**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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**FORM 10-Q**

 

| **(Mark  One)**                                                                                                                                                                                                                                                                                    |   |                                                                                                              |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------|
| **ý**                                                                                                                                                                                                                                                                                         |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|                                                                                                                                                                                                                                                                                               |   |                                                                                                              |
| **For the quarterly period ended  March 31, 2004**                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                               |   |                                                                                                              |
| **OR**                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                                                                               |   |                                                                                                              |
| **o**                                                                                                                                                                                                                                                                                              |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                                                                               |   |                                                                                                              |
| **For  the transition period  from                     to                     ** |

 

**CommissionFile Number: 000-28-559**

 

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**Universal Access Global Holdings Inc.**

(Exactname of registrant as specified in its charter)

 

| **Delaware**                                                     |   | **36-4408076**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **233 S.  Wacker Drive, Suite 600  Chicago, Illinois**      |   | **60606**                             |
| (Address of principal  executive offices)                        |   | (Zip Code)                            |
|                                                             |   |                                  |
| **(312) 660-5000**                                          |
| (Registrant’s telephone  number, including area code)       |

 

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Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes  ý   No  o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Exchange Rule 12b-2). Yes  o   No  ý

 

The number of shares outstanding of the issuer’scommon stock, par value $0.01, as of April 30, 2004 was 11,474,388 shares.

 

 

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**UniversalAccess Global Holdings Inc.**

**Form 10-Q**

**Tableof Contents**

 
| **Part I  Financial Information** |                                                                                                             |
|----------------------------------------|------------------------------------------------------------------------------------------------------------------|
|                                   |                                                                                                             |   |
| Item 1.                           | Condensed  Consolidated Financial Statements                                                                     |   |
|                                   |                                                                                                             |   |
|                                   | Condensed  Consolidated Balance Sheets at March 31, 2004 and December 31, 2003  (Unaudited)                      |   |
|                                   |                                                                                                             |   |
|                                   | Condensed  Consolidated Statements of Operations for the Three Months Ended March 31,  2004 and 2003 (Unaudited) |   |
|                                   |                                                                                                             |   |
|                                   | Condensed  Consolidated Statements of Cash Flows for the Three Months Ended March 31,  2004 and 2003 (Unaudited) |   |
|                                   |                                                                                                             |   |
|                                   | Notes  to Condensed Consolidated Financial Statements (Unaudited)                                                |   |
|                                   |                                                                                                             |   |
| Item 2.                           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                      |   |
|                                   |                                                                                                             |   |
| Item 3.                           | Quantitative  and Qualitative Disclosures about Market Risk                                                      |   |
|                                   |                                                                                                             |   |
| Item 4.                                | Controls and Procedures                                                                                          |   |
|                                   |                                                                                                             |   |
| **Part II  Other Information**    |                                                                                                             |
|                                   |                                                                                                             |   |
| Item 1.                           | Legal  Proceedings                                                                                               |   |
|                                   |                                                                                                             |   |
| Item 6.                           | Exhibits and  Reports on Form 8-K                                                                                |   |
|                                   |                                                                                                             |   |
| Signatures                             |                                                                                                             |   |
|                                   |                                                                                                             |   |
| Certifications                         |                                                                                                             |

 

2

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**NoteRegarding Forward-looking Statements**

 

This reportcontains forward-looking statements within the meaning of Section 21E ofthe Securities Exchange Act of 1934, as amended, and Section 27A of theSecurities Act of 1933, as amended. These forward-looking statements involve anumber of risks and uncertainties, including those identified in the section ofthis Form 10-Q entitled “Factors That May Affect Future OperatingResults,” which may cause actual results to differ materially from thosediscussed in the forward-looking statements. The forward-looking statements inthis Form 10-Q are identified by words such as “believes,” “anticipates,”“expects,” “intends,” “may,” “will” and other similar expressions. However,these words are not the only way we identify forward-looking statements. Inaddition, any statements that refer to expectations, projections or othercharacterizations of future events or circumstances are forward-lookingstatements. We undertake no obligation to publicly release the results of anyrevisions to these forward-looking statements that could occur after the filingof this Form 10-Q. You are urged to carefully review and consider the variousdisclosures made by us in this report and in our other reports filed with theSEC for a discussion of some of the risks and factors that may affect ourbusiness.

 

3

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## **PART I.FINANCIAL INFORMATION**

##  

## **ITEM I. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

##  

**UNIVERSALACCESS GLOBAL HOLDINGS INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(inthousands, except per share data)**

**(unaudited)**

 
|                                                                                                                          |   | **March 31,  2004** |       | **December  31,  2003** |       |
|-------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                                                    |   |                | ** ** |                    | ** ** |
| Current assets:                                                                                                               |   |                |       |                    |       |
| Cash and cash  equivalents                                                                                                    |   | $                   | 12,268     |                    | $          | 16,740 |   |
| Accounts  receivable, less allowance for doubtful accounts of $360 and $507                                                   |   | 5,500               |       | 5,293                   |       |
| Prepaid expenses  and other current assets                                                                                    |   | 2,237               |       | 2,717                   |       |
| Total current  assets                                                                                                         |   | 20,005              |       | 24,750                  |       |
| Restricted cash                                                                                                               |   | 1,036               |       | 1,738                   |       |
| Property and  equipment, net                                                                                                  |   | 6,566               |       | 7,944                   |       |
| Other long-term  assets                                                                                                       |   | 692                 |       | 651                     |       |
| Total assets                                                                                                                  |   | $                   | 28,299     |                    | $          | 35,083 |   |
|                                                                                                                          |   |                |       |                    |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY (DEFICIT)**                                                                      |   |                | ** ** |                    | ** ** |
| Current  liabilities:                                                                                                         |   |                |       |                    |       |
| Accounts payable                                                                                                              |   | $                   | 1,923      |                    | $          | 2,556 |   |
| Non-income taxes  payable                                                                                                     |   | 1,361               |       | 1,285                   |       |
| Accrued carrier  expenses                                                                                                     |   | 10,603              |       | 12,230                  |       |
| Accrued expenses  and other current liabilities                                                                               |   | 1,874               |       | 1,729                   |       |
| Unearned revenue                                                                                                              |   | 8,758               |       | 9,178                   |       |
| Short-term  restructuring liability                                                                                           |   | 200                 |       | 710                     |       |
| Total current  liabilities                                                                                                    |   | 24,719              |       | 27,688                  |       |
| Notes payable                                                                                                                 |   | 1,800               |       | 1,763                   |       |
| Security  deposits payable                                                                                                    |   | 2,010               |       | 2,038                   |       |
| Restructuring  liability                                                                                                      |   | 856                 |       | 3,566                   |       |
| Total  liabilities                                                                                                            |   | 29,385              |       | 35,055                  |       |
| Commitments and  contingent liabilities (Note 7)                                                                         |   |                |       |                    |       |
| Stockholders’  equity (deficit):                                                                                         |   |                |       |                    |       |
| Common stock,  $.01 par value; 1,000,000,000 shares authorized; 11,473,111 and  11,465,611 shares issued and outstanding |   | 115                 |       | 115                     |       |
| Common stock  warrants                                                                                                        |   | 540                 |       | 540                     |       |
| Additional  paid-in-capital                                                                                                   |   | 294,757             |       | 294,803                 |       |
| Deferred stock  compensation                                                                                                  |   | (504                | )          | (721                    | )          |
| Accumulated  deficit                                                                                                          |   | (296,031            | )          | (294,747                | )          |
| Accumulated  other comprehensive income                                                                                       |   | 37                  |       | 38                      |       |
| Total  stockholders’ equity (deficit)                                                                                    |   | (1,086              | )          | 28                      |       |
| Total  liabilities and stockholders’ equity (deficit)                                                                    |   | $                   | 28,299     |                    | $          | 35,083 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

4

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**UNIVERSALACCESS GLOBAL HOLDINGS INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(inthousands, except per share data)**

**(unaudited)**

 
|                                                                                                               |   | **Three  Months Ended March 31,** |   |
|--------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                                                               |   | **2004**                               |   | **2003** |   |
|                                                                                                               |   |                                   |   |   |   |
| Revenues                                                                                                           |   | $                                      | 14,943 |   | $ | 19,151 |   |
| Costs and  operating expenses:                                                                                     |   |                                   |   |   |   |
| Cost of circuit  access (exclusive of depreciation of $276 and $1,260 in 2004 and 2003  respectively, shown below) |   | 9,726                                  |   | 12,753 |   |
| Operations &  administration                                                                                   |   | 7,564                                  |   | 9,219 |   |
| Restructuring  charges/(credits)                                                                                   |   | (2,398                                 | )      | — |   |
| Depreciation  & amortization                                                                                   |   | 1,339                                  |   | 2,479 |   |
|                                                                                                               |   |                                   |   |   |   |
| Total costs and  operating expenses                                                                                |   | 16,231                                 |   | 24,451 |   |
|                                                                                                               |   |                                   |   |   |   |
| Operating loss                                                                                                     |   | (1,288                                 | )      | (5,300 | ) |
| Other income,  net                                                                                                 |   | 4                                      |   | 92 |   |
|                                                                                                               |   |                                   |   |   |   |
| Net loss                                                                                                           |   | $                                      | (1,284 | ) | $ | (5,208 | ) |
|                                                                                                               |   |                                   |   |   |   |
| Basic and  diluted net loss per share                                                                              |   | $                                      | (0.11  | ) | $ | (1.06 | ) |
| Weighted average  shares used in computing basic and diluted net loss per share                                    |   | 11,473                                 |   | 4,933 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

5

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**UNIVERSALACCESS GLOBAL HOLDINGS INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

**(unaudited)**

 
|                                                  |   | **Three  Months Ended  March 31,** |   |
|-------------------------------------------------------|--------|-----------------------------------------|--------|
|                                                  |   | **2004**                                |   | **2003** |   |
|                                                  |   |                                    |   |   |   |
| **Cash flows from operating  activities:**            |   |                                    |   |   |   |
| Net cash used  for operating activities               |   | $                                       | (5,171 | ) | $ | (4,270 | ) |
| **Cash flows from investing  activities:**            |   |                                    |   |   |   |
| Capital  expenditures, net                            |   | (2                                      | )      | 243 |   |
|                                                  |   |                                    |   |   |   |
| Net cash  provided/(used) by investing activities     |   | (2                                      | )      | 243 |   |
| **Cash flows from financing  activities:**            |   |                                    |   |   |   |
| Release of  restriction on cash balance               |   | 702                                     |   | 1,842 |   |
| Issuance of  common stock                             |   | 1                                       |   | 1 |   |
| Proceeds of  notes receivable—employee           |   | —                                  |   | 4 |   |
|                                                  |   |                                    |   |   |   |
| Net cash  provided/(used) by financing activities     |   | 703                                     |   | 1,847 |   |
| Effect of  exchange rate changes on cash              |   | (2                                      | )      | — |   |
| Net  increase/(decrease) in cash and cash equivalents |   | (4,472                                  | )      | (2,180 | ) |
| Cash and cash  equivalents, beginning of period       |   | 16,740                                  |   | 12,353 |   |
|                                                  |   |                                    |   |   |   |
| Cash and cash  equivalents, end of period             |   | $                                       | 12,268 |   | $ | 10,173 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

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**UNIVERSALACCESS GLOBAL HOLDINGS INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**Note 1—Basisof Presentation**

 

The accompanying unaudited condensed consolidatedfinancial statements have been prepared by Universal Access GlobalHoldings Inc. (“Holdings”) and its subsidiaries (collectively, “theCompany” or “we”), and reflect all adjustments, consisting only of normalrecurring adjustments, which in the opinion of management are necessary tostate fairly the financial position and the results of operations for theinterim periods. The statements have been prepared in accordance with the rulesand regulations of the Securities and Exchange Commission (the “SEC”). Certaininformation and footnote disclosures in financial statements prepared inaccordance with generally accepted accounting principles have been omittedpursuant to such rules and regulations. These statements should be read inconjunction with the Financial Statements and Notes thereto included in our2003 Annual Report on Form 10-K. Results for fiscal 2004 interim periodsare not necessarily indicative of results to be expected for the fiscal yearending December 31, 2004. All numbers presented are in thousands, exceptshare and per share amounts and where otherwise indicated.

