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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

For the fiscal year ended December 31, 2000

OR

For the transition period from                to                

Commission File Number: 000-28-559

Universal Access, Inc.
(Exact name of registrant as specified in its charter)

(312) 660-5000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock

    Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /x/  No / /

    Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. / /

    The aggregate market value of common stock held by non-affiliates of the registrant as of February 28, 2001 was $317,966,752.

    The number of shares outstanding of the issuer's common stock, par value $0.01, as of February 28, 2001 was 91,466,282 shares.

DOCUMENTS INCORPORATED BY REFERENCE

    Portions of the registrant's definitive proxy statement to be filed on or before April 30, 2001 and to be delivered to shareholders in connection with the 2000 Annual Meeting of Shareholders are incorporated by reference into Part III.

UNIVERSAL ACCESS, INC.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS

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PART I

    This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These forward-looking statements involve a number of risks and uncertainties, including those identified in the section of this Form 10-K entitled "Factors That May Affect Future Operating Results," which may cause actual results to differ materially from those discussed in the forward-looking statements. The forward-looking statements in this Form 10-K are identified by words such as "believes," "anticipates," "expects," "intends," "may," "will" and other similar expressions. However, these words are not the only way we identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements which could occur after the filing of this Form 10-K. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the SEC, that attempt to advise you of the risks and factors that may affect our business.

ITEM 1. BUSINESS

Overview

    We are a provider of network infrastructure services and facilitate the buying and selling of capacity on communications networks. We facilitate the process through which users of communications circuits obtain circuits dedicated for their specific use from multiple vendors. We refer to this process as "provisioning a circuit." We also facilitate the installation and servicing of these dedicated circuits. Our clients are communications service providers, such as telecommunications service providers, internet service providers and application service providers, who buy capacity on communications circuits for use by their customers. We obtain the communications capacity from many different transport suppliers, who own the communications infrastructure over which information is transmitted.

    Through our services, we allow our clients to outsource the work of obtaining, installing and provisioning their communications infrastructure within a fragmented network services market. Our solution provides significant time, effort and cost savings to our clients who would otherwise be forced to independently analyze the capacity, availability and pricing of circuits from multiple vendors to construct and maintain circuits. As an independent intermediary, we have been able to collect network information from multiple transport suppliers in our Universal Information Exchange (UIX) databases, which include several proprietary, interconnected databases containing pricing, capacity, availability, location and interconnection information from over 75 transport suppliers. Using this information, we efficiently and cost effectively provide our clients circuit solutions across multiple, geographically dispersed vendor networks.

    We also maintain a network management service organization through which we provide a single point of contact for 24-hour-a-day, seven-day-a-week network monitoring, maintenance and restoration across multiple vendor networks. Our organization interfaces with the network management organizations of our transport suppliers, which enables us to identify and isolate circuit outages and facilitate their restoration throughout each segment of dedicated circuits. Without these network management services a client would have to contact multiple vendors to determine the source of a circuit outage and to restore the circuit.

    Our Universal Transport Exchange (UTX) facilities are physical sites where transport capacity suppliers and our clients lease space to locate communications equipment and interconnect with the networks of transport suppliers. Our UTX facilities enable our clients to more easily extend the geographic reach of their networks by using a cross connect circuit connection within our UTX facility rather than a local loop connection. With access to a greater number of circuit routes, our clients are

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better positioned to offer a broader range of options to their customers. This approach directly supports our primary business of providing circuit access. We expect that our UTX facilities will increase our ability to provision circuits and will thereby increase circuit access revenues and related profit margins.

    To date, we have derived substantially all of our revenues from providing ongoing, dedicated circuit access, generating our first revenues from this source in the quarter ended December 31, 1997.

Industry Background and Market Opportunity

    We believe that the increased reliance by businesses on data-intensive applications, including data communications, electronic commerce, video and graphics, will continue to support substantial global demand for additional network infrastructure and underlying communications capacity. In addition, we believe that the resulting demand for network capacity to transmit data will accelerate as communications service providers increasingly offer high speed data access to businesses.

    Service providers currently rely on multiple suppliers of communications infrastructure. These transport suppliers focus on one or more geographically dispersed network segments, including local segments, intercity segments, interbuilding segments, and segments connecting the networks of multiple providers. The ability of a service provider to obtain dedicated circuits and infrastructure services quickly and efficiently is becoming increasingly difficult as the number of transport suppliers increases.

    The increase in the number of competing transport suppliers and service providers is attributed to the deregulation of the telecommunications industry beginning with the 1984 divestiture of AT&T and continuing with the Telecommunications Act of 1996. Similar deregulation is occurring in international markets. The increase in the number of transport suppliers and service providers competing in and across different geographically dispersed network segments has impeded the development of seamless communications networks.

    Transport suppliers have employed a variety of business strategies to compete, including building or acquiring additional network infrastructure, entering into interconnection agreements, reselling or exchanging network capacity and offering new services. As a result, multiple networks have developed serving various geographic regions and focusing on different network segments. In this competitive, multiple vendor market, we believe that to date, transport suppliers have not been able to effectively support dedicated circuit connections on their own networks, or through efficient interconnection with other suppliers, to fully meet their customers' requirements.

