##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 OR
 o
    
    TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 Commission File No. 0-30900
 
 XO 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)
(703) 547-2000
(Registrants telephone number, including area code)
 þ o
 þ o
 o o
 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
 þ o




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##### 



XO Communications, Inc. and Subsidiaries
Index to Form 10-Q
 PagePart I. Financial InformationItem 1. XO Communications, Inc. and Subsidiaries Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004
    
    
    1Condensed Consolidated Statements of Operations for the Three Months Ended September
30, 2005 and September 30, 2004
    
    
    2Condensed Consolidated Statements of Operations for the Nine Months Ended September 30,
2005 and September 30, 2004
    
    
    3Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30,
2005 and September 30, 2004
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    31Part II. Other InformationItem 1. Legal Proceedings
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    34Item 3. Defaults Upon Senior Securities
    
    
    34Item 4. Submission of Matters to a Vote of Security Holders
    
    
    34Item 5. Other Information
    
    
    34Item 6. Exhibits
    
    
    34Signatures
    
    
    35




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##### 



PART I. FINANCIAL INFORMATION
  XO Communications, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Amounts in thousands, except for share and per share data)
 September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    271,643
    
    
    $
    233,989Marketable securities and other investments
    
    
    8,559
    
    
    
    17,300Accounts receivable, net of allowance for doubtful accounts of $39,120 at
September 30, 2005 and $38,981 at December 31, 2004, respectively
    
    
    138,732
    
    
    
    150,101Other current assets
    
    
    29,542
    
    
    
    50,864Total current assets
    
    
    448,476
    
    
    
    452,254Property and equipment, net
    
    
    742,447
    
    
    
    820,536Broadband wireless licenses, net
    
    
    42,109
    
    
    
    46,854Other intangibles, net
    
    
    61,029
    
    
    
    93,012Other assets, net
    
    
    44,614
    
    
    
    46,729Total assets
    
    $
    1,338,675
    
    
    $
    1,459,385LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    88,080
    
    
    $
    88,010Other current liabilities
    
    
    207,580
    
    
    
    241,532Total current liabilities
    
    
    295,660
    
    
    
    329,542Long-term debt and accrued interest payable
    
    
    391,887
    
    
    
    366,247Other long-term liabilities
    
    
    67,623
    
    
    
    73,691Total liabilities
    
    
    755,170
    
    
    
    769,480Class A convertible preferred stock
    
    
    213,817
    
    
    
    204,353Commitments and contingenciesStockholders equity:Preferred stock: par value $0.01 per share, 200,000,000 shares
authorized: 4,000,000 shares of Class A convertible preferred stock
issued and outstanding on September 30, 2005 and December 31, 2004
    
    
    
    
    
    
    Warrants and common stock, par value $0.01 per share, 1,000,000,000
shares authorized: 181,933,035 shares issued and outstanding on September
30, 2005 and December 31, 2004
    
    
    980,048
    
    
    
    989,511Deferred compensation
    
    
    (443
    )
    
    
    (574
    )Accumulated other comprehensive income
    
    
    1,180
    
    
    
    4,712Accumulated deficit
    
    
    (611,097
    )
    
    
    (508,097
    )Total stockholders equity
    
    
    369,688
    
    
    
    485,552Total liabilities, convertible preferred stock and stockholders equity
    
    $
    1,338,675
    
    
    $
    1,459,385
  1




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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
    
    
    Three monthsended
    
    
    endedSeptember 30,
    
    
    September 30,2005
    
    
    2004Revenue
    
    $
    358,672
    
    
    $
    391,885Costs and expenses:Cost of service (exclusive of depreciation and amortization)
    
    
    147,009
    
    
    
    161,946Selling, operating, and general
    
    
    177,712
    
    
    
    209,427Depreciation and amortization
    
    
    57,269
    
    
    
    56,739Total costs and expenses
    
    
    381,990
    
    
    
    428,112Loss from operations
    
    
    (23,318
    )
    
    
    (36,227
    )Interest income
    
    
    2,488
    
    
    
    554Investment (loss) gain, net
    
    
    (676
    )
    
    
    487Interest expense, net
    
    
    (9,128
    )
    
    
    (6,593
    )Net loss
    
    
    (30,634
    )
    
