NOT, DIRECTLY OR INDIRECTLY, ENGAGE IN ANY HEDGING TRANSACTIONS WITH REGARD TO THIS SECURITY OR ANY SHARES OF CLASS A COMMON STOCK ISSUABLE UPON CONVERSION OF THIS NOTE EXCEPT AS PERMITTED BY THE SECURITIES ACT. A-2-2 78 COX COMMUNICATIONS, INC. Convertible Senior Notes due 2021 No. R-__ CUSIP: 224044 BA 4 Issue Date: February 23, 2001 Original Issue Discount: $304.97 Issue Price: $695.03 (for each $1,000 Principal (for each $1,000 Principal Amount at Maturity) Amount at Maturity) Cox Communications, Inc., a Delaware corporation (the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to Cede & Co., or registered assigns, the Principal Amount at Maturity of [_______________________________] ($[_____________]) on February 23, 2021. This Note shall not bear interest except as specified on the other side of this Note. Original Issue Discount will accrue as specified on the other side of this Note. This Note is convertible as specified on the other side of this Note. Reference is hereby made to the further provisions of this Note set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Note shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. A-2-3 79 IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. COX COMMUNICATIONS, INC. By: ------------------------- Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Debt Securities of the series designated therein referred to in the within-mentioned Indenture. Dated: THE BANK OF NEW YORK, as Trustee By ---------------------- Authorized Signatory A-2-4 80 [REVERSE SIDE OF NOTE] Convertible Senior Notes Due 2021 1. Cash Interest; Original Issue Discount. The Company promises to pay interest in cash on the Principal Amount at Maturity of this Note at the rate per annum of 0.348%. The Company will pay cash interest semiannually in arrears on February 23 and August 23 of each year (each an "Interest Payment Date") to Holders of record at the close of business on each February 8 or August 8 (whether or not a business day) (each a "Regular Record Date") immediately preceding such Interest Payment Date. Cash interest on the Notes will accrue from the most recent date to which interest has been paid or duly provided or, if no interest has been paid, from the Issue Date. Cash interest will be computed on the basis of a 360-day year of twelve 30-day months. Original Issue Discount (the difference between the Issue Price and the Principal Amount at Maturity of the Note), in the period during which a Note remains outstanding, together with regular cash interest, shall accrue at 2.25% per annum, on a semiannual bond equivalent basis using a 360-day year composed of twelve 30-day months, from the Issue Date of this Note. 2. Method of Payment. Subject to the terms and conditions of the Indenture, the Company will make payments in respect of the principal of, premium, if any, and cash interest on this Note and in respect of Redemption Prices, Purchase Prices and Fundamental Change Repurchase Prices to Holders who surrender Notes to a Paying Agent to collect such payments in respect of the Notes. The Company will pay cash amounts in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may make such cash payments by check payable in such money. Any payment required to be made on any day that is not a Business Day will be made on the next succeeding Business Day. 3. Paying Agent, Conversion Agent and Registrar. Initially, The Bank of New York, a New York banking association (the "Trustee"), will act as Paying Agent, Conversion Agent and Registrar. The Company may appoint and change any Paying Agent, Conversion Agent, Registrar or co-registrar without notice, other than notice to the Trustee except that the Company will maintain at least one Paying Agent in the State of New York, City of New York, Borough of Manhattan, which shall initially be an office or agency of the Trustee. The Company or any of its Subsidiaries or any of their Affiliates may act as Paying Agent, Conversion Agent, Registrar or co-registrar. 4. Indenture. The Company issued the Notes under an Indenture dated as of June 27, 1995 (the "Original Indenture"), as supplemented by a fourth supplemental indenture, dated as of February 23, 2001 (the "Supplemental Indenture," and together with the Original Indenture, the "Indenture") between the Company and the Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of A-2-5 81 1939, as in effect from time to time (the "TIA"). Capitalized terms used herein and not defined herein have the meanings ascribed thereto in the Indenture. The Notes are subject to all such terms, and Noteholders are referred to the Indenture and the TIA for a statement of those terms. The Notes are general unsecured obligations of the Company limited to $793,000,000 aggregate Principal Amount at Maturity (subject to Article 2 of the Supplemental Indenture). 5. Redemption at the Option of the Company. No sinking fund is provided for the Notes. The Notes are redeemable as a whole, or from time to time in part, at any time at the option of the Company at the Redemption Prices set forth below, provided that the Notes are not redeemable prior to February 26, 2003. The table below shows Redemption Prices of a Note per $1,000 Principal Amount at Maturity on the dates shown below and at Stated Maturity, which prices reflect accrued Original Issue Discount calculated to each such date. The Redemption Price of a Note redeemed between such dates shall include an additional amount reflecting the additional Original Issue Discount accrued since the immediately preceding date in the table. In addition, the Company shall pay accrued and unpaid cash interest on Notes to be redeemed to, but excluding, the Redemption Date.
