##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One)[x]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2004[ ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to
 Commission File Number 1-6590 
 COMMUNICATIONS  Cox Communications, Inc. (Exact name of registrant as specified in its charter)
 Delaware
    
    58-2112281(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer 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   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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes x No o There were 606,319,354 shares of Class A Common Stock and 27,597,792
shares of Class C Common Stock
outstanding as of October 31, 2004.




---



Cox Communications, Inc.
Form 10-Q
For the Three and Nine Months Ended September 30, 2004 Table of Contents PagePart I  Financial InformationItem 1.
    
    Condensed Consolidated Financial Statements
    
    
    2Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    23Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    32Item 4.
    
    Controls and Procedures
    
    
    34Part II  Other InformationItem 1.
    
    Legal Proceedings
    
    
    34Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3.
    
    Defaults Upon Senior Securities
    
    
    34Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    34Item 5.
    
    Other Information
    
    
    34Item 6.
    
    Exhibits
    
    
    35EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFIACTION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEO AND CFO
  Preliminary Note This quarterly report on Form 10-Q is for the three and nine-month periods
ended September 30, 2004. This quarterly report modifies and supersedes
documents filed prior to this quarterly report. In this quarterly report,
Cox, refers to Cox Communications, Inc. and its subsidiaries, unless the
context requires otherwise. The SEC allows Cox to incorporate by reference
information that Cox files with it, which means that Cox can disclose important
information to you by referring you directly to those documents. Information
incorporated by reference is considered to be part of this quarterly report.
In addition, information that Cox files with the SEC in the future will
automatically update and supersede information contained in this quarterly
report.




---



##### Table of Contents



Part I - Financial Information 
 Item 1. Condensed Consolidated Financial Statements Cox Communications, Inc.Condensed Consolidated Balance Sheets September 30
    
    December 312004
    
    2003(unaudited)(Thousands of Dollars)AssetsCurrent assetsCash
    
    $
    137,313
    
    
    $
    83,841Accounts and notes receivable, less allowance for doubtful
accounts of $26,669 and $26,175
    
    
    383,981
    
    
    
    370,832Other current assets
    
    
    129,241
    
    
    
    131,106Total current assets
    
    
    650,535
    
    
    
    585,779Net plant and equipment
    
    
    7,739,990
    
    
    
    7,907,561Investments
    
    
    58,901
    
    
    
    109,380Intangible assets
    
    
    16,185,669
    
    
    
    15,697,495Other noncurrent assets
    
    
    85,936
    
    
    
    117,361Total assets
    
    $
    24,721,031
    
    
    $
    24,417,576Liabilities and shareholders equityCurrent liabilitiesAccounts payable and accrued expenses
    
    $
    749,833
    
    
    $
    778,708Other current liabilities
    
    
    402,030
    
    
    
    450,553Current portion of long-term debt
    
    
    56,071
    
    
    
    48,344Amounts due to CEI
    
    
    12,581
    
    
    
    3,980Total current liabilities
    
    
    1,220,515
    
    
    
    1,281,585Deferred income taxes
    
    
    6,637,029
    
    
    
    6,388,970Other noncurrent liabilities
    
    
    224,891
    
    
    
    164,070Long-term debt, less current portion
    
    
    6,615,707
    
    
    
    6,963,456Total liabilities
    
    
    14,698,142
    
    
    
    14,798,081Commitments and contingencies (Note 12)Minority interest in equity of consolidated subsidiaries
    
    
    
    
    
    
    139,519Shareholders equitySeries A preferred stock - liquidation preference of $22.1375
per share, $1 par value; 10,000,000 shares of preferred stock
authorized; shares issued and outstanding: 0 and
4,836,372
    
    
    
    
    
    
    4,836Class A common stock, $1 par value; 671,000,000 shares
authorized; shares issued: 610,642,602 and 598,481,602; shares
outstanding: 605,110,097 and 592,958,582
    
    
    610,642
    
    
    
    598,482Class C common stock, $1 par value; 62,000,000 shares
authorized; shares issued and outstanding: 27,597,792
    
    
    27,598
    
    
    
    27,598Additional paid-in capital
    
    
    4,934,737
    
    
    
    4,545,635Retained earnings
    
    
    4,662,966
    
    
    
    4,500,621Accumulated other comprehensive income
    
    
    20
    
    
    
    15,548Class A common stock in treasury, at cost: 5,532,505 and 5,523,020
shares
    
    
    (213,074
    )
    
    
    (212,744
    )Total shareholders equity
    
    
    10,022,889
    
    
    
    9,479,976Total liabilities and shareholders equity
    
    $
    24,721,031
    
    
    $
    24,417,576
 See notes to condensed consolidated financial statements. 2




---



##### Table of Contents



Cox Communications, Inc.
Condensed Consolidated Statements of Operations Three Months
    
    Nine MonthsEnded September 30
    
    Ended September 302004
    
    2003
    
    2004
    
    2003(unaudited)(Thousands of Dollars, excluding share data)Revenues
    
    $
    1,618,059
    
    
    $
    1,460,168
    
    
    $
    4,753,656
    
    
    $
    4,250,389Costs and expensesCost of services (excluding depreciation and amortization)
    
    
    666,924
    
    
    
    617,013
    
    
    
    1,947,367
    
    
    
    1,786,926Selling, general and administrative expenses
    
    
    343,852
    
    
    
    299,693
    
    
    
    1,015,736
    
    
    
    908,432Loss on litigation
    
    
    22,600
    
    
    
    
    
    
    
    22,600
    
    
    
    Depreciation and amortization
    
    
    400,871
    
    
    
    382,053
    
    
    
    1,190,051
    
    
    
    1,130,647Loss (gain) on sale of cable systems
    
    
    
    
    
    
    
    
    
    
    5,021
    
    
    
    (469
    )Operating income
    
    
    183,812
    
    
    
    161,409
    
    
    
    572,881
    
    
    
    424,853Interest expense
    
    
    (96,998
    )
    
    
    (116,593
    )
    
    
    (289,201
    )
    
    
    (370,652
    )(Loss) gain on derivative instruments, net
    
    
    (43
    )
    
    
    4,182
    
    
    
    (97
    )
    
    
    (22,518
    )(Loss) gain on investments, net
    
    
    (204
    )
    
    
    43,674
    
    
    
    28,931
    
    
    
    166,069Equity in net losses of affiliated companies
    
    
    (1,130
    )
    
    
    (3,171
    )
    
    
    (1,325
    )
    
    
    (9,689
    )Loss on extinguishment of debt
    
    
    
    
    
    
    (443,806
    )
    
    
    (7,006
    )
    
    
    (450,069
    )Other, net
    
    
    (1,431
    )
    
    
    75
    
    
    
    (3,198
    )
    
    
    (882
    )Income (loss) before income taxes and
minority interest
    
    
    84,006
    
    
    
    (354,230
    )
    
    
    300,985
    
    
    
    (262,888
    )Income tax expense
(benefit)
    
    
    41,415
    
    
    
    (140,379
    )
    
    
    137,437
    
    
    
    (141,475
    )Income (loss) before minority interest
    
    
    42,591
    
    
    
    (213,851
    )
    
    
    163,548
    
    
    
    (121,413
    )Minority interest, net of tax
    
    
    (631
    )
    
    
    (1,215
    )
    
    
    (1,203
    )
    
    
    (5,129
    )Net income (loss)
    
    $
    41,960
    
    
    $
    (215,066
    )
    
    $
    162,345
    
    
    $
    (126,542
    )Share dataBasic net income (loss) per shareBasic weighted-average shares outstanding
    
    
    632,605,996
    
    
    
    620,340,892
    
    
    
    625,044,058
    
    
    
    620,273,775Basic net income (loss) per share
    
    $
    0.07
    
    
    $
    (0.35
    )
    
    $
    0.26
    
    
    $
    (0.20
    )Diluted net income (loss) per shareDiluted weighted-average shares outstanding
    
    
    633,761,072
    
    
    
    620,340,892
    
    
    
    637,041,456
    
    
    
    620,273,775Diluted net income (loss) per share
    
    $
    0.07
    
    
    $
    (0.35
    )
    
    $
    0.25
    
    
    $
    (0.20
    )
 See notes to condensed consolidated financial statements. 3




---



##### Table of Contents



Cox Communications, Inc.
Condensed Consolidated Statement of Shareholders Equity Class ASeries APreferred
    
    Common Stock
    
    AdditionalPaid-in
    
    Retained
    
    AccumulatedOtherComprehensive
    
    CommonStock inTreasury,
    
    
    
    
    
    ComprehensiveStock
    
    Class A
    
    Class C
    
    Capital
    
    Earnings
    
    Income
    
    at Cost
    
    Total
    
    Income(unaudited)(Thousands of Dollars)December 31, 2003
    
    $
    4,836
    
    
    $
    598,482
    
    
    $
    27,598
    
    
    $
    4,545,635
    
    
    $
    4,500,621
    
    
    $
    15,548
    
    
    $
    (212,744
    )
    
    $
    9,479,976Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    162,345
    
    
    
    
    
    
    
    
    
    
    
    162,345
    
    
    $
    162,345Issuance of stock related to
stock compensation plans (including tax
benefit on stock options exercised of $2,584)
    
    
    
    
    
    
    948
    
    
    
    
    
    
    
    23,137
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,085Shares surrendered in connection
with vesting of restricted stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (330
    )
    
    
    (330
    )Conversion of Series A Preferred Stock
to Class A Common Stock
    
    
    (4,836
    )
    
    
    11,212
    
    
    
    
    
    
    
    225,243
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    231,619Acquisition of minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140,722
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140,722Change in net accumulated unrealized
gain on securities, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,528
    )
    
    
    
    
    
    
    (15,528
    )
    
    
    (15,528
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,528
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    146,817September 30, 2004
    
    $
    
    
    
    $
    610,642
    
    
    $
    27,598
    
    
    $
    4,934,737
    
    
    $
    4,662,966
    
    
    $
    20
    
    
    $
    (213,074
    )
    
    $
    10,022,889
 See notes to condensed consolidated financial statements. 4




---



##### Table of Contents



Cox Communications, Inc.
Condensed Consolidated Statements of Cash Flows Nine MonthsEnded September 302004
    
    2003(unaudited)(Thousands of Dollars)Cash flows from operating activitiesNet income (loss)
    
    $
    162,345
    
    
    $
    (126,542
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Depreciation and amortization
    
    
    1,190,051
    
    
    
    1,130,647Loss (gain) on sale of cable system
    
    
    5,021
    
    
    
    (469
    )Deferred income taxes
    
    
    121,478
    
    
    
    (518,226
    )Loss on derivative instruments, net
    
    
    97
    
    
    
    22,518Gain on investments, net
    
    
    (28,931
    )
    
    
    (166,069
    )Equity in net losses of affiliated companies
    
    
    1,325
    
    
    
    9,689Loss on extinguishment of debt
    
    
    7,006
    
    
    
    450,069Minority interest, net of tax
    
    
    1,203
    
    
    
    5,129Other, net
    
    
    11,253
    
    
    
    100,948(Increase) decrease in accounts and notes receivable
    
    
    (14,343
    )
    
    
    7,288Decrease in other assets
    
    
    4,595
    
    
    
    38,709Increase (decrease) in accounts payable and accrued expenses
    
    
    6,108
    
    
    
    (41,213
    )(Decrease) increase in taxes payable
    
    
    (16,549
    )
    
    
    447,791(Decrease) increase in other
liabilities
    
    
    (26,925
    )
    
    
    8,800Net cash provided by operating activities
    
    
    1,423,734
    
    
    
    1,369,069Cash flows from investing activitiesCapital expenditures
    
    
    (1,008,745
    )
    
    
    (1,045,579
    )Investments in affiliated companies
    
    
    (17,356
    )
    
    
    (16,651
    )Proceeds from the sale of investments
    
    
    70,230
    
    
    
    246,416Decrease in amounts due from CEI, net
    
    
    
    
    
    
    21,109Proceeds from the sale of cable systems
    
    
    53,076
    
    
    
    822Acquisition of minority interest
    
    
    (153,016
    )
    
    
    Other, net
    
    
    43,766
    
    
    
    (1,508
    )Net cash used in investing activities
    
    
    (1,012,045
    )
    
    
    (795,391
    )Cash flows from financing activitiesCommercial paper borrowings, net
    
    
    203,732
    
    
    
    234,941Proceeds from issuance of debt, net of debt issuance costs
    
    
    
    
    
    
    1,330,831Repayment of debt
    
    
    (562,664
    )
    
    
    (2,267,371
    )Proceeds from exercise of stock options
    
    
    3,347
    
    
    
    4,896Increase in amounts due to CEI, net
    
    
    8,601
    
    
    
    5,240Payment to repurchase remarketing option
    
    
    
    
    
    
    (43,734
    )Other, net
    
    
    (11,233
    )
    
    
    2,918Net cash used in financing activities
    
    
    (358,217
    )
    