    
    (41,779
    )Preferred stock accretion
    
    
    (3,221
    )
    
    
    (1,839
    )Net loss applicable to common shares
    
    $
    (33,855
    )
    
    $
    (43,618
    )Net loss per common share, basic and diluted
    
    $
    (0.19
    )
    
    $
    (0.24
    )Weighted average shares, basic and diluted
    
    
    181,933,035
    
    
    
    181,933,035
  2




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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)
 Nine months
    
    
    Nine monthsended
    
    
    endedSeptember 30,
    
    
    September 30,2005
    
    
    2004Revenue
    
    $
    1,082,341
    
    
    $
    931,013Costs and expenses:Cost of service (exclusive of depreciation and amortization)
    
    
    432,955
    
    
    
    390,729Selling, operating, and general
    
    
    557,179
    
    
    
    542,129Depreciation and amortization
    
    
    176,731
    
    
    
    112,501Total costs and expenses
    
    
    1,166,865
    
    
    
    1,045,359Loss from operations
    
    
    (84,524
    )
    
    
    (114,346
    )Interest income
    
    
    6,308
    
    
    
    2,147Investment gain (loss), net
    
    
    936
    
    
    
    (2,851
    )Interest expense, net
    
    
    (25,720
    )
    
    
    (19,044
    )Net loss
    
    
    (103,000
    )
    
    
    (134,094
    )Preferred stock accretion
    
    
    (9,464
    )
    
    
    (1,839
    )Net loss applicable to common shares
    
    $
    (112,464
    )
    
    $
    (135,933
    )Net loss per common share, basic and diluted
    
    $
    (0.62
    )
    
    $
    (0.89
    )Weighted average shares, basic and diluted
    
    
    181,933,035
    
    
    
    152,479,324
  3




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##### 



XO Communications, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
 Nine months
    
    
    Nine monthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004OPERATING ACTIVITIES:Net loss
    
    $
    (103,000
    )
    
    $
    (134,094
    )Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:Depreciation and amortization
    
    
    176,731
    
    
    
    112,501Accrual of interest
    
    
    25,640
    
    
    
    19,746Stock-based compensation
    
    
    131
    
    
    
    316Realized (gain) loss on investments
    
    
    (936
    )
    
    
    5,632Changes in assets and liabilities:Accounts receivable
    
    
    11,369
    
    
    
    (26,024
    )Other assets
    
    
    (1,993
    )
    
    
    (14,921
    )Accounts payable
    
    
    1,466
    
    
    
    10,932Accrued liabilities
    
    
    (37,844
    )
    
    
    (3,260
    )Net cash provided by (used in) operating activities
    
    
    71,564
    
    
    
    (29,172
    )INVESTING ACTIVITIES:Capital expenditures
    
    
    (63,309
    )
    
    
    (72,756
    )Cash paid for acquired businesses
    
    
    
    
    
    
    (324,698
    )Sales of marketable securities and investments
    
    
    6,145
    
    
    
    21,186Purchases of
marketable securities and investments
    
    
    
    
    
    
    (36,413
    )Release of escrow account
    
    
    25,430
    
    
    
    Net cash used in investing activities
    
    
    (31,734
    )
    
    
    (412,681
    )FINANCING ACTIVITIES:Repayments of long term debt and capital leases
    
    
    (2,176
    )
    
    
    (199,072
    )Proceeds from issuance of common stock
    
    
    
    
    
    
    197,612Proceeds from issuance of preferred stock, net
    
    
    
    
    
    
    199,427Proceeds from exercise of stock options
    
    
    
    
    
    
    2,714Net cash (used in) provided by financing activities
    
    
    (2,176
    )
    
    
    200,681Net increase (decrease) in cash and cash equivalents
    
    
    37,654
    
    
    
    (241,172
    )Cash and cash equivalents, beginning of period
    
    
    233,989
    
    
    
    478,560Cash and cash equivalents, end of period
    
    $
    271,643
    
    
    $
    237,388SUPPLEMENTAL DATA:Cash paid for interest
    
    $
    2,270
    
    
    $
    1,798Stock issued for acquired businesses
    
    $
    
    
    
    $
    311,307Assets and obligations acquired through capital lease
    
    $
    
    
    