    Compounding the problems associated with a fragmented, multiple-vendor market, transport suppliers and service providers have placed a higher priority on obtaining customers to build market share rather than on interconnecting their independently built networks. In addition, it is difficult to connect networks due to the fact that transport suppliers and service providers do not have access to pricing, capacity, availability, and location information for the networks of other suppliers. Because transport suppliers compete with each other, they have little incentive to share this information or to locate their equipment within competitors' facilities in order to connect their networks.

Our Strategy

    Our objective is to facilitate the creation of a seamlessly connected, global communications network by improving the overall efficiency of the market for network capacity and infrastructure services. To achieve this objective, we intend to enhance the Internet functionality of our UIX databases, continue to expand and populate our UIX databases, continue to develop UTX facilities in the United States and internationally, optimize circuit configurations to gain network and economic efficiencies, expand internationally and enhance our operating and technological capabilities through strategic acquisitions and partnerships.

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Services

    We offer our clients several groups of services, the UniversalNet suite of services that are specifically designed for clients including telecommunications service providers, ISPs and ASPs. We also provide customized solutions. We deliver our services using our UIX databases, our UTX facilities and our client support services.

Universal Information Exchange (UIX) Databases

    Our UIX databases include several proprietary, interconnected databases containing capacity, availability, physical location and pricing information from over 75 transport suppliers and over 14 million data elements. We plan to continue to gather data elements from our existing transport suppliers, including information about pricing, capacity, availability, location and interconnection information and other network elements for inclusion in our UIX databases. We also plan to add information to our UIX on the networks of domestic and international transport suppliers from whom we do not currently gather information. We have begun this initiative with the 2000 acquisition of Tri-Quad Enterprises and its LATTIS database. The acquisition represents a strategic transaction aimed at transforming our UIX database into the industry's most comprehensive global database of pricing discovery and circuit capacity. We believe that our UIX databases provide us with a competitive advantage and will become more difficult for a competitor to replicate as we continue to enhance the data and functionality of our UIX databases over time.

    We use our UIX databases to provide our clients with a single point of contact for the supply and installation of circuits from multiple vendors, as well as circuit access and network monitoring. We continue to develop and improve the infrastructure to provide an enhanced Internet interface for our services that will enable our clients to obtain price quotes, order circuits and receive dedicated monitoring and support services, all in real time. We believe these initiatives will enhance the efficiency and reliability of our web-based services and will enable us to offer a more complete, electronic commerce solution to our clients.

    We believe our UIX databases enable us to provide, more efficiently and cost-effectively than traditional communications transport suppliers, a comprehensive range of services including:

    Quoting.  Our quoting system can be accessed over the Internet and enables clients to request and receive quotes for circuit configuration, supply and installation.

    Order Processing.  Clients can place orders online by directly entering information about their desired circuit, including capacity requirement, physical location, contract terms, technical specifications and special instructions.

    Supply and Installation of Circuits.  Our UIX databases contain information on the processes by which over 75 transport suppliers supply and install circuits. By using this information we are able to work with the personnel and field technicians of multiple vendors to provide dedicated circuits to our clients. As part of our service we can provide our clients with a graphical design layout record showing critical network points and a regular status update.

    Circuit Access.  We provide our clients with ongoing dedicated circuit access over the networks of multiple vendors through long term contracts, with terms typically ranging from 12 to 60 months, and averaging 23 months at December 31, 2000. Our clients pay us for this ongoing circuit access on a monthly recurring basis for the life of the contract. A circuit can be delivered at different speeds and capacities. We currently are able to provide our clients circuit access at data rates ranging from DS-1 circuits carrying data at a rate of 1.536 million bits per second to OC-192 circuits carrying data at a rate of 192 OC-1 signals or 9.952 billion bits per second.

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    Billing.  We compile the costs of multiple vendor circuit segments and present our clients with a single monthly invoice containing a single line item for each service. This eliminates the need for our clients to process multiple vendor bills and reduces our clients' processing time and costs.

    Network Management Services.  We use our network operations center to provide 24-hour-a-day, seven-day-a-week network management services, offering a single point of contact for network monitoring, maintenance and restoration across multiple vendor networks. Through this single point of contact, we generate one client reference record of a problem, which we use to provide network management across multiple vendor networks and to provide our clients with reporting and trouble resolution. This single client reference record increases response time and decreases down time in a circuit outage. Our organization interacts with the network management organizations of our transport suppliers, enabling us to identify and isolate circuit outages and to facilitate their restoration throughout each segment of a circuit. Without these services a client would have to contact multiple vendors to determine the source of a circuit outage and to restore the circuit.

