UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 
 FORM 10-Q 
  x

          

          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2010 or  o

          

          TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number: 0-30900 
 XO HOLDINGS, INC. (Exact name of registrant as specified in its charter)  Delaware

          

          54-1983517(State or other jurisdiction of incorporation or organization)

          

          (I.R.S. Employer Identification No.)
 13865 Sunrise Valley Drive Herndon, Virginia 20171 (Address of principal executive offices, including zip code) (703) 547-2000 (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 o Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months. Yes o No o Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.  Large accelerated filer o

          

          Accelerated filer oNon-accelerated filer x

          

          Smaller reporting company o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No x The number of shares of common stock outstanding as of May 12, 2010 was 182,075,165.
     TABLE OF CONTENTS XO HOLDINGS, INC.   Table of Contents  PagePART I  FINANCIAL INFORMATIONITEM 1.Financial Statements





1Condensed Consolidated Balance Sheets





1Condensed Consolidated Statements of Operations





2Condensed Consolidated Statements of Cash Flows





3Notes to Condensed Consolidated Financial Statements





4ITEM 2.Managements Discussion and Analysis of Financial Condition and Results of Operations





12ITEM 3.Quantitative and Qualitative Disclosures About Market Risk





19ITEM 4.Controls and Procedures





19PART II  OTHER INFORMATIONITEM 1.Legal Proceedings





19ITEM 1A.Risk Factors





21ITEM 6.Exhibits





21
 i    TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements. XO Holdings, Inc.   Condensed Consolidated Balance Sheets (in thousands, except per share data)  March 31, 2010

          

          December 31, 2009(Unaudited)ASSETSCurrent AssetsCash and cash equivalents

          

          $

          309,837

          

          

          $

          363,159Marketable securities

          

          

          1,400

          

          

          

          1,320Accounts receivable, net of allowance for doubtful accounts of $10,657 and $11,052, respectively

          

          

          133,311

          

          

          

          153,745Prepaid expenses and other current assets

          

          

          33,017

          

          

          

          29,248Total current assets

          

          

          477,565

          

          

          

          547,472Property and equipment, net

          

          

          766,013

          

          

          

          749,930Intangible assets, net

          

          

          45,233

          

          

          

          45,233Other assets

          

          

          64,255

          

          

          

          67,123Total Assets

          

          $

          1,353,066

          

          

          $

          1,409,758LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS DEFICITCurrent LiabilitiesAccounts payable

          

          $

          75,139

          

          

          $

          77,344Accrued liabilities

          

          

          225,111

          

          

          

          220,455Total current liabilities

          

          

          300,250

          

          

          

          297,799Deferred revenue, less current portion

          

          

          82,125

          

          

          

          82,400Other liabilities

          

          

          42,296

          

          

          

          43,331Total Liabilities

          

          

          424,671

          

          

          

          423,530Class A convertible preferred stock

          

          

          216,874

          

          

          

          255,011Class B convertible preferred stock

          

          

          625,644

          

          

          

          614,912Class C perpetual preferred stock

          

          

          230,075

          

          

          

          223,958Commitments and contingenciesStockholders DeficitWarrants, common stock and additional paid in capital: par value $0.01 per share, 1,000,000 shares authorized; 182,075 shares issued and outstanding

          

          

          844,262

          

          

          

          864,282Accumulated other comprehensive income

          

          

          1,205

          

          

          

          1,125Accumulated deficit

          

          

          (989,665

          )

          

          

          (973,060

          )Total Stockholders Deficit

          

          

          (144,198

          )

          

          

          (107,653

          )Total Liabilities, Redeemable Preferred Stock and Stockholders Deficit

          

          $

          1,353,066

          

          

          $

          1,409,758
 See accompanying notes to the unaudited condensed consolidated financial statements.
 1    TABLE OF CONTENTS XO Holdings, Inc.   Condensed Consolidated Statements of Operations (Unaudited) (in thousands, except per share data)  Three Months Ended March 31,2010

          

          2009Revenue

          

          $

          369,549

          

          

          $

          377,825Costs and expensesCost of service (exclusive of depreciation and amortization)

          

          

          208,475

          

          

          

          220,004Selling, general and administrative

          

          

          130,634

          

          

          

          129,964Depreciation and amortization

          

          

          44,867

          

          

          

          43,396Loss on disposal of assets

          

          

          1,908

          

          

          

          1,515Total costs and expenses

          

          

          385,884

          

          

          

          394,879Loss from operations

          

          

          (16,335

          )

          

          

          (17,054

          )Interest income (expense), net

          

          

          25

          

          

          

          3,121Investment gain, net

          

          

          

          

          

          

          9,757Net loss before income taxes

          

          

          (16,310

          )

          

          

          (4,176

          )Income tax expense

          

          

          (295

          )

          

          

          (292

          )Net loss

          

          

          (16,605

          )

          

          

          (4,468

          )Preferred stock accretion

          

          

          (20,155

          )

          

          

          (19,508

          )Net loss allocable to common shareholders

          

          $

          (36,760

          )

          

          $

          (23,976

          )Net loss allocable to common shareholders per common share, basic and diluted

          

          $

          (0.20

          )

          

          $

          (0.13

          )Weighted average shares, basic and diluted

          

          

          182,075

          

          

          

          182,075
 See accompanying notes to the unaudited condensed consolidated financial statements.
 2    TABLE OF CONTENTS XO Holdings, Inc.   Condensed Consolidated Statements of Cash Flows(Unaudited) (in thousands)  Three Months Ended March 31,2010

          

          2009OPERATING ACTIVITIES:Net loss

          

          $

          (16,605

          )

          

          $

          (4,468

          )Adjustments to reconcile net loss to net cash provided by operating activitiesDepreciation and amortization

          

          

          44,867

          

          

          

          43,396Provision for doubtful accounts

          

          

          4,115

          

          

          

          3,278Stock-based compensation

          

          

          138

          

          

          

          253Gain from investments

          

          

          

          

          

          

          (9,757

          )Loss on disposal of assets

          

          

          1,908

          

          

          

          1,515Changes in assets and liabilitiesAccounts receivable

          

          

          16,319

          

          

          

          3,615Other assets

          

          

          (901

          )

          

          

          (8,092

          )Accounts payable

          

          

          (913

          )

          

          

          967Accrued liabilities

          

          

          4,567

          

          

          

          1,946Net cash provided by operating activities

          

          

          53,495

          

          

          

          32,653INVESTING ACTIVITIES:Capital expenditures

          

          

          (64,188

          )

          

          

          (40,314

          )Proceeds from fixed asset sales

          

          

          37

          

          

          

          45Proceeds from the sale of available-for-sale marketable securities

          

          

          

          

          

          

          34,781Net cash used in investing activities

          

          

          (64,151

          )

          

          

          (5,488

          )FINANCING ACTIVITIES:Redemption of preferred stock

          

          

          (41,445

          )

          

          

          Payments on capital leases

          

          

          (1,221

          )

          

          

          (274

          )Net cash used in financing activities

          

          

          (42,666

          )

          

          

          (274

          )Net increase (decrease) in cash and cash equivalents

          

          

          (53,322

          )

          

          

          26,891Cash and cash equivalents, beginning of period

          

          

          363,159

          

          

          

          256,747Cash and cash equivalents, end of period

          

          $

          309,837

          

          

          $

          283,638SUPPLEMENTAL DATA:Cash paid for interest

          

          $

          364

          

          

          $

          393Cash paid for income taxes

          

          $

          48

          

          

