**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

----

 

**FORM 10-Q**

** **

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

### ** **

----

** **

**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)          |

 

----

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days. Yes ý  No o

 

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

 

The number of shares outstanding of the issuer’s common stock, parvalue $0.01, as of April 30, 2003 was 99,131,705 shares.

 

 

----

 

**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 March 31, 2003 and December 31, 2002  (Unaudited) | 3 |
|                      |   |
|                      | Condensed Consolidated Statements of  Operations for the Three Months Ended March 31, 2003 and 2002  (Unaudited) | 4 |
|                      |   |
|                      | Condensed Consolidated Statements of Cash  Flows for the Three Months Ended March 31, 2003 and 2002 (Unaudited) | 5 |
|                      |   |
|                      | Notes to Condensed Consolidated Financial  Statements (Unaudited) | 6 |
|                      |   |
| Item 2.              | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 12 |
|                      |   |
| Item 3.              | Quantitative and Qualitative Disclosures  about Market Risk | 30 |
|                      |   |
| Item 4.                   | Controls and Procedures | 30 |
|                      |   |
| **Part II**          |
| **Other Information**     |
|                      |
| Item 1.              | Legal Proceedings | 31 |
|                      |   |
| Item 2.              | Changes in Securities and Use of Proceeds | 32 |
|                      |   |
| Item 6.              | Exhibits and Reports on Form 8-K | 32 |
|                      |   |
| Signatures                | 34 |
|                      |
| Certifications            | 35 |

 

2

----

 

## **PART I**. FINANCIAL INFORMATION

 

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

## ** **

**UNIVERSAL ACCESS GLOBAL HOLDINGS INC. ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

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

**(unaudited)**

 
|                                                                                                                                                                                           |   | **March 31,  2003** |   | **Dec. 31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|--------|-------------------------|--------|
|                                                                                                                                                                                           |   |                     |   |                    |   |
| **ASSETS**                                                                                                                                                                                     |   |                     |   |                    |   |
| Current assets:                                                                                                                                                                                |   |                     |   |                    |   |
| Cash and cash equivalents                                                                                                                                                                      |   | $                        | 10,173 |                    | $      | 12,353 |   |
| Accounts receivable, less allowance of  doubtful accounts of $1,728 and $1,728                                                                                                                 |   | 3,240                    |   | 4,566                   |   |
| Prepaid expenses and other current assets                                                                                                                                                      |   | 4,359                    |   | 2,674                   |   |
|                                                                                                                                                                                           |   |                     |   |                    |   |
| Total current assets                                                                                                                                                                           |   | 17,772                   |   | 19,593                  |   |
| Restricted cash                                                                                                                                                                                |   | 2,058                    |   | 3,900                   |   |
| Property and equipment, net                                                                                                                                                                    |   | 17,909                   |   | 20,617                  |   |
| Other long-term assets                                                                                                                                                                         |   | 2,417                    |   | 2,607                   |   |
|                                                                                                                                                                                           |   |                     |   |                    |   |
| Total assets                                                                                                                                                                                   |   | $                        | 40,156 |                    | $      | 46,717 |   |
|                                                                                                                                                                                           |   |                     |   |                    |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY**                                                                                                                                                 |   |                     |   |                    |   |
| Current liabilities:                                                                                                                                                                           |   |                     |   |                    |   |
| Accounts payable                                                                                                                                                                               |   | $                        | 2,771  |                    | $      | 2,382 |   |
| Non income tax payable                                                                                                                                                                         |   | 1,289                    |   | 1,071                   |   |
| Accrued carrier expenses                                                                                                                                                                       |   | 14,579                   |   | 15,611                  |   |
| Accrued expenses and other current  liabilities                                                                                                                                                |   | 1,669                    |   | 2,051                   |   |
| Unearned revenue                                                                                                                                                                               |   | 9,051                    |   | 9,813                   |   |
| Short-term restructuring liability                                                                                                                                                             |   | 768                      |   | 773                     |   |
|                                                                                                                                                                                           |   |                     |   |                    |   |
| Total current liabilities                                                                                                                                                                      |   | 30,127                   |   | 31,701                  |   |
| Security deposits payable                                                                                                                                                                      |   | 1,903                    |   | 1,859                   |   |
| Restructuring liability                                                                                                                                                                        |   | 4,085                    |   | 4,274                   |   |
|                                                                                                                                                                                           |   |                     |   |                    |   |
| Total liabilities                                                                                                                                                                              |   | 36,115                   |   | 37,834                  |   |
| Commitments and contingencies (Note 6)                                                                                                                                                    |   |                     |   |                    |   |
| Stockholders’ equity:                                                                                                                                                                     |   |                     |   |                    |   |
| Common stock, $.01 par value;  1,000,000,000 shares authorized; 99,114,297 and 99,179,341 shares issued  and outstanding at March 31, 2003 and December 31, 2002,  respectively |   | 991                      |   | 992                     |   |
| Common stock warrants                                                                                                                                                                          |   | 129                      |   | 129                     |   |
| Additional paid-in-capital                                                                                                                                                                     |   | 282,487                  |   | 283,165                 |   |
| Deferred stock plan compensation                                                                                                                                                               |   | (1,941                   | )      | (3,010                  | )      |
| Accumulated deficit                                                                                                                                                                            |   | (277,001                 | )      | (271,793                | )      |
| Accumulated other comprehensive income                                                                                                                                                         |   | 40                       |   | 40                      |   |
| Notes receivable—employees                                                                                                                                                                |   | (664                     | )      | (640                    | )      |
|                                                                                                                                                                                           |   |                     |   |                    |   |
| Total stockholders’ equity                                                                                                                                                                |   | 4,041                    |   | 8,883                   |   |
|                                                                                                                                                                                           |   |                     |   |                    |   |
| Total liabilities and stockholders’ equity                                                                                                                                                |   | $                        | 40,156 |                    | $      | 46,717 |   |

 

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

 

3

----

 

**UNIVERSAL ACCESS GLOBAL HOLDINGS INC. ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
|                                                                                                            |   | **Three Months Ended  March 31,** |   |
|-----------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                                                            |   | **2003**                               |   | **2002** |   |
|                                                                                                            |   |                                   |   |   |   |
| Revenues                                                                                                        |   | $                                      | 19,151 |   | $ | 29,080 |   |
| Costs and expenses:                                                                                             |   |                                   |   |   |   |
| Cost of circuit access (exclusive of  depreciation of $0 and $1,260 in 2003 and 2002 respectively, shown below) |   | 12,753                                 |   | 21,203 |   |
| Operations & administration (excluding  stock plan compensation)                                            |   | 8,830                                  |   | 15,494 |   |
| Operations & administration (stock plan  compensation)                                                      |   | 389                                    |   | 291 |   |
| Depreciation & amortization                                                                                 |   | 2,479                                  |   | 5,086 |   |
|                                                                                                            |   |                                   |   |   |   |
| Total costs and expenses                                                                                        |   | 24,451                                 |   | 42,074 |   |
|                                                                                                            |   |                                   |   |   |   |
| Operating loss                                                                                                  |   | (5,300                                 | )      | (12,994 | ) |
| Other income, net                                                                                               |   | 92                                     |   | 378 |   |
|                                                                                                            |   |                                   |   |   |   |
| Net loss                                                                                                        |   | (5,208                                 | )      | (12,616 | ) |
|                                                                                                            |   |                                   |   |   |   |
| Basic and diluted net loss per share                                                                            |   | $                                      | (0.05  | ) | $ | (0.13 | ) |
| Weighted average shares used in computing  basic and diluted net loss per share                                 |   | 98,658                                 |   | 98,049 |   |

 

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

 

4

----

 