    
    (732,279
    )Net increase (decrease) in cash
    
    
    53,472
    
    
    
    (158,601
    )Cash at beginning of period
    
    
    83,841
    
    
    
    228,704Cash at end of period
    
    $
    137,313
    
    
    $
    70,103
 See notes to condensed consolidated financial statements. 5




---



##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) Three and Nine Months Ended September 30, 2004 1. Organization and Basis of Presentation Cox Communications, Inc. (Cox), an indirect 62.2% majority-owned
subsidiary of Cox Enterprises, Inc. (CEI), is a multi-service broadband
communications company serving approximately 6.6 million customers nationwide.
Cox is the nations third-largest cable television provider and offers an array
of broadband products and services to both residential and commercial customers
in its markets. These services primarily include analog and digital video,
high-speed Internet access and local and long-distance telephone. Cox operates
in one operating segment, broadband communications. The accompanying unaudited interim condensed consolidated financial
statements of Cox have been prepared in accordance with accounting principles
generally accepted in the United States of America (GAAP) for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnote
disclosures required by GAAP for complete financial statements. In the opinion
of management, all adjustments considered necessary for the fair presentation
of the accompanying unaudited interim condensed consolidated financial
statements have been made. All such adjustments are of a normal recurring
nature. These unaudited interim condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto contained in Coxs Annual Report on Form 10-K for
the year ended December 31, 2003. 2. Summary of Significant Accounting Policies The following is a summary of certain significant accounting policies.
For a detailed description of all of Coxs significant accounting policies, see
Note 2. Summary of Significant Accounting Policies and Other Items contained
in Coxs Annual Report on Form 10-K for the year ended December 31, 2003. Use of Estimates The preparation of financial statements in conformity with GAAP 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. The results of operations for the interim periods presented
are not necessarily indicative of the results to be expected for the year
ending December 31, 2004 or any other interim period. Stock Compensation Plans At September 30, 2004, Cox had two stock-based compensation plans for
employees, a Long-Term Incentive Plan (LTIP) and an Employee Stock Purchase
Plan (ESPP), which are more fully described in Coxs Annual Report on Form 10-K
for the year ended December 31, 2003. Cox accounts for these plans under the
intrinsic value method, which follows the recognition and measurement
principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. All options granted
under the LTIP had an exercise price equal to or greater than the market value
of the underlying Class A common stock on the grant date; therefore, no
employee compensation cost is reflected in net income with respect to options.
Further, the ESPP is a noncompensatory plan under APB Opinion No. 25, and, as
such, no compensation cost was recognized with respect to the ESPP. Cox 6




---



##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued recognizes compensation cost related to restricted stock awards granted
under the LTIP, as the exercise price of the awards is less than the market
value of the underlying Class A common stock on the grant
date. The following table illustrates the effect on net income and net income
per share if Cox had applied the fair value recognition provisions of Statement
of Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, and SFAS No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation: Three Months EndedSeptember 302004
    
    2003(Thousands of Dollars,excluding per share data)Net income (loss), as reported
    
    $
    41,960
    
    
    $
    (215,066
    )Add: Stock-based compensation, as reported, net
of tax
    
    
    1,306
    
    
    
    560Deduct: Total stock-based compensation
determined under fair value based method
for all awards, net of
tax
    
    
    (8,131
    )
    
    
    (6,607
    )Pro forma net income
    
    $
    35,135
    
    
    $
    (221,113
    )Net income per share:Basic net income per share  as reported
    
    $
    0.07
    
    
    $
    (0.35
    )Basic net income per share  pro forma
    
    
    0.06
    
    
    
    (0.36
    )Diluted net income per share  as reported
    
    $
    0.07
    
    
    $
    (0.35
    )Diluted net income per share  pro forma
    
    
    0.06
    
    
    
    (0.36
    )
 Nine Months EndedSeptember 302004
    
    2003(Thousands of Dollars,excluding per share data)Net income, as reported
    
    $
    162,345
    
    
    $
    (126,542
    )Add: Stock-based compensation, as reported, net of
tax
    
    
    3,330
    
    
    
    1,213Deduct: Total stock-based compensation
determined under fair value based method
for all awards, net of tax
    
    
    (23,232
    )
    
    
    (18,116
    )Pro forma net income
    
    $
    142,443
    
    
    $
    (143,445
    )Net income per share:Basic net income per share  as reported
    
    $
    0.26
    
    
    $
    (0.20
    )Basic net income per share  pro forma
    
    
    0.23
    
    
    
    (0.23
    )Diluted net income per share  as reported
    
    $
    0.25
    
    
    $
    (0.20
    )Diluted net income per share  pro forma
    
    
    0.22
    
    
    
    (0.23
    )
 Recently Issued Accounting Pronouncements 7




---



##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued In May 2004, the Financial Accounting Standards Board issued FASB Staff
Position (FSP) 106-2, Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003(the
Act). FSP 106-2 requires measures of the accumulated postretirement benefit
obligation and net periodic postretirement benefit costs to reflect the effects
of the Act and became effective for Cox on July 1, 2004. The adoption of FSP
106-2 did not have a material impact on Coxs financial position or results of
operations. Reclassifications Certain amounts in the 2003 unaudited interim condensed consolidated
financial statements have been reclassified for comparative purposes with 2004. 3. Investments September 30
    
    December 312004
    
    2003(Thousands of Dollars)Investments stated at fair value:Available-for-sale
    
    $
    282
    
    
    $
    66,376Derivative
instruments
    
    
    968
    
    
    
    1,269Equity method investments
    
    
    45,005
    
    
    
    31,088Investments stated at
cost
    
    
    12,646
    
    
    
    10,647Total
investments
    
    $
    58,901
    
    
    $
    109,380
 Investments Stated at Fair Value The aggregate cost of Coxs investments stated at fair value at September
30, 2004 and December 31, 2003 was $1.6 million and $42.5 million,
respectively. Gross unrealized gains on investments were nominal as of
September 30, 2004. Gross unrealized gains on investments were $25.3 million
as of December 31, 2003. For the three and nine months ended September 30,
2004, gross realized gains and losses on investments stated at fair value were
$0.2 million and $29.1 million, respectively, and $0.2 million and $0.2
million, respectively. For the three and nine months ended September 30, 2003,
gross realized gains and losses on investments stated at fair value were $57.3
million and $13.7 million, respectively, and $181.8 million and $15.8 million,
respectively. Derivative instruments classified within investments are comprised of
certain warrants to purchase shares of publicly-traded and privately-held
entities, as further described in Note 6. Derivative Instruments and Hedging
Activities. Sprint Corporation. In March 2004, Cox sold 0.1 million shares of
Sprints PCS Group preferred stock for aggregate net proceeds of approximately
$56.9 million. Cox recognized a pre-tax gain of $19.5 million on the sale of
these shares. In April 2004, Sprint eliminated its PCS tracking stock by mandating the
exchange of its PCS shares for shares of its FON common stock. Cox held
certificates representing approximately 330,000 PCS shares and received
approximately 165,000 FON shares in exchange for the certificates. In June
2004, Cox sold the FON shares for net proceeds of approximately $3.0 million.
Cox recognized a pre-tax gain of approximately $2.3 million on the sale of
these shares. As a result of the sale, Cox no longer holds any shares of
Sprint stock. Other 8




---



##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued During the first quarter of 2004, Cox sold certain other non-strategic
investments for aggregate net proceeds of approximately $10.3 million. Cox
recognized a pre-tax gain of $7.3 million on the sale of these investments. Cox has several other fair value, equity and cost method investments that
were not, individually or in the aggregate, significant in relation to the
Condensed Consolidated Balance Sheets at September 30, 2004 and December 31,
2003. 4. Intangible Assets On January 1, 2002, Cox adopted SFAS No. 142, Goodwill and Other
Intangible Assets, which requires that goodwill and certain intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually. Cox has determined that its franchise value
intangible assets have an indefinite useful life. Cox has assessed franchise
value for impairment under SFAS No. 142 by utilizing a residual approach
whereby Cox measures the implied fair value of each franchise value intangible
asset subject to the same unit of accounting by deducting from the fair value
of each cable system cluster the fair value of the cable system clusters other
net assets, including previously unrecognized intangible assets. In performing
an impairment test in accordance with SFAS No. 142, Cox considers the guidance
contained in EITF Issue No. 02-17, Recognition of Customer Relationship
Intangible Assets Acquired in a Business Combination, whereby Cox considers
assumptions that marketplace participants would consider, such as expectations
of future contract renewals and other benefits related to the intangible asset,
when measuring the fair value of the cable system clusters other net assets.
The January 2003 impairment test in accordance with SFAS No. 142 resulted in a
non-cash impairment charge of approximately $25.0 million, which is classified
within amortization expense in Coxs Condensed Consolidated Statements of
Operations for the nine months ended September 30, 2003. Cox completed its
next impairment tests in accordance with SFAS No. 142 in August 2003 and 2004.
The August 2003 and 2004 tests indicated no impairment of franchise value. On September 29, 2004, the SEC announced that a direct value method should
be used to determine the fair value of all intangible assets required to be
recognized under SFAS No. 141, Business Combinations, and that registrants
should apply a direct value method to such assets acquired in business
combinations completed after September 29, 2004. Further, registrants who have
applied the residual method to the valuation of intangible assets for purposes
of impairment testing shall perform an impairment test, the transition test,
using a direct value method on all intangible assets that were previously valued
using the residual method under SFAS No. 142, Goodwill and Other Intangible
Assets, no later than the beginning of their first fiscal year beginning after
December 15, 2004. Impairments of intangible assets recognized upon
application of a direct value method by entities previously applying the
residual method should be reported as a cumulative effect of a change in
accounting principle. Related deferred tax effects should also be reported as
part of the cumulative effect of a change in accounting principle.
Reclassification of recorded balances between goodwill and intangible assets
immediately prior to adoption is prohibited. Early
adoption of this SEC position is encouraged. Consistent with this SEC
position, Cox will apply a direct value method to determine the fair value of
all intangible assets required to be recognized under SFAS No. 141 for such
assets acquired in business combinations completed after September 29, 2004 and
for purposes of impairment testing under SFAS No. 142 for fiscal years
beginning after December 15, 2004. Cox anticipates that the application of a
direct value method for valuing its intangible assets that were previously
valued using the residual method under SFAS No. 142 may result in a non-cash
impairment charge, and such charge may be significant. Summarized below are the carrying value and accumulated amortization of
intangible assets that continue to be amortized under SFAS No. 142, as well as
the carrying value of those intangible assets, which are no longer amortized: 9




---



##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued September 30, 2004
    
    December 31, 2003Gross
    
    
    
    
    
    Net
    
    Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    Carrying
    
    Carrying
    
    Accumulated
    
    CarryingValue
    
    Amortization
    
    Value
    
    Value
    
    Amortization
    
    Value(Thousands of Dollars)Intangible assets
subject
to amortization
    
    $
    74,889
    
    
    $
    21,890
    
    
    $
    52,999
    
    
    $
    58,526
    
    
    $
    21,855
    
    
    $
    36,671Franchise value
    
    
    
    
    
    
    
    
    
    
    16,132,670
    
    
    
    
    
    
    
    
    
    
    
    15,660,824Total intangible assets
    
    
    
    
    
    
    
    
    
    $
    16,185,669
    
    
    
    
    
    
    
    
    
    
    $
    15,697,495
 5. Debt September 30
    
    December 312004
    
    2003(Thousands of Dollars)Revolving credit facilities
    
    $
    
    
    
    $
    Commercial paper
    
    
    507,626
    
    
    
    302,283Medium-term notes
    
    
    264,411
    
    
    
    364,359Notes and
debentures
    
    
    5,657,828
    
    
    
    6,078,904Exchangeable subordinated debentures
    
    
    19,205
    
    
    
    26,138Capitalized lease obligations
    
    
    201,919
    
    
    
    217,992Other
    
    
    20,789
    
    
    
    22,1246,671,778
    
    
    
    7,011,800Less current
portion
    
    
    56,071
    
    
    
    48,344Total long-term
debt
    
    $
    6,615,707
    
    
    $
    6,963,456
 See Note 6. Derivative Instruments and Hedging Activities for a
discussion of the accounting for certain derivative instruments embedded in the
exchangeable subordinated debentures, which have been classified as a component
of debt in the Condensed Consolidated Balance Sheets at September 30, 2004 and
December 31, 2003. Revolving Credit Facilities In June 2004, Cox entered into a new five-year revolving bank credit
facility with a capacity of $1.25 billion, which will be available through June
4, 2009. This new credit facility replaces Coxs $900.0 million 364-day and
$900.0 million five-year revolving bank credit facilities. At Coxs election,
the interest rate on the credit agreement is based on London Interbank Offered
Rate (LIBOR), the certificate of deposit rate plus varying percentages or an
alternate base rate. The credit agreement also imposes a commitment fee on the
unused portion of the total amount available based on a ratio of debt to
operating cash flow, a measure of performance not calculated in accordance with
GAAP, and a utilization fee based on the level of borrowing. Cox had no
borrowings outstanding under any of its credit agreements at September 30, 2004
and December 31, 2003. Notes and Debentures 10




