##### 



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 March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File No. 0-30900
 
 XO Holdings, 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
 o þ o
 o þ
 APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
 þ o




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##### 



XO Holdings, Inc. and Subsidiaries
Index to Form 10-Q
 PagePart I. Financial InformationItem 1.
    
    XO Holdings, Inc. and Subsidiaries Condensed Consolidated Financial StatementsCondensed Consolidated Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005
    
    
    1Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and March 31, 2005 (unaudited)
    
    
    2Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and March 31, 2005 (unaudited)
    
    
    3Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    4Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    26Item 4.
    
    Controls and Procedures
    
    
    26Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    27Item 1A.
    
    Risk Factors
    
    
    29Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3.
    
    Defaults Upon Senior Securities
    
    
    36Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    36Item 5.
    
    Other Information
    
    
    36Item 6.
    
    Exhibits
    
    
    36Signatures
    
    
    37




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##### 



PART I. FINANCIAL INFORMATION
 Item 1. Financial Statements.
 XO Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Amounts in thousands, except for share and per share data)
 March 31,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    161,415
    
    
    $
    176,838Marketable securities and other investments
    
    
    7,390
    
    
    
    7,150Accounts receivable, net of allowance for doubtful accounts of $35,148 at
March 31, 2006, and $36,061 at December 31, 2005, respectively
    
    
    129,499
    
    
    
    137,564Other current assets
    
    
    27,824
    
    
    
    34,106Total current assets
    
    
    326,128
    
    
    
    355,658Property and equipment, net
    
    
    697,978
    
    
    
    717,627Broadband wireless licenses, net
    
    
    38,945
    
    
    
    40,527Other intangibles, net
    
    
    45,364
    
    
    
    51,252Other assets, net
    
    
    38,344
    
    
    
    37,661Total assets
    
    $
    1,146,759
    
    
    $
    1,202,725LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    86,176
    
    
    $
    79,935Other current liabilities
    
    
    190,330
    
    
    
    216,278Total current liabilities
    
    
    276,506
    
    
    
    296,213Long-term debt and accrued interest payable
    
    
    309,175
    
    
    
    301,113Other long-term liabilities
    
    
    63,913
    
    
    
    65,755Total liabilities
    
    
    649,594
    
    
    
    663,0816% Class A convertible preferred stock
    
    
    220,344
    
    
    
    217,056Commitments and contingenciesStockholders equity:Preferred stock: par value $0.01 per share, 200,000,000 shares
authorized: 4,000,000 shares of 6% Class A convertible preferred stock
issued and outstanding on March 31, 2006 and December 31, 2005
    
    
    
    
    
    
    Warrants and common stock, par value $0.01 per share, 1,000,000,000
shares authorized: 181,933,035 shares issued and outstanding on March 31,
2006 and December 31, 2005
    
    
    974,021
    
    
    
    976,447Deferred compensation
    
    
    
    
    
    
    (77
    )Accumulated other comprehensive income
    
    
    1,060
    
    
    
    820Accumulated deficit
    
    
    (698,260
    )
    
    
    (654,602
    )Total stockholders equity
    
    
    276,821
    
    
    
    322,588Total liabilities, convertible preferred stock and stockholders equity
    
    $
    1,146,759
    
    
    $
    1,202,725
  1




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##### 



XO Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Amounts in thousands, except for share and per share data)
(Unaudited)
 Three months
    
    
    Three monthsended
    
    
    endedMarch 31,
    
    
    March 31,2006
    
    
    2005Revenue
    
    $
    349,690
    
    
    $
    361,504Costs and expensesCost of service (exclusive of depreciation and amortization)
    
    
    154,380
    
    
    
    147,922Selling, operating, and general
    
    
    178,863
    
    
    
    191,694Depreciation and amortization
    
    
    54,436
    
    
    
    58,365Total costs and expenses
    
    
    387,679
    
    
    
    397,981Loss from operations
    
    
    (37,989
    )
    
    
    (36,477
    )Interest income
    
    
    1,974
    
    
    
    1,893Investment loss, net
    
    
    
    
    
    
    (271
    )Interest expense, net
    
    
    (7,643
    )
    
    
    (8,004
    )Net loss
    
    
    (43,658
    )
    
    
    (42,859
    )Preferred stock accretion
    
    
    (3,288
    )
    
    
    (3,097
    )Net loss applicable to common shares
    
    $
    (46,946
    )
    
