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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 June 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 (COX LOGO) COMMUNICATIONS
 Cox Communications, Inc.
 (Exact name of registrant as specified in its charter)
 Delaware(State or other jurisdiction of incorporation or organization)
    
    58-2112281(I.R.S. Employer Identification No.)
 1400 Lake Hearn Drive, Atlanta, Georgia(Address of principal executive offices)
    
    30319(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
[   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act
Rule 12b-2).     Yes
[X] No [   ] There
were 604,950,345 shares of Class A
Common Stock and 27,597,792 shares
of Class C Common Stock
outstanding as of July 31, 2004.




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Cox Communications, Inc.
Form 10-Q
For the Quarter Ended June 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
    
    
    20Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4.
    
    Controls and Procedures
    
    
    29Part II  Other InformationItem 1.
    
    Legal Proceedings
    
    
    29Item 2.
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    29Item 3.
    
    Defaults Upon Senior Securities
    
    
    29Item 4.
    
    Submission of Matters of a Vote of Security Holders
    
    
    29Item 5.
    
    Other Information
    
    
    30Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    30EX-10.1 FIVE YEAR CREDIT AGREEMENT, DATED JUNE 4, 2004EX-10.2 SHARE CONVERSION AGREEMENT, DATED JUNE 23, 2004EX-21 SUBSIDIARIES OF COX COMMUNICATIONS, INC.EX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SETION 906 CERTIFICATION OF THE CEO AND THE CFO
  Preliminary Note This quarterly report on Form 10-Q is for the three and six-month periods
ended June 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.




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##### Table of Contents



Part I  Financial Information 
 Item 1. Condensed Consolidated Financial Statements Cox Communications, Inc.
Condensed Consolidated Balance Sheets June 30
    
    December 312004
    
    2003(unaudited)(Thousands of Dollars)AssetsCurrent assetsCash
    
    $
    75,368
    
    
    $
    83,841Accounts and notes receivable, less allowance for doubtful
accounts of $23,357 and $26,175
    
    
    379,100
    
    
    
    370,832Amounts due from Cox Enterprises, Inc. (CEI)
    
    
    10,871
    
    
    
    Other current assets
    
    
    147,316
    
    
    
    131,106Total current assets
    
    
    612,655
    
    
    
    585,779Net plant and equipment
    
    
    7,729,694
    
    
    
    7,907,561Investments
    
    
    58,710
    
    
    
    109,380Intangible assets
    
    
    16,029,591
    
    
    
    15,697,495Other noncurrent assets
    
    
    76,720
    
    
    
    117,361Total assets
    
    $
    24,507,370
    
    
    $
    24,417,576Liabilities and shareholders equityCurrent liabilitiesAccounts payable and accrued expenses
    
    $
    695,807
    
    
    $
    778,708Other current liabilities
    
    
    444,773
    
    
    
    450,553Current portion of long-term debt
    
    
    527,211
    
    
    
    48,344Amounts due to CEI
    
    
    
    
    
    
    3,980Total current liabilities
    
    
    1,667,791
    
    
    
    1,281,585Deferred income taxes
    
    
    6,568,869
    
    
    
    6,388,970Other noncurrent liabilities
    
    
    157,877
    
    
    
    164,070Long-term debt, less current portion
    
    
    6,136,613
    
    
    
    6,963,456Total liabilities
    
    
    14,531,150
    
    
    
    14,798,081Commitments and contingencies (Note 12)Minority interest in equity of consolidated subsidiaries
    
    
    140,091
    
    
    
    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: 610,479,850 and 598,481,602; shares
outstanding: 604,947,345 and 592,958,582
    
    
    610,480
    
    
    
    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
    
    
    4,790,123
    
    
    
    4,545,635Retained earnings
    
    
    4,621,006
    
    
    
    4,500,621Accumulated other comprehensive (loss) income
    
    
    (4
    )
    
    
    15,548Class A common stock in treasury, at cost: 5,532,505 and 5,523,020
shares
    
    
    (213,074
    )
    
    
    (212,744
    )Total shareholders equity
    
    
    9,836,129
    
    
    
    9,479,976Total liabilities and shareholders equity
    
    $
    24,507,370
    
    
    $
    24,417,576
 See notes to condensed consolidated financial statements. 2




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Cox Communications, Inc.
Condensed Consolidated Statements of Operations Three Months
    
    Six MonthsEnded June 30
    
    Ended June 302004
    
    2003
    
    2004
    
    2003(unaudited)(Thousands of Dollars, excluding share data)Revenues
    
    $
    1,595,240
    
    
    $
    1,423,939
    
    
    $
    3,135,597
    
    
    $
    2,790,221Costs and expensesCost of services (excluding depreciation and amortization)
    
    
    644,627
    
    
    
    590,122
    
    
    
    1,280,443
    
    
    
    1,169,914Selling, general and administrative expenses
    
    
    334,576
    
    
    
    301,702
    
    
    
    671,884
    
    
    
    608,738Depreciation and amortization
    
    
    397,114
    
    
    
    364,274
    
    
    
    789,180
    
    
    
    748,594Loss (gain) on sale of cable systems
    
    
    5,021
    
    
    
    (469
    )
    
    
    5,021
    
    
    
    (469
    )Operating income
    
    
    213,902
    
    
    
    168,310
    
    
    
    389,069
    
    
    
    263,444Interest expense
    
    
    (95,591
    )
    
    
    (134,394
    )
    
    
    (192,203
    )
    
    
    (264,218
    )Loss on derivative instruments, net
    
    
    (15
    )
    
    
    (24,197
    )
    
    
    (54
    )
    
    
    (26,700
    )Gain on investments, net
    
    
    2,326
    
    
    
    124,146
    
    
    
    29,135
    
    
    
    122,395Equity in net losses of affiliated companies
    
    
    (1,167
    )
    
    
    (4,354
    )
    
    
    (195
    )
    
    
    (6,518
    )(Loss) gain on extinguishment of debt
    
    
    (7,006
    )
    
    
    3,896
    
    
    
    (7,006
    )
    
    
    3,896Other, net
    
    
    (258
    )
    
    
    (616
    )
    
    
    (1,767
    )
    
    
    (957
    )Income before income taxes and
minority interest
    
    
    112,191
    
    
    
    132,791
    
    
    
    216,979
    
    
    
    91,342Income tax expense
(benefit)
    
    
    49,922
    
    
    
    13,402
    
    
    
    96,022
    
    
    
    (1,096
    )Income before minority interest
    
    
    62,269
    
    
    
    119,389
    
    
    