---



##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued In September 2004, Cox repaid its $100 million principal amount of 6.69%
medium-term notes due September 20, 2004 upon their maturity. In August 2004,
Cox repaid its $375 million principal amount of 7.5% notes due August 15, 2004
upon their maturity. In accordance with the terms of the indenture governing Coxs convertible
senior notes due 2021, Cox became obligated to purchase for cash convertible
notes tendered and not withdrawn before the close of business on February 23,
2004. Cox repurchased $19.0 million aggregate principal amount at maturity of
the convertible notes that had been properly tendered and not withdrawn, for
aggregate cash consideration of $13.9 million, which represented the accreted
value of the repurchased notes. As a result, no convertible notes remain
outstanding. On August 1, 2003, Coxs $250.0 million aggregate principal amount of
6.15% REset Put Securities due 2033 (REPS) was subject to mandatory tender to
the remarketing dealer. However, the remarketing dealer and Cox mutually agreed
to terminate the remarketing dealers right to remarket the REPS and, in
accordance with the terms of the REPS, Cox repurchased the REPS on August 1,
2003. The total aggregate consideration paid to repurchase the REPS was $301.4
million, which amount included $257.7 million principal amount and accrued
interest paid to the holders and $43.7 million remarketing option value paid to
the remarketing dealers. Cox recognized a pre-tax loss of approximately $1.5
million in connection with the repurchase of the REPS. In accordance with the terms of the indenture governing Coxs convertible
senior notes due 2021, Cox became obligated to purchase for cash convertible
notes tendered and not withdrawn before the close of business on February 24,
2003. Cox repurchased $422.7 million aggregate principal amount at maturity of
the convertible notes that had been properly tendered and not withdrawn, for
aggregate cash consideration of $304.2 million, which represented the accreted
value of the repurchased notes. Cox recognized a pre-tax loss of approximately
$10.2 million in connection with the repurchase of the convertible notes. Exchangeable Subordinated Debentures In June 2004, Cox redeemed all of its remaining outstanding exchangeable
subordinated debentures due 2029 (PRIZES) and 3% exchangeable subordinated
debentures due 2030 (Premium PHONES) for aggregate cash consideration of $14.7
million.

Exchangeable subordinated debentures at September 30, 2004 were comprised
of $62.3 million aggregate principal amount at maturity of its exchangeable
subordinated discount debentures due 2020 (Discount Debentures). In September 2003, Cox purchased
$1.8 billion original principal amount at maturity of
its Discount Debentures pursuant to Coxs tender offer for such securities for
aggregate cash consideration of $908.8 million, representing the tender offer
consideration and, as applicable, the early tender premium, plus accrued and
unpaid interest. Cox recognized a pre-tax loss of approximately $412.8 million
in connection with the purchase of the Discount Debentures. In June 2003, Cox purchased $1.3 billion original principal amount of its
PRIZES and $274.9 million original principal amount of its Premium PHONES
pursuant to Coxs tender offers for such securities for aggregate cash
consideration of $755.1 million, representing the tender offer consideration
plus accrued and unpaid interest for each security. As a result of Coxs
purchase pursuant to the tender offers, on June 30, 2003, the Premium PHONES
were de-listed from the New York Stock Exchange and registration of the Premium
PHONES under Section 12 of the Securities Exchange Act of 1934 was terminated.
Cox recognized a pre-tax gain of approximately $3.9 million in connection with
the purchase of the PRIZES and Premium PHONES. Zero-Coupon Debt 11




---



##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued In August 2003, Cox terminated its series of prepaid forward contracts,
which matured at various dates between 2004 and 2006, and at Coxs election,
could be settled in cash or shares of Sprint PCS common stock. These hybrid
instruments were comprised of a zero-coupon debt instrument, as the host
contract, and an embedded derivative, which derived its value, in part, based
on the trading price of Sprint PCS common stock. The zero-coupon debt
instrument was extinguished upon the termination of the prepaid forward
contracts. In connection with the termination, Cox sold the 19.5 million
shares of Sprint PCS common stock, which had been pledged to secure its
obligations pursuant to the series of prepaid forward contracts and were
classified as trading. Proceeds from this sale, net of the payment made to the
prepaid forward contracts counterparty and customary fees, were $0.1 million.
Cox recognized a pre-tax loss of approximately $29.5 million in connection with
the net settlement of the zero-coupon debt instruments. Interest Rate Swaps Cox utilizes interest rate swap agreements to manage its exposure to
changes in interest rates associated with certain of its fixed-rate debt
obligations whereby these fixed-rate debt obligations are effectively converted
into floating-rate debt obligations. The variable rates with respect to Coxs
interest rate swaps are adjusted quarterly or semi-annually based on LIBOR.
The notional amounts with respect to the interest rate swaps do not quantify
risk, but are used in the determination of cash settlements under the interest
rate swap agreements. Cox is exposed to a credit loss in the event of
nonperformance by the counterparties; however, these counterparties are major
financial institutions, rated investment grade or better. Accordingly, Cox
does not anticipate nonperformance by the counterparties. For a further
discussion regarding Coxs accounting for interest rate swaps, see Note 6.
Derivative Instruments and Hedging Activities. The following table summarizes the notional amounts, weighted-average
interest rate data and maturities for Coxs interest rate swap agreements at
September 30, 2004 and December 31, 2003: September 30
    
    December 312004
    
    2003Notional amount (in thousands)
    
    $
    1,375,000
    
    
    $
    1,750,000Weighted-average fixed interest rate received
    
    
    7.37
    %
    
    
    7.38
    %Weighted-average floating interest rate paid
    
    
    3.89
    %
    
    
    3.27
    %Maturity
    
    
    2005  2009
    
    
    
    2004  2009
 As a result of the settlements under Coxs interest rate swap agreements,
interest expense was reduced by $13.3 million and $47.1 million, respectively,
during the three and nine months ended September 30, 2004, and $17.3 million
and $46.3 million, respectively, during the same periods in the prior year. 6. Derivative Instruments and Hedging Activities Cox accounts for derivative instruments in accordance with SFAS No. 133,
which requires all freestanding and embedded derivative instruments to be
measured at fair value and recognized on the balance sheet as either assets or
liabilities. In addition, all derivative instruments used in hedging
relationships must be designated, reassessed and accounted for as either fair
value hedges or cash flow hedges pursuant to the provisions of SFAS No. 133. Cox does not hold or issue derivative instruments for trading purposes and
is not a party to leveraged instruments. From time to time, however, Cox uses
derivative instruments to manage its exposure to changes in the fair value of
certain of its assets or liabilities or to manage its exposure to changes in
interest rates or equity prices. These derivative instruments are designated
and accounted for by Cox as hedges of the underlying exposure being managed, as
prescribed by SFAS No. 133. In addition, upon adoption of SFAS No. 133,
certain of Coxs debt instruments and investments contained embedded or
freestanding 12




---



##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued derivatives, as defined. Cox has not designated these embedded and
freestanding derivatives as hedges under SFAS No. 133 and, as such, changes in
their fair value are being recognized in earnings as derivative gains or
losses. Coxs use of derivative instruments may result in short-term gains or
losses and may increase volatility in its earnings. The credit risks associated with Coxs derivative financial instruments
are controlled through the evaluation and monitoring of the creditworthiness of
the counterparties. The counterparties are major financial institutions, rated
investment grade or better. Accordingly, Cox does not anticipate
nonperformance by the counterparties. Cox recorded nominal pre-tax losses on derivative instruments during the
three and nine months ended September 30, 2004. Cox recorded a pre-tax gain on
derivative instruments of $4.2 million during the three months ended September
30, 2003 and a $22.5 million pre-tax loss during the nine months ended
September 30, 2003. Derivative adjustments made in accordance with SFAS No.
133 have historically had a material impact on reported indebtedness. As a
result of Coxs purchase of its exchangeable subordinated debentures, net
settlement of its zero-coupon debt and sale of Sprint PCS stock during 2003,
SFAS No. 133 adjustments did not significantly impact reported indebtedness at
September 30, 2004 or December 31, 2003. The following is a detail of Coxs
loss on derivative instruments for the three and nine months ended September
30, 2004 and 2003 followed by a summary of Coxs derivative instruments. Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003(Millions of Dollars)Zero-coupon
debt
    
    $
    
    
    
    $
    4.2
    
    
    $
    
    
    
    $
    (18.7
    )Exchangeable
subordinated
debentures
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.6Stock purchase
warrants
    
    
    
    
    
    
    
    
    
    
    (0.1
    )
    
    
    (4.4
    )Total gain (loss)
on derivative
instruments,
net
    
    $
    
    
    
    $
    4.2

    
    
    $
    (0.1
    )
    
    $
    (22.5
    )
 Interest Rate Swap Agreements Cox utilizes interest rate swap agreements designed to assist Cox in
maintaining a mix of fixed and floating rate debt by converting a portion of
existing fixed rate debt into a floating rate obligation. Cox has designated
and accounted for its interest rate swap agreements as fair value hedges
whereby the fair value of the related interest rate swap agreements are
classified as a component of other assets with the corresponding fixed-rate
debt obligations being classified as a component of debt in the Condensed
Consolidated Balance Sheets. Cox has assumed no ineffectiveness with regard to
these interest rate swap agreements as the agreements qualify for the short-cut
methodof accounting for fair value hedges of debt instruments, as prescribed
by SFAS No. 133. Coxs interest rate swap agreements approximated a derivative
asset of $30.6 million and $61.2 million at September 30, 2004 and December 31,
2003, respectively. Zero-Coupon Debt As discussed in Note 5. Debt, Cox terminated its series of prepaid
forward contracts to sell up to 19.5 million shares of its Sprint PCS common
stock in August 2003. Prior to the termination, these contracts met the
definition of a hybrid instrument, as prescribed by SFAS No. 133. These hybrid
instruments were comprised of a zero-coupon debt instrument, as the host
contract, and an embedded derivative, which derived its value, in part, based
on the trading price of Sprint PCS common stock. Cox did not designate these
embedded derivatives as a hedge of its investment in Sprint PCS common stock.
As a result, changes in the fair value of these embedded derivatives were
recognized in earnings and classified within gain (loss) 13




---



##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued on derivative instruments in Coxs Condensed Consolidated Statements of
Operations for the three and nine months ended September 30, 2003. Exchangeable Subordinated Debentures Prior to June 2004, Cox had three series of exchangeable subordinated
debentures, referred to as PRIZES, Premium Phones, and Discount Debentures. In
June 2004, Cox purchased all remaining outstanding PRIZES and Premium Phones;
as a result, the only remaining exchangeable subordinated debentures are the
Discount Debentures. The exchangeable subordinated debentures meet the
definition of a hybrid instrument, as prescribed by SFAS No. 133. These hybrid
instruments are comprised of an exchangeable subordinated debt instrument, as
the host contract, and an embedded derivative, which derives its value, in
part, based on the trading price of Sprint PCS common stock, U.S. Treasury
rates and Coxs credit spreads. Cox has not designated these embedded
derivatives as a hedge of its investment in Sprint PCS common stock. As a
result, changes in the fair value of these embedded derivatives are recognized
in earnings and classified within gain (loss) on derivative instruments in the
Condensed Consolidated Statements of Operations. The aggregate fair value of
these embedded derivatives approximated a derivative obligation of $0 at
September 30, 2004 and December 31, 2003. Stock Purchase Warrants Cox holds warrants to purchase equity securities of certain
publicly-traded and privately-held entities. Warrants that can be exercised
and settled by the delivery of net shares such that Cox pays no cash upon
exercise are deemed freestanding derivative instruments, as prescribed by SFAS
No. 133. Cox has not designated net share warrants as hedging instruments;
accordingly, changes in the fair value of these warrants are recognized in
earnings and classified within gain (loss) on derivative instruments in the
Condensed Consolidated Statements of Operations. The aggregate fair value of
these warrants approximated a derivative asset of $1.2 million and $1.3 million
at September 30, 2004 and December 31, 2003, respectively, and has been
classified as a component of investments in the Condensed Consolidated Balance
Sheets. 7. Net Income Per Share The following table reconciles the numerator and the denominator of the
basic and diluted per share computations for net income for the three and nine
months ended September 30, 2004 and 2003: Three Months Ended September 302004
    
    2003(In Thousands,excluding per share data)Net income (loss)
(A)
    
    $
    41,960
    
    
    $
    (215,066
    )Basic weighted-average shares
outstanding
(B)
    
    
    632,606
    
    
    
    620,341Effect of dilutive securities:Restricted
stock
    
    
    1,155
    
    
    
    Employee stock purchase plan
    
    
    
    
    
    
    Diluted weighted-average shares
outstanding
(C)
    
    
    633,761
    
    
    
    620,341Net Income (Loss) per shareBasic net income (loss) per share (A/B)
    