    $
    (45,956
    )Net loss per common share, basic and diluted
    
    $
    (0.26
    )
    
    $
    (0.25
    )Weighted average shares, basic and diluted
    
    
    181,933,035
    
    
    
    181,933,035
  2




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##### 



XO Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
 Three months
    
    
    Three monthsended
    
    
    endedMarch 31,
    
    
    March 31,2006
    
    
    2005OPERATING ACTIVITIES:Net loss
    
    $
    (43,658
    )
    
    $
    (42,859
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Depreciation and amortization
    
    
    54,436
    
    
    
    58,365Accrual of interest
    
    
    8,062
    
    
    
    7,948Stock-based compensation
    
    
    939
    
    
    
    66Realized gain on investments
    
    
    
    
    
    
    3,191Changes in assets and liabilities:Accounts receivable
    
    
    8,065
    
    
    
    16,121Other assets
    
    
    (1,962
    )
    
    
    (4,900
    )Accounts payable
    
    
    1,692
    
    
    
    (6,180
    )Accrued liabilities
    
    
    (26,889
    )
    
    
    (13,470
    )Net cash provided by operating activities
    
    
    685
    
    
    
    18,282INVESTING ACTIVITIES:Capital expenditures
    
    
    (22,767
    )
    
    
    (21,573
    )Sales of marketable securities, investments and
other assets
    
    
    7,562
    
    
    
    1,342Release of escrow account
    
    
    
    
    
    
    25,430Net cash (used in) provided by investing activities.
    
    
    (15,205
    )
    
    
    5,199FINANCING ACTIVITIES:Repayments of long term debt and capital leases
    
    
    (903
    )
    
    
    (853
    )Net cash used in financing activities
    
    
    (903
    )
    
    
    (853
    )Net (decrease) increase in cash and cash equivalents
    
    
    (15,423
    )
    
    
    22,628Cash and cash equivalents, beginning of period
    
    
    176,838
    
    
    
    233,989Cash and cash equivalents, end of period
    
    $
    161,415
    
    
    $
    256,617SUPPLEMENTAL DATA:Cash paid for interest
    
    $
    444
    
    
    $
    824Accrued interest converted to long-term debt
    
    $
    8,062
    
    
    $
    7,948
  3




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##### 



XO Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
  Termination of Equity Purchase Agreement
   Basis of Presentation
   Significant Accounting Policies
  Share
Based Payments
  4




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##### 



Principles of Consolidation
  Use of Estimates and Assumptions
   Reclassifications
  2. NET LOSS PER SHARE AND COMPREHENSIVE LOSS
 Net Income (Loss) Per Share
  5




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##### 



Comprehensive Loss
  Three Months Ended March 31,2006
    
    
    2005Net loss
    
    $
    (43,658
    )
    
    $
    (42,859
    )Other comprehensive loss:Net unrealized gains(losses) on investment
    
    
    240
    
    
    
    (2,092
    )Comprehensive loss
    
    $
    (43,418
    )
    
    $
    (44,951
    )
 3. SEGMENT INFORMATION
 Segments
      Three Months Ended March 31, 2006XOC
    
    
    Nextlink
    
    
    ConsolidatedSegment revenue
    
    $
    349,579
    
    
    $
    111
    
    
    $
    349,690Segment costs and expenses:Cost of service (exclusive of
depreciation and amortization)
    
    
    154,380
    
    
    
    
    
    
    
    154,380Selling, operating, and general
    
    
    173,688
    
    
    
    5,175
    
    
    
    178,863Depreciation and amortization
    
    
    52,795
    
    
    
    1,641
    
    
    
    54,436Total business unit costs and expenses
    
    
    380,863
    
    
    
    6,816
    
    
    
    387,679Segment loss
    
    $
    (31,284
    )
    
    $
    (6,705
    )
    
    $
    (37,989
    )Interest income
    
    
    
    
    
    
    
    
    
    
    1,974
 6




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##### 



Investment loss, net
    
    
    
    
    
    
    
    
    
    
    Interest expense, net
    
    
    
    
    
    
    
    
    
    
    (7,643
    )Net loss
    
    
    
    
    
    
    
    
    
    $
    (43,658
    )Capital expenditures
    
    $
    20,872
    
    
    $
    1,895
    
    
    $
    22,767Total assets at March 31, 2006
    
    $
    1,102,236
    
    
    $
    44,523
    
    
    $
    1,146,759
 Three Months Ended March 31, 2005XOC
    
    
    Nextlink
    
    
    ConsolidatedSegment revenue
    
    $
    361,504
    
    
    $
    
    
    