          $

          58
 See accompanying notes to the unaudited condensed consolidated financial statements.
 3    TABLE OF CONTENTS XO Holdings, Inc.   Notes to Condensed Consolidated Financial Statements (Unaudited) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Organization XO Holdings, Inc. together with its consolidated subsidiaries (XOH or the Company) is a leading facilities-based, competitive telecommunications services provider that delivers a comprehensive array of telecommunications services to the telecommunications provider, business and government markets. The Company uses its nationwide IP network, extensive local metropolitan networks and broadband wireless facilities to offer a broad portfolio of services. b. Basis of Presentation The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual consolidated financial statements prepared according to U.S. generally accepted accounting principles (GAAP) have been condensed or omitted, although the Company believes the disclosures are adequate to prevent the information presented from being misleading. As a result, the accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated
financial statements of the Company included in its Annual Report on Form 10-K for the year ended December 31, 2009 (the 2009 Annual Report). In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring entries) considered necessary to present fairly the financial position, results of operations and cash flows for the periods presented. Operating results for any interim period are not necessarily indicative of results that may be expected for any subsequent interim period or for the year ended December 31, 2010. The Companys condensed 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 transactions among consolidated entities have been eliminated. The carrying amounts reported in our condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and other liabilities approximate fair value due to the immediate to short-term maturity of these financial instruments. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ materially from these estimates. Managements estimates and assumptions are evaluated on an ongoing basis and are based on historical experience, current conditions and available information. Significant items subject to such estimates and assumptions
include: estimated customer life related to revenue recognition; estimated collection of accounts receivable; accrued balances and disputed amounts payable for cost of service provided by other telecommunication carriers; liability estimates related to loss contingencies, asset retirement obligations and accruals for underutilized space; estimated useful lives and recoverability of long-lived fixed assets and intangible assets; and valuation of preferred stock. c. Transaction Based Taxes and Other Surcharges The Company records certain transaction based taxes and other surcharges on a gross basis. For the three months ended March 31, 2010 and 2009, revenue and expenses included taxes and surcharges of $3.1 million and $3.6 million, respectively. d. Accounts Receivable The Companys principal concentration of credit risk is accounts receivable. Although the Companys accounts receivable are geographically dispersed and include numerous customers in many different industries, the receivables from other telecommunications service providers represented 29% of our consolidated receivables as of March 31, 2010. XOH generally does not require collateral to secure its receivable balances.
 4    TABLE OF CONTENTS XO Holdings, Inc.   Notes to Condensed Consolidated Financial Statements (Unaudited) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES   (continued) e. New Accounting Pronouncements In September 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2009-13, Revenue Recognition (Topic) 605  Multiple Deliverable Revenue Arrangements.The amendment addresses how revenue should be allocated to separate elements of a multiple deliverable revenue arrangement which could impact the timing of revenue recognition. The amendment will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. e. Reclassifications Certain prior period amounts have been reclassified to conform to current period presentation. 2. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) includes the Companys net loss, as well as net unrealized gains and losses on available-for-sale investments. The following table summarizes the Companys calculation of comprehensive income (loss) (in thousands):  Three Months Ended March 31,2010

          

          2009Net loss

          

          $

          (16,605

          )

          

          $

          (4,468

          )Other comprehensive income:Net unrealized gain on investments

          

          

          80

          

          

          

          14,382Comprehensive income (loss)

          

          $

          (16,525

          )

          

          $

          9,914
 3. MARKETABLE SECURITIES The Companys marketable securities consist of equity securities that are classified as available-for-sale and are stated at estimated fair value based upon available market information. The estimated fair values of our marketable securities are as follows (in thousands):  Quoted Prices in Active Markets(Level 1)At March 31, 2010

          

          At December 31, 2009Available-for-sale marketable equity securities

          

          $

          1,400

          

          

          $

          1,320
 Unrealized gains and losses are computed on the basis of average cost and are reported as a separate component of accumulated other comprehensive income (loss) in stockholders deficit until realized. No marketable securities were sold during the quarter ended March 31, 2010. Proceeds from the sales of marketable securities totaled $29.0 million for the three months ended March 31, 2009. The gross realized gains related to sales of marketable securities were $3.9 million for the three months ended March 31, 2009. There were $1.2 million and $1.1 million in unrealized holding gains related to equity securities at March 31, 2010 and December 31, 2009, respectively. These unrealized gains were recorded on the Consolidated Balance Sheets as a separate component of stockholders deficit. The Company recognized net investment gains of $9.8 million for the three months ended March 31, 2009. The net investment gain for the three months ended March 31, 2009 resulted from $5.8 million of cash received from a distribution related to a legal matter regarding the Companys holding of certain debt securities and $3.9 million from realized gains on the sale of debt
securities.
 5    TABLE OF CONTENTS XO Holdings, Inc.   Notes to Condensed Consolidated Financial Statements (Unaudited) 4. PROPERTY AND EQUIPMENT Property and equipment consisted of the following (in thousands):  March 31,2010

          

          December 31,2009Telecommunications networks and acquired bandwith

          

          $

          1,414,774

          

          

          $

          1,376,254Furniture, fixtures, equipment and other

          

          

          422,561

          

          

          

          410,0631,837,335

          

          

          

          1,786,317Less: accumulated depreciation

          

          

          (1,154,764

          )

          

          

          (1,112,171

          )682,571

          

          

          

          674,146Construction-in-progress, parts and equipment

          

          

          83,442

          

          

          

          75,784Property and equipment, net

          

          $

          766,013

          

          

          $

          749,930
 Depreciation and amortization expense was $44.9 million and $43.4 million for the three months ended March 31, 2010 and 2009, respectively. Assets classified as construction-in-progress, parts and equipment are not being depreciated as they have not yet been placed in service. During the three months ended March 31, 2010 and 2009, the Company capitalized interest on construction costs of $0.3 million and $0.4 million, respectively. 5. REDEEMABLE PREFERRED STOCK As of March 31, 2010, there were 200,000,000 authorized shares of redeemable preferred stock. The table below shows shares of preferred stock issued and outstanding:  March 31, 2010

          

          December 31, 2009Class A convertible preferred stock

          

          

          3,096,549

          

          

          

          3,695,686Class B convertible preferred stock

          

          

          555,000

          

          

          

          555,000Class C perpetual preferred stock

          

          

          225,000

          

          

          

          225,000
 On January 15, 2010, the Company redeemed and retired all 599,137 shares of Class A preferred stock held by entities unaffiliated with the Chairman for cash at a redemption price equal to 100% of the aggregate liquidation preference of $41.4 million as of such date. As of March 31, 2010, ACF Industries Holding Corp. (ACF Holding) was the holder of 100% of the remaining 3,096,549 shares of Class A preferred stock. In accordance with an agreement entered into between the Company and ACF Holding in 2009 extending until April 15, 2010 the date by which the Company would be required to redeem the shares of Class A preferred stock held by ACF
Holding, on April 15, 2010, the Company redeemed and retired the outstanding shares of Class A preferred stock held by ACF Holding for cash at a redemption price equal to 100% of the aggregate liquidation preference for such shares of $217.4 million as of such date. 6. EARNINGS (LOSS) PER SHARE Net loss per common share, basic is computed by dividing net loss allocable to common shareholders by the weighted average common shares outstanding during the period. Net loss per common share, diluted is calculated by dividing net loss allocable to common shareholders by the weighted average common shares outstanding adjusted for the dilutive effect of common stock equivalents related to stock options, warrants and preferred stock. In periods where the assumed common share equivalents for stock options, warrants and preferred stock are anti-dilutive, they are excluded from the calculation of diluted weighted average shares.
 6    TABLE OF CONTENTS XO Holdings, Inc.   Notes to Condensed Consolidated Financial Statements (Unaudited) 6. EARNINGS (LOSS) PER SHARE   (continued) The table below details the anti-dilutive items that were excluded in the computation of net loss per common share, diluted (in millions):  Three Months EndedMarch 31,2010

          

          2009Stock options

          

          

          7.4

          

          

          

          8.8Warrants

          

          

          

          

          

          

          23.7Class A preferred stock

          

          

          46.6

          

          

          