**UNIVERSAL ACCESS GLOBAL HOLDINGS INC. ANDSUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

**(unaudited)**

 
|                                                     |   | **Three Months Ended  March 31,** |   |
|----------------------------------------------------------|--------|----------------------------------------|--------|
|                                                     |   | **2003**                               |   | **2002** |   |
|                                                     |   |                                   |   |   |   |
| **Cash flows from  operating activities:**               |   |                                   |   |   |   |
| Net cash used for operating activities                   |   | $                                      | (4,270 | ) | $ | (12,466 | ) |
| **Cash flows from  investing activities:**               |   |                                   |   |   |   |
| Additions to property, plant, &  equipment           |   | —                                 |   | (5,186 | ) |
| Proceeds from sales of property, plant,  & equipment |   | 243                                    |   | 17 |   |
| Increase in notes receivable                             |   | —                                 |   | (950 | ) |
| Sale of short-term investments                           |   | —                                 |   | 15,069 |   |
|                                                     |   |                                   |   |   |   |
| Net cash provided by investing activities                |   | 243                                    |   | 8,950 |   |
| **Cash flows from  financing activities:**               |   |                                   |   |   |   |
| Payments on capital lease obligations                    |   | —                                 |   | (760 | ) |
| Payment of long-term and short-term  obligations         |   | —                                 |   | (299 | ) |
| Proceeds from short-term obligations                     |   | —                                 |   | 1,500 |   |
| Restriction on cash balance                              |   | 1,842                                  |   | (1,230 | ) |
| Issuance of common stock                                 |   | 1                                      |   | 206 |   |
| Proceeds of notes receivable—employee               |   | 4                                      |   | 32 |   |
|                                                     |   |                                   |   |   |   |
| Net cash provided (used) by financing  activities        |   | 1,847                                  |   | (551 | ) |
| Effect of exchange rate changes on cash                  |   | —                                 |   | 14 |   |
| Net increase/(decrease) in cash and cash  equivalents    |   | (2,180                                 | )      | (4,053 | ) |
| Cash and cash equivalents, beginning of  period          |   | 12,353                                 |   | 20,758 |   |
|                                                     |   |                                   |   |   |   |   |   |
| Cash and cash equivalents, end of period                 |   | $                                      | 10,173 |   | $ | 16,705 |   |
|                                                     |   |                                   |   |   |   |
| **Non-Cash Financing  Activities:**                      |   |                                   |   |   |   |
| Issuance of restricted stock                             |   | 2                                      |   | — |   |
| Redemption of notes receivable using outstanding  stock  |   | —                                 |   | 316 |   |

 

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

 

5

----

 

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

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(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 theopinion of management are necessary to state fairly the financial position andthe results of operations for the interim periods. The statements have beenprepared in accordance with the rules and regulations of the Securities andExchange Commission (the “SEC”). 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. All numberspresented are in thousands, except share and per share amounts and whereotherwise indicated.

 

**Note 2—Liquidity**

 

Our consolidated financial statements have been prepared assuming wewill continue as a going concern. However, we have determined that we need toraise capital from external sources in order both to fund operations and toenhance our existing IT tools to help achieve our sales objectives. Accordingly,we are aggressively pursuing both debt and equity capital raising opportunitiesto provide sufficient funds to accomplish these goals.

 

Effective April 7, 2003, we obtained $5 million in secureddebt financing from CityNet Telecommunications, Inc. (“CityNet”).  The financing is evidenced by a promissorynote (the “Note”) and secured by substantially all of our assets.  Under the terms of the Note, the unpaidprincipal balance accrues interest at a rate of 12% per annum, compoundedquarterly, and the entire unpaid principal balance and accrued but unpaidinterest is payable on April 6, 2004 unless otherwise accelerated underthe Note.

 

Additionally, effective April 7, 2003, we entered into adefinitive Stock Purchase Agreement (the “Purchase Agreement”) with CityNet.Under the Purchase Agreement, if closing conditions (including thereceipt of regulatory approval and the approval of our stockholders) aresatisfied or waived,  (a) CityNetwill pay to us $16 million in cash and transfer to us fiber optic ringslocated in Albuquerque, New Mexico and Indianapolis, Indiana having a value of$700 thousand, (b) we will issue to CityNet newly issued shares of our common stock representing approximately55% of our outstanding common stock on a fully diluted basis (with any options and warrants having an exerciseprice in excess of $1.00 being excluded from the calculation of “fullydiluted,” subject to CityNet’sright to receive compensating shares in the event that any of these options orwarrants are subsequently exercised) and (c) we will assume certainliabilities of CityNet. In particular, we will assume $2 million inprincipal amount of a Promissory Note executed by CityNet and made to ElectroBanque dated December 30, 2002. The note is secured by the fiber optic ring located in Albuquerque, NewMexico, matures in a single installmenton December 31, 2007 and does not bear interest until January 1, 2006;thereafter, it bears interest at 8% per annum.

 

After payingexpenses related to the transaction, we estimate that the net proceeds from thePurchase Agreement will be approximately $14.5 million.  Upon the closing under the PurchaseAgreement, principal and accrued interest under the Note will (in lieu of cashpayment to CityNet) be applied to reduce the purchase price payable by CityNetunder the Purchase Agreement. The closing under the Purchase Agreement issubject to approval by our shareholders, regulatory approval and other closingconditions. Subject to receipt of these approvals and satisfaction or waiver ofthese conditions, we expect the closing under the Purchase Agreement tooccur by July 31, 2003. Pursuantto the terms of, and upon closing under, the Purchase Agreement, our board ofdirectors must consist of nine members, five of whom, including the chairman,are to be designated by CityNet.

 

In connection with the execution of the Purchase Agreement, certain ofour significant stockholders entered into a voting agreement with CityNet.  Under the terms of the voting agreement,these stockholders agreed to vote the shares of our common stock owned by themin favor of the transactions contemplated by the Purchase Agreement.  As of April 7, 2003, these stockholderscollectively owned common stock representing approximately 49% of ouroutstanding common stock.  In addition,these stockholders have agreed to vote for the election of the CityNet directornominees to be appointed to our board of directors upon the closing under thePurchase Agreement.  

 

Based on our receipt of $5 million from the secured debt financing andassuming the closing occurs under the 

 

6

----

 

Purchase Agreement, our operational cash receipts remain stable, weachieve our sales objectives and we continue to control uses of cash, we estimatethat we will have sufficient liquidity and capital resources to meet our shortterm liquidity needs. In addition, we estimate that this debt and equitycapital raising will be sufficient to fund our operations until we become cashflow positive and we can accomplish our long term liquidity goal to fund ourbusiness with internally generated cash. However, we may not be able to closethe Purchase Agreement, and even if we are able to raise additional capital byclosing the Purchase Agreement or otherwise, our operational and financialflexibility may be limited. The issuance of stock under the PurchaseAgreement will also be dilutive to our existing stockholders. Further,unexpected events adversely affecting our cash resources, including declines incollections due to client bankruptcies or deteriorating industry conditions,bankruptcy preference payment settlements, security deposit requirements,accelerated vendor terms, payments required to settle disputes or adverselydetermined litigation, may create a need for us to obtain more funding fromexternal sources in addition to the current capital raising activitiesdescribed above.

 

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

 

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

 
|                                             |   | **March 31, 2003** |   | **December 31, 2002** |   |
|--------------------------------------------------|--------|--------------------|--------|-----------------------|--------|
|                                             |   |               |   |                  |   |
| Furniture and fixtures                           |   | $                  | 1,044  |                  | $      | 1,075 |   |
| Leasehold improvements                           |   | 1,442              |   | 1,442                 |   |
| UTX equipment                                    |   | 15,567             |   | 15,572                |   |
| Computer hardware and software                   |   | 21,435             |   | 21,436                |   |
| Other equipment                                  |   | 324                |   | 523                   |   |
|                                             |   |               |   |                  |   |
| Property and Equipment, gross                    |   | 39,812             |   | 40,048                |   |
| Less: Accumulated depreciation and  amortization |   | (21,903            | )      | (19,431               | )      |
|                                             |   |               |   |                  |   |   |   |
| Property and equipment, net                      |   | $                  | 17,909 |                  | $      | 20,617 |   |

 

Included in cost of computer hardware and software are softwaredevelopment and website costs of $0 and $2.8 million that were capitalizedduring 2003 and 2002, respectively. Accumulated depreciation related to capitalized software and websiteassets was $5.3 million and $4.7 million at March 31, 2003 and December 31,2002, respectively.

 

**Note 4—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 $627 thousand and $438 thousand at March 31, 2003 andDecember 31, 2002, respectively.

 

We also have security deposits receivable classified as long-termtotaling $523 thousand at March 31, 2003 and at December 31, 2002. We paythese security deposits to carriers, landlords, and utility companies in theordinary course of business.

