Untitled Document

Recent Acquisitions, Transactions and Investments

Recent Acquisitions
In January 2000, Cox completed the acquisition of cable television systems serving 522,000 customers in Kansas, Oklahoma and North Carolina from Multimedia Cablevision, Inc., in a cash transaction valued at $2.7 billion.
In July 1999, Cox and AT&T entered into a definitive agreement to exchange Cox's 50.3 million shares of AT&T common stock for AT&T subsidiaries that own cable television systems serving approximately 495,000 customers and other assets, including cash. In return for its 50.3 million shares of AT&T common stock, Cox will receive: cable television systems serving Tulsa, Oklahoma (160,000 customers) and Baton Rouge, Louisiana (156,000 customers); the remaining 20% ownership interest in a partnership in which Cox acquired an 80% interest through its merger with TCA Cable TV, Inc.; Peak Cablevision LLC, which has 117,000 customers in Oklahoma, Arkansas, Utah and Nevada; and approximately $750.0 million in other assets, including cash. In March 2000, Cox completed 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 consideration consisting of $1.6 billion in cash, 38.3 million shares of Cox Class A common stock and assumed indebtedness of $540.0 million. Upon completion of the merger, Cox repaid $340.0 million of the assumed TCA debt. Cox also acquired VPI Communications, Inc., an affiliate of TCA, and TCA's interest in two majority owned partnerships in connection with the TCA merger. VPI provides advertising sales and turnkey advertising services to 82 cable television system operators representing more than 3.5 million customers nationwide.
      Also in August 1999, Cox and MediaOne exchanged selected cable television systems serving communities in Massachusetts, Rhode Island and Connecticut. In connection with the transaction, Cox traded cable television systems in Massachusetts, serving more than 54,000 customers, for MediaOne properties in Connecticut and Rhode Island, serving 51,000 customers, and cash. Cox recognized a pre-tax gain of $77.4 million upon completion of this transaction.
      In October 1999, Cox completed the acquisition of cable television systems serving more than 260,000 customers in Fairfax County and Fredericksburg, Virginia, from Media General, Inc., in a cash transaction valued at $1.4 billion.
     Also in October 1999, Cox reorganized its partnership with Time Warner Entertainment Company, L.P., under which Cox acquired control of the cable television system serving Fort Walton Beach, Florida and received $104.5 million and Time Warner acquired control of the cable television system serving Staten Island, New York. Cox recognized a pre-tax gain of $94.8 million in connection with this reorganization.

1998 Acquisitions and Transactions
In June 1998, Cox completed the acquisition of a cable television system serving approximately 115,000 customers in Arizona from Tele-Communications, Inc. in a cash transaction valued at $250.2 million.
In October 1998, Cox completed the acquisition of a cable television system serving approximately 293,000 residential customers and 105,000 hotel units in the greater Las Vegas area, and certain related businesses owned by Prime South Diversified, Inc. for a combination of common and convertible preferred stock and cash with an aggregate value of approximately $1.3 billion, including the refinancing of certain Prime South indebtedness.

Investments

Cox has made substantial investments in cable television programming, telecommunications and technology, and broadband networks. For a summary of Cox's significant investments, see page 30. Significant transactions during 1999 related to Cox's investments are discussed below.
     AT&T Corp. In March 2000, Cox exchanged its 50.3 million shares of AT&T common stock for cable television systems serving approximately 495,000 customers and other assets, including cash.
     Excite@Home. Excite@Home, formerly @Home Corporation, is both an Internet service and content provider and supplier of comprehensive Internet navigation services. Excite@Home provides customers high-speed access to the Internet via a cable modem and the cable television broadband network. In May 1999, @Home Corporation acquired Excite and changed its name to Excite@Home.
     Liberate Technologies, Ltd. Liberate Technologies develops and sells software that enables the delivery of Internet-enhanced content and applications to information appliances, such as cable television set-top boxes, game consoles and personal digital assistants. In May 1999, Cox acquired 1,041,666 shares of Liberate's common stock for $5.0 million. Liberate successfully completed an initial public offering of its common stock in July 1999.
     Sprint PCS. Sprint PCS is a personal communications services provider and an indirect wholly-owned subsidiary of Sprint Corporation. Cox's investment in Sprint PCS is composed of Sprint PCS common stock -- Series 2, convertible preferred stock and warrants. In November 1999, Cox issued 14,375,000 debt securities, called PRIZES, which are indexed to the trading price of Sprint PCS common stock-Series 1 and are exchangeable for cash.
     In December 1999, Cox sold 3.9 million shares of its Sprint PCS common stock for approximately $197.3 million and recognized a pre-tax gain of approximately $165.6 million. Cox sold an additional 16.1 million shares in January and February 2000 and expects to recognize a gain in the first quarter.
     Cox PCS. In May 1999, Cox exercised its right under the Cox Communications PCS, L.P. partnership agreement to transfer its remaining 32.0% equity interest in Cox PCS to Sprint Corporation in exchange for approximately 38.1 million shares of Sprint PCS Common StockÐSeries 2. As a result of this transaction, Cox recognized a pre-tax gain of $908.5 million.
     Telewest Communications plc. In January 1999, Cox sold its 11.9% equity interest in Telewest for $727.9 million in cash and recognized a pre-tax gain of $433.1 million.