          57.1Class B convertible preferred stock

          

          

          412.4

          

          

          

          388.1
 7. INCOME TAXES The provision for income taxes for the three months ended March 31, 2010 and 2009 of $0.3 million and $0.3 million, respectively, is for current taxes. The Company has a full valuation against its net deferred tax assets. The current provision for income taxes consists primarily of state taxes computed based on modified gross receipts or gross margin but designated as income tax by the FASB due to the various components of the calculation and interest on certain state income tax positions. Open Tax Years The statutes of limitation for the Companys U.S. federal income tax return and certain state income tax returns including California, New Jersey, Texas, and Virginia remain open for the tax years 2005 through 2009. 8. RELATED PARTY TRANSACTIONS Various entities controlled by the Chairman of the Companys Board of Directors and the Companys majority stockholder (the Chairman) hold the following interests in the Company:  At March 31, 2010

          

          At December 31, 2009(1)Outstanding Common Stock

          

          

          Greater than 50%

          

          

          

          Greater than 50%Series A, B and C Warrants(2)

          

          

          NA

          

          

          

          Greater than 40%Class A Convertible Preferred Stock(3)

          

          

          100%

          

          

          

          Greater than 80%Class B Convertible Preferred Stock

          

          

          100%

          

          

          

          100%Class C Perpetual Preferred Stock

          

          

          100%

          

          

          

          100%
  (1)

          As reported in the January 4, 2010 Form 4 for the Chairman and other parties to such joint filing, and the January 4, 2010, Amendment No. 23 to Schedule 13D filed by the Chairman and other parties to such joint filing. (2)

          The terms of the Companys Series A, B and C Warrants provided that all such unexercised warrants expired on January 15, 2010. (3)