 

 

 

 

7

----

 

**Note 5—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 therestructuring reserve at March 31, 2003:

 
|                                                       |   | **Balance at  December 31, 2002** |   | **Incurred Cash  Payments** |   | **Balance at  March 31, 2003** |   |
|------------------------------------------------------------|--------|-----------------------------------|--------|-----------------------------|--------|--------------------------------|--------|
|                                                       |   |                              |   |                        |   |                           |   |
| Facility exit costs, net of estimated  sublease recoveries |   | 5,014                             |   | (181                        | )      | 4,833                          |   |
| Other                                                      |   | 33                                |   | (13                         | )      | 20                             |   |
| Total                                                      |   | 5,047                             |   | (194                        | )      | 4,853                          |   |

 

**Note 6—Commitments and Contingencies**

 

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 initial publicoffering of securities. The complaint brings claims for violation of severalprovisions of the federal securities laws against the underwriters of our IPO,and also against us and certain of our former directors and officers under theSecurities 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. In July 2002, the defendants in theconsolidated actions filed motions to dismiss all of the cases in thelitigation, including the case involving us. On February 19, 2003, theCourt ruled on the motions to dismiss. The motions to dismiss the claims underthe Securities Act were denied as to virtually all of the defendants in theconsolidated cases, including us. The Court also denied our motion to dismissthe claims against us under the Exchange Act. The former directors and officersnamed in the complaint signed a tolling agreement and were dismissed from theaction without prejudice on October 9, 2002. We believe that theallegations against us are without merit.

 

In February 2000, a complaint was filed in the Superior Court ofCalifornia, County of Santa Clara, against us, certain of our directors andofficers and other parties by Point West Ventures, LP (“Point West”),previously known as Fourteen Hill Capital, LP and certain other shareholders inVaultline Incorporated. The claim arises out of a letter of intent that we enteredinto in December 1998 relating to our potential acquisition of Vaultline.The claimants contend that a mutual settlement agreement executed by thepresident of Vaultline was unauthorized and are seeking damages in excess of$10 million. We believe that the allegations against us are without merit. OnMay 4, 2000, the Superior Court granted our petition to compel arbitrationand to stay proceedings pending arbitration. No arbitration demand has everbeen made against us in this matter. In February 2002, Point West wasplaced into receivership by the United States District Court. The United StatesSmall Business Administration was appointed as Receiver. In January 2003,certain of the plaintiffs’ claims were voluntarily dismissed without prejudice.

 

Level 3 Communications, LLC has filed an action in the UnitedStates District Court for the Eastern District of Virginia, and the action hasbeen 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 

 

8

----

 

Level 3 and TA Acquisition and for termination charges underthose contracts. Level 3 seeks a declaration establishing the defendants’liability, if any, under the contracts and a judgment in those amounts againstthe defendants, including us. Level 3 has not specified the amount ofdamages it seeks. We have answered Level 3’s complaint and denied anyliability. No trial date in the action has been set. We believe that theallegations against us are without merit.

 

We have been dismissed from an action that QwestCommunications Corp. filed in the United States District Court for theEastern District of Virginia, and which was referred to a bankruptcy judge.Qwest’s amended complaint named as defendants the Company and three bankruptentities (Aleron U.S., Inc., Aleron, Inc., and TA AcquisitionCorp.). In its amended complaint, Qwest (a) claims that it is owed for certaintelecommunications services provided under contracts between Qwest andTA Acquisition and (b) requests a declaration that defendants are jointlyand severally liable for approximately $3.5 million under those contracts.In March 2003 we entered into a settlement agreement with Qwest relatingto the claims Qwest brought against us. Under the settlement agreement, in Marchand April 2003, we paid Qwest a total of $750 thousand to settle thelitigation. We may use up to $250 thousand of this amount as a prepayment ofcertain services. On May 9, 2003, Qwest filed a motion to dismiss us from thesuit.  Qwest's motion is scheduled to beheard by the bankruptcy court on May 27, 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 stated that the estimatedvalue of the claims was between $3 and $5 million. TA Acquisitionstated that it “may have substantial claims against Universal Access” andstated that the value of those claims was unknown. We believe that the claimsagainst us are without merit.

 

We and certain of our former directors and officers are defendants inan action pending in the United States District Court for the Eastern Districtof Texas, Frandsen v. Universal Access, Inc., et al., No. 9:02CV103(E.D. Tex.). The complaint alleged causes of action for securities fraud inconnection with public disclosures made by our officers between 2000 and 2002.We believe that the allegations against us are without merit. On March 5,2003, the court granted a motion to dismiss the complaint and has permittedplaintiffs the opportunity to replead the complaint with respect to a minorityof the alleged misstatements. On March 20, 2003, plaintiffs filed a motionfor reconsideration of, and to vacate, the court’s March 5 order. On April10, 2003, the court denied this motion. On April 21, 2003, plaintiffs filed asecond motion for reconsideration of, and to vacate, the court’s March 5order. Plaintiffs have not specified the amount of damages they seek.

 

In November 2002, a placement agent that we engaged in 2001 fileda complaint against us in the Central District of California claiming that theplacement agent was entitled to certain amounts in connection with a creditfacility that we purportedly had entered into. We have settled the matter andthe suit was dismissed in January 2003.

 

In April 2003, 360networks (USA), Inc. filed a complaint against us inthe United States District Court for the Southern District of New York. In itscomplaint, 360 requests 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 betweenthe amount purchased and the specified minimum annual amount. In addition, 360seeks 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.We believe that 360's claims are without merit. We have answered 360's complaintand asserted counterclaims against 360. In our counterclaims, we request thatthe court grant judgment against 360, declare the agreement between 360 and usterminated, and award us our costs and fees in connection with this lawsuit, aspermitted by the agreement.

 

We lease UTX facilities, office facilities and certain equipment overperiods ranging from two to fifteen years. Through December 31, 2002, wecompleted buyout agreements for certain leased office facilities and terminatedearly certain office facility leases, eliminating aggregate lease obligationsof approximately $47.0 million. Rent expense for the three months March31, 2003 and 2002 was approximately $2.0 million and $2.3 million,respectively. Future rentals for non-cancelable operating leases, inclusive ofamounts in our restructuring liability, are as follows as of March 31, 2003:

 
| 2003                         |   | $      | 6,480  |   |
|------------------------------|--------|--------|--------|--------|
| 2004                         |   | 8,477  |   |
| 2005                         |   | 7,633  |   |
| 2006                         |   | 7,180  |   |
| 2007                         |   | 7,417  |   |
| Thereafter                   |   | 30,022 |   |
| Total minimum lease payments |   | $      | 67,209 |   |

 

9

----

 

Additionally, we have entered into agreements with varioustelecommunications vendors to purchase minimum amounts of network serviceswithin a defined period, such as on a monthly basis. As of July 31, 2002,we reached a settlement whereby we paid a telecommunications vendor the sum of$1.4 million to satisfy outstanding billing disputes and eliminate anaggregate minimum purchase commitment of $66.0 million. InMarch 2003, we reached a settlement with a supplier that eliminated withthat supplier the remaining minimum purchase commitment of approximately$54.8 million as of December 31, 2002.  The total amount of remaining purchase commitments at March 31,2003 is as follows:

 
| 2003                               |   | $      | 17,653 |   |
|------------------------------------|--------|--------|--------|--------|
| 2004                               |   | 18,385 |   |
| 2005                               |   | 7,000  |   |
| 2006                               |   | 2,250  |   |
| 2007                               |   | 0      |   |
| Thereafter                         |   | 0      |   |
| Total minimum purchase commitments |   | $      | 45,288 |   |

 

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 7—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 taxobligations in connection with the exercise of options to acquire our commonstock. Each note allows the individual to satisfy the outstanding principalbalance thereof (and in one case, the principal and interest owed under thenote) by returning a fixed number of shares of our common stock. The chargereduced the value of the notes receivable to the total amount we would havereceived if the notes had been satisfied by the return of shares of our commonstock, based on the closing price of our common stock on June 30, 2002. Wemay reverse this charge in future periods or record additional expense as ourstock price changes to reflect the value of the notes receivable as of thebalance sheet date. For the three months ended March 31, 2003, no additionalcharge was recorded because the aggregate market value of the shares assumed tobe returned for purposes of calculating the charge did not change materiallyfrom June 30, 2002.

 

**Note 8—Comprehensive Income**

 

Comprehensive income, which includes net income and all other non-ownerchanges in equity during a period, is as follows for the three months endedMarch 31, 2003 and 2002:

 
|                                     |   | **For the Three Months  Ended March 31,** |   |
|------------------------------------------|--------|-------------------------------------------|--------|
|                                     |   | **2003**                                  |   | **2002** |   |
|                                     |   |                                      |   |   |   |
| Net income (loss)                        |   | $                                         | (5,208 | ) | $ | (12,616 | ) |
| Foreign currency translation adjustments |   | 0                                         |   | 3 |   |
| Comprehensive net income (loss)          |   | $                                         | (5,208 | ) | $ | (12,613 | ) |

 

10

----

 

**Note 9—Stock-Based Compensation Plans**

 

Effective for fiscal 2003, we adopted the disclosure requirements underStatement of Financial Standards (“SFAS”) No. 148, “Accounting for Stock-BasedCompensation – Transition and Disclosure,” as an amendment for SFAS No. 123.

