XO Communications 2009 Annual Report Download

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XO Holdings, Inc.
2009 Annual Report

Table of contents

  • Page 1
    XO Holdings, Inc. 2009 Annual Report

  • Page 2
    ...Exact name of registrant as specified in its charter) Commission File Number: 0-30900 Delaware (State or other jurisdiction of incorporation or organization) 54-1983517 (I.R.S. Employer Identification No.) 13865 Sunrise Valley Drive Herndon, Virginia 20171 (Address of principal executive offices...

  • Page 3
    ... and Corporate Governance...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions, and Director Independence ...Principal Accounting Fees and Services ...PART IV Exhibits, Financial...

  • Page 4
    ... of risk factors affecting our business and operations, see Item 1A "Risk Factors" of this Annual Report. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. These forward-looking statements should not be relied on...

  • Page 5
    ...XO Holdings, Inc., a Delaware corporation, was incorporated in December 2005 and has its principal executive offices at 13865 Sunrise Valley Drive, Herndon, Virginia 20171. XO Holdings, Inc. is a holding company for its direct and indirect operating subsidiaries, including XO Communications, LLC (XO...

  • Page 6
    ...offer solutions with significant appeal to business, carrier and wholesale customers. XOH's national network includes over 950 central office collocations in over 80 major metropolitan markets across the United States. XOH's network footprint includes an 18,000 route mile nationwide inter-city fiber...

  • Page 7
    ...high speed optical internet access at speeds up to 10 Gbps. A suite of ethernet transport services, including Gigabit Ethernet ("GigE"), as well as inter-city ethernet services at 10 Mbps, 100 Mbps, 1 Gbps, and 10 Gbps between markets is available on both our fiber network and through fixed wireless...

  • Page 8
    ...in size from growing businesses to Fortune 500 companies. Business Services provides managed IP, data and end-to-end communications solutions. Carrier Services markets wholesale solutions to carriers and other telecommunications providers. Concentric is primarily marketed to small business customers...

  • Page 9
    ... long distance connectivity to terminate IP-originated calls to the Public Switched Telephone Network ("PSTN"). These services are used by some of the nation's leading retail VoIP service providers. Carrier Services also offers customers high-capacity, inter-city private line and inter-city ethernet...

  • Page 10
    ... States cities. The core of each of our metropolitan fiber networks is one or more rings of fiber optic cable in a city's central business district that connect to our central office locations from which we can provision services to our customers. These central offices contain the switches, routers...

  • Page 11
    ... fiber networks in the 85 markets we serve: State Metro Fiber Network Location Service Market State Metro Fiber Network Location Service Market AZ CA CA Phoenix Los Angeles Orange County CA CA CA Sacramento San Diego San Francisco CA CO San Jose Denver DC/VA Washington D.C./ Northern VA...

  • Page 12
    ...inter-city fiber optic and transmission network. This Nx10G IP/MPLS backbone connects to ten IP core nodes in the US, three IP core nodes in Europe and one IP core node in Hong Kong, as well as 70 IP POPs located in 38 US markets and provides connectivity to one XOH-operated hosting data center. The...

  • Page 13
    ... services exclusively by means of IP. Many hosted VoIP providers also aggressively compete for business customers; to date, most of these providers operate on a local or regional basis. Cable companies, such as Cox Communications, Comcast and Time Warner have begun aggressively marketing...

  • Page 14
    .... Upgrades to our IP-based network infrastructure in recent years and anticipated continued enhancements will position us well to meet this demand. Regulatory Overview. We offer wireline and fixed wireless communications services to small and medium sized businesses, large enterprises, government...

  • Page 15
    ...to other carriers for access to our network). As for interstate and international long distance telecommunications services, the FCC requires us to make the terms, conditions and rates of the detariffed services available to the public on our web site. The Telecom Act includes a number of provisions...

