Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number 1-6590

Cox Communications, Inc.

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x         No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.    o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes x         No o

     As of February 28, 2003, the aggregate market value of the Class A Common Stock held by non-affiliates of the registrant was $6.315 billion based on the closing price on the New York Stock Exchange on such date.

     There were 592,612,071 shares of Class A Common Stock and 27,597,792 shares of Class C Common Stock outstanding as of February 28, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the 2002 Summary Annual Report are incorporated by reference into Part II, and portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders are incorporated by reference into Part III.

Table of Contents

COX COMMUNICATIONS, INC.

2002 FORM 10-K ANNUAL REPORT

PRELIMINARY NOTE

      This Annual Report on Form10-K is for the year ended December 31, 2002. This Annual Report modifies and supersedes documents filed prior to this Annual Report. 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 Annual Report. In addition, information that Cox files with the SEC in the future will automatically update and supersede information contained in this Annual Report. In this Annual Report, “Cox,” refers to Cox Communications, Inc. and its subsidiaries, unless the context requires otherwise.

1

Table of Contents

PART I

ITEM 1.     BUSINESS

Overview

      Cox Communications, Inc. is a multi-service broadband communications company serving approximately 6.5 million customers nationwide. Cox is the nation’s fourth 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 is an indirect 63.4% majority-owned subsidiary of Cox Enterprises, Inc. CEI, a privately-held corporation headquartered in Atlanta, Georgia, is one of the largest diversified media companies in the U.S. with consolidated revenues in 2002 of approximately $9.9 billion. CEI, which has a 105-year history in the media and communications industry, also publishes 17 daily newspapers and owns or operates 15 television stations. Through its indirect majority-owned subsidiary, Cox Radio, Inc., CEI owns, operates or provides sales and marketing services for 78 radio stations clustered in 18 markets. CEI is also an operator of wholesale auto auctions through Manheim Auctions, Inc., an indirect wholly-owned subsidiary.

Business Strategy

      Cox’s strategy is to leverage the capacity and capability of its broadband network to deliver multiple services to consumers and businesses while creating multiple revenue streams for Cox. Cox believes that aggressive investment in the technological capabilities of its broadband network, the long-term advantages of clustering, the competitive value of bundled services and its commitment to customer and community service will enhance its ability to continue to grow its cable operations and offer new services to existing and new customers.

      Technology and Network Infrastructure. Cox strives to maintain the highest technological standards in the industry. Available service offerings depend on bandwidth capacity. The greater the bandwidth, the greater the capacity of the system. Cox’s cable systems have bandwidth capacities ranging from 400 to 750 megahertz or greater. At the end of 2002, Cox had upgraded 90% of its networks to a bandwidth capacity of 750 megahertz or greater and anticipates that approximately 91% of its networks will have a bandwidth capacity of 750 megahertz or greater by the end of 2003. At the end of 2002, digital cable was available to 97% of the homes passed by Cox’s broadband network, high-speed Internet was available to 96% of homes passed and telephone was available to 40% of homes passed.

      Clustering. As an integral part of its broadband communications strategy, Cox has continually sought the advantages and efficiencies of operating large local and regional cable system clusters. As of December 31, 2002, approximately 70% of Cox’s customers were served by Cox’s 12 largest clusters, which averaged approximately 368,000 customers each. These clusters, represented by location, are:

      Locally and regionally clustered cable systems enable Cox to reduce expenses through the consolidation of marketing and support functions and to place more experienced management teams who are better equipped to meet the new competitive and regulatory challenges of today’s communications industry at the system level. Local and regional clusters also increase the speed and effectiveness of Cox’s new product and services deployment, enhancing its ability to increase both customers and revenues.

      Bundling. Bundling is a fundamental business strategy for Cox. A bundled customer is one who subscribes to two or more of Cox’s primary services (video, high-speed Internet access and telephone). Cox offers the full bundle of services supported by a single, integrated back-office platform. That means customers can make one call regarding any and all of their services, can receive a single bill for all services and can

2

Table of Contents

      Customer Service. Strong customer service is a key element of Cox’s business strategy to deliver advanced communications services to its customers. Cox has always been committed to customer service and has been recognized by several industry groups as a leader in providing excellent customer service. Cox believes that its high level of customer satisfaction helps it compete more effectively as it delivers its wide range of broadband communications services, including digital video, high-speed Internet access and local and long-distance telephone, as well as future services. Cox places special emphasis on training its customer contact employees and has developed customer service standards and programs that exceed national customer service standards developed by the National Cable and Telecommunications Association and the Federal Communications Commission (FCC).

      Community Service. A key element of Cox’s community service is enhancing education through the use of cable technology and programming. Cox participates in a wide range of education and community service initiatives in its communities nationwide. Cox’s major company-wide programs include:

	•	“Cox Cable in the Classroom,” which provides more than 5,900 schools and 3.5 million students with complimentary basic cable service and more than 540 hours of commercial-free educational cable programming on a monthly basis.
	•	“Cox Line to Learning,” which provides complimentary high-speed Internet access, exclusive curricula and distance-learning experiences to students in accredited public and private schools in communities where high-speed digital services are available. The program is part of Cox’s participation in “Cable’s High-Speed Connection,” a National Cable and Telecommunications Association initiative in which major broadband communications companies are providing high-speed Internet access to schools free of charge.
	•	“Cox Model Technology Schools,” established by Cox in Chula Vista, California; Omaha; Norfolk; Phoenix; New Orleans; Las Vegas; Rhode Island; and Pensacola. These schools test future broadband services, such as interactive fiber optic links to local colleges, to determine their value in the classroom.

Products and Services

      Cox has one operating segment, broadband communications, and offers video and high-speed Internet access in almost all of its markets, telephone service in a growing number of markets and new advanced services in select markets.

Video

      Cox’s cable operations represent the primary element of its integrated broadband communications strategy. Video revenues represented 68% of total revenues in 2002. Cox offers customers a full range of video services and packages. Customers generally pay initial connection charges and fixed monthly fees for video service. As of December 31, 2002, Cox’s cable systems provided video service to approximately 6.3 million customers.

      Cox’s video service offerings consist of the following:

	•	Basic Cable. Basic cable includes, for a monthly fee, local broadcast signals available off-air, a limited number of broadcast signals from so-called “superstations,” and public, governmental and educational access channels.
	•	Expanded Basic. Expanded service includes, for an additional monthly fee, numerous satellite-delivered non-broadcast programming (such as CNN, MTV, USA, ESPN, A&E, TNT, The Discovery Channel, The Learning Channel and Nickelodeon).

3

Table of Contents

	•	Premium Services. Premium services include, for an additional monthly fee, satellite-delivered programming that consists principally of feature motion pictures presented without commercial interruption, sports events, concerts and other entertainment programming (such as Home Box Office, Showtime, Starz and Cinemax).
	•	Pay-Per-View. Pay-per-view service allows customers to order, for a fee, a single showing of a recently released movie, sporting event or music concert on a commercial-free basis.
	•	Cox Digital Cable. Digital compression technology currently allows up to 12 digital channels to be inserted into the space of only one traditional analog channel. A set-top video terminal converts the digital signal into analog signals that can be viewed on a television set. A Cox Digital Cable customer can currently receive up to approximately 250 channels, including enhanced pay-per-view service, digital music channels, new networks grouped by genre and an interactive program guide. Customers pay a monthly fee for digital cable, which varies based on level of service and number of digital converters selected by the customer.

      In addition, Cox has introduced new video services to enhance its competitive position and generate additional revenues.

	•	Entertainment On Demand. Entertainment On Demand is an interactive service that provides access to hundreds of movies and other programming with full VCR like functionality, including the ability to pause, rewind and fast forward programs. Customers can also start a program whenever they like, stop the selection before it is completed and view a program repeatedly during the 24 hour rental period. Customers generally pay on a per-selection basis. Cox has already launched Entertainment On Demand in some areas, and is working with technology vendors and others to make Entertainment On Demand as widely available as possible.
	•	High-Definition Television. High definition television is high-resolution digital television. A high definition television signal has twice the color resolution, provides a picture that is six times sharper than that provided by a traditional analog television set and provides enhanced audio, such as Dolby Digital. Cox provides high definition television service in seven markets: Omaha, Las Vegas, Phoenix, Northern Virginia, San Diego, Oklahoma City and Cleveland. Altogether, Cox’s high definition service is now available to more than 50% of Cox’s homes passed.
	•	Digital Video Recorders. A digital video recorder is a device that allows you to store television programming on a hard disk drive so that you can access this programming at any time. The digital video recorder functions like a VCR, except that there is no videotape and it offers more sophisticated recording options and playback features. Cox launched its first deployment of digital video recorder in its Gainesville, Florida market in the first quarter of 2003 and plans additional deployments of digital video recorder service in 2003.

High-Speed Internet Access

      Cox offers high-speed Internet access services under the Cox High Speed Internet and Cox Express brand names. These services deliver access to the Internet at speeds of up to 100 times faster than traditional phone modems and provide unique online content that capitalizes on the substantial capacity of Cox’s broadband network. Cox uses its own nationwide Internet Protocol network to deliver high-speed data and Internet services to its subscribers. This network utilizes Cox’s coaxial cable infrastructure to connect subscribers to the Internet and other online services and includes standard Internet service provider functionality, such as web page hosting for subscribers, access to Internet news groups, multiple e-mail accounts and remote access. Cox believes that control of its network and service will result in better customer service, reduced operating costs and enhanced future services.

      Cox is also offering home networking as part of its high-speed Internet product. A home network is a group of personal computers and other devices that communicate with each other through a common wired or wireless technology. Cox High Speed Internet customers can purchase a home networking solution that includes the necessary wired or wireless equipment, a professional installation and 24-hour technical support.

4

Table of Contents

Cox Digital Telephone

      Cox utilizes the capacity and reliability of its advanced broadband network by providing local telephone services and reselling long-distance services. Cox provides traditional circuit-based telephony, but is exploring technologies using Internet protocol technology to transmit digital voice signals over its systems.

Cox Business Services

      Through both its dedicated fiber optic networks and its hybrid fiber coaxial cable networks, Cox Business Services provides a range of advanced communications services, including high-speed Internet access, local and long distance telephone and advanced voice and data transport solutions for companies of all sizes.

Advertising Revenue

      Cox also derives revenues from the sale of advertising time on satellite-delivered networks such as ESPN, MTV and CNN through its advertising sales division, Cox Media. Currently, Cox inserts advertising on up to 49 analog channels in each of its cable systems and inserts advertising on digital channels in its major markets. In addition to advertising sales in Cox markets, Cox Media represents the advertising sales efforts of other cable operators.