Universal Transport Exchange (UTX)

    Our UTX facilities provide interconnection points between multiple network service providers and transport suppliers. Network service providers and transport suppliers lease space in our facilities to place network equipment that may be connected to other network service providers and transport suppliers in the facility. Our UTX facilities may range in size from approximately 500 square feet to approximately 10,000 square feet.

    Our facilities do not depend on any particular technology and are open to multiple competing network service providers and transport suppliers, such as local exchange carriers, interexchange carriers, competitive local exchange carriers, ISPs and ASPs. We are not aligned with or reliant upon any single or group of transport suppliers. We believe that our UTX clients are attracted to our neutral position, which both alleviates their competitive concerns and provides them a broader range of solutions. We also believe that our UTX facilities represent a platform for offering new services to our clients and transport suppliers alike. For example, once a transport supplier places its network in our UTX facility, the supplier may utilize our UTX services to interconnect with other suppliers in that UTX facility to extend the geographic coverage of its network.

    As of December 31, 2000 we had fifteen operational UTX facilities in Atlanta, Chicago, Dallas, Los Angeles, Miami, New York City (3 locations), Phoenix, Portland, San Francisco, Santa Clara, Seattle, Washington D.C., and Vienna, Virginia. We define operational as our ability to facilitate the connectivity of both carriers and customers within a fully constructed UTX facility. In addition to the fifteen operational UTX facilities, we expect during 2001 to begin construction of sixteen smaller facilities, fourteen in North America and two in Europe, for a total of thirty-one UTX facilities. We made a strategic investment during 2000 in CityReach International, a London-based provider of carrier neutral co-location and next-generation interconnect facilities. We plan to locate our first European UTX facilities within CityReach's "Secure Internet Exchange" (SiX) facilities.

    In addition, we intend to construct UTX facilities that are designed to meet the specific service requirements of major metropolitan areas, regional sites and high occupancy buildings. We believe these facilities will provide our clients a convenient and cost-effective method to interconnect with multiple service providers and transport suppliers.

    We also plan to actively manage circuits through our UTX facilities to deliver circuits to customers more quickly and to increase margins. We plan to achieve this by physically aggregating circuits on the same route. In order to physically aggregate circuits, we plan to deploy optical switches that would allow circuits to be optically switched between networks. For example, we may install multiple circuits for customers on a route between two UTX facilities. The total amount we pay transport suppliers for these individual circuits may exceed the cost of a larger capacity circuit for the same route which would

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include each of the individual circuits and include additional capacity. We can purchase the larger capacity circuit on the route and then, using optical network switches, transfer the individual circuits to this larger circuit. We can then sell the additional remaining capacity on the larger circuit to customers requiring the same route.

    Our UTX facilities enable us to obtain additional information regarding available network capacity and points of access that is entered into our UIX databases. This additional information enables us to use our UIX databases more efficiently to provide circuits and network monitoring services for our clients.

Client Support Services

    Client Advocacy Services.  Our approach to client support involves developing an understanding of our clients' business objectives, competitive environment, market initiatives and service needs by maintaining close contact with our clients through our Client Advocacy Services group. This group includes Client Operations Specialists, highly trained field representatives with extensive technical knowledge of our services and an understanding of our client's business objectives. These representatives team with both our sales and provisioning organizations to meet client service expectations, provide technical and administrative support during the circuit planning, ordering, supply and installation processes and provide ongoing consultation.

    Carrier Development Services.  Our development services personnel are responsible for managing our relationships with our existing transport suppliers and for identifying new relationships.

Sales and Marketing

    Our sales and marketing efforts are focused on achieving broad market penetration and increasing brand name recognition. Our sales efforts target ISPs, telecommunications service providers and ASPs that we believe have the greatest need for transport capacity and infrastructure services.

Sales

    We have developed a two-tiered sales strategy which is designed to (a) target new accounts through our direct sales representatives and (b) identify opportunities for additional sales to our existing client base through our account managers. The direct sales force is divided into geographic regions in the United States and Europe and is supervised by regional directors, each of whom has responsibility for all sales functions in his or her geographic region. The account management group is supervised by a director and targets larger clients, based on recurring monthly revenue.

    We have developed programs to attract and retain a highly skilled, motivated sales staff that possesses the necessary technical skills, consultative sales experience and knowledge of its assigned territory markets. These programs include technical and sales process training and instruction in consultative selling techniques. Our sales representatives and account managers are compensated through a combination of base salary and performance-based bonuses.

Marketing

    We direct our corporate marketing efforts to a select market segment of clients, including Internet service providers, application service providers and telecommunications service providers. Our marketing activities include participating in telecommunication industry tradeshows attended by our clients and prospects; advertising in telecommunications trade publications that target transport suppliers and service providers; conducting direct mail campaigns that use tradeshow lists in order to attract the show's participants to our booth to learn about our current service offerings; and issuing press releases about our services. We intend to increase marketing expenditures in future periods in an effort to stimulate demand for our services and build brand awareness.