    $
    2,765
  4




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##### 



XO Communications, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Wireline
Business Sale
  Wireline Business Overview
  Fixed Wireless Business Overview
    Basis of Presentation
   Principles of Consolidation
 5




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##### 



Reclassifications
  Use of Estimates and Assumptions
   Adjustments
  Net Income (Loss) Per Share
  6




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##### 



Stock-Based Compensation
  Three months endedSeptember 30,2005
    
    2004Expected volatility
    
    
    61.0
    %
    
    
    63.0
    %Risk free interest rate
    
    
    4.0
    %
    
    
    3.4
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected life (range in years)
    
    
    4.0
    
    
    
    4.0Fair value per share at grant date
    
    $
    0.85
    
    
    $
    1.71
 Nine months endedSeptember 30,2005
    
    2004Expected volatility
    
    
    61.0
    %
    
    
    63.0
    %Risk free interest rate
    
    
    3.7
    %
    
    
    3.1
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected life (range in years)
    
    
    4.0
    
    
    
    4.0Fair value per share at grant date
    
    $
    0.95
    
    
    $
    2.23
  Three months ended September 30,2005
    
    
    2004Net loss applicable to common shares, as reported
    
    $
    (33,855
    )
    
    $
    (43,618
    )Add: Stock-based employee compensation expense
included in net loss, as reported
    
    
    20
    
    
    
    90Deduct: Total stock-based employee compensation
expense determined under fair value based
methods for all stock awards
    
    
    (1,452
    )
    
    
    (2,378
    )Pro forma net loss applicable to common shares
    
    $
    (35,287
    )
    
    $
    (45,906
    )Net loss per
common share, basic and diluted 
as reported
    
    $
    (0.19
    )
    
    $
    (0.24
    )Net loss per
common share, basic and diluted 
pro forma
    
    $
    (0.19
    )
    
    $
    (0.25
    )
 Nine months ended September 30,2005
    
    
    2004Net loss applicable to common shares, as reported
    
    $
    (112,464
    )
    
    $
    (135,933
    )Add: Stock-based employee compensation expense
included in net loss, as reported
    
    
    131
    
    
    
    316Deduct: Total stock-based employee compensation
expense determined under fair value based
methods for all stock awards
    
    
    (4,877
    )
    
    
    (6,479
    )Pro forma net loss applicable to common shares
    
    $
    (117,210
    )
    
    $
    (142,096
    )Net loss per
common share, basic and diluted 
as reported
    
    $
    (0.62
    )
    
    $
    (0.89
    )Net loss per
common share, basic and diluted 
pro forma
    
    $
    (0.64
    )
    
    $
    (0.93
    )
 7




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##### 



Comprehensive Loss
  Three Months EndedSeptember 30,2005
    
    
    2004Net loss applicable to common shares
    
    $
    (33,855
    )
    
    $
    (43,618
    )Other comprehensive loss:Net unrealized (losses) gains on investment
    
    
    (220
    )
    
    
    (1,410
    )Comprehensive loss
    
    $
    (34,075
    )
    
    $
    (45,028
    )
 Nine Months EndedSeptember 30,2005
    
    
    2004Net loss applicable to common shares
    
    $
    (112,464
    )
    
    $
    (135,933
    )Other comprehensive loss:Net unrealized (losses) gains on investment
    
    
    (3,000
    )
    
    
    1,610Reclassification adjustment for gain
included in net income
    
    
    (532
    )
    
    
    Comprehensive loss
    
    $
    (115,996
    )
    
    $
    (134,323
    )
 Long-Lived Assets
   8




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##### 



Recent Accounting Pronouncements
  2. BUSINESS COMBINATION
   Nine Months ended September 30,2005
    
    2004actual
    

pro
formaRevenue
    
    $
    1,082,341
    
    
    $
    1,160,346Net loss applicable to common shares
    
    $
    (112,464
    )
    
    $
    (189,806
    )Net loss per
common share  basic and diluted
    
    $
    (0.62
    )
    
    $
    (1.05
    )Weighted
average shares  basic and diluted
    
    
    181,933,035
    
    
    
