**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  June 30, 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                     ** |

 

**Commission File Number: 000-28-559**

 

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**Universal Access Global Holdings Inc.**

(Exact name of registrant asspecified 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 allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.Yes  ý   No  o

 

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

 

The number of shares outstanding of the issuer’s common stock, parvalue $0.01, as of July 31, 2004 was 11,474,066 shares.

 

 

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**Universal Access Global Holdings Inc.**

**Form 10-Q**

**Table of Contents**

 

 
| **Part I  Financial Information** |                                                                                                                                |
|----------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------|
|                                   |                                                                                                                                |   |
| Item 1.                           | Condensed Consolidated Financial Statements                                                                                         |   |
|                                   |                                                                                                                                |   |
|                                   | Condensed Consolidated Balance Sheets at  June 30, 2004 and December 31, 2003 (Unaudited)                                 |   |
|                                   |                                                                                                                                |   |
|                                   | Condensed Consolidated Statements of  Operations for the Three Months and Six Months Ended June 30, 2004 and  2003 (Unaudited) |   |
|                                   |                                                                                                                                |   |
|                                   | Condensed Consolidated Statements of Cash  Flows for the Six Months Ended June 30, 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 2                                 | Changes in Securities and use of proceeds                                                                                           |   |
|                                   |                                                                                                                                |   |
| Item 4                                 | Submission of matters to a vote of security  holders                                                                                |   |
|                                   |                                                                                                                                |   |
| Item 6.                           | Exhibits and Reports on Form 8-K                                                                                                    |   |
|                                   |                                                                                                                                |   |
| Signatures                             |                                                                                                                                |   |
|                                   |                                                                                                                                |   |
| Certifications                         |                                                                                                                                |

 

2

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**NoteRegarding Forward-looking Statements**

 

This report contains forward-looking statements within the meaning ofSection 21E of the Securities Exchange Act of 1934, as amended, andSection 27A of the Securities Act of 1933, as amended. Theseforward-looking statements involve a number of risks and uncertainties,including those identified in the section of this Form 10-Q entitled“Factors That May Affect Future Operating Results,” which may cause actualresults to differ materially from those discussed in the forward-lookingstatements. The forward-looking statements in this Form 10-Q areidentified by words such as “believes,” “anticipates,” “expects,” “intends,”“may,” “will” and other similar expressions. However, these words are not theonly way we identify forward-looking statements. In addition, any statementsthat refer to expectations, projections or other characterizations of futureevents or circumstances are forward-looking statements. We undertake noobligation to publicly release the results of any revisions to theseforward-looking statements that could occur after the filing of thisForm 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.

 

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## **PART I. FINANCIAL INFORMATION**

 

## **ITEM I. CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**UNIVERSAL ACCESS GLOBAL HOLDINGS INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(in thousands, except per share data)**

**(unaudited)**

 
| ** **                                                                                                                    | ** ** | **June 30,   2004** | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                    | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                               |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                     |       | $                        | 8,806      |                        | $          | 16,740 |   |
| Accounts receivable, less allowance for  doubtful accounts of $305 and $507, respectively                                     |       | 4,590                    |       | 5,293                       |       |
| Prepaid expenses and other current assets                                                                                     |       | 1,998                    |       | 2,717                       |       |
| Total current assets                                                                                                          |       | 15,394                   |       | 24,750                      |       |
| Restricted cash                                                                                                               |       | 852                      |       | 1,738                       |       |
| Property and equipment, net                                                                                                   |       | 5,119                    |       | 7,944                       |       |
| Other long-term assets                                                                                                        |       | 682                      |       | 651                         |       |
| Total assets                                                                                                                  |       | $                        | 22,047     |                        | $          | 35,083 |   |
|                                                                                                                          |       |                     |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                      | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                          |       |                     |       |                        |       |
| Accounts payable                                                                                                              |       | $                        | 3,501      |                        | $          | 2,556 |   |
| Non-income taxes payable                                                                                                      |       | 1,212                    |       | 1,285                       |       |
| Accrued carrier expenses                                                                                                      |       | 7,665                    |       | 12,230                      |       |
| Accrued expenses and other current  liabilities                                                                               |       | 2,948                    |       | 1,729                       |       |
| Unearned revenue                                                                                                              |       | 8,299                    |       | 9,178                       |       |
| Short-term restructuring liability                                                                                            |       | —                   |       | 710                         |       |
| Notes payable                                                                                                                 |       | 2,707                    |       | 1,763                       |       |
| Total current liabilities                                                                                                     |       | 26,332                   |       | 29,451                      |       |
|                                                                                                                          |       |                     |       |                        |       |
| Security deposits payable                                                                                                     |       | 1,831                    |       | 2,038                       |       |
| Restructuring liability                                                                                                       |       | —                   |       | 3,566                       |       |
| Total liabilities                                                                                                             |       | 28,163                   |       | 35,055                      |       |
| Commitments and contingent liabilities  (Note 9)                                                                         |       |                     |       |                        |       |
| Stockholders’ equity (deficit):                                                                                          |       |                     |       |                        |       |
| Common stock, $.01 par value;  1,000,000,000 shares authorized; 11,474,066 and 11,465,611 shares issued  and outstanding |       | 115                      |       | 115                         |       |
| Common stock warrants                                                                                                         |       | 540                      |       | 540                         |       |
| Additional paid-in-capital                                                                                                    |       | 294,754                  |       | 294,803                     |       |
| Deferred stock compensation                                                                                                   |       | (334                     | )          | (721                        | )          |
| Accumulated deficit                                                                                                           |       | (301,228                 | )          | (294,747                    | )          |
| Accumulated other comprehensive income                                                                                        |       | 37                       |       | 38                          |       |
| Total stockholders’ equity (deficit)                                                                                     |       | (6,116                   | )          | 28                          |       |
| Total liabilities and stockholders’ equity  (deficit)                                                                    |       | $                        | 22,047     |                        | $          | 35,083 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

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**UNIVERSAL ACCESS GLOBAL HOLDINGS INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

**(in thousands, except per share data)**

**(unaudited)**

 
| ** **                                                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                      | ** ** | **2004**                              | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                            |       |                                  |       |                                |       |   |   |   |   |
| Revenues                                                                        |       | $                                     | 13,274     |                                | $          | 18,591 |   | $ | 28,217 |   | $ | 37,742 |   |
| Costs and expenses:                                                             |       |                                  |       |                                |       |   |   |   |   |
| Cost of circuit access (exclusive of  depreciation shown below)                 |       | 9,484                                 |       | 12,579                              |       | 19,210 |   | 25,332 |   |
| Operations & administration                                                 |       | 7,510                                 |       | 6,788                               |       | 15,074 |   | 16,008 |   |
| Restructuring credits                                                           |       | —                                |       | —                              |       | (2,398 | ) | — |   |
| Impairment of property, plant &  equipment                                  |       | 293                                   |       | 1,198                               |       | 293 |   | 1,198 |   |
| Depreciation & amortization                                                 |       | 1,173                                 |       | 1,988                               |       | 2,512 |   | 4,467 |   |
|                                                                            |       |                                  |       |                                |       |   |   |   |   |
| Total costs and expenses                                                        |       | 18,460                                |       | 22,553                              |       | 34,691 |   | 47,005 |   |
| Operating loss                                                                  |       | (5,186                                | )          | (3,962                              | )          | (6,474 | ) | (9,263 | ) |
| Other income/(loss), net                                                        |       | (12                                   | )          | (58                                 | )          | (7 | ) | 34 |   |
|                                                                            |       |                                  |       |                                |       |   |   |   |   |
| Net loss                                                                        |       | $                                     | (5,198     | )                                   | $          | (4,020 | )  | $ | (6,481 | ) | $ | (9,229 | ) |
|                                                                            |       |                                  |       |                                |       |   |   |   |   |
| Basic and diluted net loss per share                                            |       | $                                     | (0.45      | )                                   | (0.81      | ) | $ | (0.56 | ) | $ | (1.87 | ) |
| Weighted average shares used in computing  basic and diluted net loss per share |       | 11,454                                |       | 4,946                               |       | 11,473 |   | 4,939 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

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**UNIVERSAL ACCESS GLOBAL HOLDINGS INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS**

**(in thousands)**

**(unaudited)**

 
| ** **                                              | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                              | ** ** | **2004**                           | ** ** | **2003** | ** ** |
|                                                    |       |                               |       |   |   |
| **Cash flows from  operating activities:**              |       |                               |       |   |   |
| Net cash used for operating activities                  |       | $                                  | (8,797     | ) | $ | (8,970 | ) |
| **Cash flows from  investing activities:**              |       |                               |       |   |   |
| Capital expenditures, net                               |       | (23                                | )          | 251 |   |
| Net cash provided/(used) by investing  activities       |       | (23                                | )          | 251 |   |
| **Cash flows from  financing activities:**              |       |                               |       |   |   |
| Proceeds from short-term notes payable                  |       | —                             |       | 5,000 |   |
| Proceeds from issuance of common stock                  |       | —                             |       | 65 |   |
| Proceeds from notes receivable—employee            |       | —                             |       | 4 |   |
| Release of restriction on cash balance                  |       | 886                                |       | 1,842 |   |
| Net cash provided (used) by financing  activities       |       | 886                                |       | 6,911 |   |
| Effect of exchange rate changes on cash                 |       | —                             |       | 3 |   |
| Net increase/(decrease) in cash and cash  equivalents   |       | (7,934                             | )          | (1,805 | ) |
| Cash and cash equivalents, beginning of  period         |       | 16,740                             |       | 12,353 |   |
|                                                    |       |                               |       |   |   |
| Cash and cash equivalents, end of period                |       | $                                  | 8,806      |   | $ | 10,548 |   |
|                                                    |       |                               |       |   |   |
| **Non-Cash Financing  Activities:**                     |       |                               |       |   |   |
| Note payable – lease termination settlement        |       | 852                                |       | — |   |
| Redemption of notes receivable using  outstanding stock |       | —                             |       | 791 |   |

 

The accompanying notes are an integral partof these condensed consolidated financial statements.

 

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**UNIVERSAL ACCESS GLOBAL HOLDINGS INC.AND SUBSIDIARIES**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(unaudited)**

 

**Note 1—Basis of Presentation**

 

The accompanying unaudited condensed consolidated financial statementshave been prepared by Universal Access Global Holdings Inc. (“Holdings”)and its subsidiaries (collectively, “the Company” or “we”), and reflect alladjustments, consisting only of normal recurring adjustments, which in theopinion of management are necessary to state fairly the financial position andthe results of operations for the interim periods. The statements have beenprepared in accordance with the rules and regulations of the Securities andExchange Commission (the “SEC”). The consolidated financial statements havebeen prepared assuming the company will continue as a going concern and noadjustments have been made as a result of the bankruptcy proceeding describedin Note 2 below. Certain information and footnote disclosures in financialstatements prepared in accordance with generally accepted accounting principleshave been omitted pursuant to such rules and regulations. These statementsshould be read in conjunction with the Financial Statements and Notes theretoincluded in our 2003 Annual Report on Form 10-K. Results for fiscal 2004interim periods are not necessarily indicative of results to be expected forthe fiscal year ending December 31, 2004. All numbers presented are inthousands, except share and per share amounts and where otherwise indicated.

 

**Note2 – Subsequent Event/Bankruptcy Filing**

** **

On August 4, 2004, theCompany and all of its U.S. subsidiaries filed voluntary petitions forreorganization under Chapter 11 of the United States Bankruptcy Code(“Bankruptcy Code”) in the United States Bankruptcy Court for the NorthernDistrict of Illinois.****The Companyis currently operating as a “debtor-in-possession” under the jurisdiction ofthe Bankruptcy Court and in accordance with the applicable provisions of theBankruptcy Code, the Federal Rules of Bankruptcy Procedure and applicable courtorders. In general, as a debtor-in-possession, the Company is authorized underChapter 11 to continue to operate as an ongoing business, but may not engage intransactions outside the ordinary course of business without the prior approvalof the Bankruptcy Court. We expect that the cases will be consolidated andjointly administered. The filings have been assigned the following casenumbers:

 

•                  Universal AccessGlobal Holdings  Inc. - 04B28747

•                  Universal Access,Inc. - 04B28752

•                  Tri QuadEnterprises, Inc. -  04B28755

•                  Universal AccessCommunications  Inc. -  04B28762

•                  Universal Accessof Virginia, Inc. - 04B28768

 

Under Section 362 of theBankruptcy Code, the filing of a bankruptcy petition automatically stays mostactions against the Company, including most actions to collect pre-petitionindebtedness or to exercise control of the property of the Company’s estate.Absent an order of the Bankruptcy Court, substantially all pre-petitionliabilities that are not otherwise resolved will be subject to settlement undera plan of reorganization.