    $
    361,504Segment costs and expenses:Cost of service (exclusive of
depreciation and amortization)
    
    
    147,922
    
    
    
    
    
    
    
    147,922Selling, operating, and general
    
    
    191,464
    
    
    
    230
    
    
    
    191,694Depreciation and amortization
    
    
    56,728
    
    
    
    1,637
    
    
    
    58,365Total business unit costs and expenses
    
    
    396,114
    
    
    
    1,867
    
    
    
    397,981Segment loss
    
    $
    (34,610
    )
    
    $
    (1,867
    )
    
    $
    (36,477
    )Interest income
    
    
    
    
    
    
    
    
    
    
    1,893Investment loss, net
    
    
    
    
    
    
    
    
    
    
    (271
    )Interest expense, net
    
    
    
    
    
    
    
    
    
    
    (8,004
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (42,859
    )Capital expenditures
    
    $
    21,545
    
    
    $
    28
    
    
    $
    21,573Total assets at December 31, 2005
    
    $
    1,159,256
    
    
    $
    43,469
    
    
    $
    1,202,725
 4. MARKETABLE SECURITIES AND OTHER INVESTMENTS
  GrossGross
    
    
    UnrealizedUnrealized
    
    
    HoldingBook Value
    
    
    Cost Basis
    
    
    Holding Gains
    
    
    (Losses)As of March 31, 2006Marketable securities
    
    $
    2,600
    
    
    $
    1,540
    
    
    $
    1,060
    
    
    $
    Other investments
    
    
    4,790
    
    
    
    4,790
    
    
    
    
    
    
    
    Total marketable
securities and other
investments
    
    $
    7,390
    
    
    $
    6,330
    
    
    $
    1,060
    
    
    $
    As of December 31, 2005Marketable securities
    
    $
    2,360
    
    
    $
    1,540
    
    
    $
    820
    
    
    $
    Other investments
    
    
    4,790
    
    
    
    4,790
    
    
    
    
    
    
    
    Total marketable
securities and other
investments
    
    $
    7,150
    
    
    $
    6,330
    
    
    $
    820
    
    
    $
    
  7




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##### 



5. LONG-LIVED ASSETS
  Property and Equipment
  March 31,
    
    
    December 31,2006
    
    
    2005Telecommunications networks and acquired
bandwidth
    
    $
    763,616
    
    
    $
    751,487Furniture, fixtures, equipment, leasehold
improvements and other
    
    
    280,732
    
    
    
    258,0341,044,348
    
    
    
    1,009,521Less: accumulated depreciation
    
    
    (432,510
    )
    
    
    (387,334
    )611,838
    
    
    
    622,187Construction-in-progress and undeployed assets
    
    
    86,140
    
    
    
    95,440$
    697,978
    
    
    $
    717,627
  Broadband Wireless Licenses
  March 31,
    
    
    December 31,2006
    
    
    2005Broadband wireless licenses
    
    $
    59,508
    
    
    $
    59,508Less: accumulated amortization
    
    
    (20,563
    )
    
    
    (18,981
    )38,945
    
    
    
    40,527
  Other Intangibles
  March 31,
    
    
    December 31,2006
    
    
    2005Customer relationships
    
    $
    112,366
    
    
    $
    112,366Internally developed technology
    
    
    9,521
    
    
    
    9,521Acquired tradenames
    
    
    5,673
    
    
    
    5,673127,560
    
    
    
    127,560Less accumulated amortization
    
    
    (99,929
    )
    
    
    (94,041
    )27,631
    
    
    
    33,519Goodwill  indefinite life asset
    
    
    1,071
    
    
    
    1,071XO Trade name  indefinite life asset
    
    
    16,662
    
    
    
    16,662$
    45,364
    
    
    $
    51,252
  8




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##### 



6. LONG-TERM DEBT
    7. RELATED PARTY TRANSACTIONS
  Outstanding
    
    Series A, B and CCommon Stock
    
    Warrants
    
    Credit Facility
    
    Preferred StockAt December 31, 2005.
    