    181,297,833
 3. MARKETABLE SECURITIES AND OTHER INVESTMENTS
  9




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##### 



GrossGross
    
    
    UnrealizedUnrealized
    
    
    HoldingFair Value
    
    
    Cost Basis
    
    
    Holding Gains
    
    
    (Losses)As of September 30, 2005Equity securities
    
    $
    2,720
    
    
    $
    1,540
    
    
    $
    1,180
    
    
    $
    Other investments
    
    
    5,839
    
    
    
    5,839
    
    
    
    
    
    
    
    Total marketable securities and other investments
    
    $
    8,559
    
    
    $
    7,379
    
    
    $
    1,180
    
    
    $
    As of December 31, 2004Equity securities
    
    $
    6,417
    
    
    $
    1,705
    
    
    $
    4,712
    
    
    $
    Other investments
    
    
    10,883
    
    
    
    10,883
    
    
    
    
    
    
    
    Total marketable securities and other investments
    
    $
    17,300
    
    
    $
    12,588
    
    
    $
    4,712
    
    
    $
    
   4. LONG-LIVED ASSETS
  Property and Equipment
  September 30,
    
    
    December 31,2005
    
    
    2004Telecommunications networks and acquired
bandwidth
    
    $
    727,677
    
    
    $
    675,844Furniture, fixtures, equipment, leasehold
improvements and other
    
    
    251,474
    
    
    
    236,788979,151
    
    
    
    912,632Less: accumulated depreciation
    
    
    (343,321
    )
    
    
    (208,032
    )635,830
    
    
    
    704,600Construction-in-progress and undeployed assets
    
    
    106,617
    
    
    
    115,936$
    742,447
    
    
    $
    820,536
  Broadband Wireless Licenses and Other Intangibles
  September 30,
    
    
    December 31,2005
    
    
    2004Broadband wireless licenses
    
    $
    59,508
    
    
    $
    59,508Customer relationships
    
    
    112,366
    
    
    
    112,366Internally developed technology
    
    
    9,521
    
    
    
    9,521Acquired trade names
    
    
    5,673
    
    
    
    5,673187,068
    
    
    
    187,068Less: accumulated amortization
    
    
    (100,592
    )
    
    
    (63,864
    )86,476
    
    
    
    123,204XO Trade
name  indefinite life asset
    
    
    16,662
    
    
    
    16,662$
    103,138
    
    
    $
    139,866
 10




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##### 



5. LONG-TERM DEBT
      6. RELATED PARTY TRANSACTIONS
  11




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##### 



Outstanding
    
    Series A, B and CCommon Stock
    
    Warrants
    
    Credit Facility
    
    Preferred StockAt
December 31, 2004
    
    Greater than 50%
    
    Greater than 40%
    
    Greater than 90%
    
    
    95
    %At September 30, 2005
    
    Greater than 50%
    
    Greater than 40%
    
    Greater than 90%
    
    
    95
    %
         7. COMMITMENTS AND CONTINGENCIES
 Legal Proceedings
  12




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##### 



Allegiance Telecom Liquidating Trust Litigation
    Cox Communications, Inc. Dispute
   13




---



##### 



8. SUBSEQUENT EVENTS
 Start Settlement
   McLeodUSA Bankruptcy
  Equity Purchase Agreement
      14




---



##### 



15




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##### 



Forward-looking and Cautionary Statements
  
    
    our services, including the development and deployment of data products and services
based on Internet protocol, or IP, Ethernet and other technologies and strategies 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 of indebtedness;
    
    trends related to and expectations regarding the results of operations in future
periods, including but not limited to those statements set forth in Managements Discussion
and Analysis of Financial Condition and Results of Operations below; and
    
    the impact of judicial decisions, legislation, and regulatory developments on our cost
structure, services, and marketing initiatives.
  
    
    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.
 Management Overview
 Wireline
Business Sale
  Wireline Business
  16




---



##### 



th
 Fixed Wireless Business
    
    
    Projected increases in bandwidth needs of mobile wireless carriers, precipitated by
customer adoption of higher bandwidth cellular services such as third generation (3G)
and Evolution Data Only (EV-DO) entertainment and media services delivered to mobile
wireless devices;
    
    the decline in the costs of purchasing and deploying wireless communications
equipment;
    
    a greater recognition of the need for redundancy in the technologies included in
communications networks; and
    
    the increased costs of fiber and copper network facilities due to FCC rulemaking
permitting the ILECs to increase prices for such facilities.
 