 

Under Section 365 of theBankruptcy Code, the Company may assume or reject certain executory contractsand unexpired leases, including leases of real property, subject to theapproval of the Bankruptcy Court and certain other conditions. In general,rejection of an unexpired lease or executory contract is treated as apre-petition breach of the lease or contract in question. Counterparties tothese rejected contracts or leases may file proofs of claim against theCompany’s estate for damages relating to such breaches. The United StatesTrustee for the Northern District of Illinois has appointed an officialcommittee of unsecured creditors (the “Creditors’ Committee”). The Creditors’Committee and its legal representatives have a right to be heard on all mattersthat come before the Bankruptcy Court. The rights and claims of variouscreditors and security holders will be determined by a plan of reorganizationthat is confirmed by the Bankruptcy Court, or by other orders of the BankruptcyCourt, such as an order approving our election to sell our business underSection 363 of the Bankruptcy Code.

 

All of the Debtors' Notespayables is now in default due to the Chapter 11 filing. Accordingly, theaccompanying Condensed Consolidated Balance Sheet as of June 30, 2004 reflectsthe classification of the Notes payables as a current liability.

 

**AccountingImpact – Beginning in the third quarter of 2004, the Company will be requiredto follow Statement of Position 90-7 (“SOP 90-7”), “Financial Reporting byEntities in Reorganization under the Bankruptcy Code.” Pursuant to SOP 90-7,the Company’s pre-petition liabilities that are subject to compromise will bereported separately on the balance sheet at an estimate of the amount that willultimately be allowed by the Bankruptcy Court. SOP 90-7 also requires separatereporting of certain expenses, realized gains and losses, and provisions forlosses related to the Filing as reorganization items.**

** **

**Pro-FormaBalance Sheet Information – Our condensed consolidated balance sheet, preparedas if we had filed petitions for reorganization under Chapter 11 atJune 30, 2004, is as follows:**

 

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**PRO FORMACONDENSED CONSOLIDATED BALANCE SHEET OF UNIVERSAL ACCESS GLOBAL HOLDINGS, INC**

(Unaudited)

(Dollars in thousands)

 
| Current Assets:                           | ** ** |   |   |
|-------------------------------------------|------------|--------|--------|
| Cash and cash equivalents                 | ** ** | $      | 8,806  |   |
| Accounts receivable                       | ** ** | 4,590  |   |
| Prepaid expenses and other current assets | ** ** | 1,998  |   |
| Total current assets                      | ** ** | 15,394 |   |
|                                      | ** ** |   |   |
| Property and equipment, net               | ** ** | 5,119  |   |
| Restricted cash                           | ** ** | 852    |   |
| Other long term assets                    | ** ** | 682    |   |
|                                      | ** ** |   |   |
| Total assets                              | ** ** | $      | 22,047 |   |
|                                      |       |   |   |
| Liabilities subject to Compromise:        |       |   |   |
| Notes Payable                             | ** ** | $      | 2,707  |   |
| Other liabilities                         | ** ** | 25,456 |   |
| Total liabilities                         | ** ** | 28,163 |   |
|                                      |       |   |   |
| Equity                                    | ** ** | (6,116 | )      |
|                                      | ** ** |   |   |
| Total liabilities and equity              |       | $      | 22,047 |   |

 

**Note 3—Liquidity**

 

The company has experienced recurring losses from operations, negativeoperating cash flows, decreasing revenues, a net working capital deficiency,and has negative stockholders’ equity. As a result of continued negative operating results in 2003 and 2004, wedecided in 2004 to stop paying monthly rent under certain leases where we arenot recognizing any economic benefit. The monthly amount of lease payments thatwe are not paying as of June 30, 2004 is approximately $248 thousand(including estimated operating expenses and taxes). As of June 30, 2004,we have not paid approximately $1.1 million in total rents, which are includedin the accrued expenses and other current liabilities line of the balancesheet. In 2004, our landlords received payments of approximately $837 thousandthat were restricted as security deposits due to non-payment of our leases andlease termination agreements.

 

We are in also in discussions with various parties to assign most ofthe UTX assets (including associated liabilities) to reduce our monthly rentalexpense.

 

**Note 4—Propertyand Equipment**

 

Property and equipment consist of the following:

 
| ** **                                       | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Furniture and fixtures                           |       | $                       | 1,038      |                        | $          | 1,083 |   |
| Leasehold improvements                           |       | 1,151                   |       | 1,441                       |       |
| UTX equipment                                    |       | 8,441                   |       | 8,636                       |       |
| Computer hardware and software                   |       | 21,488                  |       | 21,465                      |       |
| Other equipment                                  |       | 571                     |       | 625                         |       |
| Property and equipment, gross                    |       | 32,689                  |       | 33,250                      |       |
| Less: Accumulated depreciation and  amortization |       | (27,570                 | )          | (25,306                     | )          |
| Property and equipment, net                      |       | $                       | 5,119      |                        | $          | 7,944 |   |

 

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Accumulated amortization related to capitalized software and websiteassets was $5.1 million and $4.8 million at June 30, 2004 andDecember 31, 2003, respectively.

 

**Note 5 – Impairment of Long-Lived Assets**

 

In compliance with SFAS No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets,* we evaluate therecoverability of our long-lived assets. Under SFAS No. 144, an impairmentreview is performed if events occur or circumstances change indicating that thecarrying amount might not be recoverable. Factors considered important thatcould trigger an impairment review include, but are not limited to, asignificant decrease in the market value, a significant adverse change in legalfactors or in the business climate, a current period operating or cash flowloss combined with a history of operating or cash flow losses or a projectionor forecast showing continuing losses, and a current expectation thatmore-likely-than-not a long-lived asset will be sold or otherwise disposed ofsignificantly before the end of its previously estimated useful life. If any ofthe impairment indicators are present or if other circumstances indicate thatan impairment may exist, we must then determine whether an impairment lossshould be recognized. An impairment loss may be recognized only if theundiscounted cash flows used to test for recoverability are less than thecarrying value.

 

For the three months ended June 30, 2004, we reviewed our assetsand determined that an impairment existed as a result of decrease in marketvalue for the fiber optic rings located in Indianapolis, Indiana andAlbuquerque, New Mexico for which a charge was taken for $64 thousand. We alsorecognized an impairment charge as a result of the lease terminations describedin Note 7 for the assets located in Santa Clara, California for which a chargewas taken for $229 thousand. For the three months ended June 30, 2003, wereviewed our assets and determined that an impairment existed as a result ofcircuit disconnections for which a charge was taken for the UTX assets locatedat Los Angeles for $1.2 million.

 

Management believes that all necessary impairment adjustments have beenmade at June 30, 2004; however, management will continue to evaluate itslong-lived assets for impairment based on specific events and circumstances.

 

**Note 6—OtherLong-term Assets**

 

The Company has security deposits receivable classified as long-termtotaling $682 thousand and $651 thousand at June 30, 2004 andDecember 31, 2003, respectively. These security deposits are paid tocarriers, landlords and utility companies in the ordinary course of business.

 

**Note 7—Restructuring**

 

The restructuring program is complete due to lease terminationagreements that we have negotiated with our landlords. On March 10, 2004,we entered into a lease termination agreement with one of our landlords for$216 thousand in cash, of which $141 thousand was restricted as a securitydeposit. On April 28, 2004, we entered into a lease termination agreementwith one of our landlords under which the leases for two sites were terminatedin consideration for $712 thousand in cash, of which $512 thousand wasrestricted as a security deposit, and a $1 million promissory note. Thepromissory 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 thesenegotiations, the restructuring reserve was reduced to zero in the first sixmonths of June 30, 2004.

 

The following summarizes the activity of the restructuring reserve fromDecember 31, 2003 to June 30, 2004:

 
| ** **                                                 | ** ** | **Balance at  December 31,  2003** | ** ** | **Incurred  Cash  Payments** | ** ** | **Note  Payable Issued** | ** ** | **Adjustments** | ** ** | **Balance at  June 30,  2004** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------|------------|------------------------------|------------|--------------------------|------------|-----------------|------------|------------------------------------------|------------|
| Facility exit costs, net of estimated  sublease recoveries |       | $                                            | 4,276      |                         | $          | (1,025                   | )          | $               | (853       | )                                        | $          | (2,398 | ) | $ | — |   |
|                                                            |            |                                              |            |                              |            |                          |            |                 |            |                                          |            |  |  |  |  |  |

 

**Note 8—Term Loans**

 

Pursuant to the terms of the Stock Purchase Agreement (“PurchaseAgreement”) with CityNet Telecommunications, Inc. (“CityNet”), on July 23,2003,  we assumed $2 million in principalamount of a promissory note executed by CityNet and made to ElectroBanque.  The note is secured by the fiberoptic ring in Albuquerque, New Mexico transferred to us from CityNet. The notematures in a single installment on December 31, 2007 and does not bearinterest until January 1, 2006; thereafter, it bears interest at 8% per annum.  During the third quarter of 2003, wediscounted the face value of the note using an imputed interest rate andrecorded the present value of $1.7 million.

 

On April 28, 2004, we entered into a lease termination agreementwith one of our landlords under which the leases for two sites were terminatedin consideration for cash and a $1 million promissory note. The promissory noteis due in April 2006 with no interest.  We discounted the face value of the note using an imputed interest rateand recorded the present value of $853 thousand.  We

 

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recognized interest expense of $55 thousand in the second quarter of2004 and $92 thousand for the six months ended June 30, 2004.

 

**Note 9—Commitmentsand Contingencies**

 

In November 2001, a complaint captioned In re: Initial PublicOffering Securities Litigation was filed in federal district court for theSouthern District of New York on behalf of a purported class of persons whopurchased our stock between March 16, 2000 and December 6, 2000. Thecomplaint generally alleges that various underwriters engaged in improper andundisclosed activities related to the allocation of shares in our initialpublic offering of securities. The complaint brings claims for violation ofseveral provisions of the federal securities laws against the underwriters ofour IPO, and also against us and certain of our former directors and officersunder the Securities Act of 1933 and the Exchange Act of 1934. Similar lawsuitsconcerning more than 300 other companies’ initial public offerings were filedin 2001, all of which were consolidated into a single coordinated proceeding inthe Southern District of New York. We believe that the allegations against usare without merit. On June 30, 2003, the litigation committee of our boardof directors conditionally approved a proposed partial settlement with theplaintiffs in this matter. In June 2004, an agreement of settlement wassubmitted to the Court for preliminary approval. The settlement would provide,among other things, a release of the individual defendants for the conductalleged in the action to be wrongful and, due to our recent bankruptcy filing,a covenant that the plaintiffs would not sue us based on such conduct. Ourinsurers are expected to bear any direct financial impact of the proposedsettlement. We are unable to determine whether or when the settlement will beapproved or finalized. Given the uncertainties regarding the amount we willultimately be required to pay, if any, as of June 30, 2004, we have not accrueda liability for this matter.

 

We and certain of our former directors and officers are defendants inan action pending in the United States District Court for the Eastern Districtof Texas, In re Universal Access, Inc. Securities Litigation, Civil Action No.9:02-CV-103.  The original complaintalleged securities fraud in connection with public statements made by theCompany and its officers between 2000 and 2002.   On March 7, 2003, the Court granted a motion to dismiss thecomplaint and granted plaintiffs the opportunity to replead with respect to aminority of the alleged misstatements. On May 27, 2003, plaintiffs filed a second amended consolidatedcomplaint.  Pursuant to the Court’sSeptember 17, 2003 order, on October 1, 2003, plaintiffs filed arevised second amended consolidated complaint.   On April 16, 2004, the Court dismissedthe action against two of the individual defendants but denied the motion todismiss as to the remaining defendants.  Plaintiffs are to file a motion for class certification onAugust 20, 2004. The matter, which is now in the discovery phase, is setfor trial on April 5, 2005.  Webelieve that the allegations against us are without merit. Given theuncertainties regarding the amount we will utimately be required to pay, ifany, as of June 30, 2004, we have not accrued a liability for this matter.

