20040727Application.pdf

XO COMMUNICATIONS SERVICES, INC.
Before the
IDAHO PUBLIC UTILITIES COMMISSIONnmJ
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Application of
Docket No.
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For a Certificate of Public Convenience and
Necessity to Provide Competitive Facilities-
Based and Resold Local Exchange and
Interexchange Telecommunications Services
Within the State of Idaho
APPLICATION OF XO COMMUNICATIONS SERVICES, INC.
XO Communications Services, Inc. ("XO" or the "Applicant"), by its attorneys
and pursuant to Idaho Code ~ 62-615 , hereby respectfully requests that the Idaho Public Utilities
Commission ("Commission ) grant this Application for a Certificate of Public Convenience and
Necessity to provide competitive facilities-based and resold local exchange and interexchange
telecommunications services within the State of Idaho. In support of this Application, XO states
as follows:
PROPOSED SERVICES
By this Application, XO requests authority to provide competitive facilities-based
and resold interexchange and local exchange telecommunications services. Specifically, XO
intends to offer to Idaho consumers a complete set of telecommunications services, which shall
include local and long distance voice, Internet access, Virtual Private Networking (VPN),
Ethernet, Wavelength, Web Hosting, and Integrated voice and data services.
XO is a wholly owned, direct subsidiary of XO Communications, Inc. ("
Communications ), a Delaware corporation located at 11111 Sunset Hills Road, Reston, Virginia
20190-5339. The stock of XO Communications is publicly traded on the Over the Counter
DCOI/FREEB/222546.
Bulletin Board under the symbol "XOCM.OB.XO Communications ultimately is controlled by
Carl C. Icahn, a U.S. citizen, through his ultimate control and ownership of various companies.
complete organizational chart, including XO , its corporate parent and its Idaho affiliate is
attached hereto as Exhibit
XO Communications is a leading facilities-based provider of broadband
telecommunications serVIces.The company offers a complete set of telecommunications
services including local and long distance voice, Internet access, Virtual Private Networking
(VPN), Ethernet, Wavelength Web Hosting and Integrated voice and data services.
Communications provides service through its facilities-based broadband networks and Tier One
Internet peering relationships. The company also is one of the nation s largest holders of fixed
wireless spectrum, covering 95% of the population of the 30 largest U.S. cities.
Communications currently offers facilities-based broadband telecommunications services within
and between more than 70 markets throughout the United States. XO Communications also is
authorized by the FCC to provide interstate and international telecommunications services and
through one or more of its subsidiaries, is authorized to provide intrastate interexchange services
virtually nationwide, and to provide competitive local exchange services in 47 states.
XO Idaho, Inc. ("XO Idaho is a wholly owned, direct subsidiary of
Communications and affiliate of XO, located at the same address.XO Idaho currently is
authorized to provide competitive local exchange and interexchange telecommunications
services pursuant to its authorization granted by the Commission. 1 Thus, XO Idaho and its
corporate parent, XO Communications, have been found by the Commission to possess the
See Idaho Pub. Uti!. Comm n Case No. GNR-99-, Order No. 28134.
DCOl/FREEB/222546.
requisite financial, managerial and technical qualifications necessary to operate as a provider
telecommunications services within the State of Idaho.
II.FORM OF BUSINESS
XO is a Delaware corporation whose principal office and place of business is
located at 11111 Sunset Hills Road, Reston, Virginia 20190-5339. A copy of the Articles of
Incorporation of XO will be late-filed with the Commission as Exhibit B. XO currently is
authorized to transact business within the State of Idaho as a foreign corporation. A certified
copy of XO' s Certificate of Good Standing issued by the Secretary of State of Idaho will be late-
filed with the Commission as Exhibit C. XO will provide the appropriate contact information
for its registered agent for service of process within the State of Idaho at such time as the above-
referenced corporate documents are late-filed with the Commission. A complete list of the
Directors and Executive Management of XO is attached hereto as Exhibit
III.TELECOMMUNICATIONS SERVICES
The authority requested by this Application is necessary to complete an internal
corporate reorganization of XO Communications and its telecommunications operating
subsidiaries, including XO and XO Idaho. Specifically, upon the Commission s grant of the
authority requested by this Application, XO Idaho will transfer its intrastate telecommunications
assets and customers to XO through a merger of XO and XO Idaho.After the merger, XO
Idaho will cease to exist, and XO will assume all of the intrastate assets and telecommunications
operations of XO Idaho and will provide telecommunications services to the current customers
of XO Idaho.The organizational charts attached hereto as Exhibit reflect the existing
At such time as XO becomes authorized by the Commission to provide
telecommunications services within the State of Idaho, the appropriate parties will file
with the Commission a formal notification of this transaction.
DCOI/FREEB/222546.
corporate structure of XO, and that following the internal corporate reorganization described
herein.
In Idaho, XO will provide facilities-based and resold interexchange and local
exchange telecommunications services primarily to small and medium-sized business customers
as well as to large business enterprises (e., national customers with multiple locations),
governmental entities and institutional end users.
IV.SERVICE TERRITORY
XO will provide facilities-based and resold interexchange and local exchange
telecommunications services on a statewide basis, and likely will compete with each of the
incumbent LECs that currently provide telecommunications services within the State of Idaho
including Qwest Corporation.
FIN AN CIAL INFO RMA TI 0 N
As indicated above XO is a wholly owned direct subsidiary of
Communications. As such, XO may rely on the financial capability of its corporate parent to
fund its telecommunications operations within the State of Idaho, and accordingly, to provide the
telecommunications services requested by this Application.The Form 10-Q of
Communications, filed with the Securities and Exchange Commission for the quarterly period
ended March 31 , 2004, attached hereto as Exhibit E demonstrates the financial fitness of XO
and its corporate parent to provide the telecommunications services requested by this
Application.
VI.ILLUSTRATIVE TARIFF FILING
Upon certification, XO will provide telecommunications services within the State
of Idaho in accordance with the rates, terms and conditions set forth in the tariff of XO Idaho
DCOl/FREEB/222546.
currently on file with the Commission. Accordingly, the tariff of XO Idaho, amended to reflect
the Applicant's company name , will serve as XO's initial tariff for telecommunications services
provided within the State of Idaho.Should the Commission require any tariff filing in
connection with this Application, XO will late- file its illustrative tariff with the Commission.
VII.CUSTOMER CONTACTS
u --
XO's designated contact for all consumer inquiries and complaints related to the
telecommunications services provided by XO is:
Theresa Powell (theresa.powell~xo.com)
XO COMMUNICATIONS SERVICES, INC.
Two Easton Oval
Suite 300
Columbus, Ohio 43219
[phone] (telephone)
[phone] (facsimile)
XO's designated contact for all inquiries by Commission Staff related to
complaints, inquiries and matters concerning rates and price lists or tariffs is:
Doug Kinkoph
Vice President, Regulatory and External Affairs
XO COMMUNICATIONS, INC.
Two Eastern Oval
Suite 300
Columbus, Ohio 43219
[phone] (telephone)
[phone] (facsimile)
XO's toll free telephone number for all customer inquiries and complaints is:
[phone].
VIII.INTERCONNECTION AGREEMENTS
XO Idaho will assign to XO its interconnection agreements for the State of Idaho
and XO will seek approval by the Commission, as necessary, of such assignment.
DCOI/FREEB/222546.
IX.COMPLIANCE WITH COMMISSION RULES
XO will comply with the rules and regulations of the Commission applicable to
the telecommunications services provided by XO within State of Idaho, or otherwise will request
a waiver of such rules that XO believes to be inapplicable to the telecommunications services
that it provides.
ESCROW ACCOUNT OR SECURITY BOND
XO will not collect customer deposits for telecommunications services provided
within the State of Idaho.In the event that XO collects customer deposits for
telecommunications services at a later date, XO will submit to the Commission a signed copy of
an escrow account with a bonded escrow agent or security bond, as required by the rules and
regulations of the Commission.
WHEREFORE, XO hereby respectfully requests that the Commission grant this
Application for a Certificate of Public Convenience and Necessity to provide competitive
facilities-based and resold local exchange and interexchange telecommunications services within
the State of Idaho.
Respectfully submitted
XO COMMUNICATIONS SERVICES, INC.
Brad E. Mutschelknaus
Melissa S. Conway
Brett Heather Freedson
KELLEY DR YE & WARREN LLP
1200 Nineteenth Street, N.
Suite 500
Washington, D.C. 20036
Tel. [phone]
Fax [phone]
Dated: July 26, 2004
DCOI/FREEB/222546.
EXHIBIT A
ORGANIZATIONAL CHARTS
DCOl/FREEB/222546.
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EXHIBIT B
ARTICLES OF INCORPORATION
(TO BE LATE-FILED)
DCO 1 /FREEB/222546.
EXHIBIT C
CERTIFICATE OF GOOD STANDING
(TO BE LATE-FILED)
DCOI/FREEB/222546.
EXHIBIT
DIRECTORS AND
EXECUTIVE MANAGEMENT
DCO 1 /FREEB/222546.
XO COMMUNICATIONS, INC.
11111 Sunset Hills Road, Reston, VA 20190
[phone] (telephone) - [phone] (facsimile)
WWW.xo.com
Board of Directors
Carl C. Icahn - Director
~ ---- -- ~ -- -
Carl J. Grivner - Chief Executive Officer
Vincent Intrieri - Director
Adam Dell - Director
Keith Meister - Director
Andrew R. Cohen - Director
Fredrik Gradin - Director
Robert Knauss - Director
DCOllFREEB/222643.
xo COMMUNICATIONS, INC.
11111 Sunset Hills Road, Reston, VA 20190
[phone] (telephone) - [phone] (facsimile)
WWW.xo.com
Executive Management
Carl J. Grivner , Chief Executive Officer
u -
Wayne Rehberger, Chief Operating Officer
Lee Weiner, Senior Vice President and General Counsel
Bill Garrahan, Acting Chief Financial Officer and Senior Vice President - Corporate Development
Doug Sobieski, Vice President - Fixed Broadband Wireless Services
Terri Burke, Vice President - Human Resources
Rob Geller, Chief Information Officer
Tom Cady, Chief Marketing Officer
Mark Faris, Senior Vice President - Network Operations
Matt Harty, President - Commercial Sales
Ernie Ortega, President - Carrier Sales
Rob Westervelt, President - Indirect Sales
Ron Scott, Senior Vice President - XO Communications and President and XO One
DCOl/FREEB/222643.
DCOl/FREEB/222546.
EXHIBIT E
FINAN CIAL TEMENTS
BOWNE INTEGRATED -TYPESETTING SYSTEM Site: BOWNE OF WASHINGTON
Name: XO COMMUNICA nONS, I (E/O) CRC: 46914W971I7SUB, DocName: IO"Q, Doc: I, Page: I EDGAR 2DescriptIon: Form IO
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- -
FORM lO-Q
IR)QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No. 0-30900
x 0 Communications, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
54-1983517
(I.R.S. employer
identification no.