 17




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##### 



Key Focus on Telecommunications Carriers .
 Demand-Driven Network Expansion .
 Competitive Pricing.
 Synthesize New Technologies into Comprehensive Solutions .
 LMDS Spectrum Licenses.
 Deployment
of Other Wireless Technologies .
  18




---



##### 



Key Performance Indicators
  
    
    Gross Margin
    
    Sales, Operating and General Expenses as a Percentage of Revenue
    
    EBITDA
  Three Months Ended September 30,2005
    
    2004Gross margin
    
    
    59.0
    %
    
    
    58.7
    %EBITDA
    
    
    9.3
    %
    
    
    5.4
    %Sales, operating & general expenses
    
    
    49.5
    %
    
    
    53.4
    %
 Nine Months Ended September 30,2005
    
    2004Gross margin
    
    
    60.0
    %
    
    
    58.0
    %EBITDA
    
    
    8.6
    %
    
    
    (0.5
    %)Sales, operating & general expenses
    
    
    51.5
    %
    
    
    58.2
    %
   Results of Operations
  
    
    the inherent uncertainties in projecting future results for any business;
    
    the inability to predict the outcome of future judicial decisions, telecommunications
related legislation or regulatory decisions, or the reaction by incumbent carriers to such
developments.
 19




---



##### 



Three and Nine Months Ended September 30, 2005 versus the Three and Nine Months Ended
September 30, 2004
  Three Months Ended September 30,2005
    
    
    2004Revenue
    
    $
    358,672
    
    
    
    100.0
    %
    
    $
    391,885
    
    
    
    100.0
    %Costs and expenses:Cost of service (exclusive of
depreciation and amortization)
    
    
    147,009
    
    
    
    41.0
    %
    
    
    161,946
    
    
    
    41.3
    %Selling, operating and general
    
    
    177,712
    
    
    
    49.5
    %
    
    
    209,427
    
    
    
    53.4
    %Depreciation and amortization
    
    
    57,269
    
    
    
    16.0
    %
    
    
    56,739
    
    
    
    14.5
    %Total costs and expenses
    
    
    381,990
    
    
    
    106.5
    %
    
    
    428,112
    
    
    
    109.2
    %Loss from operations
    
    
    (23,318
    )
    
    
    (6.5
    %)
    
    
    (36,227
    )
    
    
    (9.2
    %)Interest income
    
    
    2,488
    
    
    
    0.7
    %
    
    
    554
    
    
    
    0.1
    %Investment gain (loss)
    
    
    (676
    )
    
    
    (0.2
    %)
    
    
    487
    
    
    
    0.1
    %Interest expense, net
    
    
    (9,128
    )
    
    
    (2.5
    %)
    
    
    (6,593
    )
    
    
    (1.7
    %)Net loss
    
    $
    (30,634
    )
    
    
    (8.5
    %)
    
    $
    (41,779
    )
    
    
    (10.7
    %)Preferred stock accretion
    
    
    (3,221
    )
    
    
    (0.9
    %)
    
    
    (1,839
    )
    
    
    (0.5
    %)Net loss applicable to common shares
    
    $
    (33,855
    )
    
    
    (9.4
    %)
    
    $
    (43,618
    )
    
    
    (11.1
    %)Net loss per common share, basic and diluted
    
    
    (0.19
    )
    
    
    
    
    
    
    (0.24
    )Weighted average shares outstanding, basic
and diluted
    
    
    181,933,035
    
    
    
    
    
    
    
    181,933,035Gross margin (1)
    
    
    211,663
    
    
    
    59.0
    %
    
    
    229,939
    
    
    
    58.7
    %EBITDA (2)
    
    
    33,275
    
    
    
    9.3
    %
    
    
    20,999
    
    
    
    5.4
    %
 Nine Months Ended September 30,2005
    
    
    2004Revenue
    
    $
    1,082,341
    
    
    
    100.0
    %
    
    $
    931,013
    
    
    
    100.0
    %Costs and expenses:Cost of service (exclusive of
depreciation and amortization)
    
    
    432,955
    
    
    
    40.0
    %
    
    
    390,729
    
    
    