          The original terms of the Companys Class A preferred stock required that by January 15, 2010, the Company would redeem in cash and in a manner provided for therein all of the shares of Class A preferred stock then outstanding at a redemption price equal to 100% of its liquidation preference. On January 15, 2010, the Company redeemed and retired all 599,137 shares of Class A preferred stock held by entities unaffiliated with the Chairman for cash at a redemption price equal to 100% of the aggregate liquidation preference of $41.4 million as of such date. As of March 31, 2010, ACF Holding was the holder of 100% of the remaining 3,096,549 shares of Class A preferred stock. In accordance with an agreement entered into between the Company and ACF Holding in 2009 extending until April 15, 2010 the date by which the Company would be required to redeem the shares of Class A preferred stock held
 7    TABLE OF CONTENTS XO Holdings, Inc.   Notes to Condensed Consolidated Financial Statements (Unaudited) 8. RELATED PARTY TRANSACTIONS   (continued) by ACF Holding, on April 15, 2010, the Company redeemed and retired the outstanding shares of Class A preferred stock held by ACF Holding for cash at a redemption price equal to 100% of the aggregate liquidation preference for such shares of $217.4 million as of such date. As a result of his ownership of a majority of the Companys common stock and voting preferred stock, the Chairman can elect all of the Companys directors. Currently, three employees of entities controlled by the Chairman are members of the Companys board of directors and certain of its committees. Under applicable law and the Companys certificate of incorporation and by-laws, certain actions cannot be taken without the approval of holders of a majority of the Companys voting stock, including mergers, acquisitions, the sale of substantially all of the Companys assets and amendments to the Companys certificate of
incorporation and by-laws. Icahn Sourcing LLC (Icahn Sourcing) is an entity formed and controlled by the Chairman in order to leverage the potential buying power of a group of entities which the Chairman either owns or with which he otherwise has a relationship in negotiating with a wide range of suppliers of goods, services, and tangible and intangible property. The Company is a member of the buying group and, as such, is afforded the opportunity to purchase goods, services and property from vendors with whom Icahn Sourcing has negotiated rates and terms. Icahn Sourcing does not guarantee that the Company will purchase any goods, services or property from any such
vendors and the Company is under no legal obligation to do so. The Company does not pay Icahn Sourcing any fees or other amounts with respect to the buying group arrangement. The Company has purchased a variety of goods and services as a member of the buying group at prices and on terms that it believes are more favorable than those which would be achieved on a stand-alone basis. 9. COMMITMENTS AND CONTINGENCIES The Company is involved in lawsuits, claims, investigations and proceedings consisting of commercial, securities, tort and employment matters, which arise in the ordinary course of business. The Company accrues its best estimates of required provisions for any such matters when the loss is probable and the amount of loss can be reasonably estimated. The Company reviews these provisions at least quarterly and adjusts these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, management believes
that the Company 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 and adversely affected in any particular period by the unfavorable resolution of one or more of these contingencies. Legal costs related to litigation in these matters are expensed as incurred. Metro Nashville The Metropolitan Government of Nashville and Davidson County, Tennessee (Metro) filed a complaint against XO Tennessee, Inc. (XOT), now XO Communications Services Inc., successor in interest to XOT, on March 1, 2002, before the Tennessee State Chancery Court for Davidson County, Tennessee. Metro sought declaratory judgment that, under Metros franchise ordinance and the franchise agreement executed by XOTs predecessor, US Signal, on October 18, 1994, XOT (a) owed franchise fees in the amount of five percent of gross revenues from 1997 to current, and (b) was contractually obligated to allow Metro access and use of
four dark fibers on XOTs network. On February 28, 2003, XOT answered the complaint contending that the franchise fee and dark fiber compensation provisions violated Tennessee and federal law. XOT also filed a counterclaim seeking to recover all sums paid to Metro under the invalid ordinance and to recover the value of the free fiber that Metro has been using and continues to use without payment. In an amended complaint, Metro added an alternative basis for relief, namely legal or equitable relief up to its costs allocated to XOT for maintaining, managing, and owning the rights-of-way. Based on a study conducted by Metro (received by the Company in November 2006) and the length of the relevant period of this case, to date, Metros costs, as calculated by Metro for the relevant period and allocated by Metro to XOT, would likely exceed
 8    TABLE OF CONTENTS XO Holdings, Inc.   Notes to Condensed Consolidated Financial Statements (Unaudited) 9. COMMITMENTS AND CONTINGENCIES   (continued) $20.0 million. On August 9, 2007, XOT filed a motion for judgment on the pleadings. On February 25, 2008, the court denied XOTs motion. On March 26, 2008, XOT filed a request with the court seeking permission to file an interlocutory appeal of the courts denial. On July 16, 2009, the court granted XOTs Motion for Interlocutory Appeal. However, on October 27, 2009, the appellate court denied XOTs petition for interlocutory appeal. The parties will coordinate the resumption of litigation with the trial court and are exploring settlement opportunities.However, on April 16, 2010, Metro filed a Motion for Judgment on
the Pleadings. The effect of this case is not expected to be material to the Companys financial position, results of operations, or cash flows. Nashville Electric Service On June 5, 2008, the Nashville Electric Service, part of Metro, (NES) served XO Communication Services, Inc. (XOCS) with a complaint and a motion for temporary injunction filed in Chancery Court, Davidson County, Tennessee. The dispute between NES and XOCS is based on a disagreement regarding the legality and enforceability of certain provisions of a fiber optics license agreement, commonly referred to as a pole attachment agreement previously signed by NES and XOCS. The pole attachment agreement between NES and XOCS contains a provision that states XOCS would provide certificates of title to six strands of optic
fiber to NES in the Companys fiber optic bundles on poles and on conduits controlled by NES. The pole attachment agreement also contains a gross revenue provision that provides that XOCS would pay to NES either four percent of XOCS gross revenue derived from rent or sale of fiber optic network services provided on XOCS fiber network in Nashville, or a set per-pole fee, whichever is greater, based upon XOCS financial statements, which per the agreement XOCS is also allegedly obligated to provide to NES. Based upon certain court decisions in Tennessee, XOCS had previously informed NES that XOCS believed that the gross revenue and title to six strands of fiber provisions of the pole attachment agreement were contrary to law and invalid and therefore unenforceable. XOCS then invoiced NES for the use of the six fiber optic strands. XOCS has not provided title to the six strands of optic fiber (although XOCS allows NES to utilize six strands of optic fiber
for its fiber network). XOCS has not provided financial statements to NES, and while XOCS is currently up to date on the payment of pole attachment fees, it has not paid NES under the gross revenue provisions. The pole attachment expired in January of 2005, and NES has refused to renegotiate the terms for a new pole attachment agreement, and has attempted to treat the expired agreement as extending from month-to-month, although no such provisions exist in the pole attachment agreement. The NES Complaint of June 5, 2008 alleges breach of contract, unjust enrichment, and violation of the Tennessee Consumer Protection Act. The complaint and the motion for temporary injunctive relief also seeks specific performance of the terms of the pole attachment agreement in the form of XOCS providing certificates of title to the six strands of optic fiber, an accounting for a determination of amounts allegedly due under the gross revenue provision, and injunctive relief in the form of
non-interference by XOCS with the right of NES to continue to utilize the six strands of optic fiber. On June 23, 2008, XOCS filed a notice of removal to federal court (the US District Court, Middle District of Tennessee). On June 30, 2008, NES filed a motion to remand the case back to state court but that motion was denied by the Court. On July 7, 2008, XOCS filed its answer and counterclaim in federal court. The XOCS counterclaim alleges that compensation paid by XOCS to NES has been in excess of fair and reasonable compensation for access to NES poles and conduit, in violation of the Communications Act, the US and Tennessee Constitutions (unconstitutional taking), and resulted in unjust enrichment to NES. On July 24, 2008, NES filed a partial motion to dismiss certain portions of XOCS counterclaim. On January 7, 2009, the Court denied NES motion to dismiss. In July of 2009, the parties renewed settlement discussions. On January 27, 2010, the parties signed a
settlement agreement. On May 7, 2010, the parties filed a joint motion to dismiss the case with prejudice.
 9    TABLE OF CONTENTS XO Holdings, Inc.   Notes to Condensed Consolidated Financial Statements (Unaudited) 9. COMMITMENTS AND CONTINGENCIES   (continued) City of Memphis Franchise Fees XOH has a Right of Way (ROW) franchise agreement with the City of Memphis (the City) for XOH fiber. The ROW franchise agreement, among other provisions, states that, as payment for the ROW, XOH was to pay a percent of its gross receipts and provide dark fiber to the City. On July 12, 2004, the Tennessee Court of Appeals, in BellSouth vs. City of Memphis found that the Citys franchise fee structure violated state law and determined that any fee imposed by a city acting pursuant to its police powers must bear a reasonable relation to the cost to the city in providing use of the rights-of-way. XOH has
refused to pay the Citys gross receipts based franchise fees based on this court ruling. Further, XOH claims that the City owes XOH for the use of the dark fiber XOH provided to the City because this also amounted to an improper payment imposed upon XOH by the City under its ROW franchise agreement that was violative of state law. The City claims that XOH owes the City some amount for the use of the Citys rights-of-way. No litigation has been filed to date by either the City or XOH. An estimated loss, if any, associated with this case is not known at this time. R2 Derivative Litigation On April 28, 2009, R2 Investments, LDC filed a complaint in the Supreme Court of the State of New York (New York County) naming individual members of the Companys Board of Directors and certain entities controlled by Carl C. Icahn, the Chairman of the Companys Board of Directors and majority shareholder, as defendants and naming the Company as the nominal defendant in connection with derivative claims. The plaintiff alleges that the defendants breached fiduciary duties in connection with the financing transaction consummated in July 2008 and other related matters. The complaint seeks equitable relief as well as damages in an unspecified
amount. On July 24, 2009, the Defendants filed a Motion to Dismiss the Complaint, which was denied on December 10, 2009. On April 23, 2010, the defendants filed an answer to the amended complaint. Discovery in this case is ongoing. The effect of this case on the Company, if any, is not known at this time. Hillenmeyer Derivative Litigation On July 21, 2009, an XOH shareholder, Don Hillenmeyer, filed under seal in the Delaware Court of Chancery a Complaint titled Verified Derivative and Class Action Complaint. On August 6, 2009, XOH filed a redacted version of the Complaint in the Chancery Court. The Complaint names as defendants individual members of the Companys Board of Directors and ACF Holding, an entity controlled by Carl C. Icahn, the Chairman of our Board of Directors and majority shareholder, and names XOH as the nominal defendant. The Complaint challenges, among other things, ACF Holdings then-recent proposal to acquire all of the outstanding XOH common
shares which it does not already own, and alleges various breaches of fiduciary duties. The parties have entered into a Stipulation and Order Extending Time to Answer and agreed to stay proceeding with the case until Plaintiff filed an Amended Complaint. On December 15, 2009, based on plaintiffs motion, the court entered an order dismissing that portion of the suit that sought to enjoin ACF Industries Holding Corp.s July 9, 2009 proposal to acquire all of the shares of XO common stock that ACF and its affiliates did not already own. On January 7, 2010 the Defendants filed a motion to stay or dismiss the remaining portion of the suit in favor of the NY litigation (R-2 v. Icahn et al). On January 26, 2010, Plaintiff filed an Amended Complaint. On February 18, 2010, Defendants filed a supporting brief for its motion to dismiss. On March 26, 2010, plaintiff filed its answering brief to defendants motion to dismiss or stay. Defendants reply brief was filed on April 13,
2010. The effect of this case on the Company, if any, is not known at this time.
 10    TABLE OF CONTENTS XO Holdings, Inc.   Notes to Condensed Consolidated Financial Statements (Unaudited) 9. COMMITMENTS AND CONTINGENCIES   (continued) Other Contingencies The Universal Service Administrative Company is in the process of auditing the Companys compliance with universal service contribution reporting obligations in connection with services provided during 2007. The Company believes that it complied with applicable Federal Communications Commission rules in all material respects; however, an adverse audit determination could result in significant retroactive assessment of universal service fund contribution liability and associated interest, penalties, fines or forfeitures. An estimated loss, if any, associated with this ongoing audit is not known at this time.
 11    TABLE OF CONTENTS Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations. The Company uses the terms we, us, and our, to describe XOH and its subsidiaries within this Quarterly Report on Form 10-Q. This managements discussion and analysis of financial condition and results of operations is intended to provide readers with an understanding of our past performance, our financial condition and our prospects. This discussion should be read in conjunction with our 2009 Annual Report and our condensed consolidated financial statements, including the notes thereto, appearing in Part 1, Item 1 of this Quarterly Report. Cautionary Language Concerning Forward-Looking Statements The statements contained in this Quarterly Report on Form 10-Q that are not historical facts are forward-looking statements, as this term is defined in the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. These statements can be identified by the use of words such as anticipate, believe, estimate, expect, plan, intend, can, may, could or other comparable words. Our forward-looking statements are based on currently available operational, financial and competitive information and managements current
expectations, estimates and projections. These forward-looking statements include: 

          expectations regarding revenue, expenses, capital expenditures and financial position in future periods; 

          our ability to broaden our customer reach and expand our market share; 

          pursuit of growth opportunities; 

          the potential need to obtain future financing; and 

          our ability to fund our business plan and pay our financial obligations. Readers are cautioned that these forward-looking statements are only predictions and are subject to a number of both known and unknown risks and uncertainties. Should one or more of these risks or uncertainties materialize, or should our underlying assumptions prove incorrect, our actual results in future periods may differ materially from the future results, performance, and/or achievements expressed or implied in this document. These risks include any failure by us to: 

          generate funds from operations sufficient to meet our cash requirements and execute our business strategy; 

          prevail in our legal and regulatory proceedings; 

          increase the volume of traffic on our network; 