11111 Sunset Hills Road
Reston, Virginia 20190
(Address of principal executive offices, including zip code)
[phone]
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES (X) NO ( )
Indicate by check mark whether the Registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act), YES (X) NO ( )
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of theSecurities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES (X) NO ( J
As of May 3, 2004, the number of shares of common stock of XO Communications, Inc, issued and outstanding was 136 553 035(excluding 45 380 000 shares of common stock deposited into escrow pending the consummation of our acquisition of the assets of Allegiance
Telecom, Inc,
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XO Communications, Inc. and Subsidiaries
Index to Form lO-Q
Page
Certifications
Item 6, Exhibits and on Form 8-
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
XO Communications, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Amounts in thousands, except for share and per share data)
March 312~04 .Dec:em~~ 31
2003
Current assets:
Other current assets 902 12,421
LIABILITIES AND STOCKHOLDERS' I!:QUITY
Preferred stock: par value $0,01 per share, 200 000 000 shares authorized: none
issued
Subscription rights exercised, 32 503 234 shares authorized: none issued and
outstandin
Accumulated deficit (151 048)(102 554)
Total liabilities and stockholders' equity 218 786 265 165
See accompanying notes to the unaudited condensed consolidated financial statements,
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XO Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Amounts in thousands, except for share and per share data)
(Unaudited)
Three months
ended
March 31,
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Three months
ended
March 31,
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Costs and
and
Total costs and expenses 304 211 300 108
Investment
Net loss (48,494)(20 488)
Weighted average shares, basic and diluted 129,406 599 000 001
See accompanying notes to the unaudited condensed consolidated financial statements.
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, .,
XO Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
Three months
Ended
March 31,
2004
Three months
Ended
March 31,
2003
- - -- -
129
Other assets
Accrued liabilities (11 068)(3,158 )
Cash and cash equivalents, end of period $ 370 515 $288,764
Cash paid for interest 612 213
See accompanying notes to condensed consolidated financial statements.
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XO Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The condensed consolidated financial statements of XO Communications, Inc, ("XO Parent ) and its subsidiaries (together with its
predecessors, collectively referred to as the "Company" or "XO") are unaudited and have been prepared in accordance with guidelines
established for interim financial statements by the Securities and Exchange Commission s (the "Commission ) instructions to Form lO-Q and
generally accepted accounting principles. Accordingly, they do not include all of the information and footnotes required by generally accepted
accounting principles in the United States for complete financial statements, Operating results for the three months ended March 31, 2004 are
not necessarily indicative of the results that may be expected for any subsequent quarterly period, or for the year ending December 31, 2004. Inthe opinion of management, the unaudited condensed consolidated financial statements contain all the adjustments (consisting of those of a
normal recurring nature) considered necessary to present fairly the financial position and the results of operations and cash flows for the
periods presented in conformity with accounting principles generally accepted in the United States applicable to interim periods. The
accompanying financial statements should be read in conjunction with the audited consolidated financial statements of XO, included in its
Annual Report on Fonn 10-K for the year ended December 31 2003 (the "2003 Annual Report"
(b) Principles of Consolidation
The Company s consolidated financial statements include all of the assets, liabilities and results of operations of subsidiaries in which the
Company has a controlling interest. All inter-company accounts and transactions among consolidated entities have been eliminated.
(c) Use of Estimates and Assumptions
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting
period, Management periodically assesses the accuracy of these estimates and assumptions. Actual results could differ from those estimates.
(d) Net Income (Loss) Per Share
Net income (loss) per common share, basic and diluted, is computed by dividing net income (loss) applicable to common shares by the
weighted average number of common shares outstanding for the period, In periods of net loss, the assumed common share equivalents for
options and warrants are anti-dilutive, and are therefore not included in the weighted average shares balance on the consolidated statement of
operations, As of March 31, 2004, the Company has options outstanding to purchase approximately 9,8 million shares of common stock of
which 3,6 million are exercisable and exercisable warrants to purchase shares up to an additional 23,75 million shares of common stock thatcan further dilute investors, if exercised.
(e) Stock-Based Compensation
As allowed by SFAS No. 148
, "
Accounting for Stock-Based Compensation-Transition and Disclosure
" ("
SFAS No, 148"), the Company
has chosen to continue to account for compensation cost associated with its employee stock plan in accordance with the intrinsic value method
prescribed by APB No, 25
, "
Accounting for Stock Issued to Employees
" ("
APB No. 25") adopting the disclosure-only provisions of SFAS
No. 123
, "
Accounting for Stock-Based Compensation
" ("
SFAS No, 123"), Under this method, no compensation expense is recorded if stockoptions are granted at an exercise price equal to or greater than the fair market value of the Company s stock on the grant date.
BOWNE INTEGRATED TYPESETTING SYSTEM Site:BOWNE OF-ASHINGTON--Name: XO COMMUNICATIONS. I (E/O)CRC: 35466W97II7.SUB DocName: IO-Q.Doc: I, Page: 7 EDGAR 2Description: Form IO-
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If the Company had adopted the fair value method of accounting for its stock awards, stock-based compensation would have been determinedbased on the fair value for all stock awards at the grant date using a Black-Scholes pricing model and the following weighted average
assumptions:
Three months ended
March 31,
2004 2003
Risk free interest rate
life
The Company s pro forma net loss, and pro forma net loss per common share, basic and diluted, if the Company had used the fair value
method would have been as follows (dollars in thousands, except per share data):
Three months ended
March 31,
2004 2003
Add: Stock-based employee compensation expense included in
net loss, as reported 129
Pro forma net loss $(50 239)$(24 526)
Net loss per common share, basic and diluted - pro forma (0.39)$ (0,26)
The XO Communications, Inc. 2002 Stock Incentive Plan (the "2002 Stock Incentive Plan ) was adopted in January 2003, Under the 2002
Stock Incentive Plan, the Company is authorized to issue awards for up to 17.6 million shares of its common stock in the form ofrestricted
stock or options to purchase stock. The Company granted a total of 643 882 options during the quarter ended March 31 , 2004.
In June 2003, XO filed a registration statement covering the offer and sale of stock options and stock appreciation rights ("SARs ) to be
granted in conjunction with the 2003 Employee Retention and Incentive Plan (the "Retention Plan ) for an aggregate award of 1.9 million
shares of its common stock, During the quarter ended March 31, 2004, XO granted 324 720 options and 18 999 SARs under the Retention
Plan.
(j) Comprehensive Loss
Comprehensive loss includes the Company s net loss applicable to common shares, as well as net unrealized gains and losses on available-
for-sale investments, The following table reflects the Company s calculation of comprehensive loss for the three months ended March 31, 2004and 2003 (dollars in thousands):
Three Months Ended
March 31,
2004 2003
Other loss:
Comprehensive loss $(47 100)$(20,686)
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2. PENDING BUSINESS COMBINATION
On February 19, 2004, the United States Bankruptcy Court for the Southern District of New York approved the Asset Purchase Agreement
entered into on February 18 2004 between the Company, Allegiance Telecom, Inc. and Allegiance Telecom Company Worldwide
Allegiance ), Allegiance and its direct and indirect subsidiaries had been in bankruptcy since May 14, 2003, Allegiance is a facilities-basednational local exchange carrier that provides integrated telecommunications services to business, government and other institutional users in 36
major metropolitan areas across the United States, Allegiance s service offerings include voice, data, and integrated communications services,Under the~~~!.l'ul"chase Agr~_ment, XO will purchase all of Allegiance s local exchange carrier businesses (the "Acquired Businesses ) for
approximately $311.0 million of cash and 45.4 million shares of XO common stock, The amount of cash consideration may be adjusted based
on changes in the Acquired Businesses' working capital , customer base, or assumed bankruptcy cure amounts, as provided in the AssetPurchase Agreement. XO will not acquire Allegiance s customer premises installation and maintenance business, their shared hosting businessor their dedicated dial-up access service business,
Upon the beginning of the bid process in February 2004, the Company placed into escrow a deposit of $30,0 million under a purchase priceescrow agreement with Allegiance that served as an earnest money deposit on the purchase. Upon the receipt of certain regulatory approvals
on April 13, 2004 (the "Early Funding Date ) the Company placed into escrow the additional cash consideration of $282.5 million and thecommon stock consideration for the purchase of the Acquired Businesses. On the Early Funding Date, XO entered into an operating agreement
that allows it to manage and fund the Acquired Businesses. Closing under the Asset Purchase Agreement is anticipated to occur following the
receipt of state regulatory approvals and the confirmation of Allegiance s Plan of Reorganization which is currently expected to be in
June 2004. Upon closing, the consideration in escrow will be distributed and XO will take title to the Acquired Businesses, The Company also
purchased $36.4 million of unsecured Allegiance debt securities with a face value of $92.5 million during the first quarter of 2004, AfterAllegiances Plan of Reorganization is confirmed by the Bankruptcy Court and becomes effective, XO will be entitled to receive its pro rata
share of the distribution made to unsecured creditors. Both the deposit and debt security payments are included in other long-term assets in theaccompanying balance sheet.
The consolidated results of Allegiance, as disclosed in their lO-K for the year ending December 31 2003 and 2002 are shown in the table
below. As noted above, XO will only be acquiring a substantial portion of the consolidated business. The information given below is presented
for information purposes only and is not necessarily indicative of the results of future operations (dollars in thousands):
December 31,
2003 2002
Total assets
Total liabilities
135 521
1,448 992
441 218
397,494
Year ending December 31,2003 2002
193
3. MARKET ABLE SECURITIES
The amortized cost, gross unrealized gains and losses and fair value of the investment securities available-for-sale as of March 31, 2004 and
December 31 2003, are as follows (dollars in thousands):
BOWNE INTEGRATED TYPESETTING SYSTEM Site: BOWNE OF WASHINGTON
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Fair Value Cost Basis
Gross
Unrealized
Holding Gains
Gross
Unrealized
Holding
(Losses)
Total marketable securities $26 292 $23,520 562 $(3 790)
Total marketable securities $42 052 $40 674 001 $(1 623)
Debt securities as of March 31, 2004 mature in 2007.
4. LONG-LIVED ASSETS
XQ's long-lived assets include property and equipment, fixed wireless licenses, and identifiable intangible assets to be held and used.
Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, The estimated useful lives of
telecommunications networks and acquired bandwidth are 3 to 20 years and 5 to 7 years for furniture fixtures, equipment and other. Theseuseful lives are detennined based on historical usage with consideration given to technological changes and trends in the industry that could
impact the network architecture and asset utilization, Costs of additions and improvements are capitalized and repairs and maintenance are
charged to expense as incurred. Direct external and internal costs of constructing property and equipment are capitalized including interest
costs related to construction,
Property and Equipment
Property and equipment consisted of the following components (dollars in thousands):
March 31,December 31
2004 2003
641 77,783
98,245 501
350 79,955
W~l~~Q~.gij~~Q~~I~tlQI~~ag~!).~~I~~I~~I. .
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Furniture, fixtures, equipment, and other
Less: accumulated depreciation
Network construction-in-progress
Depreciation expense related to property and equipment for the three months ended March 31 , 2004 and 2003 was $19,2 million and$19.9 million respectively. Assets classified as construction-in-progress are not being depreciated as they are not currently ready for theirintended use,
Broadband Wireless Licenses and Other Intangibles
Broadband wireless licenses and other intangible assets consisted of the following components (dollars in thousands):
March 31,
2004
December 31,
2003
BOWNEINTEGRA TED TYPESETfiNG SYSTEM Site: BOWNE OF WASHINGTONName: XOCOMMUNICATIONS, I (EtO)CRC: 58622W97I17.SUB, DocName: IO-Q, Doc: J, Page: 9 EDGAR 2Description:I':~....!"..IO-Q
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$102 974 $109 515
Amortization expense related to intangible assets for each of the three months ended March 31 , 2004 and 2003 was $6.5 million. As ofMarch 31, 2004, approximately $23.5 million of fixed wireless
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licenses are not being amortized as commercial services have not been deployed in the license s geographic area.
5. RESTRUCTURING CHARGES
As of March 31, 2004, the remaining restructuring accrual resulting from restructuring of the Company s business operations initiated inprior years including divesting the Company s European operations, reducing the Company s discretionary spending, capital expenditure and
workforce was $55.3 million, which relates primarily to payments due to landlords on exited leased facilities. The restructuring accrual has
decreased from $60.0 million as of December 31, 2003 , primarily due to $4,1 million in payments associated with exited leased facilities.