    120,957
    
    
    
    92,438Minority interest, net of tax
    
    
    413
    
    
    
    (1,644
    )
    
    
    (572
    )
    
    
    (3,914
    )Net income
    
    $
    62,682
    
    
    $
    117,745
    
    
    $
    120,385
    
    
    $
    88,524Share dataBasic net income per shareBasic weighted-average shares outstanding
    
    
    621,755,118
    
    
    
    620,256,065
    
    
    
    621,221,210
    
    
    
    620,239,661Basic net income per share
    
    $
    0.10
    
    
    $
    0.19
    
    
    $
    0.19
    
    
    $
    0.14Diluted net income per shareDiluted weighted-average shares outstanding
    
    
    633,386,628
    
    
    
    629,728,659
    
    
    
    633,327,627
    
    
    
    629,693,126Diluted net income per share
    
    $
    0.10
    
    
    $
    0.19
    
    
    $
    0.19
    
    
    $
    0.14
 See notes to condensed consolidated financial statements. 3




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Cox Communications, Inc.
Condensed Consolidated Statement of Shareholders Equity Class AAccumulated
    
    CommonSeries A
    
    Common Stock
    
    Additional
    
    
    
    
    
    Other
    
    Stock inPreferred
    
    
    
    Paid-in
    
    Retained
    
    Comprehensive
    
    Treasury,
    
    
    
    
    
    ComprehensiveStock
    
    Class A
    
    Class C
    
    Capital
    
    Earnings
    
    Income (Loss)
    
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    120,385
    
    
    
    
    
    
    
    
    
    
    
    120,385
    
    
    $
    120,385Issuance of stock related to
stock compensation plans (including tax
benefit on stock options exercised of $1,942)
    
    
    
    
    
    
    786
    
    
    
    
    
    
    
    19,245
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,031Shares 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    231,619Change in net accumulated unrealized
gain on securities, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,552
    )
    
    
    
    
    
    
    (15,552
    )
    
    
    (15,552
    )Other comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,552
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    104,833June 30, 2004
    
    $
    
    
    
    $
    610,480
    
    
    $
    27,598
    
    
    $
    4,790,123
    
    
    $
    4,621,006
    
    
    $
    (4
    )
    
    $
    (213,074
    )
    
    $
    9,836,129
 See notes to condensed consolidated financial statements. 4




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Cox Communications, Inc.
Condensed Consolidated Statements of Cash Flows Six MonthsEnded June 302004
    
    2003(unaudited)(Thousands of Dollars)Cash flows from operating activitiesNet income
    
    $
    120,385
    
    
    $
    88,524Adjustments to reconcile net income to net cash provided by
operating activities:Depreciation and amortization
    
    
    789,180
    
    
    
    748,594Loss (gain) on sale of cable system
    
    
    5,021
    
    
    
    (469
    )Deferred income taxes
    
    
    53,333
    
    
    
    (232,527
    )Loss on derivative instruments, net
    
    
    54
    
    
    
    26,700Loss (gain) on extinguishment of debt
    
    
    7,006
    
    
    
    (3,896
    )Write-off of debt issuance costs
    
    
    
    
    
    
    36,063Gain on investments, net
    
    
    (29,135
    )
    
    
    (122,395
    )Equity in net losses of affiliated companies
    
    
    195
    
    
    
    6,518Minority interest, net of tax
    
    
    572
    
    
    
    3,914Other, net
    
    
    6,138
    
    
    
    77,870(Increase) decrease in accounts and notes receivable
    
    
    (9,510
    )
    
    
    20,245(Increase) decrease in other assets
    
    
    (17,040
    )
    
    
    33,829Decrease in accounts payable and accrued expenses
    
    
    (55,019
    )
    
    
    (91,874
    )Increase in taxes payable
    
    
    18,178
    
    
    
    231,290Decrease in other liabilities
    
    
    (31,938
    )
    
    
    (3,518
    )Net cash provided by operating activities
    
    
    857,420
    
    
    
    818,868Cash flows from investing activitiesCapital expenditures
    
    
    (617,869
    )
    
    
    (662,892
    )Investments in affiliated companies
    
    
    (15,827
    )
    
    
    (8,412
    )Proceeds from the sale of investments
    
    
    70,230
    
    
    
    161,739(Increase) decrease in amounts due from CEI
    
    
    (10,871
    )
    
    
    21,109Proceeds from the sale of cable systems
    
    
    53,076
    
    
    
    822Other, net
    
    
    12,312
    
    
    
    (5,234
    )Net cash used in investing activities
    
    
    (508,949
    )
    
    
    (492,868
    )Cash flows from financing activitiesCommercial paper (repayments) borrowings, net
    
    
    (266,308
    )
    
    
    110,000Proceeds from issuance of debt
    
    
    
    
    
    
    596,154Repayment of debt
    
    
    (72,549
    )
    
    
    (1,124,971
    )Proceeds from exercise of stock options
    
    
    2,154
    
    
    
    2,535(Decrease) increase in amounts due to CEI
    
    
    (3,980
    )
    
    
    8,489Premium paid on extinguishment of debt
    
    
    
    
    
    
    (19,483
    )Other, net
    
    
    (16,261
    )
    
    
    21,008Net cash used in financing activities
    
    
    (356,944
    )
    
    
    (406,268
    )Net decrease in cash
    
    
    (8,473
    )
    
    
    (80,268
    )Cash at beginning of period
    
    
    83,841
    
    
    
    228,704Cash at end of period
    
    $
    75,368
    
    
    $
    148,436
 See notes to condensed consolidated financial statements. 5




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##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) Quarter Ended June 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. Asset Retirement Obligations On January 1, 2003, Cox adopted Statement of Financial Accounting Standards
(SFAS) No. 143, Accounting for Asset Retirement Obligations, which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 requires that a liability be recognized for an asset
retirement obligation in the period in which it is incurred if a reasonable
estimate of fair value can be made. Certain of Coxs franchise agreements and
lease agreements contain provisions requiring Cox to restore facilities or
remove equipment in the event that the franchise or lease agreement is not
renewed. Cox expects to continually renew its franchise agreements and lease
agreements related to the continued operation of its broadband network, and has
concluded that the related franchise right is an indefinite-lived intangible 6




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Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued asset. Accordingly, Cox has concluded that the timing of the settlement
related to any potential asset retirement obligation is indeterminate. Cox
continually monitors the renewal status of its franchise agreements and its
lease agreements. In the unlikely event that it is anticipated that a
franchise agreement or lease agreement containing such a provision will not be
renewed and Cox is required to remove its equipment (and accordingly the timing
of the settlement related to any potential asset retirement obligation can be
estimated), Cox will record an estimated asset retirement obligation, if
material. Stock Compensation Plans At June 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 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 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 EndedJune 302004
    