 

Stock-based employee compensation, including stock options, isaccounted for under the intrinsic value method as prescribed by AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees.”  No compensation expense isrecognized for these options as they are issued at fair market value at date ofgrant.

 

If we were to recognize compensation expense over the relevant serviceperiod under the fair-value method of SFAS No. 123 with respect to stockoptions granted and employee stock purchases for the quarter ended March 31,2003 and all prior periods, net earning would have decreased, resulting in proforma net losses and losses per share as presented below:

 
|                                                                                                                   |   | **For the  Three MonthsEnded March 31,** |   |
|------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|--------|
|                                                                                                                   |   | **2003**                                 |   | **2002** |   |
| Net income (loss):                                                                                                     |   |                                     |   |   |   |
| As reported                                                                                                            |   | $                                        | (5,208 | ) | $ | (12,616 | ) |
| Less:   Stock-based compensation expense determined under fair value method  for all awards, net of related taxes |   | (264                                     | )      | (335 | ) |
| Pro forma net loss                                                                                                     |   | $                                        | (5,472 | ) | $ | (12,951 | ) |
|                                                                                                                   |   |                                     |   |   |   |
| Basic and Diluted net earnings (loss) per  common share:                                                               |   |                                     |   |   |   |
| As reported                                                                                                            |   | $                                        | (0.05  | ) | $ | (0.13 | ) |
| Pro forma                                                                                                              |   | $                                        | (0.06  | ) | $ | (0.13 | ) |

 

11

----

 

**ITEM 2. MANAGEMENT’S DISCUSSION****AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

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 months ended March 31, 2003 and 2002 and of our liquidity and capitalresources. You should read the following discussion in conjunction with ourconsolidated financial statements and the related notes included elsewhere inthis quarterly report as well as the other reports we file with the SEC.Amounts are in thousands, except for items otherwise indicated and per shareamounts.

 

**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 have 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 results have been affected by bankruptcies, credit problems in thetelecommunications industry, circuit disconnections and lengthening newbusiness closing cycles.  We haveprovided and currently provide services to several clients that are inbankruptcy. Although these services generally are entitled to priority paymentas post-bankruptcy services, we could experience collectibility issues withrespect to services we provide these clients. When collectibility of areceivable is not assured in the month service is provided, we recognizerevenue 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 38% and 50% oftotal revenues for the quarter ended March 31, 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 that begin anywhere from six totwelve months after we enter into the contract. At March 31, 2003, theseminimum purchase commitments totaled approximately $2.0 million per month.Our aggregate actual purchases under these contracts, which averagedapproximately $1.7 million per month for the quarter ended March 31, 2003,have not exceeded these minimum purchase commitments for certain vendors. Whenour actual 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 the 

 

12

----

 

development, expansion and maintenance of our Universal InformationExchange (“UIX”) database, and costs associated with sales, 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. AtMarch 31, 2003, we had an accumulated deficit of $277 million.

 
|                                                                                         |   | **For the  Three Months****Ended March 31,** |   |
|----------------------------------------------------------------------------------------------|--------|---------------------------------------------------|--------|
|                                                                                         |   | **2003**                                          |   | **2002** |   |
|                                                                                         |   |                                              |   |   |   |
| Net loss                                                                                     |   | $                                                 | (5,208 | ) | $ | (12,616 | ) |
|                                                                                         |   |                                              |   |   |   |
| Basic and diluted net loss per share                                                         |   | $                                                 | (0.05  | ) | $ | (0.13 | ) |
| Basic and diluted net loss per share  (excluding non-cash stock option compensation expense) |   | $                                                 | (0.05  | ) | $ | (0.13 | ) |
| Weighted average shares used in computing  net loss per share                                |   | 98,658                                            |   | 98,049 |   |

 

**Results of Operations**

 

**Comparison of Three Months Ended March 31,2003 to Three Months Ended March 31, 2002**

 

**Revenues**

 

Revenues decreased to $19.2 million for the quarter endedMarch 31, 2003 from $29.1 million for the quarter endedMarch 31, 2002. Revenues for the quarter ended March 31, 2003decreased $1.7 million from $20.9 million in the fourth quarter of2002. Substantially all of our revenues consisted of circuit revenues in eachof these quarters. The decrease in revenues for the quarter endedMarch 31, 2003 compared to the quarter ended March 31, 2002 and thequarter ended December 31, 2002 was attributable to circuit disconnections,mainly from customers in bankruptcy, and lengthened new business closingcycles.  We expect that continuednegative trends in the telecommunications industry will continue to adverselyaffect our revenues.

 

**Cost of Circuit Access**

 

Cost ofcircuit access decreased to $12.8 million for the quarter endedMarch 31, 2003 from $21.2 million for the quarter endedMarch 31, 2002. As a percentage of total revenues, cost of circuit accessdecreased to 67% for the quarter ended March 31, 2003 from 73% for thequarter ended March 31, 2002. The decrease in cost of circuit access in absolutedollars was primarily attributable to circuit disconnections.  The decrease in circuit cost as a percentageof total revenues for the quarter ended March 31, 2003 was primarilyattributable to the reversal of approximately $1 million in net accruedliabilities based on our determination that those amounts were no longer owedto suppliers and a large client bankruptcy in the quarter ended March 31, 2002where we incurred the cost of certain circuits but were unable to recognize theassociated revenue.

 

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

 

Operations and administration expenses (excluding stock plancompensation) decreased $6.7 million to $8.8 million in the quarterended March 31, 2003 from $15.5 million in the quarter endedMarch 31, 2002. This decrease was primarily attributable to significantdecreases in personnel and a decrease in bad debt expense.

 

The number of employees decreased to 112 at March 31, 2003 from229 at March 31, 2002. As a result, salaries, benefits, travel expenses andemployee related payroll taxes decreased $4.3 million for the quarter endedMarch 31, 2003 as compared to the quarter ended March 31, 2002. Weexpect headcount to remain relatively flat for the remainder of 2003.  We also incurred a charge of $1.6 million inthe quarter ended March 31, 2002 related to the costs of a third-party carrierassignment.

 

13

----

 

**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 periodof the related options.

 

Stock plan compensation expense totaled $389 thousand for the quarterended March 31, 2003 and $291 thousand for the quarter endedMarch 31, 2002.  The increase instock plan compensation expense was primarily due to an adjustment in the threemonths ended March 31, 2002 related to an option grant to anexecutive.  Stock plan compensationexpense in the three months ended March 31, 2002 would have beenapproximately $900 thousand greater than the expense recognized in the threemonths ended March 31, 2003 due mainly to the forfeiture of restrictedstock upon employee terminations in 2003.

 

There were 11,014,453 and 4,864,419 and stock options outstanding atMarch 31, 2003 and 2002, 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 $2.5 million in the first three months of 2003,compared to $5.0 million in the first three months of 2002, representing adecrease of $2.5 million. The decrease in depreciation is primarilyattributable to the impairment of the UTX equipment in 2002.

 

Amortization expense, which decreased to $0 in the three months endedMarch 31, 2003 from $63 thousand in the quarter ended March 31, 2002,relates to intangible assets acquired in connection with the purchases of StuffSoftware, Inc. in November 1999 which was subsequently sold for anominal amount in 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 will bepaid through 2003.

 

The following summarizes the significant components of therestructuring reserve at March 31, 2003:

 
|                                                       |   | **Balance at********December 31, 2002** |   | **Incurred Cash  Payments** |   | **Balance at  March 31, 2003** |   |
|------------------------------------------------------------|--------|-----------------------------------------|--------|-----------------------------|--------|--------------------------------|--------|
|                                                       |   |                                    |   |                        |   |                           |   |
| Facility exit costs, net of estimated sublease  recoveries |   | 5,014                                   |   | (181                        | )      | 4,833                          |   |
| Other                                                      |   | 33                                      |   | (13                         | )      | 20                             |   |
| Total                                                      |   | 5,047                                   |   | (194                        | )      | 4,853                          |   |

 

**Other Income (Expense)**

 

Other income decreased $286 thousand in the quarter endingMarch 31, 2003 to $92 thousand from $378 thousand in the quarter ending March 31,2002. The decrease in other income was primarily attributable to a reduction ininterest income, reflecting lower balances of cash and investments held by us.