 

In August 2003, Genuity Telecom Inc. filed a complaint against usin the United States Bankruptcy Court for the Southern District of New Yorkseeking nearly $1.6 million, plus interest and costs.  The caption of this case is Genuity TelecomInc. v. Universal Access, Inc. No. 03-06928. In its complaint, Genuity alleges that we did not purchase the minimumamount of telecommunications services specified by the parties’ contract, andthe amount sought represents the difference between the purported minimumpurchase commitment and the amount of telecommunications services wepurchased.  We believe that Genuity’sclaims lack merit. We answered Genuity’s complaint and asserted severaldefenses to Genuity’s claims, including defenses based on the parties’renegotiated agreement and the invoices Genuity sent to us for ten months inaccordance with the parties’ renegotiated agreement. We also filed a motionseeking to stay the action and to compel arbitration of the matter inaccordance with the mandatory arbitration provision in the contract.  In July 2004, the court granted therelief requested in our motion.  ShouldGenuity pursue the matter in arbitration, we intend to vigorously defendagainst Genuity’s claims.  Genuityassigned our contract to Level 3 Communications, LLC on February 4, 2003as part of Genuity’s bankruptcy proceeding and reorganization efforts.  The amount sought by Genuity in its complaintrelates to actions prior to February 4, 2003.

 

In March 2004, the landlord of our New York office spacefiled an action against us captioned 330 Madison Company LLC againstUniversal Access, Inc., Civil Court of the City of New York, County of NewYork: Non-Housing Part 52, Index No. 063274/2004. In its complaint,the landlord seeks the payment of approximately $73thousand, representing rent the landlord claims is unpaid, plus interestand attorneys’ fees, and the issuance of a warrant to remove us from thepremises.

 

In May 2004, AboveNet, Inc. filed a complaint against us in the UnitedStates Bankruptcy Court for the Southern District of New York, In re AboveNet,Inc. v Universal Access Global Holdings, Inc. In its complaint AboveNet seeksthe payment of approximately $3.8 million plus interest, representing amountsallegedly paid to us in the 90 day period prior to the commencement date ofAboveNet’s bankruptcy. AboveNet asserts it is entitled to the recovery underseveral theories, including that the payments were preferential transfers,fraudulent transfers, and fraudulent conveyances. We believe that AboveNet’sclaims are without merit.  We answeredAboveNet’s complaint and asserted several defenses to AboveNet’s claims.

 

On August 2, 2004, the landlord of the Sears Tower (our mainoffice space) filed a complaint against us captioned 233 South Wacker DriveLLC, successor in interest to TH Tower Leasing LLC, v. Universal Access, Inc.,04M1718970. In its complaint, the landlord seeks to terminate our possession ofthe premises and the payment of approximately $1 million, representing rent thelandlord claims is unpaid, plus unpaid rent that accrues during the pendancy ofthe case and costs.

 

On August 4, 2004, the Company and all of its U.S. subsidiariesfiled voluntary petitions for reorganization under chapter 11 of the UnitedStates Bankruptcy Code (“Bankruptcy Code”) in the United States BankruptcyCourt for the Northern District of Illinois (the “Bankruptcy Court”). We expectthat the cases will be consolidated and jointly administered under case numbers04B28747, 04B28752, 04B28755, 04B28762, and 04B28768. We are currently

 

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operatingour business as “debtors-in-possession” under the jurisdiction of the BankruptcyCourt, but may not engage in transactions outside the ordinary course ofbusiness without the prior approval of the Bankruptcy Court. As of the date ofthe bankruptcy filing, our pending litigation, including the above-listedlitigation, is stayed.  The rights andclaims of various creditors and security holders will be determined by a planof reorganization and under the priority rules established under the BankruptcyCode.  Any Chapter 11 plan filed by usmay provide that unsecured creditors of subsidiaries of us will need to besatisfied before any distribution to the unsecured creditors or stockholders ofus. As a result, a plan of reorganization could result in holders of our commonstock receiving little or no value as part of the plan of reorganization.  A plan of reorganization must be confirmed bythe Bankruptcy Court.  At this time, itis not possible to predict accurately the effect of the Chapter 11reorganization process on our business, our creditors or our stockholders orwhen or if we may emerge from Chapter 11. Our future results may depend on thetimely and successful confirmation and implementation of a plan ofreorganization.

 

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The Company leases UTX facilities, office facilities and certainequipment over periods ranging from two to fifteen years. Through June 30,2004, the Company completed buyout agreements for certain leased officefacilities and terminated early certain office facility leases, eliminatingaggregate lease obligations of approximately $8.5 million. Rent expense for thethree months ended June 30, 2004 and 2003 was $1.5 million and $1.9million, respectively, and $3.3 million and $3.9 million for the six monthsended June 30, 2004 and 2003, respectively. Future rentals fornon-cancelable operating leases are as follows as of June 30, 2004:

 
| 2004                         |   | $      | 3,014  |   |
|------------------------------|--------|--------|--------|--------|
| 2005                         |   | 5,636  |   |
| 2006                         |   | 5,516  |   |
| 2007                         |   | 5,674  |   |
| 2008                         |   | 5,866  |   |
| Thereafter                   |   | 17,636 |   |
| Total minimum lease payments |   | $      | 43,342 |   |

 

Additionally, the Company has entered into agreements with varioustelecommunications vendors to purchase minimum amounts of network serviceswithin a defined period, such as on a monthly basis. The Company paid vendorswith minimum purchase commitments a total of $3.3 million and $5.6 millionfor the three months ended June 30, 2004 and June 30, 2003,respectively, and $6.8 million and $11.1 million for the six months endedJune 30, 2004 and June 30, 2003, respectively.  Additionally, we have entered into agreementswith certain of our suppliers that obligate us to purchase a defined percentageof our actual circuit orders from them if they meet certain pricing and otherterms and conditions. The total amount of remaining purchase commitments atJune 30, 2004 is as follows:

 
| 2004                               |   | $      | 7,093  |   |
|------------------------------------|--------|--------|--------|--------|
| 2005                               |   | 13,025 |   |
| 2006                               |   | 4,750  |   |
| 2007                               |   | — |   |
| 2008                               |   | — |   |
| Thereafter                         |   | — |   |
| Total minimum purchase commitments |   | $      | 24,868 |   |

 

The Company has standby letters of credit, which have been issued onits behalf totaling $852 thousand, collateralizing performance of certaincontracts with carriers, state regulators, and landlords. These letters ofcredit directly relate to the operating leases, carrier agreements, and staterequirements, which they secure, and expire according to the terms andconditions of these agreements.

 

The Company is involved in various other legal matters in the ordinarycourse of business. In the opinion of management, the ultimate resolution ofthese matters will not have a material adverse impact on the Company’sfinancial position, results of operations or cash flows.

 

**Note 10—Stock-Based Compensation Plans**

 

Effective for 2003, we adopted the disclosure requirements underStatement of Financial Standards (“SFAS”) No. 148, “Accounting forStock-Based Compensation – Transition and Disclosure,” as an amendment of SFASNo. 123. Stock-based employee compensation, including stock options, isaccounted 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 the relevant serviceperiod under the fair-value method of SFAS No. 123 with respect to stockoptions granted and employee stock purchases for the three and six months endedJune 30, 2004 and all prior periods, net losses would have increased,resulting in pro forma net losses and losses per share as presented below:

 

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| ** **                                                                                                             | ** ** | **Three Months****Ended June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                             | ** ** | **2004**                                | ** ** | **2003**                            | ** ** | **2004** | ** ** | **2003** | ** ** |   |
| Net income (loss):                                                                                                     |       |                                    |       |                                |       |   |   |   |   |   |
| As reported                                                                                                            |       | $                                       | (5,198     | )                                   | $          | (4,020 | ) | $ | (6,481 | ) | $ | (9,229 | ) |   |
| Less:   Stock-based compensation expense determined under fair value method for  all awards, net of related taxes |       | (225                                    | )          | (233                                | )          | (707 | ) | (497 | ) |   |
|                                                                                                                   |       |                                    |       |                                |       |   |   |   |   |   |
| Pro forma net loss                                                                                                     |       | $                                       | (5,423     | )                                   | $          | (4,253 | ) | $ | (7,188 | ) | $ | (9,726 | ) |   |
|                                                                                                                   |       |                                    |       |                                |       |   |   |   |   |   |
| Basic and Diluted net earnings (loss) per  common share:                                                               |       |                                    |       |                                |       |   |   |   |   |   |
| As reported                                                                                                            |       | $                                       | (0.45      | )                                   | $          | (0.81 | ) | $ | (0.56 | ) | $ | (1.87 | ) |   |
| Pro forma                                                                                                              |       | $                                       | (0.47      | )                                   | $          | (0.86 | ) | $ | (0.63 | ) | $ | (1.97 | ) |   |
|                                                                                                                        |            |                                         |            |                                     |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**Note 11—RelatedParty Transactions**

 

In July 2003, in connection with the closing under the CityNetPurchase Agreement, we entered into a lease maintenance agreement, whereby weagreed beginning in July 2003, to reimburse CityNet for office renttotaling approximately $20 thousand per month for three years. OnApril 25, 2004, we entered into an Indemnification Agreement with CityNetas a result of requesting CityNet to not pay the monthly rent in an attempt tonegotiate the termination of the lease with the landlord.

 

In July 2004, we modified a consulting agreement with one of ourdirectors, Anthony Coelho. The modification provides that if Mr. Coelho assistsus in selling certain services, he will receive a fee equal to five percent ofthe amount we are paid by our customer. The modification to the consultingagreement also eliminated the payment to Mr. Coelho of $10,000 per month.

 

**Note12 – Net income/(loss) per share**

** **

Basic net income/(loss) per share is computed using the weightedaverage number of shares of common stock outstanding during the period. Dilutedloss per share does not differ from basic loss per share since potential commonshares from conversion of stock options and warrants are anti-dilutive for allperiods presented.

 

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**ITEM2.****     MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Overview**

 

Our business consists of analyzing, designing, planning andprovisioning 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 some include minimum purchase commitments that begin anywhere from six totwelve months after we enter into the contract.

 

**BankruptcyProceeding**

 

On August 4, 2004 (“Petition Date”), the Company and all of itsU.S. subsidiaries filed voluntary petitions for reorganization under Chapter 11of the United States Bankruptcy Code (“Bankruptcy Code”) in the United StatesBankruptcy Court for the Northern District of Illinois (the “BankruptcyCourt”). We expect that the cases will be consolidated and jointly administeredunder case numbers 04B28747, 04B28752, 04B28755, 04B28762, and 04B28768. We are currently operating our business as“debtors-in-possession” under the jurisdiction of the Bankruptcy Court and inaccordance with the applicable provisions of the Bankruptcy Code, the FederalRules of Bankruptcy Procedure and applicable court orders. In general, asdebtors-in-possession, we are authorized under Chapter 11 to continue tooperate as an ongoing business, but may not engage in transactions outside theordinary course of business without the prior approval of the Bankruptcy Court.We plan to continue operating our business in the ordinary course. As of thePetition Date, we had approximately $9.4 million of cash on hand to fund ouroperations.

** **

Thedistressed economic environment and the general downturn in thetelecommunications industry has adversely impacted our business. Specifically,(a) many of our existing and potential customers have experienced their ownfinancial difficulties, thereby decreasing customer demand for our services,(b) the financial difficulties of our customers has led to non-payment, partialpayment, or slow payment of bills for services provided by us, (c) ourfinancial instability, together with the financial instability of othercompanies in the telecommunications industry, has adversely affected thewillingness of potential customers to move their telecommunications services tous, (d) we have been unsuccessful in our efforts to reduce or eliminate ourreal estate lease obligations and, therefore, some of our landlords have filedor threatened to file proceedings against us, and (e) many of our competitorshave undergone financial and operational restructurings in which, among otherthings, they have substantially reduced their level of debt and overall coststructure. As a consequence of the foregoing, the continued poor economicenvironment and the need for us to focus on profitability instead of highrevenue growth, we determined that our current level of indebtedness orobligations needed to be significantly reduced. Consequently, we, in theexercise of our prudent business judgment, determined that it was in the bestinterests of our creditors and other stakeholders and for the maximization of thevalue of our businesses to commence the Chapter 11 cases and consummate arestructuring of our indebtedness and obligations through the Bankruptcy Court,such as an order approving our election to sell our business underSection 363 of the Bankruptcy Code.

