###### ** **

**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,  2003**                                                                                                             |
|                                                                                                                                                          |
| **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 GlobalHoldings Inc.**

(Exact name of registrant as specified in itscharter)

 

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

 

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Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past90 days. Yes ý  No o

 

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

 

The number of shares outstanding of theissuer’s common stock, par value $0.01, as of July 31, 2003 was 11,440,358shares.

 

 

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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, 2003 and December 31, 2002 (Unaudited) |
|                      |   |
|                      | Condensed Consolidated Statements of  Operations for the Three Months and Six Months Ended June 30, 2003 and  2002 (Unaudited) |
|                      |   |
|                      | Condensed Consolidated Statements of Cash  Flows for the Six Months Ended June 30, 2003 and 2002 (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 6.              | Exhibits and Reports on Form 8-K |
|                      |   |
| Signatures                |
|                      |   |

 

2

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## **PART I. FINANCIAL INFORMATION**

 

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

 

**UNIVERSAL ACCESS GLOBAL HOLDINGS INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED BALANCESHEETS(in thousands, except per share data)(Unaudited)**

 
|                                                                                                                                                                               |   | **June 30,  2003** |   | **December 31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|--------|-----------------------------|--------|
|                                                                                                                                                                               |   |               |   |                        |   |
| **ASSETS**                                                                                                                                                                         |   |               |   |                        |   |
| Current assets:                                                                                                                                                                    |   |               |   |                        |   |
| Cash and cash equivalents                                                                                                                                                          |   | $                  | 10,548 |                        | $      | 12,353 |   |
| Accounts receivable, less allowance for  doubtful accounts of $1,552 and $1,728                                                                                                    |   | 4,852              |   | 4,566                       |   |
| Prepaid expenses and other current assets                                                                                                                                          |   | 4,170              |   | 2,674                       |   |
|                                                                                                                                                                               |   |               |   |                        |   |
| Total current assets                                                                                                                                                               |   | 19,570             |   | 19,593                      |   |
| Restricted cash                                                                                                                                                                    |   | 2,058              |   | 3,900                       |   |
| Property and equipment, net                                                                                                                                                        |   | 14,723             |   | 20,617                      |   |
| Other long-term assets                                                                                                                                                             |   | 2,265              |   | 2,607                       |   |
|                                                                                                                                                                               |   |               |   |                        |   |
| Total assets                                                                                                                                                                       |   | $                  | 38,616 |                        | $      | 46,717 |   |
|                                                                                                                                                                               |   |               |   |                        |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY (DEFICIT)**                                                                                                                           |   |               |   |                        |   |
| Current liabilities:                                                                                                                                                               |   |               |   |                        |   |
| Accounts payable                                                                                                                                                                   |   | $                  | 2,533  |                        | $      | 2,382 |   |
| Non-income tax payable                                                                                                                                                             |   | 1,548              |   | 1,071                       |   |
| Accrued carrier expenses                                                                                                                                                           |   | 12,083             |   | 15,611                      |   |
| Accrued expenses and other current  liabilities                                                                                                                                    |   | 1,654              |   | 2,051                       |   |
| Unearned revenue                                                                                                                                                                   |   | 9,571              |   | 9,813                       |   |
| Short-term notes payable                                                                                                                                                           |   | 5,000              |   | 0                           |   |
| Short-term restructuring liability                                                                                                                                                 |   | 765                |   | 773                         |   |
|                                                                                                                                                                               |   |               |   |                        |   |
| Total current liabilities                                                                                                                                                          |   | 33,154             |   | 31,701                      |   |
| Security deposits payable                                                                                                                                                          |   | 1,892              |   | 1,859                       |   |
| Restructuring liability                                                                                                                                                            |   | 3,892              |   | 4,274                       |   |
|                                                                                                                                                                               |   |               |   |                        |   |
| Total liabilities                                                                                                                                                                  |   | 38,938             |   | 37,834                      |   |
| Commitments and contingencies (Note 7)                                                                                                                                        |   |               |   |                        |   |
| Stockholders’ equity (deficit):                                                                                                                                               |   |               |   |                        |   |
| Common stock, $.01 par value;  50,000,000 shares authorized; 4,917,061 and 4,958,968 shares issued and  outstanding at June 30, 2003 and December 31, 2002, respectively |   | 49                 |   | 50                          |   |
| Common stock warrants                                                                                                                                                              |   | 129                |   | 129                         |   |
| Additional paid-in-capital                                                                                                                                                         |   | 282,584            |   | 284,107                     |   |
| Deferred stock plan compensation                                                                                                                                                   |   | (1,549             | )      | (3,010                      | )      |
| Accumulated deficit                                                                                                                                                                |   | (281,022           | )      | (271,793                    | )      |
| Accumulated other comprehensive income                                                                                                                                             |   | 43                 |   | 40                          |   |
| Notes receivable—employees                                                                                                                                                    |   | (556               | )      | (640                        | )      |
|                                                                                                                                                                               |   |               |   |                        |   |
| Total stockholders’ equity (deficit)                                                                                                                                          |   | (322               | )      | 8,883                       |   |
|                                                                                                                                                                               |   |               |   |                        |   |
| Total liabilities and stockholders’ equity  (deficit)                                                                                                                         |   | $                  | 38,616 |                        | $      | 46,717 |   |

 

3

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**UNIVERSAL ACCESS GLOBAL HOLDINGS INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS(in thousands, except per share data)(unaudited)**

 
|                                                                            |   | **Three Months Ended********June 30,** |       | **Six Months Ended   June 30,** |       |
|---------------------------------------------------------------------------------|--------|----------------------------------------|------------|---------------------------------|------------|
|                                                                            |   | **2003**                               |       | **2002**                        |       | **2003** |   | **2002** |   |
|                                                                            |   |                                   | ** ** |                            | ** ** |   | ** ** |   | ** ** |
| Revenues                                                                        |   | $                                      | 18,591     |                            | $          | 24,113 |   | $ | 37,742 |   | $ | 53,193 |   |
| Costs and expenses:                                                             |   |                                   |       |                            |       |   |   |   |   |
| Cost of circuit access (exclusive of  depreciation shown below)                 |   | 12,579                                 |       | 20,151                          |       | 25,332 |   | 41,354 |   |
| Operations & administration (excluding  stock plan compensation)            |   | 6,542                                  |       | 19,748                          |       | 15,372 |   | 35,242 |   |
| Operations & administration (stock plan  compensation)                      |   | 246                                    |       | 1,143                           |       | 636 |   | 1,434 |   |
| Impairment of property, plant  & equipment                                  |   | 1,198                                  |       | 46,025                          |       | 1,198 |   | 46,025 |   |
| Impairment of goodwill                                                          |   | 0                                      |       | 4,472                           |       | 0 |   | 4,472 |   |
| Depreciation & amortization                                                 |   | 1,988                                  |       | 4,803                           |       | 4,467 |   | 9,889 |   |
|                                                                            |   |                                   |       |                            |       |   |   |   |   |
| Total costs and expenses                                                        |   | 22,553                                 |       | 96,342                          |       | 47,005 |   | 138,416 |   |
| Operating loss                                                                  |   | (3,962                                 | )          | (72,229                         | )          | (9,263 | ) | (85,223 | ) |
| Other income, net                                                               |   | (58                                    | )          | 123                             |       | 34 |   | 500 |   |
|                                                                            |   |                                   |       |                            |       |   |   |   |   |
| Net loss                                                                        |   | $                                      | (4,020     | )                               | $          | (72,106 | ) | $ | (9,229 | ) | $ | (84,723 | ) |
|                                                                            |   |                                   |       |                            |       |   |   |   |   |
| Basic and diluted net loss per share                                            |   | $                                      | (0.81      | )                               | $          | (14.72 | ) | $ | (1.87 | ) | $ | (17.29 | ) |
| Weighted average shares used in computing  basic and diluted net loss per share |   | 4,945                                  |       | 4,897                           |       | 4,939 |   | 4,900 |   |

 

4

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**UNIVERSAL ACCESS GLOBAL HOLDINGS INC. ANDSUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS(in thousands)(unaudited)**

 
|                                                     |   | **Six Months Ended June 30,** |   |
|----------------------------------------------------------|--------|------------------------------------|--------|
|                                                     |   | **2003**                           |   | **2002** |   |
|                                                     |   |                               |   |   |   |
| **Cash flows from  operating activities:**               |   |                               |   |   |   |
| Net cash used for operating activities                   |   | $                                  | (8,970 | ) | $ | (18,390 | ) |
| **Cash flows from  investing activities:**               |   |                               |   |   |   |
| Additions to property, plant, &  equipment           |   | (16                                | )      | (6,164 | ) |
| Proceeds from sales of property, plant,  & equipment |   | 267                                |   |   |   |
| Increase in notes receivable                             |   |                               |   | (2,080 | ) |
| Sale of short-term investments                           |   |                               |   | 24,800 |   |
|                                                     |   |                               |   |   |   |
| Net cash provided/(used) by investing  activities        |   | 251                                |   | 16,556 |   |
| **Cash flows from  financing activities:**               |   |                               |   |   |   |
| Payments on capital lease obligations                    |   |                               |   | (3,467 | ) |
| Payment of long-term and short-term  obligations         |   |                               |   | (610 | ) |
| Proceeds from short-term notes payable                   |   | 5,000                              |   |   |   |
| Proceeds from issuance of common stock                   |   | 65                                 |   | 307 |   |
| Proceeds from notes receivable—employee             |   | 4                                  |   | 64 |   |
| Release of restriction on cash balance                   |   | 1,842                              |   | 948 |   |
|                                                     |   |                               |   |   |   |
| Net cash provided (used) by financing  activities        |   | 6,911                              |   | (2,758 | ) |
| Effect of exchange rate changes on cash                  |   | 3                                  |   | (20 | ) |
| Net increase/(decrease) in cash and cash  equivalents    |   | (1,805                             | )      | (4,612 | ) |
| Cash and cash equivalents, beginning of  period          |   | 12,353                             |   | 20,758 |   |
|                                                     |   |                               |   |   |   |
| Cash and cash equivalents, end of period                 |   | $                                  | 10,548 |   | $ | 16,146 |   |
|                                                     |   |                               |   |   |   |
| **Non-Cash Financing  Activities:**                      |   |                               |   |   |   |
| Redemption of notes receivable using  outstanding stock  |   | 791                                |   | 218 |   |

 

5

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**UNIVERSAL ACCESS GLOBAL HOLDINGS INC.AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS(unaudited)**

 

**Note 1—Basis of Presentation**

 

Theaccompanying unaudited condensed consolidated financial statements have beenprepared by Universal Access Global Holdings Inc. (“Holdings”) and itssubsidiaries (collectively, “the Company” or “we”), and reflect alladjustments, consisting only of normal recurring adjustments, which in the opinionof management are necessary to state fairly the financial position and theresults of operations for the interim periods. The statements have beenprepared in accordance with the rules and regulations of the Securities andExchange Commission (the “SEC”). Certain information and footnote disclosuresin financial statements prepared in accordance with generally acceptedaccounting principles have been omitted pursuant to such rules and regulations.These statements should be read in conjunction with the Financial Statementsand Notes thereto included in our 2002 Annual Report on Form 10-K. Resultsfor fiscal 2003 interim periods are not necessarily indicative of results to beexpected for the fiscal year ending December 31, 2003. On August 8, 2003,we effected a one-for-twenty reverse stock split.  All share and per share information herein reflect this reversestock split.  All numbers presented arein thousands, except share and per share amounts and where otherwise indicated.

 

**Note 2—Liquidity**

 

Our consolidated financial statements have been prepared assuming wewill continue as a going concern. Effective July 23, 2003, we have completedour $16 million capital raising transaction with CityNet Telecommunications,Inc.  We completed this transaction toprovide resources to fund operations focusing on marketing and our four saleschannels: wholesale carrier, foreign PTT, cable and government.  We also plan to use the proceeds to fundtargeted investments to enhance our existing IT tools to help increase our revenue.