          realize benefits from our enterprise-wide transformation initiative; and 

          achieve and maintain market penetration and revenue levels given the highly competitive nature of the telecommunications industry. For a detailed discussion of risk factors affecting our business and operations, see Item 1A, Risk Factors in our 2009 Annual Report. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. These forward-looking statements should not be relied on as representing our estimates or views as of any subsequent date. Executive Summary We are a leading nationwide facilities-based competitive telecommunications services provider that delivers a comprehensive array of telecommunications solutions to large enterprises, medium and small business, government customers, telecommunications carriers and service providers, and internet content providers. The items we believe differentiate us from the competition include our nationwide high-capacity network, advanced IP and converged communications services, broadband wireless capabilities, and a responsive, customer-focused orientation. We offer customers a broad range of managed voice, data and IP services in more than 80 metropolitan
markets across the United States.
 12    TABLE OF CONTENTS Total revenue for the first quarter of 2010 was $369.5 million, a decrease of $8.3 million, or 2%, compared to the same period last year. This decrease primarily resulted from targeted wholesale long-distance services price increases implemented to improve margins on selected routes. On July 9, 2009, we purchased and retired 304,314 shares of our Class A preferred stock from entities unaffiliated with our Chairman at an aggregate purchase price of $18.4 million. On January 15, 2010, we redeemed and retired all remaining 599,137 shares of Class A preferred stock held by entities unaffiliated with our Chairman for cash at a redemption price equal to 100% of the aggregate liquidation preference of $41.4 million as of such date. As of March 31, 2010, ACF Holding was the holder of 100% of the remaining 3,096,549 shares of Class A preferred stock. In accordance with an agreement entered into between the Company and ACF Holding in 2009
extending until April 15, 2010 the date by which the Company would be required to redeem the shares of Class A preferred stock held by ACF Holding, on April 15, 2010, we redeemed and retired the outstanding shares of Class A preferred stock held by ACF Holding for cash at a redemption price equal to 100% of the aggregate liquidation preference for such shares of $217.4 million as of such date. We believe that to remain competitive with much larger telecom and cable companies, we will require significant additional capital expenditures to enhance and operate our fiber network. We believe that cash on hand and operating cash flow will be sufficient to finance our operational needs for at least the next 12 months. However, in order to maintain our competitive position, we intend to raise additional capital and continue to explore various alternatives to obtain additional capital. We continue to believe that these alternatives should not include an issuance of high yield debt because such an issuance would be deleterious to XOH for the
following reasons: 1) the high cost of such debt would negatively affect our ability to compete in the current highly competitive telecommunications environment; and 2) the burdensome restrictive covenants associated with such debt would impair our ability to pursue potential strategic investments and to take advantage of other opportunities which may be necessary for us to compete in such environment. We believe that certain opportunities exist today in the highly competitive telecommunications industry that may not recur such as, but not limited to, the acquisition of other telecommunications service providers. For all the above reasons, we intend to seek to raise appropriate levels of capital in the near future. In 2008, we commenced an enterprise-wide transformation initiative intended to enhance shareholder value through focusing on improving service delivery, accelerating revenue growth, and reducing operating costs. We expect continued realization of these initiatives throughout 2010 and beyond. In conjunction with this transformation initiative, we intend to continue to invest in new network infrastructure, develop new service offerings and continue expanding our customer base in high-growth markets. We continue to monitor the impact of macro-economic conditions on our business. Potential negative aspects include a general slowdown in the demand for telecommunications services, delayed IT and other projects that have telecommunications needs, elongated sales cycles on the part of our customers, higher involuntary churn, and delayed payments from customers. Critical Accounting Policies and Estimates Our unaudited condensed consolidated financial statements are based on the selection of accounting policies and the application of significant accounting estimates, some of which require management to make significant assumptions. We believe that some of the more critical estimates and related assumptions that affect our financial condition and results of operations are in the areas of revenue recognition, cost of service, allowance for uncollectible accounts, assessment of loss contingencies and property and equipment. For more information on critical accounting policies and estimates, see Item 7, Managements Discussion and Analysis of
Financial Condition and Results of Operations, of our 2009 Annual Report. We have discussed the application of these critical accounting policies and estimates with the Audit Committee of our Board of Directors. During the three months ended March 31, 2010, we did not change or adopt any new accounting policies that had a material effect on our consolidated financial condition or results of operations.
 13    TABLE OF CONTENTS Results of Operations The following table contains certain data from our unaudited condensed consolidated statements of operations (dollars in thousands):  Three Months Ended March 31,% ofConsolidatedRevenue

          

          

          

          % ofConsolidatedRevenue

          

          Change2010

          

          2009

          

          Dollars

          

          PercentRevenue

          

          $

          369,549

          

          

          

          100

          %

          

          $

          377,825

          

          

          

          100

          %

          

          $

          (8,276

          )

          

          

          -2

          %Costs and expenses:Cost of service*

          

          

          208,475

          

          

          

          56

          %

          

          

          220,004

          

          

          

          59

          %

          

          

          (11,529

          )

          

          

          -5

          %Selling, general and administrative

          

          

          130,634

          

          

          

          35

          %

          

          

          129,964

          

          

          

          35

          %

          

          

          670

          

          

          

          1

          %Depreciation and amortization

          

          

          44,867

          

          

          

          12

          %

          

          

          43,396

          

          

          

          11

          %

          

          

          1,471

          

          

          

          3

          %Loss on disposal of assets

          

          

          1,908

          

          

          

          1

          %

          

          

          1,515

          

          

          

          0

          %

          

          

          393

          

          

          

          26

          %Total costs and expenses

          

          

          385,884

          

          

          

          104

          %

          

          

          394,879

          

          

          

          105

          %

          

          

          (8,995

          )

          

          

          -2

          %Loss from operations

          

          $

          (16,335

          )

          

          

          -4

          %

          

          $

          (17,054

          )

          

          

          -5

          %

          

          $

          (719

          )

          

          

          -4

          %
  *

          exclusive of depreciation and amortization Revenue Total revenue for the three months ended March 31, 2010 decreased 2% compared to the three months ended March 31, 2009. For 2010, we still anticipate that our full year revenue will increase relative to 2009. Based on continued investments which leverage next-generation IP-based technologies, we expect revenue from Legacy/TDM services, as a percentage of our total revenue, will continue to decline throughout 2010 as our sales and marketing efforts continue to focus on next-generation IP-based solutions. The projections for 2010 will be sensitive to influences in a challenging macro-economic environment and regulatory climate changes. Revenue was earned from services provided in the following categories (dollars in thousands):  Three Months Ended March 31,% ofRevenue

          

          

          

          % ofRevenue

          

          Change2010

          

          2009

          

          Dollars

          

          PercentBroadband

          

          $

          209,784

          

          

          

          57

          %

          

          $

          189,455

          

          

          

          50

          %

          

          $

          20,329

          

          

          

          11

          %Integrated/Voice

          

          

          55,926

          

          

          

          15

          %

          

          

          73,747

          

          

          

          20

          %

          

          

          (17,821

          )

          

          

          -24

          %Legacy/TDM services

          

          

          103,839

          

          

          

          28

          %

          

          

          114,623

          

          

          

          30

          %

          

          

          (10,784

          )

          

          

          -9

          %Total revenue

          

          $

          369,549

          

          

          

          100

          %

          

          $

          377,825

          

          

          

          100

          %

          

          $

          (8,276

          )

          

          