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Clients

    As of December 31, 2000, we had more than 150 clients, including telecommunication services providers, Internet services providers and application service providers. For the year ended December 31, 2000, AboveNet Communications (MFN), UUNet Technologies (WorldCom), BCE Nexxia Corporation and Allied Riser Operations accounted for approximately 21%, 17%, 12% and 11% of revenues, respectively. For the year ended December 31, 1999, AboveNet Communications (MFN) accounted for 38% of our revenues. For the year ended December 31, 1998, Carmen Associates accounted for approximately 16% of our revenues and GTE Internetworking accounted for approximately 13% of our revenues. As revenues continue to increase our composite mix of significant customers should change accordingly, since these customers may increase or decrease their purchases from us.

    Our client contracts generally provide for terms ranging from 12 to 60 months, with an average length of 23 months. Over time we expect the average contract length to trend down as more large customers with twelve month contracts are added. Our clients may terminate their contracts at any time, subject to additional payments. We bill for circuit charges monthly in advance, and we recognize circuit revenues in the month that we provide the service.

Vendors

    From time to time we enter into long-term contracts, commonly referred to as "master service agreements" or "master carrier agreements", with communications transport suppliers for the supply and installation of network capacity. Under a master carrier agreement, each circuit provided by a transport supplier has its own term, generally ranging from 12 to 60 months, and is governed by the terms and conditions set forth in the master carrier agreement. If we cancel a contract with a transport supplier with respect to a particular circuit, we must generally pay cancellation charges that can equal substantially all of the amount payable over the remaining term of the contract for that circuit.

Competition

    The market for the services we provide is highly fragmented. We believe that at this time no single competitor competes directly with us with respect to all of the services we offer. However, we currently or potentially compete with a variety of companies with respect to our services on an individual basis. There are few substantial barriers to entry into our market, and we expect that we will face additional competition from existing and new global entrants in the future. We believe that any entrant in this market must grow rapidly and achieve a significant presence in the market in order to compete effectively. We believe that the principal competitive factors in this market include:

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the ability to access information regarding multiple vendor networks;



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the ability to provide connections to networks of multiple vendors;



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the ability to provide comprehensive network management services including troubleshooting and circuit restoration across multiple network environments;



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the ability to secure strategic relationships with carriers and clients;



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the ability to provide a high level of ongoing client service and support;



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the ability to locate interconnection facilities in strategic locations; and



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brand recognition.

    We might not have the resources or expertise to compete successfully in the future. For additional information on the competitive risks that we face, you should read the section entitled "Factors That May Affect Future Results—Competition in our industry is intense and growing, and we may be unable to compete effectively".

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Intellectual Property Rights

    We rely on a combination of copyright, trademark, service mark and trade secret laws and contractual restrictions to establish and protect proprietary rights in our intellectual property. We have no patented technology that would preclude or inhibit competitors from entering our market. We have applied for registration of certain of our service marks in the United States and in other countries, and have obtained a registration for one of our service marks in Switzerland. Even if additional registrations are granted, we may be limited in the scope of services for which we may exclusively use our service marks. We enter into confidentiality agreements with our employees, consultants and partners, and we control access to, and distribution of, our proprietary information. Our intellectual property may be misappropriated or a third party may independently develop similar intellectual property. Moreover, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States. Unauthorized use of any of our proprietary information could seriously harm our business.

Government Regulation

    We plan to offer communications common carrier services that will be subject to regulation by federal, state and local government agencies. Most data and Internet services are not subject to regulation, although communications services used for access to the Internet are regulated. We have obtained certain federal and state regulatory authorizations for our regulated service offerings, and are in the process of applying for additional authorizations.

    The FCC will exercise jurisdiction over our facilities and services to the extent those facilities are used to provide, originate or terminate interstate domestic or international common carrier communications. State regulatory commissions will have jurisdiction over our services to the extent they are used to originate or terminate intrastate common carrier communications. Municipalities and other local government agencies may require carriers to obtain licenses or franchises regulating use of public rights-of-way to install and operate their networks. Many of the regulations issued by these regulatory bodies may change and are the subject of various judicial proceedings, legislative hearings and administrative proposals. In addition, federal, state and local authorities may seek to tax the services which we provide, which could impair the profitability of our business. We cannot predict the results of any changes.

    As we expand our business to other countries, we will become subject to similar regulatory issues in each country in which we do business. Although the trend in regulation globally is towards less regulation of competitive telecommunications markets, regulations in particular countries may limit our service offerings or our ability to compete effectively.

Federal Regulation

    The FCC regulates us as a non-dominant communications common carrier. The FCC's generally applicable regulations permit us to provide interstate domestic common carrier services without any further authorization, and we also have received authority from the FCC to provide international services between the United States and foreign countries. Our interstate domestic and international services are not subject to significant federal regulation, although we are required to make available to the public schedules of our prices, terms, and conditions for our telecommunications services, and to pay regulatory fees and assessments based on our interstate and international telecommunications revenues. The FCC has the authority to condition, modify, cancel, terminate or revoke our licenses and authorizations for failure to comply with federal laws or the rules, regulations and policies of the FCC. The FCC may also impose fines or other penalties for violations. The FCC also imposes prior approval requirements on transfers of control and assignments of authorizations. While we believe we are in compliance with applicable laws and regulations, we cannot assure you that the FCC or third parties will not raise issues with regard to our compliance.