      Viewership to cable networks has continued to increase over the past 15 years showing the gaining popularity of the medium. Cox expects continued growth of this revenue source as a result of this audience shift. In addition, Cox participates in the regional and national cable advertising market through its investment in National Cable Communications, L.L.C., a partnership that represents cable companies in connection with the sale of advertising space to advertisers. National Cable Communications is the largest representation firm in spot cable advertising sales.

5

Table of Contents

Customer Data

      The following table presents operating statistics for Cox’s primary services as of December 31, 2002 and 2001:

(a)	A home with one or more television sets connected to a cable system is counted as one basic customer.
(b)	Cox sold certain cable systems in 2002. After adjusting for such sales, basic video customers and Cox Digital Cable customers at December 31, 2001 were 6,221,235 and 1,384,023, respectively, and video homes passed at December 31, 2001 was 9,947,664.
(c)	A non-video customer receives high-speed Internet or telephone service, but does not subscribe to video service.
(d)	Total customer relationships represent the number of customers who receive at least one level of service, encompassing video, high-speed Internet and telephony services, without regard to which service(s) customers purchase.
(e)	Advanced services include Cox Digital Cable, high-speed Internet access and Cox Digital Telephone.

(f)	Each basic video customer and each advanced service is a revenue generating unit. In certain locations, a household may purchase more than one advanced service, each of which is counted as a separate revenue generating unit.

(g)	A home is deemed to be “passed” if it can be connected to the distribution system without any further extension of the distribution plant.
(h)	Basic video customers as a percentage of video homes passed.

6

Table of Contents

Franchises

      Cable systems are constructed and operated under non-exclusive franchises granted by local governmental authorities that may choose to award additional franchises to competing companies at any time. Franchise agreements typically contain many requirements, such as time limitations on commencement and completion of system construction, service standards, including number of channels, types of programming and the provision of free service to schools and certain other public institutions, and the maintenance of insurance and indemnity bonds. Local regulation of cable television operations and franchising matters is subject to federal regulation under the Communications Act of 1934, as amended (the Communications Act) and the corresponding regulations of the FCC. See “Legislation and Regulation — Cable Franchising Matters.”

      As of March 2003, Cox held approximately 850 cable television franchises. These franchises generally provide for the payment of fees to the issuing authority. The Communications Act prohibits franchising authorities from imposing annual franchise fees in excess of 5% of “gross revenues” derived from the provision of cable services and also permits the cable system operator to seek renegotiation and modification of franchise requirements if warranted by changed circumstances.

      Cox has never had a franchise revoked, and it has never been denied a franchise renewal. Although franchises historically have been renewed, renewals may include less favorable terms and conditions than the existing franchise. The Communications Act provides for an orderly franchise renewal process and establishes comprehensive renewal procedures designed to protect cable operators against arbitrary denials of renewal. A franchising authority may not unreasonably withhold the renewal of a franchise. If a franchise renewal is denied, and the franchise authority or a third party acquires the system, then the franchise authority must pay the operator the “fair market value” for the system covered by the franchise, but with no value allocated to the franchise itself. Cox believes that it has satisfactory relationships with its franchising authorities.

Programming Suppliers

      Cox has various contracts to obtain basic and premium programming from program suppliers whose compensation is typically based on a fixed fee per customer or a percentage of Cox’s gross receipts for the particular service. Some program suppliers provide volume discount pricing structures or offer marketing support to Cox. Cox’s programming contracts are generally for a fixed period of time and are subject to negotiated renewal. Cox’s programming costs have increased in recent years and are expected to continue to increase due to additional programming being provided to Cox’s customers, increased costs to produce or purchase programming, inflationary increases and other factors. Increases in the cost of programming services have been offset in part by additional volume discounts as a result of the growth of Cox and its success in selling such services to its customers.

Investments

      Cox has certain investments in businesses focused on cable programming, telecommunications and technology. The following summarizes Cox’s significant investments at December 31, 2002.

      Discovery Communications, Inc. Discovery provides nature, science and technology, exploration and adventure programming, and is distributed to customers in virtually all homes receiving cable television in the U.S. The principal businesses of Discovery are the advertiser-supported networks The Discovery Channel, The Learning Channel, Animal Planet Network, The Travel Channel and Discovery Europe, and the retail businesses of Discovery.com. In addition, Discovery is building a documentary programming library. During 2002, Cox received a $27.1 million partial return on its investment from Discovery. Since Cox’s cumulative proportionate share of equity in net losses attributable to Discovery exceeded the carrying amount of its investment in Discovery, this resulted in a pre-tax gain of $27.1 million. At December 31, 2002, Cox owned a 24.9% interest in Discovery.

      Sprint PCS. Sprint Corporation offers personal communications services through its PCS Group. In February and March 2002, Cox terminated its series of costless equity collar arrangements, which managed its exposure to market price fluctuations of 15.8 million shares of Sprint PCS common stock, for aggregate

7

Table of Contents

      At December 31, 2002, Cox’s investment in Sprint PCS was comprised of 66.7 million shares of Sprint PCS common stock, and warrants and convertible preferred stock that are exercisable for, or convertible into, approximately 10.3 million shares of Sprint PCS common stock. Of the shares of Sprint PCS common stock owned by Cox, approximately 47.2 million shares are identified with Cox’s exchangeable subordinated debentures, the PRIZES, Premium PHONES and Discount Debentures, and 19.5 million are pledged in connection with Cox’s prepaid forward contracts to sell up to 19.5 million shares of Sprint PCS common stock. The estimated fair value of Cox’s investment in Sprint PCS was $349.2 million and $2,444.3 million at December 31, 2002 and December 31, 2001, respectively. Cox recognized an aggregate pre-tax investment loss of $390.6 million during 2002 and an aggregate pre-tax investment gain of $77.4 million during 2001 as a result of the change in market value of its investment in Sprint PCS common stock classified as trading. In addition, during 2002, Cox recorded an aggregate pre-tax impairment charge of approximately $795.7 million on its investment in Sprint PCS common stock classified as available-for-sale as a result of a decline in market value that was considered other than temporary.

      Other. Cox also has ownership interests in Liberate Technologies, In Demand, L.L.C. and National Cable Communications, L.L.C., as well as certain other public and private companies in the cable programming, telecommunications and technology businesses.

      The following summarizes Cox’s significant dispositions and sales of investments in 2002.

      AT&T Corp. and AT&T Wireless Services, Inc. AT&T provides voice, video and data communications to businesses, consumers and government agencies. AT&T Wireless provides wireless voice and data services to consumers and businesses. In February and March 2002, Cox terminated its costless equity collar arrangements which managed its exposure to market price fluctuations of 22.5 million shares of AT&T common stock and 17.2 million shares of AT&T Wireless common stock for aggregate proceeds of approximately $112.8 million and recognized an aggregate pre-tax derivative gain of $99.9 million. In connection with the terminations, Cox also sold the 22.5 million shares of AT&T common stock and 17.2 million shares of AT&T Wireless common stock covered by these collar arrangements for aggregate net proceeds of approximately $527.0 million. In addition, Cox sold 12.5 million shares of AT&T common stock and 6.7 million shares of AT&T Wireless common stock that were not covered by collar arrangements for aggregate net proceeds of approximately $263.8 million. Cox recognized an aggregate pre-tax loss of $170.1 million on the sale of these shares. As a result of these transactions, Cox no longer holds any shares of AT&T common stock or AT&T Wireless common stock.

      Cox Interactive Media Joint Ventures. From 1997 through 2002, Cox entered into a series of local joint ventures with Cox Interactive Media, Inc., an indirect wholly owned subsidiary of CEI, to develop, operate and promote advertising supported local Internet content, or “City Sites”, in the markets where Cox operates cable television systems featuring high-speed Internet access. During 2002, Cox and Cox Interactive Media agreed to terminate the relationship and entered into a transition services agreement under which Cox paid Cox Interactive Media approximately $7.0 million to continue to operate Cox’s city sites during a transition period. The joint venture entities were dissolved as of December 31, 2002, and pursuant to a separate agreement dated December 31, 2002, Cox purchased certain assets used in the operation of the City Sites for insignificant cash consideration. Cox will use those assets to develop the City Sites as part of Cox High Speed Internet service.

      Motorola, Inc. Motorola provides integrated communications solutions and embedded electronic solutions, including end-to-end systems for the delivery of interactive digital video, voice and high-speed data solutions for broadband operators. In June 2002, Cox sold its remaining 1.7 million shares of Motorola common stock for aggregate net proceeds of approximately $24.5 million and recognized an aggregate pre-tax

8

Table of Contents

Competition

      Based on reported subscriber numbers of other providers of multi-channel video services, Cox is the sixth largest provider of multi-channel video services in the county. The following providers report higher subscriber numbers than Cox: Comcast Corporation, EchoStar Communications Corporation, DirecTV (a subsidiary of Hughes Electronics), AOL-Time Warner and Charter Communications.

      Each of Cox’s broadband services operates in a competitive environment. Certain facilities-based competitors, including local telephone companies and satellite program distributors, offer cable and/or other communications services in various areas where Cox operates its cable systems. Cox anticipates that facilities-based competitors will develop in other areas that Cox serves. Cox’s services will likely face competition in the future from other competitors using additional spectrum the FCC makes available from time to time in spectrum auctions.

      Cable and Internet Access Competition. Cox’s cable systems compete with a variety of news, information and entertainment providers. Cox’s cable systems also face competition from all media for advertising dollars. In the communities in which Cox operates its cable systems, Cox may compete with one or more of the following businesses:

	•	direct broadcast satellite (commonly known as DBS) and direct-to-home satellite program distributors that transmit video programming, data and other information by satellite to customers’ receiving dishes;
	•	multichannel multipoint distribution service (also known as MMDS or wireless cable) that uses low-power microwave frequencies to transmit video programming and other information over-the-air to subscribers’ receiving dishes;
	•	local television broadcast stations providing free off-air programming that can be received using a roof-top antenna and television set;
	•	satellite master antenna television systems (also known as SMATV or private cable systems) that serve condominiums, apartments, office complexes and private residential developments;
	•	competitive cable systems that have been franchised by local governments to provide cable television services in areas where Cox operates (commonly known as overbuilders);
	•	distributors of home video products;
	•	interactive online computer and Internet services;
	•	movie theaters;
	•	live concerts and sporting events; and
	•	books, newspapers and magazines.

9

Table of Contents

      In order to compete effectively, Cox strives to provide, at a reasonable price to its subscribers:

	•	new products and services, including digital video and audio programming, high definition video programming, high-speed Internet access and telephone services;
	•	a greater variety of optional video programming packages;
	•	superior technical performance; and
	•	superior customer service.