 

Effective April 7, 2003, we entered into a definitive StockPurchase Agreement (the “Purchase Agreement”) with CityNet. Pursuant to theterms of the Purchase Agreement, on July 23, 2003, (a) CityNet paid to us$16 million in cash and transferred to us fiber optic rings located inAlbuquerque, New Mexico and Indianapolis, Indiana having an agreed-upon valueof $700 thousand, (b) we issued to CityNet newly issued shares of ourcommon stock representing approximately 55% of our outstanding commonstock on a fully diluted basis (with any options and warrants having an exercise price in excess of $20.00,adjusted for the August 8, 2003, one-for-twenty reverse stock split, beingexcluded from the calculation of “fully diluted,” subject to CityNet’s right to receivecompensating shares in the event that any of these options or warrants aresubsequently exercised) and (c) we assumed certain liabilities ofCityNet. In particular, we assumed $2 million in principal amount of aPromissory Note executed by CityNet and made to Electro Banque.  The note is secured by the fiber optic ringlocated in Albuquerque, New Mexico, maturesin a single installment on December 31, 2007 and does not bear interest untilJanuary 1, 2006; thereafter, it bears interest at 8% per annum.

 

Related to this transaction, effective April 7, 2003, we obtained$5 million in secured debt financing from CityNetTelecommunications, Inc. (“CityNet”). The financing was evidenced by a promissory note (the “Note”) andsecured by substantially all of our assets. Under the terms of the Note, the unpaid principal balance accruedinterest at a rate of 12% per annum, compounded quarterly, and the entireunpaid principal balance and accrued but unpaid interest was payable onApril 6, 2004 unless otherwise accelerated under the Note.  Upon the closing of the PurchaseAgreement, principal and accrued interest of $5.2 million under the Note was(in lieu of cash payment to CityNet) applied to reduce the cash portion of thepurchase price payable by CityNet under the Purchase Agreement.

 

After payingexpenses related to the Purchase Agreement, the net proceeds from the PurchaseAgreement were approximately $14.5 million.  Pursuant to the terms of the Purchase Agreement, our boardof directors consists of nine members, five of whom, including the chairman,have been or will be designated by CityNet.

 

Based on our receipt of net proceeds of approximately $14.5 millionfrom the Purchase Agreement, and assuming (a) our operational cash receiptsremain stable, (b) we generate significantly higher revenues and (c) wecontinue to control uses of cash, we estimate that we will have sufficientliquidity and capital resources to meet our short term liquidity needs. Inaddition, we estimate that meeting all of these conditions will allow us tomeet our long term liquidity goal of funding our business with internallygenerated cash.  However, there can beno assurance these conditions will be met, and our operational and financialflexibility may be limited in the future. Further, unexpected events adverselyaffecting our cash resources, including declines in collections due to clientbankruptcies or deteriorating industry conditions, bankruptcy preferencepayment settlements, security deposit requirements, accelerated vendor paymentterms, payments required to settle disputes or adversely determined litigation,may create a need for us to obtain more funding from external sources.  There can be no assurance that additionalfinancing will be available to us on terms and conditions favorable to us, ifat all.

 

6

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**Note 3—Property and Equipment, Net**

 

Property and equipment consists of the following, stated at the lowerof fair market value or cost:

 
|                                             |   | **June 30, 2003** |   | **December 31, 2002** |   |
|--------------------------------------------------|--------|-------------------|--------|-----------------------|--------|
|                                             |   |              |   |                  |   |
| Furniture and fixtures                           |   | $                 | 1,022  |                  | $      | 1,075 |   |
| Leasehold improvements                           |   | 1,442             |   | 1,442                 |   |
| UTX equipment                                    |   | 13,925            |   | 15,572                |   |
| Computer hardware and software                   |   | 21,450            |   | 21,436                |   |
| Other equipment                                  |   | 350               |   | 523                   |   |
|                                             |   |              |   |                  |   |
| Property and Equipment, gross                    |   | 38,189            |   | 40,048                |   |
| Less: Accumulated depreciation and  amortization |   | (23,466           | )      | (19,431               | )      |
|                                             |   |              |   |                  |   |
| Property and equipment, net                      |   | $                 | 14,723 |                  | $      | 20,617 |   |

 

Included in cost of computer hardware andsoftware are software development and website costs of $0 and $2.8 million thatwere capitalized during 2003 and 2002, respectively.  Accumulated depreciation related to capitalized software andwebsite assets was $7.0 million and $4.7 million at June 30, 2003 and December31, 2002, respectively.

 

**Note 4 - Impairment of Long-Lived Assets**

 

In compliance with SFASNo. 144, *Accounting for the Impairmentor Disposal of Long-Lived Assets,* we evaluate the recoverability ofour long-lived assets. Under SFAS No. 144, an impairment review isperformed if events occur or circumstances change indicating that the carryingamount might not be recoverable. Factors considered important that couldtrigger an impairment review include, but are not limited to, a significantdecrease in the market value, a significant adverse change in legal factors orin the business climate, a current period operating or cash flow loss combinedwith a history of operating or cash flow losses or a projection or forecastshowing continuing losses, and a current expectation that more-likely-than-nota long-lived asset will be sold or otherwise disposed of significantly beforethe end of its previously estimated useful life. If any of the impairmentindicators are present or if other circumstances indicate that an impairmentmay exist, we must then determine whether an impairment loss should berecognized. An impairment loss may be recognized only if the undiscounted cashflows used to test for recoverability are less than the carrying value.

 

As of June 30, 2003, wereviewed our assets and determined that an impairment existed as a result ofcircuit disconnections for the UTX assets located at Los Angeles and the UTXassets located in Chicago associated with our termination of the related leasein July, 2003. The Company recognized an impairment charge in the secondquarter 2003 of $1.1 million and $137 thousand for these assets,respectively. The remaining book value of the Los Angeles UTX assets after thisimpairment is $1.7 million.

 

Management believes that allnecessary impairment adjustments have been made at June 30, 2003; however,management will continue to evaluate its long-lived assets for impairment basedon specific events and circumstances.

 

**Note 5—Other Long-term Assets**

 

During 2001, we paid a supplier $3.3 million in exchange forfavorable pricing terms and were amortizing this cost over the ten-year life ofthe agreement. At December 31, 2002, based on an analysis we performed, weconcluded that we expect to realize the benefits associated with this asset butonly over the next 3.75 years. As a result, starting in 2003 theamortization expense for this asset is being recognized over the remaining3.75 years. The cash flows directly attributable to this asset exceed thenet book value, so no impairment is warranted. Accumulated amortization relatedto this asset was $816 thousand and $438 thousand at June 30, 2003 andDecember 31, 2002, respectively.

 

We also have security deposits receivable classified as long-termtotaling $560 thousand at June 30, 2003 and $523 at December 31, 2002. Wepay these security deposits to carriers, landlords, and utility companies inthe ordinary course of business.

 

7

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**Note 6—Restructuring**

 

Therestructuring program is substantially complete, except for facility exit costsand operating lease payments for office equipment. The ability to subletfacilities at the rates contemplated by the restructuring charge will depend onmarket conditions. Amounts relating to facilities will be paid over therespective lease terms through 2013 and will be net of any sublease recoveries,while operating lease payments for office equipment will be paid through 2003.

 

The following summarizes the significant components of therestructuring reserve at June 30, 2003:

 
|                                                       |   | **Balance at  December 31, 2002** |   | **Incurred Cash  Payments** |   | **Balance at  June 30, 2003** |   |
|------------------------------------------------------------|--------|-----------------------------------|--------|-----------------------------|--------|-------------------------------|--------|
|                                                       |   |                              |   |                        |   |                          |   |
| Facility exit costs, net of estimated  sublease recoveries |   | $                                 | 5,014  |                        | $      | (369                          | )      | $ | 4,645 |   |
| Other                                                      |   | 33                                |   | (22                         | )      | 11                            |   |
| Total                                                      |   | $                                 | 5,047  |                        | $      | (391                          | )      | $ | 4,656 |   |

 

**Note 7—Commitments and Contingencies**

 

In November 2001, a complaint was filed in federal district courtfor the Southern District of New York on behalf of a purported class of personswho purchased our stock between March 16, 2000 and December 6, 2000.The complaint generally alleges that various underwriters engaged in improperand undisclosed 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 ourboard of directors conditionally approved a proposed partial settlement withthe plaintiffs in this matter.  Thesettlement would provide, among other things, a release of us and of theindividual defendants for the conduct alleged in the action to be wrongful inthe complaint.  We would agree toundertake other responsibilities under the partial settlement, includingagreeing to assign away, not assert, or release certain potential claims we mayhave against our underwriters.  Ourinsurers are expected to bear any direct financial impact of the proposedsettlement.   The committee agreed toapprove the settlement subject to a number of conditions, including theparticipation of a substantial number of other issuer defendants in theproposed settlement, the consent of our insurers to the settlement, and thecompletion of acceptable final settlement documentation.  Furthermore, the settlement is subject to ahearing on fairness and approval by the Court overseeing the litigation.

 

We have entered into a settlement agreementwith respect to an action that Level 3 Communications, LLC filed inthe United States District Court for the Eastern District of Virginia, andwhich was referred to a bankruptcy judge. The complaint names as defendants theCompany, three bankrupt entities (Aleron, Inc., Aleron U.S., Inc.,and TA Acquisition Corp.), and those three entities’ bankruptcy trustee.In its complaint, Level 3 claims that it is owed for certaintelecommunication services provided under contracts between Level 3 andTA Acquisition and for termination charges under those contracts. OnJuly 2, 2003, Level 3 Communications, LLC accepted a settlementagreement entered into in June 2003 relating to the claims Level 3 broughtagainst us. Under the settlement agreement, we agreed to pay Level 3 a total of$1.4 million to settle the litigation and other matters.  We may use up to $200 thousand of thisamount as a prepayment of certain services. On July 23, 2003, Level 3 filed amotion to dismiss us from the suit. The bankruptcy court is scheduled to hearLevel 3’s motion on August 19, 2003. The entire settlement amount of $1.2 million was accrued for the periodending June 30, 2003 in Accrued carrier expenses.

 

Before their conversion under Chapter 7of the Bankruptcy Code, Aleron, Inc. and TA Acquisition Corp. listedpotential claims against us in their Chapter 11 schedules listing theirassets. Aleron stated that it “has substantial breach of contract and otherclaims against Universal Access” arising out of contractual agreements andprovided that the estimated value of the claims was between $3 and$5 million. TA Acquisition stated that it “may have substantialclaims against Universal Access” and provided that the value of those claimswas unknown. We believe that the claims against us are without merit.

 

We and certain of our formerdirectors and officers are defendants in an action pending in the United StatesDistrict Court for the Eastern District of Texas, Frandsen v. Universal Access,Inc., et al., No. 9:02CV103 (E.D. Tex.). The complaint alleged causes of actionfor securities fraud in connection with public disclosures made by our officersbetween 2000 and 2002. We believe that the allegations against us are withoutmerit. On March 5, 2003, the court granted a motion to dismiss the complaintand has permitted plaintiffs the opportunity to replead the complaint withrespect to a minority of the alleged misstatements. On May 27, 2003, plaintiffsfiled a second amended consolidated complaint. Defendants’ motion to dismiss isscheduled to be fully briefed and under submission by October 2003. Plaintiffshave not specified the amount of damages they seek.

 

8

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We have been dismissed from an action that360networks (USA), Inc. filed against us in the United States District Courtfor the Southern District of New York. In its complaint, 360 requested adeclaration that we are obligated to purchase a specified amount oftelecommunications services from 360 each year for five years, beginning onApril 1, 2002, and that if we purchase less than the specified amount, we areobligated to pay 360 in cash the difference between the amount purchased andthe specified minimum annual amount. In addition, 360 sought damages against usof at least $3 million, representing the difference between the amount oftelecommunications services we purchased from 360 between April 1, 2002 andMarch 31, 2003 and the purported minimum purchase commitment. In July 2003, weentered into a settlement agreement with 360. Under the settlement agreement, we ordered certain services from 360 fora nominal monthly amount.  In July 2003,we were dismissed from the action.

