##### 



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 June 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
 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEEDING 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 June 30, 2005 and December 31, 2004
    
    
    1Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2005 and June 30, 2004
    
    
    2Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2005 and June 30, 2004
    
    
    3Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and June 30, 2004
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    27Item 4. Controls and Procedures
    
    
    27Part II. Other InformationItem 1. Legal Proceedings
    
    
    28Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 3. Defaults Upon Senior Securities
    
    
    28Item 4. Submission of Matters to a Vote of Security Holders
    
    
    28Item 5. Other Information
    
    
    28Item 6. Exhibits
    
    
    29Signatures
    
    
    30




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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)
 June 30,
    
    December 31,2005
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    270,143
    
    
    $
    233,989Marketable securities and other investments
    
    
    9,455
    
    
    
    17,300Accounts receivable, net of allowance for doubtful accounts of $37,145 at
June 30 , 2005 and $38,981 at December 31, 2004, respectively
    
    
    137,683
    
    
    
    150,101Other current assets
    
    
    33,121
    
    
    
    50,864Total current assets
    
    
    450,402
    
    
    
    452,254Property and equipment, net
    
    
    764,729
    
    
    
    820,536Broadband wireless licenses and other intangibles, net
    
    
    115,567
    
    
    
    139,866Other assets, net
    
    
    44,917
    
    
    
    46,729Total assets
    
    $
    1,375,615
    
    
    $
    1,459,385LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    86,055
    
    
    $
    88,010Other current liabilities
    
    
    225,073
    
    
    
    241,532Total current liabilities
    
    
    311,128
    
    
    
    329,542Long-term debt and accrued interest payable
    
    
    382,646
    
    
    
    366,247Other long-term liabilities
    
    
    67,502
    
    
    
    73,691Total liabilities
    
    
    761,276
    
    
    
    769,480Class A convertible preferred stock
    
    
    210,596
    
    
    
    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 June 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 June
30 , 2005 and December 31, 2004
    
    
    983,268
    
    
    
    989,511Deferred compensation
    
    
    (463
    )
    
    
    (574
    )Accumulated other comprehensive income
    
    
    1,400
    
    
    
    4,712Accumulated deficit
    
    
    (580,462
    )
    
    
    (508,097
    )Total stockholders equity
    
    
    403,743
    
    
    
    485,552Total liabilities, convertible preferred stock and stockholders equity
    
    $
    1,375,615
    
    
    $
    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
    
    endedJune 30,
    
    June 30,2005
    
    2004Revenue
    
    $
    362,164
    
    
    $
    278,183Costs and expenses:Cost of service (exclusive of depreciation and amortization)
    
    
    138,024
    
    
    
    118,822Selling, operating, and general
    
    
    187,772
    
    
    
    164,149Depreciation and amortization
    
    
    61,097
    
    
    
    30,065Total costs and expenses
    
    
    386,893
    
    
    
    313,036Loss from operations
    
    
    (24,729
    )
    
    
    (34,853
    )Interest income
    
    
    1,919
    
    
    
    841Investment gain (loss), net
    
    
    1,891
    
    
    
    (3,962
    )Interest expense, net
    
    
    (8,588
    )
    
    
    (5,846
    )Net loss
    
    $
    (29,507
    )
    
    $
    (43,820
    )Preferred stock accretion
    
    
    (3,145
    )
    
    
    Net loss applicable to common shares
    
    $
    (32,652
    )
    
    $
    (43,820
    )Net loss per common share, basic and diluted
    
    $
    (0.18
    )
    
    $
    (0.31
    )Weighted average shares, basic and diluted
    
    
    181,933,035
    
    
    
    140,538,159
  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)
 Six months
    
    Six monthsended
    
    endedJune 30,
    
    June 30,2005
    
    2004Revenue
    
    $
    723,669
    
    
    $
    539,128Costs and expenses:Cost of service (exclusive of depreciation and amortization)
    
    
    285,947
    
    
    
    228,783Selling, operating, and general
    
    
    379,466
    
    
    
    332,702Depreciation and amortization
    
    
    119,461
    
    
    
    55,762Total costs and expenses
    
    
    784,874
    
    
    
    617,247Loss from operations
    
    
    (61,205
    )
    
    
    (78,119
    )Interest income
    
    
    3,820
    
    
    
    2,546Investment gain (loss), net
    
    
    1,612
    
    
    