    Greater than 50%
    
    Greater than 40%
    
    Greater than 90%
    
    
    95
    %At March 31, 2006
    
    Greater than 50%
    
    Greater than 40%
    
    Greater than 90%
    
    
    95
    %At April 28, 2006 (1)
    
    Greater than 50%
    
    Greater than 40%
    
    Greater than 90%
    
    
    52
    %
 
 (1)
    
    According to Amendment No. 8 to the Schedule 13D of Cardiff Holding LLC (Cardiff),
filed with the Commission on May 1, 2006, on April 28, 2006, Cardiff sold in a private
sale to qualified institutional buyers an aggregate of 1,725,000 shares of the Companys
6% Class A Convertible Preferred Stock (the Preferred Stock).  9




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##### 



8. STOCK-BASED COMPENSATION
  Share based arrangements
 XO Holdings, Inc. 2002 Stock Incentive Plan
      10




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##### 



Three monthsendedMarch 31, 2005Net loss applicable to common shares, as reported
    
    $
    (45,956
    )Add: Stock-based employee compensation expense included in net loss, as reported
    
    
    66Deduct: Total stock-based employee compensation expense determined under fair
value based methods for all stock awards
    
    
    (1,649
    )Pro forma net loss applicable to common shares
    
    $
    (47,539
    )Net loss per common share, basic and diluted  as reported
    
    $
    (0.25
    )Net loss per common share, basic and diluted  pro forma
    
    $
    (0.26
    )
  WeightedaverageremainingNumber of
    
    Weighted average
    
    contractual
    
    Aggregateshares
    
    exercise price
    
    term
    
    intrinsic valueOutstanding at December 31, 2005
    
    
    9,296,457
    
    
    $
    5.06Granted
    
    
    115,000
    
    
    
    5.00Forfeited
    
    
    (145,817
    )
    
    
    5.08Expired
    
    
    (245,662
    )
    
    
    5.05Exercised
    
    
    
    
    
    
    Outstanding at March 31, 2006
    
    
    9,019,978
    
    
    
    5.06
    
    
    7.2 years
    
    
    Exercisable at March 31, 2006
    
    
    6,221,963
    
    
    
    5.04
    
    
    7.0 years
    
    
    
     Three months endedMarch 31,2006
    
    
    2005Expected volatility
    
    
    65.9
    %
    
    
    61.0
    %Risk free interest rate
    
    
    4.7
    %
    
    
    3.6
    %Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected life (range in years)
    
    
    4.0
    
    
    
    4.0Fair value per share at grant date
    
    $
    0.67
    
    
    $
    0.96
  9. COMMITMENTS AND CONTINGENCIES
 Legal Proceedings
  11




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##### 



Allegiance Telecom Liquidating Trust Litigation
     Litigation Relating to the Wireline Sale
 2 2
 12




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##### 



Allegiance Telecom
Liquidating Trust v. Carl C. Icahn, et al. 2
 Donald
J. Hillenmeyer, Jr. v. XO Communications, Inc., et al.
  Houlihan Lokey Howard and Zukin Capital LLC
  Level 3
  Verizon Indemnification Notice
  13




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##### 



Regulatory
 FCC Treatment of ESP Access Charge Exemption
  10. SUBSEQUENT EVENTS
 Cox Settlement
  Amendment to Registration Rights Agreement
   14




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##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 Forward-looking and Cautionary Statements
  
    
    the Companys services, including the development and deployment of data products and
services based on Internet protocol, or IP, Ethernet, broadband wireless and other
technologies and strategies to expand the Companys targeted customer base and broaden its
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 revenue levels sufficient to
provide financial viability to the Companys business;
    
    the quality and price of similar or comparable telecommunications services offered, or
to be offered, by the Companys 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
  XOC Business
  15




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##### 



Nextlink Business
    16




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##### 



XOC Business Sale
   Key Performance Indicators
  
    
    Gross Margin;
    
    Sales, Operating and General Expenses; and
    
    EBITDA
  Three Months Ended March 31,2006
    
    2005Gross margin
    
    
    55.9
    %
    
    
    59.1
    %EBITDA
    
    
    4.7
    %
    
    
    6.0
    %Sales, operating & general expenses
    
    
    51.1
    %
    
    
    53.0
    %
  Results of Operations
 Overview
  
    
    the inherent uncertainties in projecting future results for any business; and
    
    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.
  17




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##### 



Comparison of Financial Results
  Three months endedMarch 31, 2006
    
    
    March 31, 2005Revenue:XOC
    
    $
    349,579
    
    
    
    
    
    
    $
    361,504Nextlink
    
    
    111
    
    
    
    
    
    
    