 

Inorder to exit Chapter 11 successfully, we will need to propose, and obtainconfirmation by the Bankruptcy Court, of a plan of reorganization thatsatisfies the requirements of the Bankruptcy Code. As provided by theBankruptcy Code, we initially have the exclusive right to file a plan ofreorganization for 120 days. If we fail to file a plan of reorganization duringthis period (or any extended period approved by the Bankruptcy Court) or ifsuch plan is not accepted by the required number of creditors within 180 daysafter the Petition Date, any party-in-interest may subsequently file its ownplan of reorganization. A plan of reorganization would resolve, among otherthings, our pre-petition obligations, set forth the revised capital structureof the newly reorganized entity and provide for our corporate governancesubsequent to exit from bankruptcy. There can be no assurance at this time thata plan of reorganizationwill be filed or confirmed by the Bankruptcy Court or, if confirmed, that anysuch plan will be implemented successfully.

 

Asa consequence of the filing of the Chapter 11 cases, under Section 362 ofthe Bankruptcy Code, pending claims and litigation against us and our U.S. subsidiaries are automaticallystayed. Absent an order of the Bankruptcy Court, no party may take any actionto recover a pre-petition claim or enforce a lien against or obtain possessionof any of our property.

 

Additionally,under Section 365 of the Bankruptcy Code, we may assume or reject certainexecutory contracts and

 

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unexpiredleases, including our leases of real property for our principal offices in theSears Tower and UTX facilities, subject to the approval of the Bankruptcy Courtand certain other conditions. In general, rejection of an unexpired lease orexecutory contract is treated as a pre-petition breach of the lease orcontract.  Subject to certain exceptions,this rejection relieves us of performing our future obligations under thatlease or contract but entitles the counterparty to a pre-petition generalunsecured claim, if any, for damages against our estate caused by the deemedbreach. Counterparties to these rejected contracts or leases may file proofs ofclaim against our estate for such damages. Due to the uncertain nature of manyof the potential rejection and abandonment related claims, we are unable toproject the magnitude of these claims with any degree of certainty at thistime. Generally, if we assume an executory contract or unexpired lease we arerequired to cure most existing defaults, including payment of any pre-petitionamounts outstanding, under such executory contract or unexpired lease.

 

TheUnited States Trustee for the Northern District of Illinois has appointed anofficial committee of unsecured creditors (the “Creditors’ Committee”) torepresent the claims of our unsecured creditors. The Creditors’ Committee andits legal representatives have a right to be heard on all matters relating toour Chapter 11 cases that come before the Bankruptcy Court. There can be no assurance that the Creditors’ Committee will supportour positions or our ultimate plan of reorganization, or any motion to sell allor certain assets, if proposed,and disagreements between the Creditors’ Committee and us could protract theChapter 11 cases and could negatively impact our ability to operate during theChapter 11 cases.

 

Therights and claims of various creditors and security holders will be determinedby court orders or a plan of reorganization that is confirmed by the BankruptcyCourt. Under the priority rules established by the Bankruptcy Code, certainpost-petition liabilities and pre-petition liabilities (i.e., securedcreditors) need to be satisfied before unsecured creditors or stockholders areentitled to any distribution. Any Chapter 11 plan filed by us may provide thatunsecured creditors of our subsidiaries will need to be satisfied before anydistribution is made to our creditors or stockholders at the holding companylevel. As a result, a plan of reorganization could result in holders of our common stock having little or novalue as part of the plan of reorganization. In light of the foregoing, weconsider our common stock to be highly speculative and we caution the holdersof such securities that such securities may ultimately be determined to have novalue. Accordingly, we urge that appropriate caution be exercised with respectto existing and future investments in any of such securities and claims.

 

Currently,we are unable to predict accurately the effect of the Chapter 11 reorganizationprocess on our business, our creditors or our stockholders or when or if we mayemerge from Chapter 11. Our future results will depend on our ability tosuccessfully develop, prosecute, confirm and consummate a plan of reorganization.

 

***RESULTS OFOPERATIONS***

 

**Threeand Six Months Ended June 30, 2004 Compared to Three and Six Months EndedJune 30, 2003**

 

***Overview***

 

Our revenues continued to decline in the second quarter of 2004primarily as a result of terminations of circuit contracts exceeding newcircuit sales. Price compression and excess capacity in the telecommunicationsmarketplace also contributed to this decline.

 

***Summary ofSelected Operations Data for the Three and Six Months Ended June 30, 2004and 2003***

 
| ** **                                                          | ** ** | **(In Thousands)**                     | ** ** | ** **                                  | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                                                          | ** ** | **Three Months  Ended  June 30, 2004** | ** ** | **Three Months  Ended  June 30, 2003** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Change from 2003 to 2004**                         |
| **$**                                                               | ** ** | **%**                                       |
| Revenues                                                            |       | $                                           | 13,274     |                                        | $          | 18,591     |       | $ | (5,317 | ) | (28.60 | )% |
| Cost of Circuit Access (excluding  Depreciation & Amortization) |       | 9,484                                       |       | 12,579                                      |       | (3,095     | )          | (24.60 | )% |
| Operations and Administration Expenses                              |       | 7,510                                       |       | 6,788                                       |       | 722        |       | 10.63 | % |
| Depreciation & Amortization                                |       | 1,173                                       |       | 1,988                                       |       | (815       | )          | (41.00 | )% |
| Impairment of property, plant &  equipment                      |       | 293                                         |       | 1,198                                       |       | (905       | )          | (75.54 | )% |
|                                                                     |            |                                             |            |                                             |            |            |            |  |  |  |  |  |

 

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| ** **                                     | ** ** | **(In Thousands)**                   | ** ** | ** **                                | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|------------|------------|
| ** **                                     | ** ** | **Six Months  Ended  June 30, 2004** | ** ** | **Six Months  Ended  June 30, 2003** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Change from 2003 to 2004**    |
| **$**                                          | ** ** | **%**                                     |
| Revenues                                       |       | $                                         | 28,217     |                                      | $          | 37,742     |       | $ | (9,525 | ) | (25.23 | )% |
| Cost of Circuit Access                         |       | 19,210                                    |       | 25,332                                    |       | (6,122     | )          | (24.17 | )% |
| Operations and Administration Expenses         |       | 15,074                                    |       | 16,008                                    |       | (934       | )          | (5.83 | )% |
| Depreciation & Amortization           |       | 2,512                                     |       | 4,467                                     |       | (1,955     | )          | (43.77 | )% |
| Impairment of property, plant &  equipment |       | 293                                       |       | 1,198                                     |       | (905       | )          | (75.54 | )% |
| Restructuring Credits                          |       | (2,398                                    | )          | —                                    |       | (2,398     | )          | (100.00 | )% |
|                                                |            |                                           |            |                                           |            |            |            |  |  |  |  |  |

 

***Revenues***

 

The decrease in revenues for the three and six months endedJune 30, 2004 compared to the three and six months ended June 30,2003 was primarily attributable to circuit disconnections, lengthening newsales cycles and price compression.

 

***Cost of CircuitAccess (excluding depreciation & amortization)***

 

As a percentage of total revenues, cost of circuit access increasedfrom 68% for the three months ended June 30, 2003 to 71% for the threemonths ended June 30, 2004 and it was 67% and 68% for six months endedJune 30, 2003 and June 30, 2004, respectively. The increase for thethree months ended June 30, 2004 compared to the three months endedJune 30, 2003 was due to payments made in connection with the settlementof a carrier dispute.

 

***Operations andAdministration***

 

The increase in operations and administration expense in the threemonths ended June 30, 2004 compared to the three months endedJune 30, 2003 primarily resulted from recognition of $500 thousand of baddebt expense in the three months ended June 30, 2004 compared to reversalof $700 thousand in bad debt expense in the three months ended June 30,2003 due to the collection of previously written off receivables from bankruptcustomers. The increase was partially offset by a reduction in rent. Rent forcorporate offices and sales offices decreased to $1.5 million in the threemonths ended June 30, 2004 from $1.9 million in the three monthsended June 30, 2003, due primarily to termination of leases in 2003 andearly 2004. The decrease in the six months ended June 30, 2004 wasprimarily due to a decrease in rent expense from $3.9 million in the six monthsended June 30, 2003 to $3.3 million in six months ended June 30,2004. This decrease was due to the termination of leases.

 

***Depreciation andAmortization***

*** ***

Depreciation expense includes depreciation of furniture, fixtures,leasehold improvements and equipment at our office and UTX facilities. Thedecrease in depreciation in the three and six months ended June 30, 2004compared to the three and six months ended June 30, 2003 was primarilyattributable to the impairment of our UTX assets in 2003.

 

***Impairment******of property, plant & equipment***

 

For the three months ended June 30, 2004, we reviewed our assetsand determined that an impairment existed as a result of decrease in marketvalue for the fiber optic rings located in Indianapolis, Indiana andAlbuquerque, New Mexico for which a charge was taken for $64 thousand. We alsorecognized an impairment charge as a result of the lease terminations describedin Note 7 for the assets located in Santa Clara, California for which a chargewas taken for $229 thousand. For the three months ended June 30, 2003, wereviewed our assets and determined that an impairment existed as a result ofcircuit disconnections for which a charge was taken for the UTX assets locatedat Los Angeles for $1.2 million.

 

***RestructuringCharges/(Credits)***

*** ***

In the six months ended June 30, 2004, a restructuring liabilityof $2.4 million was reversed as a result of favorable lease  negotiations for three restructured sites asdescribed in Note 7.

 

***LIQUIDITY ANDCAPITAL RESOURCES***

*** ***

The consolidated financial statements have been prepared assuming thecompany will continue as a going concern. The company has experienced recurringlosses from operations, negative operating cash flows, decreasing revenues, anet working capital deficiency, and has negative stockholders’ equity.  As a result of continued negative operatingresults in 2003 and 2004, we decided in 2004 to stop paying monthly rent undercertain leases where we are not recognizing any economic benefit. The monthlyamount of lease payments that we are not paying as of August 4, 2004 isapproximately $248 thousand (including estimated operating expenses and taxes).As of August 4, 2004, we have not paid approximately $1.1 million in totalrents. In 2004, our landlords received payments of approximately $837 thousandthat were restricted as security deposits due to non-payment of our leases andlease termination agreements. We are in also in discussions with

 

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various parties to assign the remaining UTX assets (includingassociated liabilities) to  reduce ourmonthly rental expense. As of August 4, 2004, our unrestricted cashbalance is approximately $9.4 million and our stockholders’ equity is negative.

 

As described in Footnote 2 on August 4, 2004, the Company and allof its U.S. subsidiaries filed voluntary petitions for reorganization underchapter 11 of the United States Bankruptcy Code in the United States BankruptcyCourt for the Northern District of Illinois. During such a restructuring, weexpect to operate in the ordinary course of business, with normal and regularterms with our suppliers and customers, although there is no assurance thiswill occur.

 

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In the second quarter 2004, we reached an agreement with one of ourvendors to settle outstanding disputes. We paid $1.75 million and an additional$350 thousand is due in December 2004.

 

The following summarizes our contractual obligations at June 30,2004:

 
| ** ** | ** ** | **Non-Cancelable  Operating Lease** | ** ** | **Non Cancelable  Purchase Commitments** | ** ** | **Total**  | ** ** |
|------------|------------|------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|
| 2004       |       | $                                        | 3,014      |                                               | $          | 7,093      |       | $ | 10,107 |   |
| 2005       |       | 5,636                                    |       | 13,025                                             |       | 18,661     |       |
| 2006       |       | 5,516                                    |       | 4,750                                              |       | 10,266     |       |
| 2007       |       | 5,674                                    |       | —                                             |       | 5,674      |       |
| 2008       |       | 5,866                                    |       | —                                             |       | 5,866      |       |
| Thereafter |       | 17,636                                   |       | —                                             |       | 17,636     |       |
| **Total**  | ** ** | **$**                                    | **43,342** | ** **                                         | **$**      | **24,868** | ** ** | **$** | **68,210** | ** ** |

 

Our principal uses of cash are to fund operating losses, workingcapital requirements and some limited capital expenditures. Our capitalexpenditures will be limited to the enhancement of selected elements of our ITtools to help us achieve our sales objectives and we will continue to seek outnew data resources relating to the provisioning of circuits.