    $
    0.07
    
    
    $
    (0.35
    )Diluted net income (loss) per share
(A/C)
    
    $
    0.07
    
    
    $
    (0.35
    )
 14




---



##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued Nine months ended September 302004
    
    2003(In Thousands,excluding per share data)Net income (loss)
(A)
    
    $
    162,345
    
    
    $
    (126,542
    )Basic weighted-average shares
outstanding
(B)
    
    
    625,044
    
    
    
    620,274Effect of dilutive securities:Restricted
stock
    
    
    1,212
    
    
    
    Employee stock purchase
plan
    
    
    4
    
    
    
    Convertible preferred
stock
    
    
    10,781
    
    
    
    Diluted weighted-average shares
outstanding
(C)
    
    
    637,041
    
    
    
    620,274Net income (loss) per shareBasic net income (loss) per share (A/B)
    
    $
    0.26
    
    
    $
    (0.20
    )Diluted net income (loss) per share
(A/C)
    
    $
    0.25
    
    
    $
    (0.20
    )
 For the three and nine months ended September 30, 2004, 18.8 million Class
A common shares related to employee stock-based compensation plans were not
included in the computation of diluted net income per share because such
effects would have been antidilutive for the period. For the three and nine months ended September 30, 2003, 26.3 million Class
A common shares related to employee stock-based compensation plans, convertible
preferred stock and convertible senior notes were not included in the
computation of diluted net loss per share because such effects would have been
antidilutive for the period. In June 2004, all 4,836,372 issued and outstanding shares of Coxs Series
A convertible preferred stock were converted into 11,212,121 shares of Coxs
Class A common stock, in accordance with the terms of the Series A convertible
preferred stock. Cox issued the Series A convertible preferred stock in
October 1998 in conjunction with its acquisition of a cable system located in
Las Vegas, Nevada. In accordance with SFAS No. 141, Cox recorded additional
franchise value of $367.6 million, which includes the related deferred tax
effects, representing the appreciation realized upon conversion of the Series A
convertible preferred stock as contingent purchase price related to the
acquisition. Upon conversion, all of the issued and outstanding shares of
Series A convertible preferred stock were retired. 8. Transactions with Affiliated Companies Cox receives day-to-day cash management services from CEI, with
settlements of outstanding balances between Cox and CEI occurring periodically
at market interest rates. The amounts due to CEI are generally due on demand
and represent the net balance of the intercompany transactions. The amount due
to CEI at September 30, 2004 and December 31, 2003 was $12.6 million and $4.0
million, respectively. The interest rate was 1.8% and 1.3% at September 30, 2004 and
December 31, 2003, respectively. Included in amounts due to CEI are the
following transactions: 15




---



##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued (Thousands of Dollars)Intercompany due to CEI, December 31, 2003
    
    $
    3,980Cash transferred to CEI
    
    
    (217,376
    )Net operating expense reimbursements
    
    
    225,977Intercompany due to CEI, September 30, 2004
    
    $
    12,581
 9. Retirement Plans The following table provides a detail of the components of net periodic
benefit cost for the three and nine months ended September 30, 2004 and 2003: Three Months Ended September 302004
    
    2003Pension
    
    Other
    
    Pension
    
    OtherBenefits
    
    Benefits
    
    Benefits
    
    BenefitsService cost
    
    $
    7,954
    
    
    $
    1,371
    
    
    $
    6,385
    
    
    $
    1,075Interest cost
    
    
    5,461
    
    
    
    842
    
    
    
    4,337
    
    
    
    699Expected return on plan assets
    
    
    (6,600
    )
    
    
    (373
    )
    
    
    (4,855
    )
    
    
    Prior service cost amortization
    
    
    59
    
    
    
    
    
    
    
    54
    
    
    
    Actuarial (gain) loss amortization
    
    
    966
    
    
    
    47
    
    
    
    392
    
    
    
    (22
    )Net periodic benefit cost
    
    $
    7,840
    
    
    $
    1,887
    
    
    $
    6,313
    
    
    $
    1,752
 Nine Months Ended September 302004
    
    2003Pension
    
    Other
    
    Pension
    
    OtherBenefits
    
    Benefits
    
    Benefits
    
    BenefitsService cost
    
    $
    23,861
    
    
    $
    4,113
    
    
    $
    19,155
    
    
    $
    3,225Interest cost
    
    
    16,382
    
    
    
    2,535
    
    
    
    13,011
    
    
    
    2,097Expected return on plan assets
    
    
    (19,799
    )
    
    
    (1,119
    )
    
    
    (14,565
    )
    
    
    Prior service cost amortization
    
    
    177
    
    
    
    
    
    
    
    162
    
    
    
    Actuarial (gain) loss amortization
    
    
    2,898
    
    
    
    149
    
    
    
    1,176
    
    
    
    (66
    )Net periodic benefit cost
    
    $
    23,519
    
    
    $
    5,678
    
    
    $
    18,939
    
    
    $
    5,256
 Cox contributed its total planned 2003 plan year contributions for the
funded pension plans during 2003. Due to this accelerated contribution, Cox
does not anticipate additional contributions during 2004 for the funded pension
plans. Cox contributed $2.4 million on January 7, 2004 into its account to fund
post-retirement welfare benefits. Additional contributions, if any, will be
determined later in 2004. Cox provides eligible employees the opportunity to defer a percentage of
annual compensation under the Cox Communications, Inc. Savings Plus Restoration
Plan. Cox matches each dollar of compensation deferred by the employee by 50%,
up to 6%, the maximum being $6,000, reduced by the amount matched by Cox under
its 401(k) plan. The amounts due each participant represent the deferred
compensation and Coxs matching deferral, plus an annual rate of return on such
amounts determined by Cox which in no event shall be less than an annual rate
of 5%. Amounts payable under this plan represent unsecured general obligations
of Cox. Prior to July 1, 2004, the Plan was administered by CEI. 10. Financial Instruments with Characteristics of both Liabilities and Equity 16




---



##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 150, Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity. SFAS No. 150 establishes standards for
classification and measurement by an issuer of certain financial instruments
with characteristics of both liabilities and equity. The statement requires
that an issuer classify a financial instrument that is within its scope as a
liability (or asset in some circumstances); however, the FASB indefinitely
deferred the effective date of this statement as it relates to certain
mandatorily redeemable non-controlling interests in consolidated limited-life
subsidiaries. As of December 31, 2003, Cox consolidated a 75% majority-owned
interest in a limited-life partnership. The estimated liquidation value of the
25% minority interest was approximately $229.0 million as of December 31, 2003. On September 17, 2004, Cox purchased the 25% minority interest in the
limited-life partnership for cash consideration of approximately $153.0
million. As a result, the partnership became wholly-owned by Cox. In
accordance with SFAS No. 141, Cox recorded additional franchise value of $139.5
million and customer relationship intangibles of $13.8 million. 11. Supplemental Financial Information September 30
    
    December 312004
    
    2003(Thousands of Dollars)Other current assetsInventory
    
    $
    55,380
    
    
    $
    49,137Prepaid assets
    
    
    35,970
    
    
    
    37,600Deferred income tax asset
    
    
    34,393
    
    
    
    34,393Other
    
    
    3,498
    
    
    
    9,976Total other current assets
    
    $
    129,241
    
    
    $
    131,106Other current liabilitiesDeposits and advances
    
    $
    93,294
    
    
    $
    92,008Income tax payable
    
    
    196,792
    
    
    
    215,926Other
    
    
    111,944
    
    
    
    142,619Total other current liabilities
    
    $
    402,030
    
    
    $
    450,553
 Nine Months EndedSeptember 302004
    
    2003(Thousands of Dollars)Significant non-cash transactionsConversion of Series A preferred stock to
Class A common stock
    
    $
    367,648
    
    
    $
    Additional cash flow informationCash paid for interest
    
    $
    259,015
    
    
    $
    272,753Cash paid (refunded) for income taxes
    
    
    33,153
    
    
    
    (69,453
    )
 12. Commitments and Contingencies 17




---



##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued In connection with certain of Coxs acquisitions and other transactions,
Cox has provided certain indemnities to the respective counterparties with
respect to future claims that may arise from state or federal taxing
authorities. The nature and terms of these indemnities vary by transaction and
generally remain in force through the requisite statutory review periods. In
addition, the events or circumstances that would require Cox to perform under
these indemnities are transaction and circumstance specific. As of September
30, 2004, Cox believes the likelihood that it will be required to perform under
these indemnities is remote and that the maximum potential future payments that
Cox could be required to make under these indemnifications are not determinable
at this time, as any future payments would be dependent on the type and extent
of the related claims, and all available defenses, which are not reasonably
estimable. Cox has not historically incurred any material costs related to
performance under these types of indemnities. Coxs subsidiary Cox Communications Louisiana L.L.C. (Cox Louisiana) was a
defendant in a putative subscriber class action suit in Louisiana state court
filed on November 5, 1997. The suit challenged the propriety of late fees
charged by Cox Louisiana in the greater New Orleans area to customers who fail
to pay for services in a timely manner. The suit seeks injunctive relief and
damages under certain claimed state law causes of action. On March 29, 2004,
the parties entered into a settlement agreement. This settlement was approved
by the court and became final in August 2004. The settlement did not have a
material impact on Coxs operations or liquidity. 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 United States
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, 2000, Verizon amended
its complaint to add CoxCom, Inc. (CoxCom), a subsidiary of Cox, as an
additional defendant. On January 8, 2002, Verizon filed a second amended
complaint, dropping its claims for interconnections and damages. Verizon seeks
various forms of relief, including declaratory and injunctive relief. On
January 29, 2002, the Court granted defendants motion to stay the case on
primary jurisdiction grounds. Cox and CoxCom intend to defend this action
vigorously. The outcome cannot be predicted at this time. Cox @Home, Inc., a wholly-owned subsidiary of Cox, is a stockholder of At
Home Corporation, also called Excite@Home, formerly a provider of high-speed
Internet access and content services, which filed for bankruptcy protection in
September 2001. On September 24, 2002, a committee of bondholders of
Excite@Home sued Cox, Cox @Home and Comcast Corporation, among others, in the
United States District Court for the District of Delaware. The suit alleged
the realization of short-swing profits under Section 16(b) of the Securities
Exchange Act of 1934 from purported transactions relating to Excite@Home common
stock involving Cox, Comcast and AT&T Corp., and purported breaches of
fiduciary duty. The suit seeks disgorgement of short-swing profits allegedly
received by the Cox and Comcast defendants totaling at least $600.0 million,
damages for breaches of fiduciary duties in an unspecified amount, attorneys
fees, pre-judgment interest and post-judgment interest. On November 12, 2002,
Cox, Cox @Home, and David Woodrow filed a motion to dismiss or transfer the
action for improper venue or, in the alternative, to transfer the action
pursuant to 28 U.S.C. Sec. 1404. On September 30, 2003, the Delaware District
Court ordered the action transferred to the United States District Court for
the Southern District of New York. On December 22, 2003, Cox and Cox@Home
filed a motion to dismiss, or, in the alternative, for judgment on the
pleadings, with respect to the Section 16(b) claim. On August 12, 2004, the
court granted Coxs and Cox @Homes motion and dismissed the Section 16(b)
claim. Cox and Cox @Home intend to defend the remaining claim in this action vigorously. 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 California,
San Mateo County, on behalf of themselves and all other stockholders of
Excite@Home as of March 28, 2000, seeking (a) to enjoin consummation of a March
28, 2000 letter agreement among Excite@Homes principal investors, including
Cox, and (b) unspecified compensatory damages. Cox and David Woodrow, Coxs
former Executive Vice President, Business 18