Results of Operations

The results of operations discussed below include the effects of the following as of their respective acquisition dates:

the August 1999 merger with TCA;
the August 1999 exchange of selected cable television systems with MediaOne;
the October 1999 acquisition of cable television systems from Media General;
the October 1999 reorganization of Cox's partnership with Time Warner, under which Cox obtained control of the cable television system serving Ft. Walton Beach, Florida;
the April 1998 disposition of Cox's partnership interests and net assets in and operations of PrimeStar Partners, L.P.;
the June 1998 acquisition of cable television systems in Tucson and Sierra Vista, Arizona; and
the October 1998 acquisition of a cable television system in Las Vegas, Nevada.

These transactions are collectively referred to in the discussion below as the 1999 and 1998 transactions.

1999 compared with 1998
Total revenues for the year ended December 31, 1999 were $2,318.1 million, a 35% increase over revenues of $1,716.8 million for the year ended December 31, 1998. Of this increase, 23% relates to increased revenues from the 1999 and 1998 transactions. The remaining 12% increase includes the effects of:

basic and digital customer growth at existing cable television systems;
rate increases, implemented primarily during the fourth quarter 1998, resulting from channel additions, increased programming costs and the pass-through of inflation adjustments;
an increase in pay-per-view revenues due to national boxing events during the first and third quarters of 1999 and an increase in digital pay-per-view revenues;
growth in local and national advertising sales; and
growth in data, commercial telephony and residential telephony product subscriptions.

     Programming costs were $561.3 million for the year ended December 31, 1999, an increase of 38% over the same period in 1998. Of this increase, 25% relates to the 1999 and 1998 transactions. The remaining 13% increase is due to basic and digital customer growth at existing cable television systems, January 1999 programming rate increases, channel additions and the 1999 pay-per-view events discussed above. Plant operations expenses increased 31% to $173.5 million. Of this increase, 19% relates to the 1999 and 1998 transactions. The remaining 12% increase relates to increased plant maintenance and costs related to significant growth of new services at existing cable television systems.
     Marketing costs increased 48% to $147.0 million. Of this increase, 29% relates to the 1999 and 1998 transactions, including the acquisition of VPI as part of the TCA merger. The remaining 19% increase relates to costs associated with the rollout of digital video, high-speed data and telephony services. General and administrative expenses for the year ended December 31, 1999 increased 37% to $535.1 million due to the 1999 and 1998 transactions and costs associated with digital video, high-speed data and telephony services in newly launched markets.
     Depreciation increased to $550.7 million for the year ended December 31, 1999 compared to $373.5 million during the year ended December 31, 1998, due to the 1999 and 1998 transactions and the continued upgrade and rebuild of Cox's broadband network. Amortization increased to $165.0 million for the year ended December 31, 1999 compared to $84.2 million during 1998 due to the 1999 and 1998 transactions. Gain on sale and exchange of cable television systems reflects the $77.4 million pre-tax gain on the August 1999 exchange of cable television systems with MediaOne. Operating income for the year ended December 31, 1999 was $262.9 million, an increase of 31% compared to 1998.
     Interest expense increased to $305.7 million for the year ended December 31, 1999 compared to $223.3 million in 1998 primarily due to an increase in the total debt outstanding. Equity in net losses of affiliated companies was $90.5 million, primarily due to losses associated with Cox PCS.
     Net gain on investments of $1,569.4 million primarily includes:

$433.1 million pre-tax gain on the sale of Cox's interest in Telewest in January 1999;
$908.5 million pre-tax gain on the transfer of Cox's remaining interest in Cox PCS to Sprint Corporation during May 1999 in exchange for approximately 38.1 million shares of SprintÕs PCS common stock -- Series 2;
$94.8 million pre-tax gain in connection with the October 1999 reorganization of Cox's partnership with Time Warner under which Cox acquired control of the cable television system serving Ft. Walton Beach, Florida and received $104.5 million; and
$165.6 million pre-tax gain on the sale of 3.9 million shares of Sprint PCS common stock in December 1999.