 

**Note 2—Liquidity**

 

The consolidated financial statements have beenprepared assuming the company will continue as a going concern. The company hasexperienced recurring losses from operations, negative operating cash flows,decreasing revenues, a net working capital deficiency, and has negativestockholders’ equity. Our ability to continue in the normal course of businessis dependent upon our access to additional capital and the success of ourfuture operations. We are actively soliciting possible investors and strategicpartners; however, there can be no assurance that we will be successful in ourefforts to obtain additional capital or improve our operating results and,therefore, that we will continue our operations in the normal course. Further,there can be no assurance that any such required funds will be available onattractive terms or that they will not have a significantly dilutive effect onthe Company’s existing shareholders. We are actively discussing terminationagreements with the landlords of facilities where the company is notrecognizing any significant economic benefit to eliminate the rent payments.Beginning in February 2004 we stopped making certain rent payments in orderto expedite the negotiating process. The monthly amount of rent payments thatwe are not making as of March 31, 2004 is approximately $248 thousand(including estimated operating expenses and taxes). We are also in discussionswith various parties to sell all remaining UTX assets (including associatedliabilities) to raise additional cash and reduce our monthly rent expense. Inaddition, we are actively researching the potential migration of our existing traffic at the remainingUTX sites to new facilities, as part of the effort to terminate the leases forthe remaining UTX sites. There can be no assurance we will either sell theremaining UTX assets or reach termination agreements with the landlords ofthese sites.

 

**Note 3—Propertyand Equipment**

** **

Property and equipment consist of the following:

 
|                                             |   | **March 31,  2004** |   | **December 31,  2003** |   |
|--------------------------------------------------|--------|---------------------|--------|-----------------------------|--------|
| Furniture and  fixtures                          |   | $                   | 1,083  |                        | $      | 1,083 |   |
| Leasehold  improvements                          |   | 1,441               |   | 1,441                       |   |
| UTX equipment                                    |   | 8,636               |   | 8,636                       |   |
| Computer  hardware and software                  |   | 21,470              |   | 21,465                      |   |
| Other equipment                                  |   | 625                 |   | 625                         |   |
| Property and  equipment, gross                   |   | 33,255              |   | 33,250                      |   |
| Less:  Accumulated depreciation and amortization |   | (26,689             | )      | (25,306                     | )      |
| Property and  equipment, net                     |   | $                   | 6,566  |                        | $      | 7,944 |   |

 

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Accumulated amortization related to capitalizedsoftware and website assets was $5.3 million and $4.8 million at March 31,2004 and December 31, 2003, respectively.

 

**Note 4—OtherLong-term Assets**

** **

The Company has security deposits receivableclassified as long-term totaling $692 thousand and $651 thousand at March 31,2004 and December 31, 2003, respectively. These security deposits are paidto carriers, landlords and utility companies in the ordinary course ofbusiness.

 

**Note 5—Restructuring**

** **

The restructuring program is substantially completedue to termination agreements that we have negotiated with the landlords. OnMarch 10, 2004, we entered into a lease termination agreement with one of ourlandlords for $216 thousand in cash of which $141 thousand was restricted as asecurity deposit. On April 28, 2004, we entered into a lease terminationagreement with one of our landlords under which the leases for two sites wereterminated in consideration for $712 thousand in cash of which $512 thousandwas restricted as a security deposit along with a $1 million promissory note.The promissory note is due in April 2006 with no interest and is convertibleinto a maximum of 400,000 shares of common stock if certain conditions are metin the future.  As a result of thesesuccessful negotiations, the restructuring reserve was reduced by $2.4 millionin the first quarter 2004.  In thesecond quarter 2004, we will reduce the remaining $1.1 million in totalrestructuring reserves upon payment of the $200 thousand and issuance of the $1million convertible note.

 

The following summarizes the significant components ofthe restructuring reserve from December 31, 2003 to March 31, 2004:

 
|                                                       |   | **Balance at  December 31,  2003** |   | **Incurred  Cash  Payments** |   | **Adjustments** |   | **Balance at  March 31,  2004** |   |
|------------------------------------------------------------|--------|----------------------------------------------|--------|------------------------------|--------|-----------------|--------|-------------------------------------------|--------|
| Facility exit  costs, net of estimated sublease recoveries |   | $                                            | 4,276  |                         | $      | (822            | )      | $                                         | (2,398 | ) | $ | 1,056 |   |
|                                                            |        |                                              |        |                              |        |                 |        |                                           |        |  |  |  |  |

 

**Note 6—TermLoans**

 

**Pursuantto the terms of the Purchase Agreement with CityNet, on July 23, 2003, weassumed certain liabilities of CityNet. In particular, we assumed $2 million inprincipal amount of a promissory note executed by CityNet and made to ElectroBanque.  The note is secured by thefiber optic ring in Albuquerque, New Mexico transferred to us from CityNet. Thenote matures in a single installment on December 31, 2007 and does not bearinterest until January 1, 2006; thereafter, it bears interest at 8% perannum.  During the third quarter of2003, we discounted the face value of the note using an imputed interest rateand recorded the book value of $1.7 million. Due to the imputed interest, we recognized interest expense of $36thousand in the first quarter of 2004.**

** **

**Note 7—Commitmentsand Contingencies**

** **

In November 2001, a complaint captioned In re:Initial Public Offering Securities Litigation was filed in federal districtcourt for the Southern District of New York on behalf of a purported class ofpersons who purchased our stock between March 16, 2000 andDecember 6, 2000. The complaint generally alleges that variousunderwriters engaged in improper and undisclosed activities related to theallocation of shares in our initial public offering of securities. Thecomplaint brings claims for violation of several provisions of the federalsecurities laws against the underwriters of our IPO, and also against us andcertain of our former directors and officers under the Securities Act of 1933and the Exchange Act of 1934. Similar lawsuits concerning more than 300 othercompanies’ initial public offerings were filed in 2001, all of which wereconsolidated into a single coordinated proceeding in the Southern District ofNew York. We believe that the allegations against us are without merit. OnJune 30, 2003, the litigation committee of our board of directorsconditionally approved a proposed partial settlement with the plaintiffs inthis matter. The settlement would provide, among other things, a release of usand of the individual defendants for the conduct alleged in the action to bewrongful in the complaint. We would agree to undertake other responsibilities underthe partial settlement, including agreeing to assign away, not assert, orrelease certain potential claims we may have against our

 

8

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underwriters.Our insurers are expected to bear any direct financial impact of the proposedsettlement. The committee agreed to approve the settlement subject to a numberof conditions, including the participation of a substantial number of otherissuer defendants in the proposed settlement, the consent of our insurers to thesettlement, and the completion of acceptable final settlement documentation.Furthermore, the settlement is subject to a hearing on fairness and approval bythe Court overseeing the litigation.

 

We and certain of our former directors and officersare defendants in an action pending in the United States District Court for theEastern District of Texas, Frandsen v. Universal Access, Inc., et al.,No. 9:02CV103 (E.D. Tex.). This case is also captioned as In re: UniversalAccess, Inc. Securities Litigation Civil Action No. 9:02CV103. Thecomplaint alleged causes of action for securities fraud in connection withpublic disclosures made by our officers between 2000 and 2002. We believe thatthe allegations against us are without merit. On March 7, 2003, the courtgranted a motion to dismiss the complaint and granted plaintiffs theopportunity to replead the complaint with respect to a minority of the allegedmisstatements. On May 27, 2003, plaintiffs filed a second amendedconsolidated complaint. Pursuant to the Court’s September 17, 2003 order,on October 1, 2003, plaintiffs filed a revised second amended consolidatedcomplaint. On February 23, 2004, the Court heard arguments on our motionto dismiss. On April 9, 2004, the court denied our motion to dismiss other thanwith respect to two of the defendants. Plaintiffs are seeking $34.5 million.

 

In August 2003, Genuity Telecom Inc. filed acomplaint against us in the United States Bankruptcy Court for the SouthernDistrict of New York. The caption of this case is Genuity Telecom Inc. v.Universal Access, Inc. No. 03-06928. In its complaint, Genuityalleges that we did not purchase the minimum amount of telecommunicationsservices specified by the parties’ contract. Genuity seeks damages against usof nearly $1.6 million, plus costs and interest, representing the differencebetween the purported minimum purchase commitment and the amount oftelecommunications services we purchased. We believe that Genuity’s claims arewithout merit. We answered Genuity’s complaint and asserted several defenses toGenuity’s claims. We also filed a motion seeking to stay the action and tocompel arbitration of the matter in accordance with the mandatory arbitrationprovision in the contract. Genuity assigned the contract to Level 3 Communications,LLC on February 4, 2003 as part of Genuity’s bankruptcy proceeding andreorganization efforts. The amount sought by Genuity in its complaint relatesto our actions prior to February 4, 2003.

 

In March 2004, thelandlord of our New York office space filed an action againstus captioned 330 Madison Company LLC against Universal Access, Inc.,Civil Court of the City of New York, County of New York: Non-HousingPart 52, Index No. 063274/2004. In its complaint, the landlord seeksthe payment of approximately $73 thousand representing rent thelandlord claims is unpaid, plus interest and attorneys’ fees, and the issuanceof a warrant to remove us from the premises. We will attemptto resolve this matter with the landlord. As noted in the sectionentitled “Factors That May Affect Future Operating Results,” otherlandlords may file complaints against us seeking payment of unpaid rents, andthis landlord may file future complaints against us seeking additional relief.

 

In May 2004, AboveNet,Inc. filed a complaint against us in the United States Bankruptcy Court for theSouthern District of New York, In re AboveNet, Inc. v Universal Access GlobalHoldings, Inc. In its complaint AboveNet seeks the payment of approximately$3.8 million plus interest, representing amounts allegedly paid to us in the 90day period prior to the commencement date of AboveNet’s bankruptcy. AboveNetasserts it is entitled to the recovery under several theories, including thatthe payments were preferential transfers, fraudulent transfers, and fraudulentconveyances. We believe that AboveNet’s claims are without merit.

 

In connection with alease buyout agreement completed in September 2002, we entered into anew lease for a reduced amount of office space at our principal offices. Thenew lease required us to deliver a letter of credit in the amount of$2.5 million to secure our obligations under the new lease byOctober 1, 2003. Delivering this letter of credit would reduce our cashand cash equivalents, and increase our restricted cash balance, by$2.5 million. We are currently under negotiations with the landlordconcerning the $2.5 million deposit and have not paid this amount.