---



##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued Development, among others, are named defendants in both lawsuits. Mr.
Woodrow formerly served on the Excite@Home board of directors. The plaintiffs
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. On February 26, 2001, the Court stayed
both actions, which had been previously consolidated, on grounds of forum
non-conveniens. A related suit styled Linda Ward, et al. v. At Home
Corporation (No. 418233) was filed on September 6, 2001, in the same court. On
February 7, 2002, the Court consolidated the Ward action with the
Schaffer/Yourman action, thereby also staying the Ward action. On June 18,
2002, the court granted plaintiffs motion to lift the stay and authorized
discovery to proceed regarding Coxs pending motion to dismiss for lack of
personal jurisdiction. On September 10, 2002, the United States Bankruptcy
Court for the Northern District of California in the Excite@Home bankruptcy
proceeding held that the claims in the suits were derivative and, thus,
constituted the exclusive property of the Excite@Home bankruptcy estate. The
Bankruptcy Court thereafter ordered the plaintiffs to dismiss the suits.
Plaintiffs subsequently appealed the Bankruptcy Courts decision to the United
States District Court for the Northern District of California. On September
29, 2003, the District Court affirmed the order of the Bankruptcy Court. On
October 27, 2003, plaintiffs filed a notice of appeal of the District Courts
decision to the United States Court of Appeals for the Ninth Circuit, and
briefing of the appeal has concluded. Cox intends to defend this action
vigorously. The outcome cannot be predicted at this time. On April 26, 2002, Frieda and Michael Eksler filed an amended complaint
naming Cox as a defendant in a putative class action lawsuit in the United
States District Court for the Southern District of New York against AT&T Corp.
and certain former officers and directors of Excite@Home, among others. Cox
was served on May 10, 2002. This case has been consolidated with a related
case captioned Semen Leykin v. AT&T Corp., et al., and another related case,
and an amended complaint in the consolidated case, naming Cox as a defendant,
was filed and served on November 7, 2002. The putative class includes persons
who purchased and held shares of Excite@Home common stock between the time
period March 28, 2000 and September 28, 2001. The complaint asserts a claim
against Cox as an alleged controlling person of Excite@Home under Section
20(a) of the Securities Exchange Act for violations of Section 10(b) of the
Securities Exchange Act and Rule 10b-5 thereunder. The suit seeks from Cox
unspecified monetary damages, statutory compensation and other relief. In
addition, a claim against Coxs former Executive Vice President, David Woodrow,
who formerly served on Excite@Homes board of directors, is asserted for breach
of purported fiduciary duties. The suit seeks from Woodrow unspecified
monetary and punitive damages. On February 11, 2003, Cox and Woodrow filed a
dispositive motion to dismiss on various grounds, including failure to state a
claim. On September 17, 2003, the District Court granted the motion in part
and denied it in part. Specifically, the Court dismissed several purported
statements by Excite@Home as bases for potential liability because they were
merely generalized expressions of confidence and optimism constituting
puffery, dismissed the fiduciary duty claim against Mr. Woodrow as pre-empted
by the federal securities laws, and denied the motions as to the remaining
allegations of the complaint. On October 7, 2003, Cox and Mr. Woodrow sought
reconsideration of a portion of the Courts order. On December 24, 2003, the
plaintiffs moved to certify a class of persons who purchased Excite@Home stock
between March 28, 2000 and September 28, 2001, or held such stock as of April
28, 2000. This motion is pending. On February 17, 2004, the Court granted
plaintiffs leave to file a motion to amend the complaint to add an additional
claim for relief against all defendants under Section 14(a) of the Securities
Exchange Act in connection with an allegedly false or misleading proxy
statement issued by Excite@Home. On February 24, 2004, the Court granted Coxs
and Mr. Woodrows motion for reconsideration and dismissed plaintiffs
allegations that Cox and Mr. Woodrow were control persons with respect to
primary violations of Rule 10b-5 alleged to have occurred after August 28,
2000. On April 5, 2004, Cox and certain other defendants jointly filed a
motion to dismiss the Section 14(a) cause of action that was added in
plaintiffs amended complaint. On August 9, 2004, the District Court granted
defendants motion, and dismissed the Section 14(a) cause of action. Cox
intends to defend this action vigorously. The outcome cannot be predicted at
this time. 19




---



##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued On July 3, 2003, Leo James filed a putative class action lawsuit against
Cox and David Woodrow, among others, in the United States District Court for
the Southern District of New York. Cox was served on October 27, 2003. Mr.
James is represented by the same attorneys who represent the individuals who
were previously designated lead plaintiffs in the Leykin action described
above. The complaint in the James action asserts claims substantially similar
to the operative allegations in the Leykin action described above.
Accordingly, the sole count against Cox asserts a claim against Cox as an
alleged controlling person of Excite@Home under Section 20(a) of the
Securities Exchange Act for violations of Section 10(b) of the Securities
Exchange Act and Rule 10b-5 thereunder and seeks from Cox unspecified monetary
damages, statutory compensation and other relief. On November 17, 2003, Cox
and certain other defendants jointly filed a motion to dismiss the James action
on the grounds that, among other things, it was duplicative of the Leykin
action. The motion to dismiss was granted on August 18, 2004, and the James
action was dismissed without prejudice. Plaintiffs time to appeal the
District Courts decision has expired without plaintiffs having
filed a notice of appeal. On June 14, 2004, Acacia Media Technologies Corporation filed a lawsuit
against Cox and Hospitality Network, Inc., (a wholly-owned subsidiary of Cox)
among others, in the United States District Court for the Northern District of
California asserting claims for patent infringement. The complaint seeks
preliminary and permanent injunctive relief and damages in an unspecified
amount. On June 18, 2004, prior to being served with the Acacia Media
Complaint, CoxCom, Inc. and Hospitality Network filed a lawsuit against Acacia
Media in the United States District Court for the Northern District of Georgia
seeking a declaratory judgment that the Acacia Media patents are invalid and
that CoxCom and Hospitality Network are not infringing those patents. On July
7, 2004, Acacia Media filed an amended complaint to its lawsuit to add CoxCom
as a defendant. On August 10, 2004, Hospitality Network filed a motion to
dismiss for lack of personal jurisdiction. Cox and CoxCom timely filed their
answer to the amended complaint on October 21, 2004. On July 28, 2004, Acacia
Media filed a motion to dismiss or to transfer the action to the Northern
District of California, and on October 22, 2004, the court granted the motion
to transfer the action to the Northern District of California. Cox, CoxCom and
Hospitality Network intend to defend the action vigorously. The outcome cannot
be predicted at this time. Eighteen putative class action lawsuits were filed, purportedly on behalf
of the public stockholders of Cox, challenging CEIs August 2, 2004 proposal to
acquire all of the issued and outstanding shares of Cox Class A common stock
not beneficially owned by CEI, for $32.00 in cash per share. Fifteen of the
lawsuits were filed in the Court of Chancery of the State of Delaware.
Following a hearing held on August 24, 2004, the Delaware court consolidated
the actions under the caption In re Cox Communications, Inc. Shareholders
Litigation, Consolidated C.A. No. 613-N. The Delaware complaint names as
defendants Cox, CEI, Cox Holdings, Barbara Cox Anthony and Anne Cox Chambers,
and the members of the Cox Board of Directors. The Delaware complaint alleges,
among other things, that the price proposed to be paid in the proposed
transaction was unfairly low, that the initiation and timing of the proposed
transaction were in breach of the defendants purported duties of loyalty and
constituted unfair dealing, that the structure of the proposed transaction was
inequitably coercive, that defendants caused materially misleading and
incomplete information to be disseminated to the public holders of the Cox
shares, and that the Board defendants would breach their duty of care and good
faith by approving the proposed transaction and by purportedly attempting to
disenfranchise the holders of the Cox shares by circumventing certain alleged
contractual voting rights. The Delaware complaint seeks an injunction against
the proposed transaction, or, if it is consummated, rescission of the
transaction and imposition of a constructive trust, as well as money damages,
an accounting, attorneys fees, expenses and other relief. The
remaining three putative class action lawsuits were filed in the Superior Court of
Fulton County, Georgia, styled Brody v. Cox Communications, Inc., et al.,
2004CV89198, Golombuski v. Cox Communications, Inc., et al., 2004CV89216, and
Durgin v. Cox Communications, Inc., et al., 2004CV89301. The Georgia actions
were purportedly brought on behalf of the public holders of shares of Cox Class
A common stock against Cox, CEI and the Cox Board, although four counts of the
Golombuski complaint were brought derivatively on behalf of Cox against the Cox
Board and CEI. With the exception of the Durgin action, which did not assert
claims against CEI, the Georgia actions each allege that CEI and the Cox Board
breached their 20




---



##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued fiduciary duties in connection with the proposed transaction, which
plaintiffs allege proposed a purchase price which was below the fair value of
the Cox shares. On August 18, 2004, plaintiffs in the Georgia actions moved
for entry of a case management order to consolidate the Georgia Actions under
the caption In re Cox Communication, Inc. Shareholder Litigation, C.A. No.
2004-CV-89198. On October 19, 2004, CEI and Cox publicly announced that they had entered
into a Merger Agreement pursuant to which the shares of Cox Class A common
stock not beneficially owned by CEI would be proposed to be acquired for $34.75
per share by means of a tender offer and follow-on merger. On October 18,
2004, prior to the announcement of the Merger Agreement, the parties to the
Delaware action agreed upon and executed a memorandum of understanding.
Pursuant to the Delaware memorandum of understanding, the parties to the
Delaware action agreed, subject to the conditions described below, to enter
into a stipulation of settlement, to cooperate in public disclosures related to
the Merger Agreement, and to use their best efforts to gain approval of the
proposed settlement terms by the Delaware court. The Delaware memorandum of
understanding contemplates that, if the proposed settlement is approved by the
Delaware court following notice to the holders of the Cox shares, the Delaware
court will enter a final order providing for the dismissal with prejudice of
the Delaware action and a release in favor of all defendants of any and all
claims related to the proposed transaction, including the tender offer and the
follow-on merger, that have been or could have been asserted by the plaintiffs
on behalf of the holders of the Cox shares. The terms of the proposed
settlement are, among other things, (i) that, subject to the Merger Agreement,
CEI shall proceed with the tender offer and the follow-on merger in which the
holders of the Cox shares shall be entitled to receive consideration of $34.75
per share, (ii) that the tender offer will be subject to, among other
conditions, the condition that a majority of shares held by persons other than
CEI, its subsidiaries and directors and executive officers of Cox tender their
shares, (iii) acknowledgement that the efforts of plaintiffs counsel in the Delaware action
were causal factors that led to the increased consideration offered to the
holders of the Cox shares in the tender offer and the follow-on merger and to
the majority of the minority condition, and (iv) that the plaintiffs shall be
given the opportunity to review in advance and comment upon certain disclosures
made by CEI and Cox in connection with the tender offer and the follow-on
merger. Also on October 18, 2004, the parties to the Georgia actions entered into
a memorandum of understanding which set forth the agreement by the parties for
the dismissal of the Georgia actions. The Georgia memorandum of understanding
provides, among other things, that if the Delaware actions are dismissed in
accordance with the Delaware memorandum of understanding and the dismissal
becomes non-appealable, the parties to the Georgia actions will jointly seek,
within two business days thereof, to effect the dismissal with prejudice of the
Georgia actions without further notice to holders of the Cox shares. The Delaware memorandum of understanding and the Georgia memorandum of
understanding provide that defendants will provide plaintiffs counsel in the
Delaware action and the Georgia actions with confirmatory discovery relating to
the Merger Agreement, including additional document production and depositions,
and that all other proceedings in the actions are suspended, except any
settlement related proceedings in Delaware and Georgia. Counsel for plaintiffs
in the Delaware action and counsel for plaintiffs in the Georgia actions intend
to apply to the Delaware court and the Georgia court, respectively, for a
reasonable award of fees and expenses, and defendants have reserved the right
to object to any such application. The above-described proposed settlement is subject to the execution of a
definitive stipulation of settlement and final approval by the Delaware court.
If the proposed settlement is ultimately not approved by the Delaware court,
the actions could proceed and the plaintiffs in the actions could seek the
relief sought in their respective complaints. Accordingly, there can be no
assurance that the proposed settlement, or the dismissal of the Delaware action
and the Georgia actions, will be completed on the terms described above. Cox and its subsidiaries are parties to various other legal proceedings
that are ordinary and incidental to their businesses. Management does not
expect that any of these other currently pending legal proceedings 21