Minority interest of $18.6 million primarily represents the coupon distributions with respect to $650.0 million FELINE PRIDES issued by Cox in August 1999 and $500.0 million RHINOS issued by Cox in October 1999. Net income for the year ended December 31, 1999 was $881.9 million as compared to $1,270.7 million for the year ended December 31, 1998.
Operating cash flow (operating income before depreciation, amortization and gain on sale and exchange of cable television systems), a non-GAAP measure of performance, is a commonly used financial analysis tool for measuring and comparing cable television companies in several areas of liquidity, operating performance and leverage. Operating cash flow increased 37% to $901.2 million for the year ended December 31, 1999. The operating cash flow margin (operating cash flow as a percentage of revenues) for the year ended December 31, 1999 was 38.9%, an increase from 38.4% over the year ended December 31, 1998. Operating cash flows should not be considered as an alternative to net income as an indicator of Cox's performance or as an alternative to net cash provided by operating activities as a measure of liquidity.

Liquidity and Capital Resources

Uses of Cash
As part of Cox's ongoing strategic plan, Cox has invested, and will continue to invest, significant amounts of capital to enhance the reliability and capacity of its broadband network in preparation for the offering of new services and to make investments in affiliated companies primarily focused on telephony, programming and communications-related activities.
     During 1999, Cox made capital expenditures of approximately $1.2 billion. These expenditures were primarily directed at upgrading and rebuilding its broadband network for the delivery of high-speed data, digital and telephony. Capital expenditures for 2000 are expected to range between $1.5 billion and $1.7 billion. Capital expenditures for each of 2001 and 2002 are expected to range between $1.3 billion and $1.5 billion and for each of 2003 and 2004 are expected to range between $1.0 billion and $1.2 billion.
     In addition to improvements of existing systems, Cox made strategic investments in businesses focused on telephony, programming and communications-related activities. Investments in affiliated companies of $31.0 million primarily included debt and equity funding for NextLink Nevada. Future funding requirements for investments in affiliated companies are expected to total approximately $20.0 million over the next five years. These capital requirements may vary significantly from the amounts stated above and will depend on numerous factors as many of these affiliates are growing businesses and specific financing requirements will change depending on the evolution of these businesses.
     Payments for the purchases of cable television systems of $3.5 billion primarily represent cash paid in connection with the TCA merger and the acquisition of cable television systems from Media General.
     During 1999, Cox paid $350.0 million towards its revolving credit borrowings and extinguished the remaining balance of $150.0 million on its Floating Rate Reset Notes. Net repayments on commercial paper were $512.4 million.

Sources of Cash
During 1999, Cox generated $404.7 million from operations. Proceeds from the sale of investments of $872.9 million include $727.9 million from the sale of Cox's interest in Telewest in January 1999 and $130.3 million for the sale of 3.9 million shares of Sprint PCS common stock in December 1999. Proceeds on exchange of cable television systems of $114.2 million primarily represent cash received from Time Warner in connection with the reorganization of CoxÕs partnership with Time Warner under which Cox acquired control of the cable television system in Ft. Walton Beach, Florida.
Proceeds from the issuance of debt during 1999 were approximately $3.3 billion, net of discounts, and are composed of the following:

the issuance of senior debt securities with aggregate proceeds of $2.0 billion; and
the issuance of PRIZES with aggregate proceeds of $1.3 billion. The PRIZES are indexed to the trading price of Sprint PCS common stockÐSeries 1 and are exchangeable for cash.

Proceeds from the issuance of common stock are from the issuance of 10.1 million shares of Class A common stock with aggregate proceeds of $350.3 million, net of $12.4 million of offering costs.
Proceeds from the issuance of Cox-obligated capital securities of subsidiary trusts were approximately $1.2 billion, and included the following:

the issuance of FELINE PRIDES by a wholly-owned subsidiary trust, with aggregate proceeds of $650.0 million. Each FELINE PRIDES consists of a unit comprised of:

(1) a three-year forward purchase contract under which the holder is obligated to purchase from Cox new shares of Cox Class A common stock based upon a settlement rate, and

(2) either:
(A) beneficial ownership of a 7% capital security having a stated liquidation amount equal to $50, representing a preferred undivided beneficial interest in the assets of Cox Trust II, a wholly-owned financing subsidiary of Cox Communications, or
(B) a 5% undivided beneficial ownership in a zero coupon U.S. Treasury Security having a principal amount at maturity equal to $1,000; and
the issuance of RHINOS, by a wholly-owned subsidiary trust, to Bank of America with aggregate proceeds of $500.0 million. The RHINOS are long-term auction-rate reset preferred securities of Cox RHINOS Trust.

Other
At December 31, 1999, Cox had approximately $6.4 billion of outstanding indebtedness and $1.2 billion of outstanding Cox-obligated capital securities of subsidiary trusts. In addition, Cox had approximately $5.0 billion available under its revolving credit facilities, shelf registration statements and commercial paper program.
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.