  • Page 16
    ... traditional local and long distance telecommunications companies, are regulated under the Communications Act; information service providers are generally unregulated. On June 1, 2007, the United States Court of Appeals for the DC Circuit upheld the FCC's order requiring VoIP providers to pay...

  • Page 17
    ... involving a similar complaint that One Communications filed against Verizon New Jersey in May, 2009. In the Pennsylvania and New Jersey complaints, XOCS claimed that Verizon was erroneously, and in violation of its tariffs, assessing switched access dedicated tandem trunk port charges on local...

  • Page 18
    ... with the provision of intrastate access services. On August 1, 2008, September 22, 2008, August 27, 2009 and January 29, 2010, XOCS filed its answers to the Colorado, California, New York and Florida complaints, respectively, denying QCC's claims and setting forth affirmative defenses. The...

  • Page 19
    ... service at 5-10 megabits per second. 4G. A term used to describe the next step in wireless communications. A 4G system will be able to provide a comprehensive IP solution where voice, data and streamed multimedia can be given to users at higher data rates than previous generations. Access Charges...

  • Page 20
    ... for bandwidth in analog terms. GE or Gigabit Ethernet. A Copper or fiber-based ethernet network service, connection or port operating at one billion bits per second. Incumbent Local Exchange Carrier, or ILEC. Large local phone companies, such as Verizon Communications Inc., AT&T Inc. and Qwest...

  • Page 21
    ... office telephones with each other as well as to the outside PSTN. IP PBXs support VoIP by converting them into traditional circuit-switched TDM connections. Private Line Dedicated Transport Services, or Private Line. link between different customer locations. A private, dedicated telecommunications...

  • Page 22
    ... to CLECs. Together, these parts make up a local loop that connects to a digital subscriber line access multiplexer, a voice switch or both. The loop allows non-facilities-based telecommunications providers to deliver service without laying network infrastructure, such as copper wire, optical fiber...

  • Page 23
    ... As of February 28, 2010, we had 4,021 employees, including 1,725 in Business Services, 338 in Carrier Services, 73 in Concentric, 1,244 in Network Services, 344 in Information Technology, 158 in Finance and 139 in Corporate. None of our employees are represented by a labor union and we have...

  • Page 24
    ...to use the fiber that makes up our network may be affected by the financial health of, or disputes with, our fiber providers. We possess rights to the fiber that is included in our networks, particularly in our inter-city network, through long-term leases or IRU agreements. A bankruptcy or financial...

  • Page 25
    ... markets or our ability to provide services on a price-competitive basis. We maintain peering agreements with various ISPs that allow us to exchange internet traffic with these providers. These exchanges are made under short-term contracts and may be made without the payment of settlement charges...

  • Page 26
    ... AT&T, Verizon, Qwest Communications, Level 3 Communications, other ILECs and CLECs, cable operators and a host of other competitors in the provision of network services. Many of these competitors have high-capacity, IP-based fiber-optic networks capable of supporting large amounts of data, IP and...

  • Page 27
    ... long distance and wireless markets has challenged the financial condition and growth prospects of some of our carrier customers, and has caused such carrier customers to optimize the telecommunications capacity that they use among competing telecommunications services providers' networks, including...

  • Page 28
    ... to the terms of the Class A preferred stock, the number of shares of common stock into which the Class A preferred stock is convertible increases quarterly. On February 5, 2009, ACF Industries Holding Corp. ("ACF Holding"), an affiliate of Mr. Carl Icahn, the Chairman of our Board of Directors and...

  • Page 29
    ... for our administrative and sales offices, central switching offices, network nodes and warehouse space in various cities throughout the United States. These leases have various expiration dates through 2019. Our corporate headquarters is located at 13865 Sunrise Valley Drive, Herndon, VA, where we...

  • Page 30
    ..., 2009, R2 Investments, LDC filed a complaint in the Supreme Court of the State of New York (New York County) naming individual members of the Company's Board of Directors and certain entities controlled by Carl C. Icahn, the Chairman of the Company's Board of Directors and majority shareholder, as...