          -2

          %
 Broadband.  During the three months ended March 31, 2010, we experienced continued growth in market demand for telecommunications services utilizing next generation Broadband technologies as evidenced by the 11% increase in revenue from our Broadband services compared to the year-ago period. This increase principally resulted from improvements in the IP VPN, IP Flex, Ethernet, and Dedicated Internet Access services, which increased $18.9 million, or 21%, compared to the year-ago period. The increases in IP VPN and Ethernet were driven by strong demand for secure, low-cost IP access and the increase in IP Flex was due to our continued
focus to move customers from TDM-based solutions. Offsetting the improvements in Broadband revenue was a $3.5 million decline in wholesale Carrier VoIP termination due to targeted price increases implemented to improve margins on selected routes. Integrated/Voice.  Integrated/Voice revenue decreased by $17.8 million, or 24%, during the three months ended March 31, 2010, compared to the year-ago period. This category contains more mature bundled data and voice offerings as well as traditional Carrier Long Distance Termination (CLDT). In addition to the continuing demand shift from older integrated voice and data offerings to Broadband-enabled solutions, CLDT decreased by $4.6 million compared to the year-ago period. The decline in CLDT was also due to targeted price increases implemented to improve margins on selected routes.
 14    TABLE OF CONTENTS Legacy/TDM Services.  For the three months ended March 31, 2010, revenue from our Legacy/TDM services category decreased compared to the three months ended March 31, 2009 due primarily to declines in our legacy voice products including retail long distance usage. Our Legacy/TDM services comprise approximately one-third of our installed customer base and generate a considerable percentage of our revenue. We believe certain Legacy/TDM services are an important part of our overall service mix; however, we expect revenue from Legacy/TDM services to decline as a percentage of our total revenue during 2010 as our sales and marketing efforts
continue to primarily focus on next-generation Broadband solutions. Cost of Service Our cost of service (COS) includes telecommunications services costs, network operations costs and pass-through taxes. Telecommunication services costs include expenses directly associated with providing services to customers, such as the cost of connecting customers to our network via leased facilities, leasing components of network facilities and interconnect access and transport services paid to third-party service providers. Network operations include costs related to network repairs and maintenance, costs to maintain rights-of-way and building access facilities, and certain functional costs related to engineering, network, system
delivery, field operations and service delivery. Pass-through taxes are taxes we are assessed related to selling our services which we pass through to our customers. COS excludes depreciation and amortization expense. The following table summarizes our cost of service by component (dollars in thousands):  Three Months Ended March 31,% ofRevenue

          

          

          

          % ofRevenue

          

          Change2010

          

          2009

          

          Dollars

          

          PercentTelecommunications services

          

          $

          144,992

          

          

          

          39

          %

          

          $

          158,888

          

          

          

          43

          %

          

          $

          (13,896

          )

          

          

          -9

          %Network operations

          

          

          49,481

          

          

          

          13

          %

          

          

          49,389

          

          

          

          13

          %

          

          

          92

          

          

          

          0

          %Pass-through taxes

          

          

          14,002

          

          

          

          4

          %

          

          

          11,727

          

          

          

          3

          %

          

          

          2,275

          

          

          

          19

          %Total cost of services

          

          $

          208,475

          

          

          

          56

          %

          

          $

          220,004

          

          

          

          59

          %

          

          $

          (11,529

          )

          

          

          -5

          %
 The COS decrease for the three months ended March 31, 2010 compared to the same period in 2009 was mainly due to the decrease in telecommunications services costs in both dollars and as a percentage of total revenue. The primary factors that contributed to the period over period decrease were $11.1 million of incremental cost savings achieved through planned network optimization projects completed as of March 31, 2010, a $9.0 million incremental decrease in the volume of wholesale long distance usage costs, and a $5.8 million decline in the cost of terminating wholesale long distance usage as a result of traffic terminating to lower cost locations.
These decreases were partially offset by an $8.2 million growth in sales of our IP and data service lines. Additionally, we recognized a $4.1 million less cost benefit from net changes in dispute balances and other accrued liabilities, relative to the year-ago period. Network optimization projects are initiatives and actions we take to reduce our costs associated with providing telecommunications services to our customers. Network optimization projects include rehoming circuits to the nearest network POP, hubbing circuits onto the same transport facility, moving network facilities to lower cost providers, disconnection of capacity from third party providers which is no longer required and other similar actions which vary in type, size and duration. Pass-through taxes increased by 19% for the three months ended March 31, 2010, compared to the year-ago period due to an increase in pass-through tax rates. While we continue to undertake initiatives and actions to reduce the cost of providing service to our customers, we expect the cost savings from network optimization projects to decline in 2010 compared to 2009. Overall, excluding the effects of future dispute settlements, if any, we expect our cost of service as a percentage of revenue for 2010 will remain relatively consistent with 2009.
 15    TABLE OF CONTENTS Selling, General and Administrative Selling, general and administrative expense (SG&A) increased by $0.7 million during the three months ended March 31, 2010 compared to the year-ago period. This increase was primarily due to changes in employee benefit programs. We plan on continuing to invest in the resources and infrastructure necessary to help grow and support our business units during 2010 while continuing to realize cost savings. Our goal during 2010 is to decrease SG&A as a percentage of revenue through implementation of company-wide expense reduction measures. Interest Income (Expense), net Interest income, net for the three months ended March 31, 2009 primarily relates to interest earned on debt securities of approximately $3.9 million and capitalized interest of $0.4 million. These amounts were partially offset by imputed interest under our capital lease agreements and interest on various accruals. As of December 31, 2009, all debt securities were sold; therefore no interest was earned related to these securities during the three months ended March 31, 2010. Investment Gain, Net Investment gain, net for the three months ended March 31, 2009 was related primarily to $5.8 million of cash received from a distribution related to a legal matter regarding our holding of certain debt securities. In addition, we recorded investment gain of $3.9 million from the sale of available-for-sale debt securities. Capital Expenditures  Three Months Ended March 31,

          

          Dollars

          

          % ofRevenue(in thousands)2010

          

          $

          64,188

          

          

          

          17

          %2009

          

          $

          40,314

          

          

          

          11

          %
 Capital expenditures increased for the three months ended March 31, 2010 compared to the year-ago period due to our continued investments made to enhance and expand our current fiber network. We plan to spend between $135.0 million and $165.0 million on additional capital expenditures during the remainder of 2010 for continued investment in our networks and Ethernet and Broadband services, expansion into new markets and continuation of our transformation initiative. Liquidity and Capital Resources Our primary capital needs are to finance the cost of operations, to acquire capital assets in support of our operations and to take advantage of opportunities to enhance our competitive position. We believe that to remain competitive with much larger telecommunications service providers, we will require significant additional capital expenditures to enhance and operate our fiber network. We believe that cash on hand and operating cash flow will be sufficient to finance our operational cash needs for at least the next twelve months. However, in order to maintain our competitive position, we intend to raise additional capital and continue to explore
various alternatives to obtain additional capital. We continue to believe that these alternatives should not include an issuance of high yield debt because such an issuance would be deleterious to XOH for the following reasons: 1) the high cost of such debt would negatively affect our ability to compete in the current highly competitive telecommunications environment; and 2) the burdensome restrictive covenants associated with such debt would impair our ability to pursue potential strategic investments and to take advantage of other opportunities which may be necessary for us to compete in such an environment. We believe that certain opportunities exist today in the highly competitive telecommunications industry that may not recur such as, but not limited to, the acquisition of other telecommunications service providers. For all the above reasons, we intend to seek to raise appropriate levels of capital in the near future.
 16    TABLE OF CONTENTS Redemption of Our 6% Class A Convertible Preferred Stock The terms of our Class A preferred stock provided that on January 15, 2010, we redeem in cash and in a manner provided for therein all of the shares of Class A preferred stock then outstanding at a redemption price equal to 100% of its liquidation preference. On February 5, 2009, ACF Holding, an affiliate of our Chairman, agreed to extend the date on which we would be required to redeem the shares of Class A preferred stock held by ACF Holding (the ACF Holding Shares) from January 15, 2010 to a date no later than April 15, 2010. The extension did not affect the redemption date of any of the shares of Class A preferred stock other than the
ACF Holding Shares. On July 9, 2009, we purchased and retired 304,314 shares of our Class A preferred stock from entities unaffiliated with our Chairman at an aggregate purchase price of approximately $18.4 million. On January 15, 2010, we redeemed and retired all 599,137 shares of Class A preferred stock held by entities unaffiliated with our Chairman for cash at a redemption price equal to 100% of the aggregate liquidation preference of $41.4 million as of such date. As of March 31, 2010, ACF Holding was the holder of 100% of the remaining 3,096,549 shares of Class A preferred stock. In accordance with the agreement with ACF Holding extending the redemption date for
the ACF Holding Shares, on April 15, 2010, we redeemed and retired the ACF Holding Shares for cash at a redemption price equal to 100% of the aggregate liquidation preference for such shares of $217.4 million as of such date. Cash Flow As of March 31, 2010, our balance of cash and cash equivalents was $309.8 million, a decrease of $53.3 million from December 31, 2009. The primary reason for this decrease was redemption of 599,137 shares of Class A preferred stock on January 15, 2010 for an aggregate redemption price of $41.4 million. We invested all of our cash provided by operations in strategic, growth-related capital expenditure investments to grow revenue through enhancing our next generation broadband network. As part of plans to grow our business, during the first quarter of 2010 we continued the investments in our long-haul fiber optic network, customer driven collocation
sites and Ethernet and Broadband services. We expect our growth-related capital expenditures will continue to outpace our cash inflows from operations during 2010. The following table summarizes the components of our cash flows for the three months ended March 31 (in thousands):  2010