    42.0
    %Selling, operating and general
    
    
    557,179
    
    
    
    51.5
    %
    
    
    542,129
    
    
    
    58.2
    %Depreciation and amortization
    
    
    176,731
    
    
    
    16.3
    %
    
    
    112,501
    
    
    
    12.1
    %Total costs and expenses
    
    
    1,166,865
    
    
    
    107.8
    %
    
    
    1,045,359
    
    
    
    112.3
    %Loss from operations
    
    
    (84,524
    )
    
    
    (7.8
    %)
    
    
    (114,346
    )
    
    
    (12.3
    %)Interest income
    
    
    6,308
    
    
    
    0.6
    %
    
    
    2,147
    
    
    
    0.2
    %Investment gain (loss)
    
    
    936
    
    
    
    0.1
    %
    
    
    (2,851
    )
    
    
    (0.3
    %)Interest expense, net
    
    
    (25,720
    )
    
    
    (2.4
    %)
    
    
    (19,044
    )
    
    
    (2.0
    %)Net loss
    
    $
    (103,000
    )
    
    
    (9.5
    %)
    
    $
    (134,094
    )
    
    
    (14.4
    %)Preferred stock accretion
    
    
    (9,464
    )
    
    
    (0.9
    %)
    
    
    (1,839
    )
    
    
    (0.2
    %)Net loss applicable to common shares
    
    $
    (112,464
    )
    
    
    (10.4
    %)
    
    $
    (135,933
    )
    
    
    (14.6
    %)Net loss per common share, basic and diluted
    
    
    (0.62
    )
    
    
    
    
    
    
    (0.89
    )Weighted average shares outstanding, basic
and diluted
    
    
    181,933,035
    
    
    
    
    
    
    
    152,479,324Gross margin (1)
    
    
    649,386
    
    
    
    60.0
    %
    
    
    540,284
    
    
    
    58.0
    %EBITDA (2)
    
    
    93,143
    
    
    
    8.6
    %
    
    
    (4,696
    )
    
    
    (0.5
    %)
 20




---



##### 



(1)
    
    Gross margin is defined as revenue less cost of service, and excludes depreciation and
amortization. Gross margin is not intended to replace operating income (loss), net income
(loss), cash flow and other measures of financial performance reported in accordance with
generally accepted accounting principles in the United States. Rather, gross margin is an
important measure used by management to assess operating performance of the Company.
Additionally, we believe that gross margin is a standard measure of operating performance that
is commonly reported and widely used by analysts, investors, and other interested parties in
the telecommunications industry. Gross margin as used in this document may not be comparable
to similarly titled measures reported by other companies due to differences in accounting
policies. A reconciliation between gross margin and net loss is as follows:
 Three Months Ended September30,2005
    
    
    2004Net loss
    
    $
    (30,634
    )
    
    $
    (41,779
    )Selling, operating and general
    
    
    177,712
    
    
    
    209,427Interest income
    
    
    (2,488
    )
    
    
    (554
    )Investment (gain) loss, net
    
    
    676
    
    
    
    (487
    )Interest expense, net
    
    
    9,128
    
    
    
    6,593Depreciation and amortization
    
    
    57,269
    
    
    
    56,739Gross margin
    
    $
    211,663
    
    
    $
    229,939
 Nine Months Ended September 30,2005
    
    
    2004Net loss
    
    $
    (103,000
    )
    
    $
    (134,094
    )Selling, operating and general
    
    
    557,179
    
    
    
    542,129Interest income
    
    
    (6,308
    )
    
    
    (2,147
    )Investment (gain) loss, net
    
    
    (936
    )
    
    
    2,851Interest expense, net
    
    
    25,720
    
    
    
    19,044Depreciation and amortization
    
    
    176,731
    
    
    
    112,501Gross margin
    
    $
    649,386
    
    
    $
    540,284
 (2)
    
    EBITDA is defined as net income or loss before depreciation, amortization, interest
expense, and interest income. EBITDA is not intended to replace operating income (loss), net
income (loss), cash flow and other measures of financial performance reported in accordance
with generally accepted accounting principles in the United States. Rather, EBITDA is an
important measure used by management to assess operating performance of the company. EBITDA as
used in this document may not be comparable to similarly titled measures reported by other
companies due to differences in accounting policies. Additionally, EBITDA as defined here does
not have the same meaning as EBITDA as defined in our secured credit facility agreement. A
reconciliation between EBITDA and net loss is as follows:
 Three Months Ended September 30,2005
    