 

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The Company leases UTX facilities, office facilitiesand certain equipment over periods ranging from two to fifteen years. ThroughMarch 31, 2004, the Company completed buyout agreements for certain leasedoffice facilities and terminated early certain office facility leases,eliminating aggregate lease obligations of approximately $8.5 million. Rentexpense for the three months ended March 31, 2004 and 2003 wasapproximately $1.8 million and $2.0 million, respectively. Futurerentals for non-cancelable operating leases, inclusive of amounts in ourrestructuring liability, are as follows as of March 31, 2004 adjusted for thelease termination signed in April 2004:

 
| 2004                          |   | $      | 4,757  |   |
|-------------------------------|--------|--------|--------|--------|
| 2005                          |   | 5,838  |   |
| 2006                          |   | 5,719  |   |
| 2007                          |   | 5,883  |   |
| 2008                          |   | 6,082  |   |
| Thereafter                    |   | 18,088 |   |
| Total minimum  lease payments |   | $      | 46,367 |   |

 

Additionally, the Company has entered into agreementswith various telecommunications vendors to purchase minimum amounts of networkservices within a defined period, such as on a monthly basis. The Company paidvendors with minimum purchase commitments a total of $3.5 million and$5.5 million for the three months ended March 31, 2004 and 2003,respectively. Additionally, we have entered into agreements with certain of our suppliers thatobligate us to purchase a defined percentage of our actual circuit orders fromthem if they meet certain pricing and other terms and conditions. Thetotal amount of remaining purchase commitments at March 31, 2004 is as follows:

 
| 2004                                |   | $      | 15,348 |   |
|-------------------------------------|--------|--------|--------|--------|
| 2005                                |   | 17,025 |   |
| 2006                                |   | 1,750  |   |
| 2007                                |   | — |   |
| 2008                                |   | — |   |
| Thereafter                          |   | — |   |
| Total minimum  purchase commitments |   | $      | 34,123 |   |

 

The Company has standby letters of credit, which havebeen issued on its behalf totaling $1.0 million, collateralizingperformance of certain contracts with carriers, state regulators, andlandlords. These letters of credit directly relate to the operating leases,carrier agreements, and state requirements, which they secure, and expireaccording to the terms and conditions of these agreements.

 

The Company is involved in various legal matters inthe ordinary course of business. In the opinion of management, the ultimateresolution of these matters will not have a material adverse impact on theCompany’s financial position, results of operations or cash flows.

 

**Note 8—Stock-BasedCompensation Plans**

 

Effective for 2003, we adopted the disclosurerequirements under Statement of Financial Standards (“SFAS”) No. 148,“Accounting for Stock-Based Compensation – Transition and Disclosure,” as anamendment of SFAS No. 123. Stock-based employee compensation, including stock options,is accounted for under the intrinsic value method as prescribed by AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees.”  No compensation expense isrecognized for these options when they are issued at fair market value at dateof grant.  If options are granted at anexercise price below fair market value to employees, stock plan compensationexpense is deferred for an amount equal to the intrinsic value on the grantdate and recognized over the respective vesting period.

 

If we were to recognize compensation expense over therelevant service period under the fair-value method of SFAS No. 123 withrespect to stock options granted and employee stock purchases for the threemonths ended March 31, 2004 and all prior periods, net loss would haveincreased, resulting in pro forma net losses and losses per share as presentedbelow:

 

10

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|                                                                                                             |   | **Three  Months  Ended March 31,** |   |
|------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                                             |   | **2004**                           |   | **2003** |   |
| Net loss, as  reported                                                                                           |   | $                                  | (1,284 | ) | $ | (5,208 | ) |
| Less:  Stock-based compensation expense determined under fair value method for all  awards, net of related taxes |   | (652                               | )      | (264 | ) |
| Pro forma net  loss                                                                                              |   | $                                  | (1,936 | ) | $ | (5,472 | ) |
|                                                                                                             |   |                               |   |   |   |
| Basic and  Diluted net loss per share:                                                                           |   |                               |   |   |   |
| As reported                                                                                                      |   | $                                  | (0.11  | ) | $ | (1.06 | ) |
| Pro forma                                                                                                        |   | $                                  | (0.17  | ) | $ | (1.11 | ) |

 

**Note 9—Related Party Transactions**

 

In July 2003, in connection with the closing under theCityNet Purchase Agreement, we entered into a lease maintenance agreement,whereby we agreed beginning in July 2003, to reimburse CityNet for office renttotaling approximately $20 thousand per month for three years. On April 25,2004, we entered into an Idemnification Agreement with CityNet as a result ofrequesting CityNet to not pay the monthly rent in an attempt to negotiate thetermination of the lease with the landlord.

 

**Note 10 – Net income/(loss)per share**

** **

Basic net income/(loss)per share is computed using the weighted average number of shares of commonstock outstanding during the period. Diluted income/(loss) per share does notdiffer from basic income/(loss) per share since potential common shares fromconversion of stock options and warrants are anti-dilutive for all periodspresented.

 

**Note 11 – Subsequent Events**

** **

On April 15, we receiveda letter from the Nasdaq notifying us that we did not meet its minimum marketcapitalization, shareholders’ equity or net income requirements and seekingadditional information on our plans for regaining compliance. We sent aresponse on April 28, 2004, in which we described our plan for regainingcompliance with the relevant Nasdaq requirements and requested that Nasdaqre-revaluate our status in 90 days.  Foradditional risks associated with a loss of our Nasdaq compliance, please seethe section of this report entitled “Factors That May Affect FutureOperating Results.”

 

On April 28, 2004, weentered into a lease termination agreement with one of our landlords underwhich the leases for two sites were terminated in consideration of the paymentof $200 thousand in cash and $512 thousand in restricted cash along with a $1million promissory note. The promissory note is due in April 2006 with nointerest and is convertible into a maximum of 400,000 shares of common stock ifcertain conditions are met in the future. As a result of these successfulnegotiations, the restructuring reserve was reduced by $2.6 million in thefirst quarter 2004.  Please refer toNote 5 of the financial statements for additional information.

 

In May 2004, AboveNet,Inc. filed a complaint against us in the United States Bankruptcy Court for theSouthern District of New York, In re AboveNet, Inc. v. Universal Access GlobalHoldings, Inc.  In its complaint,AboveNet seeks the payment of approximately $3.8 million plus interest,representing amounts allegedly paid to us in the 90 day period prior to thecommencement date of AboveNet’s bankruptcy. AboveNet asserts it is entitled to recovery under several theories,including that the payments were preferential transfers, fraudulent transfers,and fraudulent conveyances. We believe that AboveNet’s claims are withoutmerit.

 

As of May 10, 2004, wehave reached a verbal agreement to settle outstanding disputes totaling $3.2million with one of our vendors. This settlement required us to make cashpayments totaling $800 thousand in May 2004. In addition, we are required topay an additional $1.1 million in cash over seven months. As of March 31, 2004,these amounts were accrued for in accrued carrier expenses.

 

11

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Our business consists of analyzing, designing,planning and provisioning private line telecommunications circuits for U.S. andinternational telecom carriers, cable companies, system integrators, andgovernment entities. Substantially all of our revenue is from the provision ofdedicated circuit access, under contracts having terms ranging from twelve tosixty months. Our most significant operating expense is the cost of circuitaccess, which consists of amounts paid to transport suppliers for circuits. Ourcontracts with suppliers generally have terms ranging from three to ten yearsand often include minimum purchase commitments that begin anywhere from six totwelve months after we enter into the contract.

 

***RESULTS OF OPERATIONS***

*** ***

**Three Months EndedMarch 31, 2004 Compared to three months ended March 31, 2003**

** **

***Overview***

*** ***

Our continued rate of cash usage and decline inrevenues raises doubt regarding our ability to continue as a going concern, asnoted by our independent auditor in its report on our financial statements forthe twelve months ended December 31, 2003. Our revenues continued todecline in 2004 primarily as a result of terminations of circuit contracts exceedingnew circuit sales. Price compression and excess capacity in thetelecommunications marketplace also contributed to this decline. Beginning inFebruary 2004, we did not pay certain lease payments where we were notrealizing significant economic benefits in an attempt to terminate thoseleases.  In April 2004, we signed atermination agreement with a landlord to eliminate approximately $70 thousandin monthly lease payments in exchange for a payment of $200 thousand and $1million promissory note that is convertible to stock if certain conditions aremet in the future.  As a result of thislease termination, we recognized a credit to restructuring expense in the firstquarter 2004 of $2.4 million.

 

***Summary of Selected Operations Data for Three MonthsEnded March 31, 2004 and 2003***

 
|                                                    |   | **(In Millions)**                   |   |                                     |   |   |   |
|---------------------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|--------|--------|
|                                                    |   | **Three  Months  Ended  March 31, 2004** |   | **Three  Months  Ended  March 31, 2003** |   |   |   |   |   |
| **Change from 2004  to 2003**            |
| **$**                                                   |   | **%**                                    |
| Revenues                                                |   | $                                        | 14.9   |                                     | $      | 19.2   |   | $ | (4.3 | ) | -22 | % |
| Cost of Circuit  Access                                 |   | 9.7                                      |   | 12.8                                     |   | (3.1   | )      | -24 | % |
| Operations and  Administration Expenses                 |   | 7.6                                      |   | 9.2                                      |   | (1.6   | )      | -17 | % |
| Depreciation &  Amortization                   |   | 1.3                                      |   | 2.5                                      |   | (1.2   | )      | -44 | % |
| Restructuring  and Other Nonrecurring Charges (Credits) |   | (2.4                                     | )      | —                                   |   | (2.4   | )      | -100 | % |
|                                                         |        |                                          |        |                                          |        |        |        |  |  |  |  |  |

 

***Revenues***

*** ***

The decrease in revenues in first quarter 2004compared to the first quarter 2003 was attributable to circuit disconnections,lengthening new sales cycles, and price compression.

 

***Cost of Circuit Access***

*** ***

The decrease in cost ofcircuit access in the first quarter 2004 compared to the first quarter 2003 wasprimarily attributable to the decrease in circuit revenues. As a percentage oftotal revenues, cost of circuit access decreased for the first quarter 2004 to65% from 67% for the first quarter 2003.

 

***Operations and Administration***

*** ***

The decrease inoperations and administration expense in the first quarter 2004 compared thefirst quarter 2003 primarily resulted from the restructuring of personnel andrent. Employee compensation and related payroll taxes decreased to $2.5 millionin first quarter 2004 from $2.8 million in the first quarter 2003. Ouraverage number of employees decreased to 110 in 2004 compared to 115 in 2003.We expect headcount to remain relatively flat for 2004. Consulting feesdecreased to $484 thousand in the first quarter 2004 compared to $999 thousandin the first quarter 2003 due to fees incurred in relation to the CityNettransaction along with fees incurred for services provided

 

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byour former interim CEO, Lance Boxer. Similarly, rent for corporate offices andsales offices decreased to $1.8 million in the first quarter 2004 from$2.0 million in the first quarter 2003, due primarily to termination ofleases in 2003.