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    International Services.  The FCC has adopted rules for a multi-year transition to lower international settlements payments by U.S. common carriers. We believe that these rules are likely to lead to lower rates for certain international services and increased demand for these services, including capacity on the U.S. facilities that provide these services.

Local Competition Rules

    The FCC's role with respect to local telephone competition arises principally from the Telecommunications Act of 1996. This Act preempts state and local laws to the extent that they prevent competitive entry into the provision of any telecommunications service and gives the FCC jurisdiction over important issues related to local competition.

    Incumbent local exchange carriers (ILECs), such as the regional Bell operating companies and affiliates of GTE and Sprint, are required to negotiate in good faith with competing carriers on rates, terms and conditions for interconnection, access to unbundled elements, resale, and other duties imposed by the Telecommunications Act of 1996. The Telecommunications Act provides procedures and timetables for negotiation, arbitration and approval of interconnection agreements. Arbitration decisions involving interconnection arrangements in several states have been challenged and appealed to Federal courts. We may experience difficulty in obtaining timely implementation of local interconnection agreements, and we can provide no assurance we will offer local services in these areas in accordance with our projected schedule, if at all.

    The duties imposed on ILECs by the Telecommunications Act of 1996 include the following:

    Interconnection.  ILECs are required to provide interconnection for competing local telecommunications carriers at any technically feasible point, on rates, terms and conditions that are just, reasonable and nondiscriminatory.

    Access to Unbundled Elements.  ILECs are required to provide competing telecommunications carriers access to network elements on an unbundled basis at any technically feasible point, on rates, terms, and conditions that are just, reasonable, and nondiscriminatory. Among other things, the FCC rules provide that dedicated transport, including dark fiber, is among the network elements that ILECs must provide on a unbundled basis. The FCC also requires ILECs to unbundle the high-frequency portion of local access lines, so as to permit competing carriers to offer broadband data services over the same copper wires the ILEC uses to provide voice telephone service.

    Collocation.  ILECs are required to provide physical collocation of equipment necessary for interconnection or access to unbundled network elements at the ILEC's premises, except that the ILEC may offer alternative arrangements, if it demonstrates to the state regulatory commission that physical collocation is not practical for technical reasons, or because of space limitations. The FCC has adopted measures designed to facilitate a competitor's ability to access ILEC collocation space, including a requirement that ILECs permit collocation without construction of a "cage" to enclose the competitor's equipment, and a requirement that competitors be able to locate all equipment necessary for interconnection, among other things. These FCC rules are subject to reconsideration and possible court appeals, and may be subject to change in the future.

    Transport and Termination Charges.  ILECs and competitive local exchange carriers (CLECs) must enter into reciprocal arrangements for transport and termination of local telephone calls.

    Pricing Methodologies.  State commissions are required to set arbitrated rates for interconnection, unbundled network elements, and transport and termination arrangements for local calls based on the ILEC's forward-looking economic costs, using the Total Element Long Run Incremental Cost, or TELRIC, methodology, plus a reasonable share of forward-looking joint and common costs. The TELRIC pricing methodology has been challenged by ILECs, and is currently the subject of an appeal

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that will be considered by the U.S. Supreme Court during its October 2001 term. Depending on the decision of the Supreme Court, future prices for access to ILEC networks may be higher than at present.

    Resale.  State commissions are required to identify which marketing, billing, collection, and other costs will actually be avoided by ILECs when they provide services on a wholesale basis and to calculate the portion of the retail rates for those services that is attributable to the avoided and avoidable costs.

    Access to Rights-of-way.  Telecommunications carriers and utilities are required to provide nondiscriminatory access to their poles, ducts, conduits, and rights-of-way.

    The Telecommunications Act of 1996 also eliminates previous prohibitions on the provision of long distance services by the regional Bell operating companies and GTE's telephone operating company subsidiaries. These companies are now generally permitted to compete in providing long distance services, except that the regional Bell operating companies are not allowed to provide long distance service within the regions in which they also provide local exchange service, known as "in-region service," until they receive specific approval of the FCC on a state-by-state basis, based on satisfying several conditions, including a checklist of requirements intended to open local telephone markets to competition. To date, Bell companies have been authorized by the FCC to provide in-region service in four states (New York, Texas, Kansas, and Oklahoma), and additional approvals are likely.

    If the FCC permits regional Bell operating companies to provide long distance service in their local service regions before they meet competing local carriers' interconnection needs, they would be able to offer integrated local and long distance services and could have a significant competitive advantage in marketing those services to their existing local clients.