    
    2004Net loss
    
    $
    (30,634
    )
    
    $
    (41,779
    )Interest income
    
    
    (2,488
    )
    
    
    (554
    )Interest expense, net
    
    
    9,128
    
    
    
    6,593Depreciation and amortization
    
    
    57,269
    
    
    
    56,739EBITDA
    
    $
    33,275
    
    
    $
    20,999
 Nine Months Ended September 30,2005
    
    
    2004Net loss
    
    $
    (103,000
    )
    
    $
    (134,094
    )Interest income
    
    
    (6,308
    )
    
    
    (2,147
    )Interest expense, net
    
    
    25,720
    
    
    
    19,044Depreciation and amortization
    
    
    176,731
    
    
    
    112,501EBITDA
    
    $
    93,143
    
    
    $
    (4,696
    )
 Revenue
   21




---



##### 



Three months ended September 30,% of
    
    
    
    
    
    
    % of2005
    
    
    Revenue
    
    
    2004
    
    
    Revenue
    
    
    % ChangeVoice services
    
    $
    182,026
    
    
    
    50.8
    %
    
    $
    214,665
    
    
    
    54.8
    %
    
    
    (15.2
    %)Data services
    
    
    108,785
    
    
    
    30.3
    %
    
    
    110,021
    
    
    
    28.1
    %
    
    
    (1.1
    %)Integrated voice and data services
    
    
    67,861
    
    
    
    18.9
    %
    
    
    67,199
    
    
    
    17.1
    %
    
    
    1.0
    %Total revenue
    
    $
    358,672
    
    
    
    100.0
    %
    
    $
    391,885
    
    
    
    100.0
    %
    
    
    (8.5
    %)
 Nine months ended September 30,% of
    
    
    
    
    
    
    % of2005
    
    
    Revenue
    
    
    2004
    
    
    Revenue
    
    
    % ChangeVoice services
    
    $
    556,824
    
    
    
    51.5
    %
    
    $
    487,265
    
    
    
    52.3
    %
    
    
    14.3
    %Data services
    
    
    324,955
    
    
    
    30.0
    %
    
    
    298,582
    
    
    
    32.1
    %
    
    
    8.8
    %Integrated voice and data services
    
    
    200,562
    
    
    
    18.5
    %
    
    
    145,166
    
    
    
    15.6
    %
    
    
    38.2
    %Total revenue
    
    $
    1,082,341
    
    
    
    100.0
    %
    
    $
    931,013
    
    
    
    100.0
    %
    
    
    16.3
    %
    Costs and expenses
 Three months ended
    
    
    Three months endedSeptember 30,
    
    
    September 30,% of
    
    
    
    
    
    
    % of2005
    
    
    Revenue
    
    
    2004
    
    
    Revenue
    
    
    % ChangeCosts and expenses:Cost of service (excluding
depreciation and
amortization)
    
    $
    147,009
    
    
    
    41.0
    %
    
    $
    161,946
    
    
    
    41.3
    %
    
    
    (9.2
    %)Selling, operating and general
    
    
    177,712
    
    
    
    49.5
    %
    
    
    209,427
    
    
    
    53.4
    %
    
    
    (15.1
    %)Depreciation and amortization
    
    
    57,269
    
    
    
    16.0
    %
    
    
    56,739
    
    
    
    14.5
    %
    
    
    0.9
    %Total
    
    $
    381,990
    
    
    
    106.5
    %
    
    $
    428,112
    
    
    
    109.2
    
    
    
    (10.8
    %)
 22




---



##### 



Nine months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,% of
    
    
    
    
    
    
    % of2005
    
    
    Revenue
    
    
    2004
    
    
    Revenue
    
    
    % ChangeCosts and expenses:Cost of service (excluding
depreciation and
amortization)
    
    $
    432,955
    
    
    
    40.0
    %
    
    $
    390,729
    
    
    
    42.0
    %
    
    
    10.8
    %Selling, operating and general
    
    
    557,179
    
    
    