6. LONG-TERM DEBT
The Company has a secured credit facility (the "Credit Facility ) which matures on July 15, 2009. There are no additional borrowings
available under the Credit Facility. At March 31, 2004, long-tean debt of $339,2 million and $6.7 million of accrued interest that, if not paidconverts to principal, was outstanding on the Credit Facility, There are no current debt service requirements since cash interest payments as
well as automatic and permanent quarterly reductions on the principal amount outstanding do not commence until 2009, However, in the eventthat consolidated excess cash flow (as defined in the Credit Facility) for any fiscal quarter during the tean of the agreement is greater than
$25 million, at the request of the lender, the Company will pay an amount equal to 50% of such excess cash flow greater than $25 million
toward the reduction of outstanding indebtedness. In addition, if the ratio of XO' s consolidated earnings before interest , taxes, depreciation and
amortization to interest expense for the four consecutive quarters exceeds 4: 1, XO would be required to pay cash interest, unless waived by the
lenders,
The security for the Credit Facility consists of all assets of XO Parent, including the stock of its direct and indirect subsidiaries, and theassets of virtually all of those subsidiaries. The Credit Facility limits additional indebtedness, liens, dividend payments and certain investments
and transactions, and contains certain covenants with respect to EBITDA (earnings before interest, taxes, depreciation and amortization)requirements and maximum capital expenditures. The Company was required to achieve a minimum consolidated EBITDA loss of not more
than $12.0 million for the quarter ended March 31, 2004, Prior to the end of the first quarter of 2004, the lender waived the applicability of the
minimum consolidated EBITDA covenant for the two fiscal quarters ending March 31, 2004 and June 30, 2004. Actual consolidated EBITDA
loss for the quarter ended March 31, 2004 was $17.6 million. The Company is also required under the terms of the Credit Facility to maintain
an unrestricted cash balance of $25 million at the end of March 31, 2004 and each fiscal quarter thereafter during the term.
At March 31 , 2004, more than 90% of the underlying loans of the Credit Facility are held by an entity controlled by Mr. Carl C. Icahn
Chairman of the Company s Board of Directors ("Mr. Icahn ), As discussed above, the Company is not required to pay cash interest accrued
on the principal amount under the Credit Facility until it meets certain financial ratios; however, the Company can elect to begin paying interest
in cash prior to the required date. Loans under the Credit Facility bear interest, at the Company s option, at an alternate base rate, as defined, ora Eurodollar rate plus, in each case, applicable margins. Once the Company begins to pay accrued interest in cash, the applicable margins are
reduced, At March 31, 2004, the annualized weighted average interest rate applicable to outstanding borrowings under the Credit Facility was
5%,
7. STOCKHOLDERS' EQUITY
Pursuant to the Company s Certificate of Incorporation, the Company has the authority to issue 1 000,0 million shares of Common Stock
and 200,0 million shares of undesignated preferred stock, As of March 31 , 2004, approximately 136,5 million shares of its Common Stock hadbeen issued, more than 60% of which were owned by entities controlled by Mr. Icahn.
The Company initiated a rights offering (the "Rights Offering ) during the fourth quarter of 2003 offering 40.0 million shares of its
common stock at a price of $5,00 per share, The Rights Offering closed on January 5, 2004, An aggregate of 39,7 million shares were issuedyielding net proceeds of
BOW INTEGRA: TED TYPESETIINGSYSTEM Site: BOWNE OF WASHINGTONName: XO COMMUNICA nONS, I (EtO)CRC: 7941W971J7.SUB, DocName: IO-Q, Doc: I Page: II EDGAR 2e.scription: Form IO-Q
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$197.6 million. Subsequent to closing, these net proceeds were used to pay down the Company s Credit Facility.
8. OPERATING SEGMENTS
Reportable Segments
The Company operates its business as one telecommunications segment. The Company s communications segment includes all of its
products and services including data, voice, integrated voice and data, and other services, These services have similar network operations and
technology requirements and are sold through similar sales channels to a similar targeted customer base. Therefore, the Company manages
these services as a single segment that are sold in geographic areas, or markets, within the United States, or that are sold to customers with a
presence across geographical markets.
Products and Services
The Company classifies its products and services revenues offered by its communications services segment into voice services, data
services, integrated voice and data services, and other services (dollars in thousands):
Three months ended
March 31,
2004 2003
Data
Total revenue $260 945 $286 093
9. RELATED PARTY TRANSACTIONS
Various entities controlled by Mr. Icahn hold the following interests in XO:
Outstanding
Common Stock Warrants Credit Facility
At December 31, 2003
At March 31, 2004
Greater than 80%
Greater than 60%
Greater than 40%
Greater than 40%
Greater than 90%
Greater than 90%
In addition, entities controlled by Mr. Icahn have acquired an option to purchase 6,25 million additional shares of XO's Common Stockfrom Franklin Mutual Advisors, LLC at a strike price of $4,25 per share, which expires June 21, 2004,
As a result of his majority ownership, Mr. Icahn can elect all of our directors, appoint the members of the committees of our Board of
Directors, appoint key members of our executive management team, and appoint our auditors, Currently, Mr, Icahn is Chairman of the Board
of Directors and three employees of Icahn Associates also sit on the Board of Directors and various Committees of the Board of Directors.
Under applicable law and XO's Certificate of Incorporation and by-laws, certain actions cannot be taken without the approval of holders of a
majority of our voting stock, including, without limitation, mergers, acquisitions, the sale of substantially all our assets, and amendments to our
Certificate of Incorporation and by-laws,
Mr. Icahn, through various entities that he owns or controls, has the right to require XO to register, under the Securities Act of 1933, sharesof XO's Common Stock held by such entities and to include shares ofXO's Common Stock held by them in certain registration statements
filed by XO.
Dixon Properties, LLC ("Dixon ), which is controlled by Mr. Icahn, owns the building in which XO's headquarters is located, XO currently
leases approximately 170 000 square feet of space in that building. Pursuant to the lease agreement, XO has paid $1.0 million in lease rent to
Dixon for the quarter ended March 31 2004 and XO is obligated to pay approximately $14.7 million to Dixon through the expiration of the
initial term of the lease, which is November 30 2007,
BOWNE INTEGRA TED TYPESEITING SYSTEM Site: BOWNE OF WASHINGTON
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XO has entered into a Tax Allocation Agreement, dated January 16 2003, between XO and Starfire Holding Corporation ("Starfire ), the
parent entity of the affiliated group of corporations controlled by Mr. leahn. XO and Starfire will file consolidated returns during the period in
which Mr. leahn s ownership of XO was equal to or greater than 80%, as required by the Internal Revenue Code. Upon the closing of the
Rights Offering in January 2004, Mr. leahn s ownership percentage fell below 80%, Consequently, XO will no longer be included as part of
Starfire s consolidated group after January 2004, Upon deconsolidation, the Tax Allocation Agreement generally provides that Starfire will
reimburse XO each year going forward for the excess of XO's actual income tax expense over the income tax that would have been owed if the
net operating losses or other tax attributes used in prior periods by the Starfire consolidated group excluding XO, if any, were still available to
XO.
The Company provides certain telecommunications services to companies affiliated with Mr. leahn, For each of the quarters ended
March 31, 2004 and 2003, the total revenue recognized on such services affiliated with Mr. leahn was approximately $0,2 million. During the
quarters ended March 31 , 2004 and 2003, the Company has purchased approximately $0.3 million and $0.2 million, respectively, in services
from leahn affiliates. During the quarter ended March 31, 2004, the Company purchased $0,1 million in hardware and services from Dell
Computers, Inc. Mr. Adam Dell, an XO director, is the brother of Mr. Michael Dell, the Chairman and Chief Executive Officer of Dell
Computers.
10. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
XO is involved in lawsuits, claims, investigations and proceedings consisting of commercial, securities, tort, and employment matters
which arise in the ordinary course of business, In addition, disputes with respect to general unsecured claims and two administrative expense
claims against XO in the aggregate amount of approximately $23.million remain pending from XO's 2002 Chapter 11 proceedings. In
accordance with SFAS No.
, "
Accounting for Contingencies " XO makes a provision for a liability when it is both probable that a liability has
been incurred and the amount of the loss can be reasonably estimated. XO believes it has adequate provisions for any such matters. XO reviews
these provisions at least quarterly and adjusts these provisions to reflect the impacts of negotiations, settlements, rulings, advice of legal
counsel, and other infonnation and events pertaining to a particular case. Litigation is inherently unpredictable, However, XO believes that it
has valid defenses with respect to legal matters pending against it. Nevertheless, it is possible that cash flows or results of operations could be
materially affected in any particular period by the unfavorable resolution or disposition of one or more of these contingencies.
~~~6NJ6~~i1~glri~~nTING SYSTEM Site: BOWNE OF WASHINGTON --- --
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PART I. FINANCIAL INFORMATION
Item 2. Management s Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking and Cautionary Statements
Some statements and information contained in this document are not historical facts, but are "forward-looking statements " as such term isdefined in the Frivate Seeurities Litigation Reform Act or1995. These forward-looking statements can be identified by the use offorward-looking terminology such as "believes
" "
expects,
" "
plans
" "
may,
" "
will
" "
would
" "
could
" "
should " or "anticipates" or the negative ofthese words or other variations of these words or other comparable words, or by. discussions of strategy that involve risks and uncertainties,
Such forward-looking statements include, but are not limited to, statements regarding:
. our services, including the development and deployment of data products and services based on IP, Ethernet and other technologies andstrategies to expand our targeted customer base and broaden our sales channels;
. the operation of our network and back office systems, including with respect to the development of IP protocols;
. liquidity and financial resources, including anticipated capital expenditures, funding of capital expenditures and anticipated levels ofindebtedness; and
. trends related to and expectations regarding the results of operations in future periods, including but not limited to those statements setforth in Management's Discussion and Analysis of Financial Condition and Results of Operations below,
All such forward-looking statements are qualified by the inherent risks and uncertainties surrounding expectations generally and also may
materially differ from our actual experience involving anyone or more of these matters and subject areas. The operation and results of our
business also may be subject to the effect of other risks and uncertainties in addition to the relevant qualifying factors identified in the
Liquidity Assessment" discussions set forth below and the "Risks and Uncertainties" discussion and the "Risk Factors" section of our 2003Annual Report, including, but not limited to:
. general economic conditions in the geographic areas that we are targeting for the sale of telecommunications services;
. the ability to achieve and maintain market penetration and average per customer revenue levels sufficient to provide financial viability to
our business;
. the quality and price of similar or comparable telecommunications services offered, or to be offered, by our current or future competitors;and
. future telecommunications-related legislation or regulatory developments and the conduct of incumbent carriers in reaction to such
developments,
Overview
We provide a comprehensive alTay of voice and data communications services to business customers, Our voice services include local and
long distance services, both bundled and standalone, other voice-related services such as conferencing, domestic and international toll free
services and voicemail, and transactions processing services for prepaid calling cards, Our data services include Internet access, private datanetworking, including dedicated transmission capacity on our networks, virtual private network services, Ethernet services, and web hostingservices. We also combine many of these services in flat rate service packages, These services are offered to a variety of customers, includingsmall, medium and large retail businesses, multi-location businesses and carrier or wholesale customers.