(1) (2) (3) Note Accrued Original Redemption Price Redemption Date Issue Price Issue Discount (1) + (2) - ------------------------------------- -------------- ------------------ ---------------- February 26, 2003.................... $695.03 $24.83 $719.86 February 23, 2004.................... $695.03 $37.52 $732.55 February 23, 2005.................... $695.03 $50.59 $745.62 February 23, 2006.................... $695.03 $63.96 $758.99 February 23, 2007.................... $695.03 $77.64 $772.67 February 23, 2008.................... $695.03 $91.62 $786.65 February 23, 2009.................... $695.03 $105.92 $800.95 February 23, 2010.................... $695.03 $120.54 $815.57 February 23, 2011.................... $695.03 $135.50 $830.53 February 23, 2012.................... $695.03 $150.79 $845.82 February 23, 2013.................... $695.03 $166.43 $861.46 February 23, 2014.................... $695.03 $182.42 $877.45 February 23, 2015.................... $695.03 $198.77 $893.80 February 23, 2016.................... $695.03 $215.50 $910.53 February 23, 2017.................... $695.03 $232.60 $927.63 February 23, 2018.................... $695.03 $250.09 $945.12 February 23, 2019.................... $695.03 $267.98 $963.01 February 23, 2020.................... $695.03 $286.27 $981.30 At Stated Maturity................... $695.03 $304.97 $1,000.00
A-2-6 82 If converted to a semiannual coupon note following the occurrence of a Tax Event, the Redemption Price will equal the Restated Principal Amount plus accrued and unpaid interest from the date of such conversion through the Redemption Date, but in no event will this Note be redeemable before February 26, 2003. 6. Purchase By the Company at the Option of the Holder. Subject to the terms and conditions of the Indenture, the Company shall become obligated to purchase, at the option of the Holder, the Notes held by such Holder on the following Purchase Dates and at the following Purchase Prices per $1,000 Principal Amount at Maturity (plus accrued and unpaid cash interest on the Notes to, but excluding, the applicable Purchase Date), upon delivery of a Purchase Notice containing the information set forth in the Indenture, at any time from the opening of business on the date that is 20 Business Days prior to such Purchase Date until the close of business on such Purchase Date and upon delivery of the Notes to the Paying Agent by the Holder as set forth in the Indenture.
Purchase Date Purchase Price ------------- -------------- February 23, 2002 $707.26 February 23, 2003 $719.76 February 23, 2004 $732.55 February 23, 2005 $745.62 February 23, 2006 $758.99 February 23, 2011 $830.53 February 23, 2016 $910.53
The Purchase Price, plus any accrued and unpaid cash interest to, but excluding, the Purchase Date, for all Notes purchased on February 23, 2002 will be paid in cash but on the later six Purchase Dates it may be paid, at the option of the Company, in cash or shares of Class A Common Stock or any combination thereof. If prior to a Purchase Date this Note has been converted to a semiannual coupon note following the occurrence of a Tax Event, the Purchase Price will be equal to the Restated Principal Amount plus accrued and unpaid interest from the date of conversion to, but excluding, the Purchase Date. At the option of the Holder and subject to the terms and conditions of the Indenture, the Company shall become obligated to purchase all or a portion of the Notes held by such Holder 35 Business Days after the occurrence of a Fundamental Change occurring on or prior to February 26, 2003 for a Fundamental Change Repurchase Price equal to the Issue Price plus accrued Original Issue Discount and accrued and unpaid cash interest to, but excluding, the Fundamental Change Repurchase Date, which Fundamental Change Repurchase Price shall be paid in cash. If prior to a Fundamental Change Repurchase Date this Note has been converted to a semiannual coupon note following the occurrence of a Tax Event, the Fundamental Change Repurchase Price shall be equal to the Restated Principal Amount plus accrued and unpaid interest from the date of conversion to, but excluding, the Fundamental Change Repurchase Date. A-2-7 83 Holders have the right to withdraw any Purchase Notice or Fundamental Change Repurchase Notice, as the case may be, by delivering to the Paying Agent a written notice of withdrawal in accordance with the provisions of the Indenture. If cash (and/or securities if permitted under the Indenture) sufficient to pay the Purchase Price or Fundamental Change Repurchase Price, as the case may be, of all Notes or portions thereof to be purchased as of the Purchase Date or repurchased as of the Fundamental Change Repurchase Date, as the case may be, is deposited with the Paying Agent on the Business Day following the Purchase Date or the Fundamental Change Repurchase Date, as the case may be, Original Issue Discount and cash interest shall cease to accrue on such Notes (or portions thereof) immediately after such Purchase Date or Fundamental Change Repurchase Date, as the case may be, whether or not such Notes have been delivered to the Paying Agent, and the Holder thereof shall have no other rights as such (other than the right to receive the Purchase Price or Fundamental Change Repurchase Price, as the case may be, upon surrender of such Note). 7. Notice of Redemption. Notice of redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed at the Holder's registered address. If money sufficient to pay the Redemption Price of all Notes (or portions thereof) to be redeemed on the Redemption Date is deposited with the Paying Agent prior to or on the Redemption Date, immediately after such Redemption Date Original Issue Discount ceases to accrue on such Notes or portions thereof. Notes in denominations larger than $1,000 of Principal Amount at Maturity may be redeemed in part but only in integral multiples of $1,000 of Principal Amount at Maturity. 8. Conversion. Subject to the next two succeeding sentences, a Holder of a Note may convert it into Class A Common Stock of the Company at any time before the close of business on February 23, 2021. If the Note is called for redemption, the Holder may convert it at any time before the close of business on the Redemption Date. A Note in respect of which a Holder has delivered a Purchase Notice or Fundamental Change Repurchase Notice exercising the option of such Holder to require the Company to purchase such Note may be converted only if such notice of exercise is withdrawn in accordance with the terms of the Indenture. The initial Conversion Rate is 11.8135 shares of Class A Common Stock per $1,000 Principal Amount at Maturity, subject to adjustment in certain events described in the Indenture. The Company will deliver cash or a check in lieu of any fractional share of Class A Common Stock. In the event the Company exercises its option pursuant to the Indenture to have interest in lieu of Original Issue Discount and cash interest accrue on the Note following a Tax Event, the Holder will be entitled on conversion to receive the same number of shares of Class A Common Stock such Holder would have received if the Company had not exercised such option. If the Company exercises A-2-8 84 such option, Notes surrendered for conversion during the period from the close of business on any Regular Record Date next preceding any Interest Payment Date to the opening of business of such Interest Payment Date (except Notes to be redeemed on a date within such period or on the next Interest Payment Date) must be accompanied by payment of an amount