    51.5
    %
    
    
    542,129
    
    
    
    58.2
    %
    
    
    2.8
    %Depreciation and amortization
    
    
    176,731
    
    
    
    16.3
    %
    
    
    112,501
    
    
    
    12.1
    %
    
    
    57.1
    %Total
    
    $
    1,166,865
    
    
    
    107.8
    %
    
    $
    1,045,359
    
    
    
    112.3
    %
    
    
    11.6
    %
 Cost of service (exclusive of depreciation and amortization)
  Selling, operating and general.
  Depreciation and amortization
 23




---



##### 



Interest income
 Investment gain (loss), net
 Interest expense, net.
 Net Loss
 EBITDA
 Critical Accounting Policies and Estimates
  24




---



##### 



Liquidity and Capital Resources
 Capital Resources and Liquidity Assessment
      25




---



##### 



Credit Risk
  Regulatory Overview
 Overview
     26




---



##### 



Federal Regulation
  Implementation of the Telecom Act
 The Telecom Acts Local Competition Framework
  
    
    Access to UNEs.ILECs are required to lease to CLECs various elements in their network
that are used individually or in combination with each other to provide local telephone
service. As discussed in more detail below, the FCC determines which facilities must be
made available by the ILECs as UNEs. The ILECs must make UNEs available at rates that are
based on their forward-looking economic costs, a pricing regime known as TELRIC, short
for Total Element Long Run Incremental Cost. For XO, the most critical UNEs are local loops
and transport, which enable us to connect our customers to our network.
    
    Construction of New Facilities.CLECs may also enter the local service market by
building entirely new facilities. The ILECs are required to allow CLECs to interconnect
their facilities with the ILECs facilities in order to reach all customers.
    
    Resale.ILECs are required to permit CLECs to purchase their services for resale to the
public at a wholesale rate that is less than the rate charged by the ILECs to their retail
customers.
   
    
    interconnection with the networks of incumbents and other carriers, which permits our
customers to exchange traffic with customers connected to other networks;
    
    requirements that the ILECs make available access to their facilities for our local
loops and transport needs, thereby enabling us to serve customers not directly connected to
our networks;
    
    compensation obligations, which mandate reciprocal payment arrangements for local
traffic exchange between us and both incumbent and other competitive carriers and
compensation for terminating local traffic originating on other carriers networks;
    
    requirements concerning local number portability, which allows customers to change local
carriers without changing telephone numbers, thereby removing a significant barrier for a
potential customer to switch to our local voice services;
    
    access to assignment of telephone numbers, which enables us to provide telephone numbers
to new customers on the same basis as incumbent carriers; and
 27




---



##### 




    
    collocation rights allowing us to place telecommunications equipment in ILEC central
offices, which enables us to have direct access to local loops and other network elements.
  Unbundling of Incumbent Network Elements
  United States Telecom Association v. FCC
  UNE Loops
 DS0 loops .
 DS1 loops .
 DS3 loops .
   28




---



##### 



UNE Transport
 DS1 transport .
 DS3 transport .
 Dark fiber transport .
  Transitional availability where elements are no longer available as UNEs
   Additional Federal Regulations
  VoIP .
 AT&T Declaratory Ruling Re: VoIP .
 29




---



##### 



ILEC Provision of Broadband Telecommunications Services and Information Services . e.g
 Intercarrier Compensation Reform .
 Cost-based TELRIC Pricing .
 VoIP 911 Regulation .
 30




---



##### 



CALEA Regulation .
 State and Local Regulation
        Evaluation of Disclosure Controls and Procedures
  31




---



##### 



Changes in Internal Controls
    32




---



##### 



PART II. OTHER INFORMATION
   Allegiance Telecom Liquidating Trust Litigation
   Start Settlement
   Cox Communications, Inc. Litigation
   33




---



##### 



31.1
    
    Rule 13a  14(a)/15(d)  14(a) Certification31.2
    
    Rule 13a  14(a)/15(d)  14(a) Certification32.1
    
    Certificate pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certificate pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
 34




---



##### 



XO Communications, Inc.Date:
November 9, 2005
    
    By:
    
    /s/ William GarrahanWilliam GarrahanSenior Vice President andActing Chief Financial Officer(Principal Financial Officer)
 35