ILEC Pricing Flexibility

    In an Order issued in August 1999, the FCC granted the major local exchange carriers increased pricing flexibility upon demonstration of increased competition (or potential competition) in relevant markets. That process will give ILECs progressively greater flexibility in setting rates as competition develops, gradually replacing regulation with competition as the primary means of setting prices. This ruling will permit the ILECs to charge different rates for the same service in different geographic markets, and in some cases to negotiate customer-specific price terms. This FCC decision is likely to have a significant impact on the interstate access prices charged by the ILECs with which we compete, and hence on our operations, expenses, pricing and revenue. The ILECs' prices for these services will affect us both directly, as a customer buying services from the ILECs for resale to our customers, and indirectly, as a competitor. To date, only BellSouth has obtained FCC permission to exercise pricing flexibility for certain interstate access services under these rules, but additional approvals are likely.

Universal Service Reform

    On May 8, 1997, the FCC issued an order to implement the provisions of the Telecommunications Act relating to the preservation of advancement of universal telephone service. All telecommunications carriers providing interstate telecommunications services, including us, must contribute to the universal service support fund. These contributions became due beginning in 1998 for all providers of interstate telecommunications services. Contributions are assessed based on interstate and international end user telecommunications. Contribution factors vary quarterly and carriers, including us, are billed monthly.

State Regulation

    We will offer intrastate common carrier services and are subject to various state laws and regulations. Most public utility commissions require some form of certification or registration. We must

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acquire such authority before commencing service. In most states, we are also required to file tariffs or price lists setting forth the terms, conditions and prices for services that are classified as intrastate. We are required to update or amend these tariffs when we adjust our rates or add new products and are subject to various other regulatory requirements, including payment of fees and filing of reports, in these states.

    Many states also require prior approval for transfers of control of certified carriers, corporate reorganizations, acquisitions of telecommunications operations, assignment of carrier assets, carrier stock offerings and incurrence of significant debt obligations. Some states treat the transfer of only 10% of the voting stock of a regulated company, or its parent company, as a transfer of control that requires prior approval. The need to obtain these approvals may delay, and therefore may affect the terms of, major financing transactions in the future.

    States generally retain the right to sanction a carrier or to revoke certification if a carrier violates relevant laws or regulations. If any state regulatory agency were to conclude that we are or were providing intrastate services without the appropriate authority, the agency could initiate enforcement actions, which could include the imposition of fines, a requirement to disgorge revenues, or the refusal to grant the regulatory authority necessary for the future provision of intrastate communications services.

    We have been granted authority to provide resold and network-based competitive local exchange and/or interexchange services in many states. We have applications for such authority pending in additional states. We cannot be sure that we will receive the authorizations we seek currently or in the future.

Local Government Authorizations

    In some municipalities, we may be required to pay license or franchise fees based on a percentage of gross revenue, as well as post performance bonds or letters of credit. In many markets, the incumbent providers do not pay these franchise fees or pay fees that are substantially less than those that we will be required to pay. To the extent that competitors do not pay the same level of fees as we do, we could be at a competitive disadvantage.

    At present, we have no plans to construct transmission facilities (such as fiber optic lines) in public rights-of-way, but if we do so in the future we may become subject to more extensive local government regulations.

International Regulation

    In some countries where we plan to operate, local laws or regulations limit or require prior government approval for the provision of international telecommunications service in competition with authorized carriers. For example, our provision of services over facilities using our own network or by purchasing minutes from other carriers for resale to our customers may be affected by increased regulatory requirements in a foreign jurisdiction. Also, local laws and regulations differ significantly among the jurisdictions in which we operate or plan to operate, and, within such jurisdictions, the interpretation and enforcement of these laws and regulations can be unpredictable. We cannot be sure that future regulatory, judicial, legislative or political changes will permit us to offer to residents of these countries all or any of its services or will not have a material adverse effect on us. In addition, we cannot be sure that regulators or third parties will not raise material issues regarding our compliance with applicable laws or regulations, or that governmental decisions will not harm our business.

    In addition, the World Trade Organization Agreement, which reflects efforts to eliminate government-owned telecommunications monopolies throughout Asia, Europe and Latin America, may affect us. Although we believe that these deregulation efforts will create opportunities for new entrants

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in the telecommunications service industry, they also create enhanced opportunities for foreign telecommunications carriers to compete against us.

Employees

    As of January 31, 2001, we had approximately 432 full-time employees, none of whom was represented by a labor union. Our future performance depends, in significant part, upon the continued service of our key technical, sales and senior management personnel. All of our executive officers are subject to employment agreements for specific terms. For additional information on these employment agreements, please see "Directors and Executive Officers of the Registrant." The loss of the services of one or more of our key employees could have a material adverse effect on our business, financial condition and results of operations. To date, we have not experienced any work stoppages, and we consider our relations with our employees to be good.

ITEM 2.  PROPERTIES

    Our headquarters are located in Chicago, Illinois, where we lease office space under an agreement expiring in July 2012. As of January 31, 2001 we lease office space for sales offices in 10 cities in the United States, two in Europe, and space for UTX facilities in thirteen cities in the United States. Our UTX leases expire on various dates between October 2004 and November 2015. We also lease office space in three cities for our other business operations. With these facilities and our other administrative and Network Operation Center facilities, we currently lease over 367,000 square feet globally.