          

          2009Cash provided by operating activities

          

          $

          53,495

          

          

          $

          32,653Cash used in investing activities

          

          $

          (64,151

          )

          

          $

          (5,488

          )Cash used in financing activities

          

          $

          (42,666

          )

          

          $

          (274

          )
 Operating Activities.  The increase in cash provided by operating activities for the three months ended March 31, 2010 compared to the same period in 2009 was related primarily to the $20.6 million improvement in working capital cash flow. Investing Activities.  The $58.7 million increase in cash used in investing activities was primarily due to the $34.8 million period-over-period decline in proceeds from the sale of available-for-sale marketable securities. The marketable securities balance at March 31, 2010 was $1.4 million. Therefore, investment gains comparable to those recognized in 2009 are not anticipated for 2010. Also contributing to the increase in cash used in investing activities was a $23.9 million increase in capital expenditures. We plan to spend between $135.0 million and $165.0 million on additional capital expenditures during 2010 for continued
investment in our networks and Ethernet and Broadband services, expansion into new markets and continuation of our transformation initiative. Without these expenditures, we believe it would be difficult to continue to effectively compete against the ever increasing pressures from the other telecommunications service providers. Financing Activities.  The primary use of cash for financing activities for the three months ended March 31, 2010 was the purchase and retirement of a portion of our Class A preferred stock for $41.4 million. In addition, payments on our capital leases were $1.2 million for the three months ended March 31, 2010.
 17    TABLE OF CONTENTS Recently Issued Accounting Pronouncements In September 2009, the FASB issued Accounting Standards Update 2009-13, Revenue Recognition (Topic 605)  Multiple Deliverable Revenue Arrangements. The amendment addresses how revenue should be allocated to separate elements of a multiple deliverable revenue arrangement which could impact the timing of revenue recognition. The amendment will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Regulatory For additional information regarding the regulatory matters affecting our business, see Regulatory subheading in Item 1, Business of our 2009 Annual Report. Other than as discussed below, during the three months ended March 31, 2010, there was no new material activity related to regulatory matters. Additional Federal Regulations Verizon and Qwest Petitions for Forbearance from Unbundling Requirements.  On September 6, 2006 and on April 27, 2007, pursuant to section 10 of the Communications Act of 1934, as amended (the Communications Act), the regulated, wholly owned subsidiaries of Verizon Communications, Inc. (collectively Verizon) and Qwest Corporation (Qwest), respectively, filed petitions for forbearance from loop and transport unbundling obligations imposed by section 251(c), price cap regulations, dominant carrier tariff regulation, computer III requirements, and section 214 dominant carrier regulations. Verizon
sought relief in six markets: Boston; New York; Pittsburgh; Philadelphia; Providence; RI and Virginia Beach, VA. Qwests request included relief in four markets: Denver; Minneapolis; Phoenix and Seattle. On December 4, 2007, the Federal Communications Commission (FCC), in a unanimous decision, found that the current evidence of competition does not satisfy the section 10 forbearance standard with respect to any of Verizons requests. Accordingly, the Commission denied the requested relief in all six MSAs. On January 14, 2008, Verizon filed an appeal in the United States Court of Appeals for the DC Circuit (DC Circuit). On July 25, 2008, in a unanimous decision, the FCC adopted a Memorandum Opinion and Order denying Qwests four petitions in their entirety. On July 29, 2008, Qwest filed an appeal of the FCCs decision with the United States Court of Appeals for the DC Circuit. We intervened in the appeals of the FCCs decisions in the
Verizon and Qwest Forbearance cases in support of the FCC. On June 19, 2009, the DC Circuit ruled on Verizons appeal, remanding to the FCC a very limited question regarding how the FCC reached its rejection of the forbearance petitions  but not overturning the actual decision. While the Qwest appeal is still pending in the DC Circuit, on July 17, 2009, the FCC asked the DC Circuit to remand the pending Qwest appeal back to the FCC so that the issues in the Qwest forbearance case can be decided simultaneously with the remand of the Verizon forbearance case. In addition, on March 24, 2009, Qwest re-filed its petition for forbearance for the Phoenix market, citing greater intermodal competition since July 25, 2008 when the FCC rejected Qwests first petition for forbearance for the Phoenix market. The FCC asked interested parties to file comments and reply on both the Verizon and Qwest remand docket as well as the Qwest re-filed Phoenix petition by September 21,
2009 and October 21, 2009, respectively. On April 15, 2010, the FCC released a Public Notice in the Qwest re-filed Phoenix docket asking parties to comment on a market share based test to analyze whether forbearance should be granted. It is not possible to predict the outcome of, or potential effect upon, our operations of the pending Verizon and Qwest remand docket or Qwests re-filed forbearance petition for the Phoenix market. Additional State and Local Regulation XOCS Complaints Against Verizon.  On April 18, 2008, XO Communications Services, Inc. (XOCS) an indirect subsidiary of XOH, filed a formal complaint against Verizon Pennsylvania Inc. before the Pennsylvania Public Utilities Commission. In the Pennsylvania complaint, XOCS claimed that Verizon was erroneously, and in violation of its tariffs, assessing switched access dedicated tandem trunk port charges on local interconnection trunks used to jointly provide switched access services to third party interexchange carriers. In Pennsylvania, evidentiary hearings have been held, and briefs have been submitted. The Pennsylvania
Commission has not issued a final decision in this matter. However, in an almost identical complaint filed by One Communications (One) and CTC Communications (CTC) against Verizon regarding dedicated tandem trunk port charges on local interconnection trunks, the Pennsylvania PUC on January 28, 2010 adopted the administrative law judges initial decision, which orders Verizon to discontinue the imposition of the disputed charges on One and CTC and orders Verizon to reimburse One and CTC for all
 18    TABLE OF CONTENTS dedicated tandem trunk port charges on local interconnection trunks previously paid by these entities. On December 14, 2009, XOCS filed a formal complaint against Verizon New Jersey before the New Jersey Board of Public Utilities (the BPU). On April, 29, 2010, XOCS filed a notice of voluntary withdrawal to dismiss XOCS complaint against Verizon New Jersey. The outcome of the XOCS complaint proceeding in Pennsylvania is not known at this time. Item 3. Quantitative and Qualitative Disclosures about Market Risk. There have been no material changes in our market risks during the three months ended March 31, 2010. For additional information regarding market risk, see our Annual Report on Form 10-K for the year ended December 31, 2009. Item 4. Controls and Procedures. Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic reports pursuant to the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required financial disclosures. We carried out an evaluation, under the supervision and with the participation of our management including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) or 15d-15(e) as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. Changes in Internal Controls There were no changes in our internal control over financial reporting during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings. XOH is involved in lawsuits, claims, investigations and proceedings consisting of commercial, securities, tort and employment matters, which arise in the ordinary course of its business. XOH believes it has adequate provisions for any such matters. We review these provisions at least quarterly and adjust these provisions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to legal matters pending against us. Nevertheless, it is possible that cash flows or