 

***Depreciation and Amortization***

*** ***

Depreciation expense includesdepreciation of furniture, fixtures, leasehold improvements and equipment atour office and UTX facilities. The decrease in depreciation in the firstquarter 2004 compared to the first quarter 2003 was primarily attributable toimpairment of UTX assets in 2002 and 2003.

 

***Restructuring and Other Nonrecurring Charges***

*** ***

In the first quarter2004, a restructuring liability of $2.4 million was reversed as a result offavorable lease negotiations for three restructured sites as described in Note5.

 

***LIQUIDITY AND CAPITAL RESOURCES***

*** ***

Although we are currently able to pay our debts asthey become due, we may not have sufficient cash to satisfy our liquidity needsfor the upcoming twelve months. As a result of our financial condition, ourindependent auditor has included an explanatory paragraph in its report on ourfinancial statements for the twelve months ended December 31, 2003,expressing substantial doubt regarding our ability to continue as a goingconcern. This means that the auditor questions whether we can continue inbusiness. Investors in our securities should carefully review the reportprepared by our auditor. Our ability to continue in the normal course ofbusiness is dependent upon our access to additional capital and the success ofour future operations. As of May 10, 2004, our unrestricted cash balance isapproximately $11.5 million and our stockholders’ equity is negative.****The success of our future operations isdependent on our ability to sell new services, manage our disconnect rate to alow level, negotiate with our carriers on outstanding billing disputes andpurported purchase commitment shortfalls while avoiding large payments tomaintain service, and to negotiate with landlords to lower our rent expense. Weare actively soliciting possible investors and strategic partners, however,there can be no assurance we will raise additional capital or improve ouroperating results. If we are unable to access additional capital or improveoperating results, we may not be able to continue our operations and we may beforced to seek bankruptcy protection. Furthermore, if we are required to sellequity to obtain additional capital, our shareholders would experiencesignificant dilution; alternatively, if we obtain debt financing, ourliabilities and future cash commitments will increase. There can be noassurance that we will be successful in our efforts to obtain additionalcapital and, therefore, that we will continue our operations in the normalcourse.

 

As a result of continued negative sales and disconnecttrends in 2003 and 2004, we decided in 2004 to stop paying monthly rent undercertain leases where we are not recognizing any economic benefit (although weare currently able to pay our debts as they become due). We are activelydiscussing termination agreements with the landlords of these premises toeliminate these monthly cash payments. The monthly amount of lease paymentsthat we are not paying as of May 10, 2004 is approximately $248 thousand(including estimated operating expenses and taxes). As of May 10, 2004, we havenot paid approximately $741 thousand in total rents. In 2004, our landlordsreceived payments of approximately $653 thousand that were restricted assecurity deposits due to non-payment of our leases and lease termination agreements.On March 10, 2004, we terminated leases that will save us approximately $65thousand a month, in exchange for a cash payment of $216 thousand of which $141thousand was restricted as a security deposit. We also signed an agreement with a different landlord on April 28, 2004terminating two leases.  As a result, weeliminated approximately $72 thousand in monthly rent payments in exchange fora cash payment of $712 thousand of which $512 thousand was restricted as asecurity deposit along with a $1 million promissory note that is convertibleinto 400,000 shares of common stock if certain conditions are met in thefuture.

 

We are in also in discussions with various parties toassign or sell the remaining UTX assets (including associated liabilities) to raiseadditional cash and/or reduce our monthly rental expense. In addition, if weare unsuccessful in assigning or selling the remaining UTX assets, we areactively researching migrating our existing traffic at the these sites to newfacilities in an effort to terminate the leases for the remaining UTX sites.Terminating these leases would further reduce our cash payments. There can beno assurance we will either assign or sell the

 

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remainingUTX assets or reach termination agreements with the landlords of these sites.If we are not able to reach termination agreements, we would likely face claimsfrom landlords for nonpayment of rent.

 

We are also in discussions with several vendors tosettle outstanding billing disputes.  Weanticipate that we will have to make payments of at least $2 million over thenext several months to settle these disputes. As of May 10, 2004, we havereached a verbal agreement to settle outstanding disputes totaling $3.2 millionwith one of our vendors. This settlement required us to make cash paymentstotaling $800 thousand in May 2004. In addition, we are required to pay anadditional $1.1 million in cash over seven months.

 

The following summarizes our contractual obligationsat March 31, 2004 adjusted for the lease termination signed in April 2004, andthe effect such obligations are expected to have on our liquidity and cash flowin future periods.

 
|       |   | **Non-Cancelable  Operating Leases (incl.  restructured facilities)** |       | **Non Cancelable  Purchase Commitments** |   | **Total**  |       |
|------------|--------|--------------------------------------------------------------------------------------|------------|----------------------------------------------------|--------|------------|------------|
| 2004       |   | $                                                                                    | 4,757      |                                               | $      | 15,348     |       | **$** | 20,105 |   |
| 2005       |   | 5,838                                                                                |       | 17,025                                             |   | 22,863     |       |
| 2006       |   | 5,719                                                                                |       | 1,750                                              |   | 7,469      |       |
| 2007       |   | 5,883                                                                                |       | —                                             |   | 5,883      |       |
| 2008       |   | 6,082                                                                                |       | —                                             |   | 6,082      |       |
| Thereafter |   | 18,088                                                                               |       | —                                             |   | 18,088     |       |
| **Total**  |   | **$**                                                                                | **46,367** | ** **                                         | **$**  | **34,123** | ** ** | **$** | **80,490** | ** ** |
|            |        |                                                                                      |            |                                                    |        |            |            |  |  |  |  |

 

Our principal uses of cash are to fund operatinglosses, working capital requirements and some limited capital expenditures. Ourcapital expenditures will be limited to the enhancement of selected elements ofour IT tools to help us achieve our sales objectives and we will continue toseek out new data resources relating to the provisioning of circuits.

 

***Restrictedcash was $1.0 million at March 31, 2004, declining approximately $700 thousandfrom a balance of $1.7 million at December 31, 2003. In 2004, certainlandlords have received payments of $653 thousand that were restricted assecurity deposits due to non-payment of our leases and lease terminationagreements. Restricted cash consists of letters of credit issued to real estatelandlords, a credit card company, a telephone company and state regulators.***

*** ***

Cash used by operating activities in the first quarter2004 was $5.2 million, compared to $4.3 million for the first quarter2003. The increase in cash used by operating activities was due primarily tothe payments incurred to settle long term leases discussed in Note  5. Cash used by investing activities was $2thousand in the first quarter 2004 compared to cash provided of $243 thousandin the first quarter 2003.  The decreaseis the result of higher fixed asset sales in the first quarter of 2003.

 

Cash provided by financing activities was $700thousand in the first quarter 2004 compared to $1.8 million in the firstquarter 2003.  The decrease is theresult of movement of restricted cash to unrestricted cash due to non-paymentof our leases and lease termination agreements .

 

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***FACTORS THATMAY AFFECT FUTURE OPERATING RESULTS***

*** ***

In addition to the factors discussed elsewhere in thisForm 10-Q and our other reports filed with the SEC, the following areimportant factors which could cause actual results or events to differmaterially from those contained in any forward-looking statements made by or onbehalf of us.

 

**We may not havesufficient cash to satisfy our liquidity needs. Consequently, our independentauditor has expressed substantial doubt in our ability to continue as a goingconcern.**

** **

Although we are currently able to pay our debts asthey become due, we may not have sufficient cash to satisfy our liquidity needsfor the upcoming twelve months. As a result of our financial condition, ourindependent auditor has included an explanatory paragraph in its report on ourfinancial statements for the period ended December 31, 2003, with respectto our ability to continue as a going concern. This means that the auditorquestions whether we can continue in business. Investors in our securitiesshould carefully review the report prepared by our auditor. Our ability tocontinue in the normal course of business is dependent upon the success of ourfuture operations and/or our access to additional capital. We are activelysoliciting possible investors and strategic partners, however, there can be noassurance we will raise additional capital or improve our operating results.Uncertainties as to these matters raised substantial doubt about our ability tocontinue as a going concern at the date of our auditor’s report. If we areunable to access additional capital or improve operationally, we may not be ableto continue our operations and may be forced to seek bankruptcy protection.Furthermore, if we are required to sell equity to obtain additional capital,our shareholders could experience significant dilution; alternatively, if weobtain debt financing, our liabilities and future cash commitments willincrease. There can be no assurance that we will be successful in our effortsto obtain additional capital and, therefore, that we will be able to continueour operations in the normal course.

 

**Our independent auditor’sreport regarding our ability to continue as a going concern could have amaterial adverse effect on our business, financial condition, and trading priceof our common stock.**

** **

The issuance by our independent auditor of its reportconcerning our ability to continue as a going concern could have a materialadverse effect on our business, financial condition and stock price. Forexample, among other things, as a result of concerns regarding our financialviability, prospective and existing customers may not desire to entrust us withtheir network capacity requirements, thus making it difficult for us toincrease or maintain our revenues. Additionally, our carrier suppliers maydemand security deposits or accelerated payment terms as a condition to providingservices to us, thus increasing our costs of operations. If any of these eventsor similar events occurs, it may have a material adverse effect on ourbusiness, financial condition and trading price of our common stock. For a moredetailed discussion of these risks, see the risk factors below.

 

**If our financialcondition continues to deteriorate, our carrier suppliers may demand securitydeposits or accelerated payment terms.**

** **

Certain of our carrier suppliers might claim the rightto demand a security deposit or accelerated payment terms from us due to ourfinancial condition. Our carrier suppliers may further seek to bill us forpurported failure to meet purchase commitments or purported under billings orother billings notwithstanding factual or legal disputes regarding any suchpurported failure. If we are required to pay any of these amounts, our cashresources could be materially diminished. Alternatively, if we do not makethese payments, carrier suppliers may be unwilling to continue to do businesswith us. Some of these failures may be claimed by incumbent local exchangecarriers, which historically have been reluctant to engage in negotiations onsuch matters and if they do engage in negotiations, often refuse tosignificantly reduce the amounts they claim we owe. Such disputes may alsoaffect the willingness of suppliers to provide us with capacity or otherservices, which would reduce our operating flexibility and ability to deliverservices to existing or potential customers. If the supplier in any suchdispute enters a bankruptcy or similar proceeding, our business relationshipwith the supplier could be disrupted, which would impair our ability tonegotiate. As of March 31, 2004, we had $18.9 million in open billing disputeswith carriers.

 

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**We have incurredsubstantial losses since our inception, and if we fail to generatesignificantly higher revenues and reduce our costs, we will be unable toachieve and maintain profitability and may be unable to continue ouroperations.**

** **

We have incurred significant losses since inceptionand expect to continue to incur losses in the future. As of March 31, 2004, wehad an accumulated deficit of $296 million. Our revenues have decreased to$14.9 million in the first quarter of 2004 from $19.1 million in the firstquarter of 2003. We cannot be certain that we will be successful in reducingour costs, that we will be able to significantly increase our revenues, or thatwe will achieve sufficient revenues in order to become profitable. We expect tocontinue to incur expenses in order to:

 

•  Develop and sell new serviceofferings, such as software or information based products;

 

•  Expand sales and marketingchannels, including our government markets group;

 

•  Enhance our UIX database anddevelop other intellectual property; and

 

•  Continue operating our UTXfacilities.