    2003(Thousands of Dollars,excluding per share data)Net income, as reported
    
    $
    62,682
    
    
    $
    117,745Add: Stock-based compensation, as reported, net of tax
    
    
    1,319
    
    
    
    559Deduct: Total stock-based compensation
determined under fair value based method
for all awards, net of tax
    
    
    (8,337
    )
    
    
    (6,654
    )Pro forma net income
    
    $
    55,664
    
    
    $
    111,650Net income per share:Basic net income per share  as reported
    
    $
    0.10
    
    
    $
    0.19Basic net income per share  pro forma
    
    
    0.09
    
    
    
    0.18Diluted net income per share  as reported
    
    $
    0.10
    
    
    $
    0.19Diluted net income per share  pro forma
    
    
    0.09
    
    
    
    0.18
 7




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Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued Six Months EndedJune 302004
    
    2003(Thousands of Dollars,excluding per share data)Net income, as reported
    
    $
    120,385
    
    
    $
    88,524Add: Stock-based compensation, as reported, net of
tax
    
    
    2,024
    
    
    
    653Deduct: Total stock-based compensation
determined under fair value based method
for all awards, net of tax
    
    
    (15,101
    )
    
    
    (11,516
    )Pro forma net income
    
    $
    107,308
    
    
    $
    77,661Net income per share:Basic net income per share  as reported
    
    $
    0.19
    
    
    $
    0.14Basic net income per share  pro forma
    
    
    0.17
    
    
    
    0.13Diluted net income per share  as reported
    
    $
    0.19
    
    
    $
    0.14Diluted net income per share  pro forma
    
    
    0.17
    
    
    
    0.12
 Recently Issued Accounting Pronouncements In March 2004, the Emerging Issues Task Force (EITF) ratified its
consensus related to the application guidance within EITF Issue No. 03-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments. EITF Issue No. 03-1 applies to investments in debt and equity
securities within the scope of SFAS No. 115, Accounting for Certain Investments
in Debt and Equity Securities, and equity securities that are not subject to
the scope of SFAS No. 115 and not accounted for under the equity method under
APB Opinion 18 and related interpretations. EITF Issue No. 03-1 requires that a
three-step model be applied in determining when an investment is considered
impaired, whether that impairment is other than temporary and the measurement
of an impairment loss. The recognition and measurement guidance within EITF
Issue No. 03-1 will be applied by Cox to other-than-temporary impairment
evaluations beginning July 1, 2004. The adoption of EITF Issue No. 03-1 is not
expected to have a material impact on Coxs financial position or results of
operations. 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 provides accounting and disclosure guidance for employers who
sponsor postretirement health care plans that provide prescription drug
benefits and becomes effective for Cox on July 1, 2004. In accordance with FSP
106-2, Cox will begin to recognize the effects of the Act on July 1, 2004. The
adoption of FSP 106-2 will 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 June 30
    
    December 312004
    
    2003(Thousands of Dollars)Investments stated at fair value:Available-for-sale
    
    $
    243
    
    
    $
    66,376Derivative instruments
    
    
    1,216
    
    
    
    1,269Equity method investments
    
    
    44,605
    
    
    
    31,088Investments stated at cost
    
    
    12,646
    
    
    
    10,647Total investments
    
    $
    58,710
    
    
    $
    109,380
 8




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##### Table of Contents



Investments Stated at Fair Value The aggregate cost of Coxs investments stated at fair value at June 30,
2004 and December 31, 2003 was $1.7 million and $42.5 million, respectively.
Gross unrealized losses on investments were nominal as of June 30, 2004. Gross
unrealized gains on investments were $25.3 million as of December 31, 2003.
For the three and six months ended June 30, 2004, gross realized gains on
investments stated at fair value were $2.3 million and $29.1 million,
respectively. For the three and six months ended June 30, 2003, gross realized
gains and losses on investments stated at fair value were
$124.5 million and $0.4 million, respectively, and
$124.5 million and $2.1 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 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 June 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 assesses 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 six months ended
June 30, 2003. Cox completed its next impairment test in accordance with SFAS
No. 142 in August 2003. The August 2003 test indicated no impairment of
franchise value. 9




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##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued 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: June 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
    
    $
    58,148
    
    
    $
    19,752
    
    
    $
    38,396
    
    
    $
    58,526
    
    
    $
    21,855
    
    
    $
    36,671Franchise value
    
    
    
    
    
    
    
    
    
    
    15,991,195
    
    
    
    
    
    
    
    
    
    
    
    15,660,824Total intangible assets
    
    
    
    
    
    
    
    
    
    $
    16,029,591
    
    
    
    
    
    
    
    
    
    
    $
    15,697,495
  5.
    
    Debt June 30
    
    December 312004
    
    2003(Thousands of Dollars)Revolving credit facilities
    
    $
    
    
    
    $
    Commercial paper
    
    
    37,000
    
    
    
    302,283Medium-term notes
    
    
    364,393
    
    
    
    364,359Notes and debentures
    
    
    6,023,315
    
    
    
    6,078,904Exchangeable subordinated debentures
    
    
    18,831
    
    
    
    26,138Capitalized lease obligations
    
    
    198,367
    
    
    
    217,992Other
    
    
    21,918
    
    
    
    22,1246,663,824
    
    
    
    7,011,800Less current
portion
    
    
    527,211
    
    
    
    48,344Total long-term debt
    
    $
    6,136,613
    
    
    $
    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 June 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 June 30, 2004 and December 31, 2003. 10




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##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued Notes and Debentures 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. Exchangeable Subordinated Debentures In 2003, Cox purchased approximately 99% of its outstanding exchangeable
subordinated debentures due 2029 (PRIZES), approximately 99% of its outstanding
3% exchangeable subordinated debentures due 2030 (Premium PHONES) and
approximately 97% of its outstanding exchangeable subordinated discount
debentures due 2029 (Discount Debentures) pursuant to cash tender offers. In
June 2004, Cox redeemed all remaining outstanding PRIZES and Premium PHONES for
aggregate cash consideration of $14.7 million.
Exchangeable subordinated debentures at June 30, 2004 were comprised of $62.3
million aggregate principal amount at maturity of Discount Debentures. 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
June 30, 2004 and December 31, 2003: June 30
    
    December 312004
    
    2003Notional amount (in
thousands)
    