    (4,291
    )Interest expense, net
    
    
    (16,592
    )
    
    
    (12,450
    )Net loss
    
    $
    (72,365
    )
    
    $
    (92,314
    )Preferred stock accretion
    
    
    (6,242
    )
    
    
    Net loss applicable to common shares
    
    $
    (78,607
    )
    
    $
    (92,314
    )Net loss per common share, basic and diluted
    
    $
    (0.43
    )
    
    $
    (0.67
    )Weighted average shares, basic and diluted
    
    
    181,933,035
    
    
    
    137,591,467
  3




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##### 



XO Communications, Inc. and Subsidiaries
 
 Condensed Consolidated Statements of Cash Flows
 (Amounts in thousands)
(Unaudited)
 Six months
    
    Six monthsEnded
    
    EndedJune 30,
    
    June 30,2005
    
    2004OPERATING ACTIVITIES:Net loss
    
    $
    (72,365
    )
    
    $
    (92,314
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    119,461
    
    
    
    55,762Accrual of interest
    
    
    16,399
    
    
    
    12,886Stock-based compensation
    
    
    111
    
    
    
    226Realized loss on investments
    
    
    3,191
    
    
    
    5,665Changes in assets and liabilities:Accounts receivable
    
    
    12,418
    
    
    
    (23,115
    )Other assets
    
    
    (5,875
    )
    
    
    (15,198
    )Accounts payable
    
    
    (1,781
    )
    
    
    9,118Accrued liabilities
    
    
    (21,123
    )
    
    
    (7,722
    )Net cash provided by (used in) operating activities
    
    
    50,436
    
    
    
    (54,692
    )INVESTING ACTIVITIES:Capital expenditures, net
    
    
    (39,529
    )
    
    
    (49,124
    )Acquisition payments
    
    
    
    
    
    
    (361,517
    )Sales of marketable securities and investments
    
    
    1,342
    
    
    
    21,144Release of escrow account
    
    
    25,430
    
    
    
    Net cash used in investing activities
    
    
    (12,757
    )
    
    
    (389,497
    )FINANCING ACTIVITIES:Repayments of long term debt and capital leases
    
    
    (1,525
    )
    
    
    (198,363
    )Proceeds from issuance of common stock
    
    
    
    
    
    
    197,612Proceeds from exercise of stock options
    
    
    
    
    
    
    2,714Net cash (used in) provided by financing activities
    
    
    (1,525
    )
    
    
    1,963Net increase (decrease) in cash and cash equivalents
    
    
    36,154
    
    
    
    (442,226
    )Cash and cash equivalents, beginning of period
    
    
    233,989
    
    
    
    478,560Cash and cash equivalents, end of period
    
    $
    270,143
    
    
    $
    36,334SUPPLEMENTAL DATA:Cash paid for interest
    
    $
    1,539
    
    
    $
    1,140Stock issued for acquired businesses
    
    $
    
    
    
    $
    311,307
  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
 Overview
  Basis of Presentation
    Principles of Consolidation
  Use of Estimates and Assumptions
  5




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##### 



Reclassifications
  Adjustments
  Net Income (Loss) Per Share
  Stock-Based Compensation
  6




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##### 



Three months endedJune 30,2005
    
    2004Expected volatility
    
    
    61.0
    %
    
    
    63.0
    %Risk free interest rate
    
    
    3.8
    %
    
    
    2.8
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected life (range in years)
    
    
    4.0
    
    
    
    4.0Fair value per share at grant date
    
    $
    0.94
    
    
    $
    2.76
 Six months endedJune 30,2005
    
    2004Expected volatility
    
    
    61.0
    %
    
    
    63.0
    %Risk free interest rate
    
    
    3.7
    %
    
    
    2.7
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected life (range in years)
    
    
    4.0
    
    
    
    4.0Fair value per share at grant date
    
    $
    0.96
    
    
    $
    3.23
  Three months ended June 30,2005
    
    2004Net loss applicable to common shares, as reported
    
    $
    (32,652
    )
    
    $
    (43,820
    )Add: Stock-based employee compensation expense
included in net loss, as reported
    
    
    45
    
    
    
    97Deduct: Total stock-based employee compensation
expense determined under fair value based
methods for all stock awards
    
    
    (1,776
    )
    
    
    (2,227
    )Pro forma net loss applicable to common shares
    
    $
    (34,383
    )
    