 

As a result, we will need to generate significantlyhigher revenues to achieve and maintain profitability. If we fail tosignificantly reduce our costs or to generate significantly higher revenues, wewill continue to incur operating losses and net losses and may be unable tocontinue our operations.

 

**In an effort toreduce our operating expenses, we have chosen not to pay certain landlords andseek agreements to terminate leases with those landlords.**

** **

Although we are currently able to pay our debts asthey become due, in an effort to reduce our operating expenses, we have chosennot to pay certain landlords and seek agreements to terminate leases with theselandlords. One of these landlords has filed suit against us seeking to evict usfrom the facility and requiring us to pay unpaid rent amounts. If we areunsuccessful in negotiating lease termination agreements, other landlords mayalso file lawsuits against us seeking to evict us, terminate the lease, orrequire payment of amounts due under all or a portion of the remainder of theterm of the lease. If we are unable to reach agreements to terminate theseleases, or the landlords file lawsuits against us, we may be required to filefor protection under bankruptcy law. If a landlord terminates a lease fornon-payment or we are evicted from our facilities, it may adversely affect ouroperations, limit our ability to increase our revenues, and increase our costof operating.

 

**Our business hasbeen unprofitable, and we may be unable to profitably manage and market ourservices to customers.**

** **

Our business has been unprofitable. To be successful,we must convince prospective customers to entrust their network capacityrequirements to us. Due to our financial condition, it may be difficult for usto obtain this trust from prospective customers. If customers do not widelyaccept our services, our client base and revenues will not increase. Ourability to expand our client base and, therefore, to increase our revenues maybe limited by the following factors:

 

•  Our perceived financialviability, including with respect to our independent auditor’s report for theperiod ending December 31, 2003;

 

•  The speed, reliability and costeffectiveness of our services;

 

•  The willingness of customers tooutsource the obtaining of circuits;

 

•  The financial viability ofcustomers and prospective customers;

 

•  The financial viability of oursuppliers;

 

•  Our ability to market ourservices effectively; and

 

•  The growth of the Internet anddemand for telecommunications services.

 

We may not be able to execute our business model ifthe markets for our services fail to develop or grow more slowly thananticipated, if competition in our industry intensifies or if we are unable toexpand our client base.

 

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**Our efforts todevelop new service offerings and expand marketing channels may not besuccessful.**

** **

In an effort to increase our revenues, we may investsignificant resources to develop and sell new service offerings, such assoftware or information based products, and to expand marketing channels,including our government markets group. These initiatives may requiresignificant expenditures, which would reduce resources available to maintainand develop our traditional lines of business. Whether new service offerings orexpanded marketing efforts succeed depends on factors we control, such ascoordinating our internal financial, engineering, marketing, informationtechnology and sales personnel, and on factors we cannot control, includingwhether customers will pay for these offerings and whether our vendors willprovide the goods and services we need. There can be no assurance we will besuccessful in these efforts. If we do not successfully develop and sell newservice offerings and expand marketing channels, we may not increase ourrevenues and could incur substantial losses that would harm our existingbusiness.

 

**Industry conditionsand further deterioration in credit quality may affect our customers’ abilityto pay their obligations to us in a timely manner or at all and may affect theability of our carrier suppliers to provide reliable service.**

** **

We operate in a highly concentrated, high-risk marketthat has experienced a general deterioration of credit quality. Credit-qualityconcerns, which have historically affected smaller network service providersand subsequently smaller telecommunications providers, have more recently impacted,and continue to impact, larger telecommunications providers and carriers.Several of our significant customers have filed for reorganization orliquidation under the bankruptcy laws. As a result of the decline in creditquality and these bankruptcies, some of our customers may have inadequatefinancial resources to meet all of their obligations and may seek to reject orrenegotiate their purchase agreements with us. If either significant customersor a significant number of smaller customers are unable to meet theirobligations to us, reject their contracts or renegotiate their contracts, wemay not be able to recognize future revenues and we may also incur additionalbad debt expenses and experience reduced opportunities for growth. If acustomer fails to pay us, we may remain obligated to third parties for the costof circuits previously provided to the customer. Certain current or formercustomers who are bankrupt have filed and additional customers might filepreference actions to try to recover amounts that they previously paid us.These events would harm our cash flow, results of operations and financialcondition, as would future deterioration in market conditions in our industryor in the creditworthiness of our significant customers or a significant numberof smaller customers.

 

In addition, some of our carrier suppliers may haveinadequate financial resources to provide reliable service or to meet theirother obligations to us. If a carrier supplier is unable to meet itsobligations to us, we could be required to purchase replacement services onless favorable terms or experience disruptions in service, which could impairour ability to retain or attract customers. Disruptions in service couldrequire us to issue outage credits to our customers or incur other liabilities,which would reduce our revenue and gross margins.

 

**Our common stockmay be de-listed from the Nasdaq Small Cap Market, which would reduce theliquidity in the market for our common stock and make capital raising and othertransactions more difficult.**

** **

In 2002, we moved from the Nasdaq National MarketSystem to the NASDAQ Small Cap Market. As a result, future capital raisingactivities and acquisitions may be more difficult due to increased statesecurities laws compliance obligations. The Nasdaq Small Cap Market requires aminimum bid price of $1.00 for continued listing. On June 3, 2003, wereceived a Nasdaq Staff Determination indicating that we had failed to complywith the $1.00 per share minimum bid price requirement for continued listingset forth in Marketplace Rule 4310(c)(4) and that our securitieswere, therefore, subject to delisting from the Nasdaq SmallCap Market. OnJuly 21, 2003, our stockholders approved a reverse stock split in aneffort to increase our stock price. On July 24, 2003, we had a hearingbefore a Nasdaq Listing Qualifications Panel to review the Staff Determination.On August 11, 2003, our stock began trading on a post split basis. OnAugust 22, 2003, the Panel granted our request for continued listing. OnApril 15, 2004, we received a letter from the Nasdaq notifying us that we didnot meet its minimum market capitalization, shareholder’s equity or net incomerequirements and seeking additional information on our plans for regainingcompliance. We sent a response on April 28, 2004, in which we described ourplan for regaining compliance with the relevant Nasdaq requirements andrequested that Nasdaq re-revaluate our status in 90 days.

 

If we fail to regain the minimum requirements forNasdaq listing in the future and we are de-listed from the Nasdaq Small CapMarket, our common stock would trade, if it traded at all, in theover-the-counter market, which

 

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mostinvestors view as a less desirable, less liquid marketplace. Among otherthings, this would place increased regulatory burden upon brokers, making themless likely to make a market in our stock. Loss of our Nasdaq Small Cap Marketstatus would likely make it more difficult for us to raise capital in thefuture. If we lose our Nasdaq Small Cap Market status, stockholders may find itmore difficult to dispose of, or to obtain accurate quotations as to the priceof our common stock thereby reducing the liquidity of our stock, making itdifficult for a stockholder to buy or sell our stock at competitive marketprices, or at all. In addition, we may lose support from institutionalinvestors, brokerage firms and market makers that may currently buy and maysell our stock and provide information to investors about us. Delisting couldalso cause the price of our stock to decrease further.

 

**If we fail tomanage our cost reduction efforts and future expansion effectively, our abilityto operate and to increase our services and customer base could suffer.**

** **

Our ability to successfully offer our services andimplement our business plan in a rapidly evolving market requires effectiveplanning and management of our operations, including our workforce. AtDecember 31, 1997, we had five employees. By the first quarter 2001, wehad over 400 full-time employees. Since that time, we have reduced ourheadcount to approximately 110 full-time employees as of March 31, 2004.These periods of growth and headcount reductions and potential growth in futureoperations will continue to place a significant strain on our managementsystems and resources. We cannot be sure that our reduced workforce will besufficient for us to identify and take advantage of market opportunities andmanage multiple relationships with various customers, suppliers and other thirdparties. If our operations and headcount grow in the future, we expect that wewill need to improve our financial and managerial controls, reporting systemsand procedures, and expand, train and manage our workforce, and we cannot besure that will be able to manage this potential expansion effectively.

 

**We depend on ourkey personnel to manage our business effectively in a rapidly changing market,and our ability to generate revenues will suffer if we are unable to retain ourkey personnel and hire additional personnel.**

** **

Our future success depends upon the continued servicesof our executive officers and other key sales, marketing and support personnel.We do not have “key person” life insurance policies covering any of our employees.In addition, we depend on the ability of a relatively new management team toeffectively execute our strategies. We have recently hired or promoted themajority of our executive officers and many of our key employees. Because ourmanagement team has worked together for a short period of time, we need tointegrate these individuals into our operations.

 

We may need to hire additional personnel in thefuture, and we believe our success depends, in large part, upon our ability toattract and retain our key employees. Attracting and retaining key employees isbecoming more difficult due to recent negative publicity regarding ourindustry, our low stock market capitalization, our limited financial resourcesand our recent workforce reductions. The loss of the services of any of our keyemployees, the inability to attract or retain qualified personnel in thefuture, or delays in hiring required personnel could limit our ability togenerate revenues and to operate our business.

 

**Conditions in ourindustry make forecasting difficult.**

** **

Our results have been affected by bankruptcies of oursuppliers and customers, credit problems in the telecommunications industry andcircuit disconnections. These industry conditions make it difficult for us toaccurately predict trends in our business. Accordingly, we are subject to allof the risks that are associated with companies in such an industry, including:

 

•  Undercapitalization;

 

•  Cash shortages;

 

•  Controlling our expenses andcash expenditures;

 

•  The new and unproven nature ofthe market for some of our services;

 

•  The need to make significantexpenditures and incur significant expenses as we develop our business,infrastructure and operations;

 

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•  The lack of sufficient customersand revenues to sustain our operations and growth without additional financing;

 

•  Difficulties in managing growth;and

 

•  Limited experience in providingsome of the services that we offer or plan to offer.

 

For example, from time to time we enter into long-termagreements with communications transport suppliers for the supply andinstallation of communications network capacity. These agreements may generallyprovide for minimum revenue commitments from us, which we must negotiate basedon forecasts of our future network capacity requirements. At March 31, 2004,these minimum purchase commitments totaled approximately $1.8 million permonth. Our aggregate actual purchases under these contracts, which averagedapproximately $1.2 million per month in the first quarter 2004, have notexceeded these minimum purchase commitments for certain vendors.  When our actual purchases fall short ofcontractual commitments, we may seek to negotiate alternate arrangement withthese suppliers.  In the event thatthese negotiations are unsuccessful, we may be left with a shortfall that couldaffect our operating margins or result in a dispute or litigation with thesupplier.  If we fail to forecast ournetwork capacity requirements accurately or fail to accurately forecast otheraspects of our business, it will be difficult for us to meet these minimumpurchase commitments or to become profitable. In addition, it may be difficultfor us to meet these minimum purchase commitments if our customers refuse touse capacity provided by a supplier that has filed for bankruptcy protection oris otherwise financially distressed. Management believes we are adequately reserved for any commitmentshortfalls.