 

Restricted cash was $852 thousand at June 30, 2004, decliningapproximately $886 thousand from a balance of $1.738 million atDecember 31, 2003. In 2004, certain landlords have received payments of$837 thousand that were restricted as security deposits due to non-payment ofour leases and lease termination agreements. The remaining decline of $49thousand is due to a reduction in a letter of credit with a state regulator.Restricted cash consists of collateralized letters of credit issued to realestate landlords, a credit card company, a telephone company and stateregulators.

 

Cash used by operating activities in the six months ended June 30,2004 was $8.8 million, compared to $9.0 million for the six monthsended June 30, 2003.

 

Cash used by investing activities was $23 thousand in the six monthsended June 30, 2004 compared to cash provided by investing activities of$251 thousand in the six months ended June 30, 2003.

 

Cash provided by financing activities was $886 thousand in the sixmonths ended June 30, 2004 compared to $6.9 million in the six monthsended June 30, 2003.  The decreaseis the result of the $5.0 million in net proceeds we received from the CityNetloan agreement in 2003 and lower reclasses of restricted cash in the six monthsended June 30, 2004 compared to the six months ended June 30, 2003.

 

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**FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS**

 

In addition to the factors discussed elsewhere in this Form 10-Qand our other reports filed with the SEC, the following are important factorswhich could cause actual results or events to differ materially from thosecontained in any forward-looking statements made by or on behalf of us.

 

**Our operations may be disrupted due to the filing ofthe Chapter 11 cases.  Furthermore, ourfiling of the Chapter 11 cases will likely adversely affect our operations andour current and potential relationships with our customers, employees,suppliers and other representatives.**

 

On August 4, 2004, we filed voluntary petitions for relief underChapter 11 of the Bankruptcy Code. The impact that the Chapter 11 cases mayhave on our operations cannot be accurately predicted or quantified at thistime. The filing of the Chapter 11 cases could further adversely affect ouroperations and our current and potential relationships with our customers,employees, suppliers, and other representatives.  Additionally, we could experience losses of keypersonnel in the future attributable to our reorganization efforts.

 

Our future results of operation will depend upon, and may be affectedby, among other things, the following:

 

•                                          ourability to develop, confirm and consummate a plan of reorganization withrespect to the Chapter 11 cases;

•                                          ourability to obtain and maintain reasonable relationships with our vendors andservice providers;

•                                          ourability to access sufficient debt or equity capital to meet  our operating and financing needs;

•                                          ourability to maintain our customer relationships and overcome their concernsregarding our bankruptcy;

•                                          ourability to attract, motivate and retain key executives and personnel; and

•                                          ourability to obtain court approval of motions from time to time, as and whennecessary in our Chapter 11 cases.

•                                          anelection to sell our business under Section 363 of Chapter 11 of the BankruptcyCode.

 

**Any plan of reorganization that we proposemay not be acceptable to our creditors and other stakeholders and/or may not beconfirmed by the Bankruptcy Court.**

 

Any plan of reorganization that we propose must be approved by ourcreditors and confirmed by the Bankruptcy Court. If we are unable to develop aplan of reorganization that is acceptable to all necessary parties, our plan isnot confirmed and/or an alternative reorganization is not agreed upon, we may electto sell our business under Section 363 of Chapter 11 of the BankruptcyCode, if a reorganization attempt or proposed sale of assets is not approved,it could result in the Chapter 11 cases being converted to a Chapter 7liquidation.

 

**Our common stock is unsecured and located at ourholding company level, Universal Access Global Holdings Inc., and as a result,a restructuring of our debt may substantially reduce the value of our commonstock, potentially to zero.**

 

We operate our business through subsidiaries and have no materialassets at our holding company level other than the common stock of oursubsidiaries including our main operating company, Universal Access, Inc.  Our holding company is the issuer of ourcommon stock. These securities are not guaranteed by any of our operatingsubsidiaries and, therefore, have no claims against our assets. As such, all ofour assets are subject to the claims of our creditors at our subsidiaryoperating companies. The rights and claims of various creditors and securityholders will be determined by a plan of reorganization that is confirmed by theBankruptcy Court. Under the priority rules established by the Bankruptcy Code,certain post-petition liabilities and pre-petition liabilities (i.e., secureddebt) of a debtor need to be satisfied before unsecured creditors orstockholders are entitled to any distribution. Any plan of reorganization filedby us may provide that unsecured creditors of our subsidiaries will need to besatisfied before any distribution to the unsecured creditors or stockholders ofour holding company. As a result, a plan of reorganization could result inholders of our common stock receiving little or no value as part of the plan ofreorganization.

 

**If our financial condition continues to deteriorate,our carrier suppliers may demand security deposits or accelerated paymentterms.**

** **

Certain of our carrier suppliers might claimthe right to demand a security deposit or accelerated payment terms from us dueto our financialcondition, including our recent bankruptcy filing. Our carrier suppliers mayfurther seek to bill us for purported failure to meet purchase commitments orpurported under billings or other billings notwithstanding factual or legaldisputes regarding any such

 

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purported failure. If we are required to pay any of these amounts,subject to bankruptcy court approval or otherwise, our cash resources could bematerially diminished. Alternatively, if we do not make these payments, carriersuppliers may be unwilling to continue to do business with us. Some of thesefailures to make payments may be claimed by incumbent local exchange carriers,which historically have been reluctant to engage in negotiations on suchmatters and if they do engage in negotiations, often refuse to significantlyreduce the amounts they claim we owe. Such disputes may also affect thewillingness of suppliers to provide us with capacity or other services, whichwould reduce our operating flexibility and ability to deliver services toexisting or potential customers. If the supplier in any such dispute enters abankruptcy or similar proceeding, our business relationship with the suppliercould be disrupted, which would impair our ability to negotiate. As ofJune 30, 2004, we had $12.8 million in open billing disputes withcarriers.

 

**We have not yet proposed a plan of reorganization and,therefore, our business and results of operation are uncertain.**

 

At the time of the filing of our bankruptcy, we were involved incertain litigation, obligated under certain contracts and leases and involvedin certain disputes with landlords, carriers and other creditors. As a resultof the filing of the Chapter 11 cases, the ultimate disposition of thesematters is uncertain. At the commencement of our bankruptcy, litigation againstus is automatically stayed. Additionally, in the bankruptcy we may assume orreject certain executory contracts and unexpired leases, subject to approval ofthe Bankruptcy Court. If an executory contract or lease is rejected, thecounterparty to such contract or lease may file proofs of claim against ourestate. Currently, we are unable to project the magnitude of these rejectionand abandonment claims.  Ultimately, ourplan of reorganization, when proposed and confirmed by the Bankruptcy Court,will dispose of these matters. Until our plan of reorganization is proposed andconfirmed, our business and results of operation are uncertain.

 

**Our common stock will likely be delisted from theNasdaq Small Cap Market, which will reduce the liquidity in the market for ourcommon stock and make capital raising and other transactions more difficult.**

 

Our common stock is currently traded on the Nasdaq Small CapMarket.  On April 15, 2004, wereceived a letter from the Nasdaq notifying us that we did not meet its minimummarket capitalization, shareholder’s equity or net income requirements andseeking additional information on our plans for regaining compliance.  On April 28, 2004, we responded toNasdaq and provided information regarding our intent to regain compliance.  On June 28, 2004, we received a letterfrom Nasdaq notifying us that our common stock would be delisted at the openingof business on July 8, 2004, unless we request a hearing in accordancewith Nasdaq Marketplace Rules. In accordance with Nasdaq rules, we requested ahearing and such hearing was held on July 29, 2004.  In connection with the filing of the Chapter16 cases, on August 4, 2004, we received another letter from Nasdaqinforming us that our bankruptcy filing would be taken into account whendetermining whether our stock would be delisted,  unless we request a hearing in accordancewith Nasdaq rules and can demonstrate at such hearing that we satisfy Nasdaq’s requirementsfor continued listing. Because we do not currently comply with the minimummarket capitalization, shareholder’s equity or net income requirements forcontinued listing on the Nasdaq Small Cap Market, we do not intend to request ahearing.  Accordingly, we expect ourcommon stock will be delisted on or about August 16, 2004.  In addition, the August 4, 2004 letterfrom Nasdaq stated that if we do not appeal the Nasdaq Staff’s determination tothe Nasdaq Listing Qualifications Panel, our securities will not be immediatelyeligible to trade on the OTC Bulletin Board (“OTCBB”) since we are the subjectof bankruptcy proceedings. The Nasdaq letter also states that although oursecurities are not immediately eligible for quotation on the OTCBB, our stockmay become eligible if a market maker makes an application to register in andquote the security in accordance with SEC Rule 15c2-11, and such application iscleared.  Only a market maker may filethis application; we may not make such filing. Loss of our Nasdaq Small CapMarket status will make it more difficult to dispose of, or to obtain accuratequotations as to the price of our common stock thereby reducing the liquidityof our stock, making it difficult for a stockholder to buy or sell our stock atcompetitive market prices, or at all. In addition, we will lose support frominstitutional investors, brokerage firms and market makers that may currentlybuy and may sell our stock and provide information to investors about us. As aresult of these factors, the value of our common stock will decline further andour stockholders could lose some or all of their investment.

 

**We have incurred substantial losses since ourinception, and if we fail to generate significantly higher revenues and reduceour costs, we will be unable to achieve and maintain profitability and may beunable to continue our operations.**

 

We have incurred significant losses since inception and expect tocontinue to incur losses in the future. As of June 30, 2004, we had anaccumulated deficit of $301 million. Our revenues have decreased to $13.3million in the second quarter

 

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of 2004 from $18.6 million in the second quarter of 2003. If we file aplan of reorganization in order to emerge from bankruptcy, we cannot be certainthat we will be able to achieve or sustain profitability or generate sufficientoperating income to meet our needs.

 

**In an effort to reduce our operating expenses, priorto the filing of the Chapter 11 cases, we stopped paying some of ourlandlords.  As a result of our bankruptcyfiling, we may elect to reject certain leases.**

 

In an effort to reduce our operating expenses, prior to the filing ofthe Chapter 11 cases, we elected not to pay certain landlords. Some of the landlordshave filed suit against us seeking to evict us from the facility and requiringus to pay unpaid rent amounts. As a consequence of filing the Chapter 11 cases,all pending claims and litigation against us are stayed automatically.Additionally, under Section 365 of the Bankruptcy Code, we may elect toreject certain unexpired leases, including our leases of real property, subjectto the approval of the Bankruptcy Court and certain other conditions.Generally, a rejection relieves us of performing our future obligations underthat lease but entitles the landlord to a pre-petition general unsecured claim,if any, for damages against our estate caused by the deemed breach. Landlord tothese rejected leases may file proofs of claim against our estate for suchdamages. Due to the uncertain nature of many of the potential rejection andabandonment related claims, we are unable to project the magnitude of theseclaims with any degree of certainty at this time. If we are able tosuccessfully reject our leases, we may significantly reduce our operatingexpenses.

 

**Our business has been unprofitable, and we may beunable to profitably manage and market our services to customers.**

 

Our business has been unprofitable. To be successful, we must convinceprospective customers to entrust their network capacity requirements to us. Dueto the filing of the Chapter 11 cases, it may be difficult for us to obtainthis trust from prospective customers. If customers do not widely accept ourservices, our client base and revenues will decrease. Our ability to expand ourclient base and, therefore, to increase our revenues may be limited by thefollowing factors:

 

•                                          Ourability to overcome our customers’ concerns regarding our financial viabilityand bankruptcy filing;

•                                          Thespeed, reliability and cost effectiveness of our services;

•                                          Thewillingness of customers to outsource the obtaining of circuits;

•                                          Thefinancial viability of our customers and prospective customers;

•                                          Thefinancial viability of our suppliers;

•                                          Ourability to market our services effectively; and

•                                          Thegrowth of the Internet and demand for telecommunications services.

 

If our revenues continue to decrease, we may not be able tosuccessfully emerge from bankruptcy or sell our business under Section 33 ofthe Bankruptcy Code, and may convert the Chapter 11 cases to Chapter 7liquidations.