BOWNE INTEGRA TED TYPESETfING SYSTEM Site: BOWNE OF WASHINGTON
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To serve our customers ' broad and expanding telecommunications needs, we operate a network comprised of a series of rings of fiber optic
cables located in the central business districts of numerous metropolitan areas, which we refer to as metro fiber networks, that are connected
primarily by a network of numerous dedicated wavelengths of transmission capacity on fiber optic cables, which we refer to as an intercity
network. By integrating these networks with advanced telecommunications technologies, we are able to provide a comprehensive aITay of
telecommunications services primarily or entirely over a network that we own or control, from the initiation of the voice or data transmission to
the point of termination, which we refer to as end-to-end service, This capability enables us to provide telecommunications services between
customers connected to our network and among customers with multiple locations primarily or entirely over our network.
WiththTacqllisition of substantially all of Allegiance s network assets and customer base discussed below, XO will become one of the
nation s largest competitive independent providers of national local telecommunications and broadband services. The company will own one of
the largest network of nationwide connections to the RBOCs' networks , more than any other competitive local exchange carrier, or CLEC, and
will double its Points of Presence (PoPs) within the 36 metropolitan areas where both XO and Allegiance operate. We believe that this
extensive network will allow the combined company to (i) improve delivery of service to customers (ii) reduce network costs (iii) improve
operating results and (iv) improve our ability to compete with other companies in the nationwide local telecommunications services market.
Recent Events
Announcement of Acting Chief Financial Officer appointment
On April 14, 2004, we announced that we had appointed William Garrahan as Acting Chief Financial Officer. Mr. Garrahan replaces
Wayne Rehberger, who has taken-the position of Chief Operating Officer of XO. From July 2001 to March 2004, Mr. Garrahan served as our
Vice President and Senior Vice President, Corporate Development and Strategic Planning, From September 1996 to February 2001, he was
Senior Vice President with Lehman Brothers in its equity research department.
Pending Business Combination
On February 19 2004, the United States Bankruptcy Court for the Southern District of New York approved the Asset Purchase Agreement
by and between XO, Allegiance Telecom, Inc. and Allegiance Telecom Company Worldwide, collectively refeITed to as Allegiance.
Allegiance and its direct and indirect subsidiaries had been in bankruptcy since May 14, 2003, Allegiance is a facilities-based national local
exchange carrier that provides integrated telecommunications services to business, government and other institutional users in 36 major
metropolitan areas across the United States. Allegiance s service offerings include voice, data, and integrated communications services, Under
the Asset Purchase Agreement, XO will purchase all of Allegiance s local exchange carrier businesses, refeITed to as the Acquired Businesses
for approximately $311.0 million in cash and 45.4 million shares of XO common stock, The amount of cash consideration may be increased or
decreased, based on changes in the Acquired Businesses' working capital, customer base, or assumed bankruptcy cure amounts, provided in the
Asset Purchase Agreement. We cuITently estimate that the purchase price could increase by as much as $25.0 million based on the resolution of
certain outstanding items, XO will not acquire Allegiance s customer premises installation and maintenance business, their shared hosting
business, or their dedicated dial-up access service business.
The assets of the Acquired Businesses consist primarily of:
. switching and routing equipment, located both in CUITent Allegiance facilities and in facilities operating by one or more incumbent local
exchange carriers;
. physical points of presence in the form of network operations centers, data centers, central offices, and sales offices located in 36 major
metropolitan areas;
. customer and sales agreements and receivables that constitute a majority of Allegiance s voice and data revenues;
. leased intercity and metro fiber network capacity that is both redundant to and expansive of XO's CUITent network; and
. billing, provisioning, and other back-office information technology platforms.
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Upon the beginning of the bid process, in February 2004 we placed into escrow a deposit of $30.0 million under a purchase price escrow
agreement with Allegiance that served as an earnest money deposit on the purchase. Upon the receipt of specified regulatory approvals, on
Apri113, 2004, the Early Funding Date, we placed into escrow the additional cash of $282.5 million and the common stock consideration for
the purchase of the Acquired Businesses, On the Early Funding Date, we entered into an operating agreement that allows us to manage and
fund the Acquired Businesses, Closing under the Asset Purchase Agreement is anticipated to occur following state regulatory approvals and the
confirmation of Allegiance s Plan of Reorganization, which we currently expect to occur in June 2004. Upon closing, the consideration in
escrow will be distributed and we will take title to the Acquired Businesses.
Comparison of Financial Results
The operational results of XO for the three months ended March 31, 2004 are discussed below, Because the acquisition of Allegiance is
expected to close in the second quarter of 2004, forward looking information for XO's stand alone business is not deemed indicative of future
trends and is not provided below. However, forward looking information with respect to the combined company of XO and Allegiance is
discussed at the end of the financial results analysis, Our actual experience may differ materially from our projections of the combined
company, based on many factors including, among others:
. there are inherent uncertainties in projecting future results for any business, and we have only been managing the Acquired Businesses
since April 13, 2004 under the terms of an operating agreement approved by the Bankruptcy Court, which further limits our ability to
make accurate projections;
. we may not successfully integrate the Acquired Businesses as efficiently as expected; and
. while Allegiance s consolidated financial position and results of operations have been audited, stand alone financial information with
respect to the Acquired Businesses is not audited.
Three Months Ended March 31, 2004 versus Three Months Ended March 31, 2003
Revenue. Total revenue for the three months ending March 31 , 2004 decreased 8,8% to $260.9 million from $286.1 million in the same
period of 2003. Customer churn of 2.4% during 2003 exceeded acquisition revenue, particularly in the carrier customer base due to downsizing
network requirements and competitive pricing pressures. Revenue for the three months ended March 31, 2004, was relatively consistent with
revenue for the three months ended December 31 2003 of $261.0 million, as commercial offerings to middle market businesses have begun to
show slight growth.
Based on our preliminary review and analyses and our initial role in managing Allegiance, we believe that on a pro forma basis, the
annualized revenue of the combined company will be approximately $1.5 billion, If current business and industry trends continue, we would
expect that the revenue for the combined company will be relatively stable during the year following the acquisition, although it may fluctuate
quarter to quarter. This projection could be negatively impacted if we do not successfully integrate the Acquired Businesses' customers, billing
systems and sales forces,
Revenue for XO services was earned from providing the following services (dollars in thousands):
Three months ended March 31
% of % of
2004 Revenue 2003 Revenue % Change
35,101 35,
$260,945 100.$286 093 100,(8.8%)
Data services
Total revenue
Voice services revenue includes revenue from local and long distance voice services, prepaid calling card processing, and other voice
telecommunications based services, interactive voice response services and stand-alone long distance services. Voice services revenue in the
first quarter of 2004
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decreased to $130.9 million from $150.7 million for the same period of 2003 but was relatively stable with fourth quarter 2003 results of
$131.6 million. The year over year decrease is primarily attributable to carrier customer declines driven by churn from competitive pricing
pressures, In addition, as costs for services declined we reduced our prices for certain services. Finally, the FCC mandated certain rate
reductions in carrier access billings.
Data services revenue includes revenue from Internet access, network access and web applications hosting services. Data services revenue
in the first quarter of 2004 decreased to $92.9 million from $102.0 million for the same period of 2003 but was relatively stable with fourth
quarter 2003 results of $92.4 million, The majority of the year over year decline was attributable to carrier customer churn due to network
downsizing. _n -
Integrated voice and data services revenue is generated largely from our XOptions service offerings, a flat-rate bundled package offering a
combination of voice and data services. Integrated voice and data services in the first quarter of 2004 increased to $37.1 million from
$33.4 million for the same period in 2003, but was relatively stable with fourth quarter 2003 results of $37.0 million,
Costs and expenses. The table below provides costs and expenses by classification and as a percentage of revenue (dollars in thousands):
Three months ended March 31,
2004
% of
Revenue 2003
% of
Revenue % Change
Depreciation and amortization,25,697 367 (2.5%)
Cost of service. Cost of service includes expenses directly associated with providing telecommunications services to our customers. Cost of
service includes, among other items, the cost of connecting customers to our networks via leased facilities, the costs of leasing components of
our network facilities and costs paid to third party service providers for interconnect access and transport services. Cost of service for the three
months ended March 31, 2004 increased in absolute dollars and increased as a percentage of revenue compared to the same period in 2003, The
absolute dollar increase is due to increased customer volume, The increase as a percentage of revenue was due primarily to reduced revenue
resulting from pricing reductions discussed above with no offsetting direct expense reductions.
Based on our preliminary review and analyses and our initial role in managing the Acquired Businesses we believe that, on a pro fonna
basis, cost of service as a percentage of revenue for the combined company will increase initially, since the Acquired Businesses has a higher
cost of service as a percentage of revenue than XO, We believe that if our integration of the combined company s networks succeeds as
expected, that this percentage will decrease thereafter and should approximate XO historical levels by the end of 2004, We estimate a potential
benefit of approximately $60.0 million in annual cost of service expense synergies if our integration efforts are successful. Cost of service as a
percentage of revenue will be adversely impacted if we do not successfully integrate the Allegiance networks and systems in a timely manner.
Selling, operating and general Selling, operating and general expense includes expenses related to sales and marketing, internal network
operations and engineering, information systems, general corporate office functions and collection risks, Selling, operating and general expense
for the quarter ended March 31 , 2004 was $168,6 million or 64,6% of revenue compared to $166,2 million or 58,1 % of revenue for the quarter
ended March 31 , 2003. Selling, operating and general expense increased in absolute dollars due to increased levels of temporary contract labor
required to fully implement new back office systems and procedures, offset by savings from headcount reductions in the network operations
sales and information technology groups, and the renegotiation of certain contracts. The increase in selling, operating and general expense as a
percentage of revenue for the quarter ended March 31, 2004 when compared to the percentage for fiscal 2003 results is due to the large
reduction of revenues due to price reductions discussed above, with no associated offsetting direct expense reductions,
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Based on our preliminary review and analyses and our inital role in managing the Acquired Businesses, on a pro fonTIa basis we expect that
selling, operating and general expense for the combined company will increase in absolute dollars, but decrease as a percentage of revenue by
the end of 2004 as we integrate the organizations. We estimate a potential benefit of approximately $100,0 million in annual selling, operating
and general expense synergies if our integration efforts are successful. This projection would be adversely affected if we do not successfully
integrate the Acquired Businesses,
Depreciation and amortization. Depreciation expense decreased to $19,2 million for the three months ended March 31, 2004, compared to
$19.9 million for the same period in 2003, The decrease is due to certain IT systems becoming fully depreciated in late 2003. Amortization
expense inClUdes the amortization of fixed wireless licenses and other intangible assets with definite useful lives, Total amortization expense
remained constant at $6.5 million for the three months ended March 31 , 2004 and 2003, respectively, As of March 31, 2004, we had
approximately $87.4 million of construction-in-progress plus $23,5 million of fixed wireless licenses that are not currently ready for their
intended use or placed into service and, accordingly, are not currently being depreciated or amortized,
Depreciation and amortization expense will increase, as the Acquired Businesses include a significant amount of fixed assets, In addition, as
we will apply SFAS 141
, "
Business Combinations , we may identify intangibles within the Acquired Businesses not previously recorded by
Allegiance.
Investment income, net. Investment income for the three months ended March 31, 2004 decreased to $1.4 million from $3.2 million for the
same period in 2003, The decrease in investment income is due primarily to reduced interest rates on lower invested balances.
Interest expense, net. Interest expense, net includes interest expense on debt and capital leases, less any amounts capitalized for
construction efforts. The majority of interest expense in 2004 is non-cash as the Credit Facility allows for accrued interest to be converted into
principal if unpaid. Interest expense, net for the quarter ended March 31, 2004 and 2003 was $6.6 million and $9,7 million, respectively. The
significant reduction for 2004 was due to the repayment of outstanding principal under the Credit Facility with the proceeds of the Rights
Offering in January 2004. During the three months ended March 31, 2004 and 2003, XO capitalized interest on construction costs of
$0,9 million and $0,7 million, respectively.