    $
    (45,950
    )Net loss per
common share, basic and diluted 
as reported
    
    $
    (0.18
    )
    
    $
    (0.31
    )Net loss per
common share, basic and diluted 
pro forma
    
    $
    (0.19
    )
    
    $
    (0.33
    )
 Six months ended June 30,2005
    
    2004Net loss applicable to common shares, as reported
    
    $
    (78,607
    )
    
    $
    (92,314
    )Add: Stock-based employee compensation expense
included in net loss, as reported
    
    
    111
    
    
    
    226Deduct: Total stock-based employee compensation
expense determined under fair value based
methods for all stock awards
    
    
    (3,422
    )
    
    
    (4,101
    )Pro forma net loss applicable to common shares
    
    $
    (81,918
    )
    
    $
    (96,189
    )Net loss per
common share, basic and diluted 
as reported
    
    $
    (0.43
    )
    
    $
    (0.67
    )Net loss per
common share, basic and diluted 
pro forma
    
    $
    (0.45
    )
    
    $
    (0.70
    )
  Comprehensive Loss
  7




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##### 



Three Months EndedJune 30,2005
    
    2004Net loss applicable to common shares
    
    $
    (32,652
    )
    
    $
    (43,820
    )Other comprehensive loss:Net unrealized (losses) gains on investment
    
    
    (1,220
    )
    
    
    1,627Comprehensive loss
    
    $
    (33,872
    )
    
    $
    (42,193
    )
 Six Months EndedJune 30,2005
    
    2004Net loss applicable to common shares
    
    $
    (78,607
    )
    
    $
    (92,314
    )Other comprehensive loss:Net unrealized (losses) gains on investment
    
    
    (2,780
    )
    
    
    3,021Reclassification adjustment for gain
included in net income
    
    
    (532
    )
    
    
    Comprehensive loss
    
    $
    (81,919
    )
    
    $
    (89,293
    )
 Long-Lived Assets
   Recent Accounting Pronouncements
  2. MARKETABLE SECURITIES AND OTHER INVESTMENTS
  8




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##### 



GrossGross
    
    UnrealizedUnrealized
    
    HoldingFair Value
    
    Cost Basis
    
    Holding Gains
    
    (Losses)As of June 30, 2005Equity securities
    
    $
    2,940
    
    
    $
    1,540
    
    
    $
    1,400
    
    
    $
    Other investments
    
    
    6,515
    
    
    
    6,515
    
    
    
    
    
    
    
    Total marketable
securities and other
investments
    
    $
    9,455
    
    
    $
    8,055
    
    
    $
    1,400
    
    
    $
    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
    
    
    $
    
 3. LONG-LIVED ASSETS
  Property and Equipment
  June 30,
    
    December 31,2005
    
    2004Telecommunications networks and acquired
bandwidth
    
    $
    711,296
    
    
    $
    675,844Furniture, fixtures, equipment, leasehold
improvements and other
    
    
    251,547
    
    
    
    236,788962,843
    
    
    
    912,632Less: accumulated depreciation
    
    
    (298,873
    )
    
    
    (208,032
    )663,970
    
    
    
    704,600Construction-in-progress and undeployed assets
    
    
    100,759
    
    
    
    115,936$
    764,729
    
    
    $
    820,536
  Broadband Wireless Licenses and Other Intangibles
  June 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
    
    
    (88,163
    )
    
    
    (63,864
    )98,905
    
    
    
    123,204XO Trade
name  indefinite life asset
    
    
    16,662
    
    
    
    16,662$
    115,567
    
    
    $
    139,866
 9




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##### 



4. LONG-TERM DEBT
     5. RELATED PARTY TRANSACTIONS
  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 June 30, 2005
    
    Greater than 50%
    
    Greater than 40%
    
    Greater than 90%
    
    
    95
    %
  10




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##### 



6. COMMITMENTS AND CONTINGENCIES
 Legal Proceedings
  Allegiance Telecom Liquidating Trust Litigation
   11




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##### 



Telecom of Nevada Litigation
   12




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##### 



Forward-looking and Cautionary Statements
  
    
    our services, including the development and deployment of data products and services
based on 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
  13