---



##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued will have a material adverse impact on Coxs consolidated financial
position, results of operations or cash flows. 13. Subsequent Events On October 15, 2004, a verdict was delivered in the case of Gardner v. Cox
Communications, Inc. and Cox Classic Cable, Inc. in the Probate Court of
Galveston County, Texas. The verdict, which is subject to appeal, assesses
damages against Cox in the amount of $16.4 million, plus pre-judgment interest
and attorneys fees totaling approximately $5.6 million, arising out of an
acquisition by TCA Cable of three cable systems formerly owned by the
plaintiffs. At trial, plaintiffs claimed, among other things, that TCA Cable
breached a letter of intent for the purchase of plaintiffs systems. Cox is
successor to TCA Cable as a result of Coxs 1999 acquisition of TCA Cable.
Through September 30, 2004, Cox has incurred legal expenses of approximately
$0.6 million in defending this action. Cox intends to appeal the verdict, and
the ultimate outcome cannot be predicted at this time. These amounts are
recorded within Loss on litigation in the accompanying Condensed Consolidated
Statements of Operations. On October 19, 2004, Cox and CEI announced that an agreement had been
reached for CEI to acquire the outstanding publicly held minority shares of Cox
for $34.75 per share. The transaction will be structured as a cash tender
offer by Cox Holdings, Inc., a wholly-owned subsidiary of CEI, and Cox,
followed by a merger. Upon completion of the transaction, anticipated to be
mid-December, Cox will become a wholly owned subsidiary of CEI. Cox Holdings
and Cox commenced a tender offer under the agreement on November 3, 2004, and
the scheduled expiration date for the tender offer is currently December 2,
2004. Consummation of the tender offer is subject to certain conditions,
including the condition that the majority of the publicly held minority
interest shares are validly tendered and not withdrawn before the expiration of
the tender offer. Currently,
both Standard and Poors (S&P) and Fitch Ratings (Fitch) have a negative outlook on Coxs credit
ratings in light of CEIs offer to purchase all outstanding Cox Class A common
stock that it does not beneficially own. On October 19, 2004, S&P confirmed
that based on the anticipated increase in indebtedness required to complete
CEIs offer and the follow-on merger, the credit rating of Cox would be lowered
to BBB- from BBB. Fitch has also indicated that it expects to downgrade the
credit rating of Cox to BBB- from BBB upon consummation of CEIs offer and the
follow-on merger. Cox believes that if S&P and/or Fitch were to downgrade Cox
following CEIs offer and the follow-on merger, these actions would not be
expected to have a material adverse impact on the ability to borrow under its
credit agreement. On October 27, 2004, Moodys Investors Service downgraded Coxs credit
rating from Baa2 to Baa3 with a stable outlook. Moodys also rated Coxs
anticipated new credit facility to be arranged in connection with Coxs and Cox
Holdings joint tender for Coxs Class A common stock Baa3. Cox believes that
the Moodys downgrade will not have a material adverse impact on its liquidity. In
connection with the tender offer, Cox received a commitment letter
for new bank credit facilities consisting of a five-year unsecured
$2.75 billion revolving credit facility, a five-year unsecured $2.0
billion term loan and an 18-month unsecured $3.0 billion term loan.
The new credit facilities will be entered into prior to the purchase
of Cox Class A common shares pursuant to the tender offer. Cox
expects the new credit facilities to contain customary affirmative
and negative covenants, as well as customary events of default. The
closing of the new credit facilities will be subject to usual
conditions for similar facilities and transactions, including, but
not limited to, execution of satisfactory credit documentation by
December 15, 2004, and either retirement and repayment in full of
Coxs existing credit facility or the effectiveness of an amendment
to the existing credit facility to conform its terms substantially
with the terms of Coxs new revolving credit facility. If Cox elects
to amend, rather than retire and repay, its existing credit facility,
then the new revolving credit facility will be permanently reduced to
$1.5 billion. 22




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations The following discussion should be read in conjunction with the
accompanying unaudited condensed consolidated financial statements for the
three and nine-month periods ended September 30, 2004 and 2003. Results of Operations Three Months Ended September 30, 2004 Compared with Three Months Ended
September 30, 2003 The following table sets forth summarized consolidated financial
information for the three months ended September 30, 2004 and 2003. Three Months EndedSeptember 302004
    
    2003
    
    $ Change
    
    % Change(Thousands of Dollars)Revenues
    
    $
    1,618,059
    
    
    $
    1,460,168
    
    
    $
    157,891
    
    
    
    11
    %Cost of services
    
    
    666,924
    
    
    
    617,013
    
    
    
    49,911
    
    
    
    8
    %Selling, general and administrative
expenses
    
    
    343,852
    
    
    
    299,693
    
    
    
    44,159
    
    
    
    15
    %Loss on litigation
    
    
    22,600
    
    
    
    
    
    
    
    22,600
    
    
    NMDepreciation and amortization
    
    
    400,871
    
    
    
    382,053
    
    
    
    18,818
    
    
    
    5
    %Operating income
    
    
    183,812
    
    
    
    161,409
    
    
    
    22,403
    
    
    
    14
    %Interest expense
    
    
    (96,998
    )
    
    
    (116,593
    )
    
    
    19,595
    
    
    
    (17
    %)(Loss) gain on derivative instruments,
net
    
    
    (43
    )
    
    
    4,182
    
    
    
    (4,225
    )
    
    
    (101
    %)(Loss) gain on investments, net
    
    
    (204
    )
    
    
    43,674
    
    
    
    (43,878
    )
    
    
    (100
    %)Equity in net losses of affiliated
companies
    
    
    (1,130
    )
    
    
    (3,171
    )
    
    
    2,041
    
    
    
    (64
    %)Loss on extinguishment of debt
    
    
    
    
    
    
    (443,806
    )
    
    
    443,806
    
    
    
    (100
    %)Other, net
    
    
    (1,431
    )
    

    
    75
    
    
    
    (1,506
    )
    
    NMIncome tax expense (benefit)
    
    
    41,415
    
    
    
    (140,379
    )
    
    
    181,794
    
    
    
    130
    %Minority interest, net of tax
    
    
    (631
    )
    
    
    (1,215
    )
    
    
    584
    
    
    
    (48
    %)Net income (loss)
    
    $
    41,960
    
    
    $
    (215,066
    )
    
    $
    257,026
    
    
    
    120
    %
 NM denotes percentage is not
meaningful. Revenues The following table sets forth summarized revenue information for the
three months ended September 30, 2004 and 2003. Three Months Ended September 30% of
    
    
    
    
    
    % of2004
    
    Total
    
    2003
    
    Total
    
    $ Change
    
    % Change(Thousands of Dollars)ResidentialVideo
    
    $
    964,067
    
    
    
    60
    %
    
    $
    918,762
    
    
    
    63
    %
    
    $
    45,305
    
    
    
    5
    %Data
    
    
    283,941
    
    
    
    18
    %
    
    
    226,949
    
    
    
    16
    %
    
    
    56,992
    
    
    
    25
    %Telephony
    
    
    147,344
    
    
    
    9
    %
    
    
    119,950
    
    
    
    8
    %
    
    
    27,394
    
    
    
    23
    %Other
    
    
    24,176
    
    
    
    1
    %
    
    
    21,675
    
    
    
    1
    %
    
    
    2,501
    
    
    
    12
    %Total residential
    
    
    1,419,528
    
    
    
    88
    %
    
    
    1,287,336
    
    
    
    88
    %
    
    
    132,192
    
    
    
    10
    %Commercial
    
    
    90,605
    
    
    
    6
    %
    
    
    73,299
    
    
    
    5
    %
    
    
    17,306
    
    
    
    24
    %Advertising
    
    
    107,926
    
    
    
    6
    %
    
    
    99,533
    
    
    
    7
    %
    
    
    8,393
    
    
    
    8
    %Total revenues
    
    $
    1,618,059
    
    
    
    100
    %
    
    $
    1,460,168
    
    
    
    100
    %
    
    $
    157,891
    
    
    
    11
    %
 23




---



##### Table of Contents



The
$157.9 million increase in total revenues is primarily attributable
to:  
    
    a 25% increase in customers for advanced services, which include
digital cable, high-speed Internet access and telephony customers;
    
    an increase in basic cable rates resulting from increased
programming costs and inflation, as well as increased channel
availability; and
    
    an increase in commercial broadband customers, as well as an increase in
advertising sales. Cox has experienced solid growth in digital cable, residential high-speed
Internet and telephony customers. For the third quarter of 2004, Cox:  
    
    ended the quarter with approximately 6.3 million basic video
customers, up 0.4% from September 30, 2003.
    
    added 72,868 digital cable customers, which contributed to
year-over-year growth of 14%.
    
    added 184,446 high-speed Internet customers, which contributed to
year-over-year growth of 32%.
    
    added 82,596 telephony customers, which contributed to
year-over-year customer growth of 33%. Cox experiences some seasonality in its business, primarily as a result of
college students leaving school for the summer break and people traveling to
warmer climates for the winter months. The college students annual summer
departure contributed to a slight decline in basic video customers during the
second quarter of 2004. This seasonality contributed to increased revenues
during the third quarter of 2004. Cox expects its overall growth trend to continue. Cox also anticipates
continued customer demand for its existing portfolio of broadband products, as
well as for new services such as Entertainment On Demand, Home Networking,
high-definition television and digital video recorders. Costs and expenses (cost of services and selling, general and administrative
expenses) The following table sets forth summarized operating expenses for the three
months ended September 30, 2004 and 2003. Three Months EndedSeptember 302004
    
    2003
    
    $ Change
    
    % Change(Thousands of Dollars)Cost of servicesProgramming costs
    
    $
    324,824
    
    
    $
    292,696
    
    
    $
    32,128
    
    
    
    11
    %Other cost of
services
    
    
    342,100
    
    
    
    324,317
    
    
    
    17,783
    
    
    
    5
    %Total cost of
services
    
    
    666,924
    
    
    
    617,013
    
    
    
    49,911
    
    
    
    8
    %Selling, general and administrativeMarketing
    
    
    88,832
    
    
    
    72,562
    
    
    
    16,270
    
    
    
    22
    %General and administrative
    
    
    255,020
    
    
    
    227,131
    
    
    
    27,889
    
    
    
    12
    %Total selling, general and Administrative
    
    
    343,852
    
    
    
    299,693
    
    
    
    44,159
    
    
    
    15
    %Total costs and expenses
    
    $
    1,010,776
    
    
    $
    916,706
    
    
    $
    94,070
    
    
    
    10
    %
 Cost of services includes cable programming costs, which are costs paid to
programmers for cable content and are generally paid on a per-subscriber basis.
Cost of services also includes other direct costs and field service and call
center costs. Other direct costs include costs that Cox incurs in conjunction
with providing its residential, commercial and advertising services. Field
service costs include costs associated with providing and maintaining Coxs
broadband network and customer care costs necessary to maintain its customer
base. Cost of services increased $49.9 million over the comparable period in
2003 due to a $32.1 million increase in programming costs reflecting
programming rate increases and customer growth. Approximately 24




---



##### Table of Contents



9% of the increase in programming costs was attributable to programming rate
increases, and 1% was related to customer growth. Other cost of services
increased $17.8 million, primarily due to 25% growth in advanced-service
customers over the last twelve months, partially offset by cost savings
achieved through successful field service initiatives. Selling, general and administrative expenses include marketing, salaries
and benefits, commissions and bonuses, travel, facilities, insurance and other
administrative expenses. Selling, general and administrative expenses
increased $44.2 million due to:  
    
    a $27.9 million increase in general and administrative expenses
primarily related to increased salaries and benefits and the cost of
trials of new video and telephony products; and
    
    a $16.3 million increase in marketing expense primarily due to the
launch of faster high-speed Internet service, new high-speed Internet
tiers and new video products, as well as a 10% increase in costs
associated with Cox Media, Coxs advertising sales business. Cox expects continued increases in programming costs and will continue to
pass through some portion of these increases to its customers. In addition, Cox
expects to have continued growth in advanced services, which include digital
cable, high-speed Internet access and telephony, both as a result of increased
penetration where these services were available in 2003 and continued roll-out
of these services in new areas during 2004. As a result of these trends, Cox
expects its cost of services and, to a lesser degree, selling, general and
administrative expenses to increase. Loss on litigation On October 15, 2004, a verdict was delivered in the case of Gardner v. Cox
Communications, Inc. and Cox Classic Cable, Inc. in the Probate Court of
Galveston County, Texas. The verdict, which is subject to appeal, assesses
damages against Cox in the amount of $16.4 million, plus pre-judgment interest
and attorneys fees totaling approximately $5.6 million, arising out of an
acquisition by TCA Cable of three cable systems formerly owned by the
plaintiffs. At trial, plaintiffs claimed, among other things, that TCA Cable
breached a letter of intent for the purchase of plaintiffs systems. Cox is
successor to TCA Cable as a result of Coxs 1999 acquisition of TCA Cable.
Through September 30, 2004, Cox has incurred legal expenses of approximately
$0.6 million in defending this action. Cox intends to appeal the verdict, and
the ultimate outcome cannot be predicted at this time. Depreciation and amortization Depreciation and amortization increased to $400.9 million from $382.1
million in the third quarter of 2003 due to an increase in depreciation from
Coxs continuing investments in its broadband network in order to deliver
additional programming and services. Interest expense Interest expense decreased 17% to $97.0 million primarily due to a
reduction of outstanding indebtedness. Loss on derivative instruments, net In August 2003, Cox terminated a series of prepaid forward contracts
accounted for as zero-coupon debt. While these contracts were outstanding,
changes in the market value of the Sprint PCS common stock associated with the
contracts impacted the loss on derivative instruments. As a result of the
termination of the contracts, the pre-tax loss on derivative instruments for
the third quarter of 2004 was insignificant. During the third quarter of 2003,
Cox recorded a $4.2 million pre-tax gain on derivative instruments primarily
resulting from the change in the fair value of certain derivative instruments
embedded in Coxs zero-coupon debt that were indexed to shares of Sprint PCS
common stock that Cox owned. 25




---



##### Table of Contents



(Loss) gain on investments, net Net loss on investments was nominal for the third quarter of 2004. The
net gain on investments for the comparable period in 2003 of $43.7 million was
primarily due to:  
    
    $57.3 million pre-tax gain on the sale of 13.9 million
 shares of Sprint PCS common stock; partially offset by
    
    $4.9 million pre-tax loss as a result of the change in
market value of Coxs investment in Sprint PCS common stock
classified as trading; and
    
