XO Communications 2010 Annual Report Download - page 22

ITEM 1A. RISK FACTORS
Risks Related to Liquidity, Financial Resources, and Capitalization
We have incurred a net loss from operations in the past and may not generate funds from operations or
financing activities sufficient to meet all of our operating or capital cash requirements and, if we are
unable to meet our needs for additional funding in the future, we may be required to limit, scale back or
cease our operations.
For each period since inception, we have incurred net losses from operations. For 2010, 2009 and 2008
our net losses from operations were $18.8 million, $47.2 million and $84.8 million, respectively. Our negative
free cash flow (cash flow from operations less our capital expenditures) was $37.0 million, $50.4 million and
$145.3 million for 2010, 2009 and 2008, respectively.
In 2008, after an extensive review of our business and operations with the assistance of outside advisers,
we commenced an enterprise-wide transformation plan intended to enhance shareholder value through
focusing on improving service delivery, accelerating broadband revenue growth, and reducing our operating
costs. In conjunction with this implementation, we have invested in new network infrastructure, sought to
develop new service offerings and sought to expand our customer base in high-growth markets. While this
transformation plan will continue to require significant capital expenditures, we continue to believe that it is
the optimal way, and perhaps the only way, for us to remain competitive in the long term with much larger
telecommunications providers. In this regard, we will continue to require significant capital expenditures to
enhance, maintain and operate our fiber network. We also believe that in the current economic environment
and the highly competitive telecommunications industry, certain opportunities may exist today that may not
recur such as, but not limited to, the acquisition of other telecommunications service providers.
On October 8, 2010, XO Communications, LLC (‘‘XO LLC’’), a wholly owned subsidiary of the
Company, entered into a Revolving Promissory Note with Arnos Corp., an affiliate of Carl C. Icahn, the
Chairman of the Company’s Board of Directors and majority shareholder (the ‘‘Chairman’’), pursuant to
which Arnos provided the Company access to a $50.0 million revolving credit facility at an annual interest
rate equal to the greater of LIBOR plus 525 basis points or 6.75%. The Revolving Promissory Note includes a
fee of 0.75% on undrawn amounts and initially matured on the earliest of (i) October 8, 2011, (ii) the date on
which any financing transaction, whether debt or equity, is consummated by the Company or certain of its
affiliates in an amount equal to or greater than $50.0 million, which could include a rights offering, or (iii), at
the Company’s option, a date selected by the Company that is earlier than October 8, 2011. The Company
entered into the Revolving Promissory Note as it pursues long-term financing to, in part, allay potential
concerns regarding the Company’s ability to invest in its transformation plan while retaining cash levels
sufficient to fund its ongoing operations.
At the request of XO LLC, Arnos Corp. entered into a First Amendment to the Revolving Promissory
Note with XO LLC dated as of February 11, 2011 (the ‘‘Amendment’’). The Amendment extends the latest
maturity date of the Revolving Promissory Note from October 8, 2011 to May 1, 2012. Accordingly, the
maturity date of the Revolving Promissory Note is the earliest of (i) May 1, 2012, (ii) the date on which any
financing transaction, whether debt or equity, is consummated by the Company or certain of its affiliates in an
amount equal to or greater than $50.0 million, and (iii), at the Company’s option, a date selected by the
Company that is earlier than May 1, 2012. As of March 31, 2011, no amounts have been drawn on the
Revolving Promissory Note.
On October 12, 2010, XOH announced plans to offer to holders of the Company’s common stock rights
to purchase shares of a new class of non-convertible preferred stock. Through this rights offering, XOH would
seek to issue up to $200.0 million of non-convertible preferred stock as a means to increase capital in our
Company without diluting the ownership interests of our stockholders and without subjecting us to unduly
burdensome restrictive covenants and other negative consequences associated with incurring high yield debt.
Prior to any issuance of rights, the Company intends to apply for listing of XOH common stock on the
Nasdaq Global Market. The Company’s application for the Nasdaq listing of XOH common stock would
follow a one-for-twenty reverse split of the Company’s common stock intended to bring the share price to the
level required for Nasdaq listing. There can be no assurance that a one-for-twenty reverse stock split would
take place. There can be no assurance that a rights offering would be successful and there is no assurance that
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