 

**Recent legalproceedings may adversely affect our results and financial position.**

** **

We are party to several legal proceedings, includingtwo securities class action lawsuits that are pending against us. Managementbelieves that these lawsuits are without merit, and we intend to defend theseactions vigorously unless a settlement is reached. Because of the complexity ofcertain of the transactions underlying these lawsuits, as well as the inherentuncertainty of litigation, however, it is possible that the outcome of one ormore of these cases may be adverse to us. In addition, the resources requiredto defend these cases, including the management time and attention required toadequately defend our position, and the costs of potential settlements, or anyjudgment award may adversely affect our results of operations and financialposition.

 

**If we havedifficulties or delays in delivering circuits to our customers, our ability togenerate revenue will suffer and we may lose existing and potential newcustomers.**

** **

It typically takes 30 to 90 days to supply acircuit for a client, and we do not begin to recognize revenue until a circuithas been installed and accepted by the customer. Once we agree to facilitatethe supply of a circuit for a client, we negotiate with one or more transportsuppliers and manage the personnel and field technicians of multiple vendors. Aclient can withdraw its order with minimal liability at any time beforeaccepting the circuit. We may experience difficulties in facilitating thesupply of circuits if our transport suppliers run out of capacity, which wouldforce us to look for alternative sources of capacity on short notice. Inaddition, credit concerns, billing or other disputes with our suppliers mayadversely affect their willingness to provide capacity in a timely manner. Ifwe are unable to facilitate the supply of a circuit in a timely manner or failto obtain client acceptance of the circuit, we would be unable to recognizerevenues for that circuit and may incur financial liability to our supplier forthat circuit, and our operating results would be adversely affected.Furthermore, because our customers may cancel orders at any time beforeaccepting the circuit, we may find it difficult to forecast revenue and planour expenses accordingly.

 

**Our ability toimplement and maintain our UIX database is a critical business requirement, andif we cannot maintain precise data, we might be unable to cost-effectivelyfacilitate obtaining circuits for our customers.**

** **

To be successful, we must increase and updateinformation about pricing, capacity, availability and location of circuitscontained in our UIX database. Our ability to cost effectively facilitate thesupplying of circuits, to provide ongoing support and to develop new softwareor information-based products or services depends upon the information wecollect from our transport suppliers regarding their networks, which we includein our UIX database. Our suppliers are not obligated to provide us with thisinformation and could decide to stop providing this information to us at anytime. Moreover, we cannot be certain that the information that our suppliersshare with us is accurate or

 

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current.If we cannot continue to maintain and expand our UIX database as planned, wemay be unable to increase our revenues, develop new products or services, orcost-effectively facilitate the supplying of the circuits.

 

**If we cannotsuccessfully operate our network operations center, we will be unable toprovide monitoring, maintenance and restoration services to our customers.**

** **

One of our primary business objectives is to provideour customers with network monitoring, maintenance and restoration services24 hours a day, seven days a week through a network operations center.While we currently operate our own network operations facility, our experiencein this regard is limited both by the amount of time we have been in businessand our providing this service on our own as well as by the technicallimitations of managing circuits and services on the networks of otherproviders. As a consequence, we cannot be sure that our efforts to providethese services will be successful. Our ability to operate a network operationscenter will depend on many factors, including our ability to train, manage andretain employees. If we fail to successfully operate a network operationscenter, we may not be able to monitor network operations effectively ortroubleshoot circuits in a cost-effective manner, which would cause us to losecustomers and make it difficult for us to attract new customers.

 

**Competition in ourindustry is intense and growing, and we may be unable to compete effectively.**

** **

The market in which we operate is rapidly changing andhighly competitive. We believe that at this time no single competitor competesdirectly with us with respect to all of the services we offer; however, wecurrently or potentially compete with a variety of companies, including some ofour transport suppliers, with respect to our products and servicesindividually, including:

 

•  National and local carriers,such as AT&T, Level 3, Broadwing, Qwest, Sprint, MCI (formerlyWorldCom) and WilTel;

 

•  Companies that providecollocation facilities, such as Switch & Data, AT&T and Equinix;

 

•  Competitive access providers andlocal exchange carriers, such as AT&T, ICG Communications, MCI, XOCommunications and FiberNet; and

 

•  Incumbent local exchangecarriers, such as Verizon, BellSouth and SBC Communications.

 

Our industry is expected to consolidate, which wouldincrease the size and scope of our competitors. Competitors could benefit fromassets acquired from distressed carriers or strategic alliances in thetelecommunications industry. New entrants could enter the market with abusiness model similar to ours. Our target markets may support only a limitednumber of competitors. Operations in such markets with multiple competitiveproviders may be unprofitable for one or more of such providers. Prices in boththe long-distance business and the data transmission business have declinedsignificantly in recent years and are expected to continue to decline. Inparticular, companies that have reduced their debt or other obligations throughbankruptcy or other restructurings may have significantly lower cost structuresthat allow them to offer services at significantly reduced prices. Thisdownward pressure on prices has caused us to lower our prices and marginpercentages to remain competitive. As a result, our gross margin percentageshave decreased, making it more difficult for us to achieve profitability.

 

Moreover, while recent regulatory initiatives allowcarriers such as us to interconnect with incumbent local exchange carrierfacilities and to obtain unbundled network elements from incumbent localexchange carriers, certain initiatives also provide increased pricingflexibility for, and relaxation of regulatory oversight of, incumbent localexchange carriers. This may permit incumbent local exchange carriers to userevenues generated from non-competitive services to subsidize services thatcompete with our services, allowing them to offer competitive services at lowerprices. Existing laws also restrict the Regional Bell Operating Companies fromfully competing with us in the market for interstate and internationallong-distance telecommunications services, but also permit the FCC to lessen orremove some restrictions. Recently the Bell companies have received FCCpermission to offer long-distance services to customers in a majority ofstates. These FCC decisions under existing law, or future amendments to Federaltelecommunications laws permitting the regional Bell operating companies tocompete fully with us in this market may result in a reduction to our revenuesfrom these services if these companies are able to attract substantial businessfrom our customers.

 

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We must distinguish ourselves through the quality ofour client service, our service offerings and brand name recognition. We maynot be successful in doing this.

 

Many of our potential competitors have certainadvantages over us, including:

 

•  Substantially greater financial,technical, marketing and other resources, including brand or corporate namerecognition;

 

•  Substantially lower coststructures, including cost structures of facility-based providers who havesignificantly reduced debt and other obligations through bankruptcy or otherrestructuring proceedings;

 

•  Larger client bases;

 

•  Longer operating histories; and

 

•  More established relationshipsin the industry.

 

Our competitors may be able to use these advantagesto:

 

•  Expand their offerings morequickly;

 

•  Adapt to new or emergingtechnologies and changes in client requirements more quickly;

 

•  Take advantage of acquisitionsand other opportunities more readily;

 

•  Enter into strategic relationshipsto rapidly grow the reach of their networks and capacity;

 

•  Devote greater resources to themarketing and sale of their services; and

 

•  Adopt more aggressive pricingand incentive policies, which could drive down margins.

 

If we are unable to compete successfully against ourcurrent and future competitors, our gross margins could decline and we couldlose market share, either of which could materially and adversely affect ourbusiness.

 

**Theunpredictability of our operating results may adversely affect the tradingprice of our common stock.**

** **

Our revenues and operating results may varysignificantly from period to period due to a number of factors, many of whichwe cannot control and any of which may cause our stock price to fluctuate.These factors include the following:

 

•  Uncertainty regarding timing forsupplying circuits or failure to obtain client acceptance of circuits;

 

•  Decisions by existing customersnot to renew services on a timely basis when existing client contractsterminate;

 

•  Decisions by existing customersoperating under bankruptcy protection to reject agreements with us or to try torecover from us in preference actions amounts that they previously paid us;

 

•  The amount of unused circuitcapacity that we hold;

 

•  Costs related to acquisitions oftechnology or businesses;

 

•  Costs related to defending andsettling litigation;

 

•  General economic conditions aswell as those specific to the telecommunications, Internet and relatedindustries;

 

•  Payment obligations to our suppliersunder service agreements in situations in which our client is not able to meetits obligations with us or is not liable to us; and

 

•  Internet growth and demand forInternet infrastructure and telecommunications services.

 

In addition, we depend on decisions by our customersto expand their Internet and telecommunications infrastructure, which in turndepend upon the success and expected demand for the services these customersoffer.

 

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We expect our operating expenses to remain relativelyconstant or decline moderately in future periods. Our operating expenses arelargely based on anticipated revenue trends, and a high percentage of ourexpenses are, and will continue to be, fixed in the short term due in largepart to maintenance of our UTX facilities. As a result, fluctuations in ourrevenue for the reasons set forth above, or for any other reason, could causesignificant variations in our operating results from period to period and couldresult in substantial operating losses.

 

Because of these factors, we believe thatperiod-to-period comparisons of our operating results are not, and will not be,a good indication of our future performance. It is likely that, in some futurequarters, our operating results may not meet the expectations of public marketanalysts and investors. In that event, the price of our common stock may fall.

 

**We expect toexperience volatility in the trading of our stock, which could negativelyaffect its value.**

** **

The market price of our common stock has fluctuatedsignificantly since our initial public offering. The market price of our commonstock may in the future fluctuate significantly in response to a number offactors, some of which are beyond our control, including:

 

•  The one-for-twenty reverse splitof our common stock completed in August 2003;

 

•  Our independent auditor’s reportfor the period ended December 31, 2003, which indicates that the auditorhas substantial doubts about our ability to continue as a going concern;

 

•  Variations in our operatingresults;

 

•  Changes in financial estimatesor coverage by securities analysts;

 

•  Reduced liquidity resulting fromour transfer from the Nasdaq National Market to the Nasdaq SmallCap Market, orthe actual or potential delisting of our stock from the Nasdaq SmallCap Market;

 

•  Changes in market valuations oftelecommunications and Internet-related companies;

 

•  Announcements by our competitorsor us of new products and services or of significant acquisitions, strategicpartnerships or joint ventures;

 

•  Any loss or bankruptcy of amajor client or supplier;

 

•  Additions or departures of keypersonnel;

 

•  Any deviations in net revenuesor in losses from levels expected by securities analysts;

 

•  Future sales of common stock orother capital raising efforts; and

 

•  Volume fluctuations in thetrading of our common stock, which are particularly common among highlyvolatile securities of telecommunications and Internet-related companies.

 

**Our facilities andthe networks on which we depend may fail, which would interrupt the circuitaccess and indefeasible rights of use we provide and make it difficult for usto retain and attract customers.**

** **

Our customers depend on our ability to provide ongoingdedicated circuit access and indefeasible rights of use (“IRU’s”). Theoperation of these circuits depends on the networks of third party transportsuppliers. The networks of transport suppliers and customers who may use ourUTX facilities may be interrupted by failures in or damage to these facilities.Our facilities and the ongoing circuit and IRU access we provide may beinterrupted as a result of various events, many of which we cannot control,including fire, human error, earthquakes and other natural disasters, disastersalong communications rights-of-way, power loss, telecommunications failures,sabotage or vandalism, or the financial distress or other events adverselyaffecting our suppliers, such as bankruptcy or liquidation.