 

We lease UTX facilities, office facilitiesand certain equipment over periods ranging from two to fifteen years.  In July, 2003, we reached a settlementwhereby we paid a landlord the sum of $723 thousand to eliminate a monthlyrental expense of $32 thousand and aggregate minimum lease payments of $3.0million.  This expense will be recordedin the third quarter of 2003.  Inaddition, the landlord is required to release a letter of credit of $320thousand within 90 days of the settlement payment.   In connection with the closing under the Purchase Agreement, wealso agreed to reimburse CityNet for one year for the cost of office spaceleased by CityNet in Maryland with monthly rental expense of $20 thousand.  Rent expense for the six months June 30,2003 and 2002 was approximately $3.9 million and $4.9 million, respectively.Future adjusted rentals for non-cancelable operating leases, inclusive ofamounts in our restructuring liability, are as follows as of June 30, 2003:

 
| 2003                         |   | $      | 4,036  |   |
|------------------------------|--------|--------|--------|--------|
| 2004                         |   | 8,035  |   |
| 2005                         |   | 6,969  |   |
| 2006                         |   | 6,677  |   |
| 2007                         |   | 6,868  |   |
| Thereafter                   |   | 28,598 |   |
| Total minimum lease payments |   | $      | 61,183 |   |

 

Additionally,we have entered into agreements with various telecommunications vendors topurchase minimum amounts of network services within a defined period, such ason a monthly basis.  In March 2003,we reached a settlement with a supplier that eliminated with that supplier theremaining minimum purchase commitment of approximately $54.8 million as ofDecember 31, 2002.  The adjustedtotal amount of remaining purchase commitments at June 30, 2003 includingsettlements is as follows:

 
| 2003                                |   | $      | 10,572 |   |
|-------------------------------------|--------|--------|--------|--------|
| 2004                                |   | 20,605 |   |
| 2005                                |   | 17,025 |   |
| 2006                                |   | 1,750  |   |
| Total minimum purchase  commitments |   | $      | 49,952 |   |

 

We have standby letters of credit, which have been issued on our behalftotaling $2.1 million, collateralizing performance of certain contractswith carriers, state regulators, and landlords. These letters of creditdirectly relate to the operating leases, carrier agreements, and staterequirements, which they secure, and expire according to the terms andconditions of these agreements.

 

We are involved in various legal matters in the ordinary course ofbusiness. In the opinion of management, the ultimate resolution of thesematters will not have a material adverse impact on our financial position,results of operations or cash flows.

 

**Note 8—Executive Notes**

 

For the three months ended June 30, 2002, we recorded a charge of$1.7 million related to notes receivable from certain of our current andformer executives. The notes evidence loans made to these individuals,including loans made in part to cover exercise price and payroll tax obligationsin connection with the exercise of options to acquire our common stock. Eachnote allows the individual to satisfy the outstanding principal balance thereof(and in one case, the principal and interest owed under the note) by returninga fixed number of shares of our common stock. The charge reduced the value ofthe notes receivable to the total amount we would have received if the noteshad been satisfied by the return of shares of our common stock, based on theclosing price of our common stock on June 30, 2002. We adjust this chargeas our stock price changes to reflect the value of the notes receivable as ofeach balance sheet date.

 

In the quarter ended June 30, 2003, certain of our former officersreturned 63,671 shares of our common stock to repay outstanding principal andaccrued and unpaid interest under certain promissory notes.  For the three months ended June 30, 2003, we

 

9

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reversed $630 thousand in reserves for officer notes due to a highervaluation of the shares returned to us to repay certain officer notes, and thehigher valuation of officer notes receivable held as of June 30, 2003.  In July 2003, a former officer returned44,458 of our common shares to repay outstanding principal and accrued andunpaid interest under a promissory note. This action was also considered in the second quarter adjustment of ourofficer notes reserve.  The returnedshares are retired by the Company.

 

**Note 9—Comprehensive Income**

 

Comprehensive income, which includes netincome and all other non-owner changes in equity during a period, is as followsfor the three and six months ended June 30, 2003 and 2002:

 
|                                     |   | **Three Months  Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                     |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
|                                     |   |                             |   |                           |   |   |   |   |   |
| Net income (loss)                        |   | $                                | (4,020 | )                              | $      | (72,106 | ) | $ | (9,229 | ) | $ | (84,723 | ) |
| Foreign currency translation adjustments |   | 3                                |   | (39                            | )      | 3 |   | (24 | ) |
|                                     |   |                             |   |                           |   |   |   |   |   |
| Comprehensive net income (loss)          |   | $                                | (4,017 | )                              | $      | (72,145 | ) | $ | (9,226 | ) | $ | (84,747 | ) |

 

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

 

Effective for 2003, we adopted the disclosurerequirements under Statement of Financial Standards (“SFAS”) No. 148,“Accounting for Stock-Based Compensation – Transition and Disclosure,” as anamendment of SFAS No. 123. Stock-based employee compensation, including stockoptions, is accounted for under the intrinsic value method as prescribed byAccounting Principles Board (“APB”) Opinion No. 25, “Accounting for StockIssued to Employees.”  No compensationexpense is recognized for these options when they are issued at fair marketvalue at date of grant.  If options aregranted at an exercise price below fair market value to employees, stock plancompensation expense is deferred for an amount equal to the intrinsic value onthe grant date and recognized over the respective vesting period.

 

If we were to recognize compensation expenseover the relevant service period under the fair-value method of SFAS No. 123with respect to stock options granted and employee stock purchases for thequarter ended June 30, 2003 and all prior periods, net loss would haveincreased, resulting in pro forma net losses and losses per share as presentedbelow:

 
|                                                                                                                   |   | **Three  MonthsEnded June 30,** |   | **Six Months  Ended June 30,** |    |
|------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|--------------------------------|---------|
|                                                                                                                   |   | **2003**                        |   | **2002**                       |    | **2003** |   | **2002** |   |
| Net income (loss):                                                                                                     |   |                            |   |                           |    |   |   |   |   |
| As reported                                                                                                            |   | $                               | (4,020 | )                              | $       | (72,106 | ) | $ | (9,229 | ) | $ | (84,723 | ) |
| Less:   Stock-based compensation expense determined under fair value method  for all awards, net of related taxes |   | (233                            | )      | (427                           | )       | (497 | ) | (762 | ) |
| Pro forma net loss                                                                                                     |   | (4,253                          | )      | $                              | (72,533 | ) | (9,726 | ) | (85,485 | ) |
|                                                                                                                   |   |                            |   |                           |    |   |   |   |   |
| Basic and Diluted net earnings (loss) per  common share:                                                               |   |                            |   |                           |    |   |   |   |   |
| As reported                                                                                                            |   | $                               | (0.81  | )                              | $       | (14.72 | ) | $ | (1.87 | ) | $ | (17.29 | ) |
| Pro forma                                                                                                              |   | $                               | (0.86  | )                              | $       | (14.81 | ) | $ | (1.97 | ) | $ | (17.45 | ) |

 

 

 

10

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## **Note11-Subsequent Events**

 

On July 23, 2003 we completed an equitytransaction with CityNet as described in Note 2 to the Condensed ConsolidatedFinancial Statementscontained herein. Under theinvestment transaction, (a) CityNet paid to us $16 million in cashand transferred to us fiber optic rings located in Albuquerque, New Mexico andIndianapolis, Indiana having an agreed-upon value of $700 thousand, (b) weissued to CityNet approximately 6.6million shares of our common stock representing approximately 55% of ouroutstanding common stock on a fully diluted basis (with any options and warrants having an exercise price in excess of $20.00,adjusted for the August 8, 2003, one-for-twenty reverse stock split, beingexcluded from the calculation of “fully diluted,” subject to CityNet’s right to receivecompensating shares in the event that any of these options or warrants aresubsequently exercised) and (c) we assumed certain liabilities ofCityNet. In particular, we assumed $2 million in principal amount of a PromissoryNote executed by CityNet and made to Electro Banque due on December 31, 2007. CityNet originally funded $5 million of itstotal investment in April in the form of secured debt, which was repaid as partof this transaction. CityNet will have the right to appoint five members to ourBoard of Directors, including the Chairman.

 

OnJuly 30, 2003, we announced a one-for-twenty reverse split of our common stock.The reverse split was effective at the close of business on August 8, 2003 andon August 11, 2003, our common stock began trading on a post-split basis. The reverse stock split is intended to help usregain compliance with the $1.00 per share minimum bid price requirement forcontinued listing on the Nasdaq SmallCap Market. On June 3, 2003, we receiveda Nasdaq Staff Determination indicating that we had failed to comply with the$1.00 per share minimum bid price requirement for continued listing set forthin Marketplace Rule 4310(c)(4) and that our securities were, therefore, subjectto delisting from the Nasdaq SmallCap Market. On July 24, 2003, we had ahearing before a Nasdaq Listing Qualifications Panel to review the StaffDetermination. There can be no assurance the Panel will grant our request forcontinued listing. There can be no assurance that the market price per share ofour common stock will remain above $1.00 per share. Accordingly, we cannotpredict whether we will be able to maintain compliance with the minimum bidrequirement or NASDAQ’s other requirements for continued listing.

 

On July 2, 2003 Level 3 Communications, LLCformally accepted a settlement agreement entered into in June 2003 as describedin Note 7 to the Condensed Consolidated Financial Statements containedherein.  Under the settlement agreement,we agreed to pay Level 3 a total of $1.4 million to settle the litigation andother matters.  Through August 14, 2003,we have paid $1.1 million of this amount, and will make four monthly paymentsof $75 thousand each beginning in September 2003.  We may use up to $200 thousand of this amount as a prepayment ofcertain services.  At June 30, 2003, werecorded an accrual of $1.2 million for this settlement.

 

On July 29, 2003 we reached a settlementwhereby we paid a landlord the sum of $723 thousand to terminate a leaseeffective July 30, 2003 to eliminate a monthly rental expense of $32 thousandand aggregate minimum lease payments of $3.0 million.  In addition, the landlord is required to release a letter ofcredit of $320 thousand within 90 days of the settlement payment.  These amounts will be expensed in the thirdquarter of 2003.  This is also describedin Note 7 to the Condensed Consolidated Financial Statements contained herein.

 

In July 2003, the Company issued 106,000options, adjusted for the August 8, 2003, one-for-twenty reverse stock split,to certain officers and directors under the 1999 Stock Plan with variousvesting schedules.

 

 

11

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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

The information in this discussion contains forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended. Such statements are based upon current expectations that involve risksand uncertainties. Any statements contained herein that are not statements ofhistorical facts may be deemed to be forward-looking statements. For example,words such as “may”, “will”, “should”, “estimates”, “predicts”, “potential”,“continue”, “strategy”, “believes”, “anticipates”, “plans”, “expects”,“intends”, and similar expressions are intended to identify forward-lookingstatements. Our actual results and the timing of certain events may differsignificantly from the results discussed in the forward-looking statements.Factors that might cause or contribute to such a discrepancy include, but arenot limited to, those discussed under the heading “Risk Factors.” The followingdiscussion provides information and analysis of our results of operations forthe three month and six months periods ended June 30, 2003 and 2002 and of ourliquidity and capital resources. You should read the following discussion inconjunction with our consolidated financial statements and the related notesincluded elsewhere in this quarterly report as well as the other reports wefile with the SEC. Amounts are in thousands, except for items otherwiseindicated and per share amounts.

 

**Overview**

 

We began operations on October 2, 1997 for the purpose offacilitating the provisioning, installation and servicing of dedicatedcommunications circuits for service providers who buy network capacity andtransport suppliers who sell network capacity. To date, we have derivedsubstantially all of our revenues from providing ongoing, dedicated circuitaccess. Monthly recurring circuit revenues are generated under client contractswith terms generally ranging from 12 to 60 months. The average length ofcircuit terms has declined as we install new circuits with shorter terms, asmost new contracts are for 12-month terms. Contracts with our clients may beterminated by the client at any time, subject to additional payments whereapplicable.

 

Our resultshave been affected by bankruptcies, credit problems in the telecommunicationsindustry, circuit disconnections and lengthening new business closingcycles.  We have provided and currentlyprovide services to several clients that are in bankruptcy. Although theseservices generally are entitled to priority payment as post-bankruptcyservices, we could experience collectibility issues with respect to services weprovide these clients. When collectibility of a receivable is not assured inthe month service is provided, we recognize revenue when payment is received,not at the time the receivable is recorded.

 

Circuit revenues include bundled charges for provisioning, networkmanagement and maintenance services.

 

Our clients primarily consist of communications service providers andtransport suppliers, such as competitive access providers, incumbenttelecommunication service providers and other application and network serviceproviders. Our three largest clients represented approximately 34% and 40% oftotal revenues for the quarter ended June 30, 2003 and 2002, respectively. Thedecrease in client concentration was primarily the result of largedisconnections by clients operating under bankruptcy protection.

 

To date, cost of circuit access has primarily consisted of amounts paidto transport suppliers for circuits. We have negotiated volume discounts andnetwork route-specific discounts under contracts with many of our suppliers.These contracts generally have terms ranging from three to ten years andsometimes include minimum purchase commitments. At June 30, 2003, these minimumpurchase commitments totaled approximately $1.8 million per month. Ouraggregate actual purchases under these contracts, which averaged approximately$1.8 million per month for the quarter ended June 30, 2003, have notexceeded these minimum purchase commitments for certain vendors. When ouractual purchases fall short of contractual commitments, we may seek tonegotiate alternate arrangements with these suppliers, but in the event thatthese negotiations are unsuccessful, we may be left with a shortfall that couldaffect our operating margins or result in a dispute or litigation with thesupplier. Management believes we are adequately reserved for any commitmentshortfalls.