      In recent years, Congress has enacted legislation and the FCC has adopted regulatory policies intended to provide a favorable operating environment for existing and new technologies that provide, or have the potential to provide, substantial competition to cable systems. These technologies include direct broadcast satellite service, among others. Direct broadcast satellite services are available throughout the country through the installation of a small roof top or side-mounted antenna. Direct broadcast satellite operators are among the cable industry’s largest competitors. The two largest direct broadcast satellite companies, EchoStar Communications Corporation and DirecTV, a subsidiary of Hughes Electronics which is controlled by General Motors, are currently offering nationwide high-power direct broadcast satellite services and are each among the four largest providers of multichannel video programming services on the basis of reported subscriber numbers. Recently published articles report that SBC Communications, the second largest local telephone company in the United States, and Cablevision Systems Corp., which provides cable to about three million subscribers and also owns the New York Rangers hockey team and the New York Knicks basketball team and stakes in cable networks, are each in preliminary discussions to acquire DirecTV; and other news reports indicate that News Corp, which currently controls direct satellite broadcast operations in Europe, Asia and Latin America, continues to be interested in acquiring DirecTV. The acquisition of DirecTV by any of those companies could significantly enhance DirecTV’s ability to compete with Cox.

      Direct broadcast satellite service subscribership continues to grow. According to recent government reports, conventional, medium and high-powered satellites provide video programming to over 18.7 million subscribers in the U.S., which represents an approximate 21% share of the national multichannel video program distributor market. Direct broadcast satellite providers with high-power satellites typically offer more than 300 channels of programming, including local television broadcast stations and other programming services substantially similar to those provided by Cox’s cable systems. Direct broadcast satellite systems use video compression technology to increase channel capacity and digital technology to improve the quality and quantity of the signals transmitted to their subscribers. Direct broadcast satellite systems have limited ability to offer locally produced programming in each community and do not have a significant local presence in most communities like cable operators. Cox’s video service packages, including its digital cable services, are competitive with the programming, channel capacity and the digital quality of signals delivered to subscribers by direct broadcast satellite systems.

      The direct broadcast satellite industry also provides advanced communications services. Direct broadcast satellite providers currently offer one-way high-speed Internet access services using a telephone return path; however, DirecTV is now providing two-way high-speed Internet access services. Another satellite company called WildBlue (formerly iSKY) reports that it plans to deliver two-way high-speed Internet access to residential and small business markets in the contiguous U.S. and portions of Canada in 2004 using the Ka-band and spot beam technology. EchoStar, according to a recent press report, is planning to offer its video programming services with the Internet services provided by EarthLink, an Internet service provider, using digital subscriber line technology. Many of Cox’s cable systems offer high-speed Internet services that compete with the Internet services offered by these direct broadcast satellite providers and by existing Internet service providers (also known as ISPs) and local and long-distance telephone companies.

      Federal law allows local telephone companies to provide, directly to subscribers, a wide variety of services that are competitive with Cox’s cable television services, including video and Internet services, within and outside their telephone service areas. Telephone companies and other businesses construct and operate

10

Table of Contents

      Real-time (i.e., streaming) and downloadable video accessible over the Internet continue to improve in quality and are becoming more widely available, although streaming Internet video has yet to become a significant competitor to traditional video services. As high-speed Internet services over cable systems become more ubiquitous, programming suppliers, such as the major movie studios, may bypass cable operators and market their services directly to consumers through video streaming over the Internet. In March 2003, Yahoo Inc. introduced a video subscription service that offers entertainment and sports content. Cox is unable to predict the impact on its business and operations from companies providing Internet services or companies using the Internet to gain direct access to Cox’s subscribers.

      Cox’s cable systems also compete for subscribers with satellite master antenna television systems that receive signals transmitted by satellite at receiving facilities located on private property such as condominiums, apartments, office complexes and other private residential developments. These systems also are developing and/or offering high-speed Internet access and other broadband services along with video service. Satellite master antenna television systems, which normally are free of many regulatory burdens imposed on franchised cable systems, often enter into exclusive agreements with property owners or managers that may preclude franchised cable systems from serving their residents, although some states have enacted laws prohibiting such exclusive arrangements. Courts reviewing challenges to these laws have reached varying results. The FCC has ruled that private cable systems can distribute cable programming services across public rights-of-way to subscribers in multiple buildings over leased video distribution capacity acquired from local telephone companies without obtaining a franchise from the local governmental authorities. Cox is unable to predict the extent to which additional competition from these services will materialize in the future or the impact such competition would have on its operations. However, Cox is continuing to develop competitive packages of services to offer residential and commercial developments.

      Cable systems also compete with multichannel multipoint distribution service systems (also known as MMDS or wireless cable systems), which are licensed by the FCC to serve specific areas using low-power microwave frequencies. The FCC amended its regulations in 1998 to provide wireless cable systems the flexibility to employ digital technology in delivering two-way communications services, including high-speed Internet access. This development, along with the use of digital compression technology, has enabled wireless cable systems to deliver more channels and additional services, such as Internet service. One such system in

11

Table of Contents

      Cox operates its cable systems pursuant to non-exclusive franchises that are issued by a community’s governing body such as a city council, a county board of supervisors or a state regulatory agency. Federal law prohibits franchising authorities from unreasonably denying requests for additional franchises, and it permits franchising authorities to operate cable systems. Companies that traditionally have not provided cable services and that have substantial financial resources (such as public utilities that own certain of the poles to which Cox’s cables are attached) may also obtain cable franchises and may provide competing communications services. To date, the number of competing cable systems in Cox’s service areas has been relatively slight, and fewer than 2% of Cox’s total homes passed are overbuilt by other cable operators at this time. While Cox believes that the current level of overbuilding has not had a material impact on its operations, it is unable to predict the extent to which adverse effects may occur in the future as a result of overbuilds. See “Legislation and Regulation — Cable Franchising Matters.”

      Other new technologies also compete with Cox’s cable-delivered services. The FCC has issued digital television (also known as DTV) licenses to incumbent television broadcast licensees. Digital television stations are capable of delivering high-definition television pictures, multiple digital program streams, as well as CD-quality audio programming and advanced digital services such as data transfer or subscription video. Digital television stations are now operating in many of Cox’s cable television markets. In the five markets where Cox is now offering high definition (HD) digital services, Cox has reached agreements with many of these stations to carry at least their primary digital broadcast signal on Cox’s cable systems.

      Telephony Competition. Cox’s telephone services compete with various providers of both landline and wireless communications services, including cellular, personal communications services (also known as PCS), specialized mobile radio (also known as SMR) systems and satellite communications services. The switched voice and data telecommunications market currently is dominated by incumbent local telephone companies (also known as incumbent local exchange carriers or ILECs); however, wireless communications service providers also offer competition to Cox in the delivery of both voice and Internet services. Resellers of the incumbent local telephone company’s voice and Internet services also compete with Cox’s communications services. Resellers are typically low-cost aggregators that serve price conscious market segments; and value-added resellers target customers with special communications needs. Companies offering telephone service via the Internet (also know as IP telephony) also compete with Cox’s telephone services, although the availability and quality of such services are not significant at this time.

      Pursuant to changes in federal law in 1996, and subject to certain limitations for rural telephone companies, the FCC may preempt any state or local law or regulation that prohibits or has the effect of prohibiting any entity from providing telecommunications services. The changes to federal law in 1996 were intended to open local exchange markets to competition, which has resulted in a substantial increase in Cox’s business opportunities to deliver telecommunications services over its cable broadband networks.

      Advances in communications technology, marketplace developments and regulatory and legislative changes will occur in the future. For further information concerning legislative and regulatory matters, please see “— Legislation and Regulation.” New technologies and services may develop and may compete with services offered by Cox over its communications facilities. Consequently, Cox is unable to predict the effect that ongoing or future developments might have on its business and operations.

12

Table of Contents

Legislation and Regulation

Cable Television

      The cable industry is regulated to varying degrees by the FCC, certain state governments and agencies and most local governments. In addition, legislative and regulatory proposals under consideration from time to time by Congress and various federal, state and local agencies may materially affect the cable industry. The following is a summary of federal laws and regulations affecting the growth and operation of the cable industry and a brief description of certain state and local laws.

      The Communications Act of 1934, as amended by the Cable Communications Policy Act of 1984 (the 1984 Cable Act), the Cable Television Consumer Protection and Competition Act of 1992 (the 1992 Cable Act), and the Telecommunications Act of 1996 (the 1996 Telecommunications Act), establishes comprehensive national standards and guidelines for the regulation of cable television systems and allocates responsibility for enforcing federal regulatory policies among the FCC, state and local governmental authorities. The courts, especially the federal courts, have an important oversight role as the statutory and regulatory provisions and policies are interpreted and enforced by various governmental units. Court actions and regulatory proceedings will continue to refine the rights and obligations of cable operators and governmental authorities under this federal law. The results of these judicial and administrative proceedings may materially impact Cox’s business and operations.

     The Communications Act and FCC Regulations

      The Communications Act and the regulations and policies of the FCC affect significant aspects of Cox’s cable system operations, including:

	•	subscriber rates;
	•	the content of programming Cox offers to subscribers, as well as the manner in which Cox markets its program packages to subscribers;
	•	the use of Cox’s cable system facilities by local franchising authorities, the public and unrelated companies;
	•	the use of utility poles and conduits;
	•	cable system and program ownership limitations; and
	•	franchise agreements with local governmental authorities.

      Rate Regulation. The Communications Act and FCC regulations authorize certified local franchising authorities to regulate rates for basic tier cable services and associated customer equipment and installations in communities where the cable system is not subject to “effective competition,” as defined by federal law. The FCC has detailed rate regulations, guidelines and rate forms that franchising authorities must use in connection with their regulation of Cox’s basic service and equipment rates. Where its cable system is regulated, Cox may modify its rates on a quarterly or annual basis to account for changes in the number of regulated channels, inflation and certain “external” costs such as franchise and other governmental fees, copyright and retransmission consent fees, taxes, programming fees and franchise-related obligations. Additionally, Cox may modify its rates to account for significant network upgrades. If the franchising authority determines that Cox’s basic service or equipment rates are not in compliance with the FCC’s regulations, it may require Cox to reduce those rates and to refund any overcharges to subscribers with interest. Cox may appeal adverse rate decisions to the FCC and the FCC may reverse any rate decision made by a local franchising authority if the decision is inconsistent with the FCC’s rules and policies.

      The Communications Act and the FCC’s regulations also:

	•	prohibit regulation of rates for non-basic multi-channel video service packages and video programming offered on a per channel or per program basis, as well as regulation of rates by local franchising authorities for other non-basic services provided over the cable system;

13

Table of Contents

	•	require operators to establish a uniform rate structure for cable services throughout each franchise area that is not subject to effective competition, subject to certain exceptions allowing operators to establish reasonable categories of customers and services;
	•	permit operators to offer non-predatory bulk discount rates for subscribers in commercial and residential developments and to offer discounted rates to senior citizens and other economically disadvantaged groups; and
	•	permit regulated basic equipment and installation rates to be computed by aggregating costs of broad categories of equipment at the franchise, system, regional or company level.