  • Page 31
    ... Action Complaint." On August 6, 2009, XOH filed a redacted version of the Complaint in the Chancery Court. The Complaint names as defendants individual members of the Company's Board of Directors and ACF Industries Holding Corp. ("ACF Holding"), an entity controlled by Carl C. Icahn, the Chairman...

  • Page 32
    ...2002 Stock Incentive Plan: the 2003 Employee Retention and Incentive Plan and the 2003 Annual Bonus Plan. For information regarding compensation plans under which equity securities are authorized for issuance, see Note 14 of our consolidated financial statements in Item 8 of this Annual Report. 28

  • Page 33
    ... 2009 with the Nasdaq Telecommunications Index and the Nasdaq Composite Index for US Companies. The graph assumes that the value of the investment was $100 on December 31, 2004 and that all dividends and other distributions were reinvested. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN Among XO...

  • Page 34
    ... $0.12 per share from settlements of legal matters related to our holding of Global Crossing debt securities. 2009 included investment gains of $53.3 million related to the sale of marketable securities and $5.8 million related to the settlement agreement associated with the Company's holding of...

  • Page 35
    .... We offer customers a broad range of managed voice, data and IP services in more than 80 metropolitan markets across the United States. During 2009, we continued to see the results from a number of initiatives previously implemented including the lighting of our long-haul fiber network, development...

  • Page 36
    ... needs, elongated sales cycles on the part of our customers, higher involuntary churn, and delayed payments from customers. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us...

  • Page 37
    ... over the contract term. Receivable Reserves Sales Credit Reserves During each reporting period we must make estimates for potential future sales credits to be issued related to billing errors, service interruptions and customer disputes. We utilize both specific identification and general reserve...

  • Page 38
    ... charge could be recorded in a future period related to an existing contingent matter. For additional information regarding all of our legal proceedings and loss contingencies, see Note 19 of our consolidated financial statements in Item 8 of this Annual Report. Property and Equipment We annually...

  • Page 39
    consideration to existing and anticipated competitive economic conditions. Other assumptions include our estimated weighted average cost of capital and long-term rate of growth for our business. Goodwill is tested by comparing the fair value of a reporting unit with its carrying amount including ...

  • Page 40
    ... data from our Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007 (dollars in thousands): 2009 % of Consolidated Revenue 2008 % of Consolidated Revenue Change Dollars Percent Revenue ...Cost and expenses Cost of service* ...Selling, general and administrative...

  • Page 41
    ...speed IP connectivity at a competitive value. Low cost access utilizing EoC also supported growth in Dedicated Internet Access (DIA) of $16.9 million, or 10.6%. Offsetting some of the growth in Broadband, Integrated/Voice Services reduced $45.6 million, or 14.4%, as compared to 2008 reported results...

  • Page 42
    ... Line and IP Flex services. During 2008, our Dedicated Private Line revenues increased $35.8 million, or 14.7%, over the prior year as a result of our investments in our long-haul network. A significant portion of Dedicated Private Line sales were driven by our wholesale Carrier sales force offering...

  • Page 43
    ... the year over year increase in the costs related to providing Telecommunications services were the net growth of our products (including the increased sales of our Broadband services), resulting in a $50.7 million increase in related costs, and the increased volume of wholesale long distance usage...

  • Page 44
    ... General and Administrative - 2009 Compared to 2008 Selling, general and administrative expense ("SG&A") includes expenses related to payroll, commissions, sales and marketing, information systems, general corporate office functions and collection risks. SG&A decreased in 2009 as payroll and related...

  • Page 45
    ...-for-sale security, partially offset by a $20.9 million impairment charge for other-than-temporary declines in market value for marketable securities. Investment gain, net for 2007 primarily resulted from $21.5 million received from the settlement related to our holdings of Global Crossing debt...