 

**Income Taxes**

 

From ourinception through September 27, 1998, we elected to be treated as asubchapter S-corporation for income tax purposes. On September 27, 1998,we converted to a C-corporation. At December 31, 2002, we hadapproximately $196 million of federal and state net operating loss carryforwards. These carry forwards may be available to offset future taxableincome. Our federal and state net operating loss carry forwards expire atvarious dates beginning in 2018. Due to the uncertainty that we will generatefuture earnings sufficient to enable us to realize the benefit of these netoperating loss carry forwards, we have recorded a valuation allowance for thefull amount of our deferred tax asset. As a result, no income tax benefit hasbeen recorded in our statement of operations. We assess our deferred tax asseton an ongoing basis and adjust the 

 

14

----

 

valuation allowance based onthis assessment. Additionally, Section 382 of 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 usecertain net operating loss carry forwards. For example, the issuance of stock under the Purchase Agreement willlimit our ability to use certain net operating loss carry forwards.

 

**Liquidity and Capital Resources**

 

Our consolidated financial statements have been prepared assuming wewill continue as a going concern. However, we have determined that we need to raisecapital from external sources in order both to fund operations and to enhanceour existing IT tools to help achieve our sales objectives. Accordingly, we areaggressively pursuing both debt and equity capital raising opportunities toprovide sufficient funds to accomplish these goals. (Please refer toNote 2 in the Notes to Condensed Consolidated Financial Statements).

 

Based on our receipt of $5 million in April 2003 from the secured debtfinancing from CityNet and assuming the closing occurs under the PurchaseAgreement, our operational cash receipts remain stable, we achieve our salesobjectives and 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 that this debt and equity capitalraising will be sufficient to fund our operations until we become cash flowpositive and we can accomplish our long term liquidity goal to fund ourbusiness with internally generated cash. However, we may not be able to closethe Purchase Agreement, and even if we are able to raise additional capital byclosing the Purchase Agreement or otherwise, our operational and financialflexibility may be limited. The issuance of stock under the PurchaseAgreement will also be dilutive to our existing stockholders. Further,unexpected events adversely affecting our cash resources, including declines incollections due to client bankruptcies or deteriorating industry conditions,bankruptcy preference payment settlements, security deposit requirements,accelerated vendor terms, payments required to settle disputes or adverselydetermined litigation, may create a need for us to obtain more funding fromexternal sources in addition to the current capital raising activitiesdescribed above.

 

Our net financial position (cash and cash equivalents and short-terminvestments net of term loans and capital lease obligations) has declined from$12.4 million as of December 31, 2002 to $10.2 million as of March31, 2003. We continue to focus on minimizing our cash burn rate and preservingcash and cash equivalents.

 

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.

 

The following summarizes our contractual obligations at March 31,2003 and the effect such obligations are expected to have on our liquidity andcash flow in future periods.

 
|       |   | **Non-Cancelable  Operating Leases (incl.  restructured facilities)** |   | **Non-Cancelable  Purchase Commitments** |   | **Total** |   |
|------------|--------|-----------------------------------------------------------------------|--------|------------------------------------------|--------|-----------|--------|
| 2003       |   | $                                                                     | 6,480  |                                     | $      | 17,653    |   | $ | 24,133 |   |
| 2004       |   | 8,477                                                                 |   | 18,385                                   |   | 26,862    |   |
| 2005       |   | 7,633                                                                 |   | 7,000                                    |   | 14,633    |   |
| 2006       |   | 7,180                                                                 |   | 2,250                                    |   | 9,430     |   |
| 2007       |   | 7,417                                                                 |   | 0                                        |   | 7,417     |   |
| Thereafter |   | 30,022                                                                |   | 0                                        |   | 30,022    |   |
| Total      |   | $                                                                     | 67,209 |                                     | $      | 45,288    |   | $ | 112,497 |   |

 

 

Our principal uses of cash are to fund operating losses, working capitalrequirements and limited capital expenditures. Our capital expenditures will belimited to the enhancement of selected elements of our two primary serviceelements, information and facilities. For information, we will continue toenhance our IT tools to help achieve our sales objectives and we will continueto seek out new data resources relating to the provisioning of circuits. Forfacilities, we will continue to enhance our UTX and metropolitan connectivityfacilities so as to create a competitive advantage in terms of servicedelivery, cost and pricing. We expect to incur approximately an additional $150thousand in expenses in the second 

 

15

----

 

quarter of 2003 to complete the build-out of our Denver UTX.

 

Restricted cash was $2.1 million at March 31, 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.

 

•                  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,reducing our 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 $4.3 million for the threemonths ended March 31, 2003, compared to $12.5 million for the three monthsended March 31, 2002. The decrease in cash used by operating activities was dueprimarily to a decrease in rent expense after renegotiating lease contracts,reduced payroll costs and the movement of $1.8 million from restricted cash tounrestricted cash after the completion of the carrier and lease negotiationsdescribed above.

 

Cash provided by investing activities was $243 thousand for the threemonths ended March 31, 2003, compared to $9 million for the three months endedMarch 31, 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 2003.

 

Cash provided by financing activities was $1.8 million for thethree months ended March 31, 2003, compared to cash used by financingactivities of $551 thousand for the three months ended March 31, 2002. Theincrease was partially attributable to reduction of restricted cash as a resultof the carrier and lease negotiations described above.

 

16

----

 

**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.

 

**As a result of our incurring indebtedness, weare obligated to comply with financial and other covenants that could restrictour future operating activities.**

 

We have received a loan from CityNet in the principal amount of$5 million. The loan is secured by substantially all of our assets. If wedo not close the Purchase Agreement with CityNet, the entire unpaid principalbalance and all accrued but unpaid interest under the loan is payable onApril 6, 2004, unless otherwise accelerated under the promissory note. Theloan documents generally contain customary covenants including, among others,provisions:

 

•                                          relatingto the maintenance of substantially all of our assets and the assets of oursubsidiaries securing the debt;

 

•                                          restrictingour ability to pledge assets or create other liens on our assets or the assetsof our subsidiaries;

 

•                                          restrictingour ability to incur additional debt;

 

•                                          restrictingour ability to issue additional securities, make certain changes in ourmanagement, and settle material litigation without CityNet’s consent;

 

•                                          requiringus to use our commercially reasonable efforts to maintain the listing of ourcommon stock on the NASDAQ Small Cap Market;

 

•                                          restrictingour ability to adversely amend or modify, terminate, supplement, supersede orwaive any material rights under any material agreement to which we or oursubsidiaries are a party; and

 

•                                          restrictingour ability to make dividends, distributions and other payments.

 

These covenants may restrict our operations and ability to pursuepotentially advantageous business opportunities. Our failure to comply withthese covenants could also result in an event of default that, if not cured orwaived, could result in the acceleration of all or a substantial portion of thedebt.

 

Our ability to repay the indebtedness when due will depend upon ourability to generate sufficient revenue, or to renegotiate or replace theindebtedness with CityNet on terms and conditions favorable to us, if at all.There can be no assurance that we will generate sufficient revenue or be able torenegotiate or replace the indebtedness with CityNet on terms and conditionsfavorable to us. If we are unable to repay or replace the indebtedness whendue, CityNet will be permitted to exercise its rights under the securityagreement securing the indebtedness and take possession of substantially all ofour assets and dispose of such assets to satisfy the indebtedness.

 

**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.**

 

We have received secured debt financing from CityNet of$5 million. If we do not close the Purchase Agreement with CityNet we mayrequire additional financing in the future. Additionally, even if we completethe stock sale to CityNet, we may need additional financing in the future tomeet our operating needs. There can be no assurance that additional financingwill be available to us on terms and conditions favorable to us, if at all. Ifwe are unable to obtain additional financing when needed or on acceptableterms, we may have to curtail our operations, delay or abandon our businessplans or take further actions to strengthen our cash position, which couldmaterially adversely affect our ability to continue our operations. Moreover,without adequate financing, potential customers who otherwise would select ourservices to purchase 

 

17

----

 

may decide to buy from other vendors whom the customers perceive tohave greater financial stability.

 

**The completion of the stock sale to CityNetis subject to fulfillment of a variety of conditions and contingenciesincluding, among other things, our satisfying certain financial covenants andobtaining approval of our stockholders.**

 

Completion ofthe stock sale to CityNet is conditioned upon a variety of conditions andcontingencies including, among other things, there being no event or series ofevents having a material adverse effect on our business, operations, conditionor future prospects of our business as currently being conducted by us and oursubsidiaries, our shareholders approving the stock sale and the transactionscontemplated by the Purchase Agreement, and our satisfying certain cash andcash equivalent and net working capital thresholds at the closing. If any ofthese conditions is not satisfied, CityNet may elect not to consummate thetransactions contemplated by the stock purchase agreement. Several of theseconditions are not in our control. If the Purchase Agreement does not close, wemay need additional financing to continue our business plans and operations.There can be no assurance that such financing is available on terms andconditions satisfactory to us, if at all.