      Approximately 220 communities served by Cox’s cable systems currently regulate Cox’s basic service and equipment rates. These communities represent approximately 26% of total communities served by Cox and approximately 21% of the total number of equivalent basic subscribers served by Cox’s cable systems. Cox does not believe that the regulation of its basic service and equipment rates in these communities will materially impact its business and operations.

      Content Requirements and Restrictions. The Communications Act and FCC regulations permit a local commercial television broadcast station to elect once every three years to require a cable operator in the station’s designated market area either:

	•	to carry the station on certain designated channel positions on the operator’s cable system (subject to certain exceptions); or
	•	to negotiate an agreement for the station’s “retransmission consent” that permits the operator to carry the station on the cable system.

      The Communications Act requires a cable operator to devote as much as one-third of its activated channel capacity for the mandatory carriage of local commercial television stations. The Communications Act also gives local non-commercial television stations mandatory carriage rights; however, such stations are not given the option to negotiate retransmission consent for the carriage of their signals by cable systems. Cable systems must negotiate retransmission consent for any additional “distant” commercial television stations (except for certain commercial satellite-delivered independent “superstations” such as WGN), commercial radio stations and certain low-power television stations.

      The FCC has a pending administrative proceeding in which it is considering various proposals for mandatory carriage of digital television signals. In the first phase of this proceeding, the FCC:

	•	declined to order the carriage of both the analog and digital signals of television stations;
	•	implemented technical and operational standards for the carriage of digital television signals;
	•	determined that a television broadcast station licensee that is operating only on its authorized digital channel and/or that has surrendered its analog broadcast channel has mandatory carriage rights for its digital broadcast channel on cable systems in its local service area;
	•	authorized the digital-only broadcast station to elect whether the operator’s cable system will carry the station’s signal in a digital or converted analog format; and
	•	authorized broadcasters with both analog and digital signals to tie the carriage of their digital signals with the carriage of their analog signals as a retransmission consent condition.

      The FCC continues to evaluate additional modifications to its digital broadcast signal carriage requirements. Cox cannot predict the ultimate outcome of this proceeding, or the impact any new carriage requirements may have on the operation of its cable systems.

      Except in areas where Cox is subject to effective competition, the Communications Act requires Cox’s cable systems to permit subscribers to purchase video programming offered by Cox on a per channel or a per program basis without the necessity of subscribing to any tier of service, other than basic service. Like many other cable operators, however, Cox was not required to comply with this requirement until October 2002 for

14

Table of Contents

      One of the underlying competitive policy goals of the 1992 Cable Act is to limit the ability of vertically integrated program suppliers from favoring affiliated cable operators over unaffiliated program distributors. Consequently, with certain limitations, federal law generally:

	•	precludes any satellite video programmer affiliated with a cable company, or with a common carrier providing video programming directly to its subscribers, from favoring an affiliated company over competitors;
	•	requires such programmers to sell their programming to other multichannel video distributors; and
	•	limits the ability of such programmers to offer exclusive programming arrangements to their affiliates.

      The statutory prohibition on exclusive programming distribution contracts between cable operators and affiliated satellite program distributors expired in October 2002; however, as permitted by statute, the FCC extended the prohibition for five years after determining that it was necessary to protect competition and diversity in the distribution of video programming.

      The Communications Act contains restrictions on the transmission by cable operators of obscene programming. The Communications Act also requires cable operators, upon the request of a subscriber, to scramble or otherwise fully block any channel that is not included in the programming package purchased by the subscriber. Cable operators are also required to provide by sale or lease a lockbox or other device that permits a subscriber to block the viewing of specific channels during specified periods selected by such subscriber.

      The FCC actively regulates other aspects of a cable operator’s programming, including:

	•	use of syndicated and network programs and local sports broadcast programming;
	•	advertising in children’s programming;
	•	political advertising;
	•	programming created or controlled by the cable operator (i.e., origination cablecasting);
	•	sponsorship identification; and
	•	closed captioning of video programming.

      The FCC has also initiated a regulatory proceeding to evaluate its jurisdiction and regulatory authority over the distribution of interactive television services, including advanced instant messaging and interactive menu services. A federal appellate court recently vacated the FCC’s decision to require video programmers, including cable operators, to provide simultaneous audio description of video activity occurring on certain programming to assist visually impaired persons.

      Use of Cox’s Cable Systems by the Government and Unrelated Third Parties. The Communications Act allows local franchising authorities and unrelated third parties to have access to cable systems’ channel capacity for their own use. For example, the Communications Act:

	•	permits franchising authorities to require that cable operators provide channel capacity for public, educational and governmental access programming; and
	•	requires cable systems with 36 or more activated channels to designate a significant portion of their channel capacity for programming provided by unaffiliated third parties under regulated lease arrangements.

The FCC regulates various aspects of third party use of channel capacity on cable systems, including the rates and certain terms and conditions of such commercial use.

15

Table of Contents

      Various consumer groups and companies, including telephone companies and Internet service providers, have lobbied vigorously for local, state and federal governments to mandate that cable operators provide capacity on their systems so that these companies and others may deliver high-speed Internet and interactive television services directly to subscribers over cable systems. Municipal efforts to impose unilaterally so-called “open access” requirements on cable operators have not generally been successful and have been rejected by several federal courts, although the rationale for each decision has varied. The FCC, in connection with its review of the AOL-Time Warner merger, imposed, together with the Federal Trade Commission, limited multiple access, technical performance and other requirements related to the merged company’s Internet and Instant Messaging platforms.

      In March 2002, the FCC decided that the provision of broadband Internet services over cable systems is an interstate “information service,” and not a “cable service” or “telecommunications service.” The FCC confirmed that cable operators offering integrated high-speed Internet services are not subject to common carrier requirements to offer the transport functions underlying their Internet services on a stand-alone basis to unaffiliated Internet service providers. This decision is the subject of a pending appeal in the U.S. Court of Appeals for the Ninth Circuit. The FCC has a separate rulemaking pending to assess issues concerning the regulation of broadband Internet services provided over cable systems, including whether the FCC can and should exercise authority to develop a new regulatory framework for Internet service provided over cable systems as a facilities-based interstate information service and the role, if any, of state and local governmental authorities in regulating such services. Similarly, in a rulemaking proceeding involving regulation of incumbent local exchange carriers’ broadband services, the FCC has proposed to classify broadband Internet services provided by local telephone companies over their own wireline facilities as “information services.” The outcome of the pending appeal of the FCC’s regulatory classification of high-speed Internet services provided over cable systems and the pending FCC broadband rulemaking proceedings may affect significantly Cox’s regulatory obligations, including whether Cox will be required to obtain additional local authority to use the local rights-of-way for the delivery of high-speed Internet services or to pay local governmental franchise fees and/or federal and state universal service fees on high-speed Internet service revenues. Cox cannot predict the ultimate outcome of these judicial and administrative proceedings or the impact of any new regulatory requirements on Cox’s business and operations.

      In June 2000, the federal appellate court for the Ninth Circuit, which has jurisdiction over California, Nevada and Arizona (among other states), decided in a dispute between AT&T Broadband and the City of Portland that the Internet service offered by AT&T Broadband was not a cable service. As a result, Cox determined that it could incur liability in those states if it continued to collect and remit franchise fees on revenue derived from its high-speed Internet services. Additionally, because the FCC ruled in March 2002 that high-speed Internet services provided over cable systems are not cable services, Cox notified all of its local franchising authorities that it no longer could collect and remit franchise fees on its high-speed Internet service revenues. For a discussion of certain related matters, see Item 3. “Legal Proceedings.” Although various local franchising authorities have objected to the termination of franchise fee payments on the revenues from Cox’s high-speed Internet services, the only franchising authorities that have taken any formal action against Cox are the City of Los Angeles, California and Jefferson Parish, Louisiana. Los Angeles has given Cox and other cable operators doing business in the City of Los Angeles a formal notice of default of their franchise obligations for failure to pay franchise fees on high-speed Internet service revenues. Jefferson Parish has filed a lawsuit claiming, among other things, that Cox is obligated to pay franchise fees on its high-speed Internet services. Cox cannot predict the outcome of these franchise fee disputes, or the impact of any adverse results in such disputes on its business and operations.

      Legislation has been introduced previously in Congress, which, among other things, would have required cable operators to offer interconnection to unaffiliated Internet service providers on terms and conditions regulated by the FCC. Although the legislation was not enacted, Cox cannot predict if similar proposals will be introduced or adopted in the future or whether such proposals, administrative proceedings or litigation will have a material impact on its business and operations.

      Pole Attachments. The Communications Act requires utilities to provide cable systems and telecommunications carriers with nondiscriminatory access to any pole, conduit or right-of-way controlled by the utility.

16

Table of Contents

      The U.S. Supreme Court has upheld the FCC’s jurisdiction to regulate the rates, terms and conditions of cable operators’ pole attachments that are simultaneously used to provide high-speed Internet access and cable services, and a federal appellate court recently confirmed that the FCC’s rate formulas, as applied in a specific case, provide “just compensation” under the Federal Constitution. Several other recent federal appellate court decisions have also upheld various aspects of the FCC’s pole attachment regulations and policies adopted pursuant to the 1996 Telecommunications Act, which decisions will provide more certainty for Cox in its negotiations with various utilities for the use of space on poles and in underground conduits.

      Cox is involved in several pending complaints filed at the FCC by various state cable associations challenging certain utilities’ rate increases and the unilateral imposition of new contract terms. The utilities in these cases have challenged, among other things, the constitutionality of the FCC’s pole attachment rate formulas. Cox is unable to predict the outcome of the legal challenges to the FCC’s regulations or the ultimate impact any revised FCC rate formula, any new pole attachment regulations or any modification of the FCC’s regulatory authority might have on Cox’s business and operations

      Ownership Limitations. The Communications Act authorizes the FCC to impose nationwide limits on the number of subscribers under the control of a cable operator and on the number of channels that can be occupied on a cable system by video programmers in which the cable operator has an attributable ownership interest. The FCC adopted cable ownership regulations and established:

	•	subscriber ownership information reporting requirements; and
	•	attribution rules that identify when the ownership or management by Cox or third parties of other communications businesses, including cable systems, television broadcast stations and local telephone companies, may be imputed to Cox for purposes of determining Cox’s compliance with the FCC’s ownership restrictions.