    $
    1,750,000
    
    
    $
    1,750,000Weighted-average fixed interest rate received
    
    
    7.38
    %
    
    
    7.38
    %Weighted-average floating interest rate
paid
    
    
    3.76
    %
    
    
    3.27
    %Maturity
    
    
    2004  2009
    
    
    
    2004  2009
 As a result of the settlements under Coxs interest rate swap agreements,
interest expense was reduced by $15.7 million and $33.8 million, respectively,
during the three and six months ended June 30, 2004, and $15.2 million and
$29.0 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. 11




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Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued 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 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 six months ended June 30, 2004 and pre-tax losses on derivative
instruments of $24.2 million and $26.7 million during the three and six months
ended June 30, 2003, respectively. 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 June 30, 2004 or December 31, 2003. The following is a detail
of Coxs loss on derivative instruments for the three and six months ended June
30, 2004 and 2003 followed by a summary of Coxs derivative instruments. Three Months Ended
    
    Six Months EndedJune 30
    
    June 302004
    
    2003
    
    2004
    
    2003(Millions of Dollars)Zero-coupon
debt
    
    $
    
    
    
    $
    (24.5
    )
    
    $
    
    
    
    $
    (22.9
    )Exchangeable
subordinated
debentures
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    0.6Stock purchase
warrants
    
    
    
    
    
    
    (0.1
    )
    
    
    (0.1
    )
    
    
    (4.4
    )Total loss on
derivative
instruments,
net
    
    $
    
    
    
    $
    (24.2
    )
    
    $
    (0.1
    )
    
    $
    (26.7
    )
 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 $21.0 million and $61.2 million
at June 30, 2004 and December 31, 2003, respectively. Zero-Coupon Debt In August 2003, Cox terminated its series of prepaid forward contracts to
sell up to 19.5 million shares of its Sprint PCS common stock. 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 12




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##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued 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) on derivative instruments in Coxs Condensed Consolidated
Statements of Operations for the three and six months ended June 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 June
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 June 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 six
months ended June 30, 2004 and 2003: 13




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##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued Three Months
    
    Six MonthsEnded
    
    EndedJune 30, 2004
    
    June 30, 2004(Thousands of Dollars,excluding per share data)Net income
(A)
    
    $
    62,682
    
    
    $
    120,385Basic weighted-average shares
outstanding
(B)
    
    
    621,755
    
    
    
    621,221Effect of dilutive securities:Restricted
stock
    
    
    1,231
    
    
    
    1,249Employee stock purchase plan
    
    
    51
    
    
    
    77Convertible preferred
stock
    
    
    10,350
    
    
    
    10,781Diluted weighted-average shares
outstanding
(C)
    
    
    633,387
    
    
    
    633,328Net Income per shareBasic net income per share (A/B)
    
    $
    0.10
    
    
    $
    0.19Diluted net income per share (A/C)
    
    $
    0.10
    
    
    $
    0.19
 Three Months
    
    Six MonthsEnded
    
    EndedJune 30, 2003
    
    June 30, 2003(Thousands of Dollars,excluding per share data)Net income
(A)
    
    $
    117,745
    
    
    $
    88,524Basic weighted-average shares
outstanding
(B)
    
    
    620,256
    
    
    
    620,240Effect of dilutive securities:Employee stock purchase
plan
    
    
    84
    
    
    
    64Convertible preferred
stock
    
    
    9,389
    
    
    
    9,389Diluted weighted-average shares
outstanding
(C)
    
    
    629,729
    
    
    
    629,693Net income per shareBasic net income per share
(A/B)
    
    $
    0.19
    
    
    $
    0.14Diluted net income per share (A/C)
    
    $
    0.19
    
    
    $
    0.14
 For the three and six months ended June 30, 2004, 19.0 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 six months ended June 30, 2003, 15.7 million Class A
common shares related to employee stock-based compensation plans and
convertible senior notes were not included in the computation of diluted net
income 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
from CEI at June 30, 2004 was $10.9 million and the amount due to CEI at
December 31, 2003 was $4.0 million. The interest rate was 1.3% at June 30,
2004 and December 31, 2003, respectively. Included in amounts due (to)/from
CEI are the following transactions: 14




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##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued (Thousands of Dollars)Intercompany due to CEI, December 31, 2003
    
    $
    (3,980
    )Cash transferred to CEI
    
    
    170,032Net operating expense reimbursements
    
    
    (155,181
    )Intercompany due from CEI, June 30, 2004
    
    $
    10,871
  9.
    
    Retirement Plans The following table provides a detail of the components of net periodic
benefit cost for the three and six months ended June 30, 2004 and 2003: Three Months Ended June 302004
    
    2003Pension
    
    Other
    
    Pension
    
    OtherBenefits
    
    Benefits
    
    Benefits
    
    BenefitsService cost
    
    $
    8,714
    
    
    $
    1,404
    
    
    $
    6,385
    
    
    $
    1,075Interest cost
    
    
    5,650
    
    
    
    916
    
    
    
    4,337
    
    
    
    699Expected return on plan assets
    
    
    (7,408
    )
    
    
    (445
    )
    
    
    (4,855
    )
    
    
    Prior service cost amortization
    
    
    59
    
    
    
    
    
    
    
    54
    
    
    
    Actuarial (gain) loss amortization
    
    
    1,037
    
    
    
    27
    
    
    
    392
    
    
    
    (22
    )Net periodic benefit cost
    
    $
    8,052
    
    
    $
    1,902
    
    
    $
    6,313
    
    
    $
    1,752
 Six Months Ended June 302004
    
    2003Pension
    
    Other
    
    Pension
    
    OtherBenefits
    
    Benefits
    
    Benefits
    
    BenefitsService cost
    
    $
    15,907
    
    
    $
    2,742
    
    
    $
    12,770
    
    
    $
    2,150Interest cost
    
    
    10,921
    
    
    
    1,693
    
    
    
    8,674
    
    
    
    1,398Expected return on plan assets
    
    
    (13,199
    )
    
    
    (746
    )
    
    
    (9,710
    )
    
    
    Prior service cost amortization
    
    
    118
    
    
    
    
    
    
    
    108
    
    
    
    Actuarial (gain) loss amortization
    
    
    1,932
    
    
    
    102
    
    
    
    784
    
    
    
    (44
    )Net periodic benefit cost
    
    $
    15,679
    
    
    $
    3,791
    
    
    $
    12,626
    
    
    $
    3,504
 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.  10.
    