  • Page 46
    Segment Financial Results As previously reported in our 2008 Annual Report, we operated our business in two reportable segments through two primary operating subsidiaries. XO Communications, LLC operated our wireline business under the trade name "XO Communications" ("XOC") and Nextlink Wireless, ...

  • Page 47
    ... Purchase Agreement were negotiated on behalf of XOH by a special committee of the Board of Directors that was established on September 28, 2007 to assist us in evaluating financing and other strategic alternatives. See Note 11 to our consolidated financial statements in Item 8 of this Annual Report...

  • Page 48
    ...provide our customers with the highest levels of service, quality and performance. Our 2010 operating plan includes capital expenditure amounts for continued investment in, and enhancement of, our (i) metro and long-haul fiber optic network, (ii) new markets, (iii) ethernet and IP-based services and...

  • Page 49
    ... of our long-term debt and accrued interest was retired. Therefore we are no longer subject to interest rate risk on long-term debt. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm ...Consolidated...

  • Page 50
    ... position of XO Holdings Inc. as of December 31, 2009 and the results of its operations and its cash flows for the year ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedule listed...

  • Page 51
    Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders XO Holdings, Inc.: We have audited the accompanying consolidated balance sheet of XO Holdings, Inc., and subsidiaries as of December 31, 2008, and the related consolidated statements of operations, ...

  • Page 52
    XO Holdings, Inc. Consolidated Balance Sheets (in thousands, except per share data) December 31, 2009 2008 ASSETS Current Assets Cash and cash equivalents ...$ 363,159 Marketable securities...1,320 Accounts receivable, net of allowance for doubtful accounts of $11,052 and $9,727 respectively ...153...

  • Page 53
    XO Holdings, Inc. Consolidated Statements of Operations (in thousands, except per share data) 2009 Years Ended December 31, 2008 2007 Revenue ...Costs and expenses Cost of service (exclusive of depreciation and amortization) . Selling, general and administrative ...Depreciation and amortization ......

  • Page 54
    ... thousands, except for share data) Common Stock and Additional Paid-In-Capital Shares Amount Accumulated Other Comprehensive Income (Loss) Accumulated Deficit Total Balance at January 1, 2007 ...182,001,285 Stock-based compensation and issuance of common stock through employee benefit plans ...73...

  • Page 55
    ... issuance ...Proceeds from issuance of related party note ...Payments on long-term debt ...Redemption of preferred stock ...Financing costs ...Payments on capital leases ...Proceeds from employee stock option exercises ...Net cash (used in) provided by financing activities ...Net increase (decrease...

  • Page 56
    ... using TDM and circuit switched voice technologies such as voice services and managed IP, data and end-to-end communications solutions. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Consolidation The Company's consolidated financial statements include all of the assets, liabilities and results...

  • Page 57
    ... and maintenance are charged to expense when incurred. Depreciation and amortization are calculated for financial reporting purposes using the straight-line method over the estimated useful lives beginning in the month telecommunications networks and acquired bandwidth are substantially complete...

  • Page 58
    ...straight-line basis over the average contracted customer relationship (generally 36 months). Network Capacity Leases Up front cash collected from lease of unlit network capacity under indefeasible rights of use is recognized ratably over the contract term. Sales Credit Reserves The Company evaluates...

  • Page 59
    ...with share-based payments as expense on a straight-line basis over the requisite service period of a stock option grant. The Company measures compensation expense related to employee stock options based on the fair value of those awards at the grant date using the Black-Scholes-Merton option pricing...

  • Page 60
    ... as a reduction to rent expense on a straight-line basis over the term of the lease. r. Transaction Based Taxes and Other Surcharges The Company collects various taxes from its customers including Universal Service Fund charges and sales, use, excise, property, utility and franchise taxes, which...

  • Page 61
    ...term maturity of these financial instruments. The estimated fair values of the Company's marketable securities at December 31, 2009 have been calculated based upon available market information and are as follows (in thousands): Quoted Prices in Active Markets (Level 1) Available-for-sale marketable...