 

**Our efforts to develop new service offerings andexpand marketing channels may not be successful.**

 

In an effort to increase our revenues, we may invest significantresources to develop and sell new service offerings, such as software orinformation based products, and to expand marketing channels, including ourgovernment markets group. These initiatives may require significantexpenditures, which would reduce resources available to maintain and developour traditional lines of business. Whether new service offerings or expandedmarketing efforts succeed depends on factors we control, such as coordinatingour internal financial, engineering, marketing, information technology and salespersonnel, and on factors we cannot control, including whether customers willpay for these offerings and whether our vendors will provide the goods andservices we need. There can be no assurance we will be successful in theseefforts. If we do not successfully develop and sell new service offerings andexpand marketing channels, we may not increase our revenues and could incursubstantial losses that would harm our existing business.

 

**Industry conditions and further deterioration incredit quality may affect our customers’ ability to pay their obligations to usin a timely manner or at all and may affect the ability of our carriersuppliers to provide reliable service.**

 

We operate in a highly concentrated, high-risk market that hasexperienced a general deterioration of credit quality. Several of oursignificant customers have filed for reorganization or liquidation under thebankruptcy laws. As a result of the decline in credit quality and thesebankruptcies, some of our customers may have inadequate financial resources to

 

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meet all of their obligations and may seek to reject or renegotiatetheir purchase agreements with us. If either significant customers or asignificant number of smaller customers are unable to meet their obligations tous, reject their contracts or renegotiate their contracts, we may not be ableto recognize future revenues and we may also incur additional bad debt expensesand experience reduced opportunities for growth. If a customer fails to pay us,we may remain obligated to third parties for the cost of circuits previouslyprovided to the customer. Certain current or former customers who are bankrupthave filed and additional customers might file preference actions to try to recoveramounts that they previously paid us. These events would harm our cash flow,results of operations and financial condition, as would future deterioration inmarket conditions in our industry or in the creditworthiness of our significantcustomers or a significant number of smaller customers. In addition, some ofour carrier suppliers may have inadequate financial resources to providereliable service or to meet their other obligations to us. If a carriersupplier is unable to meet its obligations to us, we could be required topurchase replacement services on less favorable terms or experience disruptionsin service, which could impair our ability to retain or attract customers.Disruptions in service could require us to issue outage credits to our customersor incur other liabilities, which would reduce our revenue and gross margins.

 

**If we fail to manage our cost reduction effortseffectively, our ability to operate and to increase our services and customerbase could suffer.**

 

Our ability to successfully offer our services and implement ourbusiness plan in a rapidly evolving market requires effective planning andmanagement of our operations, including our workforce. In an effort to reducecosts, we have continued to reduce our headcount.  As of June 30, 2004, we had reduced ourheadcount to approximately 108 full-time employees.  Additionally, in July andAugust 2004 we further reduced our headcount by 25 employees.  Also, depending upon the progress of ourChapter 11 cases, we may be required to make further headcount reductions. Ourcontinued reduction in headcount will place a significant strain on ourmanagement systems and resources. We cannot be sure that our reduced workforcewill be sufficient for us to identify and take advantage of market opportunitiesand manage multiple relationships with various customers, suppliers and otherthird parties.

 

**Our success depends on our key personnel and we maynot be able to replace key employees who leave, especially during ourreorganization under Chapter 11 of the Bankruptcy Code.**

 

Our future success depends upon the continued services of our executiveofficers 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 to effectivelyexecute our strategies. We cannot assure you that we will be able to hire orretain necessary personnel during the bankruptcy process and if we are unableto do so, this could have a material effect on us. Furthermore, we may need tohire additional personnel in the future. Attracting and retaining key employees will be more difficult due to ourfiling of the Chapter 11 cases, negative publicity regarding our industry, ourlimited financial resources and our recent workforce reductions. The loss ofthe services of any of our key employees, the inability to attract or retainqualified personnel in the future, or delays in hiring required personnel couldlimit our ability to generate revenues and to operate our business.

 

**Conditions in our industry make forecasting difficult.**

 

Our results have been affected by bankruptcies of our suppliers andcustomers, credit problems in the telecommunications industry and circuitdisconnections. 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 and cashexpenditures;

•                                          The new and unproven nature of the market forsome of our services;

•                                          The need to make significant expenditures andincur significant expenses as we develop our business, including new marketingchannels, infrastructure and operations;

•                                          The lack of sufficient customers and revenuesto sustain our operations and growth without additional financing; and

•                                          Limited experience in providing some of theservices that we offer or plan to offer.

 

If we fail to forecast our network capacity requirements accurately orfail to accurately forecast other aspects of our

 

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business, it will be difficult for us to become profitable.

 

**If we have difficulties or delays in deliveringcircuits to our customers, our ability to generate revenue will suffer and wemay lose existing and potential new customers.**

 

It typically takes 30 to 90 days to supply a circuit for a client,and we do not begin to recognize revenue until a circuit has been installed andaccepted by the customer. Once we agree to facilitate the supply of a circuitfor a customer, we negotiate with one or more transport suppliers and managethe personnel and field technicians of multiple vendors. A customer can withdrawits order with minimal liability at any time before accepting the circuit. Wemay experience difficulties in facilitating the supply of circuits if ourtransport suppliers run out of capacity, which would force us to look foralternative sources of capacity on short notice. In addition, credit concerns,billing or other disputes with our suppliers may adversely affect theirwillingness to provide capacity in a timely manner. If we are unable tofacilitate the supply of a circuit in a timely manner or fail to obtain clientacceptance of the circuit, we would be unable to recognize revenues for thatcircuit and may incur financial liability to our supplier for that circuit, andour operating results would be adversely affected. Furthermore, because our customersmay cancel orders at any time before accepting the circuit, we may find itdifficult to forecast revenue and plan our expenses accordingly.

 

**Our ability to implement and maintain our UIX databaseis a critical business requirement, and if we cannot maintain precise data, wemight be unable to cost-effectively facilitate obtaining circuits for ourcustomers.**

 

To be successful, we must increase and update information aboutpricing, capacity, availability and location of circuits contained in our UIXdatabase. Our ability to cost effectively facilitate the supplying of circuits,to provide ongoing support and to develop new software or information-basedproducts or services depends upon the information we collect from our transportsuppliers regarding their networks, which we include in our UIX database. Oursuppliers are not obligated to provide us with this information and coulddecide to stop providing this information to us at any time. Moreover, wecannot be certain that the information that our suppliers share with us isaccurate or current. If we cannot continue to maintain and expand our UIXdatabase as planned, we may be unable to increase our revenues, develop newproducts or services, or cost-effectively facilitate the supplying of the circuits.

 

**If we cannot successfully operate our networkoperations center, we will be unable to provide monitoring, maintenance andrestoration services to our customers.**

 

One of our primary business objectives is to provide our customers withnetwork monitoring, maintenance and restoration services 24 hours a day,seven days a week through a network operations center. While we currentlyoperate our own network operations facility, our experience in this regard islimited both by the amount of time we have been in business and our providingthis service on our own as well as by the technical limitations of managingcircuits and services on the networks of other providers. As a consequence, wecannot be sure that our efforts to provide these services will be successful.Our ability to operate a network operations center will depend on many factors,including our ability to train, manage and retain employees, which may be moredifficult as a result of our bankruptcy filing. If we fail to successfullyoperate a network operations center, we may not be able to monitor networkoperations effectively or troubleshoot circuits in a cost-effective manner,which would cause us to lose customers and make it difficult for us to attractnew customers.

 

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

 

The market in which we operate is rapidly changing and highlycompetitive. 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 asAT&T, Level 3, Broadwing, Qwest, Sprint, MCI (formerly WorldCom) andWilTel;

•                                          Companies that provide collocationfacilities, such as Switch & Data, AT&T and Equinix;

•                                          Competitive access providers and localexchange carriers, such as AT&T, ICG Communications, MCI, XO Communicationsand FiberNet; and

•                                          Incumbent local exchange carriers, such asVerizon, BellSouth and SBC Communications.

 

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Our industry is expected to consolidate, which would increase the sizeand scope of our competitors. Competitors could benefit from assets acquiredfrom distressed carriers or strategic alliances in the telecommunicationsindustry. New entrants could enter the market with a business model similar toours. Our target markets may support only a limited number of competitors.Operations in such markets with multiple competitive providers may beunprofitable for one or more of such providers. Prices in both thelong-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.  Depending upon our plan of reorganization, weexpect that we will be able to reduce or eliminate certain of our expenses,which may allow us to be more competitive and offer lower prices to ourcustomers. Moreover, while recent regulatory initiatives allow carriers such asus to interconnect with incumbent local exchange carrier facilities and toobtain unbundled network elements from incumbent local exchange carriers,certain initiatives also provide increased pricing flexibility for, andrelaxation of regulatory oversight of, incumbent local exchange carriers. Thismay permit incumbent local exchange carriers to use revenues generated fromnon-competitive services to subsidize services that compete with our services,allowing them to offer competitive services at lower prices. Recent FCCdecisions, or future amendments to Federal telecommunications laws permittingthe regional Bell operating companies to compete with us may result in areduction to our revenues from these services if these companies are able toattract substantial business from our customers.

 

**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 certain advantages over us,including:

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

•                                          Substantially lower cost structures,including cost structures of facility-based providers who have significantlyreduced debt and other obligations through bankruptcy or other restructuringproceedings;

•                                          Larger client bases;

•                                          Longer operating histories; and

•                                          More established relationships in theindustry.

 

Our competitors may be able to use these advantages to:

•                                          Expand their offerings more quickly;

•                                          Adapt to new or emerging technologies andchanges in client requirements more quickly;

•                                          Take advantage of acquisitions and otheropportunities more readily;

•                                          Enter into strategic relationships to rapidlygrow the reach of their networks and capacity;

•                                          Devote greater resources to the marketing andsale of their services; and

•                                          Adopt more aggressive pricing and incentivepolicies, which could drive down margins.

 

If we are unable to compete successfully against our current and futurecompetitors, our operating results will be adversely affected and we will losemarket share, either of which could materially and adversely affect ourbusiness.

 

**Our facilities and the networks on which we depend mayfail, which would interrupt the circuit access and indefeasible rights of usewe provide and make it difficult for us to retain and attract customers.**

 

Our customers depend on our ability to provide ongoing dedicatedcircuit access and indefeasible rights of use (“IRU’s”). The operation of thesecircuits depends on the networks of third party transport suppliers. Thenetworks of transport suppliers and customers who may use our UTX facilitiesmay be interrupted by failures in or damage to these facilities. Our facilitiesand the ongoing circuit and IRU access we provide may be interrupted as aresult of various events, many of which we cannot control, including fire,human error, earthquakes and other natural disasters, disasters alongcommunications rights-of-way, power loss, telecommunications failures, sabotageor vandalism, or the financial distress or other events adversely affecting oursuppliers, such as bankruptcy or liquidation. We may be subject to legal claimsand be liable for losses suffered by customers and carriers for disruptions tocircuits or IRU’s or damage to client or carrier equipment or other propertyresulting from failures at our facilities or on the networks of third partyproviders. Unless caused by an event excused under our contract, such as a“force majeure” event, we generally provide outage credits to

 

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our customers if service disruptions occur. If our service failure rateis high, we may incur significant expenses related to service outage credits,which would reduce our revenues and gross margins. We would also incursignificant expenses in investigating and addressing the causes of such servicefailures, which would divert resources from the maintenance or expansion of ourservices and cause our business to suffer. In addition, we may lack theresources to investigate and address any such failures in as timely a manner asour customers may expect, which may damage our business relationship with thosecustomers and reduce our ability to obtain future business. Customers may seekto terminate their contracts with us if there is a service failure. Inaddition, if our service failure rate is high, our reputation could be harmed.

 

**Terrorist attacks and threats or actual war maynegatively affect our business, financial condition and results of operations.**

 

Our business is affected by general economic conditions that candecline as a result of numerous factors outside of our control, such asterrorist attacks and acts of war. Terrorist attacks against the United States,as well as events occurring in response to or in connection with them,including future terrorist attacks against U.S. targets, rumors or threats ofwar, actual conflicts involving the United States or its allies, or military ortrade disruptions affecting our suppliers or our customers, may affect impactour operations. As a result, there could be delays or losses in the delivery ofour service, decreased sales of our services and extension of time for payment ofaccounts receivable from our customers. Strategic targets such ascommunications networks and the Sears Tower (where our principal businessoffices are located) may be at greater risk of future terrorist attacks thanother targets in the United States. This occurrence could have an adverseaffect on our operations. It is possible that any or a combination of theseoccurrences could have a material adverse effect on our business, financialcondition and results of operations.