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##### 




    
    Gross Margin
    
    Sales, Operating and General Expenses as a Percentage of Revenue
    
    EBITDA
  Three Months Ended June 30,2005
    
    2004Gross margin
    
    
    61.9
    %
    
    
    57.3
    %EBITDA
    
    
    10.6
    %
    
    
    (3.1
    %)Sales, operating & general expenses
    
    
    51.8
    %
    
    
    59.0
    %
 Six Months Ended June 30,2005
    
    2004Gross margin
    
    
    60.5
    %
    
    
    57.6
    %EBITDA
    
    
    8.3
    %
    
    
    (4.9
    %)Sales, operating & general expenses
    
    
    52.4
    %
    
    
    61.7
    %
   14




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##### 



Recent Events
    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.
 15




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##### 



Three and Six Months Ended June 30, 2005 versus the Three and Six Months Ended June 30, 2004
  Three Months Ended June 30,2005
    
    2004Revenue
    
    $
    362,164
    
    
    
    100.0
    %
    
    $
    278,183
    
    
    
    100.0
    %Costs and expenses:Cost of service (exclusive of
depreciation and amortization)
    
    
    138,024
    
    
    
    38.1
    %
    
    
    118,822
    
    
    
    42.7
    %Selling, operating and general
    
    
    187,772
    
    
    
    51.8
    %
    
    
    164,149
    
    
    
    59.0
    %Depreciation and amortization
    
    
    61,097
    
    
    
    16.9
    %
    
    
    30,065
    
    
    
    10.8
    %Total costs and expenses
    
    
    386,893
    
    
    
    106.8
    %
    
    
    313,036
    
    
    
    112.5
    %Loss from operations
    
    
    (24,729
    )
    
    
    (6.8
    %)
    
    
    (34,853
    )
    
    
    (12.5
    %)Interest income
    
    
    1,919
    
    
    
    0.5
    %
    
    
    841
    
    
    
    0.3
    %Investment gain (loss)
    
    
    1,891
    
    
    
    0.5
    %
    
    
    (3,962
    )
    
    
    (1.4
    %)Interest expense, net
    
    
    (8,588
    )
    
    
    (2.4
    %)
    
    
    (5,846
    )
    
    
    (2.1
    %)Net loss
    
    $
    (29,507
    )
    
    
    (8.1
    %)
    
    $
    (43,820
    )
    
    
    (15.8
    %)Preferred stock accretion
    
    
    (3,145
    )
    
    
    (0.9
    %)
    
    
    
    
    
    
    
    %Net loss applicable to common shares
    
    $
    (32,652
    )
    
    
    (9.0
    %)
    
    $
    (43,820
    )
    
    
    (15.8
    %)Net loss per common share, basic and diluted
    
    
    (0.18
    )
    
    
    
    
    
    
    (0.31
    )Weighted average shares outstanding, basic
and diluted
    
    
    181,933,035
    
    
    
    
    
    
    
    140,538,159Gross margin (1)
    
    
    224,140
    
    
    
    61.9
    %
    
    
    159,361
    
    
    
    57.3
    %EBITDA (2)
    
    
    38,259
    
    
    
    10.6
    %
    
    
    (8,750
    )
    
    
    (3.1
    %)
 16




---



##### 



Six Months Ended June 30,2005
    
    2004Revenue
    
    $
    723,669
    
    
    
    100.0
    %
    
    $
    539,128
    
    
    
    100.0
    %Costs and expenses:Cost of service (exclusive of
depreciation and amortization)
    
    
    285,947
    
    
    
    39.5
    %
    
    
    228,783
    
    
    
    42.4
    %Selling, operating and general
    
    
    379,466
    
    
    
    52.4
    %
    
    
    332,702
    
    
    
    61.7
    %Depreciation and amortization
    
    
    119,461
    
    
    
    16.5
    %
    
    
    55,762
    
    
    
    10.3
    %Total costs and expenses
    
    
    784,874
    
    
    
    108.5
    %
    
    
    617,247
    
    
    
    114.5
    %Loss from operations
    
    
    (61,205
    )
    
    
    (8.5
    %)
    
    
    (78,119
    )
    
    
    (14.5
    %)Interest income
    
    
    3,820
    
    
    
    0.5
    %
    
    
    2,546
    
    
    
    0.5
    %Investment gain (loss)
    
    
    1,612
    
    
    
    0.2
    %
    
    
    (4,291
    )
    
    
    (0.8
    %)Interest expense, net
    
    
    (16,592
    )
    
    
    (2.3
    %)
    
    
    (12,450
    )
    