  • Page 62
    ... from the sale of debt securities, a $12.1 million gain from the sale of equity securities, a $5.8 million gain related to the settlement agreement associated with the Company's holding of Global Crossing debt securities and a $0.9 million gain from the settlement with ATLT of claims related to the...

  • Page 63
    ...the following as of December 31, (in thousands): 2009 2008 Customer relationships ...Internally developed technology ...Acquired trade names ...Less accumulated amortization ...Broadband wireless licenses - indefinite life asset ...XO trade name - indefinite life asset ...Goodwill - indefinite life...

  • Page 64
    ...impact related to the fair value determination of leases which existed at the time of the Company's emergence from bankruptcy on January 16, 2003. As of December 31, 2009, the remaining liability was $18.8 million, of which $12.1 million represents a non-current liability reported in other long-term...

  • Page 65
    ... 31, 2009 ...$ 5,170 11. LONG-TERM DEBT TO RELATED PARTIES During 2008, all of the Company's long-term debt and accrued interest was retired in connection with the issuance and sale of shares from a new series of 7% Class B convertible preferred stock. The Class B convertible preferred stock was...

  • Page 66
    ... on a share price of $4.62, a premium of approximately 20.0% above the trading price of the common stock on the closing date of the Preferred Stock Offering. The Company may also, at its sole option, redeem the Class A preferred stock at any time after August 5, 2007 if the average market price of...

  • Page 67
    ... immediately following the Restricted Period and ending July 25, 2013, the shares of Class B convertible preferred stock shall be redeemable only if the price of the Company's common stock equals or exceeds 250% of the conversion price in effect at such time for 20 trading days in any period of any...

  • Page 68
    ... the Board of Directors comprised of disinterested directors in respect of such affiliates. Each issued and outstanding share of Class C perpetual preferred stock will be entitled to the number of votes equal to the quotient obtained by dividing the liquidation preference by the conversion price for...

  • Page 69
    ... at $44.9 million using the Black-Scholes-Merton pricing model. As of January 16, 2010, substantially all of the warrants expired unexercised. Universal Shelf Registration Statement On January 18, 2008, the Company's Universal Shelf Registration Statement on Form S-3 (SEC File No. 333-147643) became...

  • Page 70
    ...relating to awards of stock options and restricted stock, including the selection of eligible participants, the number of shares of common stock to be subject to each option or restricted stock award, the exercise price of each option, vesting, and all other terms and conditions of awards. Generally...

  • Page 71
    ... compensation cost related to non-vested stock options. This cost is expected to be recognized in 2010. 15. EMPLOYEE SAVINGS AND RETIREMENT PLAN At December 31, 2009, the Company has a defined contribution plan, generally covering all full time employees in the United States. The Company...

  • Page 72
    ...Starfire Holding Corporation ("Starfire"), the parent entity of an affiliated group of corporations controlled by Mr. Carl Icahn. In January 2004, the Company deconsolidated from Starfire and under a tax allocation agreement, Starfire was required to reimburse the Company each year going forward for...

  • Page 73
    ... for the Company's U.S. federal income tax return and certain state income tax returns including California, New Jersey, Texas, and Virginia remain open for the tax years 2006 through 2009. The IRS audit of the Company's 2003 and short tax year ended January 16, 2004 federal income tax returns...

  • Page 74
    ... file state income tax returns. 17. RELATED PARTY TRANSACTIONS On July 25, 2008, as a result of the issuance and sale of two new series of preferred stock and the related retirement of all of the Company's long-term debt, which were transactions the Company conducted with affiliates of the Chairman...

  • Page 75
    ... of goods and services as a member of the buying group at prices and on terms that it believes are more favorable than those which would be achieved on a stand-alone basis. 18. SEGMENT INFORMATION As previously reported in the Company's 2008 Annual Report, the Company operated its business in...