    Total revenue
    
    
    349,690
    
    
    
    100.0
    %
    
    
    361,504
    
    
    
    100.00
    %Costs and expenses:Cost of service (exclusive of depreciation
and amortization):XOC
    
    
    154,380
    
    
    
    
    
    
    
    147,922Nextlink
    
    
    
    
    
    
    
    
    
    
    Total cost of service
    
    
    154,380
    
    
    
    44.1
    %
    
    
    147,922
    
    
    
    40.9
    %Selling, operating, and general:XOC
    
    
    173,688
    
    
    
    
    
    
    
    191,464Nextlink
    
    
    5,175
    
    
    
    
    
    
    
    230Total selling, operating, and general
    
    
    178,863
    
    
    
    51.1
    %
    
    
    191,694
    
    
    
    53.0
    %Depreciation and amortization:XOC
    
    
    52,795
    
    
    
    
    
    
    
    56,728Nextlink
    
    
    1,641
    
    
    
    
    
    
    
    1,637Total depreciation and amortization
    
    
    54,436
    
    
    
    15.6
    %
    
    
    58,365
    
    
    
    16.1
    %Total costs and expenses
    
    
    387,679
    
    
    
    110.9
    %
    
    
    397,981
    
    
    
    110.1
    %Loss from operations
    
    
    (37,989
    )
    
    
    (10.9
    %)
    
    
    (36,477
    )
    
    
    (10.1
    %)Interest income
    
    
    1,974
    
    
    
    0.6
    %
    
    
    1,893
    
    
    
    0.5
    %Investment loss
    
    
    
    
    
    
    (0.0
    %)
    
    
    (271
    )
    
    
    (0.1
    %)Interest expense, net
    
    
    (7,643
    )
    
    
    (2.2
    %)
    
    
    (8,004
    )
    
    
    (2.2
    %)Net loss
    
    
    (43,658
    )
    
    
    (12.5
    %)
    
    
    (42,859
    )
    
    
    (11.9
    %)Preferred stock accretion
    
    
    (3,288
    )
    
    
    (0.9
    %)
    
    
    (3,097
    )
    
    
    (0.9
    %)Net loss applicable to common shares
    
    
    (46,946
    )
    
    
    (13.4
    %)
    
    
    (45,956
    )
    
    
    (12.7
    %)Net loss per common share, basic and diluted
    
    
    (0.26
    )
    
    
    
    
    
    
    (0.25
    )Weighted average shares, basic and diluted
    
    
    181,933,035
    
    
    
    
    
    
    
    181,933,035Gross margin (1)
    
    
    195,310
    
    
    
    55.9
    %
    
    
    213,582
    
    
    
    59.1
    %EBITDA (2)XOC
    
    
    21,511
    
    
    
    
    
    
    
    21,847Nextlink
    
    
    (5,064
    )
    
    
    
    
    
    
    (230
    )Total EBITDA
    
    
    16,447
    
    
    
    4.7
    %
    
    
    21,617
    
    
    
    6.0
    %
 
 *
    
    Not applicable(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 18




---



##### 



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, management believes 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 March 31,2006
    
    
    2005Net loss
    
    $
    (43,658
    )
    
    $
    (42,859
    )Selling, operating and general
    
    
    178,863
    
    
    
    191,694Interest income
    
    
    (1,974
    )
    
    
    (1,893
    )Investment (gain) loss, net
    
    
    
    
    
    
    271Interest expense, net
    
    
    7,643
    
    
    
    8,004Depreciation and amortization.
    
    
    54,436
    
    
    
    58,365Gross margin
    
    $
    195,310
    
    
    $
    213,582
 (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 March 31,2006
    
    
    2005Net loss
    
    $
    (43,658
    )
    
    $
    (42,859
    )Interest income
    
    
    (1,974
    )
    
    
    (1,893
    )Interest expense, net
    
    
    7,643
    
    
    
    8,004Depreciation and amortization
    
    
    54,436
    
    
    
    58,365EBITDA
    
    $
    16,447
    
    
    $
    21,617
 Revenue
     Three months ended March 31,% of
    
    
    
    
    
    
    % of2006
    
    
    Revenue
    
    
    2005
    
    
    Revenue
    
    
    % ChangeVoice services
    
    $
    179,416
    
    
    
    51.3
    %
    
    $
    186,298
    
    
    
    51.5
    %
    
    
    (3.7
    %)Data services
    
    
    103,759
    
    
    