 

Operations and administration expense consists of salaries and employeebenefits, costs associated with developing, expanding and maintaining ourUniversal Information Exchange (“UIX”) database, and costs associated withsales, marketing, operations, administration and facilities.

 

In each year since our inception, we have incurred operating losses andnet losses, and have experienced negative cash flows from operations. At June30, 2003, we had an accumulated deficit of $281 million.

 

12

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|                                                                                         |   | **For the  Three Months****Ended June 30,** |       | **For the  Six Months****Ended June 30,** |       |
|----------------------------------------------------------------------------------------------|--------|--------------------------------------------------|------------|-------------------------------------------|------------|
|                                                                                         |   | **2003**                                         |       | **2002**                                  |       | **2003** |   | **2002** |   |
|                                                                                         |   |                                             | ** ** |                                      | ** ** |   | ** ** |   | ** ** |
| Net loss                                                                                     |   | $                                                | (4,020     | )                                         | $          | (72,106 | ) | $ | (9,229 | ) | $ | (84,723 | ) |
|                                                                                         |   |                                             |       |                                      |       |   |   |   |   |
| Basic and diluted net loss per share                                                         |   | $                                                | (0.81      | )                                         | $          | (14.72 | ) | $ | (1.87 | ) | $ | (17.29 | ) |
| Basic and diluted net loss per share  (excluding non-cash stock option compensation expense) |   | $                                                | (0.76      | )                                         | $          | (14.49 | ) | $ | (1.74 | ) | $ | (17.00 | ) |
| Weighted average shares used in computing  net loss per share                                |   | 4,945                                            |       | 4,897                                     |       | 4,939 |   | 4,900 |   |

 

**Resultsof Operations**

 

**Comparisonof Three Months and Six Months Ended June 30, 2003 to Three Months and SixMonths Ended June 30, 2002**

 

**Revenues**

 

Revenues decreased to $18.6 million for the three months ended June 30,2003 from $24.1 million for the three months ended June 30, 2002. Revenues forsix months ended June 30, 2003 decreased to $37.7 million from $53.2 millionfor the six months ended June 30, 2002. Substantially all of our revenues consisted of circuit revenues in eachof these quarters. The decrease in revenues for the three and six months endedJune 30, 2003 compared to the three and six months ended June 30, 2002 wasattributable to circuit disconnections, mainly from customers in bankruptcy,and lengthened new business closing cycles. The decrease in revenues was partly offset by several non-recurringpayments in the three months ended June 30, 2003 for previously reservedaccounts receivable and customer settlements totaling $1.3 million.  We expect that continued negative trends inthe telecommunications industry will continue to adversely affect our revenues.

 

**Cost of Circuit Access**

 

Cost ofcircuit access decreased to $12.6 million for the three months ended June 30,2003 from $20.2 million for the three months ended June 30, 2002. Cost ofcircuit access for the six months ended June 30, 2003 decreased to $25.3million compared to $41.4 million for the six months ended June 30,2002.  As a percentage of total revenues, cost ofcircuit access decreased to 68% for the three months ended June 30, 2003 from84% for the three months ended June 30, 2002. The decrease in cost of circuitaccess in absolute dollars was primarily attributable to circuitdisconnections.  The decrease in circuitcost as a percentage of total revenues for the three months ended June 30, 2003was primarily attributable to the reversal of approximately $1 million in netaccrued liabilities based on our determination that those amounts were nolonger owed to suppliers and client bankruptcies in the three months ended June30, 2002 where we incurred the cost of certain circuits but were unable torecognize the associated revenue.

 

**Operations and Administration (ExcludingStock Plan Compensation)**

 

Operations and administration expenses (excluding stock plancompensation) decreased $13.2 million to $6.5 million for the three monthsended June 30, 2003 from $19.7 million for the three months ended June 30,2002. Operations and administration expenses (excluding stock plancompensation) decreased $19.8 million to $15.4 million for the six months endedJune 30, 2003 from $35.2 million for the six months ended June 30, 2002. Thisdecrease in the three and six months ended 2003 was primarily attributable tosignificant decreases in personnel and a reversal of bad debt expense.

 

Based on impairment reviews performed at June 30, 2002, the companyrecognized a $46.0 million impairment charge to reduce the carrying value ofATM equipment, a web-based pricing, quoting and provisioning software tool(Project Gemini) and UTX assets and a $4.5 million impairment charge related togoodwill.  In the quarter ended June 30,2003, we took a $1.2 million impairment charge for a UTX asset affected bysignificant circuit disconnects by a customer.

 

The number of employees decreased to 106 at June 30, 2003 from 206 atJune 30, 2002.  As a result, salaries,benefits, travel expenses and employee related payroll taxes decreased $5million for the three months ended June 30, 2003 and $8.7 million for the sixmonths ended June 30, 2003 as compared to the three and six months ended June30, 2002. Including employees of CityNet that we hired in connection with theclosing under the Purchase Agreement, the number of employees at July 31, 2003was 112. We expect headcount to remain relatively flat for the remainder of2003.  As a result of collections of accountsreceivable that were previously reserved, we recorded a reversal of bad debtexpense of $704 thousand in the three and six months ended June 30, 2003compared to a charge of $0 bad debt in the first quarter and $1.4 millionsecond quarter of 2002, and $3.1 million for the six months endedJune 30, 2003.

 

**Operations and Administration (Stock PlanCompensation)**

 

During fiscal year 1999 and the first quarter of 2000, we granted stockoptions to employees and non-employees with per share exercise prices deemed tobe below the fair market value of our common stock at the dates of grant. Thesestock option issuances have resulted in stock option plan compensation charges,which are initially deferred and subsequently amortized over the vesting 

 

13

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period of the related options.

 

During fiscal year 1999 and the first quarterof 2000, we granted stock options to employees and non-employees with per shareexercise prices deemed to be below the fair market value of our common stock atthe dates of grant. These stock option issuances have resulted in stock plancompensation charges, which are initially deferred and subsequently amortizedover the vesting period of the related options. In addition, a restricted stockplan was adopted during fiscal year 2001, whereby zero-cost restricted stockwas granted to employees. The stock plan compensation expense for restrictedstock grants is also initially deferred and subsequently recognized over thevesting period.

 

Stock plan compensation expense totaled $246thousand for the three months ended June 30, 2003 and $1,143 thousand for thequarter ended June 30, 2002. For the six months ended June 30, 2003and June 30, 2002 the stock plan compensation expense was $636 thousand and$1.4 million, respectively.  Thedecrease in stock plan compensation expense was primarily due to the forfeitureof restricted stock upon employee terminations in 2002 and 2003.  Stock plan compensation expense in the sixmonths ended June 30, 2002 would have been approximately $766 thousand greaterthan the expense recognized in the six months ended June 30, 2003 had there notbeen any restricted stock forfeitures subsequent to June 30, 2002.

 

There were 511,977 and 332,819 stock options outstanding, adjusted forthe August 8, 2003, one-for-twenty reverse stock split, at June 30, 2003 and2002, respectively.

 

## **Depreciation and Amortization**

 

Depreciation expense includes depreciation of furniture, fixtures andequipment at our office facilities and of equipment at our UTX facilities.Depreciation expense was  $2 million inthe three months ended June 30, 2003, compared to $4.7 million in thethree months ended June 30, 2002, representing a decrease of $2.7 million.Depreciation expense for the six months ended June 30, 2003 decreased to $4.5million compared to $9.8 million for the six months ended June 30, 2002. Thedecrease in depreciation expense is primarily attributable to lower assetvalues due to the impairment of the UTX equipment in 2002 and assets becomingfully depreciated.

 

Amortization expense, which decreased to $0 in the quarter ended June30, 2003 from $64 thousand in the quarter ended June 30, 2002, relates tointangible assets acquired in connection with the purchases of StuffSoftware, Inc. in November 1999 that were subsequently sold for anominal amount in 2002.  Amortizationexpense decreased $127 thousand to $0 in the six months ended June 30, 2003,compared to the six months ended June 30, 2002.

 

## **Restructuring**

 

The restructuring program is substantially complete, except forfacility exit costs and operating lease payments for office equipment. Theability to sublet facilities at the rates contemplated by the restructuringcharge will depend on market conditions. Amounts relating to facilities will bepaid over the respective lease terms through 2013 and will be net of anysublease recoveries, while operating lease payments for office equipment willbe paid through 2003.

 

The following summarizes the significant components of the restructuringreserve at June 30, 2003:

 
|                                                       |   | **Balance at********December 31, 2002** |   | **Incurred Cash   Payments** |   | **Balance at   June 30, 2003** |   |
|------------------------------------------------------------|--------|-----------------------------------------|--------|------------------------------|--------|--------------------------------|--------|
|                                                       |   |                                    |   |                         |   |                           |   |
| Facility exit costs, net of estimated  sublease recoveries |   | 5,014                                   |   | (369                         | )      | 4,645                          |   |
| Other                                                      |   | 33                                      |   | (22                          | )      | 11                             |   |
| Total                                                      |   | 5,047                                   |   | (391                         | )      | 4,656                          |   |

 

**Other Income (Expense)**

 

Other income decreased $181 thousand in the three months ended June 30,2003 to net expense of $58 thousand from other income of $123 thousand in thethree months ended June 30, 2002. Other income decreased $466 thousand to $34thousand for the six months ended June 30, 2003, compared to $500 thousand forthe six months ended June 30, 2002. The decrease in other income wasattributable to a reduction in interest income, reflecting lower balances ofcash and investments held, and interest expense of $138 thousand incurred onthe $5.0 million note payable to CityNet, which was borrowed in April, 2003 andrepaid in July, 2003 when the equity transaction was completed with CityNet asdescribed in Note 2 to the condensed financial statements.

 

**Income Taxes**

 

From our inception throughSeptember 27, 1998, we elected to be treated as a subchapter S-corporationfor income tax purposes. On September 27, 1998, we converted to aC-corporation. At December 31, 2002, we had approximately $196 million offederal and state net operating loss carry forwards. These carry forwards maybe available to offset future taxable income. Our federal and state netoperating loss carry forwards expire at various dates beginning in 2018. Due tothe uncertainty that we will generate future earnings sufficient to enable usto realize the benefit of these net operating loss carry forwards, we haverecorded a valuation allowance for the full amount of our deferred tax asset.As a result, no income tax benefit has been recorded in our statement ofoperations. We assess our deferred tax asset on an ongoing basis and adjust thevaluation allowance based on this assessment. Additionally, Section 382 of

 

14

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the Internal Revenue Code of1986, as amended, imposes annual limitations on the use of net operating losscarry forwards if there is a change in ownership, as defined, within anythree-year period. Our capital stock transactions may limit our ability to use certainnet operating loss carry forwards.  Inparticular, the issuance of stock under the Purchase Agreement will limit ourability to use certain net operating loss carry forwards.

 

**Liquidity and Capital Resources**

 

Based on our receipt of net proceeds of approximately $14.5 millionfrom the Purchase Agreement as described in Footnote 2, and assuming (a) ouroperational cash receipts remain stable, (b) we generate significantly higherrevenues and (c) we continue to control uses of cash, we estimate that we willhave sufficient liquidity and capital resources to meet our short termliquidity needs. In addition, we estimate meeting these conditions will allowus to accomplish our long term liquidity goal to fund our business withinternally generated cash. However, there can be no assurance these conditionswill be met, and our operational and financial flexibility may be limited inthe future.  Further, unexpected events adversely affecting ourcash resources, including declines in collections due to client bankruptcies ordeteriorating industry conditions, bankruptcy preference payment settlements,security deposit requirements, accelerated vendor terms, payments required tosettle disputes or adversely determined litigation, may create a need for us toobtain more funding from external sources. There can be no assurance thatadditional financing will be available to us on terms and conditions favorableto us, if at all.

 

The Company finished the second quarter June 30, 2003 with $12.6million in cash which included the $5 million in loan proceeds during thesecond quarter 2003 (including cash, cash equivalents, short term investmentsand restricted cash) compared to $12.2 million at March 31, 2003 and$16.2 million at December 31, 2002.

 

In March 2003, we reached a settlement with a supplier thateliminated a remaining aggregate minimum purchase commitment of approximately$54.8 million. As part of the settlement, we paid a total of$1.1 million, including a $1.0 million prepayment for private lineservices and $104 thousand to satisfy outstanding billing disputes. AtJune 30, 2003, the remaining prepaid asset was $0.