ITEM 3.  LEGAL PROCEEDINGS

    In February 2000, a complaint was filed in the Superior Court of California, County of Santa Clara, against us and other parties by Point West Ventures, L.P., previously known as Fourteen Hill Capital, L.P. and certain other shareholders in Vaultline Incorporated. The claim arises out of a letter of intent that we entered into in December 1998 relating to our potential acquisition of Vaultline. The letter stated that it was not binding on the parties except with respect to a $250,000 advance to be made by us and certain obligations of Vaultline. The letter contemplated that we would undertake a due diligence investigation of Vaultline. After performing the due diligence, we determined not to

13

complete the transaction and entered into a mutual settlement agreement and release. Subsequently, Vaultline ceased doing business. The claimants contend that the mutual settlement agreement executed by the president of Vaultline was unauthorized. They allege that we, certain of our officers and others conspired to deprive them of their interests in Vaultline. They are seeking damages in excess of $10,000,000. We believe all of our legal obligations were satisfied and intend to vigorously contest any claims asserted against us relating to this matter. On May 4, 2000, the Superior Court granted our petition to compel arbitration and to stay proceedings pending arbitration. On July 17, 2000, the Superior Court granted the petition made by certain of our directors and officers to compel arbitration and to stay proceedings pending arbitration.

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

    The only item submitted for a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2000 was the election of three directors at the annual meeting of stockholders held November 9, 2000. The Board of Directors is divided into three classes, each with a three-year term expiring at the annual meeting of stockholders to be held in the year indicated: Class I (2003), Class II (2001) and Class III (2002). The Board of Directors nominated Paolo Guidi, Carolyn Katz and Joseph Schocken to serve as Class I directors. The stockholders elected each nominee to a three-year term, with stockholders representing the indicated number of shares voting in favor of or voting against each nominee: (a) Mr. Guidi, 80,247,330 in favor and 1,066,784 against; (b) Ms. Katz: 80,248,009 in favor and 1,066,105 against; and (c) Mr. Schocken, 80,040,729 in favor and 1,273,385 against. Of the 90,412,841 shares of common stock outstanding and entitled to be voted at the annual meeting, a total of 81,314,114 shares, or 89.94% of the total, were represented at the meeting.

PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

    Our common stock has been quoted on the Nasdaq National Market under the symbol "UAXS" since our initial public offering on March 17, 2000. The following table sets forth the range of the high and low sale prices per share of our common stock as reported on the Nasdaq National Market for the periods indicated:

    As of December 31, 2000, the number of stockholders of record was 644. Because many of our shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial stockholders represented by these record holders.

    We have never declared or paid any dividends on our capital stock. We currently expect to retain future earnings, if any, to operate and expand our business and do not expect to pay any cash dividends in the foreseeable future.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

    The selected consolidated financial data set forth below should be read in conjunction with our financial statements and the notes to our financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations", included as Item 7 in this Form 10-K. The consolidated statement of operations data for the years ended December 31, 1998, 1999 and 2000, and the consolidated balance sheet data as of December 31, 1999 and 2000 are derived from, and are qualified by reference to, the audited financial statements included as Item 14(a) in this Form 10-K. The consolidated statement of operations data for the period from inception through December 31, 1997, and the consolidated balance sheet data as of December 31, 1997 and 1998 are derived from audited financial statements not included in this Form 10-K. Historical results are not necessarily indicative of the results to be expected in the future.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    The information in this discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are based upon current expectations that involve risks and uncertainties. Any statements contained herein that are not statements of historical 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-looking statements. Our actual results and the timing of certain events may differ significantly from the results discussed in the forward-looking statements. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those discussed under the heading "Factors That May Affect Future Results." The following discussion provides information and analysis of our results of operations for the three years ended December 31, 2000, and our liquidity and capital resources. You should read the following discussion in conjunction with our consolidated financial statements and the related notes included elsewhere in this yearly report as well as the reports we file with the Securities and Exchange Commission.

Overview

    We commenced operations on October 2, 1997 for the purpose of facilitating the provisioning, installation and servicing of dedicated communications circuits for service providers who buy network capacity and transport suppliers who sell network capacity. To date, we have derived substantially all of our revenues from providing ongoing, dedicated circuit access. Monthly recurring circuit revenues are generated under client contracts with terms ranging from 12 to 60 months, with an average length of 23 months as of December 31, 2000. Contracts with our clients may be terminated by the client at any time, subject to additional payments. Circuit charges are billed monthly in advance, and circuit revenues are recognized in the month that service is provided. Amounts billed in advance are recorded on the balance sheet as accounts receivable and unearned revenue. At December 31, 2000, unearned revenue was $8.0 million.

    These access revenues include bundled charges for provisioning, network management and maintenance services. UTX billing and revenue recognition policies are the same as those described above for circuit access revenues.