    29.7
    %
    
    
    108,392
    
    
    
    30.0
    %
    
    
    (4.3
    %)Integrated voice and data services
    
    
    66,515
    
    
    
    19.0
    %
    
    
    66,814
    
    
    
    18.5
    %
    
    
    (0.4
    %)Total revenue
    
    $
    349,690
    
    
    
    100.0
    %
    
    $
    361,504
    
    
    
    100.0
    %
    
    
    (3.3
    %)
  19




---



##### 



Costs and expenses
 Three months ended
    
    
    Three months endedMarch 31,
    
    
    March 31,2006
    
    
    % of Revenue
    
    
    2005
    
    
    % of Revenue
    
    
    % ChangeCosts and expenses:Cost of service (excluding
depreciation and
amortization)
    
    $
    154,380
    
    
    
    44.1
    %
    
    $
    147,922
    
    
    
    40.9
    %
    
    
    4.4
    %Selling, operating and general
    
    
    178,863
    
    
    
    51.1
    %
    
    
    191,694
    
    
    
    53.0
    %
    
    
    (6.7
    %)Depreciation and amortization.
    
    
    54,436
    
    
    
    15.6
    %
    
    
    58,365
    
    
    
    16.1
    %
    
    
    (6.7
    %)Total
    
    $
    387,679
    
    
    
    110.9
    %
    
    $
    397,981
    
    
    
    110.1
    %
    
    
    (2.6
    %)
 Cost of service (excluding depreciation and amortization)
  Selling, operating and general.
 Depreciation and amortization
 20




---



##### 



Interest income
 Investment gain (loss), net
 Interest expense, net.
 Comparison of Segment Financial Results
 Overview
  XOC Segment
 Overview
   Nextlink Segment
 Overview
  21




---



##### 



Three Months EndedMarch 31,2006
    
    2005Revenue
    
    
    111
    
    
    
    Cost of service (exclusive of depreciation and amortization)
    
    
    
    
    
    
    Selling, operating and general
    
    
    5,175
    
    
    
    230Depreciation and amortization
    
    
    1,641
    
    
    
    1,637
 Revenue
 Cost of service (exclusive of depreciation and amortization) .
 Selling, operating and general.
 Depreciation and amortization
 Critical Accounting Policies and Estimates
  Accounting for Stock-based Compensation
    22




---



##### 



Liquidity and Capital Resources
 Capital Resources and Liquidity Assessment
      Credit Risk
  Contractual Obligations
  23




---



##### 



Otherlong-term
    
    
    OperatingCredit
    
    
    contractual
    
    
    lease
    
    
    Capital lease
    
    
    TotalMarch 31,
    
    Facility
    
    
    obligations
    
    
    obligations
    
    
    obligations
    
    
    obligations2006
    
    $
    
    
    
    $
    62,205
    
    
    $
    53,757
    
    
    $
    3,403
    
    
    $
    119,3652007
    
    
    
    
    
    
    79,663
    
    
    
    65,576
    
    
    
    3,854
    
    
    
    149,0932008
    
    
    
    
    
    
    68,642
    
    
    
    55,195
    
    
    
    2,398
    
    
    
    126,2352009
    
    
    309,175
    
    
    
    44,573
    
    
    
    47,367
    
    
    
    1,770
    
    
    
    402,8852010
    
    
    
    
    
    
    15,688
    
    
    
    40,611
    
    
    
    1,419
    
    
    
    57,718Thereafter
    
    
    
    
    
    
    87,322
    
    
    
    129,994
    
    
    
    12,491
    
    
    
    229,807Total minimum commitments
    
    $
    309,175
    
    
    $
    358,093
    
    
    $
    392,500
    
    
    $
    25,335
    
    
    $
    1,085,103
  Regulatory Overview
 Overview
     24




---



##### 



Federal Regulation
    FCC Regulation of Wireless Services
   FCC Regulation of LMDS and 39 GHz Services in Particular
 Generally .
 Performance Requirements .
   25




---



##### 



Auctions .
 Other Issues Affecting the Companys Spectrum Licenses .
 Additional Federal Regulations
  Unbundling of Incumbent Network Elements
 United States Telecom Association v. FCC
  VoIP
 26




---



##### 



AT&T Declaratory Ruling Re: VoIP
 ILEC Provision of Broadband Telecommunications Services and Information Services e.g
 Intercarrier Compensation Reform
 Cost-based TELRIC Pricing
 VoIP 911 Regulation
 CALEA Regulation
 27