    Financial Instruments with Characteristics of both Liabilities and Equity 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- 15




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Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued controlling interests in consolidated limited-life
subsidiaries. For all periods presented, Cox consolidated a 75% majority-owned
interest in a limited-life partnership. The estimated liquidation value of the
25% minority interest was approximately $177.0 million as of June 30, 2004.  11.
    
    Supplemental Financial Information June 30
    
    December 312004
    
    2003(Thousands of Dollars)Other current assetsInventory
    
    $
    62,898
    
    
    $
    49,137Prepaid assets
    
    
    42,273
    
    
    
    37,600Deferred income tax asset
    
    
    34,393
    
    
    
    34,393Other
    
    
    7,752
    
    
    
    9,976Total other current assets
    
    $
    147,316
    
    
    $
    131,106Other current liabilitiesDeposits and advances
    
    $
    95,335
    
    
    $
    92,008Income tax payable
    
    
    232,161
    
    
    
    232,161Other
    
    
    117,277
    
    
    
    142,619Total other current liabilities
    
    $
    444,773
    
    
    $
    450,553
 Six Months EndedJune 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
    
    $
    188,611
    
    
    $
    192,975Cash paid for income taxes
    
    
    24,981
    
    
    
    1,116
  12.
    
    Commitments and Contingencies In connection with certain of Coxs recent 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 June 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) is a
defendant in a putative subscriber class action suit in Louisiana state court
filed on November 5, 1997. The suit challenges 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, which does 16




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##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued not have a material
impact on Coxs operations or liquidity. This settlement has been submitted to
the court for final approval. 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 alleges
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. That motion is pending.
Cox and Cox @Home intend to defend 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 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. Cox
intends to defend this action vigorously. The outcome cannot be predicted at
this time. 17




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Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued 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, and briefing of that motion has concluded. Cox
intends to defend this action vigorously. The outcome cannot be predicted at
this time. 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. That motion is pending. Cox intends to defend the action vigorously.
The outcome cannot be predicted at this time. 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. Specifically, the
complaint alleges that Cox and Hospitality Network have infringed Acacia
Medias U.S. Patent Nos. 5,132,992, 5,550, 863, and 6,144,702 and that Cox has
also infringed certain Acacia Media patents. 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 18




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##### Table of Contents



Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)  Continued lawsuit
to add CoxCom as a defendant. The deadline for Cox, CoxCom and Hospitality Network to answer or
otherwise respond to the amended complaint is August 13, 2004. The deadline
for Acacia Media to answer or otherwise respond to CoxCom and Hospitality
Networks complaint is July 28, 2004. Cox, CoxCom and Hospitality Network
intend to defend the action vigorously. The outcome cannot be predicted at
this time. Nine
purported class action lawsuits have been filed naming Cox and each
of its directors as defendants. Eight of the lawsuits also name Cox
Enterprises, Inc. (CEI) as a defendant. The complaints allege, among
other things, that the defendants have breached their fiduciary
duties to the stockholders of Cox in connection with CEIs
proposal to acquire the outstanding publicly held minority interest
in Cox. The complaints also seek variously the certification of a
class of Cox stockholders, preliminary and permanent injunctive
relief prohibiting the defendants from proceeding with CEIs
proposal or requiring them to take certain actions with respect to
CEIs proposal, an accounting or compensatory damages (except in
one instance), attorneys fees and costs, and other relief, and
in certain complaints, rescission or other damages in the event
CEIs proposal is consummated. On
August 2, 2004, the following lawsuits were filed in the
Delaware Court of Chancery: Smith v. Cox Communications Inc. et al.;
Wilson v. Cox Enterprises Inc., et al.; Steiner v. Cox Communications
Inc., et al.; Guerin v. Cox Enterprises Inc. et al.; Eastside
Investors LLP v. Cox Communications Inc., et al.; and Hill v. Cox
Communications Inc. et al. On August 3, 2004, an additional
action captioned Schaefer v. Cox Communications, Inc., et al. was
filed in the Delaware Court of Chancery. The outcome of these actions
cannot be predicted at this time. Also
on August 2, 2004, two other purported shareholders of Cox also
filed lawsuits in the Superior Court of Fulton County, Georgia; Brody
v. Cox Communications, Inc., et al.; and Golombuski v. Kennedy, et
al. In addition to the allegations set forth above, the complaint in
the Golombuski action also alleges derivative claims on behalf of Cox
for corporate waste, abuse of control, breach of fiduciary duty and
unjust enrichment. The outcome of these actions cannot be predicted
at this time. 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 will have a
material adverse impact on Coxs consolidated financial position, results of
operations or cash flows. 13.     Subsequent Event On August 2, 2004, Cox received Cox
Enterprises proposal to acquire the outstanding, publicly-held minority interest in
Cox. Coxs Board of Directors will appoint a special committee of independent directors to
review Cox Enterprises proposal. 19




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##### 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 six-month periods ended June 30, 2004 and 2003. Results of Operations Three Months Ended June 30, 2004 Compared with Three Months Ended June 30, 2003 The following table sets forth summarized consolidated financial
information for the three months ended June 30, 2004 and 2003. Three Months EndedJune 302004
    
    2003
    
    $ Change
    
    % Change(Thousands of Dollars)Revenues
    
    $
    1,595,240
    
    
    $
    1,423,939
    
    
    $
    171,301
    
    
    
    12
    %Cost of services
    
    
    644,627
    
    
    
    590,122
    
    
    
    54,505
    
    
    
    9
    %Selling, general and administrative
expenses
    
    
    334,576
    
    
    
    301,702
    
    
    
    32,874
    
    
    
    11
    %Depreciation and amortization
    
    
    397,114
    
    
    
    364,274
    
    
    
    32,840
    
    
    
    9
    %Loss (gain) on sale of cable systems
    
    
    5,021
    
    
    
    (469
    )
    
    
    5,490
    
    
    NMOperating income
    
    
    213,902
    
    
    
    168,310
    
    
    
    45,592
    
    
    
    27
    %Interest expense
    
    
    (95,591
    )
    
    
    (134,394
    )
    
    
    (38,803
    )
    
    
    (29
    %)Loss on derivative instruments, net
    
    
    (15
    )
    
    
    (24,197
    )
    
    
    (24,182
    )
    
    
    (100
    %)Gain on investments, net
    
    
    2,326
    
    
    
    124,146
    
    
    
    (121,820
    )
    
    
    (98
    %)Equity in net losses of affiliated
companies
    
    
    (1,167
    )
    
    
    (4,354
    )
    
    
    (3,187
    )
    
    
    (73
    %)(Loss) gain on extinguishment of debt
    
    
    (7,006
    )
    