 

**We depend on several large customers, and the loss ofone or more of these customers, or a significant decrease in total revenuesfrom any of these customers, would likely significantly reduce our revenue andincome.**

 

Historically, a substantial portion of our revenues has come from alimited number of customers. In the three months ended June 30, 2004, ourthree largest clients accounted for approximately 29% of our total revenuescompared to approximately 34% in the three months ended June 30, 2003.  Although the percentage of our revenuesderived from our three largest customers has declined over the years, wecontinue to have a significant number of contracts with these customers andderive a significant portion of our revenues from these customers. Thesecontracts expire on various dates between now and March 2005. If, throughour bankruptcy proceeding or otherwise, we lose one or more large customers, orif one or more of our large customers reduces the services they purchase fromus or otherwise renegotiates the terms on which they purchase services from usand we fail to add new customers, our revenues could decline and our results ofoperations would suffer.

 

**Operating our UTX facilities causes us to incursignificant costs and expenses. To date, the market for our UTX services hasbeen unprofitable.**

 

We have incurred significant costs and expenses in developing our UTXfacilities, and we continue to incur costs and expenses related to thesefacilities in connection with: leasing real estate; hiring, training andmanaging employees; maintaining power and redundancy systems; maintainingmultiple communications connections; and depreciation of equipment. To date,the market for our UTX services has been unprofitable and has been developingmore slowly than we had expected. We have derived substantially all of ourrevenues from providing on-going circuit access and have only limitedexperience providing our UTX services. While management believes that some ofour UTX facilities have significant value to our business, we have tested andimpaired our UTX sites in 2002 and in 2003 in compliance with SFASNo. 144. If the market for our UTX services does not increasesignificantly, we will not generate revenues to offset the costs we incur inconnection with such facilities, and therefore, we will suffer losses. Inaddition, through our bankruptcy filing, we may seek to reject the leaseagreements for certain UTX sites.  If wereject such leases, the landlords and customers in those sites may file proofsof claims against us for damages and it might impact customer service.  Due to the uncertain nature of the potentialrejections and related claims, we are unable to predict our resulting liabilityunder these leases.

 

**The regulatory framework under which we operate andnew regulatory requirements or new interpretations of existing regulatoryrequirements could require substantial time and resources for compliance, whichcould make it difficult for us to operate our business.**

 

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Our U.S. communications services are subject to both federal and stateregulation. In providing our interstate and international communicationsservices, we must comply with applicable telecommunications laws andregulations 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 subjectto frequent changes and different interpretations, and therefore, it isdifficult for us to assess the impact of these factors on our operations. Thecurrent domestic and international trend is toward deregulation oftelecommunications and Internet services. However, we cannot be certain thatthis trend will continue, and it is possible that changes in regulatorypolicies could limit our ability to compete in some markets. Theimplementation, modification, interpretation and enforcement of laws andregulations vary and can limit our ability to provide many of our services. Wehave been required to obtain authorization from the FCC, many state publicutilities commissions and foreign regulatory authorities to offer particulartypes of telecommunications services. Pursuant to these authorizations, we haveto comply with a variety of regulatory obligations on an ongoing basis. Wecannot provide assurance that the FCC, state commissions or foreign authoritieswill grant us required authority (or do so in a timely manner), or refrain fromtaking action against us if we are found to have violated any applicablerequirements. If authority is not obtained or if our schedules of prices, termsand conditions are not filed, or are not updated, or otherwise do not fullycomply with the rules of the FCC or state or foreign regulatory agencies,third parties or regulators could challenge our ability to offer our servicesor attempt to impose fines. Such challenges or fines could cause us to incursubstantial legal and administrative expenses. Because we purchasetelecommunications services from other carriers (including both long-distanceand local telephone companies) for resale to our customers, our costs of doingbusiness can be affected by changes in regulatory policies affecting theseother carriers. For example, the FCC has recently announced decisions that mayincrease the costs of some dedicated transmission services offered by the localtelephone companies. We cannot control and often cannot predict these types ofdecisions or their impact on our business operations. Changes to existingregulations in particular markets may decrease the opportunities that areavailable for us to enter into those markets, or may increase our legal,administrative or operational costs, or may constrain our activities in otherways that we cannot necessarily anticipate.

 

**Required regulatory approvals may interfere with ordelay corporate transactions.**

 

As a regulated company, we may be required to obtain the approval ofthe FCC and certain state and foreign regulators before engaging in certaintypes 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.

 

**We may incur operational and management inefficienciesif we acquire new businesses or technologies.**

 

Depending upon our plan for reorganization, we may seek to acquirebusinesses or technologies that we believe will complement our existingbusiness or otherwise relate to a strategic transaction. Any such acquisitionswould likely involve some or all of the following risks:

 

•                                          Approval by the bankruptcy court;

•                                          Difficulty of assimilating acquiredoperations and personnel and information systems;

•                                          Potential disruption of our ongoing business;

•                                          Possibility that we may not realize anacceptable return on our investment in these acquired companies or assets;

•                                          Diversion of resources;

•                                          Possible inability of management to maintainuniform standards, controls, procedures and policies;

•                                          Risks of entering markets in which we havelittle or no experience; and

•                                          Potential impairment of relationships withemployees, suppliers or customers.

 

We may need to complete these transactions in order to generaterevenues, obtain needed capital, and to continue our business and successfullyemerge from bankruptcy. We cannot be sure that we will be able to obtain anyrequired financing for these transactions or that these transactions willoccur.

 

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**We must continue our marketing and sales initiativesto increase market awareness and sales of our services.**

 

Our services require a sophisticated sales and marketing effort thattargets key people within our prospective customers’ organizations. This saleseffort requires the efforts of select personnel as well as specialized systemand consulting engineers within our organization. Our ability to execute oursales and marketing initiatives depends on many factors, including our abilityto train, manage and retain employees. As a result of our bankruptcy filing, itmay be difficult for us to retain or provide effective incentives for ourmarketing and sales staff.  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 and ultimately, successfully sellingour business under Section 363 of the Bankruptcy Code or emerging frombankruptcy.

 

**If we do not continue to train, manage and retain ouremployees, customers may significantly reduce purchases of our services.**

 

Our employees are responsible for providing our customers withtechnical and operational support, and for identifying and developingopportunities to provide additional services to our existing customers.Retention of qualified employees may be adversely affected as a result of ourbankruptcy filing and headcount reductions. If we fail to train, manage and retain our employees, we may be limitedin our ability to gain more business from existing customers, and we may beunable to obtain or maintain current information regarding our customers’ andsuppliers’ communications networks, which could limit our ability to provisionfuture circuits for our customers or sell and/or develop new service offerings.

 

**Failure to successfully maintain and upgrade ourmanagement information systems could harm our ability to operate or manage ourbusiness effectively.**

 

Our ability to manage our business could be harmed if we fail tosuccessfully and promptly maintain and upgrade our management informationsystems as necessary. In addition, our ability to efficiently operate ourbusiness could suffer if the software that runs our information systemsmalfunctions.

 

**Because we have no patented technology and havelimited ability to protect our proprietary information, competitors may moreeasily replicate our business and harm our ability to generate revenues.**

 

***We have no patented technologythat would preclude or inhibit competitors from replicating our business. Werely on a combination of copyright, trademark, service mark and trade secretlaws and contractual restrictions to establish and protect our intellectual property.We have applied for registration of certain of our service marks in the UnitedStates and in other countries, and have obtained registrations for certain ofour service 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 which we may exclusively use our service marks. Weenter into confidentiality agreements with our employees, consultants andpartners, and we control access to, and distribution of, our proprietaryinformation. Our intellectual property may be misappropriated or a third partymay independently develop similar intellectual property. Moreover, the laws ofcertain foreign countries may not protect our intellectual property rights tothe same extent as do the laws of the United States. Unauthorized use of any ofour proprietary information could expose us to competition, which would harmour ability to attract new and existing customers and generate revenues.***

 

**ITEM 3. QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

The primary objective of our investment activities is to preserveprincipal while at the same time maximizing the income we receive from ourinvestments without significantly increasing risk. Some of the securities thatwe may invest in may be subject to market risk. This means that a change inprevailing interest rates may cause the principal amount of the investment tofluctuate. For example, if we hold a security that was issued with a fixedinterest rate at the then-prevailing rate and the prevailing interest ratelater rises, the principal amount of our investment will probably decline. Tominimize this risk, we maintain our portfolio of cash equivalents in a varietyof securities, including commercial paper, money market funds, government andnon-government debt securities. In general, money market funds are not subjectto market risk because the interest paid on such funds fluctuates with theprevailing interest rate. As of June 30, 2004, all of our investments werein cash and cash equivalents.

 

**Interest Rate Sensitivity**

 

We maintain our cash equivalents primarily in a portfolio comprised ofcommercial paper, money market funds, and

 

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investment grade debt securities. As of June 30, 2004, all of ourinvestments had maturities of less than three months. Accordingly, we do notbelieve that our investments have significant exposure to interest rate risk.

 

**Exchange Rate Sensitivity**

 

We currently operate primarily in the United States, and substantiallyall of our revenues and expenses to date have been in U.S. dollars.Accordingly, we have had no material exposure to foreign currency ratefluctuations.

 

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**ITEM4. CONTROLS AND PROCEDURES**

 

We carried out an evaluation, under the supervision and with theparticipation of our management, including our Chief Executive Officer andPrincipal Financial Officer, of the effectiveness of our disclosure controlsand procedures (as defined in Rules 13a-15(c) and 15d-15(e) under theSecurities Exchange Act of 1934) as of June 30, 2004. Based on that evaluation,our Chief Executive Officer and Chief Financial Officer have concluded that asof June 30, 2004, our disclosure controls and procedures were effective intimely notification to them of information we are required to disclose in ourperiodic SEC filings and in ensuring that this information is recorded,processed, summarized and reported within the time periods specified in theSEC's rules and regulations.

 

During the period covered by this report, there were no significantchanges in our internal control over financial reporting that have materiallyaffected, or were reasonably likely to materially affect, our disclosurecontrol over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

***ITEM 1. LEGAL PROCEEDINGS***

 

In November 2001, a complaint captioned In re: Initial PublicOffering Securities Litigation was filed in federal district court for theSouthern District of New York on behalf of a purported class of persons whopurchased our stock between March 16, 2000 and December 6, 2000. Thecomplaint generally alleges that various underwriters engaged in improper andundisclosed activities related to the allocation of shares in our initialpublic offering of securities. The complaint brings claims for violation ofseveral provisions of the federal securities laws against the underwriters ofour IPO, and also against us and certain of our former directors and officersunder the Securities Act of 1933 and the Exchange Act of 1934. Similar lawsuitsconcerning more than 300 other companies’ initial public offerings were filedin 2001, all of which were consolidated into a single coordinated proceeding inthe Southern District of New York. We believe that the allegations against usare without merit. On June 30, 2003, the litigation committee of our boardof directors conditionally approved a proposed partial settlement with theplaintiffs in this matter. In June 2004, an agreement of settlement wassubmitted to the Court for preliminary approval. The settlement would provide,among other things, a release of the individual defendants for the conductalleged in the action to be wrongful and, due to our recent bankruptcy filing,a covenant that the plaintiffs would not sue us based on such conduct. Ourinsurers are expected to bear any direct financial impact of the proposedsettlement. We are unable to determine whether or when the settlement will beapproved or finalized. Given the uncertainties regarding the amount we willultimately be required to pay, if any, as of June 30, 2004, we have not accrueda liability for this matter.

 

We and certain of ourformer directors and officers are defendants in an action pending in the UnitedStates District Court for the Eastern District of Texas, In re UniversalAccess, Inc. Securities Litigation, Civil Action No. 9:02-CV-103.  The original complaint alleged securitiesfraud in connection with public statements made by the Company and its officersbetween 2000 and 2002.    OnMarch 7, 2003, the Court granted a motion to dismiss the complaint andgranted plaintiffs the opportunity to replead with respect to a minority of thealleged misstatements.  On May 27, 2003,plaintiffs filed a second amended consolidated complaint.  Pursuant to the Court’s September 17,2003 order, on October 1, 2003, plaintiffs filed a revised second amendedconsolidated complaint.   OnApril 16, 2004, the Court dismissed the action against two of theindividual defendants but denied the motion to dismiss as to the remainingdefendants.   Plaintiffs are to file amotion for class certification on August 20, 2004. The matter, which isnow in the discovery phase, is set for trial on April 5, 2005.  We believe that the allegations against usare without merit. Given the uncertainties regarding the amount we willultimately be required to pay, if any, as of June 30, 2004, we have not accrueda liability for this matter.