 

**After consummation of the transactionscontemplated by the Purchase Agreement, CityNet will own a majority of ouroutstanding common stock on a fully-diluted basis. This may discourage thirdparty offers to acquire us.**

 

After completion of the stock sale to CityNet, CityNet will havesignificant control over our operations. CityNet will own approximately 55% ofour outstanding common stock on a fully-diluted basis (excluding those optionsand warrants outstanding at the closing of the Purchase Agreement having anexercise price above $1.00). In addition, upon completion of the stock sale,CityNet will have the power to designate five out of nine of the members of ourboard of directors, including the chairman. The extent of CityNet’s controlover us may have the effect of discouraging third party offers to acquire us.

 

**Consummation of the transactions contemplatedby the Purchase Agreement will result in significant dilution of ourstockholders’ equity interests.**

 

Upon consummation of the stock sale under the Purchase Agreement, the equityinterests of our existing common stockholders, as a percentage of the totalnumber of the outstanding shares of our common stock, will be significantlydiluted. If the stock sale is consummated, as of the date of the closing of thestock sale our existing holders of common stock will own approximately 45% ofour then-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). If, in the future, we need to issueadditional shares of common stock to fund our business, our common stockholderswould be further diluted.

 

**Our continued NASDAQ Small Cap Market listingis not assured, which would reduce the liquidity in the market for our commonstock 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 May 13, 2003, the closing price of ourCommon Stock on the NASDAQ Small Cap Market was $0.24. We have untilJune 3, 2003 to demonstrate compliance with the $1.00 per sharerequirement although the NASDAQ Small Cap Market may extend that deadline by90 days if we meet certain criteria. On May 13, 2003, NASDAQ requested additional documents andinformation to assist in their review of whether the transactions contemplatedby the Purchase Agreement may result in a change of control under NASDAQrules.  If NASDAQ determines that thetransactions contemplated by the Purchase Agreement will result in a change ofcontrol meeting certain criteria, then we would be required to submit an intiallisting application and to meet all of the initial inclusion criteria of theNASDAQ SmallCap Market. If we are required to satisfy these initial inclusioncriteria, then among other things we would be required to demonstratecompliance with the $4.00 per share minimum bid price requirement.  Our board of directors may considerauthorizing a reverse stock split of our common stock in an effort to increasethe market price of our common stock. There can be no assurance, however, thatthe market price per share of our common stock after a reverse stock split willincrease or if it does increase that it will not decline after the reversestock split. Furthermore, the liquidity of our common stock could be adverselyaffected by the reduced number of shares that would be outstanding after areverse stock split. Accordingly, we cannot predict whether we will be able tomaintain compliance with the minimum bid requirement or NASDAQ’s other requirementsfor continued listing.  In addition, ifwe are required to satisfy the initial inclusion criteria of the NASDAQSmallCap Market, including the $4.00 per share minimum bid price requirement,we cannot predict whether we will be able to do so.  If we are de-listed from the NASDAQ Small Cap Market, our commonstock would trade, if it traded at all, in the over-the-counter market, whichis viewed by most investors as a less desirable, less liquid marketplace. Amongother things, this would place increased regulatory burden upon brokers, makingthem less likely to make a market in our stock. Loss of our NASDAQ Small CapMarket status would likely make it more difficult for us to raise capital inthe future.

 

Additionally, if we lose our NASDAQ Small Cap Market statusstockholders may find it more difficult to dispose of, or to obtain accuratequotations as to the price of our common stock thereby reducing the liquidityof our stock, making it difficult for a stockholder to buy or sell our stock atcompetitive market prices, or at all, and we may lose support from 

 

18

----

 

institutional investors, brokerage firms and market makers thatcurrently buy and sell our stock and provide information to investors about us.Delisting could also cause the price of our stock to decrease further.

 

Under the terms of the Purchase Agreement with CityNet, we must use ourcommercially reasonable efforts to maintain our listing on the NASDAQ Small CapMarket including, but not limited to authorizing and consummating a reversestock split of our common stock. If we do not use our commercially reasonableefforts to maintain the listing of our common stock on the NASDAQ Small CapMarket, CityNet may assert that we are in breach of the Purchase Agreement andfail to consummate the stock sale transaction.

 

**By entering into the Purchase Agreement withCityNet our ability to enter into an alternative transaction may be limited.**

 

By entering into the Purchase Agreement with CityNet our ability toenter into an alternative transaction may be limited. Under the PurchaseAgreement, if our board of directors determines an alternative transaction ismore favorable to our stockholders and/or creditors than the PurchaseAgreement, we are required to pay CityNet certain termination fees of up to$3 million. Because we are required to pay CityNet these fees, our abilityto accept and enter into an alternative transaction or a transaction at asubstantially increased valuation may be significantly limited.

 

**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.Several of our significant clients have filed for reorganization or liquidationunder the bankruptcy laws. As a result of the decline in credit quality andthese bankruptcies, some of our clients may have inadequate financial resourcesto meet 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 previouslyprovided to the client. Certain current or former clients who are bankrupt havefiled and additional clients might file preference actions to try to recoveramounts that they previously paid us. These events would harm our cash flow,results of operations and financial condition, as would future deterioration inmarket conditions in our industry or in the creditworthiness of our significantclients or a significant number of smaller clients.

 

In addition, some of our carrier suppliers, including WorldCom, mayhave inadequate financial resources to provide reliable service or to meettheir other obligations to us. If a carrier supplier is unable to meet itsobligations to us, we could be required to purchase replacement services onless favorable terms or experience disruptions in service, which could impairour ability to retain or attract clients. Disruptions in service could requireus to issue outage credits to our clients, which would reduce our revenue andgross margins.

 

**We have incurred substantial losses since ourinception, and if we fail to reduce our costs and increase our revenues, wewill be unable to achieve and maintain profitability and may be unable tocontinue our operations.**

 

We have incurred significant losses since inception and expect tocontinue to incur losses in the future. As of March 31, 2003, we had anaccumulated deficit of $277 million. Our revenues have decreased to$19.2 million in the three months ended March 31, 2003 from $29.1 millionin the three months ended March 31, 2002. We cannot be certain that we will besuccessful in reducing our costs, that we will be able to increase our revenuesor that we will achieve sufficient revenues to become profitable. We expect tocontinue to incur expenses in order to:

 

•                                          Evaluatesales and marketing activities that may help us increase market acceptance;

 

•                                          Enhanceour UIX database and develop other intellectual property; and

 

19

----

 

•                                          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 higher revenues, we may continue to incur operating lossesand net losses and may be unable to continue our operations.

 

**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. These periods of growth and headcountreductions and potential growth in future operations will continue to place asignificant strain on our management systems and resources. We cannot be surethat our reduced workforce will be sufficient for us to identify and takeadvantage of market opportunities and manage multiple relationships withvarious clients, suppliers and other third parties. If our operations andheadcount grow in the future, we expect that we will need to improve ourfinancial and managerial controls, reporting systems and procedures, andexpand, train and manage our workforce, and we cannot be sure that will be ableto 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 March 31, 2003, we had $16.7 million in openbilling disputes with carriers.

 

**Our limited operating history makesforecasting difficult.**

 

We have a limited operating history and, therefore, limited meaningfulhistorical financial data upon which to base our planned operating expenses andto accurately predict trends in our business. Accordingly, we are subject toall of the risks that are associated with companies in an evolving industry andin an early stage of development, including:

 

•                                          Undercapitalization;

 

•                                          Cashshortages;

 

•                                          Controllingour expenses and cash expenditures;

 

•                                          Theunproven nature of our business model;

 

•                                          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;

 

20

----

 

•                                          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 withcommunications transport suppliers for the supply and installation ofcommunications network capacity. These agreements may generally provide forminimum revenue commitments from us, which we must negotiate based on forecastsof our future network capacity requirements. At March 31, 2003, these minimumpurchase commitments totaled approximately $2.0 million per month. If wefail to forecast our network capacity requirements accurately or fail toaccurately forecast other aspects of our business, it will be difficult for usto meet these minimum purchase commitments or to become profitable. Inaddition, it may be difficult for us to meet these minimum purchase commitmentsif our clients refuse to use capacity provided by a supplier that has filed forbankruptcy protection or is otherwise financially distressed.