Critical Accounting Policies
Our significant accounting policies are more fully described in the notes to the consolidated financial statements in our 2003 Annual Report.
The preparation of the condensed consolidated financial statements in accordance with accounting principles generally accepted in the United
States requires management to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Management uses historical
experience and all available infonTIation to make these judgments and estimates and actual results could differ from those estimates and
assumptions that are used to prepare our financial statements at any given time, Despite these inherent limitations, management believes that
Management's Discussion and Analysis and the accompanying condensed consolidated financial statements and footnotes provide a
meaningful and fair perspective of our financial condition and our operating results for the current period, Management believes the following
critical accounting policies represent the more significant judgments and estimates used in the preparation of our condensed consolidated
financial statements included in this Quarterly Report on FonTI lO-
Long-Lived Assets
Our long-lived assets include property and equipment, fixed wireless licenses, and identifiable intangible assets to be held and used,
Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, The estimated useful lives of
telecommunications networks and acquired bandwidth are 3 to 20 years and 5 to 7 years for furniture fixtures, equipment and other. These
useful lives are detenTIined based on historical usage with consideration given to technological changes and trends in the industry that could
impact the network architecture and asset utilization. This latter assessment is significant because we operate within an industry in which new
technological changes could render some or all of our network related equipment obsolete requiring application of a
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sharter useful life 0.1', in certain circumstances, a write-aff af the entire value af the asset. Accardingly, in making this assessment, we cansideraur planned use af the assets, the views af experts bath from internal and autside saurces regarding the impact af technalagical advances and
trends in the industry an the value and useful lives af aur netwark assets. Casts af additians and improvements are capitalized and repairs and
maintenance are charged to. expense as incurred, Direct external and internal casts af canstructing praperty and equipment are capitalizedincluding interest casts related to. canstructian.
Investments in braadband wireless licenses are amartized aver the license periad af 10 years as determined by the Federal CammunicatiansCammissian.n arder to. receive an extensian an the ari inallicense term from the FCC we are r quite ta_sho.l)ubstantial.sefYicejn-the-cense area within ten years af being licensed, Failure to. meet this requirement cauld result in farfeiture af the license, Approximately$23,5 millian in baak value af these licenses have nat yet been placed into. service. Had these licenses been in service during the first quarter af2004, amartizatian expense wauld have increased by appraximately $1.1 millian. If we fail to. shaw substantial service in the licensedgeagraphic area at the end af the ariginal ten year periad and are nat granted an extensian 0.1' renewal fram the FCC, we wauld farfeit the rightto. affer such services in that market, and write-aff the impaired asset. XO is evaluating recent improvements in the price and perfarmance af
broadband wireless equipment, and is develaping a plan to. meet the FCC's substantial service test in all its licensed areas befare the licensesare due far renewal praceedings,
Other intangibles cansist af custamer relatianships, internally develaped technalagy and XO's trade name. The custamer relatianships andinternally develaped technalagy are being amartized using the straight-line methad aver the estimated useful lives af three years, The XO tradename was determined to. have an indefinite life and is nat being amartized, but is reviewed at least annually far impairment, as required underStatement af Financial Accaunting Standards, 0.1' SFAS, No., 142 "Gaadwill and Other Intangible Assets " 0.1' SFAS No.. 142,
Depreciatian 0.1' amartizatian af the lang-lived asset begins when the asset is substantially camplete or placed into. service,
Lang-lived assets are reviewed far impairment whenever events 0.1' changes in circumstances indicate that the can-ying amaunt shauld be
addressed pursuant to. SFAS No., 144
, "
Accaunting far the Impairment 0.1' Dispasal af Lang-Lived Assets," 0.1' SFAS No., 144. The criteria fardetermining impairment far lang-lived assets to. be held and used is determined by camparing the carrying value af these lang-lived assets to.management's best estimate af future undiscaunted cash flaws expected to. result fram the use af the assets and their eventual dispasitian. Webelieve that no. impairment existed under SFAS No.. 144 as af December 31 2003, In the event that there are changes in the planned use af aurlang-lived assets 0.1' aur expected future undiscaunted cash flaws are reduced significantly, aur assessment af aur ability to. recaver the carryingvalue af these assets under SFAS No.. 144 cauld change.
Revenue Recognition
Revenues from telecammunicatians services are recagnized when the services are perfarmed, evidence af an an-angement exists, the fee isfixed and determinable and callectibility is probable, In circumstances when these criteria are nat met, revenue recagnitian is deferred untilresalutian accurs, Far example, if a custamer files far protectian under bankruptcy, we believe the probability af callectian is weakened.
Cansequently, under such circumstances, althaugh we cantinue to. bill the custamer far all services provided, we do. nat recagnize revenue untilcash is received, In additian, telecammunicatians custamers aften dispute the amaunts that we invaice them due to. regulatary issues, latepayment fees, and early terminatian charges based an differences af apinian regarding can tract terms 0.1' service levels, Accardingly, as thesebillings are nat cansidered fixed and determinable and callectian af such amaunts is nat cansidered prabable while these amaunts are disputed
revenue recagnitian is deferred until the dispute is resalved and the cash is callected,
Service discaunts and incentives related to. telecammunicatians services are recarded as a reductian af revenue when granted 0.1' ratably avera cantract periad. Fees billed in cannectian with custamer installatians and ather nan-recurring fees are deferred and recagnized ratably aver
the
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estimated customer life. The estimated customer life is calculated by analyzing customer disconnects as a percentage of revenue. This
calculation is reviewed every quarter.
We establish an allowance for collection of doubtful accounts and other sales credit adjustments, Allowances for sales credits are
established through a charge to revenue, while allowances for doubtful accounts are established through a charge to selling, operating and
general expenses. We assess the adequacy of these reserves monthly by considering general factors, such as the length of time individualreceivables are past due, historical collection experience, the economic and competitive environment, and changes in the credit worthiness of
our customers, As considered necessary, we also assess the abilit of specific customers to meet their financial obli ations to us and establish
specific valuation allowances based on the amount we expect to collect from these customers. We can and have experienced material changes
to our reserve requirements on a month to month basis as significant customers have in the past unexpectedly filed for bankruptcy or otherwise
became insolvent. We believe that our established valuation allowances were adequate as of March 31 2004, If circumstances relating to
specific customers change or economic conditions worsen such that our past collection experience and assessment of the economic
environment are no longer valid, our estimate of the recoverability of our trade receivables could be changed, If this occurs, we would adjustour valuation allowance in the period the new information is known.
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Cost of Service
Cost of service includes expenses directly associated with providing telecommunications services to customers, including, among other
items, the cost of connecting customers to our networks via leased facilities, the costs of leasing components of our network facilities and costs
paid to third party providers for local access and transport services. All such costs are expensed as incurred, We accrue for the expected costs
of services received from third party telecommunications providers during the period the services are rendered, Invoices received from the
third party telecommunications providers are often disputed due to billing discrepancies, We accrue for all invoiced amounts, even amounts in
dispute, as these amounts represent contingent liabilities that are considered probable and measurable. Disputes resolved in our favor may
reduce cost of service in the period the dispute is settled and typically reflect costs paid in prior periods. As the period of time required to
resolve these types of disputes often lapses over several quarters, the benefits associated with the favorable resolution of such disputes
normally are realized in periods subsequent to the accrual of the disputed invoice.
Liquidity and Capital Resources
Capital Resources and Liquidity Assessment
During the quarter ended March 31, 2004, our operating activities used net cash of $34.9 million, our investing activities used net cash
$75.4 million, and our financing activities provided net cash of $2.2 million, Our balance of cash and cash equivalents decreased to
$370,5 million at March 31, 2004 from $478.6 million at December 31, 2003.
On April 14, 2004, we transferred the final cash installment of $282,5 million into an escrow account as part of the total consideration for
the Acquired Businesses. After the acquisition, we expect that the combined company will continue to use cash for operating and investing
activities, but at a reduced rate as compared to our first quarter results,
Based on current trends, our preliminary review and analyses, and our initial management of the Acquired Businesses, after funding the
Allegiance acquisition, we believe we have sufficient cash to fund our needs through to the point we expect to become free cash flow positive
in 2005. However, our cash could be negatively impacted if there is a material purchase price adjustment, if we are not successful in properlyintegrating XO and the Acquired Businesses in a timely manner, if we see unexpected customer losses during the integration period, ifintegration costs are higher than expected or if there are further downturns in the industry or the economy. In addition, we continue toinvestigate potential acquisitions to add additional scale and synergies to our business. Effecting any such acquisitions would likely require
additional cash, For all
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of these reasons we are currently considering raising additional capital through the issuance of debt and/or equity securities,
We raised net proceeds of $197.6 million in January 2004 upon the consummation of our Rights Offering, and applied these proceeds to the
outstanding balance on the credit facility, reducing the amount outstanding from $536.8 million as of December 31 2003 to $339.2 million,We have no current debt service requirements since cash interest payments as well as automatic and pennanent quarterly reductions of the
principal amount outstanding under the Credit Facility do not commence until 2009. There are no additional boITowings available under ourCredit Facility, However, in the event that consolidated excess cash flow (as defined in the Credit Facility) for any fiscal quarter during the
tenD of the agreement is greater than $25.0 million, at the request of the lender, KO will p-iiy_ao_amnunLequaLt050%-of-such-excess-cash--flowgreater than $25:D miUlOn toward the reduction of outstanding indebtedness. In addition, if the ratio of our consolidated earnings beforeinterest, taxes depreciation and amortization for the four consecutive quarters exceeds 4: 1, we would be required to pay cash interest, unlesswaived by the lenders,
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Our Credit Facility limits additional indebtedness, liens, dividend payments and certain investments and transactions, and contains certaincovenants with respect to EBITDA requirements and maximum capital expenditures. The Company was required to achieve a minimum
consolidated EBITDA loss of not more than $12.0 million for the quarter ended March 31 , 2004. Prior to the end of the first quarter of 2004the lender waived the applicability of the minimum consolidated EBITDA covenant for the two fiscal quarters ending March 31, 2004 andJune 30, 2004, Actual consolidated EBITDA loss for the quarter ended March 31 , 2004 was $17.6 million. The Company is also required underthe tenus of the Credit Facility to maintain an unrestricted cash balance of $25.0 million at the end of March 31 , 2004 and each fiscal quarterthereafter during the tenD.
Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of trade receivables. Although our trade
receivables are geographically dispersed and include customers in many different industries, a portion of our revenue is generated fromservices provided to other telecommunications service providers, Several of these companies have filed for protection under Chapter 11 of theBankruptcy Code, We believe that our established valuation and credit allowances are adequate as of March 31 , 2004 to cover these risks.
Regulatory Overview
Overview
The Telecommunications Act of 1996, or the "Telecom Act", which substantially revised the Communications Act of 1934, established theregulatory framework for the introduction of competition for local telecommunications services throughout the United States by new
competitive independent entrants such as us. Prior to the passage of the Telecom Act, states typically granted an exclusive franchise in eachlocal service area to a single dominant carrier - often a fonDer subsidiary of AT&T known as an RBOC - which owned the entire local
exchange network and operated a virtual monopoly in the provision of most local exchange services in most locations in the United States, The
Regional Bell Operating Companies (RBOCs), following some recent consolidation, now consist of the following companies: BellSouthVerizon, Qwest Communications and SBC Communications,
Among other things, the Telecom Act preempts state and local governments from prohibiting any entity from providing telecommunications
service, which has the effect of eliminating prohibitions on entry that existed in almost half of the states at the time the Telecom Act was
enacted, At the same time, the Telecom Act preserved state and local jurisdiction over many aspects of local telephone service and, as a resultwe are subject to varying degrees of federal, state and local regulation, Consequently, federal, state, and local regulation, and other legislativeand judicial actions relating to the telecommunications industry could significantly affect our business,
We believe that the Telecom Act provided the opportunity to accelerate the development of competition at the local level by, among other
things, requiring the incumbent carriers to cooperate with competitors' entry into the local exchange market. We have developed our businessand designed
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and constructed our networks to take advantage of the features of the Telecom Act that require cooperation from the incumbent carriers
, andbelieve that the continued viability of the pro-competitive statutory provisions is critical to the success of the competitive framework
contemplated by the Telecom Act.