    
    3,896
    
    
    
    (10,902
    )
    
    NMOther, net
    
    
    (258
    )
    
    
    (616
    )
    
    
    (358
    )
    
    
    (58
    %)Income tax expense
    
    
    49,922
    
    
    
    13,402
    
    
    
    36,520
    
    
    
    272
    %Minority interest, net of tax
    
    
    413
    
    
    
    (1,644
    )
    
    
    (2,057
    )
    
    
    (125
    %)Net income
    
    $
    62,682
    
    
    $
    117,745
    
    
    $
    (55,063
    )
    
    
    (47
    %)
 NM denotes percentage is not meaningful Revenues The following table sets forth summarized revenue information for the
three months ended June 30, 2004 and 2003. Three Months Ended June 302004
    
    % of Total
    
    2003
    
    % of Total
    
    $ Change
    
    % Change(Thousands of Dollars)ResidentialVideo
    
    $
    960,914
    
    
    
    60
    %
    
    $
    907,901
    
    
    
    64
    %
    
    $
    53,013
    
    
    
    6
    %Data
    
    
    270,545
    
    
    
    17
    %
    
    
    210,700
    
    
    
    15
    %
    
    
    59,845
    
    
    
    28
    %Telephony
    
    
    144,111
    
    
    
    9
    %
    
    
    116,449
    
    
    
    8
    %
    
    
    27,662
    
    
    
    24
    %Other
    
    
    26,336
    
    
    
    2
    %
    
    
    20,538
    
    
    
    1
    %
    
    
    5,798
    
    
    
    28
    %Total residential
    
    
    1,401,906
    
    
    
    88
    %
    
    
    1,255,588
    
    
    
    88
    %
    
    
    146,318
    
    
    
    12
    %Commercial
    
    
    86,338
    
    
    
    5
    %
    
    
    70,078
    
    
    
    5
    %
    
    
    16,260
    
    
    
    23
    %Advertising
    
    
    106,996
    
    
    
    7
    %
    
    
    98,273
    
    
    
    7
    %
    
    
    8,723
    
    
    
    9
    %Total revenues
    
    $
    1,595,240
    
    
    
    100
    %
    
    $
    1,423,939
    
    
    
    100
    %
    
    $
    171,301
    
    
    
    12
    %
 20




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##### Table of Contents



The $171.3 million increase in total revenues is primarily attributable
to:  
    
    a 27% 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 second quarter of 2004, Cox:  
    
    ended the quarter with approximately 6.3 million basic video
customers, up 0.6% from June 30, 2003.
    
    added 60,351 digital cable customers, which contributed to
year-over-year growth of 18%.
    
    added 97,517 high-speed Internet customers, which contributed to
year-over-year growth of 34%.
    
    added 66,265 telephony customers, which contributed to
year-over-year customer growth of 35%. 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 has generally resulted in increased
revenues during the third quarter of the year. Cox expects this trend to
continue in 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 June 30, 2004 and 2003. Three Months Ended June 302004
    
    2003
    
    $ Change
    
    % Change(Thousands of Dollars)Cost of servicesProgramming costs
    
    $
    320,725
    
    
    $
    286,682
    
    
    $
    34,043
    
    
    
    12
    %Other cost of
services
    
    
    323,902
    
    
    
    303,440
    
    
    
    20,462
    
    
    
    7
    %Total cost of
services
    
    
    644,627
    
    
    
    590,122
    
    
    
    54,505
    
    
    
    9
    %Selling, general and administrativeMarketing
    
    
    83,431
    
    
    
    74,476
    
    
    
    8,955
    
    
    
    12
    %General and administrative
    
    
    251,145
    
    
    
    227,226
    
    
    
    23,919
    
    
    
    11
    %Total selling, general and
administrative
    
    
    334,576
    
    
    
    301,702
    
    
    
    32,874
    
    
    
    11
    %Total costs and expenses
    
    $
    979,203
    
    
    $
    891,824
    
    
    $
    87,379
    
    
    
    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. 21




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##### Table of Contents



Cost of services increased $54.5 million over the comparable period in
2003 due to a $34.0 million increase in programming costs reflecting
programming rate increases and customer growth. Approximately 10% of the
increase in programming costs was attributable to programming rate increases,
and 2% was related to customer growth. Other cost of services increased $20.5
million, primarily due to 27% 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 $32.9 million due to:  
    
    a $23.9 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 $9.0 million increase in marketing expense primarily due to
additional marketing related to new video products and an industry-wide
campaign aimed at satellite competition, as well as a 9% increase in
marketing 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 $397.1 million from $364.3
million in the second 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. Loss (gain) on sale of cable systems In the second quarter of 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 29% to $95.6 million primarily due to a
reduction of outstanding indebtedness and interest savings as a result of 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 second quarter of 2004 was insignificant.
During the second quarter of 2003, Cox recorded a $24.2 million pre-tax loss 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. 22




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##### Table of Contents



Gain on investments, net Net gain on investments of $2.3 million for the second quarter of 2004 was
due to the sale of all remaining shares of Sprint stock held by Cox. The net
gain on investments for the comparable period in 2003 of $124.1 million was
primarily due to a $97.2 million pre-tax gain on the sale of 32.9 million
shares of Sprint PCS common stock and a $27.1 million pre-tax gain as a result
of the change in the market value of Coxs investment in Sprint PCS common
stock classified as trading. Equity in net losses of affiliated companies Equity in net losses of affiliated companies for the second quarter of
2004 was $1.2 million compared to $4.4 million for the second quarter of 2003.
Generally, this loss is attributable to Coxs proportionate share of the
investees income or 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) gain on extinguishment of debt During the second quarter of 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 Coxs exchangeable subordinated debentures due 2029
(PRIZES) and $0.1 million aggregate principal amount of Coxs 3% exchangeable
subordinated debentures due 2030 (Premium PHONES), which represented all
remaining outstanding PRIZES and Premium PHONES. During the comparable period
in 2003, Cox recorded a $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. Income tax expense (benefit) Income tax expense was $49.9 million for the second quarter of 2004
compared to $13.4 million for the same period in 2003. The change in the effective tax rate was primarily due to
the impact of investing and financing transactions in the prior year, along
with varying effective state tax rates across Coxs operations. Net income Net income for the second quarter of 2004 was $62.7 million compared to
$117.7 million for the comparable period in 2003. 23




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##### Table of Contents



Six Months Ended June 30, 2004 Compared with Six Months Ended June 30, 2003 The following table sets forth summarized consolidated financial
information for the six months ended June 30, 2004 and 2003. Six Months EndedJune 302004
    