      The federal courts have rejected constitutional challenges to the statutory ownership limitations; but a federal appellate court recently concluded that the FCC’s nationwide cable subscriber ownership limit and its cap on the number of affiliated programming channels an operator may carry on its cable systems were unconstitutional and that certain of its ownership attribution rules were unreasonable. The FCC has initiated a rulemaking proceeding to evaluate the feasibility of new horizontal and vertical cable ownership limitations and revised attribution standards. Cox is unable to predict the outcome of this FCC proceeding or the impact any new FCC ownership restrictions or attribution rules might have on its business and operations.

      The 1996 Act eliminated the statutory prohibition on the common ownership, operation or control of a cable system and a television broadcast station in the same market. The FCC eliminated its regulations precluding the cross-ownership of a national broadcasting network and a cable system, and its regulations prohibiting the common ownership of other broadcasting interests and cable systems in the same geographical areas. This broadcast-cable cross-ownership rule prohibited Cox from owning or operating a cable system in the same area in which CEI or one of CEI’s subsidiaries owns or operates a television broadcast station. Although the FCC is currently reevaluating many of its media ownership restrictions, it has not proposed to implement a new broadcast-cable cross-ownership prohibition. With the elimination of this FCC cross-ownership restriction, Cox may obtain an enhanced degree of flexibility in structuring its cable operations.

17

Table of Contents

      Local Telephone Company Ownership of Cable Systems. Prior to the 1996 Telecommunications Act, federal cross-ownership restrictions limited entry into the cable business by potentially strong competitors such as telephone companies. The 1996 Telecommunications Act modified the regulatory relationship between local telephone companies and cable television operators by:

	•	eliminating federal legal barriers to competition in the local telephone and cable communications businesses, including repeal of the statutory telephone company/cable television cross-ownership prohibition (thereby allowing local telephone companies to offer video services in their local telephone service areas);
	•	preempting legal barriers to competition that exist in state and local laws and regulations;
	•	setting basic standards for relationships between telecommunications providers; and
	•	limiting acquisitions among cable systems and telephone companies in the same market and prohibiting certain joint ventures between local telephone companies and cable operators in the same market.

      Under the 1996 Telecommunications Act, local telephone companies and other entities may provide video programming services as traditional cable operators or, among other things, as open video system (also known as OVS) operators, subject to certain conditions, including setting aside a portion of their channel capacity for use by unaffiliated program distributors on a non-discriminatory basis. Open video system operators are exempt from several of the regulatory obligations that currently apply to cable operators. However, certain restrictions and requirements remain applicable to open video system operators, including, without limitation, the obligation to obtain FCC certification for open video system operations and any necessary local operating authority, and the obligation to comply with the FCC’s sports blackout, network non-duplication, syndicated exclusivity and mandatory carriage rules.

      Under the 1996 Telecommunications Act, local telephone companies providing cable service through cable systems or open video systems are not bound by common carrier obligations, which otherwise would require a telephone company to make capacity available on its network on a nondiscriminatory basis for the provision of cable service directly to subscribers by unaffiliated third parties. In addition, telephone companies are not required to obtain a certification under Section 214 of the Communications Act to establish or operate a video programming delivery system. The FCC has ruled that cable operators may elect to operate open video systems, but only if they are subject to effective competition as defined in the 1992 Cable Act and corresponding FCC regulations. The FCC’s rules prohibit a cable operator from terminating an existing franchise agreement to become an open video system operator. Cox does not operate any open video systems, and no open video systems operate in any of Cox’s franchise areas.

      General Ownership Limitations. The Communications Act generally prohibits Cox, with certain limited exceptions, from owning and/or operating a satellite master antenna television system or a wireless cable system in any area where Cox provides franchised cable television service. The FCC’s rules, however, permit a cable operator to offer service through satellite master antenna television systems in the operator’s existing franchise area so long as the service is offered according to the terms and conditions of the cable operator’s local franchise agreement.

      In 1998, the FCC initiated a rulemaking proceeding, which, among other things, sought comments on whether the FCC should implement cross-ownership restrictions between direct broadcast satellite operators and cable operators. That proceeding remains pending, and no FCC rule currently prohibits cross-ownership between direct broadcast satellite providers and cable system operators. The FCC has stated that it would evaluate cross-ownership issues case-by-case in the context of FCC license transfer proceedings.

      Other Regulatory Requirements of the Communications Act and the FCC. The Communications Act and the FCC’s rules also include provisions concerning, among other things:

	•	customer service;
	•	subscriber privacy;

18

Table of Contents

	•	marketing practices;
	•	equal employment opportunity;
	•	technical standards and equipment compatibility;
	•	antenna structure notification, marking, and lighting;
	•	emergency alert system requirements; and
	•	the collection from cable operators of annual regulatory fees, which are calculated based on the number of subscribers served and the types of FCC licenses held.

      The FCC adopted cable inside wiring rules to provide specific procedures for the disposition of residential home wiring and internal building wiring where a subscriber terminates service or where an incumbent cable operator is forced by a building owner to terminate service in a multiple dwelling unit building. Recent clarifications by the FCC of its inside wiring rules are intended to facilitate the ability of competitors to access incumbent cable operators’ internal building distribution plant.

      The FCC also adopted regulations regarding compatibility between cable systems and consumer electronics equipment. The FCC’s rules assure the competitive availability of customer premises equipment, such as set-top converters or other navigation devices, which are used to access services offered by cable systems and other multichannel video programming distributors. Cable operators are required to separate security from non-security functions in certain customer premises equipment by making available modular security components that would function in set-top converters purchased or leased by subscribers from retail outlets. Effective January 1, 2005, Cox will be prohibited from selling or leasing new navigation devices or set-top converters that integrate both security and non-security functions. Cox, however, will not be required to discontinue the leasing of older set-top converters that include integrated security functions if those converters are provided to subscribers before January 1, 2005.

      The FCC also actively regulates other aspects of Cox’s cable operations and has adopted regulations implementing its authority and jurisdiction under the Communications Act. The FCC may enforce its regulations through the imposition of substantial fines, the issuance of cease and desist orders and the imposition of other administrative sanctions such as the revocation of FCC licenses needed to operate certain transmission facilities often used in cable operations. Local franchising authorities are also permitted to enforce the FCC’s technical and consumer protection standards. Pending FCC proceedings may change existing rules or lead to new regulations. Cox is unable to predict the impact that any further FCC rule changes may have on its business and operations.

     Cable Copyright Matters

      Cox’s cable systems utilize local and distant television and radio broadcast signals in their channel line-ups. This programming is protected by federal copyright law. Cox, however, generally does not obtain licenses to display this programming directly from its owner or owners. Consequently, Cox must comply with a federal compulsory licensing process that covers television and radio broadcast signals. In exchange for filing certain reports and contributing a percentage of its revenues to a federal copyright royalty pool, Cox obtains blanket permission to retransmit the copyrighted material carried on broadcast signals. The nature and amount of future copyright payments for broadcast signal carriage cannot be predicted at this time. Increases in such payments may be passed through to subscribers as external costs under the FCC’s cable rate regulations.

      The Copyright Office has recommended that Congress revise both the cable and satellite compulsory copyright licenses. Congress modified the satellite compulsory license in a manner that permits direct broadcast satellite operators to be more competitive with cable operators such as Cox. The possible simplification, modification or elimination of the compulsory copyright license is the subject of continuing legislative review. The elimination or substantial modification of the cable compulsory license could adversely affect Cox’s ability to obtain suitable programming and could substantially increase the cost of programming that remains available for distribution to Cox’s subscribers. Cox cannot predict the outcome of this legislative activity.

19

Table of Contents

      Cox distributes to subscribers programming that contains music, including local advertising, local origination programs, access channels and pay-per-view events. The right to utilize this music is often controlled by music rights organizations that negotiate on behalf of their members for the payment of license fees covering each performance. The cable industry previously reached an agreement with one of these organizations for a standard license covering the performance of music in programs and advertising originated by cable operators and in pay-per-view events. Cable industry representatives negotiated standard license agreements with the two remaining sizable music performing rights organizations covering locally originated programming, including advertising inserted by the cable operator in programming produced by other parties, and Cox recently executed music performance license agreements with these organizations. Although each of these agreements will require the payment of music license fees for earlier time periods and for future periods, Cox does not believe such license fees will have a significant impact on its business and operations.

     Cable Franchising Matters

      Because cable systems use local streets and rights-of-way, they are subject to state and local regulation, which typically is implemented through the franchising process. Consistent with the Communications Act, state and/or local officials are usually involved in franchisee selection and in establishing requirements for system capabilities and construction, insurance, basic service rates, consumer relations, billing practices and community-related programming and services. Upon receipt of a franchise, the cable system owner usually assumes a broad range of obligations to the issuing authority that directly affect the system’s business. Franchise terms and conditions vary materially from jurisdiction to jurisdiction, and even from city to city within the same state. Although franchising matters normally are resolved at the local level through a franchise agreement and/or a local ordinance, the Communications Act provides certain guidelines and requirements that govern a cable operator’s relationship with its local franchising authority. For example, the Communications Act:

	•	generally prohibits a cable operator from operating without a franchise;
	•	encourages competition with existing cable systems by:

	—	allowing municipalities to operate their own cable systems without franchises; and
	—	preventing franchising authorities from granting exclusive franchises or from unreasonably refusing to award additional franchises covering an existing cable system’s service area;

	•	permits local authorities, when granting or renewing franchises, to establish requirements for cable-related facilities and equipment;
	•	permits local authorities, in granting or reviewing a cable franchise, to require the provision of channel capacity for public, educational and governmental channels, and to require the construction of institutional networks;
	•	prohibits franchising authorities from establishing requirements for specific video programming or information services other than in broad categories;
	•	permits a cable operator to seek modification of franchise requirements from the franchising authority or by judicial action if changed circumstances warrant the modification;
	•	generally prohibits franchising authorities from:

	—	imposing requirements in the grant or renewal of a cable franchise that require, prohibit or restrict the provision of telecommunications services;
	—	imposing cable franchise fees on revenues derived from providing telecommunications services over the cable system; or
	—	restricting the use of any type of subscriber equipment or transmission technology;

	•	limits franchise fees to 5% of gross revenues derived from providing cable services over the cable system;

20

Table of Contents

	•	establishes formal and informal procedures for renewal of cable franchises that are designed to protect cable operators from arbitrary denials of renewal; and
	•	permits state or local franchising authorities to adopt certain additional conditions regarding the transfer of cable system ownership.