equal to the interest thereon that the registered Holder is to receive. Except where Notes surrendered for conversion must be accompanied by payment as described above, no interest on converted Notes will be payable by the Company on any Interest Payment Date subsequent to the date of conversion. To convert a Note, a Holder must (1) complete and manually sign the conversion notice below (or complete and manually sign a facsimile of such notice) and deliver such notice to the Conversion Agent, (2) surrender the Note to the Conversion Agent, (3) furnish appropriate endorsements and transfer documents if required by the Conversion Agent, the Company or the Trustee, if required and (4) pay any transfer or similar tax, if required. A Holder may convert a portion of a Note if the Principal Amount at Maturity of such portion is $1,000 or an integral multiple of $1,000. No payment or adjustment will be made for dividends on, or other distributions with respect to, the Class A Common Stock except as provided in the Indenture. On conversion of a Note, that portion of accrued Original Issue Discount attributable to the period from the Issue Date to, but excluding, the Conversion Date and (except as provided below) that portion of accrued cash interest attributable to the period from the last Interest Payment Date (or, if no Interest Payment Date has occurred, from the Issue Date) to, but excluding, the Conversion Date (or, if the Company has exercised the option provided for in paragraph 10 hereof, that portion of accrued interest attributable to the period from the later of (x) the date of such exercise and (y) the most recent Interest Payment Date following the date of such exercise to, but excluding, the Conversion Date) with respect to the converted Note shall not be cancelled, extinguished or forfeited, but rather shall be deemed to be paid in full to the Holder thereof through the delivery of the Class A Common Stock (together with the cash payment, if any, in lieu of fractional shares) and/or cash, if any, in exchange for the Note being converted pursuant to the terms hereof; and such cash, if any, and the fair market value of such shares of Class A Common Stock (together with any such cash payment in lieu of fractional shares) shall be treated as issued, to the extent thereof, first in exchange for Original Issue Discount and cash interest (or interest, if the Company has exercised its option provided for in paragraph 10 hereof) accrued to, but excluding, the Conversion Date, and the balance, if any, of such cash and/or the fair market value of such Class A Common Stock (together with any such cash payment in lieu of fractional shares) shall be treated as issued in exchange for the Issue Price of the Note being converted pursuant to the provisions hereof. Notwithstanding the foregoing, accrued but unpaid interest will be payable upon conversion of Notes made concurrently with or after acceleration of Notes following an Event of Default. The Conversion Rate will be adjusted for dividends or distributions on Class A Common Stock payable in Class A Common Stock or other Capital Stock; subdivisions, combinations or certain reclassifications of Class A Common Stock; distributions to all holders of Class A Common Stock of certain rights to purchase Class A Common Stock for a period expiring within 60 days at a price per share less than the Sale Price at the Time of Determination; and distributions to such holders of assets or debt securities of the Company or certain rights to purchase securities of the Company (excluding certain cash dividends or distributions). However, no adjustment need be made if Noteholders A-2-9 85 may participate in the transaction or in certain other cases. The Company from time to time may voluntarily increase the Conversion Rate. If the Company is a party to a consolidation, merger or binding share exchange or a transfer of all or substantially all of its assets, or upon certain distributions described in the Indenture, the right to convert a Note into Class A Common Stock may be changed into a right to convert it into securities, cash or other assets of the Company or another person. 9. Conversion Arrangement on Call for Redemption. Any Notes called for redemption, unless surrendered for conversion before the close of business on the Redemption Date, may be deemed to be purchased from the Holders of such Notes at an amount not less than the Redemption Price, by one or more investment bankers or other purchasers who may agree with the Company to purchase such Notes from the Holders, to convert them into Class A Common Stock of the Company and to make payment for such Notes to the Trustee in trust for such Holders. 10. Tax Event. (a) From and after (i) the date (the "Tax Event Date") of the occurrence of a Tax Event and (ii) the date the Company exercises such option, whichever is later (the "Option Exercise Date"), at the option of the Company, interest in lieu of future Original Issue Discount and regular cash interest shall accrue at the rate of 2.25% per annum on a principal amount per Note (the "Restated Principal Amount") equal to the Issue Price plus Original Issue Discount accrued through the Option Exercise Date and shall be payable semiannually on each Interest Payment Date to Holders of record at the close of business on the Regular Record Date immediately preceding such Interest Payment Date. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months and will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from the Option Exercise Date. (b) Cash interest on any Note that is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the person in whose name that Note is registered at the close of business on the Regular Record Date for such cash interest at the office or agency of the Company maintained for such purpose. Each installment of cash interest on any Note shall be paid in same-day funds by transfer to an account maintained by the payee located inside the United States. (c) Except as otherwise specified with respect to the Notes, any Defaulted Interest on any Note shall forthwith cease to be payable to the registered Holder thereof on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company as provided for in Section 402 of the Supplemental Indenture and Section 2.17 of the Original Indenture. 11. Denominations; Transfer; Exchange. The Notes are in fully registered form, without coupons, in denominations of $1,000 of Principal Amount at Maturity and integral multiples of $1,000. A Holder may transfer or exchange Notes in accordance with the Indenture. The Registrar may require a Holder, among other things, to furnish A-2-10 86 appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not transfer or exchange any Notes selected for redemption (except, in the case of a Note to be redeemed in part, the portion of the Note not to be redeemed) or any Notes in respect of which a Purchase Notice or Fundamental Change Repurchase Notice has been given and not withdrawn (except, in the case of a Note to be purchased in part, the portion of the Note not to be purchased) or any Notes for a period of 15 days before the mailing of a notice of redemption of Notes to be redeemed. 12. Persons Deemed Owners. The registered Holder of this Note may be treated as the owner of this Note for all purposes. 13. Unclaimed Money or Securities. The Trustee and the Paying Agent shall return to the Company upon written request any money or securities held by them for the payment of any amount with respect to the Notes that remains unclaimed for two years, subject to applicable unclaimed property law. After return to the Company, Holders entitled to the money or securities must look to the Company for payment as general creditors unless an applicable abandoned property law designates another person. 