 

**We have an unproven business model, and wecannot be sure that we can profitably manage and market our services toclients.**

 

Our business strategy is unproven. To be successful, we must convinceprospective clients to entrust their network capacity data and transportrequirements to a company without a long and proven track record. We are notaware of any companies that have a directly comparable business, and we cannotbe sure that clients will widely accept our services.

 

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.

 

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 arecurrently in bankruptcy or that have emerged from bankruptcy. Managementbelieves that these lawsuits are without merit, and we intend to defend theseactions vigorously or to settle these lawsuits. Because of the complexity ofcertain of the transactions underlying these lawsuits, as well as the inherentuncertainty of litigation, however, it is possible that the outcome of one ormore of these cases may be adverse to us. In addition, the resources requiredto defend these cases, including the management time and attention required toadequately defend our position, and the costs of potential settlements, or anyjudgment award may adversely affect our results of operations and financialposition.

 

21

----

 

**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 effect 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.

 

**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 hireadditional personnel.**

 

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 recently hired some of our keyemployees. Because some members of our management team have worked togetheronly for a short period of time, we need to integrate these officers into ouroperations.

 

We may need to hire additional personnel in the future, and we believe oursuccess depends, in large part, upon our ability to attract and retain our keyemployees. Attracting and retaining key employees is becoming more difficultdue to recent negative publicity regarding our industry, our low stock marketcapitalization, our limited financial resources and our recent workforcereductions. The loss of the services of any of our key employees, the inabilityto attract or retain qualified personnel in the future, or delays in hiringrequired personnel could limit our ability to generate revenues and to operateour business.

 

**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 circuitsand to provide ongoing dedicated line circuit access depends upon theinformation we collect from our transport suppliers regarding their networks,which we include in our UIX database. Our suppliers are not obligated toprovide us with this information and could decide to stop providing thisinformation to us at any time. Moreover, we cannot be certain that theinformation that our suppliers share with us is accurate or current. If wecannot continue to maintain and expand our UIX database as planned, we may beunable to increase our revenues or to cost-effectively facilitate the supplyingof the circuits.

 

**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.

 

22

----

 

**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;

 

•                                          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 presentincumbent local exchange carriers with an opportunity to subsidize servicesthat compete with our services with revenues generated from non-competitiveservices. This would allow incumbent local exchange carriers to offercompetitive services at lower prices. Existing laws also restrict the RegionalBell Operating Companies from fully competing with us in the market forinterstate and international long-distance telecommunications services, butalso permit the FCC to lessen or remove some restrictions. Recently the Bellcompanies have received FCC permission to offer long-distance services tocustomers in a number of states, and the FCC is expected to consider severaladditional requests for this relief in the near future. These FCC decisionsunder existing law, or future amendments to Federal telecommunications lawspermitting the regional Bell operating companies to compete fully with us inthis market, may result in a reduction to our revenues from these services ifthese companies are able to attract substantial business from 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.

 

23

----

 

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.

 

**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 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 ordecline moderately in future periods. Our operating expenses are largely basedon anticipated revenue trends, and a high percentage of our expenses are, andwill continue to be, fixed in the short term due in large part to maintenanceof our UTX facilities. As a result, fluctuations in our revenue for the reasonsset forth above, or for any other reason, could cause significant variations inour operating 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 

 

24

----

 

the expectations of public market analysts and investors. In thatevent, 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:

 

•                                          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;

 

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

 

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

 

•                                          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.

 

25

----

 

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

 

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

 

**We depend on several large 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 March 31, 2003, our three largest clients accounted for approximately 38%of our total revenues. We have a number of significant contracts with these clientsunder which we derive a significant amount of our revenues. These contractsexpire on various dates between now and March 2005. If, through abankruptcy 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.

 

**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 much slower thanexpected. 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 in compliance with SFAS No. 144. Our ability to generate revenuesfrom UTX services will suffer if the market for these services fails to developor 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 corresponding revenueand 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.

 

26

----

 

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 assure you that the FCC, state commissions orforeign authorities will grant us required authority (or do so in a timelymanner), or refrain from taking action against us if we are found to haveviolated any applicable requirements. If authority is not obtained or if ourschedules of prices, terms and conditions are not filed, or are not updated, orotherwise do not fully comply with the rules of the FCC or state or foreignregulatory agencies, third parties or regulators could challenge our ability tooffer our services or attempt to impose fines. Such challenges or fines couldcause us to incur substantial 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 completing the CityNettransaction or engaging in certain other types of transactions, including somemergers, acquisitions of other regulated companies, sales of all or substantialparts of our business, issuances of stock, and incurrence of debt obligations.The particular types of transactions that require approval differ in eachjurisdiction. If we cannot obtain the required approvals, or if we encountersubstantial delays in obtaining them, we may not be able to enter intotransactions on favorable terms and our flexibility in operating our businesswill be limited. If our flexibility is limited, we may not be able to optimizeour operating results.

 

**We may incur operational and managementinefficiencies if we acquire new businesses or technologies.**

 

To further our strategy, we may seek to acquire businesses andtechnologies that we believe will complement our existing business. Any suchacquisitions would likely involve some or all of the following risks:

 

•                                          Difficultyof assimilating acquired operations and personnel and information systems;

 

27

----

 

•                                          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 notsuccessful, we may not be able to increase market awareness or sales of our productsand services, which may prevent us from achieving and maintainingprofitability.

 

**Our efforts to develop new service offeringsmay not be successful.**

 

We may choose to invest significant sales and management resources todeveloping and selling new service offerings. There may be significantout-of-pocket expenses associated with these investments, which in turn wouldreduce resources available to develop our traditional lines of business. Thesuccess of potential new service offerings is uncertain and would depend on ourability to successfully coordinate our internal financial, engineering andsales personnel and on many factors outside of our control, including thewillingness of our clients to pay for these offerings and the willingness ofour vendors to provide the goods and services that these new service offeringsrequire. If we are unsuccessful in developing and selling our new serviceofferings, our growth could be adversely affected.

 

**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.

 

**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.

 

28

----

 

**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 inhibit competitorsfrom replicating our business. We rely on a combination of copyright,trademark, service mark and trade secret laws and contractual restrictions toestablish and protect our intellectual property. We have applied forregistration of certain of our service marks in the United States and in othercountries, and have obtained registrations for certain of our service marks inthe 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.

 

**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. Sales of a substantial number of shares of ourcommon stock or market expectations that these sales may occur could cause ourstock price to fall. In addition, the sale of these shares could impair ourability to raise necessary capital through the issuance of additional commonstock.

 

29

----

 

**ITEM3. QUANTITATIVE****AND QUALITATIVE DISCLOSURES 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 March 31, 2003,all of our investments were in cash and cash equivalents.

 

**Interest Rate Sensitivity**

 

We maintain our cash equivalents and short-term investments primarilyin a portfolio comprised of commercial paper, money market funds, andinvestment grade debt securities. As of March 31, 2003, all of our investmentshad maturities of less than six months. Accordingly, we do not believe that ourinvestments have significant exposure to interest rate risk.

 

**Exchange Rate Sensitivity**

 

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

 

**ITEM4. CONTROLS AND****PROCEDURES**

 

Our management, including our Chief Executive Officer and ChiefFinancial Officer, carried out an evaluation of our disclosure controls andprocedures (as defined in Rule 15d-14(c) under the Securities Exchange Actof 1934, as amended) within 90 days of the filing date of this report.Based on that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that we had sufficient procedures for recording, processing,summarizing, and reporting information that is required to be disclosed in ourreports under the Securities Exchange Act of 1934, as amended. Our controlswere designed by our management.

 

There have not been any significant changes to our internal controls orin other factors that could significantly affect these controls subsequent tothe date of this evaluation.

 

30

----

 

**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. In July 2002, the defendants in theconsolidated actions filed motions to dismiss all of the cases in thelitigation, including the case involving us. On February 19, 2003, theCourt ruled on the motions to dismiss. The motions to dismiss the claims underthe Securities Act were denied as to virtually all of the defendants in theconsolidated cases, including us. The Court also denied our motion to dismissthe claims against us under the Exchange Act. The former directors and officersnamed in the complaint signed a tolling agreement and were dismissed from theaction without prejudice on October 9, 2002. We believe that theallegations against us are without merit.