 

In July 2003, we reached a settlement whereby we paid a landlord $723thousand to eliminate a monthly rental expense of $33 thousand and aggregateminimum lease payments of $3.0 million. The landlord is required to release a letter of credit of $320 thousandwithin 90 days of the settlement payment. Also in July 2003, in connection with the closing under the PurchaseAgreement, (a) we hired marketing, operations and sales personnel previouslyemployed by CityNet totaling approximately $160 thousand monthly, (b) we agreedto reimburse CityNet for the cost of office space leased by CityNet in Marylandtotaling $20 thousand monthly and (c) we entered into an agreement with CityNetunder which CityNet will perform maintenance services for the two fiber opticrings we assumed from CityNet. Under the maintenance agreement, we have agreedto pay CityNet $40 thousand per month for these services.

 

In the third quarter of 2003, we will pay Level 3 a total of $1.4million to settle the litigation and other matters described in Note 7 to thecondensed financial statements.  We mayuse up to $200 thousand of this amount as a prepayment of certain services.

 

The followingsummarizes our adjusted contractual obligations at June 30, 2003 and the effectsuch obligations are expected to have on our liquidity and cash flow in futureperiods.

 
|       |   | **Non-Cancelable   Operating Leases (incl.   restructured facilities)** |   | **Non-Cancelable   Purchase Commitments** |   | **Total** |   |
|------------|--------|-------------------------------------------------------------------------|--------|-------------------------------------------|--------|-----------|--------|
| 2003       |   | $                                                                       | 4,036  |                                      | $      | 10,572    |   | $ | 14,608 |   |
| 2004       |   | 8,035                                                                   |   | 20,605                                    |   | 28,640    |   |
| 2005       |   | 6,969                                                                   |   | 17,025                                    |   | 23,994    |   |
| 2006       |   | 6,677                                                                   |   | 1,750                                     |   | 8,427     |   |
| 2007       |   | 6,868                                                                   |   | 0                                         |   | 6,868     |   |
| Thereafter |   | 28,598                                                                  |   | 0                                         |   | 28,598    |   |
| Total      |   | $                                                                       | 61,183 |                                      | $      | 49,952    |   | $ | 111,135 |   |

 

Our principal uses of cash are to fund operations including aninvestment in marketing and our sales channels, working capital requirementsand limited capital expenditures. Our capital expenditures will be limited tothe enhancement of selected elements of our two primary service elements,information and facilities. For information, we will continue to enhance our ITtools to help achieve our sales objectives and we will continue to seek out newdata resources relating to the provisioning of circuits. For facilities, wewill continue to enhance our UTX and metropolitan connectivity facilities so asto create a competitive advantage in terms of service delivery, cost andpricing.

 

Restricted cash was $2.1 million at June 30, 2003, declining $1.8million from a balance of $3.9 million at December 31, 2002.Restricted cash consists of letters of credit issued to real estate landlords,carriers and other vendors. The decline of $1.8 million was due primarilyto the release of letters of credits described below.

 

15

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•                  OnMarch 14, 2003, we renegotiated a contract with one of our carriers. Aspart of the renegotiation and in return for a $1 million prepayment, thecarrier released a $500 thousand letter of credit, reducing our restricted cashbalance.

•                  Pursuant to a lease buyout agreementcompleted in 2002 with the landlord of an office facility, in January 2003 thelandlord returned to us a letter of credit in the amount of $900 thousand, reducingour restricted cash balance.

 

In general, our obligations under certain real estate leases, carriercontracts and other business agreements are secured by letters of credit issuedto the landlord or applicable vendor. Each of these letters of credit issecured by restricted cash we have pledged to the bank issuing the letter ofcredit. In the past, we have completed negotiations with certain of ourlandlords to reduce our future lease obligations in exchange for considerationincluding the release to the landlord of funds under letters of credit. Weexpect to continue these types of negotiations in the future. If thesenegotiations to reduce our lease obligations are successful, then we expect ourrestricted cash balance will decline further.

 

In connection with a lease buyout agreement completed in September2002, we entered into a new lease for a reduced amount of office space.The new lease requires us to deliver a letter of credit in the amount of$2.5 million to secure our obligations under the new lease byOctober 1, 2003. Delivering this letter of credit would reduce our cashand cash equivalents and short-term investments, and increase our restrictedcash balance, by $2.5 million.

 

Cash used by operating activities was $9 million for the six monthsended June 30, 2003, compared to $18.4 million for the six months endedJune 30, 2002. The decrease in cash used by operating activities was dueprimarily to reduced payroll costs and a decrease in rent expense afterrenegotiating lease contracts.

 

Cash provided by investing activities was $251 thousand for the sixmonths ended June 30, 2003, compared to $16.6 million for the six months endedJune 30, 2002. The decrease is primarily due to a reduction in the sale ofshort-term investments used to fund operations in 2002 and was offset by areduction in the purchase of property, plant, and equipment to support thebusiness in the six months ended June 30, 2003.

 

Cash provided by financing activities was $6.9 million for the sixmonths ended June 30, 2003, compared to cash used by financing activities of$2.8 million for the six months ended June 30, 2002. The increase was primarilyattributable to the receipt of $5 million in secured debt by CityNet before theclosing of the Purchase Agreement and the reduction of $1.8 million inrestricted cash as a result of the carrier and lease negotiations describedabove.

 

**RISK FACTORS**

 

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.

 

**We have incurred substantial losses since our inception, and if we failto generate significantly higher revenues and reduce our costs, we will beunable to achieve and maintain profitability and may be unable to continue ouroperations.**

 

We haveincurred significant losses since inception and expect to continue to incurlosses in the future. As of June 30, 2003, we had an accumulated deficit of$281 million. Our revenues have decreased to $18.6 million in the threemonths ended June 30, 2003 from $24.1 million in the three months ended June30, 2002. Revenue was $37.7 million for six months ended June 30, 2003,compared to $53.2 million for six months ended June 30, 2002. We cannot becertain that we will be successful in reducing our costs, that we will be ableto significantly increase our revenues or that we will achieve sufficientrevenues to become profitable. We expect to continue to incur expenses in orderto:

 

•                                          Developand sell new service offerings, such as software or information based products;

 

•                                          Expandsales and marketing channels, including our government markets group;

 

•                                          Enhanceour UIX database and develop other intellectual property; and

 

•                                          Maintainour UTX facilities.

 

As a result, we will need to generate significantly higher revenues toachieve and maintain profitability. If we fail to significantly reduce ourcosts or to generate significantly higher revenues, we will continue to incuroperating losses and net losses and may be unable to continue our operations.

 

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**Our efforts to develop new service offeringsand expand marketing channels may not be successful.**

 

We plan to invest significant resources to develop and sell new serviceofferings, such as software or information based products, and to expandmarketing channels, including our government markets group. These initiativesmay require significant expenditures, which would reduce resources available tomaintain and develop our traditional lines of business. Whether new serviceofferings or expanded marketing efforts succeed depends on factors we control,such as coordinating our internal financial, engineering, marketing,information technology and sales personnel, and on factors we cannot control,including whether clients will pay for these offerings and whether our vendorswill provide the goods and services we need. If we do not successfully developand sell new service offerings and expand marketing channels, we could incursubstantial losses that would harm our existing business.

 

**Industry conditions and further deteriorationin credit quality may affect our clients’ ability to pay their obligations tous in 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. Credit-quality concerns,which have historically affected smaller network service providers andsubsequently smaller telecommunications providers, have more recently impacted,and continue to impact, larger telecommunications providers and carriers. Severalof our significant clients have filed for reorganization or liquidation underthe bankruptcy laws. As a result of the decline in credit quality and thesebankruptcies, some of our clients may have inadequate financial resources tomeet all of their obligations and may seek to reject or renegotiate theirpurchase agreements with us. If either significant clients or a significantnumber of smaller clients are unable to meet their obligations to us, rejecttheir contracts or renegotiate their contracts, we may not be able to recognizefuture revenues and we may also incur additional bad debt expenses andexperience reduced opportunities for growth. If a client fails to pay us, wemay remain obligated to third parties for the cost of circuits previously providedto the client. Certain current or former clients who are bankrupt have filedand additional clients might file preference actions to try to recover amountsthat they previously paid us. These events would harm our cash flow, results ofoperations and financial condition, as would future deterioration in marketconditions in our industry or in the creditworthiness of our significantclients or a significant number of smaller clients.

 

In addition,some of our carrier suppliers, including WorldCom, may have inadequatefinancial resources to provide reliable service or to meet their otherobligations to us. If a carrier supplier is unable to meet its obligations tous, we could be required to purchase replacement services on less favorableterms or experience disruptions in service, which could impair our ability toretain or attract clients. Disruptions in service could require us to issueoutage credits to our clients or incur other liability, which would reduce ourrevenue and gross margins.

 

**We may require additional financing in thefuture to meet our operating needs and if we cannot obtain such financing oncommercially reasonable terms, our ability to operate our business may suffer.**

 

If ouroperational cash receipts decline, we fail to generate significantly higherrevenues or we fail to control uses of cash, we will need additional financingin the future to meet our operating needs. There can be no assurance thatadditional financing will be available to us on terms and conditions favorableto us, if at all. In addition, if in the future we need to issue additionalshares of common stock to fund our business, our common stockholders would bediluted. If we are unable to obtain additional financing when needed or onacceptable terms, we may have to curtail our operations, delay or abandon ourbusiness plans or take further actions to strengthen our cash position, whichcould materially adversely affect our ability to continue our operations.Moreover, without adequate financing, potential customers who otherwise wouldselect our services to purchase may decide to buy from other vendors whom thecustomers perceive to have greater financial stability.

 

## **Our recentlyimplemented reverse stock split might cause our stock price and our totalmarket capitalization to decline**

 

We haveimplemented a one-for-twenty reverse split of our common and on August 11,2003, our common stock began trading on a post-split basis. The total marketcapitalization of our common stock (the aggregate value of all our common stockat the then current market price) after the reverse stock split may be lowerthan the total market capitalization before the reverse stock split. Inaddition, the per share market price of our common stock after the reversestock split may be lower than the per share market price of our common stockbefore the reverse stock split.

 

Our stockprice may not attract institutional investors or investment funds and may notsatisfy the investing guidelines of such investors and, consequently, thetrading liquidity of our common stock may not improve. Now that the reversestock split has been completed, a decline in the market price of our commonstock may result in a greater percentage decline than would occur in theabsence of a reverse stock split. In addition, the reduced number of sharesoutstanding after the reverse stock split could adversely affect the liquidityof our common stock.

 

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**Our common stock may be de-listed from theNASDAQ Small Cap Market, which would reduce the liquidity in the market for ourcommon stock and make capital raising and other transactions more difficult.**

 

In 2002, we moved from the NASDAQ National Market System to the NASDAQSmall Cap Market. As a result, future capital raising activities andacquisitions may be more difficult due to increased state securities lawscompliance obligations. The NASDAQ Small Cap Market requires a minimum bidprice of $1.00 for continued listing. On June 3, 2003, we received a NasdaqStaff Determination indicating that we had failed to comply with the $1.00 pershare minimum bid price requirement for continued listing set forth inMarketplace Rule 4310(c)(4) and that our securities were, therefore, subject todelisting from the Nasdaq SmallCap Market. On July 24, 2003, we had a hearingbefore a Nasdaq Listing Qualifications Panel to review the Staff Determination.There can be no assurance the Panel will grant our request for continuedlisting. There can be no assurance that the market price per share of ourcommon stock will remain above $1.00 per share. Accordingly, we cannot predictwhether we will be able to maintain compliance with the minimum bid requirementor NASDAQ’s other requirements for continued listing.

 

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

 

**If we fail to manage our cost reductionefforts and future expansion effectively, our ability to operate and toincrease our services and client base 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. At December 31,1997, we had five employees. By the first quarter 2001, we had over 400full-time employees. Since that time, we have reduced our headcount toapproximately 112 full-time employees as of July 31, 2003. These periods ofgrowth and headcount reductions and potential growth in future operations willcontinue to place a significant strain on our management systems and resources.We cannot be sure that our reduced workforce will be sufficient for us toidentify and take advantage of market opportunities and manage multiplerelationships with various clients, suppliers and other third parties. If ouroperations and headcount grow in the future, we expect that we will need toimprove our financial and managerial controls, reporting systems andprocedures, and expand, train and manage our workforce, and we cannot be surethat will be able to manage this potential expansion effectively.