    
    (2.3
    %)Net loss
    
    $
    (72,365
    )
    
    
    (10.0
    %)
    
    $
    (92,314
    )
    
    
    (17.1
    %)Preferred stock accretion
    
    
    (6,242
    )
    
    
    (0.9
    %)
    
    
    
    
    
    
    
    %Net loss applicable to common shares
    
    $
    (78,607
    )
    
    
    (10.9
    %)
    
    $
    (92,314
    )
    
    
    (17.1
    %)Net loss per common share, basic and diluted
    
    
    (0.43
    )
    
    
    
    
    
    
    (0.67
    )Weighted average shares outstanding, basic
and diluted
    
    
    181,933,035
    
    
    
    
    
    
    
    137,591,467Gross margin (1)
    
    
    437,722
    
    
    
    60.5
    %
    
    
    310,345
    
    
    
    57.6
    %EBITDA (2)
    
    
    59,868
    
    
    
    8.3
    %
    
    
    (26,648
    )
    
    
    (4.9
    %)
 
 (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 June 30,2005
    
    2004Net loss
    
    $
    (29,507
    )
    
    $
    (43,820
    )Selling, operating and general
    
    
    187,772
    
    
    
    164,149Interest income
    
    
    (1,919
    )
    
    
    (841
    )Investment (gain) loss, net
    
    
    (1,891
    )
    
    
    3,962Interest expense, net
    
    
    8,588
    
    
    
    5,846Depreciation and amortization
    
    
    61,097
    
    
    
    30,065Gross margin
    
    $
    224,140
    
    
    $
    159,361
 Six Months Ended June 30,2005
    
    2004Net loss
    
    $
    (72,365
    )
    
    $
    (92,314
    )Selling, operating and general
    
    
    379,466
    
    
    
    332,702Interest income
    
    
    (3,820
    )
    
    
    (2,546
    )Investment (gain) loss, net
    
    
    (1,612
    )
    
    
    4,291Interest expense, net
    
    
    16,592
    
    
    
    12,450Depreciation and amortization
    
    
    119,461
    
    
    
    55,762Gross margin
    
    $
    437,722
    
    
    $
    310,345
 
 (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: 17




---



##### 



Three Months Ended June 30,2005
    
    2004Net loss
    
    $
    (29,507
    )
    
    $
    (43,820
    )Interest income
    
    
    (1,919
    )
    
    
    (841
    )Interest expense, net
    
    
    8,588
    
    
    
    5,846Depreciation and amortization
    
    
    61,097
    
    
    
    30,065EBITDA
    
    $
    38,259
    
    
    $
    (8,750
    )
 Six Months Ended June 30,2005
    
    2004Net loss
    
    $
    (72,365
    )
    
    $
    (92,314
    )Interest income
    
    
    (3,820
    )
    
    
    (2,546
    )Interest expense, net
    
    
    16,592
    
    
    
    12,450Depreciation and amortization
    
    
    119,461
    
    
    
    55,762EBITDA
    
    $
    59,868
    
    
    $
    (26,648
    )
 Revenue
   Three months ended June 30,% of
    
    
    
    
    
    % of2005
    
    Revenue
    
    2004
    
    Revenue
    
    % ChangeVoice services
    
    $
    188,498
    
    
    
    52.0
    %
    
    $
    141,679
    
    
    
    50.9
    %
    
    
    33.0
    %Data services
    
    
    107,779
    
    
    
    29.8
    %
    
    
    95,612
    
    
    
    34.4
    %
    
    
    12.7
    %Integrated voice and data services
    
    
    65,887
    
    
    
    18.2
    %
    
    
    40,892
    
    
    
    14.7
    %
    
    
    61.1
    %Total revenue
    
    $
    362,164
    
    
    
    100.0
    %
    
    $
    278,183
    
    
    
    100.0
    %
    
    
    30.2
    %
 Six months ended June 30,% of
    
    
    
    
    
    % of2005
    
    Revenue
    
    2004
    
    Revenue
    
    % ChangeVoice services
    
    $
    374,797
    
    
    
    51.8
    %
    
    $
    272,600
    
    
    
    50.5
    %
    
    
    37.5
    %Data services
    
    
    216,171
    
    
    
    29.9
    %
    
    
    188,561
    
    
    
    35.0
    %
    
    
    14.6
    %Integrated voice and data services
    
    
    132,701
    
    
    