14. Amendment; Waiver. Subject to certain exceptions set forth in the Indenture, (i) the Indenture or the Notes may be amended with the written consent of the Holders of at least a majority in aggregate Principal Amount at Maturity of the Notes at the time Outstanding and (ii) certain Defaults may be waived with the written consent of the Holders of a majority in aggregate Principal Amount at Maturity of the Notes at the time Outstanding. Subject to certain exceptions set forth in the Indenture, without the consent of any Noteholder, the Company and the Trustee may amend the Indenture or the Notes to cure any ambiguity, omission, defect or inconsistency, or to comply with certain provisions of the Indenture, to provide for uncertificated Notes in addition to or in place of certificated Notes or to make any change that does not adversely affect the rights of any Noteholder, or to comply with any requirement of the SEC in connection with the qualification of the Indenture under the TIA, or as necessary in connection with the registration of the Notes under the Securities Act or to make any change that does not adversely affect the rights of any Holders. 15. Defaults and Remedies. Under the Indenture, Events of Default include (i) default in the payment of the Principal Amount at Maturity (or, if the Notes have been converted to semiannual coupon Notes following a Tax Event, the Restated Principal Amount), Issue Price plus accrued Original Issue Discount, Redemption Price, Purchase Price or Fundamental Change Repurchase Price on any Note when the same becomes due and payable at its Stated Maturity, upon redemption, upon declaration, when due for purchase by the Company or otherwise; (ii) default in the payment of any cash interest upon any Note when such interest becomes due and payable, and such default in payment of interest shall continue for 30 days; A-2-11 87 (iii) failure by the Company to deliver shares of Class A Common Stock (together with cash in lieu of fractional shares), or cash instead, when such Class A Common Stock (or cash in lieu of fractional shares), or cash instead, is required to be delivered upon conversion of a Note and such failure continues for 10 days; (iv) failure by the Company to comply with any of its agreements in the Notes or the Indenture covering mergers and sales of assets; (v) failure by the Company to comply with any of its obligations or agreements under the Indenture with respect to the Notes and such failure continues for 60 days after receipt by the Company of a Notice of Default, provided that this provision does not apply where the Indenture specifically provides otherwise; (vi) nonpayment of the Indebtedness of the Company or any Restricted Subsidiary within any applicable grace period after final maturity or acceleration of such Indebtedness by its holders because of a default and the total amount of such unpaid or accelerated Indebtedness exceeds 5% of the aggregate outstanding principal amount of all Indebtedness of the Company and the Restricted Subsidiaries; and (vii) certain events of bankruptcy, insolvency or reorganization affecting the Company. If an Event of Default occurs and is continuing, the Trustee, or the Holders of at least 25% in aggregate Principal Amount at Maturity of the Notes at the time Outstanding, may declare all the Notes to be due and payable immediately. Certain events of bankruptcy or insolvency are Events of Default which will result in the Notes becoming due and payable immediately upon the occurrence of such Events of Default. Noteholders may not enforce the Indenture or the Notes except as provided in the Indenture. The Trustee may refuse to enforce the Indenture or the Notes unless it receives reasonable indemnity or security. Subject to certain limitations, Holders of a majority in aggregate Principal Amount at Maturity of the Notes at the time Outstanding may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Noteholders notice of any continuing Default (except a Default in payment of amounts specified in clause (i) or (ii) above) if it determines that withholding notice is in their interests. 16. Trustee Dealings with the Company. Subject to certain limitations imposed by the TIA, the Trustee under the Indenture, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with and collect obligations owed to it by the Company or its Affiliates and may otherwise deal with the Company or its Affiliates with the same rights it would have if it were not Trustee. 17. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Note, each Noteholder waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. 18. Authentication. This Note shall not be valid until an authorized signatory of the Trustee manually signs the Trustee's Certificate of Authentication on the other side of this Note. A-2-12 88 19. Abbreviations. Customary abbreviations may be used in the name of a Noteholder or an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the entireties), JT TEN (=joint tenants with right of survivorship and not as tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors Act). 20. GOVERNING LAW. THE INDENTURE AND THIS NOTE WILL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. The Company will furnish to any Noteholder upon written request and without charge a copy of the Indenture which has in it the text of this Note in larger type. Requests may be made to: Cox Communications, Inc. Treasurer 1400 Lake Hearn Drive NE Atlanta, Georgia 30319 A-2-13 89 ASSIGNMENT FORM If you want to assign this Note, fill in the form below and have your signature guaranteed: I or we assign and transfer this Note to: ================================================================================ - -------------------------------------------------------------------------------- (Print or type name, address and zip code and social security or tax ID number of assignee) and irrevocably appoint _____________________________________ agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Date: Signed: ----------------------- ------------------------ (Sign exactly as your name appears on the other side of this Note) Signature Guarantee:________________________________ FORM OF CONVERSION NOTICE If you want to convert this Note for Class A Common Stock, check the box: [ ] To convert only part of this Note, state the Principal Amount at Maturity to be converted (which must be $1,000 or an integral multiple of $1,000): $---------------------------------- If you want the Class A Common Stock certificate made out in another person's name, fill in the form below: - -------------------------------------------------------------------------------- (Insert other person's social security or tax ID no.) ================================================================================ - -------------------------------------------------------------------------------- (Print or type other person's name, address and zip code) 1. The undersigned understands and acknowledges (or if the undersigned is acting for the account of another person, such person has confirmed to the undersigned that it acknowledges) that the shares of Class A Common Stock issuable upon conversion of the Notes have not been registered under the Securities Act of 1933 (the "Act") or any other applicable securities law, are being offered for resale in transactions not requiring registration under the Act and, unless so registered, may not be offered, sold or otherwise A-2-14 90 transferred except in compliance with the registration requirements of the Act or any other applicable securities law, pursuant to an exemption therefrom or in a transaction not subject thereto and in each case in compliance with the conditions for transfer set forth in paragraph (3) below. 