 

**Our cash resources and operating flexibilitymay diminish if our relationships with our carrier suppliers deteriorate.**

 

Certain of our carrier suppliers might claim the right to demand asecurity deposit or accelerated payment terms from us due to our financialcondition or payment history. Our carrier suppliers may further seek to bill usfor purported failure to meet purchase commitments or purported under billingsor other billings notwithstanding factual or legal disputes regarding any suchpurported failure. If we are required to pay any of these amounts, our cashresources could be materially diminished. Some of these failures may be claimedby incumbent local exchange carriers, which historically have been reluctant toengage in negotiations on such matters and if they do engage in negotiations,often refuse to significantly reduce the amounts they claim we owe. Suchdisputes may also affect the willingness of suppliers to provide us withcapacity or other services, which would reduce our operating flexibility andability to deliver services to existing or potential clients. If the supplierin any such dispute enters a bankruptcy or similar proceeding, our businessrelationship with the supplier could be disrupted, which would impair ourability to negotiate. As of June 30, 2003, we had $14.3  million in open billing disputes withcarriers.

 

**We depend on our key personnel to manage ourbusiness effectively in a rapidly changing market, and our ability to generaterevenues will suffer if we are unable to retain our key personnel and hire additionalpersonnel.**

 

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. Inaddition, we depend on the ability of a relatively new management team toeffectively execute our strategies. We have recently hired or promoted themajority of our executive officers and many of our key employees. Because ourmanagement team has worked together for a short period of time, we need tointegrate these individuals into our operations.

 

We may need to hire additional personnel in the future, and we believeour success depends, in large part, upon our ability to attract and retain ourkey employees. Attracting and retaining key employees is becoming moredifficult due to recent negative publicity regarding our industry, our lowstock market capitalization, our limited financial resources and our recentworkforce reductions. The loss of the services of any of our key employees, theinability to attract or retain qualified personnel in the future, or delays inhiring required personnel could limit our ability to generate revenues and tooperate our business.

 

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**Conditions in our industry make forecastingdifficult.**

 

Our results have been affected by bankruptcies, credit problems in thetelecommunications industry and circuit disconnections. These industryconditions make it difficult to accurately predict trends in our business.Accordingly, we are subject to all of the risks that are associated withcompanies in an evolving industry, including:

 

•                                          Undercapitalization;

 

•                                          Cashshortages;

 

•                                          Controllingour expenses and cash expenditures;

 

•                                          Thenew and unproven nature of the market for some of our services;

 

•                                          Theneed to make significant expenditures and incur significant expenses as wedevelop our business, infrastructure and operations;

 

•                                          Thelack of sufficient clients and revenues to sustain our operations and growthwithout additional financing;

 

•                                          Difficultiesin managing growth; and

 

•                                          Limitedexperience in providing some of the services that we offer or plan to offer.

 

For example,from time to time we enter into long-term agreements with communications transportsuppliers for the supply and installation of communications network capacity.These agreements may generally provide for minimum revenue commitments from us,which we must negotiate based on forecasts of our future network capacityrequirements. At June 30, 2003, these minimum purchase commitments totaledapproximately $1.8 million per month. If we fail to forecast our networkcapacity requirements accurately or fail to accurately forecast other aspectsof our business, it will be difficult for us to meet these minimum purchasecommitments or to become profitable. In addition, it may be difficult for us tomeet these minimum purchase commitments if our clients refuse to use capacityprovided by a supplier that has filed for bankruptcy protection or is otherwisefinancially distressed.

 

**Our business has been unprofitable, and wemay be unable to profitably manage and market our services to clients.**

 

Our business has been unprofitable. To be successful, we must convinceprospective clients to entrust their network capacity data and transportrequirements to us. We are not aware of any companies that have a directlycomparable business, and we cannot be sure that clients will widely accept ourservices.

 

Our ability to expand our client base may be limited by the followingfactors:

 

•                                          Thespeed, reliability and cost effectiveness of our services;

 

•                                          Thewillingness of clients to outsource the obtaining of circuits;

 

•                                          Thefinancial viability of clients and prospective clients;

 

•                                          Thefinancial viability of our suppliers;

 

•                                          Ourperceived financial viability;

 

•                                          Ourability to market our services effectively; and

 

•                                          Thegrowth of the Internet and demand for telecommunications services.

 

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We may not be able to execute our business model if the markets for ourservices fail to develop or grow more slowly than anticipated, if competitionin our industry intensifies or if we are unable to expand our client base.

 

**Recent legal proceedings may adversely affectour results and financial position.**

 

We are party to several legal proceedings, including two securitiesclass action lawsuits that are pending against us. Certain of these proceedingsrelate to transactions that we have entered into with companies that are currentlyin bankruptcy or that have emerged from bankruptcy. Management believes thatthese lawsuits are without merit, and we intend to defend these actionsvigorously or to settle these lawsuits. Because of the complexity of certain ofthe transactions underlying these lawsuits, as well as the inherent uncertaintyof litigation, however, it is possible that the outcome of one or more of thesecases may be adverse to us. In addition, the resources required to defend thesecases, including the management time and attention required to adequatelydefend our position, and the costs of potential settlements, or any judgmentaward may adversely affect our results of operations and financial position.

 

**If we have difficulties or delays indelivering circuits to our clients, our ability to generate revenue will sufferand we may lose existing and potential new clients.**

 

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 client. Once we agree to facilitate the supply of a circuit fora client, we negotiate with one or more transport suppliers and manage thepersonnel and field technicians of multiple vendors. A client can withdraw itsorder with minimal liability at any time before accepting the circuit. We mayexperience difficulties in facilitating the supply of circuits if our transportsuppliers run out of capacity, which would force us to look for alternativesources of capacity on short notice. In addition, credit concerns, billing orother disputes with our suppliers may adversely affect their willingness toprovide capacity in a timely manner. If we are unable to facilitate the supplyof a circuit in a timely manner or fail to obtain client acceptance of thecircuit, we would be unable to recognize revenues for that circuit, may incurfinancial liability to our supplier for that circuit, and our operating resultswould be adversely affected. Furthermore, because our clients may cancel ordersat any time before accepting the circuit, we may find it difficult to forecastrevenue and plan our expenses accordingly.

 

**Our ability to implement and maintain our UIXdatabase is a critical business requirement, and if we cannot maintain precisedata, we might be unable to cost-effectively facilitate obtaining circuits forour clients.**

 

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 thecircuits.

 

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

 

One of our primary business objectives is to provide our clients 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 providing thisservice on our own as well as by the technical limitations of managing circuitsand services on the networks of other providers. As a consequence, we cannot besure that our efforts to provide these services will be successful. Our abilityto operate a network operations center will depend on many factors, includingour ability to train, manage and retain employees. 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 clients and make it difficult for us to attractnew clients.

 

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

 

The market in which we operate is rapidly evolving 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:

 

•                                          Nationaland local carriers, such as AT&T, Level 3, Broadwing, Qwest, Sprint,WorldCom and WilTel;

 

•                                          Companiesthat provide collocation facilities, such as Switch & Data, AT&Tand Equinix;

 

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•                                          Competitiveaccess providers and local exchange carriers, such as AT&T, ICGCommunications, WorldCom, XO Communications and FiberNet; and

 

•                                          Incumbentlocal exchange carriers, such as Verizon, BellSouth and SBC Communications.

 

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.

 

Moreover, while recent regulatory initiatives allow carriers such as usto interconnect with incumbent local exchange carrier facilities and to obtainunbundled network elements from incumbent local exchange carriers, certaininitiatives also provide increased pricing flexibility for, and relaxation ofregulatory oversight of, incumbent local exchange carriers. This may allowincumbent 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. Existing laws alsorestrict the Regional Bell Operating Companies from fully competing with us inthe market for interstate and international long-distance telecommunicationsservices, but also permit the FCC to lessen or remove some restrictions.Recently the Bell companies have received FCC permission to offer long-distanceservices to customers in a number of states, and the FCC is expected toconsider several additional requests for this relief in the near future. TheseFCC decisions under existing law, or future amendments to Federaltelecommunications laws permitting the regional Bell operating companies tocompete fully with us in this market, may result in a reduction to our revenuesfrom these services if these companies are able to attract substantial businessfrom our clients.

 

We must distinguish ourselves through the quality of our clientservice, our service offerings and brand name recognition. We may not besuccessful in doing this.

 

Many of our potential competitors have certain advantages over us,including:

 

•                                          Substantiallygreater financial, technical, marketing and other resources, including brand orcorporate name recognition;

 

•                                          Substantiallylower cost structures, including cost structures of facility-based providerswho have significantly reduced debt and other obligations through bankruptcy orother restructuring proceedings;

 

•                                          Largerclient bases;

 

•                                          Longeroperating histories; and

 

•                                          Moreestablished relationships in the industry.

 

Our competitors may be able to use these advantages to:

 

•                                          Expandtheir offerings more quickly;

 

•                                          Adaptto new or emerging technologies and changes in client requirements morequickly;

 

•                                          Takeadvantage of acquisitions and other opportunities more readily;

 

•                                          Enterinto strategic relationships to rapidly grow the reach of their networks andcapacity;

 

•                                          Devotegreater resources to the marketing and sale of their services; and

 

•                                          Adoptmore aggressive pricing and incentive policies, which could drive down margins.

 

If we are unable to compete successfully against our current and futurecompetitors, our gross margins could decline and we could lose market share,either of which could materially and adversely affect our business.

 

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**The unpredictability of our operating resultsmay adversely affect the trading price of our common stock.**

 

Our revenues and operating results may vary significantly from periodto period due to a number of factors, many of which we cannot control and anyof which may cause our stock price to fluctuate. These factors include thefollowing:

 

•                                          Uncertaintyregarding timing for supplying circuits or failure to obtain client acceptanceof circuits;

 

•                                          Decisionsby existing clients not to renew services on a timely basis when existingclient contracts terminate;

 

•                                          Decisionsby existing clients operating under bankruptcy protection to reject agreementswith us or to try to recover from us in preference actions amounts that theypreviously paid us;

 

•                                          Theamount of unused circuit capacity that we hold;

 

•                                          Costsrelated to acquisitions of technology or businesses;

 

•                                          Costsrelated to defending and settling litigation;

 

•                                          Generaleconomic conditions as well as those specific to the telecommunications,Internet and related industries;

 

•                                          Paymentobligations to our suppliers under service agreements in situations in whichour client is not able to meet its obligations with us or is not liable to us;and

 

•                                          Internetgrowth and demand for Internet infrastructure and telecommunications services.

 

In addition, we depend on decisions by our clients to expand theirInternet and telecommunications infrastructure, which in turn depend upon thesuccess and expected demand for the services these clients offer.

 

We expect our operating expenses to remain relatively constant or declinemoderately in future periods. Our operating expenses are largely based onanticipated revenue trends, and a high percentage of our expenses are, and willcontinue to be, fixed in the short term due in large part to maintenance of ourUTX facilities. As a result, fluctuations in our revenue for the reasons setforth above, or for any other reason, could cause significant variations in ouroperating results from period to period and could result in substantialoperating losses.

 

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

 

**We expect to experience volatility in thetrading of our stock, which could negatively affect its value.**

 

The market price of our common stock has fluctuated significantly sinceour initial public offering. The market price of our common stock may in thefuture fluctuate significantly in response to a number of factors, some ofwhich are beyond our control, including:

 

•                                          Theone-for-twenty reverse split of our common stock completed in August 2003;

 

•                                          Variationsin operating results;

 

•                                          Changesin financial estimates or coverage by securities analysts;

 

•                                          Reducedliquidity resulting from our transfer from the Nasdaq National Market to theNasdaq SmallCap Market and the possibility that our common stock may bedelisted from the NASDAQ Smallcap Market;

 

•                                          Changesin market valuations of telecommunications and Internet-related companies;

 

•                                          Announcementsby our competitors or us of new products and services or of significant acquisitions,strategic partnerships or joint ventures;

 

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•                                          Anyloss or bankruptcy of a major client or supplier;

 

•                                          Additionsor departures of key personnel;

 

•                                          Anydeviations in net revenues or in losses from levels expected by securitiesanalysts;

 

•                                          Futuresales of common stock; and

 

•                                          Volumefluctuations, which are particularly common among highly volatile securities oftelecommunications and Internet-related companies.