 

InAugust 2003, Genuity Telecom Inc. filed a complaint against us in theUnited States Bankruptcy Court for the Southern District of New York seekingnearly $1.6 million, plus interest and costs. The caption of this case is Genuity Telecom Inc. v. Universal Access,Inc. No. 03-06928.  In its complaint,Genuity alleges that we did not purchase the minimum amount oftelecommunications services specified by the parties’ contract, and the amountsought represents the difference between the purported minimum purchasecommitment and the amount of telecommunications services we purchased.  We believe that Genuity’s claims lack merit.  We answered Genuity’s complaint and assertedseveral defenses to Genuity’s claims, including defenses based on the parties’renegotiated agreement and the invoices Genuity sent to us for ten months inaccordance with the parties’ renegotiated agreement. We also filed a motionseeking to stay the action and to compel arbitration of the matter inaccordance with the mandatory arbitration provision in the contract.  In July, 2004, the court granted the reliefrequested in our motion.  Should Genuitypursue the matter in arbitration, we intend to vigorously defend againstGenuity’s claims.  Genuity assigned ourcontract to Level 3 Communications, LLC on February 4, 2003 as part ofGenuity’s bankruptcy proceeding and reorganization efforts.  The amount sought by Genuity in its complaintrelates to actions prior to February 4, 2003.

 

In March 2004, the landlord of our New York office spacefiled an action against us captioned 330 Madison Company LLC againstUniversal Access, Inc., Civil Court of the City of New York, County of NewYork: Non-Housing Part 52, Index No. 063274/2004. In its complaint,the landlord seeks the payment of approximately $73thousand representing rent the landlord claims is unpaid, plus interestand attorneys’ fees, and the issuance of a warrant to remove us from thepremises.

 

In May 2004, AboveNet, Inc. filed a complaint against us in the UnitedStates Bankruptcy Court for the Southern District of New York, In re AboveNet,Inc. v Universal Access Global Holdings, Inc. In its complaint AboveNet seeksthe payment of approximately $3.8 million plus interest, representing amountsallegedly paid to us in the 90 day period prior to the commencement date ofAboveNet’s bankruptcy. AboveNet asserts it is entitled to the recovery underseveral theories, including that the payments were preferential transfers,fraudulent transfers, and fraudulent conveyances. We believe that AboveNet’sclaims are without merit.  We answeredAboveNet’s complaint and asserted several defenses to AboveNet’s claims.

 

On August 2, 2004, the landlord of the Sears Tower (our main officespace) filed a complaint against us captioned 233 South Wacker Drive LLC,successor in interest to TH Tower Leasing LLC, v. Universal Access, Inc.,04M1718970.   In its complaint, thelandlord seeks to terminate our possession of the premises and the payment ofapproximately $1 million, representing rent the landlord claims is unpaid, plusunpaid rent that accrues during the pendancy of the case and costs.

 

On August 4, 2004, the Company and all of its U.S. subsidiariesfiled voluntary petitions for reorganization under chapter 11 of the UnitedStates Bankruptcy Code (“Bankruptcy Code”) in the United States BankruptcyCourt for the Northern District of Illinois (the “Bankruptcy Court”). We expectthat the cases will be consolidated and jointly administered under case numbers04B28747,

 

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04B28752, 04B28755, 04B28762, and 04B28768. We are currently operating our business as“debtors-in-possession” under the jurisdiction of the Bankruptcy Court, but maynot engage in transactions outside the ordinary course of business without theprior approval of the Bankruptcy Court. As of the date of the bankruptcyfiling, our pending litigation, including the above-listed litigation, isstayed.  The rights and claims of variouscreditors and security holders will be determined by a plan of reorganizationand under the priority rules established under the Bankruptcy Code.  Any Chapter 11 plan filed by us may providethat unsecured creditors of subsidiaries of us will need to be satisfied beforeany distribution to the unsecured creditors or stockholders of us. As a result,a plan of reorganization could result in holders of our common stock receivinglittle or no value as part of the plan of reorganization.  A plan of reorganization must be confirmed bythe Bankruptcy Court.  At this time, itis not possible to predict accurately the effect of the Chapter 11reorganization process on our business, our creditors or our stockholders or whenor if we may emerge from Chapter 11. Our future results may depend on thetimely and successful confirmation and implementation of a plan ofreorganization.

 

**ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS**

 

On April 28, 2004, we issued a convertible promissory note in the principal amount of $1,000,000 to one of our landlords.  The note is due in two years, non-interest bearing, and is convertible into a maximum of 400,000 shares of our common stock at a conversion price of $2.50 per share if certain conditions are met in the future.  The issuance was a private placement transaction exempt from the registration requirements of the Securities Exchange Act of 1933, as amended, pursuant to Section 4(2) thereunder, without payment of underwriting discounts or commissions to any person.

 

**ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

Our annual meeting of stockholders was held on May 27, 2004.  At this meeting, three proposals weresubmitted to a vote of our stockholders: (1) the election of three Class IIdirectors (with Anthony L. Coelho, William J. Elsner and Randall R. Lay beingthe nominees); (2) the ratification of our appointment ofPricewaterhouseCoopers LLP as our independent auditors for fiscal year 2004;and (3) the approval of an amendment to our 1999 Stock Plan to increase thenumber of shares of common stock reserved for issuance under the Plan in 2004from 500,000 to 1,250,000 shares.  At theclose of business on the record date for the meeting (which was April 12,2004), there were 11,473,111 shares of common stock outstanding and entitled tobe voted at the meeting.    Holders of10,853,562 shares of common stock outstanding or approximately 94.6% of thetotal shares outstanding and entitled to vote at the meeting were either presentin person or represented by proxy.  Thefollowing table sets forth the results of the voting.

 
| **Proposal**                   | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|--------------------------------|------------|------------|------------|--------------|------------|
|                           |       |       |       |         |       |
| 1. Election of three directors |       |       |       |         |       |
| Anthony L. Coelho              |       | 10,809,775 |       | 43,787       |       |
| William J. Elsner              |       | 10,817,230 |       | 36,332       |       |
| Randall R. Lay                 |       | 10,812,631 |       | 40,931       |       |

 
| ** **                                                                                                                                                                          | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker  Non-Votes** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|-----------------------|------------|
|                                                                                                                                                                                |       |       |       |        |       |        |       |                  |       |
| 2. Ratification of our appointment of  PricewaterhouseCoopers LLP as our independent auditors for fiscal year 2004                                                                  |       | 10,838,177 |       | 4,699       |       | 10,686      |       | 0                     |       |
| 3. Approval of an amendment to our 1999  Stock Plan to increase the number of shares of common stock reserved for  issuance under the Plan in 2004 from 500,000 to 1,250,000 shares |       | 8,458,500  |       | 131,924     |       | 14,671      |       | 2,248,467             |       |

 

Each of the proposals set forth above received more than the requirednumber of votes for approval and were therefore duly and validly approved bythe stockholders.

 

**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

 

**(a)**                                  List of Exhibits

 

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| **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 with CityNet Telecommunications, Inc. dated July 23,  2003.(3)                                                                                                                                                                                  |
| 4.6                 |       | Form of warrant to  purchase shares of Common Stock of the Company issued to Advanced  Equities.(5)                                                                                                                                                                                 |
| 4.7                 |       | 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.(6) |
| 4.7.1               |       | Assumption of and  Amendment to the Universal Access, Inc. Preferred Stock Rights Agreement  dated July 13, 2001.(1)                                                                                                                                                           |
| 4.7.2               |       | Second Amendment to the  Universal Access Global Holdings Inc. Preferred Stock Rights Agreement dated  April 7, 2003.(2)                                                                                                                                                            |
| 4.8                 |       | Warrant to purchase  shares of Common Stock of the Company issued to Broadmark Capital, Inc.  dated July 23, 2003.(3)                                                                                                                                                          |
| 10.3.1              |       | First Amendment to the  1999 Stock Plan of Universal Access Global Holdings Inc. dated May 27, 2004.                                                                                                                                                                                     |
| 10.7.1              |       | First Amendment to  Independent Contractor Agreement with Anthony Coelho dated June 9, 2004.                                                                                                                                                                                        |
| 10.13.4             |       | Fourth Amendment to the  Global Services Agreement with MCI WorldCom Communications, Inc. dated  June 24, 2004.                                                                                                                                                                     |
| 10.20               |       | Indemnification  Agreement with CityNet Telecommunications, Inc. dated April 25, 2004.(7)                                                                                                                                                                                           |
| 10.21               |       | Convertible Promissory  Note with Lafayette Business Park, LLC dated April 28, 2004.(7)                                                                                                                                                                                             |
| 31.1                |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002.                                                                                                                                                                               |
| 31.2                |       | Certification of  Principal Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                           |
| 32.1                |       | Certification of  Principal Executive Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                           |
| 32.2                |       | Certification of  Principal Financial Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                           |

 

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

(2)             Filed with theCompany’s Current Report on Form 8-K dated April 11, 2003.

(3)             Filed with theCompany’s Quarterly Report on Form 10-Q for the period endedSeptember 30, 2003.

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

(5)             Filed with theCompany’s Registration Statement on Form S-1 (No. 333-93039) filedwith the Securities and Exchange Commission by the Company in connection withits initial public offering that became effective March 16, 2000.

(6)             Filed with the Company’sRegistration Statement on Form 8-A, filed with the Securities and ExchangeCommission on August 9, 2000.

(7)             Filed with the Company’sQuarterly Report on Form 10-Q for the period ended March 31, 2004.

†                     Confidentialtreatment requested for certain portions of this Exhibit that portionshave been omitted and filed separately with the Securities and ExchangeCommission.

 

(a)                                    OnAugust 4, 2004, the Company filed with the SEC a report on Form 8-K, which wasfurnished pursuant to Items 3, 4, 5 and 7 of Form 8-K and which announced thefollowing: (i) On August 4, 2004, the Company and its domestic subsidiariesfiled voluntary petitions for reorganization under Chapter 11 of the UnitedStates Bankruptcy Code with the United States Bankruptcy Court for the NorthernDistrict of Illinois; (ii) On August 2, 2004, the Company received notice thateffective upon the Company's filing of its Form 10-Q for the quarter ended June30, 2004, PricewaterhouseCoopers LLP will resign as the Company's independentaccountants; (iii) that Anothy P. Dolanski has resigned from the Board ofDirectors effective July 29, 2004; (iv) that William Elsner and Anthony Dafferhave resigned from the Board of Directors of the Company effective August 3,2004,; and (v) that Brian Coderre, Chief Executive Officer of the Company willbe leaving the Company effective, August 3, 2004. Attached as exhibits to theForm 8-K were a press release of the Company dated August 4, 2004 and a letterfrom PricewaterhouseCoopers LLP dated August 4, 2004.

 

(b)                                   Reportson Form 8-K:

 

On April 14, 2004, the Company filed with the SEC a report on Form8-K, which was furnished pursuant to Item 7 and Item 12 of Form 8-K and whichprovided information on the financial results of the Company for the fourthquarter and the year ended December 31, 2003.

 

On July 1, 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 on June 28, 2004 theCompany received a Nasdaq Staff Determination indicating that the Companyfailed to comply with the minimum stockholders’ equity requirement forcontinued listing, and that its securities were therefore subject to delistingfrom the Nasdaq SmallCap Market.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 
|                         | UNIVERSAL ACCESS GLOBAL HOLDINGS INC. |
|------------------------------|---------------------------------------|
|                         | (Registrant)                          |
|                         |                                  |   |
|                         |                                  |   |
| Dated: August 16,  2004 | By:                                   | /s/ Daniel M.  Bresingham | * * |
|                         |                                  | Name: Daniel M.  Bresingham |
|                         |                                  | Title:*Principal Financial Officer* |
|                         |                                  | *(Principal Financial and  Accounting Officer)* |
|                              |                                       |  |  |  |

 

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