    2003
    
    $ Change
    
    % Change(Thousands of Dollars)Revenues
    
    $
    3,135,597
    
    
    $
    2,790,221
    
    
    $
    345,376
    
    
    
    12
    %Cost of services
    
    
    1,280,443
    
    
    
    1,169,914
    
    
    
    110,529
    
    
    
    9
    %Selling, general and administrative
expenses
    
    
    671,884
    
    
    
    608,738
    
    
    
    63,146
    
    
    
    10
    %Depreciation and amortization
    
    
    789,180
    
    
    
    748,594
    
    
    
    40,586
    
    
    
    5
    %Loss (gain) on sale of cable systems
    
    
    5,021
    
    
    
    (469
    )
    
    
    5,490
    
    
    NMOperating income
    
    
    389,069
    
    
    
    263,444
    
    
    
    125,625
    
    
    
    48
    %Interest expense
    
    
    (192,203
    )
    
    
    (264,218
    )
    
    
    (72,015
    )
    
    
    (27
    %)Loss on derivative
instruments, net
    
    
    (54
    )
    
    
    (26,700
    )
    
    
    (26,646
    )
    
    
    (100
    %)Gain on investments, net
    
    
    29,135
    
    
    
    122,395
    
    
    
    (93,260
    )
    
    
    (76
    %)Equity in net losses of affiliated
companies
    
    
    (195
    )
    
    
    (6,518
    )
    
    
    (6,323
    )
    
    
    (97
    %)(Loss) gain on extinguishment of debt
    
    
    (7,006
    )
    
    
    3,896
    
    
    
    (10,902
    )
    
    NMOther, net
    
    
    (1,767
    )
    
    
    (957
    )
    
    
    810
    
    
    
    85
    %Income tax expense (benefit)
    
    
    96,022
    
    
    
    (1,096
    )
    
    
    97,118
    
    
    NMMinority interest, net of tax
    
    
    (572
    )
    
    
    (3,914
    )
    
    
    (3,342
    )
    
    
    (85
    %)Net income
    
    $
    120,385
    
    
    $
    88,524
    
    
    $
    31,861
    
    
    
    36
    %
 NM denotes percentage is not meaningful Revenues The following table sets forth summarized revenue information for the six
months ended June 30, 2004 and 2003. Six Months Ended June 302004
    
    % of Total
    
    2003
    
    % of Total
    
    $ Change
    
    % Change(Thousands of Dollars)ResidentialVideo
    
    $
    1,911,545
    
    
    
    61
    %
    
    $
    1,806,843
    
    
    
    65
    %
    
    $
    104,702
    
    
    
    6
    %Data
    
    
    528,228
    
    
    
    17
    %
    
    
    404,918
    
    
    
    15
    %
    
    
    123,310
    
    
    
    30
    %Telephony
    
    
    278,071
    
    
    
    9
    %
    
    
    223,188
    
    
    
    8
    %
    
    
    54,883
    
    
    
    25
    %Other
    
    
    52,843
    
    
    
    2
    %
    
    
    39,857
    
    
    
    1
    %
    
    
    12,986
    
    
    
    33
    %Total residential
    
    
    2,770,687
    
    
    
    89
    %
    
    
    2,474,806
    
    
    
    89
    %
    
    
    295,881
    
    
    
    12
    %Commercial
    
    
    169,521
    
    
    
    5
    %
    
    
    136,634
    
    
    
    5
    %
    
    
    32,887
    
    
    
    24
    %Advertising
    
    
    195,389
    
    
    
    6
    %
    
    
    178,781
    
    
    
    6
    %
    
    
    16,608
    
    
    
    9
    %Total revenues
    
    $
    3,135,597
    
    
    
    100
    %
    
    $
    2,790,221
    
    
    
    100
    %
    
    $
    345,376
    
    
    
    12
    %
 The $345.4 million increase in total revenues is primarily attributable
to:  
    
    a 27% 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 six months ended June 30, 2004, Cox:  
    
    ended the period with approximately 6.3 million basic video
customers, up 0.6% from June 30, 2003.
    
    added 137,304 digital cable customers, which contributed to
year-over-year growth of 18%.
    
    added 258,872 high-speed Internet customers, which contributed to
year-over-year growth of 34%.
    
    added 145,224 telephony customers, which contributed to
year-over-year customer growth of 35%. 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. 24




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##### Table of Contents



Costs and expenses (cost of services and selling, general and administrative
expenses) The following table sets forth summarized operating expenses for the six
months ended June 30, 2004 and 2003. Six Months Ended June 302004
    
    2003
    
    $ Change
    
    % Change(Thousands of Dollars)Cost of servicesProgramming costs
    
    $
    638,384
    
    
    $
    577,500
    
    
    $
    60,884
    
    
    
    11
    %Other cost of
services
    
    
    642,059
    
    
    
    592,414
    
    
    
    49,645
    
    
    
    8
    %Total cost of
services
    
    
    1,280,443
    
    
    
    1,169,914
    
    
    
    110,529
    
    
    
    9
    %Selling, general and administrativeMarketing
    
    
    162,412
    
    
    
    140,739
    
    
    
    21,673
    
    
    
    15
    %General and administrative
    
    
    509,472
    
    
    
    467,999
    
    
    
    41,473
    
    
    
    9
    %Total selling, general and
administrative
    
    
    671,884
    
    
    
    608,738
    
    
    
    63,146
    
    
    
    10
    %Total costs and expenses
    
    $
    1,952,327
    
    
    $
    1,778,652
    
    
    $
    173,675
    
    
    
    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 $110.5 million over the comparable period in
2003 due to a $60.9 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 $49.6
million, primarily due to 27% 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 $63.1 million primarily due to:  
    
    a $41.5 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 $21.7 million increase in marketing expense primarily due to
additional marketing related to new video products and an industry-wide
campaign aimed at satellite competition, as well as an 8% increase in
marketing 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. 25