 

**Our facilities and the networks on which wedepend may fail, which would interrupt the circuit access we provide and makeit difficult for us to retain and attract clients.**

 

Our clients depend on our ability to provide ongoing dedicated circuitaccess. The operation of these circuits depends on the networks of third partytransport suppliers. The networks of transport suppliers and clients who mayuse our UTX facilities may be interrupted by failures in or damage to thesefacilities. Our facilities and the ongoing circuit access we provide may beinterrupted as a result of various events, many of which we cannot control,including fire, human error, earthquakes and other natural disasters, disastersalong communications rights-of-way, power loss, telecommunications failures,sabotage or vandalism, or the financial distress or other event adverselyaffecting our suppliers, such as bankruptcy or liquidation.

 

We may be subject to legal claims and be liable for losses suffered byclients and carriers for disruptions to circuits or damage to client or carrierequipment resulting from failures at our facilities or on the networks of thirdparty providers. We generally provide outage credits to our clients if circuitdisruptions occur. If our circuit failure rate is high, we may incursignificant expenses related to circuit outage credits, which would reduce ourrevenues and gross margins. We would also incur significant expenses ininvestigating and addressing the causes of such circuit failures, which woulddivert resources from the maintenance or expansion of our services and causeour business to suffer. In addition, we may lack the resources to investigateand address any such failures in as timely a manner as our clients may expect,which may damage our business relationship with those clients and reduce ourability to obtain future business. Clients may seek to terminate theircontracts with us if there is a circuit failure. In addition, if our circuitfailure rate is high, our reputation could be harmed.

 

**Terrorist attacks and threats or actual warmay negatively impact our business, financial condition and results ofoperations.**

 

Our businessis affected by general economic conditions that can decline as a result ofnumerous factors outside of our control, such as terrorist attacks and acts ofwar. Recent terrorist attacks against the United States, as well as eventsoccurring in response to or in connection with them, including future terroristattacks against U.S. targets, rumors or threats of war, actual conflictsinvolving the United States or its allies, or military or trade disruptionsimpacting our suppliers or our clients, may adversely impact our operations. Asa result, there could be delays or losses in the delivery of our service,decreased sales of our services and extension of time for payment of accountsreceivable from our clients. Strategic targets such as communications networksand the Sears Tower (where our principal business offices are located) may beat greater risk of future terrorist attacks than other targets in the United States.This occurrence could have an adverse impact on our operations. It is possiblethat any or a combination of these occurrences could have a material adverseeffect on our business, financial condition and results of operations.

 

**We depend on several large clients, and theloss of one or more of these clients, or a significant decrease in totalrevenues from any of these clients, would likely significantly reduce ourrevenue and income.**

 

Historically, a substantial portion of our revenues has come from alimited number of clients. For example, for the year ended December 31,2001, our three largest clients accounted for approximately 56% of our totalrevenues, and for the year ended December 31, 2002, our three largestclients accounted for approximately 39% of our total revenues. For the quarterended June 30, 2003, our three largest clients accounted for approximately34% of our total revenues. We have a number of significant contracts with theseclients under which we derive a significant amount of our revenues. Thesecontracts expire on various dates between now and March 2005. If, througha bankruptcy proceeding or otherwise, we lose one or more large clients, or ifone or more of our large clients reduces the services they purchase from us orotherwise renegotiates the terms on which they purchase services from us and wefail to add new clients, our revenues could decline and our results ofoperations would suffer.

 

**We have assumed indebtedness that couldrestrict our future operating activities.**

 

In connection with the closing under the Purchase Agreement, we assumed$2 million in principal amount of a Promissory Note executed by CityNetand made to Electro Banque. The note is secured by the fiber optic ring locatedin Albuquerque, New 

 

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Mexico and related assets, matures in a single installment onDecember 31, 2007 and does not bear interest until January 1, 2006;thereafter, it bears interest at 8% per annum. The loan documents provide that we will not sell the fiber optic ringunless we make certain payments to Electro Banque. This restrictionmight prevent us from pursuing potentially advantageous business opportunities.In addition, our ability to repay the indebtedness when due will depend uponour ability to generate sufficient revenue, or to renegotiate or replace theindebtedness with Electro Banque on terms and conditions favorable to us, if atall. There can be no assurance that we will generate sufficient revenue or beable to renegotiate or replace the indebtedness with Electro Banque on termsand conditions favorable to us. If we are unable to repay or replace theindebtedness when due, Electro Banque will be permitted to exercise its rightsunder the security agreement securing the indebtedness and take possession ofthe fiber optic ring located in Albuquerque, New Mexico and the related assetsand dispose of such assets to satisfy the indebtedness.

 

**The market for our UTX services is unproven,and we have limited experience providing our UTX services.**

 

The market for our UTX services has been developing more slowly than wehad expected. To date, we have derived substantially all of our revenues fromproviding on-going circuit access, and we have only limited experienceproviding our UTX services. While management believes our UTX facilities havesignificant value to our business, we have tested and impaired our UTX sites in2002 and in 2003 in compliance with SFAS No. 144. Our ability to generaterevenues from UTX services will suffer if the market for these services failsto develop or develops more slowly than we expect.

 

One of our key strategies has been to expand our business by openingadditional UTX facilities in geographically diverse locations. Because we havesuspended this strategy, the resulting delays in the expansion of our UTXfacilities may make it more difficult for us to respond to competitivepressures and establish our presence in the market.

 

**Operating UTX facilities causes us to incursignificant costs and expenses.**

 

Our UTX facilities cause us to incur significant costs and expenses. Ifthe demand for UTX services from these facilities does not develop as weanticipate, we will have certain costs and expenses without correspondingrevenue and our business will be harmed. These costs and expenses include:

 

•                                          Leasingreal estate;

 

•                                          Expensesassociated with hiring, training and managing employees;

 

•                                          Maintainingpower and redundancy systems;

 

•                                          Maintainingmultiple communications connections; and

 

•                                          Depreciationexpense.

 

An inability to attract sufficient clients to our UTX facilities wouldharm our ability to generate revenues.

 

**The regulatory framework under which weoperate and new regulatory requirements or new interpretations of existingregulatory requirements could require substantial time and resources forcompliance, which could make it difficult for us to operate our business.**

 

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 subject to frequent changes anddifferent interpretations, and therefore, it is difficult for us to assess theimpact of these factors on our operations. The current domestic andinternational trend is toward deregulation of telecommunications and Internetservices. However, we cannot be certain that this trend will continue, and itis possible that changes in regulatory policies could limit our ability tocompete in some markets. The implementation, modification, interpretation andenforcement of laws and regulations vary and can limit our ability to providemany of our services.

 

We have been required to obtain authorization from the FCC, many statepublic utilities commissions and foreign regulatory authorities to offerparticular types of telecommunications services. Pursuant to theseauthorizations, we have to comply with a variety of regulatory obligations onan ongoing basis. We cannot provide assurance that the FCC, state commissionsor foreign authorities will 

 

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grant us required authority (or do so in a timely manner), or refrainfrom taking 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 fully complywith the rules of the FCC or state or foreign regulatory agencies, thirdparties or regulators could challenge our ability to offer our services orattempt to impose fines. Such challenges or fines could cause us to incursubstantial legal and administrative expenses.

 

Because we purchase telecommunications services from other carriers(including both long-distance and local telephone companies) for resale to ourcustomers, our costs of doing business can be affected by changes in regulatorypolicies affecting these other carriers. For example, the FCC has recentlyannounced decisions that may increase the costs of some dedicated transmissionservices offered by the local telephone companies. We cannot control and oftencannot predict these types of decisions or their impact on our businessoperations.

 

Changes to existing regulations in particular markets may decrease theopportunities that are available for us to enter into those markets, or mayincrease our legal, administrative or operational costs, or may constrain ouractivities in other ways that we cannot necessarily anticipate.

 

**Required regulatory approvals may interferewith or delay 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 certainother types of transactions, including some mergers, acquisitions of otherregulated companies, sales of all or substantial parts 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 favorable termsand our flexibility in operating our business will be limited. If ourflexibility is limited, we may not be able to optimize our operating results.

 

**We may incur operational and managementinefficiencies if we acquire new businesses or technologies, including thefiber optic rings we assumed from CityNet.**

 

To further our strategy, we may seek to acquire businesses andtechnologies that we believe will complement our existing business. Forexample, in July 2003 we assumed from CityNet fiber optic rings located inAlbuquerque, New Mexico and Indianapolis, Indiana.  Any such acquisitions would likely involve some or all of thefollowing risks:

 

•                                          Difficultyof assimilating acquired operations and personnel and information systems;

 

•                                          Potentialdisruption of our ongoing business;

 

•                                          Possibilitythat we may not realize an acceptable return on our investment in theseacquired companies or assets;

 

•                                          Diversionof resources;

 

•                                          Possibleinability of management to maintain uniform standards, controls, procedures andpolicies;

 

•                                          Risksof entering markets in which we have little or no experience; and

 

•                                          Potentialimpairment of relationships with employees, suppliers or clients.

 

We may need to complete these transactions in order to remaincompetitive. We cannot be sure that we will be able to obtain any requiredfinancing for these transactions or that these transactions will occur.

 

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

 

Our services require a sophisticated sales and marketing effort thattargets key people within our prospective clients’ 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. If we are unable to effectively staffour marketing and sales operations, or our marketing efforts are not successful,we may not be able to increase market awareness or sales of our products andservices, which may prevent us from achieving and maintaining profitability.

 

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**If we do not continue to train, manage andretain our employees, clients may significantly reduce purchases of ourservices.**

 

Our employees are responsible for providing our clients with technicaland operational support, and for identifying and developing opportunities toprovide additional services to our existing clients. If we fail to train,manage and retain our employees, we may be limited in our ability to gain morebusiness from existing clients, and we may be unable to obtain or maintaincurrent information regarding our clients’ and suppliers’ communicationsnetworks, which could limit our ability to provision future circuits for ourclients or develop new service offerings.

 

**Failure to successfully maintain and upgradeour management information systems could harm our ability to operate or manageour business effectively.**

 

We are in the process of augmenting our management information systemsto facilitate management of client order, client service, billing and financialapplications. 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 andhave limited ability to protect our proprietary information, competitors maymore easily replicate our business and harm our ability to generate revenues.**

 

We have no patented technology that would preclude or inhibitcompetitors from replicating our business. We rely on a combination ofcopyright, trademark, service mark and trade secret laws and contractualrestrictions to establish and protect our intellectual property. We haveapplied for registration of certain of our service marks in the United Statesand in other countries, and have obtained registrations for certain of ourservice marks in the United States, the European Union, Australia, Korea,Indonesia, Mexico, Thailand, Switzerland, New Zealand and Singapore. Even if additionalregistrations are granted, we may be limited in the scope of services for whichwe may exclusively use our service marks. We enter into confidentialityagreements with our employees, consultants and partners, and we control accessto, and distribution of, our proprietary information. Our intellectual propertymay be misappropriated or a third party may independently develop similarintellectual property. Moreover, the laws of certain foreign countries may notprotect our intellectual property rights to the same extent as do the laws ofthe United States. Unauthorized use of any of our proprietary information couldexpose us to competition, which would harm our ability to attract new andexisting clients and generate revenues.

 

**CityNet owns a majority of our outstandingcommon stock, which may discourage third party offers to acquire us.**

 

CityNet has significant control over us. CityNet owns approximately 55%of our outstanding common stock on a fully-diluted basis (excluding thoseoptions and warrants outstanding at the closing of the Purchase Agreementhaving an exercise price above $1.00 per share). In addition, CityNet has theright to designate five out of nine of the members of our board of directors,including the chairman. The extent of CityNet’s control over us may have theeffect of discouraging third party offers to acquire us.

 

**Provisions of our charter documents may haveanti-takeover effects that could prevent a change in corporate control.**

 

Provisions of our certificate of incorporation, bylaws, and Delawarelaw could make it more difficult for a third party to acquire us, even if doingso would be a benefit to our stockholders.

 

**There may be sales of a substantial amount ofour common stock that could cause our stock price to fall.**

 

A small number of our current stockholders hold a substantial number ofshares of our common stock. Pursuant to the terms of the Purchase Agreement, onJuly 23, 2003 we entered into a stockholders agreement with CityNet, ICGHoldings, Inc., ComVentures and two of our former executives. Under thisagreement, these stockholders, including CityNet, (a) have agreed to vote forthe election of the CityNet director nominees appointed to our board ofdirectors upon the closing under the Purchase Agreement, and (b) have agreed tolimitations on their ability to dispose of shares of Common Stock until July23, 2004 (12 months after the closing under the Purchase Agreement), except asotherwise agreed to by the vote of a majority of our board. These stockholdersbeneficially own approximately 75% of our outstanding common stock. Sales of asubstantial number of shares of our common stock or market expectations thatthese sales may occur could cause our stock price to fall. In addition, thesale of these shares could make it difficult for us to raise necessary capitalby issuing additional common stock.