  • Page 76
    The following tables provide summarized historical financial information of the Company's previously presented reportable segments for the years ended December 31, 2008 and 2007 as reported in the Company's 2008 Form 10-K (in thousands): 2008 Intercompany Elimination XOC Nextlink Consolidated ...

  • Page 77
    ..., general and administrative on the Company's Consolidated Statements of Operations. Future minimum lease commitments under operating leases that had initial non-cancelable lease terms in excess of one year as of December 31, 2009 are as follows (in thousands): 2010 ...2011 ...2012 ...2013 ...2014...

  • Page 78
    ...contractually obligated to allow Metro access and use of four dark fibers on XOT's network. On February 28, 2003, XOT answered the complaint contending that the franchise fee and "dark fiber" compensation provisions violated Tennessee and federal law. XOT also filed a counterclaim seeking to recover...

  • Page 79
    ... to the Company's financial position, results of operations, or cash flows. Nashville Electric Service On June 5, 2008, the Nashville Electric Service, part of Metro, ("NES") served XO Communication Services, Inc. ("XOCS") with a complaint and a motion for temporary injunction filed in Chancery...

  • Page 80
    ..., 2009, R2 Investments, LDC filed a complaint in the Supreme Court of the State of New York (New York County) naming individual members of the Company's Board of Directors and certain entities controlled by Carl C. Icahn, the Chairman of the Company's Board of Directors and majority shareholder, as...

  • Page 81
    ... The following tables illustrate selected quarterly financial data for 2009 and 2008 (in thousands except per share amounts). Results of any one or more quarters are not necessarily indicative of annual results or continuing trends. Income (loss) per common share was calculated for each three-month...

  • Page 82
    ... principal executive officer and our principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with United States generally accepted accounting principles...

  • Page 83
    ... ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information required by this Item is incorporated by reference to our definitive Proxy Statement for the 2010 Annual Meeting of Stockholders (the "Proxy Statement"). The Proxy Statement will be filed with the SEC within 120 days...

  • Page 84
    ...of January 16, 2003, by and between XO Communications, Inc. and American Stock Transfer & Trust Company (incorporated by reference to exhibit 10.1 filed with the Current Report on Form 8-K of XO Communications, Inc. filed on January 30, 2003). Series B Warrant Agreement, dated as of January 16, 2003...

  • Page 85
    ... Change in Control Agreement by and between XO Communications, Inc. and Carl J. Grivner, President and Chief Executive Officer of XO Communications, Inc. (incorporated by reference to exhibit 10.2 filed with the Quarterly Report on Form 10-Q of XO Communications, Inc. for the quarter ended March 31...

  • Page 86
    ... Company and Presidents Park II, LLC (incorporated by reference to exhibit 10.27 filed with the Annual Report on Form 10-K for the year ended December 31, 2006).(2) Stipulation and Agreement of Compromise, Settlement and Release, approved by the Delaware Court of Chancery on March 31, 2008, among XO...

  • Page 87
    ... J. Grivner Laura W. Thomas Laura W. Thomas Keith Meister Keith Meister Vincent J. Intrieri Vincent J. Intrieri Robert L. Knauss Robert L. Knauss David Schechter David Schechter President and Chief Executive Officer, Director (Principal Executive Officer) Senior Vice President and Chief Financial...

  • Page 88
    XO Holdings, Inc. Schedule II Valuation and Qualifying Accounts For The Years Ended December 31, 2009, 2008 and 2007 (in thousands) Additions Charged to Charged to Costs and Other Expenses Accounts Beginning Balance Deductions Ending Balance Allowance for doubtful accounts 2007 ...2008 ...2009 ...

  • Page 89
    ... * In previous years (through 2008), we used the NASDAQ Stock Market (US Companies) Index provided by a third party vendor. It has come to our attention that since 2006 this index has not been recognized by NASDAQ and has been replaced by the NASDAQ Composite Index which we will use going forward.