2. The undersigned certifies that either: A. it is a qualified institutional buyer (as defined in Rule 144A under the Act), and at the time of issuance of the shares of Class A Common Stock referred to above, the undersigned (or one or more qualified institutional buyers for whose account the undersigned is acting) will be the beneficial owner of the shares of Class A Common Stock, OR B. the undersigned is a broker-dealer acting for the account of its customer; its customer has confirmed to the undersigned that it is a qualified institutional buyer and either (i) at the time of issuance of the shares of Class A Common Stock referred to above, it will be the beneficial owner of the shares of Class A Common Stock, or (ii) it is acting for the account of a qualified institutional buyer that, at the time of issuance of the shares of Class A Common Stock referred to above, will be the beneficial owner of the shares of Class A Common Stock, OR C. the undersigned is outside the United States and is not a U.S. person (as defined in Regulation S) and is not acting for the account or benefit of a U.S. person. OR D. the undersigned is an institutional "accredited investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Act and is acquiring the shares of Class A Common Stock referred to above for its own account, or for the account of such an institutional "accredited investor," for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Act and agrees to provide the Transfer Agent and Registrar with respect to the Class A Common Stock and Cox Communications, Inc. with such opinions and further certifications as they may require. 3. The undersigned agrees (or if it is acting for the account of another person, such person has confirmed to it that such person agrees) that the undersigned (or such person) will offer, sell, pledge or otherwise transfer the shares of Class A Common Stock prior to the Resale Restriction Termination Date only (a) to the Company or any subsidiary thereof, (b) for so long as A-2-15 91 shares of Class A Common Stock are eligible for resale pursuant to Rule 144A, to a person the undersigned reasonably believes (or such person and anyone acting on such person's behalf reasonably believes) is a qualified institutional buyer as defined in Rule 144A under the Act that purchases for its own account or for the account of a qualified institutional buyer to which notice is given that the transfer is being made in reliance on Rule 144A, (c) if the undersigned is a qualified institutional buyer or an institutional "accredited investor" within the meaning of subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Act, to such an institutional "accredited investor" that is acquiring the Note for its own account, or for the account of such an institutional "accredited investor," for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Act, (d) in an offshore transaction in accordance with Rule 904 of Regulation S under the Act, (e) pursuant to a registration statement which has been declared effective under the Act or (f) pursuant to any other available exemption from registration under the Act, including under Rule 144, if available, subject to the Company's and the Transfer Agent and Registrar's right prior to any such offer, sale or transfer pursuant to clause (c), (d) or (f) to require the delivery of an opinion of counsel, certification and/or other information satisfactory to each of them. The undersigned agrees not to, directly or indirectly, engage in any hedging transactions with regard to the shares of Class A Common Stock except as permitted by the Securities Act. Date: Signed: ---------------------- ----------------------- (Sign exactly as your name appears on the other side of this Note) Signature Guarantee:________________________________ A-2-16 92 EXHIBIT B-1 Transfer Certificate In connection with any transfer of any of the Securities within the period prior to the expiration of the holding period applicable to the sales thereof under Rule 144(k) under the Securities Act of 1933, as amended (the "Securities Act") (or any successor provision), the undersigned registered owner of this Security hereby certifies with respect to $____________ Principal Amount at Maturity of the above-captioned securities presented or surrendered on the date hereof (the "Surrendered Securities") for registration of transfer, or for exchange or conversion where the securities deliverable upon such exchange or conversion are to be registered in a name other than that of the undersigned registered owner (each such transaction being a "transfer"), that such transfer complies with the restrictive legend set forth on the face of the Surrendered Securities for the reason checked below: [ ] A transfer of the Surrendered Securities is made to the Company or any subsidiaries; or [ ] The transfer of the Surrendered Securities complies with Rule 144A under the U.S. Securities Act of 1933, as amended (the "Securities Act"); or [ ] The transfer of the Surrendered Securities is to an institutional accredited investor, as described in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act; or [ ] The transfer of the Surrendered Securities is pursuant to an effective registration statement under the Securities Act, or [ ] The transfer of the Surrendered Securities is pursuant to an offshore transaction in accordance with Rule 904 of Regulation S under the Securities Act; or [ ] The transfer of the Surrendered Securities is pursuant to another available exemption from the registration requirement of the Securities Act. and unless the box below is checked, the undersigned confirms that, to the undersigned's knowledge, such Securities are not being transferred to an "affiliate" of the Company as defined in Rule 144 under the Securities Act (an "Affiliate"). [ ] The transferee is an Affiliate of the Company. DATE: -------------------- ------------------------------------ Signature(s) (If the registered owner is a corporation, partnership or fiduciary, the title of the Person signing on behalf of such registered owner must be stated.) B-1-1 93 EXHIBIT B-2 Form of Letter to be Delivered by Accredited Investors Cox Communications, Inc. 1400 Lake Hearn Drive, NE Atlanta, Georgia 30319 Attention: Treasurer The Bank of New York, as Registrar 101 Barclay Street New York, New York 10286 Attention: Corporate Trust Office Dear Sirs: We are delivering this letter in connection with the proposed transfer of $_____________ principal amount of the Convertible Senior Notes due 2021 (the "Notes") of Cox Communications, Inc. (the "Company"), which are convertible into shares of Class A Common Stock of the Company (the "Common Stock"). We hereby confirm that: (i) we are an "accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act of 1933, as amended (the "Securities Act"), or an entity in which all of the equity owners are accredited investors within the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act (an "Institutional Accredited Investor"); (ii) the purchase of Notes by us is for our own account or for the account of one or more other Institutional Accredited Investors or as fiduciary for the account of one or more trusts, each of which is an "accredited investor" within the meaning