 

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**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 andshort-term investments in a variety of securities, including commercial paper,money market funds, government and non-government debt securities. In general,money market funds are not subject to market risk because the interest paid onsuch funds fluctuates with the prevailing interest rate. As of June 30, 2003,all of our investments were in cash and cash equivalents.

 

**Interest Rate Sensitivity**

 

We maintainour cash equivalents and short-term investments primarily in a portfoliocomprised of commercial paper, money market funds, and investment grade debtsecurities. As of June 30, 2003, all of our investments had maturities of lessthan six months. Accordingly, we do not believe that our investments havesignificant 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.

 

**ITEM4. CONTROLS AND PROCEDURES**

 

Our management, including our Chief Executive Officer and ChiefFinancial Officer, carried out an evaluation of our disclosure controls andprocedures (as required under paragraph (b) of Rule 15d-15 under the SecuritiesExchange Act of 1934, as amended) as of the end of the period covered by thisreport. Based on that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that we had sufficient procedures for recording,processing, summarizing, and reporting information that is required to bedisclosed in our reports under the Securities Exchange Act of 1934, as amended.Our controls were designed by our management.

 

There have not been any significant changes to our internal controlsover financial reporting or in other factors that could significantly affectthese controls subsequent to the date of this evaluation.

 

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**PART II. OTHER INFORMATION**

 

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

# *** ***

InNovember 2001, a complaint 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 ourboard of directors conditionally approved a proposed partial settlement withthe plaintiffs in this matter.  Thesettlement would provide, among other things, a release of us and of theindividual defendants for the conduct alleged in the action to be wrongful inthe complaint.  We would agree toundertake other responsibilities under the partial settlement, includingagreeing to assign away, not assert, or release certain potential claims we mayhave against our underwriters.  Ourinsurers are expected to bear any direct financial impact of the proposedsettlement.   The committee agreed toapprove the settlement subject to a number of conditions, including theparticipation of a substantial number of other issuer defendants in theproposed settlement, the consent of our insurers to the settlement, and thecompletion of acceptable final settlement documentation.  Furthermore, the settlement is subject to ahearing on fairness and approval by the Court overseeing the litigation.

 

We have entered into a settlement agreement with respect to an actionthat Level 3 Communications, LLC filed in the United States DistrictCourt for the Eastern District of Virginia, and which was referred to abankruptcy judge. The complaint names as defendants the Company, three bankruptentities (Aleron, Inc., Aleron U.S., Inc., and TA AcquisitionCorp.), and those three entities’ bankruptcy trustee. In its complaint,Level 3 claims that it is owed for certain telecommunication servicesprovided under contracts between Level 3 and TA Acquisition and fortermination charges under those contracts. On July 2, 2003, Level 3 Communications, LLC accepted asettlement agreement entered into in June 2003 relating to the claims Level 3brought against us. Under the settlement agreement, we agreed to pay Level 3 atotal of $1.4 million to settle the litigation and other matters.  We may use up to $200 thousand of thisamount as a prepayment of certain services. On July 23, 2003, Level 3 filed amotion to dismiss us from the suit. The bankruptcy court is scheduled to hearLevel 3’s motion on August 19, 2003.

 

Before their conversion under Chapter 7 of the Bankruptcy Code,Aleron, Inc. and TA Acquisition Corp. listed potential claims againstus in their Chapter 11 schedules listing their assets. Aleron stated thatit “has substantial breach of contract and other claims against UniversalAccess” arising out of contractual agreements and provided that the estimatedvalue of the claims was between $3 and $5 million. TA Acquisitionstated that it “may have substantial claims against Universal Access” andprovided that the value of those claims was unknown. We believe that the claimsagainst us are without merit.

 

We and certain of our formerdirectors and officers are defendants in an action pending in the United StatesDistrict Court for the Eastern District of Texas, Frandsen v. Universal Access,Inc., et al., No. 9:02CV103 (E.D. Tex.). The complaint alleged causes of actionfor securities fraud in connection with public disclosures made by our officersbetween 2000 and 2002. We believe that the allegations against us are withoutmerit. On March 5, 2003, the court granted a motion to dismiss the complaintand has permitted plaintiffs the opportunity to replead the complaint withrespect to a minority of the alleged misstatements. On May 27, 2003, plaintiffsfiled a second amended consolidated complaint. Defendants’ motion to dismiss isscheduled to be fully briefed and under submission by October 2003. Plaintiffshave not specified the amount of damages they seek.

 

We have beendismissed from an action that 360networks (USA), Inc. filed against us in theUnited States District Court for the Southern District of New York. In itscomplaint, 360 requested a declaration that we are obligated to purchase aspecified amount of telecommunications services from 360 each year for fiveyears, beginning on April 1, 2002, and that if we purchase less than thespecified amount, we are obligated to pay 360 in cash the difference between theamount purchased and the specified minimum annual amount. In addition, 360sought damages against us of at least $3 million, representing the differencebetween the amount of telecommunications services we purchased from 360 betweenApril 1, 2002 and March 31, 2003 and the purported minimum purchase commitment.In July 2003, we entered into a settlement agreement with 360.  Under the settlement agreement, we orderedcertain services from 360.  In July2003, we were dismissed from the action.

 

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

 

The effective date of the Registration Statement filed on Form S-1under the Securities Act of 1933, as amended (File No. 333-93039), wasMarch 16, 2000. The class of securities registered was Common Stock. Theoffering commenced on March 16, 2000. The managing underwriters for theoffering were Goldman, Sachs & Co., Chase Securities Inc.and FleetBoston Robertson 

 

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Stephens Inc. Pursuant to the Registration Statement, 12,650,000shares of our Common Stock were sold. After deducting approximately $12.4million in underwriting discounts and commissions and approximately $2.3million in other expenses related to the offering, our net proceeds wereapproximately $162.4 million. We invested the proceeds from the offering inshort-term investment grade, interest-bearing securities and intend to use theproceeds for working capital and general corporate purposes, including saleschannel development and other corporate purposes. In addition, we may use aportion of the net proceeds to acquire products or technologies that arecomplementary to our current or future business and product lines. The use ofproceeds from the offering does not represent a material change in the use ofproceeds described in the prospectus for the offering.

 

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

 

(a)                                  List of Exhibits

 
| **Exhibit   Number** |   | **Description of Document**                                                                                                                                                                                                                                                    |
|----------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |   |                                                                                                                                                                                                                                                                           |
| 2.1                  |   | Agreement  and Plan of Merger among the Company, Migration Corporation and Universal  Access, Inc. dated July 18, 2001.(1)                                                                                                                                                     |
| 2.2                  |   | Stock  Purchase Agreement with CityNet Telecommunications, Inc. dated April 7,  2003.(2)                                                                                                                                                                                       |
| 2.3                  |   | Letter  agreement with CityNet Telecommunications, Inc. dated April 7, 2003.(2)                                                                                                                                                                                                |
| 3.1                  |   | 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.(4)                                                                                                                                                                                                                       |
| 4.2                  |   | Amended and  Restated Registration and Informational Rights Agreement dated June 28,  1999.(5)                                                                                                                                                                                 |
| 4.3                  |   | Amended and  Restated Registration and Informational Rights Agreement dated June 30,  1999.(5)                                                                                                                                                                                 |
| 4.4                  |   | Registration  Rights Agreement dated November 10, 1999.(5)                                                                                                                                                                                                                     |
|                 |   |                                                                                                                                                                                                                                                                           |
| 4.5                  |   | Registration  Rights Agreement dated July 1, 2000.(6)                                                                                                                                                                                                                          |
| 4.7                  |   | Form of  warrant to purchase shares of Common Stock of the Company issued to Advanced  Equities.(5)                                                                                                                                                                            |
| 4.8                  |   | Preferred  Stock Rights Agreement, dated as of July 31, 2000, between Universal Access,  Inc. and Wells Fargo, including the Certificate of Designation, the form of  Rights Certificate and the Summary of Rights attached thereto as Exhibits A,  B, and C, respectively.(7) |
| 4.8.1                |   | Assumption  of and Amendment to the Universal Access, Inc. Preferred Stock Rights  Agreement dated July 13, 2001.(1)                                                                                                                                                           |
| 4.8.2                |   | Second  Amendment to the Universal Access Global Holdings Inc. Preferred Stock Rights  Agreement dated April 7, 2003. (2)                                                                                                                                                      |
| 10.31                |   | Promisory  Note with CityNet Telecommunications, Inc. dated April 7, 2003.(2)                                                                                                                                                                                                  |
| 10.32                |   | Guarantee  and Security Agreement with CityNet Telecommunications, Inc. dated April 7,  2003.(2)                                                                                                                                                                               |
| 10.33†          |   | Master  Services Agreement with Level 3 Communications, LLC dated June 30, 2003.                                                                                                                                                                                               |
| 31.1                 |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                          |
| 31.2                 |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                          |
| 32.1                 |   | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                          |
| 32.2                 |   | Certification  of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002.                                                                                                                                                                          |

 

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

 

(2)                                  Filedwith the Company’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 ended June 30, 2002.

 

(4)                                  Filed with theCompany’s Annual Report on Form 10-K for the year ended December 31, 2001.

 

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

 

(6)                                  Filed with theCompany’s Quarterly Report on Form 10-Q for the quarterly period ended June 30,2000.

 

(7)                                  Filed with theCompany’s Registration Statement on Form 8-A, filed with the Securities andExchange Commission on August 9, 2000.

 

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†                                          Confidentialtreatment requested for certain portions of this Exhibit; such portions havebeen omitted and filed separately with the Securities and Exchange Commission.

 

(b)       Reportson Form 8-K:

 

On April 8, 2003, we filed with the SEC a report on Form 8-K, which wasfurnished pursuant to Item 9 of Form 8-K and which provided Chief ExecutiveOfficer and Chief Financial Officer certifications for our annual report onForm 10-K for the period ending December 31, 2002.  The certifications were provided pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

OnApril 11, 2003, we filed with the SEC a report on Form 8-K, which was furnishedpursuant to Items 5, 7 and 9 of Form 8-K. Item 5 announced that we had reached an agreement with CityNetfor a cash investment of $16 million and provided information on the related agreements we entered into withCityNet, including a Stock Purchase Agreement, Promissory Note, Guarantee andSecurity Agreement and a Voting Agreement CityNet entered into with holders ofapproximately 49% of our outstanding common stock.  Item 7 provided copies of the various agreements referred to inItem 5 and copies of the Press Releases referred to in Items 5 and 9.  Item 9 provided information on the financialresults for the fourth quarter and year ended December 31, 2002.

 

OnMay 15, 2003, we filed with the SEC a report on Form 8-K, which was furnishedpursuant to Item 9 of Form 8-K and which provided Chief ExecutiveOfficer and Chief Financial Officer certifications for our quarterly report onForm 10-Q for the period ending March 31, 2003.  The certifications were provided pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

On June 5, 2003, we filed with the SEC a report on Form 8-K, which wasfurnished pursuant to Item 5 of Form 8-K and which announced thatwe received a Nasdaq StaffDetermination indicating that we failed to comply with the $1.00 per shareminimum bid price requirement for continued listing set forth in MarketplaceRule 4310(c)(4) and that our securities were, therefore, subject to delistingfrom the Nasdaq SmallCap Market.

 

On June 12, 2003, we filed with the SEC areport on Form 8-K, which was furnished pursuant to Item 5 ofForm 8-K and which announced (i) that Lance B. Boxer had resigned as ourinterim Chief Executive Officer and as a director, effective July 15, 2003;(ii) that we had changed the date of our Annual Meeting of Stockholders to July21, 2003; and (iii) that Robert J. Pommer, Jr., Senior Vice President,Government and Strategic Channels, had resigned effective June 13, 2003.

 

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**SIGNATURES**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|                                   | UNIVERSAL ACCESS GLOBAL HOLDINGS INC.   (Registrant) |
|----------------------------------------|------------------------------------------------------|
|                                   |                                                 |   |
| Date:   August 14, 2003 | By:                                                  | /s/ BRIAN CODERRE |   |
|                                   |                                                 | Brian Coderre |
|                                   |                                                 | *Chief Financial Officer* |
|                                   |                                                 | *(Principal Financial and Accounting  Officer)* |

 

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