    18.3
    %
    
    
    77,967
    
    
    
    14.5
    %
    
    
    70.2
    %Total revenue
    
    $
    723,669
    
    
    
    100.0
    %
    
    $
    539,128
    
    
    
    100.0
    %
    
    
    34.2
    %
    Costs and expenses
 18




---



##### 



Three months ended
    
    Three months endedJune 30,
    
    June 30,% of
    
    
    
    
    
    % of2005
    
    Revenue
    
    2004
    
    Revenue
    
    % ChangeCosts and expenses:Cost of service (excluding
depreciation and
amortization)
    
    $
    138,024
    
    
    
    38.1
    %
    
    $
    118,822
    
    
    
    42.7
    %
    
    
    16.2
    %Selling, operating and general
    
    
    187,772
    
    
    
    51.8
    %
    
    
    164,149
    
    
    
    59.0
    %
    
    
    14.4
    %Depreciation and amortization
    
    
    61,097
    
    
    
    16.9
    %
    
    
    30,065
    
    
    
    10.8
    %
    
    
    103.2
    %Total
    
    $
    386,893
    
    
    
    
    
    
    $
    313,036
    
    
    
    
    
    
    
    23.6
    %
 Six months ended
    
    Six months endedJune 30,
    
    June 30,% of
    
    
    
    
    
    % of2005
    
    Revenue
    
    2004
    
    Revenue
    
    % ChangeCosts and expenses:Cost of service (excluding
depreciation and
amortization)
    
    $
    285,947
    
    
    
    39.5
    %
    
    $
    228,783
    
    
    
    42.4
    %
    
    
    25.0
    %Selling, operating and general
    
    
    379,466
    
    
    
    52.4
    %
    
    
    332,702
    
    
    
    61.7
    %
    
    
    14.1
    %Depreciation and amortization
    
    
    119,461
    
    
    
    16.5
    %
    
    
    55,762
    
    
    
    10.3
    %
    
    
    114.2
    %Total
    
    $
    784,874
    
    
    
    
    
    
    $
    617,247
    
    
    
    
    
    
    
    27.2
    %
 Cost of service (exclusive of depreciation and amortization)
  Selling, operating and general.
   Depreciation and amortization
 19




---



##### 



Interest income
 Investment gain (loss), net
 Interest expense, net.
 Net Loss
 EBITDA
 Critical Accounting Policies and Estimates
    20




---



##### 



Liquidity and Capital Resources
 Capital Resources and Liquidity Assessment
        Credit Risk
  Regulatory Overview
 Overview
  21




---



##### 



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.
 22




---



##### 




    
    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
    
    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
 23




---



##### 



UNE Loops
 DS0 loops.
 DS1 loops.
 DS3 loops.
   UNE Transport
 DS1 transport.
 DS3 transport.
 Dark fiber transport.
  Transitional availability where elements are no longer available as UNEs
  24




---



##### 



Additional Federal Regulations
  VoIP.
 AT&T Declaratory Ruling Re: VoIP.
 Level 3 Forbearance Petition
 ILEC Provision of Broadband Telecommunications Services and Information Services.
 25




---



##### 



Intercarrier Compensation Reform.
 Cost-based TELRIC Pricing.
 State and Local Regulation
    California Public Utilities Commission Proceeding
 26




---



##### 



Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
    27




---



##### 



PART II. OTHER INFORMATION
 
      
   
   
    Votes For
    
    
    Votes WithheldCarl C. Icahn
    
    
    129,371,004
    
    
    
    1,117,934Carl J. Grivner
    
    
    129,382,705
    
    
    
    1,106,233Adam Dell
    
    
    129,423,773
    
    
    
    1,065,165Vincent J. Intrieri
    
    
    129,389,651
    
    
    
    1,102,287Keith Meister
    
    
    129,387,177
    
    
    
    1,101,761Robert Knauss
    
    
    129,420,266
    
    
    
    1,068,672Fredrik Gradin
    
    
    129,425,819
    
    
    
    1,063,119Jon F. Weber
    
    
    129,389,369
    
    
    
    1,099,569
 
   28




---



##### 



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.
 29




---



##### 



XO Communications, Inc.Date: August 9, 2005
    By:
    /s/ William GarrahanWilliam GarrahanSenior Vice President and

Acting Chief Financial Officer
(Principal Financial Officer) 30