    $8.8 million decline in the fair value of certain
investments considered to be other than temporary. Equity in net losses of affiliated companies Equity in net losses of affiliated companies for the third quarter of 2004
was $1.1 million compared to $3.2 million for the third quarter of 2003.
Generally, this loss is attributable to Coxs proportionate share of the
investees loss. Although Cox has various levels of ownership and rights with
respect to the companies in which it has equity investments, Cox has little, if
any, control over the financial position of these companies. Therefore, Cox
cannot predict the impact that its equity investments will have on its future
operations. Loss on extinguishment of debt For the third quarter of 2003, Cox recorded a $443.8 million pre-tax loss
on extinguishment of debt consisting of:  
    
    $412.8 million pre-tax loss resulting from the purchase of
$1.8 billion aggregate principal amount at maturity of Discount Debentures
pursuant to Coxs offer to purchase any and all Discount Debentures;
    
    $29.5 million pre-tax loss resulting from the termination of
Coxs series of prepaid forward contracts to sell up to 19.5 million
 shares of Sprint PCS common stock; and
    
    $1.5 million pre-tax loss resulting from the purchase of
$250.0 million aggregate principal amount of REPS. Net income (loss) Net income for the third quarter of 2004 was $42.0 million compared to a
net loss of $215.1 million for the comparable period in 2003. Nine Months Ended September 30, 2004 Compared with Nine Months Ended September
30, 2003 The following table sets forth summarized consolidated financial
information for the nine months ended September 30, 2004 and 2003. Nine Months EndedSeptember 302004
    
    2003
    
    $ Change
    
    % Change(Thousands of Dollars)Revenues
    
    $
    4,753,656
    
    
    $
    4,250,389
    
    
    $
    503,267
    
    
    
    12
    %Cost of services
    
    
    1,947,367
    
    
    
    1,786,926
    
    
    
    160,441
    
    
    
    9
    %Selling, general and administrative
expenses
    
    
    1,015,736
    
    
    
    908,432
    
    
    
    107,304
    
    
    
    12
    %Loss on litigation
    
    
    22,600
    
    
    
    
    
    
    
    22,600
    
    
    
    NMDepreciation and amortization
    
    
    1,190,051
    
    
    
    1,130,647
    
    
    
    59,404
    
    
    
    5
    %Loss (gain) on sale of cable systems
    
    
    5,021
    
    
    
    (469
    )
    
    
    5,490
    
    
    
    NMOperating income
    
    
    572,881
    
    
    
    424,853
    
    
    
    148,028
    
    
    
    35
    %Interest expense
    
    
    (289,201
    )
    
    
    (370,652
    )
    
    
    81,451
    
    
    
    (22
    %)Loss on derivative
instruments, net
    
    
    (97
    )
    
    
    (22,518
    )
    
    
    22,421
    
    
    
    (100
    %)Gain on investments, net
    
    
    28,931
    
    
    
    166,069
    
    
    
    (137,138
    )
    
    
    (83
    %)Equity in net losses of affiliated
companies
    
    
    (1,325
    )
    
    
    (9,689
    )
    
    
    8,364
    
    
    
    (86
    %)Loss on extinguishment of debt
    
    
    (7,006
    )
    
    
    (450,069
    )
    
    
    443,063
    
    
    
    (98
    %)Other, net
    
    
    (3,198
    )
    
    
    (882
    )
    
    
    (2,316
    )
    
    NMIncome tax expense (benefit)
    
    
    137,437
    
    
    
    (141,475
    )
    
    
    278,912
    
    
    NMMinority interest, net of tax
    
    
    (1,203
    )
    
    
    (5,129
    )
    
    
    3,926
    
    
    
    (77
    %)Net income (loss)
    
    $
    162,345
    
    
    $
    (126,542
    )
    
    $
    288,887
    
    
    NM
 NM denotes percentage is not meaningful 26




---



##### Table of Contents



Revenues

The following table sets forth summarized revenue information for the nine
months ended September 30, 2004 and 2003.

Nine Months Ended September 30% of
    
    
    
    
    
    % of2004
    
    Total
    
    2003
    
    Total
    
    $ Change
    
    % Change(Thousands of Dollars)ResidentialVideo
    
    $
    2,875,612
    
    
    
    60
    %
    
    $
    2,725,605
    
    
    
    64
    %
    
    $
    150,007
    
    
    
    6
    %Data
    
    
    812,169
    
    
    
    17
    %
    
    
    631,867
    
    
    
    15
    %
    
    
    180,302
    
    
    
    29
    %Telephony
    
    
    425,415
    
    
    
    9
    %
    
    
    343,138
    
    
    
    8
    %
    
    
    82,277
    
    
    
    24
    %Other
    
    
    77,019
    
    
    
    2
    %
    
    
    61,532
    
    
    
    1
    %
    
    
    15,487
    
    
    
    25
    %Total residential
    
    
    4,190,215
    
    
    
    88
    %
    
    
    3,762,142
    
    
    
    88
    %
    
    
    428,073
    
    
    
    11
    %Commercial
    
    
    260,126
    
    
    
    5
    %
    
    
    209,933
    
    
    
    5
    %
    
    
    50,193
    
    
    
    24
    %Advertising
    
    
    303,315
    
    
    
    7
    %
    
    
    278,314
    
    
    
    7
    %
    
    
    25,001
    
    
    
    9
    %Total revenues
    
    $
    4,753,656
    
    
    
    100
    %
    
    $
    4,250,389
    
    
    
    100
    %
    
    $
    503,267
    
    
    
    12
    %


The $503.3 million increase in total revenues is primarily attributable
to:



| |  |  | a 25% increase in customers for advanced services, which include
digital cable, high-speed Internet access and telephony customers;      
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | an increase in basic cable rates resulting from increased
programming costs and inflation, as well as increased channel
availability; and
|
| |  |  | an increase in commercial broadband customers, as well as an increase in
advertising sales.                                              

Cox has experienced solid growth in digital cable, residential high-speed
Internet and telephony customers. For the nine months ended September 30, 2004,
Cox:



| |  |  | ended the period with approximately 6.3 million basic video
customers, up 0.4% from September 30, 2003.
| | - |  | -------------------------------------------------------------------------------------------------------
|
| |  |  | added 210,172 digital cable customers, which contributed to
year-over-year growth of 14%.              
|
| |  |  | added 443,318 high-speed Internet customers, which contributed to
year-over-year growth of 32%.        
|
| |  |  | added 227,820 telephony customers, which contributed to
year-over-year customer growth of 33%.         

Cox expects its overall growth trend to continue. Cox also anticipates
continued customer demand for its existing portfolio of broadband products, as
well as for new services such as Entertainment On Demand, Home Networking,
high-definition television and digital video recorders.

Costs and expenses (cost of services and selling, general and administrative
expenses)

27



---



##### Table of Contents



The following table sets forth summarized operating expenses for the nine
months ended September 30, 2004 and 2003. Nine Months EndedSeptember 302004
    
    2003
    
    $ Change
    
    % Change(Thousands of Dollars)Cost of servicesProgramming costs
    
    $
    963,208
    
    
    $
    870,195
    
    
    $
    93,013
    
    
    
    11
    %Other cost of
services
    
    
    984,159
    
    
    
    916,731
    
    
    
    67,428
    
    
    
    7
    %Total cost of
services
    
    
    1,947,367
    
    
    
    1,786,926
    
    
    
    160,441
    
    
    
    9
    %Selling, general and administrativeMarketing
    
    
    251,244
    
    
    
    213,302
    
    
    
    37,942
    
    
    
    18
    %General and administrative
    
    
    764,492
    
    
    
    695,130
    
    
    
    69,362
    
    
    
    10
    %Total selling, general and
administrative
    
    
    1,015,736
    
    
    
    908,432
    
    
    
    107,304
    
    
    
    12
    %Total costs and expenses
    
    $
    2,963,103
    
    
    $
    2,695,358
    
    
    $
    267,745
    
    
    
    10
    %
 Cost of services includes cable programming costs, which are costs paid to
programmers for cable content and are generally paid on a per-subscriber basis.
Cost of services also includes other direct costs and field service and call
center costs. Other direct costs include costs that Cox incurs in conjunction
with providing its residential, commercial and advertising services. Field
service costs include costs associated with providing and maintaining Coxs
broadband network and customer care costs necessary to maintain its customer
base. Cost of services increased $160.4 million over the comparable period in
2003 due to a $93.0 million increase in programming costs reflecting
programming rate increases and customer growth. Approximately 9% of the
increase in programming costs was attributable to programming rate increases,
and 2% was related to customer growth. Other cost of services increased $67.4
million, primarily due to 25% growth in advanced-service customers over the
last twelve months, partially offset by cost savings achieved through
successful field service initiatives. Selling, general and administrative expenses include marketing, salaries
and benefits, commissions and bonuses, travel, facilities, insurance and other
administrative expenses. Selling, general and administrative expenses
increased $107.3 million primarily due to:  
    
    a $69.4 million increase in general and administrative expenses
primarily related to increased salaries and benefits and the cost of
trials of new video and telephony products; and
    
    a $37.9 million increase in marketing expense primarily due to the
launch of faster high-speed Internet service, new high-speed Internet
tiers and new video products, as well as a 9% increase in costs
associated with Cox Media, Coxs advertising sales business. Cox expects continued increases in programming costs and will continue to
pass through some portion of these increases to its customers. In addition, Cox
expects to have continued growth in advanced services, which include digital
cable, high-speed Internet access and telephony, both as a result of increased
penetration where these services were available in 2003 and continued roll-out
of these services in new areas during 2004. As a result of these trends, Cox
expects its cost of services and, to a lesser degree, selling, general and
administrative expenses to increase. Depreciation and amortization Depreciation and amortization increased to $1.2 billion from $1.1 billion
in the nine months ended September 30, 2003. This was mainly due to an
increase in depreciation from Coxs continuing investments in its broadband
network in order to deliver additional programming and services. 28




---



##### Table of Contents



Loss (gain) on sale of cable systems During the nine months ended September 30, 2004, Cox recorded a $5.0
million pre-tax loss on the sale of certain small, non-clustered cable systems
in Oklahoma, Kansas, Texas and Arkansas, which in the aggregate consisted of
approximately 53,000 basic cable subscribers. Interest expense Interest expense decreased 22% to $289.2 million primarily due to interest
savings as a result of a reduction of outstanding indebtedness and Coxs
interest rate swap agreements. Loss on derivative instruments, net In August 2003, Cox terminated a series of prepaid forward contracts
accounted for as zero-coupon debt. While these contracts were outstanding,
changes in the market value of the Sprint PCS common stock associated with the
contracts impacted the loss on derivative instruments. As a result of the
termination of the contracts, the pre-tax loss on derivative instruments for
the nine months ended September 30, 2004 was insignificant. For the nine
months ended September 30, 2003, Cox recorded a $22.5 million pre-tax loss on
derivative instruments primarily due to a $4.4 million pre-tax loss resulting
from the change in the fair value of Coxs net settleable warrants and an $18.7
million pre-tax loss resulting from the change in the fair value of certain
derivative instruments embedded in Coxs zero-coupon debt that were indexed to
shares of Sprint PCS common stock that Cox owned. Gain on investments, net Net gain on investments of $28.9 million for the nine months ended
September 30, 2004 was due to a $2.3 million pre-tax gain on the sale of all
remaining shares of Sprint stock held by Cox, a $19.5 million pre-tax gain on
the sale of 0.1 million shares of Sprint PCS preferred stock and a $7.3 million
pre-tax gain on the sale of certain other non-strategic investments. Net gain on investments of $166.1 million for the nine months ended
September 30, 2003 was primarily due to:  
    
    $154.5 million pre-tax gain on the sale of 46.8 million
 shares of Sprint PCS common stock;
    
    $21.8 million pre-tax gain as a result of the change in
market value of Coxs investment in Sprint PCS common stock
classified as trading; partially offset by
    
    $9.6 million pre-tax decline in the fair value of certain
investments considered to be other than temporary. Equity in net losses of affiliated companies Equity in net losses of affiliated companies for the nine months ended
September 30, 2004 was $1.3 million compared to $9.7 million for the comparable
period in 2003. Generally, this loss is attributable to Coxs proportionate
share of the investees loss. Although Cox has various levels of ownership and
rights with respect to the companies in which it has equity investments, Cox
has little, if any, control over the financial position of these companies.
Therefore, Cox cannot predict the impact that its equity investments will have
on its future operations. Loss on extinguishment of debt During the nine months ended
September 30, 2004, Cox recorded a $7.0 million pre-tax
loss on extinguishment of debt due to the redemption of
$14.6 million aggregate principal amount of the PRIZES and
$0.1 million aggregate principal amount of the Premium PHONES,
which represented all remaining outstanding PRIZES and Premium PHONES. For the nine months ended September 30, 2003, Cox recorded a $450.1
million pre-tax loss on extinguishment of debt consisting of: 29




---



##### Table of Contents




    
    $412.8 million pre-tax loss resulting from the purchase of
$1.8 billion aggregate principal amount at maturity of the Discount Debentures
pursuant to Coxs offer to purchase any and all Discount Debentures;
    