of Rule 501(a)(7) under the Securities Act and for each of which we exercise sole investment discretion or (B) we are a "bank," within the meaning of Section 3(a)(2) of the Securities Act, or a "savings and loan association" or other institution described in Section 3(a)(5)(A) of the Securities Act that is acquiring Notes as fiduciary for the account of one or more institutions for which we exercise sole investment discretion; (iii) we will acquire Notes having a minimum principal amount of not less than $100,000 for our own account or for any separate account for which we are acting; (iv) we have such knowledge and experience in financial and business matters that we are capable of evaluating the merits and risks of purchasing Notes; and (v) we are not acquiring Notes with a view to distribution thereof or with any present intention of offering or selling Notes or the Common Stock issuable upon conversion thereof, except as permitted below; provided B-2-1 94 that the disposition of our property and property of any accounts for which we are acting as fiduciary shall remain at all times within our control. We understand that the Notes were originally offered and sold in a transaction not involving any public offering within the United States within the meaning of the Securities Act and that the Notes and the shares of Common Stock issuable upon conversion thereof have not been registered under the Securities Act, and we agree, on our own behalf and on behalf of each account for which we acquire any Notes, that: (vi) we will offer, sell or otherwise transfer such Notes, or any beneficial interest therein, prior to the date which is two years after the later of the date of original issuance of the Notes and the last date on which the Company or an affiliate of the Company was the owner of the Notes or any beneficial interest therein (or any predecessor of the Notes) only (1) to the Company or any subsidiary thereof, or (2) for as long as the Notes are eligible for resale pursuant to Rule 144A, to a person we reasonably believe is a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) that purchases for its own account or for the account of a qualified institutional buyer to which notice is given that the transfer is being made in reliance on Rule 144A, or (3) to an Institutional Accredited Investor that is acquiring the Note for its own account, or for the account of such Institutional Accredited Investor for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act, or (4) pursuant to a registration statement which has been declared effective under the Securities Act, or (5) outside the United States to non-U.S. persons in an offshore transaction in accordance with Rule 903 or 904 of Regulation S under the Securities Act, or (6) pursuant to another available exemption from registration under the Securities Act, including under Rule 144, if available, and, in each case, in accordance with any applicable securities laws of any State of the United States or any other applicable jurisdiction and in accordance with and subject to the legends set forth on the Notes; and (vii) we will offer, sell or otherwise transfer any Common Stock delivered by the Company upon the conversion of any Notes, or any beneficial interest therein, prior to the date which is two years after the later of the date of original issuance of the Notes and the last date on which the Company or any affiliate of the Company was the owner of the Common Stock, the Notes upon conversion of which such Common Stock was issued or any beneficial interest therein (or any predecessor of such securities), only (1) to the Company or any subsidiary thereof, or (2) for as long as the shares of Common Stock are eligible for resale pursuant to Rule 144A, to a person we reasonably believe is a qualified institutional buyer that purchases for its own account or for the account of a qualified institutional buyer to which notice is given that the transfer is being made in reliance on Rule 144A, or (3) if we are a qualified institutional buyer or an Institutional Accredited Investor, to an Institutional Accredited Investor that is acquiring the shares of Common Stock for its own account, or for the account of such Institutional Accredited Investor for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act, or (4) in an offshore transaction in accordance with Rule 904 of Regulation S under the Securities Act, or (5) pursuant to a registration statement B-2-2 95 which has been declared effective under the Securities Act, or (6) pursuant to another available exemption from registration under the Securities Act, including under Rule 144, if available and, in each case, in accordance with any applicable securities laws of any State of the United States or any other applicable jurisdiction and in accordance with and subject to the legends set forth on the certificates representing the Common Stock. We further agree to provide any person purchasing any of the shares of Common Stock from us, other than pursuant to clause (vi)(5) or (vii)(5) above, a notice advising such purchaser that resales of such shares of Common Stock are restricted as stated herein. We understand that the trustee or the transfer agent, as the case may be, for the shares of Common Stock will not be required to accept for registration of transfer any shares of Common Stock pursuant to clause (vi)(3), (4) or (6) or clause (vii)(3), (4) or (6) above except upon the delivery of an opinion of counsel, certification and/or other information satisfactory to each of them that the foregoing restrictions on transfer have been complied with. The undersigned agrees not to, directly or indirectly, engage in any hedging transactions with regard to the shares of Common Stock except as permitted by the Securities Act. We further understand that any shares of Common Stock will be in the form of definitive physical certificates and that such certificates will bear a legend reflecting the substance of paragraph (v) or (vi), as applicable, other than certificates representing shares of Common Stock transferred pursuant to clauses (vi)(5) or (vii)(5) above. We acknowledge that the Company, others and you will rely upon our confirmations, acknowledgments and agreements set forth herein, and we agree to notify you promptly in writing if any of our representations or warranties herein ceases to be accurate and complete. THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK. (Name of Purchaser) By: ------------------------------- Name: Title: Address: B-2-3 EX-13 3 g67591ex13.txt PORTIONS OF THE 2000 SUMMARY ANNUAL REPORT 1 EXHIBIT 13 SHAREHOLDER INFORMATION CORPORATE HEADQUARTERS Cox Communications, Inc. 1400 Lake Hearn Dr., NE Atlanta, GA 30319 404-843-5000 www.cox.com STOCK DATA Cox's Class A Common Stock is traded on the New York Stock Exchange. Ticker symbol: COX. Daily newspaper stock table listing: CoxComm A. As of February 1, 2001, there were 6,290 shareholders of record of Cox's Class A Common Stock, two shareholders of record of Class C Common Stock and three shareholders of record of Preferred Stock. There is no established trading market for Cox's Class C Common Stock or Preferred Stock. There have been no stock dividends paid on any of Cox's equity securities. Cox does not intend to pay cash dividends in the foreseeable future. See "Management's Discussion and Analysis - Liquidity and Capital Resources - Other" in the company's Annual Report on Form 10-K. QUARTERLY MARKET INFORMATION (Prices prior to second quarter 1999 have been adjusted to reflect a two-for-one stock split effective in May 1999.)