Although the Telecom Act and the related rules governing competition issued by the FCC
, as well as pro-competitive policies alreadydeveloped by state regulatory commissions, have enabled new entrants like us to capture a portion of the incumbent carriers' market share oflocal services, there have been numerous attempts to limit or eliminate the basic framework for competiti
on in the local exchan e servicesmarket through a combination of fedeLallegislation adoption-of-new-rules-by-the-Fee;-an RBOCChaI1enges to existing and proposedregulations. We expect these efforts to limit the benefits of the Telecom Act to continue. Successful implementation of our business plan is
predicated on the assumption that the basic competitive framework will remain in place.
Federal Regulation
The FCC exercises jurisdiction over our telecommunications facilities and services. We have authority from the FCC for the installation
acquisition and operation of our wireline network facilities to provide facilities-based domestic interstate and international services. In additionwe have obtained FCC authorizations for the operation of our LMDS and 39 GHz broadband wireless facilities. Unlike incumbent carriers
, weare not currently subject to price cap or rate of return regulation, which leaves us free to set our own pricing policies for end user servicessubject only to the general federal guidelines that our charges for interstate and international services be just
, reasonable, and non-discriminatory. The FCC allows us to file interstate tariffs for interstate access services (rates charged by carriers for access to their networks).
The FCC, however, required that, with only minor exception, we withdraw our tariffs for interstate domestic long distance services andinternational long distance services. We, however, are still required to make the terms, conditions and rates of the detariffed services availableto the public on our Company web page, and such tenus, conditions, and rates are located at http://www.xo.com/legal/.
The following is a summary of the interconnection and other rights granted by the Telecom Act that are important for effective local service
competition and our belief as to the effect of the requirements, if properly implemented:
. interconnection with the networks of incumbents and other carriers, which permits our customers to exchange traffic with customersconnected to other networks;
. local loop and transport unbundling, which allows us to selectively gain access at cost-based rates to incumbent carriers' facilities andwires that connect the incumbent carriers' central offices and/or customer premises , thereby enabling us to serve customers not directlyconnected to our networks;
. reciprocal compensation, which mandates arrangements for local traffic exchange between us and both incumbent and competitive
carriers and compensation for terminating local traffic originating on other carriers
' networks , thereby improving our margins for localservice;
. number portability, which allows customers to change local carriers without changing telephone numbers
, thereby removing a significantbarrier for a potential customer to switch to our local voice services;
. access to phone numbers, which mandates assignment of new telephone numbers to our customers, thereby enabling us to providetelephone numbers to new customers on the same basis as incumbent carriers; and
. collocation of telecommunications equipment in incumbent carrier central offices, which enables us to have direct access to unbundledloops and other network elements and facilitates for efficient integration with our switching and other network facilities.
In January 1999, the U.S. Supreme Court, in a decision that was generally favorable to competitive telephone companies such as us
, upheldkey provisions of the FCC rules implementing the Telecom Act. In finding that the FCC has general jurisdiction to implement the Telecom
Act's local
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competition provisions, the Court confirmed the FCC's role in establishing national telecommunications policy, and thereby created greater
certainty regarding the rules governing local service competition on a going forward basis.
Although the rights established in the Telecom Act are a necessary prerequisite to the introduction of full local competition, they must be
properly implemented and enforced to permit competitive telephone companies like us to compete effectively with the incumbent carriers.
Discussed below are several FCC and court proceedings relating to the application of certain FCC rules and policies that are significant to and
directly impact our operations as well as the nature and scope of industry competition.
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Unbundling of Incumbent Network Elements
On August 21 2003, the FCC released its Triennial Review Order ("TRO"). Under the TRO, our ability to obtain access to certain
unbundled network elements ("UNEs ) and incumbent network upgrades may be curtailed or more costly in the future. Also, the TROdelegated to the states the overall responsibility for deciding whether certain unbundled elements should remain available to competitors like us
in local markets of each of the respective states. Delegation of these determinations created the risk that some states may decide to limit or
eliminate certain unbundled network elements to which we have access today and that we would be faced with different sets of rules and costs
if states issue inconsistent decisions.
The following Triennial Review Order matters directly impact us and many of our competitors:
. Curtailed Access to Broadband: The TRO adopted new rules that, for certain very small customers restrict competitive carriers from
leasing as unbundled elements certain upgrades that the incumbent carriers make to their networks, such as the deployment of new
optical fiber or upgrades from copper to optical fiber. For example, a new fiber loop to a very small customer that replaces an existing
copper loop could be exempt from unbundling, except that incumbents must continue to unbundle the pre-existing copper loop or provide
a voice channel for us on the new fiber loops that is equivalent to the old copper loop. Although the imposition of any restrictions on our
access to the incumbents' broadband networks is not a favorable development for us, we believe that the adverse impact is partially
mitigated by the fact that incumbents are required to continue to provide us with basic access to those facilities that we currently lease
from them to serve many of our customers.
. Unbundled Local Loops: The Order made a general, national finding that, with the exception of optical carrier ("OC") level loops
competitive carriers should have access to unbundled loops of the incumbent carriers at cost-based rates. The states, however, may
remove competitive carriers' access to certain non-DC level high capacity and unlit capacity loops based on the results of specified
competitive analyses. Incumbent carriers will no longer be required to provide competitive carriers with access to OC level loops as
UNEs. We believe that the net result of these changes will not have a significant impact on us because the access to the vast majority of
unbundled loops that we use today will be preserved.
. Unbundled Dedicated Transport: The TRO has changed the definition of "dedicated transport" in such a way that competitive carriers
have to purchase certain transport facilities at higher rates. The TRO maintained unbundled access to many types of transport between
incumbent facilities, such as transport between incumbent central offices, but it redefines dedicated transport to eliminate the unbundling
of other transport. The TRO also sets forth a test that the states must follow in considering whether certain non-DC level high capacity
transport should be available as UNEs in local markets within the states. The FCC also ruled that OC level transport would no longer be
available as an unbundled element and that shared transport would be unavailable as an unbundled element in most business markets. We
believe that it is likely that this determination will raise our costs for transport services in the future.
. Enhanced Extended Links and Co-Mingling: The TRO enhances the ability of competitive carriers like us to obtain a combination of
unbundled loop and transport elements known as
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enhanced extended links , provided that the underlying loop and transport elements are individually available on an unbundled basis.
The FCC created new rules that pennit competitive carriers to mix services that they lease from the incumbent carriers. We will now be
able to mix incumbent carrier unbundled network elements with services purchased from the wholesale tariff (e., switched and special
access services) instead of being required to artificially segregate unbundled network elements from such wholesale services. Because we
currently lease both wholesale services and unbundled network elements from the incumbent carriers, we believe that these developmentswill result in cost savings for us.
. Calculation of Unbundled Element Rates: The TRO will allow incumbent carriers to utilize a higher cost of capital and shorterde p reeiation-liv es-t o-estab lish,ate s-for-u nb undled-eleme nts-=-W-betieYe th-anhl~s-e dtfi:catl on s co u lOrlli s e 0 u r co s (Sf eas I n gunbundled network elements in the future.
Although the rules adopted by the FCC in the Triennial Review Order became effective on October 2, 2003, many of the requirements
imposed by the FCC in the TRO were not self-executing. Accordingly, the FCC made clear that carriers must follow the change of law
procedures in their applicable interconnection agreements to implement any TRO requirements that are not self-executing and that carriers
must follow the procedures et forth in section 252(b) of the Telecom Act to modify interconnection agreements that are silent as to
implementation of changes in law. We have been in negotiations with incumbent carriers to amend our interconnection agreements to
implement relevant TRO requirements and to date have executed amendments in several states.
Several carriers and other entities appealed the FCC's TRO decision. On March 2 , 2004, the u.S. Court of Appeals for the D.c. Circuit inWashington, D.c. issued its opinion in United States Telecom Association v. FCC, No. 00-1012 ("USTA Decision ). In the USTA Decisionthe court reversed and vacated many of the conclusions of the TRO. Specifically, the court found that the FCC improperly delegated to the
states the overall responsibility for deciding whether certain unbundled elements should remain available to competitive carriers in each of the
respective states. The FCC's detennination in the TRO that competitive carriers should have access to switching platfonn services as a UNE
UNE-) was vacated by the court. The court also vacated the portions of the TRO which held that competitive carriers should have access to
high capacity non-OC level unbundled dedicated transport at cost-based UNE rates. In addition, a number of RBOCs have taken the positionthat they believe the UST A Decision vacates portions of the TRO holding that competitors should have access to certain non-OC level highcapacity loops at cost-based UNE rates although we disagree with this interpretation of the UST A Decision. If the RBOCs prevail on theirposition, our costs for purchasing high capacity local loops can be expected to increase depending on final determinations by regulatory
agencies and/or the courts.
XO does not rely on ILEC facilities to switch the majority of its customers ' traffic and , therefore, will not be affected by the court s decisionpertaining to UNE-P service. Additionally, with the pending acquisition of Allegiance and its hundreds of collocation sites, we believe XO willlease less unbundled dedicated transport facilities from the ILECs. We expect these factors to help mitigate the effects of any potential
increases in the costs of leasing transport capacity that may result if the UST A decision is not further stayed or reversed. Finally, it is our
position that incumbent carriers are required to make unbundled network elements impacted by the UST A Decision available at cost-basedUNE rates under state and federal laws, independent of the TRO. The UST A Decision has been stayed by the U.S. Court of Appeals for thec. Circuit until June 15, 2004. Parties will seek review of the UST A Decision at the Supreme Court and will also seek a further stay of the
decision. If the UST A Decision does go into effect and reverses and vacates large portions of the TRO, our ability to obtain access to certain
unbundled network elements and incumbent network upgrades may be curtailed or become more costly in the future. The FCC has urged
competitive carriers and incumbent carriers to engage in good faith commercial negotiations to agree upon rates, terms and conditions for thecontinued availability of UNEs impacted by the UST A Decision. Weare engaged in such commercial negotiations with several incumbent
carriers but, at this time, cannot predict the outcome of these negotiations or whether they will result in preserving existing UNE rates.
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Many incumbent carriers will continue to seek to institute follow-on administrative proceedings with the FCC and state regulatory agencies
and lobby the United States Congress, all in an effort to affect laws and regulations in a manner even more favorable to them and against the
interests of competitive carriers. At the same time, we anticipate that competitive carriers will endeavor to improve their positions and access to
the incumbents' networks through similar means. The final outcome of the appellate review and implementation process remains unknown at
this time, but it is possible that further changes to the rules could adversely affect our cost of doing business by increasing the cost of
purchasing or leasing network facilities from the incumbent carriers.
Regulation of the RBOCs ' Ability to Provide Long Distance Service
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The FCC has primary jurisdiction over the implementation of Section 271 of the Telecom Act, which provides that the RBOCs cannot offer
in-region long distance services until they have demonstrated that:
. they have entered into an approved interconnection agreement with a facilities-based competitive telephone company or that no such
competitive telephone company has requested interconnection as of a statutorily detennined deadline;
. they have satisfied a 14-element checklist designed to ensure that the RBOC is offering access and interconnection to all local exchange
carriers on competitive terms; and
. the FCC has detennined that allowing the RBOC to offer in-region, long distance services is consistent with the public interest
convenience and necessity.