 

In February 2000, a complaint was filed in the Superior Court ofCalifornia, County of Santa Clara, against us, certain of our directors andofficers and other parties by Point West Ventures, LP (“Point West”),previously known as Fourteen Hill Capital, LP and certain other shareholders inVaultline Incorporated. The claim arises out of a letter of intent that weentered into in December 1998 relating to our potential acquisition ofVaultline. The claimants contend that a mutual settlement agreement executed bythe president of Vaultline was unauthorized and are seeking damages in excessof $10 million. We believe that the allegations against us are without merit.On May 4, 2000, the Superior Court granted our petition to compelarbitration and to stay proceedings pending arbitration. No arbitration demandhas ever been made against us in this matter. In February 2002, Point Westwas placed into receivership by the United States District Court. The UnitedStates Small Business Administration was appointed as Receiver. In January 2003,certain of the plaintiffs’ claims were voluntarily dismissed without prejudice.

 

Level 3 Communications, LLC has filed an action in the UnitedStates District Court for the Eastern District of Virginia, and the action hasbeen 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 certain telecommunicationservices provided under contracts between Level 3 and TA Acquisitionand for termination charges under those contracts. Level 3 seeks adeclaration establishing the defendants’ liability, if any, under the contractsand a judgment in those amounts against the defendants, including us.Level 3 has not specified the amount of damages it seeks. We have answeredLevel 3’s complaint and denied any liability. No trial date in the actionhas been set. We believe that the allegations against us are without merit.

 

We have been dismissed from an action that QwestCommunications Corp. filed in the United States District Court for theEastern District of Virginia, and which was referred to a bankruptcy judge.Qwest’s amended complaint named as defendants the Company and three bankruptentities (Aleron U.S., Inc., Aleron, Inc., and TA AcquisitionCorp.). In its amended complaint, Qwest (a) claims that it is owed for certaintelecommunications services provided under contracts between Qwest and TA Acquisitionand (b) requests a declaration that defendants are jointly and severally liablefor approximately $3.5 million under those contracts. In March 2003we entered into a settlement agreement with Qwest relating to the claims Qwestbrought against us. Under the settlement agreement, in March and April 2003, wepaid Qwest a total of $750 thousand to settle the litigation. We may use up to$250 thousand of this amount as a prepayment of certain services. On May 9,2003, Qwest filed a motion to dismiss us from the suit.  Qwest's motion is scheduled to be heard bythe bankruptcy court on May 27, 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 Acquisition statedthat it “may have substantial claims against Universal Access” and providedthat the value of those claims was unknown. We believe that the claims againstus are 

 

31

----

 

without merit.

 

We and certain of our former directors and officers are defendants inan action pending in the United States District Court for the Eastern Districtof Texas, Frandsen v. Universal Access, Inc., et al., No. 9:02CV103(E.D. Tex.). The complaint alleged causes of action for securities fraud inconnection with public disclosures made by our officers between 2000 and 2002.We believe that the allegations against us are without merit. On March 5,2003, the court granted a motion to dismiss the complaint and has permitted plaintiffsthe opportunity to replead the complaint with respect to a minority of thealleged misstatements. On March 20, 2003, plaintiffs filed a motion forreconsideration of, and to vacate, the court’s March 5 order. On April 10,2003, the court denied this motion. On April 21, 2003, plaintiffs filed asecond motion for reconsideration of, and to vacate, the court’s March 5order. Plaintiffs have not specified the amount of damages they seek.

 

In November 2002, a placement agent that we engaged in 2001 fileda complaint against us in the Central District of California claiming that theplacement agent was entitled to certain amounts in connection with a creditfacility that we purportedly had entered into. We have settled the matter andthe suit was dismissed in January 2003.

 

In April 2003, 360networks (USA), Inc. filed a complaint against us inthe United States District Court for the Southern District of New York. In itscomplaint, 360 requests 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 betweenthe amount purchased and the specified minimum annual amount. In addition, 360seeks 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.We believe that 360's claims are without merit. We have answered 360'scomplaint and asserted counterclaims against 360. In our counterclaims, werequest that the court grant judgment against 360, declare the agreementbetween 360 and us terminated, and award us our costs and fees in connectionwith this lawsuit, as permitted by the agreement.

 

**ITEM 2.CHANGES****INSECURITIES 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. andFleetBoston Robertson Stephens Inc. Pursuant to the RegistrationStatement, 12,650,000 shares of our Common Stock were sold. After deductingapproximately $12.4 million in underwriting discounts and commissions andapproximately $2.3 million in other expenses related to the offering, our netproceeds were approximately $162.4 million. We invested the proceeds from theoffering in short-term investment grade, interest-bearing securities and intendto use the proceeds for working capital and general corporate purposes, includingsales channel development and other corporate purposes. In addition, we may usea portion 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****ANDREPORTS 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)                                                                 |

 

32

----

 
| 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)                                                                                                                                                      |
| 10.17† |   | Amended and Restated Master Service Agreement with WilTel  Communications, LLC, formerly known as Williams Communications, LLC dated  March 14, 2003.(8)                                                                                                                 |
| 10.27       |   | Summary of Terms for Lance Boxer Agreement dated February 28,  2003.(8)                                                                                                                                                                                                       |
| 10.28       |   | Notice of Stock Option Grant to Lance Boxer dated March 19, 2003.(8)                                                                                                                                                                                                          |
| 10.29       |   | Nonstatutory Stock Option Agreement with Lance Boxer dated March 19,  2003.(8)                                                                                                                                                                                                |
| 10.31       |   | Promissory 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)                                                                                                                                                                               |

 

----

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

 

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

 

(3)                                  Filed with theCompany’s Quarterly Report on Form 10-Q for the period 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)           Filedwith the Company’s Registration Statement on Form 8-A, filed with theSecurities and Exchange Commission on August 9, 2000.

 

(8)           Filed with theCompany’s Annual Report on Form 10-K for the year ended December 31, 2002.

 

†                                          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:

 

OnJanuary 3, 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 that PatrickC. Shutt had resigned from our Board of Directors effective December 31, 2002.

 

On January 13, 2003, we filed with the SEC a report on Form 8-K, whichwas furnished pursuant to Item 5 of Form 8-K and which announced that we hadappointed Les W. Hankinson as our Senior Vice President, Sales.

 

33

----

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   |              | Universal Access Global Holdings Inc.  (Registrant) |
|--------|-------------------|-----------------------------------------------------|
|   |              |                                                |
| Date:  | May 15, 2003 | By:                                                 | /s/ Randall R. Lay |   |
|   |              |                                                | Randall R. Lay |
|   |              |                                                | *Chief Financial Officer  (Principal Financial and Accounting Officer)* |

 

34

----

 

***CERTIFICATIONS***

 

I, Lance B. Boxer, certify that:

 

1.             I have reviewedthis quarterly report on Form 10-Q of Universal Access GlobalHoldings Inc. (the “Registrant”);

 

2.             Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Registrant as of, andfor, the periods presented in this quarterly report;

 

4.             The Registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the Registrant and we have:

 

a)             designedsuch disclosure controls and procedures to ensure that material informationrelating to the Registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)            evaluatedthe effectiveness of the Registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report(the “Evaluation Date”); and

 

c)             presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.             The Registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the Registrant’s auditors and the audit committee ofRegistrant’s board of directors (or persons performing the equivalentfunction):

 

a)             allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the Registrant’s ability to record, process, summarizeand report financial data and have identified for the Registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)            anyfraud, whether or not material, that involves management or other employees whohave a significant role in the Registrant’s internal controls; and

 

6.             The Registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date: May 15, 2003 |   |
|--------------------|--------|
|               |   | /s/ Lance B.  Boxer |   |
|               |   | Lance B. Boxer |   |
|               |   | *President and Chief Executive Officer* |   |

 

35

----

 

***CERTIFICATIONS***

 

I, Randall R. Lay, certify that:

 

1.             I have reviewedthis quarterly report on Form 10-Q of Universal Access Global Holdings Inc.(the “Registrant”);

 

2.             Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the Registrant as of, andfor, the periods presented in this quarterly report;

 

4.             The Registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the Registrant and we have:

 

a)             designedsuch disclosure controls and procedures to ensure that material informationrelating to the Registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)            evaluatedthe effectiveness of the Registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report(the “Evaluation Date”); and

 

c)             presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.             The Registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the Registrant’s auditors and the audit committee ofRegistrant’s board of directors (or persons performing the equivalentfunction):

 

a)             allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the Registrant’s ability to record, process, summarizeand report financial data and have identified for the Registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)            anyfraud, whether or not material, that involves management or other employees whohave a significant role in the Registrant’s internal controls; and

 

6.             The Registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date: May 15, 2003 |   |
|--------------------|--------|
|               |   | /s/ Randall R.  Lay |   |
|               |   | Randall R. Lay |   |
|               |   | *Chief Financial Officer (Principal  Financial and  Accounting Officer)* |   |

 

36

----