      Cox’s franchises typically require the periodic payment of fees to franchising authorities of up to 5% of “gross revenues,” as defined by each franchise agreement. Under the Communications Act and FCC rules, these franchise fees may be passed on to subscribers and separately itemized on subscriber bills. The FCC has ruled that franchise fees paid by cable operators on non-subscriber related revenue generated from such things as cable advertising and home shopping commissions may be passed through to subscribers and itemized on subscriber bills regardless of the source of the revenues on which they were assessed. Local franchising authorities have appealed this FCC decision to a federal appellate court. In connection with its March 2002 decision classifying high-speed Internet services provided over a cable system as interstate information services, the FCC stated that revenues derived from cable operators’ Internet services should not be included in the revenue base from which franchise fees are calculated. That FCC decision has also been challenged in a federal appellate court by local governmental and consumer groups. Because of the FCC’s decision, Cox notified all of its local franchising authorities that it no longer could collect and remit franchise fees on its high-speed Internet service revenues. For a discussion of this and other related matters, see “Legislation and Regulation — Cable Television — Use of Cox’s Cable Systems by the Government and Unrelated Third Parties.” Cox is unable to predict the ultimate resolution of these matters, but does not expect that any additional franchise fees it may be required to pay will be material to Cox’s business and operations.

      The Communications Act contains franchise renewal procedures designed to protect cable operators against arbitrary denials of renewal. Even if a franchise is renewed, however, the franchising authority may seek to impose as a condition of renewal new requirements, such as upgrades in facilities and services or increased franchise fees. Similarly, if a franchising authority’s consent is required for the purchase or sale of a cable system or franchise, the franchising authority may attempt to impose additional franchise requirements as a condition for such consent.

      Historically, cable operators providing satisfactory services to their subscribers and complying with the terms of their franchises typically have obtained franchise renewals. Cox believes it generally has met the terms of its franchises and has provided high-quality service. Cox therefore anticipates that its future franchise renewal prospects generally will be favorable. Nevertheless, although the Communications Act provides certain procedural protections, no assurance can be given that franchise renewals will be granted or that renewals will be made on similar terms and conditions.

      The Communications Act places certain limitations on a franchising authority’s ability to control cable system operation, and courts have from time to time reviewed the constitutionality of several general franchise requirements, including franchise fees and access channel requirements, often with inconsistent results. Federal law immunizes franchising authorities from monetary damage awards arising from their regulation of cable systems or decisions regarding franchise grants, renewals, transfers and amendments.

      A number of states subject cable systems to the jurisdiction of centralized state governmental agencies, some of which impose public utility-type regulation on cable operators. Attempts in other states to regulate cable systems are continuing and can be expected to increase. To date, the states in which Cox operates that have enacted such state level regulation are Connecticut, Massachusetts and Rhode Island. State and local franchising jurisdiction is not unlimited, however, and must be exercised in accordance with federal law.

Telecommunications

      The telecommunications services currently offered by Cox affiliates are subject to varying degrees of federal, state and local regulation. The FCC exercises jurisdiction over all aspects of interstate and international telecommunications services and the facilities used to provide those services. The 1996 Telecommunications Act established a national policy of promoting local exchange competition and set standards to govern relationships among telecommunications providers, including, among others, the intercon-

21

Table of Contents

      Local Telephone Competition Rules. While the current switched voice and data market is dominated by incumbent local telephone companies, the 1996 Telecommunications Act presents unprecedented opportunities for new entrants into these markets, such as Cox. Because incumbent local telephone companies historically had exclusive state franchises to provide telephone services, they established monopoly relationships with their customers. Under the 1996 Telecommunications Act, and subject to certain limited exemptions for rural telephone companies, the FCC may preempt any state law or regulation that prohibits or has the effect of prohibiting any entity from providing telecommunications services.

      The 1996 Telecommunications Act also imposes access and interconnection requirements on incumbent local telephone companies to open their networks to competitors. State regulators generally are responsible for arbitrating interconnection disputes that arise between incumbent local telephone companies and new entrants. In addition, the 1996 Telecommunications Act specifies procedures for state commissions to review and approve interconnection agreements entered into between new entrants and incumbent local telephone companies. The FCC adopted pricing standards and negotiation and arbitration guidelines that the states must follow in reviewing interconnection agreements between incumbent local telephone companies and their competitors. In 1997, a federal appellate court vacated certain portions of the FCC’s rules, but in January 1999, the U.S. Supreme Court reversed the lower court and upheld, for the most part, the FCC’s interconnection rules. The Supreme Court, however, instructed the FCC to reconsider its determination regarding the extent to which incumbent local telephone companies must provide unbundled elements of their networks to competitors. In response to the Supreme Court’s decision, the FCC eliminated several items from its previous list of unbundled network elements and provided a framework for the phase-out of other network elements. The FCC’s revised unbundling rules were designed to advance the development of facilities-based competition and to provide incentives for incumbent and competitive carriers to invest in their own facilities and to innovate.

      In February 2003, the FCC adopted modified unbundling rules. These rules will:

	•	limit the access of competitive carriers to new broadband facilities constructed by incumbent telephone companies;
	•	phase out “line sharing,” a mechanism that permits competitive providers of broadband services to purchase only a portion of the capacity on a telephone line; and
	•	give state regulators new authority to determine whether incumbent telephone company switching facilities should continue to be unbundled.

It is expected that both incumbent telephone companies and competitive carriers will appeal aspects of this decision. The new rules are expected to disadvantage competitive carriers, such as AT&T, WorldCom and Covad, that make significant use of unbundled elements to provide local telephone services.

      In July 2000, a federal appellate court vacated the FCC’s pricing rules for incumbent local telephone companies pricing of unbundled network elements and interconnection, but in May 2002, the U.S. Supreme Court reversed the appeals court and upheld the FCC rules. Although its current rules were upheld by the Supreme Court, the FCC is considering modifying its rules governing intercarrier competition. If the FCC modifies these rules, Cox’s costs for interconnection could decrease, but Cox also may lose revenues it now receives for providing interconnection to other local telephone companies, including incumbent local telephone companies.

22

Table of Contents

      The terms of intercarrier compensation for local calls to Internet service providers have been the subject of ongoing disputes between competitive local exchange carriers (known as CLECs) and incumbent local exchange carriers (also known as ILECs and incumbent local telephone companies) at state commissions and the FCC. Although most states have ruled otherwise, the FCC has twice held that such traffic is not subject to the standard compensation for termination of local calls. The FCC’s initial determination was vacated and remanded to the FCC by a federal appellate court and the FCC’s second order is the subject of a pending appeal in that court. If the FCC’s rules are upheld, Cox may receive significantly reduced reciprocal compensation payments in the future. In addition, Cox has had repeated disputes with incumbent local telephone companies concerning their refusal to pay reciprocal compensation for Internet-bound traffic. Cox cannot be assured that it will recover reciprocal compensation for traffic delivered to Internet service providers to which Cox believes it is entitled under its existing interconnection agreements.

      Under the 1996 Telecommunications Act, new wireline entrants such as Cox are subject to federal regulatory requirements for the provision of local exchange service in any market. Specifically, the 1996 Telecommunications Act required the FCC to implement rules under which all local telephone companies must provide telephone number portability, dialing parity, reciprocal compensation for transport and termination of local traffic, resale, and access to rights-of-way. These requirements also place burdens on new entrants that may benefit their competitors. In particular, the resale requirement means that a company could seek to resell services using the facilities of a new entrant such as Cox without making a similar investment in facilities. In addition to incumbent local telephone companies and existing competitive access providers, new entrants potentially capable of offering telecommunications services include cable companies, electric utilities, long-distance carriers, microwave carriers, terrestrial and satellite wireless service providers, resellers and private networks built by large end-users or groups of these entities in combination.

      The 1996 Telecommunications Act also requires state commissions to review and approve voluntarily negotiated interconnection agreements and to arbitrate unresolved compulsory interconnection negotiations between new entrants and incumbent local telephone companies. The Communications Act permits carriers to appeal state commission decisions concerning interconnection agreements to United States district courts. Several state commissions challenged this provision based on the Eleventh Amendment, which gives states immunity from suits in federal court. On May 20, 2002, the U.S. Supreme Court held that a carriers’ right to appeal state commission decisions concerning interconnection agreements to United States district courts did not violate the Eleventh Amendment, preserving the appeal rights of Cox and other carriers.

      Access Charges. On April 27, 2001, the FCC adopted an order to prevent competitive local telephone companies from using the FCC’s tariff rules to impose excessive access charges on long distance carriers. The FCC implemented a regime designed to cause the access charge rates of competitive local telephone companies to decrease over time until they reach the rates charged by incumbent local telephone companies. At the same time, the FCC held that a long distance carrier’s refusal to serve the customers of a competitive local telephone company whose access charges comply with the FCC’s benchmarks generally would constitute a violation of the duty of all common carriers to provide service upon reasonable request. Consequently, while the access charges collected by competitive local telephone companies, including Cox, could decline under the FCC’s order, the order also will ensure that the competitive local telephone company’s customers have access to a fully interconnected telecommunications network.

      Bell Company Long Distance Service. Prior to the passage of the 1996 Telecommunications Act, the Bell telephone companies, such as BellSouth, were prohibited from providing long distance service in their local service territories. The 1996 Telecommunications Act included provisions that allow a Bell company to provide long distance service after it meets a series of statutory tests, including a “competitive checklist” of compliance with the market-opening requirements of the Communications Act. Obtaining long distance authority in a state improves a Bell company’s competitive position with respect to other providers of local telephone service and may reduce its incentive to continue to comply with its obligations to open its market to local competition. As of the end of 2002, the Bell companies had obtained long distance authority in 35 of the 48 states and in the District of Columbia where they had been subject to the prohibition on providing long distance service, including the states of California, Connecticut, Iowa, Louisiana, Nebraska, Oklahoma, Rhode Island and Virginia where Cox provides local telephone service.

23

Table of Contents

      Universal Service. One of the goals of the Communications Act is to extend telephone service to all citizens of the United States, that is, to provide universal service. This goal was achieved primarily by state commissions maintaining the rates for basic local exchange service at an affordable level. Prior to AT&T’s divestiture of its local exchange affiliates pursuant to the AT&T Modified Final Judgment, most observers accepted that incumbent local telephone companies were able to maintain relatively low local rates by subsidizing them with revenues from business and long-distance toll services, and by subsidizing rural service at the expense of urban customers. The extent of these subsidies has been widely disputed and the incumbent local telephone companies that possess this information generally have not made it available for review and verification.

      The 1996 Telecommunications Act continues the goal of preserving and advancing universal service by requiring the FCC to establish an explicit mechanism for subsidizing service to those who might otherwise drop local telephone service. The rules adopted by the FCC in its Universal Service orders require telecommunications carriers (subject to limited exemptions) to contribute to funding existing universal service programs for high-cost carriers and low income customers and to new universal service programs for schools, libraries and rural health care providers. The FCC has adopted a program to fund high-cost service areas that preserves many of the existing subsidies. The FCC is currently considering recommendations of the Rural Task Force, as submitted by the Federal-State Joint Board on Universal Service, for implementing a rural universal service program. Among other recommendations, the proposal calls for an expansion of the services covered by the Universal Service Fund. If adopted, this recommendation could substantially increase carrier contributions to the Universal Service Fund. Moreover, the FCC’s recent tentative conclusion that broadband Internet services provided by telephone companies should be classified as information services under the Communications Act has led to questions regarding whether similar services provided by cable operators should be subject to universal service fund contributions.