 

We may be subject to legal claims and be liable forlosses suffered by customers and carriers for disruptions to circuits or IRU’sor damage to client or carrier equipment or other property resulting fromfailures at our facilities or on the networks of third party providers. Unlesscaused by an event excused under our contract, such as a “force majeure” event,we generally provide outage credits to our customers if service disruptionsoccur. If our service failure rate is high, we may incur significant expensesrelated to service outage credits, which would reduce our

 

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revenuesand gross margins. We would also incur significant expenses in investigatingand addressing the causes of such service failures, which would divertresources from the maintenance or expansion of our services and cause ourbusiness to suffer. In addition, we may lack the resources to investigate andaddress any such failures in as timely a manner as our customers may expect,which may damage our business relationship with those customers and reduce ourability to obtain future business. Customers may seek to terminate theircontracts with us if there is a service failure. In addition, if our servicefailure rate is high, our reputation could be harmed.

 

**Terrorist attacksand threats or actual war may negatively affect our business, financialcondition and results of operations.**

** **

Our business is affected by general economicconditions that can decline as a result of numerous factors outside of ourcontrol, such as terrorist attacks and acts of war. Terrorist attacks againstthe United States, as well as events occurring in response to or in connectionwith them, including future terrorist attacks against U.S. targets, rumors orthreats of war, actual conflicts involving the United States or its allies, ormilitary or trade disruptions affecting our suppliers or our customers, mayaffect impact our operations. As a result, there could be delays or losses inthe delivery of our service, decreased sales of our services and extension oftime for payment of accounts receivable from our customers. Strategic targetssuch as communications networks and the Sears Tower (where our principalbusiness offices are located) may be at greater risk of future terroristattacks than other targets in the United States. This occurrence could have anadverse affect on our operations. It is possible that any or a combination ofthese occurrences could have a material adverse effect on our business,financial condition and results of operations.

 

**We depend onseveral large customers, and the loss of one or more of these customers, or asignificant decrease in total revenues from any of these customers, wouldlikely significantly reduce our revenue and income.**

** **

Historically, a substantial portion of our revenueshas come from a limited number of customers. For example, our three largestcustomers accounted for approximately 56%, 39%, and 31% of our total revenuesin 2001, 2002, and 2003, respectively. In the first quarter of 2004, our threelargest clients accounted for approximately 32% of our total revenues comparedto approximately 38% in the first quarter of 2003.  Although the percentage of our revenues derived from our threelargest customers has declined over the three past years, we continue to have asignificant number of contracts with these customers and derive a significantportion of our revenues from these customers. These contracts expire on variousdates between now and March 2005. If, through a bankruptcy proceeding orotherwise, we lose one or more large customers, or if one or more of our largecustomers reduces the services they purchase from us or otherwise renegotiatesthe terms on which they purchase services from us and we fail to add newcustomers, our revenues could decline and our results of operations wouldsuffer.

 

**We have assumedindebtedness that could restrict our future operating activities.**

** **

In April 2004, we entered into a lease terminationagreement with one of our landlords under which the leases for two sites wereterminated in consideration of a cash payment along with a $1 millionpromissory note. The promissory note is due in two years with no interest andis convertible into a maximum of 400,000 shares of common stock if certainconditions are met in the future.  Inaddition, in connection with the closing of the Purchase Agreement with CityNetin July 2003, we assumed $2 million in principal amount of apromissory note executed by CityNet and made to Electro Banque. The note issecured by the fiber optic ring located in Albuquerque, New Mexico and relatedassets, matures in a single installment on December 31, 2007 and does notbear interest until January 1, 2006; thereafter, it bears interest at 8%per annum. The loan documents provide that we will not sell the fiber opticring unless we make certain payments to Electro Banque. This restriction mightprevent us from pursuing potentially advantageous business opportunities. Inaddition, our ability to repay the above described indebtedness when due willdepend upon our ability to generate sufficient revenue, or to renegotiate orreplace a portion of the indebtedness on terms and conditions favorable to us,if at all. There can be no assurance that we will generate sufficient revenueor be able to renegotiate or replace the indebtedness on terms and conditionsfavorable to us.

 

**Operating our UTXfacilities causes us to incur significant costs and expenses. To date, themarket for our UTX services has been unprofitable.**

** **

We have incurred significant costs and expenses indeveloping our UTX facilities, and we continue to incur costs and expensesrelated to these facilities in connection with: leasing real estate; hiring,training and managing employees; maintaining power and redundancy systems;maintaining multiple communications connections; and

 

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depreciationof equipment. To date, the market for our UTX services has been unprofitableand has been developing more slowly than we had expected. We have derivedsubstantially all of our revenues from providing on-going circuit access andhave only limited experience providing our UTX services. While managementbelieves that some of our UTX facilities have significant value to ourbusiness, we have tested and impaired our UTX sites in 2002 and in 2003 incompliance with SFAS No. 144. If the market for our UTX services does notincrease significantly, we will not generate revenues to offset the costs weincur in connection with such facilities, and therefore, we will suffer losses.In addition, we are actively seeking termination agreements with the landlordsof certain UTX sites and may seek to terminate additional leases in the future.Please see the above risk factor that describes these efforts.

 

**The regulatoryframework under which we operate and new regulatory requirements or newinterpretations of existing regulatory requirements could require substantialtime and resources for compliance, which could make it difficult for us tooperate our business.**

** **

Our U.S. communications services are subject to bothfederal and state regulation. In providing our interstate and internationalcommunications services, we must comply with applicable telecommunications lawsand regulations prescribed by the FCC and applicable foreign regulatoryauthorities. At the state level, we are subject to state laws and to regulationby state public utility commissions. Our international services are subject toregulation by foreign authorities and, in some markets, multi-nationalauthorities, such as the European Union.

 

These laws and regulations are subject to frequentchanges and different interpretations, and therefore, it is difficult for us toassess the impact of these factors on our operations. The current domestic andinternational trend is toward deregulation of telecommunications and Internetservices. However, we cannot be certain that this trend will continue, and itis possible that changes in regulatory policies could limit our ability tocompete in some markets. The implementation, modification, interpretation and enforcementof laws and regulations vary and can limit our ability to provide many of ourservices.

 

We have been required to obtain authorization from theFCC, many state public utilities commissions and foreign regulatory authoritiesto offer particular types of telecommunications services. Pursuant to theseauthorizations, we have to comply with a variety of regulatory obligations onan ongoing basis. We cannot provide assurance that the FCC, state commissionsor foreign authorities will grant us required authority (or do so in a timelymanner), or refrain from taking action against us if we are found to haveviolated any applicable requirements. If authority is not obtained or if ourschedules of prices, terms and conditions are not filed, or are not updated, orotherwise do not fully comply with the rules of the FCC or state orforeign regulatory agencies, third parties or regulators could challenge ourability to offer our services or attempt to impose fines. Such challenges orfines could cause us to incur substantial legal and administrative expenses.

 

Because we purchase telecommunications services fromother carriers (including both long-distance and local telephone companies) forresale to our customers, our costs of doing business can be affected by changesin regulatory policies affecting these other carriers. For example, the FCC hasrecently announced decisions that may increase the costs of some dedicatedtransmission services offered by the local telephone companies. We cannotcontrol and often cannot predict these types of decisions or their impact onour business operations.

 

Changes to existing regulations in particular marketsmay decrease the opportunities that are available for us to enter into thosemarkets, or may increase our legal, administrative or operational costs, or mayconstrain our activities in other ways that we cannot necessarily anticipate.

 

**Requiredregulatory approvals may interfere with or delay corporate transactions.**

** **

As a regulated company, we may be required to obtain theapproval of the FCC and certain state and foreign regulators before engaging incertain types of transactions, including some mergers or acquisitions of otherregulated companies, sales of all or substantial portions of our business,issuances of stock, and incurrence of debt obligations. The particular types oftransactions that require approval differ in each jurisdiction. If we cannotobtain the required approvals, or if we encounter substantial delays inobtaining them, we may not be able to enter into transactions on favorableterms, if at all, and our flexibility in operating our business will belimited. If our flexibility is limited, we may not be able to optimize ouroperating results.

 

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**We may incuroperational and management inefficiencies if we acquire new businesses ortechnologies.**

** **

Tofurther our strategy, we may seek to acquire businesses and technologies thatwe believe will complement our existing business or otherwise relate to astrategic transaction. Any such acquisitions would likely involve some or allof the following risks:

 

•  Difficulty of assimilatingacquired operations and personnel and information systems;

 

•  Potential disruption of ourongoing business;

 

•  Possibility that we may notrealize an acceptable return on our investment in these acquired companies orassets;

 

•  Diversion of resources;

 

•  Possible inability of managementto maintain uniform standards, controls, procedures and policies;

 

•  Risks of entering markets in whichwe have little or no experience; and

 

•  Potential impairment ofrelationships with employees, suppliers or customers.

 

We may need to complete these transactions in order togenerate revenues, obtain needed capital, and to continue our business strategies.We cannot be sure that we will be able to obtain any required financing forthese transactions or that these transactions will occur.

 

**We must continueour marketing and sales initiatives to increase market awareness and sales ofour services.**

** **

Our services require a sophisticated sales andmarketing effort that targets key people within our prospective customers’organizations. This sales effort requires the efforts of select personnel aswell as specialized system and consulting engineers within our organization.Our ability to execute our sales and marketing initiatives depends on manyfactors, including our ability to train, manage and retain employees. If we areunable to effectively staff our marketing and sales operations, or ourmarketing efforts are not successful, we may not be able to increase marketawareness or sales of our products and services, which may prevent us fromachieving and maintaining profitability.

 

**If we do notcontinue to train, manage and retain our employees, customers may significantlyreduce purchases of our services.**

** **

Our employees are responsible for providing ourcustomers with technical and operational support, and for identifying anddeveloping opportunities to provide additional services to our existingcustomers. If we fail to train, manage and retain our employees, we may belimited in our ability to gain more business from existing customers, and wemay be unable to obtain or maintain current information regarding ourcustomers’ and suppliers’ communications networks, which could limit ourability to provision future circuits for our customers or sell and/or developnew service offerings.

 

**Failure tosuccessfully maintain and upgrade our management information systems could harmour ability to operate or manage our business effectively.**

** **

Our ability to manage our business could be harmed ifwe fail to successfully and promptly maintain and upgrade our managementinformation systems as necessary. In addition, our ability to efficientlyoperate our business could suffer if the software that runs our informationsystems malfunctions.

 

**Because we have nopatented technology and have limited ability to protect our proprietaryinformation, competitors may more easily replicate our business and harm ourability to generate revenues.**

** **

We have no patented technology that would preclude orinhibit competitors from replicating our business. We rely on a combination ofcopyright, trademark, service mark and trade secret laws and contractualrestrictions to establish and protect our intellectual property. We haveapplied for registration of certain of our service marks in the United Statesand in other countries, and have obtained registrations for certain of ourservice marks in the United States, Canada, the European Union, Australia,Korea, Indonesia, Mexico, Thailand, Switzerland, New Zealand, Taiwan, andSingapore. Even if additional registrations are granted, we may be limited inthe scope of services for

 

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whichwe may exclusively use our service marks. We enter into confidentialityagreements with our employees, consultants and partners, and we control accessto, and distribution of, our proprietary information. Our intellectual propertymay be misappropriated or a third party may independently develop similarintellectual property. Moreover, the laws of certain foreign countries may notprotect our intellectual property rights to the same extent as do the laws ofthe United States. Unauthorized use of any of our proprietary information couldexpose us to competition, which would harm our ability to attract new andexisting customers and generate revenues.