Class A Common Stock High Low 2000 First Quarter $58.38 $41.25 Second Quarter 51.50 37.31 Third Quarter 47.88 31.69 Fourth Quarter 48.00 36.00 1999 First Quarter $41.28 $32.00 Second Quarter 44.44 32.78 Third Quarter 42.25 34.25 Fourth Quarter 52.00 38.69
TRANSFER AGENT AND REGISTRAR First Chicago Trust Company of New York Division of Equiserve P.O. Box 2500 Jersey City, NJ 07303-2500 800-519-3111 www.equiserve.com e-mail: fctc@em.fcnbd.com ANNUAL MEETING OF SHAREHOLDERS May 17, 2001, 9 a.m. Cox Corporation Headquarters 1400 Lake Hearn Dr., NE Atlanta, GA 30319 FORM 10-K Cox Communications' Annual Report on Form 10-K as filed with the Securities and Exchange Commission is available free upon written request to: 2 Investor Relations Department Cox Communications, Inc. 1400 Lake Hearn Dr., NE Atlanta, GA 30319 404-843-5000, Ext 6454 COMPANY INFORMATION Cox Investor Hotline: 888-COX-NYSE (toll-free) (888-269-6973) All communications regarding stock transfers, lost certificates, or account changes should be directed to the transfer agent, First Chicago Trust Company of New York, a division of Equiserve, 800-519-3111. Shareholders of record may access their accounts via the Internet to obtain share balance, current market price of shares, historical stock prices and the total value of their investment. For information on how to access this secure site, call toll-free: 877-843-9327. For other information, contact one of the following: Analysts/Investors: Frank Loomans, Manager of Finance, 404-843-5377, fax: 404-843-5939, frank.loomans@cox.com News Media: Amy Cohn, Director of Corporate Communication, 404-843-5769, fax: 404-843-5777, amy.cohn@cox.com INDEPENDENT AUDITORS Deloitte & Touche LLP 191 Peachtree St., Suite 1500 Atlanta, GA 30303-1924 404-220-1500 COX Communications (C)2001 Cox Communications, Inc. All rights reserved. Cox, Cox Communications, the Cox Communications logo, Cox Digital Telephone, Cox Digital Cable, Cox Express, Cox Business Services and Now You're Living are registered service marks or service marks of Cox Communications, Inc. @Home Network is a service mark of AtHome.Net. The @ ball is a registered trademark of At Home Corporation. Road Runner is a registered service mark of Time Warner Entertainment Company, L.P. EX-21 4 g67591ex21.txt SUBSIDIARIES OF COX COMMUNICATIONS, INC. 1 EXHIBIT 21 Subsidiaries of Registrant
State of Name of Subsidiary Incorporation =============================================================================== ============= Arizona NewsChannel, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cable Network Services, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cablecoupons, Inc. Texas - ------------------------------------------------------------------------------- ------------- CableRep, Inc. Delaware - ------------------------------------------------------------------------------- ------------- Cablevision of Arizona Partner, Inc. Colorado - ------------------------------------------------------------------------------- ------------- Cablevision of Leander, Inc. Texas - ------------------------------------------------------------------------------- ------------- Cablevision of Oklahoma Partner, Inc. Colorado - ------------------------------------------------------------------------------- ------------- Cablevision of Pflugerville, Inc. Texas - ------------------------------------------------------------------------------- ------------- Cablevision of Texas Partner, Inc. Colorado - ------------------------------------------------------------------------------- ------------- Cablevision of Utah Partner, Inc. Colorado - ------------------------------------------------------------------------------- ------------- CCI PCS, Inc. Delaware - ------------------------------------------------------------------------------- ------------- Community Tel Nevada - ------------------------------------------------------------------------------- ------------- Cox @Home, Inc. Delaware - ------------------------------------------------------------------------------- ------------- Cox Animal Planet, Inc. Delaware - ------------------------------------------------------------------------------- ------------- Cox Arizona Telcom, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cox Business Services, Inc. Delaware - ------------------------------------------------------------------------------- ------------- Cox California Telcom, L.L.C. (formerly Cox California Telcom II, L.L.C.) Delaware - ------------------------------------------------------------------------------- ------------- Cox Classic Cable, Inc. Delaware - ------------------------------------------------------------------------------- ------------- Cox Communications Baton Rouge II, Inc. Delaware - ------------------------------------------------------------------------------- ------------- Cox Communications BTP Holdings, Inc. ( formerly Cox Teleport Partners, Inc.) Delaware - ------------------------------------------------------------------------------- ------------- Cox Communications Central II, Inc. Delaware - ------------------------------------------------------------------------------- ------------- Cox Communications E.T.E. Inc. Delaware - ------------------------------------------------------------------------------- ------------- Cox Communications Florida (Partnership) (formerly Cox Cable New York) New York - ------------------------------------------------------------------------------- ------------- Cox Communications Gulf Coast, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cox Communications Hampton Roads, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cox Communications Holdings, Inc. Delaware - ------------------------------------------------------------------------------- ------------- Cox Communications Kansas, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cox Communications Las Vegas, Inc. Delaware - ------------------------------------------------------------------------------- ------------- Cox Communications NCC, Inc. Delaware - ------------------------------------------------------------------------------- ------------- Cox Communications New York City, Inc. New York - ------------------------------------------------------------------------------- ------------- Cox Communications Omaha, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cox Communications Payroll, Inc. California - ------------------------------------------------------------------------------- ------------- Cox Communications Pensacola, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cox Communications Services, Inc. Delaware - ------------------------------------------------------------------------------- ------------- Cox Communications Shopping Services, Inc. Delaware - ------------------------------------------------------------------------------- ------------- Cox Communications Telecom, Inc. Virginia - ------------------------------------------------------------------------------- ------------- Cox Connecticut Telcom, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cox Consumer Information Network, Inc. Delaware - ------------------------------------------------------------------------------- ------------- Cox DC Radio, Inc. Delaware - ------------------------------------------------------------------------------- -------------