results of operations could be materially and adversely affected in any particular period by the unfavorable resolution of one or more of these contingencies. Legal costs related to litigation in these matters are expensed as incurred. Nashville Electric Service On June 5, 2008, the Nashville Electric Service, part of Metropolitan Government of Nashville, (NES) served XO Communication Services, Inc. (XOCS) with a complaint and a motion for temporary injunction filed in Chancery Court, Davidson County, Tennessee. The dispute between NES and XOCS is based on a disagreement regarding the legality and enforceability of certain provisions of a fiber optics license agreement, commonly referred to as a pole attachment agreement, previously signed by NES and XOCS. The pole attachment agreement between NES and XOCS contains a provision that states XOCS would provide certificates of
title to six strands of optic fiber to NES in our fiber optic bundles on poles and on conduits controlled by NES. The pole attachment agreement also contains a gross revenue provision that provides
 19    TABLE OF CONTENTS that XOCS would pay to NES either four percent of XOCS gross revenue derived from rent or sale of fiber optic network services provided on XOCS fiber network in Nashville, or a set per-pole fee, whichever is greater, based upon XOCS financial statements, which per the agreement XOCS is also allegedly obligated to provide to NES. Based upon certain court decisions in Tennessee, XOCS had previously informed NES that XOCS believed that the gross revenue and title to six strands of fiber provisions of the pole attachment agreement were contrary to law and invalid and therefore unenforceable. XOCS then invoiced NES for the use of the six
fiber optic strands. XOCS has not provided title to the six strands of optic fiber (although XOCS allows NES to utilize six strands of optic fiber for its fiber network). XOCS has not provided financial statements to NES, and while XOCS is currently up to date on the payment of pole attachment fees, it has not paid to NES under the gross revenue provisions. The pole attachment expired in January of 2005, and NES has refused to renegotiate the terms of the pole attachment agreement, and has attempted to treat the agreement as extending from month-to-month, although no such provisions exist in the pole attachment agreement. The NES Complaint of June 5, 2008 alleges breach of contract, unjust enrichment, and violation of the Tennessee Consumer Protection Act. The complaint and the motion for temporary injunctive relief also seeks specific performance of the terms of the pole attachment agreement in the form of XOCS providing certificates of title to the six strands of optic
fiber, an accounting for a determination of amounts allegedly due under the gross revenue provision, and injunctive relief in the form of non-interference by XOCS with the right of NES to continue to utilize the six strands of optic fiber. On June 23, 2008, XOCS filed a notice of removal to federal court (the US District Court, Middle District of Tennessee). On June 30, 2008, NES filed a motion to remand the case back to state court but that motion was denied by the Court. On July 7, 2008, XOCS filed its answer and counterclaim in federal court. The XOCS counterclaim alleges that compensation paid by XOCS to NES has been in excess of fair and reasonable compensation for access to NES poles and conduit, in violation of the Communications Act, the US and Tennessee Constitutions (unconstitutional taking), and resulted in unjust enrichment to NES. On July 24, 2008, NES filed a partial motion to dismiss certain portions of XOCS counterclaim. On January 7, 2009, the Court denied
NES motion to dismiss. In July of 2009, the parties renewed settlement discussions. On January 27, 2010, the parties signed a settlement agreement. On May 7, 2010, the parties filed a joint motion to dismiss the case with prejudice. R2 Derivative Litigation On April 28, 2009, R2 Investments, LDC filed a complaint in the Supreme Court of the State of New York (New York County) naming individual members of the Companys Board of Directors and certain entities controlled by Carl C. Icahn, the Chairman of the Companys Board of Directors and majority shareholder, as defendants and naming the Company as the nominal defendant in connection with derivative claims. The plaintiff alleges that the defendants breached fiduciary duties in connection with the financing transaction consummated in July 2008 and other related matters. The complaint seeks equitable relief as well as damages in an unspecified
amount. On July 24, 2009 the Defendants filed a Motion to Dismiss the Complaint, which was denied on December 10, 2009. On April 23, 2010, defendants filed an answer to the complaint. Discovery in this case is ongoing. The effect of this case on the Company, if any, is not known at this time. Hillenmeyer Derivative Litigation On July 21, 2009, an XOH shareholder, Don Hillenmeyer, filed under seal in the Delaware Court of Chancery a Complaint titled Verified Derivative and Class Action Complaint. On August 6, 2009, XOH filed a redacted version of the Complaint in the Chancery Court. The Complaint names as defendants individual members of the Companys Board of Directors and ACF Industries Holding Corp. (ACF Holding), an entity controlled by Carl C. Icahn, the Chairman of our Board of Directors and majority shareholder, and names XOH as the nominal defendant. The Complaint challenges, among other things, ACF Holdings then-recent proposal to
acquire all of the outstanding XOH common shares which it does not already own, and alleges various breaches of fiduciary duties. The parties have entered into a Stipulation and Order Extending Time to Answer and agreed to stay proceeding with the case until Plaintiff filed an Amended Complaint. On December 15, 2009, based on plaintiffs motion, the court entered an order dismissing that portion of the suit that sought to enjoin ACF Holdings July 9, 2009 proposal to acquire all of the shares of XO common stock that ACF Holding and its affiliates did not already own. On January 7, 2010 the Defendants filed a motion to stay or dismiss the remaining portion of the suit in favor of the NY litigation (R-2 v. Icahn et al). On January 26, 2010, Plaintiff filed an Amended Complaint. On February 18, 2010, Defendants filed a supporting
 20    TABLE OF CONTENTS brief for its motion to dismiss. On March 26, 2010, plaintiff filed its answering brief to defendants motion to dismiss or stay. Defendants reply brief was filed on April 13, 2010. The effect of this case on the Company, if any, is not known at this time. Item 1A. Risk Factors A description of the risks associated with our business and operations is set forth in Part I, Item 1A Risk Factors of our 2009 Annual Report. There have been no material changes in our risks from such description. Item 6. Exhibits.  3.1

          

          Certificate of Incorporation of XO Holdings, Inc., as filed with the Secretary of State of the State of Delaware on October 25, 2005 (incorporated herein by reference to exhibit 3.1 filed with the Current Report on Form 8-K of XO Holdings, Inc., filed on March 6, 2006)3.2

          

          Certificate of Designation of the Powers, Preferences and Relative, Participating, Optional and other Special Rights of the 6% Class A Convertible Preferred Stock and Qualifications, Limitations and Restrictions thereof, as filed with the Secretary of State of the State of Delaware on February 28, 2006 (incorporated herein by reference to exhibit 3.2 filed with the Current Report on Form 8-K of XO Holdings, Inc., filed on March 6, 2006)3.3

          

          Bylaws of XO Holdings, Inc. (incorporated herein by reference to exhibit 3.3 filed with the Current Report on Form 8-K of XO Holdings, Inc., filed on March 6, 2006)31.1

          

          Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith)31.2

          

          Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended (filed herewith)32.1

          

          Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (filed herewith)
 21    TABLE OF CONTENTS SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.  Date: May 17, 2010

          

          XO HOLDINGS, INC.By:/s/ Laura W. ThomasLaura W. Thomas Senior Vice President and Chief Financial Officer (Principal Financial Officer)
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