 

**CityNet owns amajority of our outstanding common stock, which may discourage third partyoffers to acquire us.**

** **

CityNet has significant control over us. CityNet ownsapproximately 55% of our outstanding common stock on a fully-diluted basis(excluding those options and warrants outstanding at July 23, 2003 havingan exercise price above $20.00 per share). In addition, CityNet has designatedfive of the members of our board of directors, including the chairman. Theextent of CityNet’s control over us may have the effect of discouraging thirdparty offers to acquire us.

 

**Provisions of ourcharter documents may have anti-takeover effects that could prevent a change incorporate control.**

** **

Provisions of our certificate of incorporation,bylaws, and Delaware law could make it more difficult for a third party toacquire us, even if doing so would be a benefit to our stockholders.

 

**There may be salesof a substantial amount of our common stock that could cause our stock price tofall.**

** **

A small number of our current stockholders hold asubstantial number of shares of our common stock. Pursuant to the terms of thePurchase Agreement we entered into with CityNet on July 23, 2003, we alsoconcurrently entered into a stockholders agreement with CityNet, ICGHoldings, Inc., ComVentures and two of our former executives. Under thisagreement, these stockholders, including CityNet, among other things, haveagreed to limitations on their ability to dispose of shares of Common Stockuntil July 23, 2004, which is twelve months after the closing under thepurchase agreement, except as otherwise agreed to by the vote of a majority ofour board. These stockholders beneficially own approximately 75% of ouroutstanding common stock. Sales of a substantial number of shares of our commonstock or market expectations that these sales may occur could cause our stockprice to fall. In addition, the sale of these shares could make it difficultfor us to raise necessary capital by issuing additional common stock.

 

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The primary objective ofour investment activities is to preserve principal while at the same timemaximizing the income we receive from our investments without significantlyincreasing risk. Some of the securities that we may invest in may be subject tomarket risk. This means that a change in prevailing interest rates may causethe principal amount of the investment to fluctuate. For example, if we hold asecurity that was issued with a fixed interest rate at the then-prevailing rateand the prevailing interest rate later rises, the principal amount of ourinvestment will probably decline. To minimize this risk, we maintain ourportfolio of cash equivalents in a variety of securities, including commercialpaper, money market funds, government and non-government debt securities. Ingeneral, money market funds are not subject to market risk because the interestpaid on such funds fluctuates with the prevailing interest rate. As of March31, 2004, all of our investments were in cash and cash equivalents.

 

**InterestRate Sensitivity**

 

We maintain our cashequivalents primarily in a portfolio comprised of commercial paper, moneymarket funds, and investment grade debt securities. As of March 31, 2004, allof our investments had maturities of less than three months. Accordingly, we donot believe that our investments have significant exposure to interest raterisk.

 

**ExchangeRate Sensitivity**

 

We currently operateprimarily in the United States, and substantially all of our revenues andexpenses to date have been in U.S. dollars. Accordingly, we have had nomaterial exposure to foreign currency rate fluctuations.

 

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**ITEM 4. CONTROLS AND PROCEDURES**

 

Our management, includingour Chief Executive Officer and Chief Financial Officer, carried out anevaluation of our disclosure controls and procedures (as defined inRule 15d-14(c) under the Securities Exchange Act of 1934, as amended) asof the filing date of this report. Based on that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that we had sufficientprocedures for recording, processing, summarizing, and reporting informationthat is required to be disclosed in our reports under the Securities ExchangeAct of 1934, as amended. Our controls were designed by our management.

 

There have not been anysignificant changes to our internal controls or in other factors that couldsignificantly affect these controls subsequent to the date of this evaluation.

 

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**PART II.OTHER INFORMATION**

 

# ***ITEM 1. LEGAL PROCEEDINGS***

#  

On April 9, 2004, in a matter pending against us andsome of our former officers and directors in the United States District Courtfor the Southern District of Texas and captioned In re: Universal Access,Inc. Securities Litigation Civil Action No. 9:02LV103, the court denied ourmotion to dismiss other than with respect to two of the defendants.  The complaint in this matter alleges causes of actionfor securities fraud in connection with public disclosures made by our officersbetween 2000 and 2002.

 

In March 2004, the landlord of our New York officespace filed an action against us captioned 330 Madison Company LLCagainst Universal Access, Inc., Civil Court of the City of New York, County ofNew York: Non-Housing Part 52, Index No. 063274/2004.  In its complaint, the landlord seeks the paymentof approximately $73 thousand representing rent the landlord claims isunpaid, plus interest and attorneys’ fees, and the issuance of a warrant toremove us from the premises.  We will attemptto resolve this matter with the landlord.  As noted in the section entitled “Factors That May Affect FutureOperating Results,” other landlords may file complaints against us seekingpayment of unpaid rents, and this landlord may file future complaints againstus seeking additional relief.

 

In May 2004, AboveNet, Inc. filed a complaint againstus in the United States Bankruptcy Court for the Southern District of New York,In re AboveNet, Inc. v. Universal Access Global Holdings, Inc.  In its complaint, AboveNet seeks the paymentof approximately $3.8 million plus interest, representing amounts allegedlypaid to us in the 90 day period prior to the commencement date of AboveNet’sbankruptcy.  AboveNet asserts it isentitled to recovery under several theories, including that the payments werepreferential transfers, fraudulent transfers, and fraudulent conveyances. Webelieve that AboveNet’s claims are without merit.

 

**ITEM6.  EXHIBITS AND REPORTS ON FORM 8-K**

** **

**(a)**           List of Exhibits

** **
| **Exhibit  Number** |   | **Description of Document**                                                                                                                                                                                                                                                    |
|---------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                 |   | Agreement and Plan of Merger among the Company,  Migration Corporation and Universal Access, Inc. dated July 18,  2001.(1)                                                                                                                                                     |
| 2.2                 |   | Stock Purchase Agreement with CityNet  Telecommunications, Inc. dated April 7, 2003.(2)                                                                                                                                                                                        |
| 2.3                 |   | Letter agreement with CityNet  Telecommunications, Inc. dated April 7, 2003.(2)                                                                                                                                                                                                |
| 2.4                 |   | Letter agreement with CityNet  Telecommunications, Inc. dated July 23, 2003.(3)                                                                                                                                                                                                |
| 3.1                 |   | Restated Certificate of Incorporation of the  Company.(4)                                                                                                                                                                                                                                |
| 3.1.1               |   | Amendment to the Restated Certificate of  Incorporation of the Company.(3)                                                                                                                                                                                                               |
| 3.2                 |   | Amended and Restated Bylaws of the Company.(1)                                                                                                                                                                                                                                           |
| 4.1                 |   | Form of the Company’s Common Stock  certificate.(3)                                                                                                                                                                                                                            |
| 4.2                 |   | Amended and Restated Registration and Informational  Rights Agreement dated June 28, 1999.(5)                                                                                                                                                                                       |
| 4.3                 |   | Amended and Restated Registration and Informational  Rights Agreement dated June 30, 1999.(5)                                                                                                                                                                                       |
| 4.4                 |   | Registration Rights Agreement dated  November 10, 1999.(5)                                                                                                                                                                                                                          |
| 4.5                 |   | Registration Rights Agreement dated July 1,  2000.(6)                                                                                                                                                                                                                               |
| 4.6                 |   | Registration Rights Agreement with CityNet  Telecommunications, Inc. dated July 23, 2003.(3)                                                                                                                                                                                   |
| 4.7                 |   | Form of warrant to purchase shares of Common  Stock of the Company issued to Advanced Equities.(5)                                                                                                                                                                                  |
| 4.8                 |   | Preferred Stock Rights Agreement, dated as of  July 31, 2000, between Universal Access, Inc. and Wells Fargo,  including the Certificate of Designation, the form of Rights Certificate and  the Summary of Rights attached thereto as Exhibits A, B, and C,  respectively.(7) |
| 4.8.1               |   | Assumption of and Amendment to the Universal  Access, Inc. Preferred Stock Rights Agreement                                                                                                                                                                                         |

 

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|   |   | dated July 13, 2001.(1)                                                                                                   |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------|
| 4.8.2  |   | Second Amendment to the Universal Access Global  Holdings Inc. Preferred Stock Rights Agreement dated April 7, 2003.(2)   |
| 4.9    |   | Stockholders Agreement dated July 23, 2003.(3)                                                                            |
| 4.10   |   | Warrant to purchase shares of Common Stock of the  Company issued to Broadmark Capital, Inc. dated July 23, 2003.(3) |
| 10.20  |   | Indemnification Agreement with CityNet  Telecommunications, Inc. dated April 25, 2004.                                    |
| 10.21  |   | Convertible Promissory Note with Lafayette Business  Park, LLC dated April 28, 2004.                                           |
| 31.1   |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                      |
| 31.2   |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                      |
| 32.1   |   | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                      |
| 32.2   |   | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                      |

 

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(1)    Filed with the Company’sQuarterly Report on Form 10-Q for the period ended June 30, 2001.

 

(2)    Filed with the Company’sCurrent Report on Form 8-K dated April 11, 2003.

 

(3)    Filed with the Company’sQuarterly Report on Form 10-Q for the period ended September 30,2003.

 

(4)    Filed with the Company’sQuarterly Report on Form 10-Q for the period ended June 30, 2002.

 

(5)    Filed with the Company’sRegistration Statement on Form S-1 (No. 333-93039) filed with theSecurities and Exchange Commission by the Company in connection with itsinitial public offering that became effective March 16, 2000.

 

(6)    Filed with the Company’s Quarterly Report on Form 10-Qfor the period ended June 30, 2000.

 

(7)    Filed with the Company’s Registration Statement onForm 8-A, filed with the Securities and Exchange Commission onAugust 9, 2000.

 

†       Confidential treatmentrequested for certain portions of this Exhibit that portions have beenomitted and filed separately with the Securities and Exchange Commission.

 

(b)           Reports on Form 8-K:

 

On January 7, 2004, theCompany filed with the SEC a report on Form 8-K, which was furnished pursuantto Item 5 of Form 8-K and which announced that Carolyn F. Katz had resignedfrom the Board of Directors of the Company, effective December 31, 2003.

 

On January 27, 2004, the Company filed with the SEC areport on Form 8-K, which was furnished pursuant to Item 5 of Form 8-K andwhich announced that Les W. Hankinson had resigned as Senior Vice President,Sales of the Company, effective January 20, 2004.

 

On February 5, 2004, theCompany filed with the SEC a report on Form 8-K, which was furnished pursuantto Item 5 of Form 8-K and which announced that the Company had appointedValerie R. Ianieri as its Senior Vice President and Chief Sales Officer,effective January 28, 2004.

 

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**SIGNATURES**

** **

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 

 
|                | UNIVERSAL ACCESS GLOBAL HOLDINGS INC. |
|---------------------|---------------------------------------|
|                | (Registrant)                          |
|                |                                  |   |
|                |                                  |   |
| Dated: May 14, 2004 | By:                                   | /s/ BRIAN W. CODERRE |   |
|                |                                  | Name: Brian W. Coderre |
|                |                                  | Title:*Chief Financial Officer* |
|                |                                  | *(Principal  Financial and Accounting Officer)* |
|                     |                                       |  |  |  |

 

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