    $29.5 million pre-tax loss resulting from the termination of
Coxs series of prepaid forward contracts to sell up to 19.5 million
 shares of Sprint PCS common stock;
    
    $1.5 million pre-tax loss resulting from the purchase of
$250.0 million aggregate principal amount of REPS;
    
    $10.2 million pre-tax loss resulting from the purchase of
$422.7 million aggregate principal amount at maturity of Coxs
convertible senior notes due 2021 pursuant to the holders right to
require Cox to purchase the convertible notes; partially offset by
    
    $3.9 million pre-tax gain resulting from the purchase of $1.3
billion aggregate principal amount of the PRIZES and $274.9 million
aggregate principal amount of the Premium PHONES pursuant to Coxs
offer to purchase any and all PRIZES and Premium PHONES. Net income (loss) Net income for the nine months ended September 30, 2004 was $162.3 million
compared to net loss of $126.5 million for the comparable period in 2003. Liquidity and Capital Resources Uses of Cash As part of Coxs ongoing strategic plan, Cox has invested, and will
continue to invest, capital to enhance the reliability and capacity of its
broadband network in preparation for the offering of new services. Cox believes
it will be able to meet its capital needs for the next twelve months and the
foreseeable future with amounts available under existing revolving credit
facilities and its commercial paper program. During the nine months ended September 30, 2004, Cox made capital
expenditures of $1.0 billion. These expenditures were primarily directed at
costs related to electronic equipment located on customers premises and costs
associated with network equipment used to enter new service areas. Capital expenditures for the year ending 2004 are expected to be
approximately $1.4 billion. Although management continuously reviews industry
and economic conditions to identify opportunities, Cox does not have any
current plans to make any material acquisitions of cable systems or enter into
any cable systems exchanges in 2004. During the nine months ended September 30, 2004, Cox repaid $562.7 million
of debt, which included the repurchase of its remaining outstanding convertible
senior notes, PRIZES and Premium PHONES and the repayment of its $375 million
7.5% notes and its $100 million 6.69% medium-term notes, each at their
maturity. During the nine months ended September 30, 2004, Cox purchased of the
minority interest in TCA Cable Partners for cash consideration of approximately
$153.0 million. Sources of Cash During the nine months ended September 30, 2004, Cox generated $1.4
billion from operating activities. Net commercial paper borrowings were $203.7
million. Proceeds from the sale of investments of $70.2 million included the
sale of 0.1 million shares of Sprint PCS preferred stock for net proceeds of
$56.9 million, the sale of certain other non-strategic investments for proceeds
of $10.3 million and the sale of all remaining Sprint stock for proceeds of
$3.0 million. Cox received net proceeds of approximately $53.1 million from
the sale of certain small, non-clustered cable systems in Oklahoma, Kansas,
Texas and Arkansas. 30




---



##### Table of Contents



Other At September 30, 2004, Cox had approximately $6.7 billion of outstanding
indebtedness. Derivative adjustments in accordance with SFAS No. 133 reduced
the reported debt balance at September 30, 2003 by approximately $72.1 million
to approximately $7.0 billion. As a result of Coxs purchase of its
exchangeable subordinated debentures, net settlement of its zero-coupon debt
and sales of Sprint PCS stock during 2003, SFAS No. 133 adjustments did not
significantly impact reported indebtedness at September 30, 2004 and are not
expected to be material in the future. In September 2004, Cox purchased DR Partners 25% interest in TCA Cable
Partners, pursuant to the partnership agreement, for cash consideration of
approximately $153.0 million. TCA Cable Partners was a general partnership
owned 75% by Cox (indirectly through subsidiaries) and 25% by DR Partners,
operating cable systems in the Southwest, mainly Arkansas, serving
approximately 260,000 customers. Other Cox
is subject to various ongoing federal and state income tax audits. Cox is
currently negotiating the settlement of its 1998-2001 federal income tax audit
and expects a conclusion of this audit to occur during the fourth quarter of
2004. Cox has previously reserved amounts that Cox believes will
adequately provide for the anticipated outcome of this audit. Recent Developments On October 15, 2004, a verdict was delivered in the case of Gardner v. Cox
Communications, Inc. and Cox Classic Cable, Inc. in the Probate Court of
Galveston County, Texas. The verdict, which is subject to appeal, assesses
damages against Cox in the amount of $16.4 million, plus pre-judgment interest
and attorneys fees totaling approximately $5.6 million, arising out of an
acquisition by TCA Cable of three cable systems formerly owned by the
plaintiffs. At trial, plaintiffs claimed, among other things, that TCA Cable
breached a letter of intent for the purchase of plaintiffs systems. Cox is
successor to TCA Cable as a result of Coxs 1999 acquisition of TCA Cable.
Through September 30, 2004, Cox has incurred legal expenses of approximately
$0.6 million in defending this action. Cox intends to appeal the verdict, and
the ultimate outcome cannot be predicted at this time. These amounts are
recorded within Loss on litigation in the accompanying Condensed Consolidated
Statements of Operations. On October 19, 2004, Cox and CEI announced that an agreement had been
reached for CEI to acquire the outstanding publicly held minority shares of Cox
for $34.75 per share. The transaction will be structured as a cash tender
offer by Cox Holdings, Inc., a wholly-owned subsidiary of CEI, and Cox,
followed by a merger. Upon completion of the transaction, anticipated to be
mid-December, Cox will become a wholly owned subsidiary of CEI. Cox Holdings
and Cox commenced a tender offer under the agreement on November 3, 2004, and
the scheduled expiration date for the tender offer is currently December 2,
2004. Consummation of the tender offer is subject to certain conditions,
including the condition that the majority of the publicly held minority
interest shares are validly tendered and not withdrawn before the expiration of
the tender offer. The information in this report regarding the tender offer for Cox shares
not beneficially owned by CEI is intended for informational purposes only and
is not an offer to buy, a solicitation of an offer to sell or a recommendation
to sell any shares of Cox Communications Class A common stock. The
solicitation of offers to sell Cox shares is only being made pursuant to a
tender offer statement on Schedule TO and an offer to purchase and related
materials. Cox stockholders and other interested parties are urged to read the
tender offer statement on Schedule TO, the offer to purchase and Cox
Communications solicitation/recommendation statement on Schedule 14D-9 and
other relevant documents filed with the SEC by CEI and Cox Communications
because they contain important information. Cox stockholders will be 31




---



##### Table of Contents



able to obtain such documents free of charge at the SECs web site:
www.sec.gov or from Cox at 1400 Lake Hearn Drive, Atlanta, GA 30319, Attn:
Corporate Communications. Currently, both S&P and
Fitch have a negative outlook on Coxs credit
ratings in light of CEIs offer to purchase all outstanding Cox Class A common
stock that it does not beneficially own. On October 19, 2004, S&P confirmed
that based on the anticipated increase in indebtedness required to complete
CEIs offer and the follow-on merger, the credit rating of Cox would be lowered
to BBB- from BBB. Fitch has also indicated that it expects to downgrade the
credit rating of Cox to BBB- from BBB upon consummation of CEIs offer and the
follow-on merger. Cox believes that if S&P and/or Fitch were to downgrade Cox
following CEIs offer and the follow-on merger, these actions would not be
expected to have a material adverse impact on the ability to borrow under its
credit agreement. On October 27, 2004,
Moodys Investors Service downgraded Coxs credit
rating from Baa2 to Baa3 with a stable outlook. Moodys also rated Coxs
anticipated new credit facility to be arranged in connection with Coxs and Cox
Holdings joint tender for Coxs Class A common stock Baa3. Cox believes that
the Moodys downgrade will not have a material adverse impact on its liquidity. Caution Concerning Forward-Looking Statements This Form 10-Q 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 that relate to
Coxs future plans, earnings, objectives, expectations, performance, and
similar projections, as well as any facts or assumptions underlying these
statements or projections. Actual results may differ materially from the
results expressed or implied in these forward-looking statements due to various
risks, uncertainties or other factors. These factors include competition
within the broadband communications industry, Coxs ability to achieve
anticipated subscriber and revenue growth, Coxs success in implementing new
services and other operating initiatives, and Coxs ability to generate
sufficient cash flow to meet debt service obligations and finance operations.
For a more detailed discussion of these and other risk factors, see the
Caution Concerning Forward-Looking Statements section of Coxs Annual Report
on Form 10-K for the year ended December 31, 2003. Cox assumes no
responsibility to update any forward-looking statements as a result of new
information, future events or otherwise. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Cox has estimated the fair value of its financial instruments as of
September 30, 2004 and December 31, 2003 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 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.
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
Coxs investments is discussed in Note 3. Investments in Part I, Item 1.
Condensed Consolidated Financial Statements. The fair value of interest rate swaps used for hedging purposes was
approximately $30.6 million and $61.2 million at September 30, 2004 and
December 31, 2003, respectively, and represents the estimated amount that Cox
would receive upon termination of the swap agreements. 32




---



##### Table of Contents



Coxs outstanding commercial paper bears interest at current market rates
and, thus, approximates fair value at September 30, 2004 and December 31, 2003.
Cox is exposed to interest rate volatility with respect to these variable-rate
instruments. The estimated fair value of Coxs fixed-rate notes and debentures and
exchangeable subordinated debentures at September 30, 2004 and December 31,
2003 are based on quoted market prices or a discounted cash flow analysis using
Coxs incremental borrowing rate for similar types of borrowing 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 September 30, 2004 and
December 31, 2003 is as follows: September 30, 2004
    
    December 31, 2003Fair Value
    
    
    
    
    
    
    
    
    
    Fair ValueCarrying
    
    Fair
    
    (1% Decrease
    
    Carrying
    
    Fair
    
    (1% DecreaseValue
    
    Value
    
    in Interest Rates)
    
    Value
    
    Value
    
    in Interest Rates)(Millions of Dollars)Fixed-rate notes and
Debentures
    
    $
    6,144.9
    
    
    
    6,442.9
    
    
    
    6,817.8
    
    
    $
    6,683.4
    
    
    $
    7,323.0
    
    
    $
    7,760.8Exchangeable subordinated
Debentures
    
    
    19.2
    
    
    
    30.8
    
    
    
    31.1
    
    
    
    26.1
    
    
    
    35.6
    
    
    
    38.9
 33




---



##### Table of Contents



Item 4. Controls and Procedures The Chief Executive Officer and the Chief Financial Officer of Cox (its
principal executive officer and principal financial officer, respectively) have
concluded, based on their evaluation as of September 30, 2004, that Coxs
disclosure controls and procedures: are effective to ensure that information
required to be disclosed by Cox in the reports filed or submitted by it under
the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the SECs rules
and forms; and include controls and procedures designed to ensure that
information required to be disclosed by Cox in such reports is accumulated and
communicated to Coxs management, including the Chief Executive Officer and the
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. There were no changes in Coxs internal controls over financial reporting
that occurred during the quarter ended September 30, 2004 that have materially
affected, or are reasonably likely to materially affect, Coxs internal control
over financial reporting. Coxs disclosure controls and procedures are designed to provide a
reasonable level of assurance of reaching Coxs desired disclosure control
objectives and are effective in reaching that level of reasonable assurance. 
 Part II - Other Information 
 Item 1. Legal Proceedings For a description of certain legal matters, refer to Note 12. Commitments
and Contingencies in Part I, Item 1. Condensed Consolidated Financial
Statements. Cox is also a party to various legal proceedings that are ordinary and
incidental to its business. Management does not expect that any legal
proceedings currently pending will have a material adverse impact on Coxs
consolidated financial position, consolidated results of operations or
consolidated cash flows. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds As of June 30, 2004, Cox had one outstanding series of exchangeable
subordinated debentures, referred to as Discount Debentures, that were
associated at issuance with shares of Sprint Corporations stock. Effective as
of April 23, 2004, Sprint eliminated its PCS tracking stock by mandating the
exchange of its PCS shares for shares of its FON common stock. Following this
recombination, the Discount Debentures are exchangeable by holders for, at
Coxs option, 3.794 shares of FON stock, cash based on the market value of such
FON shares or a combination of both. 
 Item 3. Defaults Upon Senior Securities None. 
 Item 4. Submission of Matters to a Vote of Security Holders None. 
 Item 5. Other Information None. 34




---



##### Table of Contents



Item 6. Exhibits (a) Exhibits: 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.)21
    
    
    
    Subsidiaries of Cox Communications, Inc. (Incorporated by
reference to Exhibit 21 to Coxs Quarterly Report on Form
10-Q, filed with the Commission on August 5, 2004.)31.1
    
    
    
    Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.31.2
    
    
    
    Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.32.1
    
    
    
    Certification of Chief Executive
Officer and Chief Financial Officer Pursuant to Rule 13a-14(b) of the Securities Exchange
Act of 1934.
 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Cox Communications, Inc.Date: November 4, 2004
    
    /s/ Jimmy W. HayesJimmy W. HayesExecutive Vice President, Financeand Chief Financial Officer(principal financial officer andduly authorized officer)
 35