---



##### 



Georgia Public Service Commission Petition for Declaratory Ruling re: 271 Pricing .
 AT&T/BellSouth Consolidation .
 State and Local Regulation
  Wireless Services Affected by State Regulations
   Item 3. Quantitative and Qualitative Disclosures about Market Risk.
    28




---



##### 



Item 4. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Controls
   29




---



##### 



PART II. OTHER INFORMATION
 Item 1. Legal Proceedings.
  Allegiance Telecom Liquidating Trust Litigation
     Litigation Relating to the Wireline Sale
 2 2
 30




---



##### 



Allegiance Telecom
Liquidating Trust v. Carl C. Icahn, et al. 2
 Donald
J. Hillenmeyer, Jr. v. XO Communications, Inc., et al.
  Houlihan Lokey Howard and Zukin Capital LLC
  Level 3
  31




---



##### 



Verizon Indemnification Notice
  Item 1A. Risk Factors.
  Risks Related to Liquidity, Financial Resources, and Capitalization
 The covenants in the Credit Facility restrict the Companys financial and operational flexibility,
which could have an adverse affect on its results of operations.
    
    
    they may impair the Companys ability to obtain additional financing in the future;
    
    they may limit the Companys flexibility in planning for or reacting to changes in market conditions; and
    
    they may cause the Company to be more vulnerable in the event of a downturn in its business.
 32




---



##### 



The Company may not prevail in its $50 million claim against the ATLT, and it may not be successful
in defending against the ATLTs counterclaim.
   The agreement to sell the Companys national wireline telecommunications business has been
terminated, requiring the Company to reevaluate the feasibility of its strategic alternatives for
addressing its liquidity and financing challenges.
  The Company incurred a net loss in the past and, in the near term, may not generate funds from
operations sufficient to meet all of its cash requirements.
  Risks Related to the Companys Wireline Operations
 In the event of a substantial failure of the Companys operations support systems, including the
systems for sales tracking, order entry and provisioning, and billing, the Companys Disaster
Recovery System may not permit the recovery of its systems operations and/or to perform critical
aspects of its services for an extended period, which would adversely affect the Companys revenues
and/or capital resources.
  33




---



##### 



The Companys rights to the use of the unlit capacity that makes up its network may be affected by
the financial health of the Companys fiber providers.
  The Company may not be able to continue to connect its network to ILEC networks or to maintain
Internet peering arrangements on favorable terms, which would impair the Companys growth and
performance.
   The Company depends on a limited number of third party service providers for the performance of
several of its business operations, including payroll and billing services.
  The Company may be unable to adequately protect its intellectual property or rights to licenses for
use of third-party intellectual property, and may be subject to claims that the Company infringes
the intellectual property of others, which could substantially harm the Companys business.
  34




---



##### 



The Company experiences turnover among its experienced and trained employee base, which could
result in the Companys inability to continue performing certain functions and completing certain
initiatives in accordance with its existing budgets and operating plans.
  Several customers account for a significant portion of the Companys revenue, and some of its
customer agreements may not continue due to bankruptcies, acquisitions, nonrenewal, or other
factors.
  Risks Related to Our Wireless Operations
 The Companys wireless business is in the early stages of development and the Company may not be
able to implement its business strategy or to obtain new customers.
  One customer accounts for nearly all of the Companys wireless services revenue.
  The
Companys licenses may not be renewed upon expiration.
  35




---



##### 



If the Company does not secure a waiver of the substantial performance obligations for its A3 Block
in New York, it may lose that LMDS license.
  A key aspect of the Companys business strategy is to provide backhaul services for providers of
cellular wireless mobile telecommunications, and its business will depend to a substantial degree
on the widespread adoption of bandwidth-intensive applications, such as 3G applications.
  The Company may not be able to successfully execute the necessary real estate transactions, or to
negotiate acceptable rates in those agreements for placing antennas and having access to necessary
equipment.
  36




---



##### 



Additional spectrum may become available from the FCC, increasing the number of and/or viability of
the Companys competitors or even allowing the Customers customers or potential customers to
obtain their own spectrum outright, reducing their need to obtain spectrum or services from the
Company.
   The Company is dependent on key personnel and its success depends on its ability to attract, train
and retain additional qualified personnel.
  FCC Regulation of RF emissions and RF environments may increase the Companys costs and/or limit
its operations.
  Risks Related to Competition and the Companys Industry
 Technological advances and regulatory changes are eroding traditional barriers between formerly
distinct telecommunications markets, which could increase the competition the Company faces and put
downward pressure on prices, which could impair its results.
  37