2 Cox Fibernet Oklahoma, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cox Fibernet Virginia, Inc. Delaware - ------------------------------------------------------------------------------- ------------- Cox Florida Telcom, L.P. (1% Member - Cox Telcom Partners, Inc., general partner; 99% Member - CoxCom, Inc., limited partner) Delaware - ------------------------------------------------------------------------------- ------------- Cox Georgia Telcom, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cox Government Services, Inc. Delaware - ------------------------------------------------------------------------------- ------------- Cox Home Video North, Inc. Delaware - ------------------------------------------------------------------------------- ------------- Cox Iowa Telcom, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cox Kansas Telcom, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cox Louisiana Telcom, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cox Missouri Telcom, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cox Nebraska Telcom, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cox Nevada Telcom, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cox Oklahoma Telcom, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cox RHINOS Trust Delaware - ------------------------------------------------------------------------------- ------------- Cox Rhode Island Telcom, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cox San Diego SPE, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Cox Telcom Partners, Inc. Delaware - ------------------------------------------------------------------------------- ------------- Cox Texas Telcom, L.P. (1% Member - Cox Telcom Partners, Inc., general partner; 99% Member - CoxCom, Inc., limited partner) Delaware - ------------------------------------------------------------------------------- ------------- Cox Trust I Delaware - ------------------------------------------------------------------------------- ------------- Cox Trust II Delaware - ------------------------------------------------------------------------------- ------------- Cox Virginia Telcom, Inc. Virginia - ------------------------------------------------------------------------------- ------------- CoxCom, Inc. Delaware - ------------------------------------------------------------------------------- ------------- CP Arizona I, LLC Delaware - ------------------------------------------------------------------------------- ------------- CP Arizona II, LLC Delaware - ------------------------------------------------------------------------------- ------------- CP Nevada, LLC Delaware - ------------------------------------------------------------------------------- ------------- CSI Partner II, Inc. Colorado - ------------------------------------------------------------------------------- ------------- CSI Partner, Inc. Colorado - ------------------------------------------------------------------------------- ------------- Fisher Communications Associates, L.L.C. Colorado - ------------------------------------------------------------------------------- ------------- Hospitality Network, Inc. Nevada - ------------------------------------------------------------------------------- ------------- Local News on Cable, L.L.C. Virginia - ------------------------------------------------------------------------------- ------------- MAS ARIZONA, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- MT Associates, Inc. (formerly Intermedia Technologies, Inc.) Texas - ------------------------------------------------------------------------------- ------------- News Channel 15, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- News Channel, L.L.C. Oklahoma - ------------------------------------------------------------------------------- ------------- Outdoor Life Network, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Padres CableRep Advertising Company, G.P. California - ------------------------------------------------------------------------------- ------------- Peak Cablevision, L.L.C. (former name Premier Media, L.L.C. - 09/26/1997) Colorado - ------------------------------------------------------------------------------- ------------- Primetel of Nevada Nevada - ------------------------------------------------------------------------------- ------------- Rhode Island News Channel, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Speedvision Network, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Sun Valley Cablevision, Inc. Idaho - ------------------------------------------------------------------------------- ------------- TAL Financial Corporation Nevada - ------------------------------------------------------------------------------- ------------- TC Systems Partner, Inc. Colorado - ------------------------------------------------------------------------------- ------------- TCA Cable Partners Delaware - ------------------------------------------------------------------------------- ------------- TCA Cable Partners II (50.39% GP interest held by TCIAmerican Cable Holdings IV, L.P;49.61% GP interest held by TCAHoldings II, L.P.) Delaware - ------------------------------------------------------------------------------- ------------- TCA Cable TV of Missouri, Inc. Texas - ------------------------------------------------------------------------------- -------------
3 TCA Communications, Inc. Texas - ------------------------------------------------------------------------------- ------------- TCA Holdings II, L.P. Texas - ------------------------------------------------------------------------------- ------------- TCA Holdings, L.P. Texas - ------------------------------------------------------------------------------- ------------- TCA Interests II, Inc. Nevada - ------------------------------------------------------------------------------- ------------- TCA Interests, L.L.C. Texas - ------------------------------------------------------------------------------- ------------- TCA Management Company Texas - ------------------------------------------------------------------------------- ------------- TCI American Cable Holdings III, L.P. Colorado - ------------------------------------------------------------------------------- ------------- TCI American Cable Holdings IV, L.P. Colorado - ------------------------------------------------------------------------------- ------------- TCI Cablevision of Arizona, Inc. Arizona - ------------------------------------------------------------------------------- ------------- TCI of Kansas Partner, Inc. Colorado - ------------------------------------------------------------------------------- ------------- Telecable Associates, Inc. Texas - ------------------------------------------------------------------------------- ------------- Telecommunications of Nevada, L.L.C. Delaware - ------------------------------------------------------------------------------- ------------- Teleservice Corporation of America Texas - ------------------------------------------------------------------------------- ------------- Texas Community Antennas, Inc. Texas - ------------------------------------------------------------------------------- ------------- TMJV, Inc. Delaware - ------------------------------------------------------------------------------- ------------- Tulsa Partner, Inc. Colorado - ------------------------------------------------------------------------------- ------------- Video Service Company Ohio - ------------------------------------------------------------------------------- ------------- VPI Communications, Inc. Texas - ------------------------------------------------------------------------------- ------------- Williamson County Cablevision Company Texas - ------------------------------------------------------------------------------- -------------
EX-23 5 g67591ex23.txt CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We hereby consent to the incorporation by reference of our report dated February 6, 2001 (March 6, 2001 as to Note 18) appearing in this Annual Report on Form 10-K of Cox Communications, Inc. for the year ended December 31, 2000, in the following Registration Statements of Cox Communications, Inc. and to the reference to us under the heading "Experts" in the Registration Statements on Form S-3:
Form File No. ---- ----------------- S-8 33-80993 S-8 33-80995 S-8 33-91506 S-8 333-44399 S-8 333-85055 S-8 333-43738 S-3 333-03766 S-3 333-82575 S-3 333-82575-01 S-3 333-82575-02 S-3 333-54450-01
/s/ DELOITTE & TOUCHE LLP Atlanta, Georgia March 16, 2001 -----END PRIVACY-ENHANCED MESSAGE-----