As of December 15 , 2003, the FCC granted all of the RBOCs the authority to provide long distance service in every state in which they
operate. All of the RBOCs now have the authority to bundle in-region long distance services with in-region local services. RBOC authorization
to provide in-region long distance services could have an adverse affect on our ability to compete if effective post-approval safeguards are not
enforced to ensure that the RBOCs continue to comply with the market-opening requirements.
Provision of Broadband Telecommunications Services and Information Services
Current federal and state regulation places certain restrictions and conditions on the provision of advanced telecommunications services, orbroadband services, such as data and DSL services, by the RBOCs. Furthermore, the network elements that RBOCs must make available under
the FCC's unbundling rules to competitors may be used for the provision of broadband services. However, at the urging of the RBOCs and
other incumbent carriers, the FCC, in the TRO, appears to have greatly curtailed the extent to which the incumbents must unbundled the
broadband portion of their networks for their competitors. The RBOCs continue to push for further deregulation through federal and state
legislative efforts. In addition, it is anticipated that deregulatory legislation will be pursued by the RBOCs in Congress. In addition to possible
legislation, the FCC has initiated another pending proceeding that could relax incumbent carriers' obligation to make unbundled networkelements that are used for certain broadband or information services available to us. The FCC has issued a Notice of Proposed Rulemaking
entitled "Appropriate Framework for Broadband Access to the Internet Over Wireline Facilities" that requests comments on the properclassification of broadband access services as either regulated telecommunications services or unregulated infonnation services. The TRO
decision, in conjunction with a decision in this proceeding, a legislative change or a court ruling further broadening the definition of what
constitutes unregulated information services could have the effect of allowing RBOCs to provide tenns, conditions and pricing to their ownaffiliates that provide data or information services that are better than those made available to competitive carriers such as us. Such
developments could also be expected to adversely affect our cost of doing business by increasing the cost of purchasing or leasing such
facilities from the RBOCs.
Universal Service
In 1997, the FCC established a significantly expanded federal telecommunications subsidy regime known as "universal serviceSpecifically, the FCC established new subsidies for services provided to
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qualifying schools and libraries and rural health care providers
, and expanded existing subsidies to low income consumers. Mosttelecommunications companies, including us, must pay for these programs based on their share of interstate and internationaltel,communications ,nd us", "venn". On Mffi'Ch 5. 2004, th, Wri,lin, Competition Bu",u ,eI'as,d a public notic, announcing that th,pwpo,"d unive"al 'emce contribution facto' fo, the 'econd quarte, of 2004 will
remIDn at 8.7 pe,cent. The pCC ha.s taken fu"he, "'1" tn
modify the system for assessment and recovery of universal service funds. In a December 2002 Notice of Proposed Rulemaking, the FCC
"'ked many bread.'anging qnesrin", regan:ling nnive"aI ,",vice, including wbetbe, to ,h"'ge it. mOthod of ",se"ing ,onttiburio", due frem
c"";.,, by bas;ng h nn Ibe numbe, ond capacity of connecrio", tbey pmv;de
, rnlbe, Ibon on ;nterntate and ;nlernatinnaLendus",-revenn",lbey-
earn, At th;s hmo, wo ore unable tnpredict..,hottretiJre.ECC"'-""-g-ndegisl",mini"ativos wili increase tho si" of on' suhs;dy
. -
payments;-the-sl:ope of1lie subsidy program, or our costs of calculating, collecting and remitting the universal service related payments.
Intercarrier Compensation Reform
Como!!y, leleeommookanoo, 'ame" "'" 'eqoITed 10 pay oth" ,...,Ie" fo, lote"'ate DC'e" ,h...se, and 100" ,ecip'oo" 'ompeo'atioocharges. These two forms ofIntermarried compensation have been under review by the FCC since
2001. The FCC continues to consider abmad o,de, ,efo,m;ng the !n'ereanic, compensation syStem and the follow;ng spedfic pmcoedmgs also ;mp"'t
!nte"'ame, compensa';on
issues for us.
Acoess Charges. Long dis"'nce caniers pny Incal tacilities-b.,ed canie", including ns, in.."",.. access cbarges to, both originating andtenninating the interstate calls of long distance customers on the local can-iers
' networks. Historically, the incumbent carriers set accesschm-ge, highe, than CO" and j u,tifled thi, pridng to ,egu!..o" '" , ,uh,idy to the CO" of providing local telephone ""vice to high", CO"
customers. With the establishment of an explicit and competitively neutral universal service subsidy mechanism
, however, the FCC is under
incre"'ing pres'"re 10 'evi", the Con-eol """" chMge regime 10 h,ing the ohMge, dom 10 Ihe actual co,' of pwviding acee". In re'poo,e. theFCC issued a decision in 2001 setting inte"'ate mtes that competitive local
o,mi"s oh"ge to long diStance oam", at a level that will gmdnally
d',",as, ov.,,- Ibm, y'ars horn a maximum of $0.025 P" minut' to th, mtes oha;g'd by iooumb,ot ""ricrs. As long as w, a;, in oompliaooo
with the FCC', cote schedule, the FCC', o,d" fo'hid, loog distance eani", from ehalIeogiog om ioteestate ace", cat". Although this FCC
decision loweriog access ch"'ges will ,ednce om "'ress ch"'ge ,eveones ovcr time
, we do oot expect that soch a '""nction will have a materialimpact on our total revenues or financial position. In 2001
, the FCC also issued a declaratory ruling that commercial mobile radio service("CMRS") pmvide" are not pennitted 10 oollect 'witched ace"" charge, fmm loog di,'ance came" ab,ent a
COnITacl between the partie, that
impo,e, a payment obligation on the long distanee eani". In Novemb" 2003. the United Stat" Court of Appeal, fo, tbe D~"iet of Columbiad'ni,d p,tition, fo, "view of th, FCC', decl"'ato,y ruling on CMRS acoo" ch"'g", Sprint PCS and AT&T are c"",ndy litigating in f'de,,'
district Court in M;,souri the issue of whethe,. in the
absence of a w,iUen 'oot,.". S priot PCS ,an ,hm-ge AT&T fo, switched access sm"es.
We "'e unable tn detennine how the oonrt will ultimately rule; howe,""
if Sprint PCS prevails in Ims lawsuit against AT&T, it may enoourugeCMRS providers to attempt to collect switched access charges from us even in the absence of a written contract.
AT&T Declaratory Ruting R., VolP, AT&T petitioned the FCC tn fmd tha' vn"e ove, Internet Protocol ("VoIP") mv".., incloding
phone to phone se",ices, are exempt fmm swHehed aee",s dun-ges. On April 21, 2004, the FCC ,"leased an o,d", denying AT&T's petition
(the "AT&T Order ). The FCC held that an interexchange service that uses ordinary customer premises equipment that originates and
lennin'le, on the pnb!;c Swilcbed telephone nelwo,k, thaI provid.. no enb,"ced functionalilY, ,"d that
nnd"gn.. no nel pmlocol convmion,is a telecommunications service and subject to switched access charges. The FCC did not make a detennination regarding the retroactive
applicability of access charges to the foregoing type of interexchange service. While the AT&T Order addressed a limited fact pattern
, the
order places interexchange services similar to those VoIP services offered by AT&T in the same regulatory category as traditional
tel'communications s"vie", and, Ihorero", subj""" such V oIP "'tVic" 10 access chatg" and oth" tOgulalory obligations including
BOWNE INTEGRATED TYPESEITING SYSTEM Site: BOWNE OF WASHINGTON
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Universal Service fees. Like a growing number of carriers, we utilize Internet protocol technology for the transmission of a portion of ournetwork traffic. The FCC has now made clear that
, to the extent such services share the same characteristics as those addressed in the
AT&TOrder, they will be treated as regulated services subject to access charges going forward. Although the FCC did not rule on the applicability of
access charges for services prior to April 21 , 2004, the RBOCs may attempt to assert claims against other telecommunications companiesincluding us for the retroactive payment of access charges. On April 22
, 2004 SBC Communications filed a collections lawsuit against AT&Tseeking retroactive payment of unpaid access charges.
nage Petition. On Sel2temJle..r22,2003 V:onage-Holdings;-fnce"onage Tfilea a petition requesting that the FCC preempt an order oftheMinnesota Public Utilities Commission ("PUC") requiring V onage to comply with state laws governing providers of telephone service. TheMinnesota PUC decision has been overturned by a Minnesota state court and now Vonage is seeking Federal preemption so that no future
rulings of the Minnesota PUC can subject Vonage to state regulation. Vonage provides VoIP origination services to its customers and Vonage
claims that it is therefore a provider of information services and not subject to traditional common can-ier
regulations. Specifically, Vonageasks that the FCC find that certain specific E911 requirements imposed by the Minnesota PUC are in conflict with federal policies. Further
Vonage states that preemption is necessary because of the impossibility of separating the Internet
, or any service offered over it, into intrastateand interstate components. Until the FCC issues its ruling, it is unclear how VoIr offerings by XO and other companies will be regulated.
---
Level (3) Forbearance Petition. On December 23, 2003, Level(3) filed a petition for forbearance requesting the FCC to forbear fromapplication of interstate or intrastate access charges on Internet protocol (IP) traffic that originates or terminates on the public switched
telephone network (PSTN). If the FCC were to rule in Level (3)'s favor
, we would expect that there would be reductions in network andregulatory costs associated with the termination of certain IP-to-PSTN and PSTN-to-IP traffic.
Pulver.Com Ruling. On February 12 2004, the FCC ruled that Pulver. Com s Free World Dialup (FWD) offering will remain a minimallyregulated VoIr service. The Pulver.com Order made clear that IP-
to-IP calls that do not transit over any portion of the PSTN will be largelyfree of regulation. Almost all of the calls carried by XO do transit some portion of the PSTN.
FCC VoIP NPRM. On February 12, 2004, the FCC initiated a major proceeding seeking public comment on a variety of issues based onthe premise that Internet services and VoIr should remain largely free of regulatory burdens. In connection with this proceeding, the FCC will
address VoIP-related Communications Assistance for Law Enforcement (CALEA) issues to address the technical aspects of enabling law-
enforcement access to IP-enabled services. At this time it is unclear how
, if at all, the FCC will regulate IP-enabled service including VoIr.
Local Reciprocal Compensation Charges. Local telephone companies such as us that originate traffic that is terminated on the network ofother can-iers typically compensate the other local carriers for terminating that traffic. These payments flow in both directions between any two
carriers. First, when we terminate traffic for another local carrier to a customer on our network
, we collect compensation. Second, when wesend our customers' traffic to another carrier for termination , we pay compensation. Some competitors, however, have a customer base thatgenerates many more minutes of terminating traffic from other carriers than originating traffic destined for other carriers. For example
, acompetitor that has a customer base that has many information service providers typically will have a large amount of compensation being paid
to it by other carriers, while it will owe very little reciprocal compensation to other carriers. The FCC revamped the local reciprocalcompensation structure in 2001 on an interim basis for three years to eliminate or reduce the opportunity for carriers to take advantage of an
imbalance of originating and terminating traffic flows due to traffic terminated to information service providers. The FCC also initiated a
rulemaking to examine inter-carrier compensation more comprehensively. Under the decision
, at the election of the incumbent carrierterminating traffic that is out-of-balance by a ratio of more than 3 to 1 can be compensated at a lower rate
, or in some cases, at no charge. Thisruling allows us to continue to collect reciprocal compensation payments from other carriers since we have an imbalance in the amount of
traffic we terminate versus the amount we
BOWNE INTEGRATED TYPESEITING SYSTEM Site: BOWNE OF WASHINGTONName: XO COMMUNICATIONS, I (E/O)CRC: 9528W971I7.SUB, DocName: IO-Q, Doc: I, Page: 27 EDGAR 2Descripti(m: Fo,:,!,
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originate. Going forward, an adverse ruling in the general intercarrier compensation reform proceeding could end reciprocal compensation
payments and eliminate this line of revenue for us.
