XO Communications 2009 Annual Report Download - page 80

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effect of which did not have a material impact on the Company’s financial position, results of operations, or
cash flows.
City of Memphis Franchise Fees
XOH has a Right of Way (“ROW”) franchise agreement with the City of Memphis (the “City”) for XOH fiber.
The ROW franchise agreement, among other provisions, states that, as payment for the ROW, XOH was to
pay a percent of its gross receipts and provide dark fiber to the City. On July 12, 2004, the Tennessee Court of
Appeals, in BellSouth vs. City of Memphis found that the City’s franchise fee structure violated state law and
determined that any fee imposed by a city acting pursuant to its police powers “must bear a reasonable
relation to the cost to the city” in providing use of the rights-of-way. XOH has refused to pay the City’s gross
receipts based franchise fees based on this court ruling. Further, XOH claims that the City owes XOH for the
use of the dark fiber XOH provided to the City because this also amounted to an improper “payment” imposed
upon XOH by the City under its ROW franchise agreement that was violative of state law. The City claims
that XOH owes the City some amount for the use of the City’s rights-of-way. No litigation has been filed to
date by either the City or XOH. An estimated loss, if any, associated with this case is not known at this time.
R2 Derivative Litigation
On April 28, 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
defendants and naming the Company as the nominal defendant in connection with derivative claims. The
plaintiff alleges that the defendants breached fiduciary duties in connection with the financing transaction
consummated in July 2008 and other related matters. The complaint seeks equitable relief as well as damages
in an unspecified amount. On July 24, 2009, the Defendants filed a Motion to Dismiss the Complaint, which
was denied on December 10, 2009. Discovery in this case is ongoing. The effect of this case on the Company,
if any, is not known at this time.
Hillenmeyer Derivative Litigation
On July 21, 2009, an XOH shareholder, Don Hillenmeyer, filed under seal in the Delaware Court of Chancery
a Complaint titled “Verified Derivative and Class 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 of our Board of Directors and majority shareholder, and names
XOH as the nominal defendant. The Complaint challenges, among other things, ACF Holding’s recent
proposal to acquire all of the outstanding XOH common shares which it does not already own, and alleges
various breaches of fiduciary duties. The parties have entered into a Stipulation and Order Extending Time to
Answer and agreed to stay proceeding with the case until Plaintiff filed an Amended Complaint. On
December 15, 2009, based on plaintiff’s motion, the court entered an order dismissing that portion of the suit
that sought to enjoin ACF Industries Holding Corp.’s July 9, 2009 proposal to acquire all of the shares of XO
common stock that ACF and its affiliates did not already own. On January 7, 2010 the Defendants filed a
motion to stay or dismiss the remaining portion of the suit in favor of the NY litigation (R-2 v Icahn et al).
On January 26, 2010, Plaintiff filed an Amended Complaint. On February 18, 2010, Defendants filed a
supporting brief for its motion to dismiss. On March 26, 2010, plaintiff filed its answering brief to defendants’
motion to dismiss or stay. The effect of this case on the Company, if any, is not known at this time.
Other Contingencies
The Universal Service Administrative Corporation is in the process of auditing the Company’s compliance
with universal service contribution reporting obligations in connection with services provided during 2007.
The Company believes that it complied with applicable FCC rules in all material respects; however, an adverse
audit determination could result in significant retroactive assessment of universal service fund contribution
liability and associated interest, penalties, fines or forfeitures. An estimated loss, if any, associated with this
ongoing audit is not known at this time.
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