      Under the contribution factors for 2002, Cox contributed approximately $7.0 million of its interstate telecommunications revenues to the federal Universal Service Fund. In addition to the federal universal service plan, most or all states likely will adopt their own universal service support mechanisms.

      Depending upon how the FCC completes the implementation of its statutory mandate to preserve and promote universal service and how states adjust their existing programs or create new programs, this subsidy mechanism may provide an additional source of revenue to those local telephone companies or other carriers (e.g., wireless providers) willing and able to provide service to markets that are less financially desirable either due to the high cost of providing service or the limited revenues that might be available from serving a particular subset of customers in an area, such as residential customers.

      Another goal of the 1996 Telecommunications Act is to increase competition in the telecommunications services market, thereby reducing the need for continuing regulation of these services. To this end, the 1996 Telecommunications Act requires the FCC to streamline its regulation of incumbent local telephone companies and permits the FCC to refrain from regulating particular classes of telecommunications services or providers. The FCC has established a framework for granting certain local telephone companies relief from the FCC’s rate level, rate structure and tariffing rules once these local telephone companies satisfy certain competitive criteria. To obtain relief, an incumbent must demonstrate that sufficient competition has developed in the incumbent’s market for high-speed dedicated connections and certain related services to warrant relaxation of the FCC rules for that market. There continues to be activity at the FCC, state public service commissions and the courts by incumbent local telephone companies requesting increased pricing flexibility, local exchange service, special access and high-capacity transport service. While the FCC has granted requests for regulatory forbearance from competitive local telephone companies, it has not granted such requests from incumbent local telephone companies.

      Telephone Numbers. Local telephone companies must have telephone numbers to provide service to their customers. In a series of proceedings over the past six years, the FCC has adopted rules that affect Cox’s access to and use of telephone numbers. The most significant FCC rules are intended to promote the efficient use of telephone numbers by all telecommunications carriers. In orders released in March and December 2000 and in December 2001, the FCC adopted rules that require carriers to meet specified number usage thresholds

24

Table of Contents

      State Telecommunications Regulation. In addition to federal rules and regulations that apply to Cox’s telephony operations, state commissions regulate, to varying degrees, the intrastate services of telecommunications providers including those of Cox’s affiliates. New entrants providing local exchange services typically must apply for and receive state certification and operate in accordance with state commission pricing, terms and quality-of-service regulations. Under the 1996 Telecommunications Act, state commissions also must review interconnection agreements entered into between incumbent local telephone companies and new entrants, as well as enforce the terms of disputed agreements. If a state commission refuses to fulfill these responsibilities, carriers may seek relief from the FCC. Cox and several other carriers have been required to seek such relief for matters arising in Virginia because the Virginia State Corporation Commission had determined that it will not consider matters brought under the 1996 Telecommunications Act. The Virginia-related matters now pending before the FCC include the arbitration of the terms of interconnection agreements between Verizon and three competitive local telephone companies, including Cox. The Virginia legislature has passed legislation that requires the State Corporation Commission to consider matters brought before it pursuant to the 1996 Telecommunications Act.

      State commissions also may choose to assess universal service funding contributions from new carriers provided that a state’s program is consistent with the FCC’s universal service rules. State commissions also are playing an increasing role in telephone number assignment and number conservation policies.

      The foregoing summary does not purport to describe all present and proposed federal, state and local regulations and legislation affecting the cable or telephony industries. Other existing federal regulations, copyright licensing and, in many jurisdictions, state and local franchise requirements currently are the subject of a variety of judicial proceedings, legislative hearings, and administrative and legislative proposals that could alter, in varying degrees, the manner in which cable or telephony systems operate. Cox cannot predict at this time the outcome of these proceedings or their impact upon the cable or telecommunications industries or upon Cox’s business and operations.

Employees

      At December 31, 2002, Cox had approximately 21,600 full-time-equivalent employees. Cox considers its relations with its employees to be satisfactory.

Available Information

      Cox’s website address is http://www.cox.com. You may obtain on or through this website, free of charge, copies of Cox’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. These reports are available on Cox’s website as soon as reasonably possible after they are electronically filed with the SEC.

ITEM 2.     PROPERTIES

      Cox’s principal physical assets consist of cable operating plant and equipment, including signal receiving, encoding and decoding devices, headends and distribution systems and customer house drop equipment for each of its cable systems. The signal receiving apparatus typically includes a tower, antenna, ancillary electronic equipment and earth stations for reception of satellite signals. Headends, consisting of associated electronic equipment necessary for the reception, amplification and modulation of signals, are located near the receiving devices. Cox’s distribution system consists primarily of coaxial and fiber optic cables and related electronic equipment. Customer premise equipment consists of decoding converters, cable modems and

25

Table of Contents

      Cox’s cable distribution plant and related equipment are generally attached to utility poles under pole rental agreements with local public utilities, although in some areas the distribution cable is buried in underground ducts or trenches. Cox owns or leases parcels of real property for signal reception sites (antenna towers and headends), microwave facilities and business offices in each of its markets and leases most of its service vehicles. Cox believes that its properties, both owned and leased, taken as a whole, are in good operating condition and are suitable and adequate for Cox’s business operations.

      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. The action is being defended vigorously. The outcome of this matter cannot be predicted at this time. A related suit filed in Texas was voluntarily dismissed on September 19, 2002.

      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., 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.

      On August 23, 2002, plaintiff Redefining Progress, on behalf of itself and all others similarly situated, sued Fax.com, Inc., Cox Business Services, L.L.C. and others in United States District Court for the Northern District of California, alleging that Fax.com has sent numerous unsolicited advertisements by facsimile in violation of a federal statute. The complaint alleges that Cox Business Services, which provides telecommunications services to Fax.com, is also liable for the facsimiles in violation of the Telephone Consumer Protection Act of 1991 (TCPA), Sections 206 and 207 of the Telecommunications Act of 1996 and certain state laws. The suit seeks an award of statutory damages in the amount of $500 for each violation of the TCPA, treble damages, injunctive relief, the establishment of a constructive trust and other relief. On October 11, 2002, Cox Business Services moved to dismiss for lack of subject matter jurisdiction, for failure to state a claim, and based on the primary jurisdiction of the FCC. On March 3, 2003, the court granted Cox Business Services’ motion to dismiss for lack of subject matter jurisdiction. The time for appeal has not expired. A nearly identical federal court suit was filed in the United States District Court for the Northern District of California on September 4, 2002 by plaintiff Daniel David, on behalf of himself and all others similarly situated, against Fax.com, Cox Business Services and others, but was not served until December 4, 2002. The David suit was reassigned to the same judge presiding over the suit filed by Redefining Progress, and it asserts substantially the same claims and seeks substantially the same relief. The David suit was stayed pending the outcome of Cox Business Services’ motion to dismiss the Redefining Progress suit. Cox Business Services intends to defend these actions vigorously. Their outcomes cannot be predicted at this time.

      In addition, on September 8, 2002, plaintiff Daniel David, on behalf of himself and all others similarly situated, filed a nearly identical case against Fax.com, Cox Business Services and others in the Superior Court of California, Alameda County. The complaint asserts various causes of action including violation of the TCPA, trespass to chattels, violation of Section 17-200 of the California Business and Professions Code and unjust enrichment. The suit seeks damages and injunctive relief similar to that sought in the related federal suits. This action has been stayed until July 8, 2003 pending FCC action on its on-going TCPA rule-making. Cox Business Services intends to defend this action vigorously. The outcome cannot be predicted at this time.

26

Table of Contents

      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. Briefing is completed. The Court has not yet decided the motion. 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 the State of California for the County of San Mateo, 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 have appealed the Bankruptcy Court’s decision to the United States District Court for the Northern District of California. Cox intends to defend these actions vigorously. The outcome cannot be predicted at this time.

      On April 26, 2002, Frieda and Michael Eksler filed an amended complaint naming Cox as a defendant in a putative class action lawsuit in the United States District Court for the Southern District of New York against AT&T Corp. and certain former officers 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 that case, naming Cox as a defendant, was filed and served on November 7, 2002. The putative class includes persons who purchased shares of Excite@Home common stock between the time period March 28, 2000 and September 28, 2001. The sole count against Cox asserts a claim against Cox as a “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 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. Cox intends to defend this action vigorously. The outcome 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.

27

Table of Contents

      None.

      The information required by this Item is incorporated by reference to the section entitled “Shareholder Information” of Cox’s 2002 Summary Annual Report. See Exhibit 13. “Portions of the 2002 Summary Annual Report.”

ITEM 6.     SELECTED CONSOLIDATED FINANCIAL DATA

      Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7. for a discussion of events that affect the comparability of the information reflected in the selected consolidated financial data for each of the years in the three-year period ended December 31, 2002.

28

Table of Contents

(a)	All historical per share amounts have been restated to reflect Cox’s two-for-one stock split which was effective on May 21, 1999.
(b)	A home with one or more television sets connected to a cable system is counted as one basic customer.
(c)	Cox sold certain cable systems in 2002. After adjusting for such sales, basic video customers were 6,221,235 and 6,175,340, respectively, at December 31, 2001 and 2000; customers for advanced services were 2,721,157 and 1,567,212, respectively, at December 31, 2001 and 2000; and video homes passed was 9,947,664 and 9,680,644, respectively, at December 31, 2001 and 2000.
(d)	Advanced services include Cox Digital Cable, high-speed Internet access and Cox Digital Telephone.
(e)	Each basic video customer and each advanced service is a revenue generating unit. In certain locations, a household may purchase more than one advanced service, each of which is counted as a separate revenue generating unit.

(f)	A home is deemed to be “passed” if it can be connected to the distribution system without any further extension of the distribution plant.

(g)	Basic video customers as a percentage of video homes passed.

      The following Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the “Consolidated Financial Statements and Supplementary Data” in Item 8.

Overview

      Cox Communications, Inc., an indirect 63.4% majority-owned subsidiary of Cox Enterprises, Inc., is a multi-service broadband communications company serving approximately 6.5 million customers nationwide. Cox is the nation’s fourth largest cable television provider and offers an array of broadband products and

29

Table of Contents

      Cox’s business strategy is to leverage the capacity and capability of its broadband network to deliver multiple services to consumers and businesses while creating multiple revenue streams for Cox. Cox believes that aggressive investment in the technological capabilities of its broadband network, the long-term advantages of clustering, the competitive value of bundled services and its commitment to customer and community service will enhance its ability to continue to grow its cable operations and offer new services to existing and new customers.