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##### Table of Contents



Depreciation and amortization Depreciation and amortization increased to $789.2 million from $748.6
million in the six months ended June 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. Interest expense Interest expense decreased 27% to $192.2 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 six months ended June 30, 2004 was insignificant. For the six months ended
June 30, 2003, Cox recorded a $26.7 million pre-tax loss on derivative
instruments primarily due to a $22.9 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 and a
$4.4 million pre-tax loss resulting from the change in the fair value of Coxs
net settleable warrants. Gain on investments, net Net gain on investments of $29.1 million for the six months ended June 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
for the comparable period in 2003 of $122.4 million was primarily due to a
$97.2 million pre-tax gain on the sale of 32.9 million shares of Sprint PCS
common stock and a $27.1 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. Equity in net losses of affiliated companies Equity in net losses of affiliated companies for the six months ended June
30, 2004 was $0.2 million compared to $6.5 million for the comparable period in
2003. Generally, this loss is attributable to Coxs proportionate share of the
investees income or 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. Income tax expense (benefit) Income tax expense was $96.0 million for the six months ended June 30,
2004 compared to income tax benefit of $1.1 million for the same period in
2003. The change in the effective
tax rate was primarily due to the impact of investing and financing
transactions in the prior year, along with varying effective state tax rates
across Coxs operations. Net income Net income for the six months ended June 30, 2004 was $120.4 million
compared to net income of $88.5 million for the comparable period in 2003. 26




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##### Table of Contents



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 six months ended June 30, 2004, Cox made capital expenditures
of $617.9 million. 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 or enter into any cable systems
exchanges in 2004. Net commercial paper repayments during the six months ended June 30, 2004
were $266.3 million. During the six months ended June 30, 2004, Cox repaid
$72.5 million of debt, which included the repurchase of its remaining
outstanding convertible senior notes, PRIZES and Premium PHONES. Sources of Cash During the six months ended June 30, 2004, Cox generated $857.4 million
from operating activities. 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. Other At June 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 June 30, 2003 by approximately $611.2 million to
approximately $7.0 billion. As a result of Coxs purchase of substantially all
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 June 30, 2004
and are not expected to be material in the future. Recent Developments In July 2004, Cox received notice from DR Partners of its election to
exercise its right to require that Cox purchase its 25% interest in TCA Cable
Partners, pursuant to the partnership agreement. The partnership is a general
partnership owned 75% by Cox (indirectly owned through subsidiaries) and 25% by
DR Partners, operating cable systems in the Southwest, mainly Arkansas, serving
approximately 260,000 customers. The price payable to DR Partners by Cox will
be determined by a negotiation between DR Partners and Cox, and if they are
unable to reach agreement, then an investment advisor will be engaged to
determine the purchase price. Cox cannot predict the outcome of the
negotiations or, if necessary, the appraisal process at this time. 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 27




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##### Table of Contents



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 June
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/from CEI approximates fair value because of
the short maturity of those instruments. The fair value of Coxs investments
stated at fair value are estimated and recorded based on quoted market prices.
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 $21.0 million and $61.2 million at June 30, 2004 and December 31,
2003, respectively, and represents the estimated amount that Cox would receive
upon termination of the swap agreements. Coxs outstanding commercial paper bears interest at current market rates
and, thus, approximates fair value at June 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 June 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 June 30, 2004 and December 31, 2003 is
as follows: June 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
    
    $
    6,608.0
    
    
    $
    6,979.5
    
    
    $
    7,369.7
    
    
    $
    6,683.4
    
    
    $
    7,323.0
    
    
    $
    7,760.8Exchangeable subordinated
Debentures
    
    
    18.8
    
    
    
    30.4
    
    
    
    30.7
    
    
    
    26.1
    
    
    
    35.6
    
    
    
    38.9
 28




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##### 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 June 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 June 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. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities 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 of a Vote of Security Holders. Cox held its Annual Meeting of Stockholders on May 18, 2004. Two matters
were voted upon at the meeting: (a) the election of a Board of Directors of
seven members to serve until the 2005 Annual Meeting or until their successors
are duly elected and qualified; and (b) approval of Coxs 2004 Employee Stock
Purchase Plan. 29




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##### Table of Contents



The following directors were elected, and they received the votes
indicated: Nominee
    
    Votes in Favor
    
    Votes WithheldJames C. Kennedy
    
    
    764,722,378
    
    
    
    43,206,964G. Dennis Berry
    
    
    764,805,863
    
    
    
    43,123,479Janet M. Clarke
    
    
    796,324,080
    
    
    
    11,605,262Robert C. OLeary
    
    
    764,794,337
    
    
    
    43,135,005James O. Robbins
    
    
    764,912,787
    
    
    
    43,016,555Rodney W. Schrock
    
    
    794,858,036
    
    
    
    13,071,306Andrew J. Young
    
    
    761,172,203
    
    
    
    46,757,139
 The 2004 Employee Stock Purchase Plan was approved, with 779,743,634 votes in
favor 3,577,545 votes in opposition, 294,499 abstentions, and 24,313,664 broker
non-votes. 
 Item 5. Other Information. None. 
 Item 6. Exhibits and Reports on Form 8-K  (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.)10.1
    
    
    
    Five-Year Credit Agreement, dated as of June 4, 2004, by and
among Cox Communications, Inc., the Lenders party thereto and
JPMorgan Chase Bank, as Administrative Agent for the Lenders,
Bank of America, N.A., as Co-Syndication Agent, Wachovia Bank,
National Association, as Co-Syndication Agent, J.P. Morgan
Securities Inc., as Co-Lead Arranger and Joint Bookrunner, and
Bank of America Securities, LLC, as Co-Lead Agent and
Bookrunner10.2
    
    
    
    Share Conversion Agreement, dated
as of June 23, 2004, by and among (1) Brian L. Greenspun,
Trustee of the Unified Credit Trust of the Declaration of Trust for
the Greenspun Family, dated December 6, 1988, G.C. Investments, LLC
(f/k/a G.C. Investments, a Limited Liability Company), Greenspun Legacy
Limited Partnership, and 3G Capital, LLC, and (2) Cox Communications, Inc.21
    
    
    
    Subsidiaries of Cox Communications, Inc.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.
  (b)
    
    Reports on Form 8-K filed during the quarter ended June 30, 2004:Form 8-K dated June 4, 2004 (filed June 9, 2004) announcing Coxs entry into
five-year credit agreement and Coxs redemption of all remaining outstanding
Exchangeable Subordinated Debentures due 2029 (PRIZES) and all remaining
outstanding 3% Exchangeable Subordinated Debentures due 2030 (Premium
PHONES) under Item 5 and furnishing a copy of Coxs redemption press release
under Item 7.Form 8-K dated June 23, 2004 (filed June 24, 2004) announcing Coxs
conversion of all its outstanding shares of Class A Convertible Preferred
Stock into shares of Class A Common Stock under Item 5. 30




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##### Table of Contents



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: August 4, 2004
    
    /s/ Jimmy W. HayesJimmy W. HayesExecutive Vice President, Financeand Chief Financial Officer(principal financial officer andduly authorized officer)
 31