TELRIC Proceeding. On September 10, 2003, the FCC initiated a new proceeding to consider significantly revamping the current Total
Element Long Run Incremental Cost ("TELRIC") methodology used for the pricing of unbundled network elements. An adverse ruling in the
new proceeding will allow the incumbent carriers to increase unbundled network element rates and this would raise our costs for leasing
unbundled network elements in the future. A decision is expected sometime in 2004. Several State Commissions have also initiated
procee ngs to review the rate levels that the incumbent carriers charge for unbundled network elemen.ts .An...adY.eIse....rulingin..these-~---proceeaings would allow the incumbent carriers to increase unbundled network element rates in the applicable state and this would raise our
costs for leasing unbundled network elements in the future.
- -
LMDS Auction. On July 28, 2004, the FCC plans to initiate an auction of spectrum in the 24 GHz band. The 24 GHz band consists ofthe
bands 24.25-24.45 GHz and 25.05-25.25 GHz. Five licenses, each with two paired 40 MHz blocks, will be offered in each of 176 geographic
areas. Stations in the 24 GHz Service may render any kind of digital fixed communications service. Auction winners will be required to protect
incumbent licensees. Virtually all of the incumbent licenses are held by Teligent, Inc. in a variety of areas throughout the country. The winningbidder for the 24 GHz service may use these stations to provide services in competition with those offered by XO, although the 24 GHz bandsconsist of less spectrum than that for which XO is licensed to provide LMDS service.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We had $345.9 million in secured loans as of March 31, 2004. Currently, we do not pay cash interest on the loans under the Credit
Agreement.
Marketable securities, available for sale, at March 31 , 2004 consist primarily of investments in equity and debt securities of publicly-tradedcompanies. The fair value of our investment in equity and debt securities exposes us to market risk; however, if the fair value were to increaseor decrease immediately, it would not likely have a material impact on our financial position or our results of operations. Weare not currently
engaged in the use of off-balance sheet derivative financial instruments, to hedge or partially hedge interest rate exposure nor do we maintainany other off-balance sheet arrangements for the purposes of credit enhancement, hedging transactions, or other financial or investmentpurposes.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. Theserules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a
company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. OurPrincipal Executive Officer and our Principal Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report. Based on the evaluation, they have concluded that, as of the end of such period, the controls andprocedures were effective at ensuring that required information was accurate and disclosed on a timely basis in our report filed under the
Exchange Act.
Changes in Internal Controls
We maintain a system of internal accounting controls that are designed to provide reasonable assurance that our books and records
accurately reflect our transactions and that our established policies and procedures are followed. For the three months ended March 31 , 2004there were no changes to our internal control over financial reporting that have materially affected, or are reasonably likely to materially affectour internal control over financial reporting.
BOWNE INTEGRATED TYPESETTING. SYSTEM Site: BOWNE OF WASHINGTONName: XO COMMUNICATIONS. I (E/O)CRC: 32728W97117.SUB. DocName: IO"Q. Doc: I. Page: 28 EDGAR 2Description: Form IO-
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
XO is involved in lawsuits, claims, investigations and proceedings consisting of commercial, securities, tort, and employment matterswhich arise in the ordinary course of business. In addition, disputes with respect to general unsecured claims and two administrative expenseclaims against XO in the aggregate amount of approximately $23.0 million remain pending from XC's 2002 Chapter 11 proceedings. Inaccordance with SFAS No.
, "
Accounting for Contingencies " XO makes a provision for a liability when it is both probable that a liability hasbeen incurred and the amount of the loss can be reasonabl estimated. XO believes it has.-adequate_pLQvisions-for-any--such...matte.rs-.X.Q-r-e-vi€-ws~-ese provisions at least quarterly and adjusts these provisions to reflect the impacts of negotiations, settlements, rulings, advice of legalcounsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, XO believes that ithas valid defenses with respect to legal matters pending against it. Nevertheless, it is possible that cash flows or results of operations could bematerially affected in any particular period by the unfavorable resolution or disposition of one or more of these contingencies.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the quarter ended March 31 2004.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-
(a) Exhibits
31.1 Rule 13a - 14(a)/15(d) - 14(a) Certification
31.2 Rule 13a - 14(a)/15(d) - 14(a) Certification
32.Certificate pursuant to 18 U.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-OxleyAct of 2002.
32.Certificate pursuant to 18 U.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-OxleyAct of 2002.
(b) Reports on Form 8-
(1) On January 8, 2004, XO filed a Current Report on Form 8-K disclosing that XO concluded its $200 million rights offering of40 million shares of XO common stock, $0.01 par value, at a purchase price of $5.00 per share, yielding gross proceeds to XO of
approximately $198.6 million.
(2) On January 23,2004, XO filed a Current Report on Form 8-K disclosing that XO had issued all of the 39.7 million shares of XOcommon stock in accordance with the terms of XC's Rights Offering that had concluded on January 6, 2004.
(3) On February 24, 2004, XO filed a Current Report on Form 8-K announcing the order issued by the U.S Bankruptcy court for theSouthern District of New York approving that certain Asset Purchase Agreement, dated as of February 18, 2004, by and amongAllegiance Telecom, Inc., Allegiance Telecom Company Worldwide, and XC, and the proposed purchase of substantially all ofthe assets of Allegiance Telecom, Inc. by XO pursuant to the terms thereof.
BOWNE INTEGRA TED- TYPESETTING SYSTEM sile:-iioWNE OF WASHINGTONName: XO COMMUNICA nONS, I (EtO)CRC: 58202W97117.SUB, DocName: 10-Q, Doc: I, Page: 29 EDGAR 2Description: Form IO-Q
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(4) On March 8, 2004, XO filed a Current Report on Form 8-K announcing that XO had issued a press release responding to the
decision of the U.S. Court of Appeals for the District of Columbia Circuit's ruling with respect to the FCC "Triennial ReviewOrder" on local telephone competition.
- - -- -- -- -
~~:';~~6N 5~~~1~gIii~~:.rING SYSTEM Site: BOWNE OFWAStfiNGH5N------rt,one: BOWW97tlfo30~OO.
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Doc: I, Page: 30 (E/O) ED1GAR 2 111111111111111111111111111111111111111111111111111111111111111111I111
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf bythe undersigned thereunto duly authorized.
XO Communications, Inc.
----
Date: May 10, 2004 By: Is/ William Garrahan
William Garrahan
Senior Vice President and Acting Chief
Financial Officer
(Principal Financial Officer)
BOWNE INTEGRATED TYPESETTING SYSTEM Site: BOWNE OF WASHINGTON --
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L~..o32..7839191 0 at BOW3I 142T D t 10 MAY 2004 10 122227Name:
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EX-31.w97117exv31w1. htm
Exhibit 31.
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Exhibit 31.1
CERTIFICATIONS
, Carl J. Grivner, certify that:
1. I have reviewed this quarterly report on Form IO-Q of XO Communications, Inc.
-~-- -
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make statements made, in light of the circumstances under which such statements were made, not misleading with respect to theperiod covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in thisquarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financialreporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of registrant s board of directors (or persons perfonning the equivalentfunction):
a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are
reasonably likely to adversely affect the registrant s ability to record, process, summarize and report financial infonnation; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
Date: May 10, 2004
/s/ Carl J. Grivner
Carl J. Grivner
Chief Executive Officer
(Principal Executive Officer)
BOWNE INTEGRATED TYPESETTING SYSTEM Site: BOWNE OF WASHINGTON
Name: . Yili.dNi9 N' Lines:
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EX-31. 2w97117exv31w2.htmExhibi t 31.
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1111111111111111111111111111111111 II I II III 1111 1111
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BOWNE INTEGRATED TYPESETTING SYSTEM Site: BOWNE OF WASHINGTON
Name: XO COMMUNICATIONS, I (E/O)CRC: 7043W97117.SUB, DocName: EX-31.2, Doc: 3, Page: I EDGAR 2Description: Exhibit 31.2
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Exhibit 31.2
CERTIFICATIONS
, William Gan-ahan, certify that:
1. I have reviewed this quarterly report on Form 1O-Q of XO Communications, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make statements made, in light of the circumstances under which such statements were made, not misleading with respect to theperiod covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in allmaterial respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in thisquarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us byothers within those entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant s disclosure controls and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on suchevaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant s mostrecent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financialreporting; and
5. The registrant's other certifying officers and I have disclosed , based on our most recent evaluation of internal control over financialreporting, to the registrant s auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
controls over financial reporting.
Date: May 10, 2004
/s/ William Gan-ahan
William Gan-ahan
Senior Vice President and Acting Chief
Financial Officer
(Principal Financial Officer)
BOWNE INTEGRA TED TYPESEITING SYSTEMSite:-oWNE- OF WASHINGTONName: . ilidNi9'j: N' Lines:
Jj/.l:!.J CRC:.W97117.SUB, DocName: EX-32., Doc: 4
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Exhibit 32.
BOWNE INTEGRA TED TYPESETIING SYSTEM Site: BOWNE OF WASHINGTONName: XOCOMMUNICATIONS, I (E/O)CRC: 39096W97117.SUB, DocName: EX-32., Doc: 4, Page: I EDGAR 2Description: Exhibit 32.
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EXHIBIT 32.
CERTIFICATE PURSUANT TO
18 U.s.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In co n n ectio.n...witb..lhe_QJ.larterly_Rep.orLolLEo rIll-lO=Q-for-th e.-qu arter.\-y-period-ended-Ma1"Gb-3-1,2QQ4-0f~XG-G0mmuni eati 0 ns-,In e;-(th e----
~~- - -
Company ), as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Carl J. Grivner, Chief ExecutiveOfficer of the Company, certify, pursuant to 18 U.c. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002that to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.c. 18m or 780(d)); and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany.
Date: May 10, 2004
/s/ Carl J. Grivner
Carl 1. Grivner
Chief Executive Officer
(Principal Executive Officer)
BOWNE INTEGRA TED TYPESETTING SYSTEM Site: BOWNE OF WASHINGTON
Name: . tiidNiq : N' Lines:'
J5/J:!. CRC:'W97117.SUB, DocName: EX-32.2, Doc: 5
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Exhibit 32.
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11111111111111111111111111111111111111111111111111
- - -
BOWNE INTEGRATED TYPESETTING SYSTEM Site: BOWNE OF WASHINGTON
Name: XO COMMUNICATIONS, I (E/O CRC: 10368
W97117.SUB, OocName: EX-32.2, Doc: 5, Page: I EDGAR 2Description: Exhibit 32.
Phone: BOW W97fi,: o3~foo~ooa Oli04
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EXHIBIT 32.
CERTIFICATE PURSUANT TO
18 U.c. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form lO-Q for the quarterly period ended March 31, 2004 of XO Communications, Inc. (thetompany), as filed with the Securities and Exchange Commission on the date hereof (the "Report"
),
William Garrahan, Senior Vice
President and Acting Chief Financial Officer of the Company, certify, pursuant to 18 U .s.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15( d) of the Securities Exchange Act of 1934 (15 U .c. 78m or 780
(d)); and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: May 10, 2004
Isl William Garrahan
William Garrahan
Senior Vice President and Acting Chief Financial
Officer
(Principal Financial Officer)