Investments

      See “Investments” in Part I, Item 1. “Business” and Note 6. “Investments” in Part II, Item 8. “Consolidated Financial Statements and Supplementary Data.”

Results of Operations

2002 compared with 2001

      The following table sets forth summarized consolidated financial information for the two years ended December 31, 2002.

	NM denotes percentage is not meaningful

30

Table of Contents

      The following table sets forth summarized revenue information for the two years ended December 31, 2002.

      The 18% increase in total revenues is primarily attributable to:

	•	a 44% increase in customers for advanced services, including digital cable, high-speed Internet access and telephony customers;
	•	a 6% increase in basic cable rates resulting from increased programming costs and inflation, as well as increased channel availability;
	•	an increase in commercial broadband customers;
	•	a continuing rebound in local and national advertising sales; and
	•	an increase due to costs associated with Cox’s high-speed Internet service of approximately $91.6 million, which had been netted against revenues in 2001 under a revenue sharing agreement with Excite@Home, and were included in cost of services in 2002 as Cox no longer has a revenue sharing agreement with Excite@Home.

      Cox has experienced solid growth in digital cable, residential data and telephony customers. Cox expects this trend to continue and anticipates continued consumer demand for its existing portfolio of broadband products, as well as for new services such as Entertainment On Demand, Home Networking and high-definition television. However, actual growth and demand may not meet Cox’s expectations due to increased competition, reduced demand and other risks and uncertainties.

31

Table of Contents

      The following table sets forth summarized operating expenses for the two years ended December 31, 2002.

      Cost of services includes cable programming costs, other direct costs and field service 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 13% over 2001 primarily due to a 12% 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 3% was related to digital customer growth. Other cost of services increased 15%, primarily due to:

	•	increased labor costs due to the transition from upgrade construction and new product launches to maintenance and related customer costs directly associated with the growth of new subscribers;
	•	costs associated with Cox’s high-speed Internet service of approximately $91.6 million, which had been netted against revenues in 2001 under a revenue sharing agreement with Excite@Home, and were included in cost of services in 2002 as Cox no longer has a revenue sharing agreement with Excite@Home; and
	•	a one-time non-recurring charge of approximately $9.8 million associated with the continuation of Excite@Home high-speed Internet service, as described below; partially offset by
	•	a one-time non-recurring net charge in 2001 of approximately $150.2 million associated with the continuation of Excite@Home high-speed Internet service and the transition to Cox High Speed Internet service following the bankruptcy of Excite@Home, as described below.

      In September 2001, Excite@Home, Cox’s primary high-speed Internet provider at that time, filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Subsequently, Cox and Excite@Home entered into two separate agreements so that Cox would continue to receive high-speed Internet access services from Excite@Home for existing and new customers through February 28, 2002 and so that Excite@Home would provide minimal services to Cox related to the transition of Cox’s customers to Cox High Speed Internet service. Pursuant to one of these agreements, Cox paid Excite@Home $160.0 million. Of this amount, approximately $9.8 million was attributable to services provided in 2002, and approximately $150.2 million was attributable to services provided in 2001. In February 2002, Cox completed the transition of its customers from Excite@Home’s high-speed Internet service to Cox High Speed Internet service.

32

Table of Contents

      Selling, general and administrative expenses include marketing, salaries and benefits, maintenance and support, commissions and bonuses, travel, facilities, insurance and other administrative expenses. Selling, general and administrative expenses increased 19% primarily due to:

	•	a 21% increase in marketing expense relating to the promotion of new services and bundling alternatives; and
	•	an 18% increase in general and administrative expenses relating to increased salaries and benefits resulting from an increase in headcount, and increased property taxes resulting from capital expenditures.

      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 2002 and continued roll-out of these services in new areas. 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 for the year ended December 31, 2002 decreased to $1.4 billion from $1.5 billion for the comparable period in 2001 due to a reduction of approximately $352.6 in amortization of intangible assets determined to have an indefinite life upon adoption of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, offset by an increase in depreciation from Cox’s continuing investment in its broadband network in order to deliver additional programming and services. Cox will continue to invest in its broadband network and new services, which management expects will result in increased revenues to offset increased depreciation expense.

      Operating income for the year ended December 31, 2002 was $417.4 million compared to operating loss of $118.3 million for the year ended December 31, 2001. The operating loss in 2001 was primarily due to a one-time non-recurring net charge of approximately $150.2 million in the fourth quarter of 2001 associated with the continuation of Excite@Home high-speed Internet service and the transition to Cox High Speed Internet service following the bankruptcy of Excite@Home. The increase in operating income, after adjusting for the one-time charge, was primarily attributable to the reduction in amortization of intangible assets determined to have an indefinite life.

      Interest expense decreased 3% to $550.6 million primarily due to interest savings as a result of Cox’s interest rate swap agreements, repayment of all commercial paper borrowings and a decrease in the interest rate on Cox’s exchangeable subordinated debentures, known as the PRIZES, from 7.75% to 2% in November 2002 in accordance with the terms of the PRIZES.

      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, Accounting for Derivative Instruments and Hedging Activities, as amended. During 2002 and 2001, Cox used the following derivative instruments in its hedging activities:

	•	four interest rate swap agreements with an aggregate principal amount of $1.2 billion that are designated and accounted for as fair value hedges. These interest rate swaps are designed to assist Cox

33

Table of Contents

		in maintaining a mix of fixed and floating rate debt by converting a portion of existing fixed rate debt into a floating rate obligation. These interest rate swaps derive their value primarily based on changes in interest rates. Cox’s expectations with respect to its hedging strategy underlying these interest rate swaps have been met since the swap agreements have resulted in Cox increasing its proportion of floating rate debt; and
	•	a series of costless equity collar arrangements that were designated and accounted for as fair value hedges to manage Cox’s exposure to changes in the fair value of 15.8 million shares of Sprint PCS common stock, 22.5 million shares of AT&T common stock and 17.2 million shares of AT&T Wireless common stock held by Cox. These equity collar arrangements derived their value primarily based on changes in the fair value of the underlying equity security. As described in Note 6. “Investments” in Part II, Item 8. Consolidated Financial Statements and Supplementary Data,” Cox terminated all of these equity collar arrangements and sold the underlying shares of common stock during the first quarter of 2002. Hence, there were no active hedging activities with respect to Cox’s investments at December 31, 2002.

      In addition to the foregoing derivatives, 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. During 2002 and 2001, Cox had the following embedded derivatives or freestanding derivatives outstanding that have not been designated as hedges:

	•	embedded derivatives contained in Cox’s outstanding series of three exchangeable subordinated debentures known as the PRIZES, the Premium PHONES and the Discount Debentures. These debentures are indexed to the trading price of Sprint PCS common stock. These embedded derivatives derive their value primarily based on changes in the fair value of Sprint PCS common stock, U.S. Treasury rates and Cox’s credit spreads;
	•	embedded derivatives contained in Cox’s series of prepaid variable forward contracts covering 19.5 million shares of Sprint PCS common stock, which Cox accounts for as zero-coupon debt. These embedded derivatives also derive their value primarily based on changes in the fair value of Sprint PCS common stock, U.S. Treasury rates and Cox’s credit spreads; and
	•	stock purchase warrants to purchase equity securities of certain publicly-traded or privately-held companies that can be exercised and settled by delivery of net shares, such that Cox pays no cash upon exercise. These warrants meet the definition of a freestanding derivative, as prescribed by SFAS No. 133, and derive their value primarily based on the change in the fair value of the underlying equity security.

      For a more detailed description of the exchangeable subordinated debentures, zero-coupon debt and their corresponding embedded derivatives, please refer to Note 8. “Debt” and Note 10. “Derivative Instruments and Hedging Activities” in Part II, Item 8. “Consolidated Financial Statements and Supplementary Data.”

      During the year ended December 31, 2002, Cox recorded a $1.1 billion pre-tax gain on derivative instruments, which was comprised of the following:

	•	a $268.8 million pre-tax gain due to the termination of Cox’s series of costless equity collar arrangements referred to above;
	•	a $583.1 million pre-tax gain due to a decrease in the fair value of the embedded derivatives contained in Cox’s exchangeable subordinated debentures. The decrease in fair value of these embedded derivatives was primarily attributed to the decrease in the trading price of Sprint PCS and the change in U.S. Treasury rates and Cox’s credit spreads during the year; and
	•	a $359.3 million pre-tax gain due to a decrease in the fair value of the embedded derivatives contained in Cox’s zero-coupon debt. The decrease in fair value of these embedded derivatives was primarily

34

Table of Contents

		attributed to the decrease in the trading price of Sprint PCS and the change in U.S. Treasury rates and Cox’s credit spreads during the year; partially offset by
	•	an $85.6 million pre-tax loss due to a decrease in the fair value of Cox’s stock purchase warrants. The decrease in fair value of these warrants was primarily attributed to the decrease in the fair value of the underlying equity security during the year.

      Net loss on investments for the year ended December 31, 2002 of $1.3 billion includes:

	•	$170.4 million pre-tax loss related to the sale of 23.9 million shares of AT&T Wireless common stock;
	•	$390.6 million pre-tax loss as a result of the change in market value of Cox’s investment in Sprint PCS common stock classified as trading; and
	•	$807.9 million decline in the fair value of certain investments, primarily Sprint PCS, considered to be other than temporary.

      In determining whether a decline in the fair value of Cox’s investments is other than temporary, Cox considers the factors prescribed by SEC Staff Accounting Bulletin Topic 5-M, Accounting for Noncurrent Marketable Equity Securities. These factors include the length of time and extent to which the fair market value has been less than cost, the financial condition and near term prospects of the investee and Cox’s intent and ability to retain its investment.

      Equity in net losses decreased 20% to $32.2 million, primarily due to a $23.9 million loss in 2001 related to Cox’s investment in Discovery. Partially offsetting the decrease was increased equity in net losses in 2002 due to additional equity investments. Generally, these losses are 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.

      Minority interest, net of tax, of $37.3 million primarily represents distributions on Cox’s obligated capital and preferred securities of subsidiary trusts, referred to as FELINE PRIDES and RHINOS. During 2002, Cox settled the FELINE PRIDES primarily with the issuance of Class A common stock and redeemed the RHINOS with cash. Please refer to Note 9. “Cox-Obligated Capital and Preferred Securities of Subsidiary Trusts” in Part II, Item 8. “Consolidated Financial Statements and Supplementary Data” for a more detailed description of the FELINE PRIDES and RHINOS.

      Net loss for the year ended December 31, 2002 was $274.0 million compared to net income of $755.0 million for the comparable period in 2001, which included an after-tax cumulative effect of change in accounting principle from adoption of SFAS No. 133, which increased earnings by $717.1 million.

35

Table of Contents

      The following table sets forth summarized consolidated financial information for the two years ended December 31, 2001.