---



##### 



The telecommunications industry is highly competitive, and has experienced the consolidation of
many existing competitors and the introduction of significant new competitors.
  The Company is subject to comprehensive and continually evolving regulation.
   Risks Related to the Companys Common Stock
 An entity owned and controlled by Mr. Icahn is the Companys majority stockholder.
  Future sales or issuances of the Companys common stock could adversely affect the Companys stock
price and/or its ability to raise capital.
   38




---



##### 



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  Item 3. Defaults Upon Senior Securities.
  Item 4. Submission of Matters to a Vote of Security Holders.
  Item 5. Other Information.
  Item 6. Exhibits.
 2.1
    
    Agreement and Plan of Merger, dated as of February 28, 2006, by and among XO
Communications, Inc., XO Holdings, Inc. and XO Communications, LLC (Incorporated herein
by reference to exhibit 2.1 filed with the Current Report on Form 8-K of XO Holdings,
Inc., filed on March 6, 2006)2.2
    
    Amendment No. 1 to Equity Purchase Agreement, dated as of March 1, 2006, by and
among XO Holdings, Inc., XO Communications, LLC (as successor by merger to XO
Communications, Inc.) and Elk Associates LLC (Incorporated herein by reference to
exhibit 2.2 filed with the Current Report on Form 8-K of XO Holdings, Inc., filed on
March 6, 2006)2.3
    
    Letter Agreement, dated March 30, 2006, between the XO Holdings, Inc. and Elk
Associates LLC (Incorporated herein by reference to exhibit 2.1 filed with the Current
Report on Form 8-K of XO Holdings, Inc., filed on March 31, 2006)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,
 39




---



##### 



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)10.1
    
    Assignment and Assumption Agreement, dated as of February 28, 2006, by and
among XO Communications, Inc. and XO Holdings, Inc. (Incorporated herein by reference
to exhibit 10.1 filed with the Current Report on Form 8-K of XO Holdings, Inc., filed
on March 6, 2006)10.2
    
    Ratification and Amendment Agreement, dated as of March 1, 2006, by and among
XO Communications, LLC (as successor by merger to XO Communications, Inc.), certain
subsidiaries of XO Communications, LLC, as guarantors, XO Holdings, Inc., as guarantor,
LMDS Holdings, Inc., as guarantor, V&K Holdings, Inc., as guarantor, Arnos Corp., as
Requisite Lenders, and Mizuho Corporate Bank, Ltd., as administrative agent
(Incorporated herein by reference to exhibit 10.2 filed with the Current Report on Form
8-K of XO Holdings, Inc., filed on March 6, 2006)10.3
    
    Waiver Agreement, dated March 30, 2006, between the XO Holdings, Inc. and Arnos
Corp., constituting Requisite Lenders (Incorporated herein by reference to exhibit 10.1
filed with the Current Report on Form 8-K of XO Holdings, Inc., filed on March 31,
2006)10.4
    
    Waiver Agreement, dated as of April 28, 2006, between the Company, its
subsidiaries and Arnos Corp., as Requisite Lenders (Incorporated herein by reference to
exhibit 10.1 filed with the Current Report on Form 8-K/A of XO Holdings, Inc., filed on
May 2, 2006)10.5
    
    Amendment No. 1 to Registration Rights Agreement made and enacted by XO
Holdings, Inc. as of April 28, 2006 (Incorporated herein by reference to exhibit 10.2
filed with the Current Report on Form 8-K/A of XO Holdings, Inc., filed on May 2, 2006)14.1
    
    Code of Ethics of the Company (Incorporated herein by reference to exhibit 14.1
filed with the Current Report on Form 8-K/A of XO Holdings, Inc., filed on May 2, 2006)31.1
    
    Rule 13a  14(a)/15(d)  14(a) Certifications31.2
    
    Rule 13a  14(a)/15(d)  14(a) Certifications32.1
    
    Certifications pursuant to 18 U.S.C. Section 1350
 40




---



##### 



Date: May 10, 2006
    XO HOLDINGS, INC.By:

/s/ Gregory W. FreibergName:
    Gregory W. FreibergTitle:
    Senior Vice President and Chief Financial Officer(Principal Financial Officer)