    At December 31, 2000, we had fifteen completed UTX facilities, all of which had been placed into operations. In addition to the fifteen operational UTX facilities, we expect during 2001 to complete construction of sixteen smaller facilities, fourteen in North America and two in Europe, for a total of thirty-one UTX facilities. Construction, equipment and facility leasing costs incurred in connection with the construction of a UTX facility are capitalized until the facility is placed into operations. Once the facility is placed into operations, these costs are amortized over the lesser of the term of the lease, ranging from seven to 15 years, or the estimated useful life of the equipment. At December 31, 2000 we had UTX construction in process of $39.3 million, and had entered into outstanding UTX equipment orders of approximately $15.4 million and minimum lease payments of approximately $54.5 million related to UTX facilities.

    Our clients are communications service providers and transport suppliers, such as Internet service providers, competitive access providers, incumbent telecommunication service providers and other application and network service providers. Our largest client represented approximately 38% of total revenues for the year ended December 31, 1999. Our four largest clients represented approximately 61% of total revenues for the year ended December 31, 2000.

    To date, cost of revenues has primarily consisted of amounts paid to transport suppliers for circuits. We have negotiated volume discounts and network route-specific discounts under contracts

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with many of our suppliers. These contracts generally have terms ranging from three to ten years and include minimum monthly purchase commitments that begin anywhere from six to twelve months after we enter into the contract. At December 31, 2000, these minimum purchase commitments totaled approximately $3.2 million per month. However, actual purchases under these contracts, which totaled approximately $3.5 million for the month ended December 31, 2000, have exceeded these minimum purchase commitments. In addition, as of December 31, 2000 we were currently party to contracts that will impose additional minimum purchase commitments that we anticipate will total approximately $4.0 million per month by December 2001.

    Operations and administration expense consists of salaries and employee benefits, costs associated with the development, expansion and maintenance of our Universal Information Exchange ("UIX") databases, and costs associated with sales, marketing, operations, administration and facilities.

    In each year since our inception, we have incurred operating losses and net losses, and have experienced negative cash flows from operations. At December 31, 2000, we had an accumulated deficit of $68.4 million.

Results of Operations

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

Revenues

    Revenues increased from $14.3 million for the year ended December 31, 1999 to $51.1 million for the year ended December 31, 2000. Substantially all of our revenues consisted of circuit revenues in each of these years. Our UTX facilities enable us to provision circuits more efficiently and therefore directly contribute to increases in circuit revenues. The increase in revenues was attributable to an increase in the volume of circuits sold, some of which were higher capacity and, therefore, generated greater revenues per circuit. In addition, there was an increase in the number of clients and additional sales to existing clients.

Cost of Circuit Access

    Cost of circuit access increased from $12.0 million for the year ended December 31, 1999 to $38.0 million for the year ended December 31, 2000. As a percentage of total revenues, cost of circuit access decreased from 84% for the year ended December 31, 1999 to 74% for the year ended December 31, 2000. The increase in cost of circuit access in absolute dollars was primarily attributable to an increase in the volume of circuits sold to both an increased number of clients and additional sales to existing clients. The decrease in cost of circuit access as a percentage of total revenues was primarily attributable to volume-pricing efficiencies created by the UIX and reflects the successful scaling of our model and the growing efficiencies in our business.

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Operations and Administration (Excluding Stock Option Plan Compensation)

    Operations and administration expenses increased from $13.5 million for the year ended December 31, 1999 to $60.0 million for the year ended December 31, 2000. This increase was primarily attributable to significant increases in personnel, continued expansion of our UIX databases and the build-out of our corporate infrastructure, including facilities, sales and marketing.

    The number of employees increased from 135 at December 31, 1999 to 430 at December 31, 2000, which resulted in a significant increase in salaries and benefits expense during 2000. As a result of these significant headcount additions, we used external placement agencies to assist with our internal recruiting efforts, increasing placement fees by $2.7 million to a total of $3.2 million during 2000. We have projected 2001 headcount to grow to 550 employees by December 31, 2001, with the majority of additions to be hired through our internal recruiting efforts; thereby, significantly decreasing placement fees incurred during 2001. Additionally, during 2001 we expect revenue growth to continue to outpace overhead growth and anticipate average SG&A expense to be $14,000 per employee per month for the year ended December 31, 2001.

    The cost of UIX development personnel as well as non-capitalized development costs associated with the UIX increased $1.3 million for the year ended December 31, 2000 as compared to December 31, 1999. Facilities costs, including rent and utilities for corporate offices and sales offices increased $8.0 million for the year ended December 31, 2000 as compared to December 31, 1999. We recorded an impairment charge of $557,000 related to the write-down of certain assets, including goodwill and fixed assets, from our division, Pacific Crest Networks (PCN). Sales and marketing costs, primarily for tradeshows, advertising and promotions, increased $3.1 million for the year ended December 31, 2000.

    During 2000, we began operations in London and Amsterdam to increase our presence in Europe, incurring a loss from these start-up operations of $2.1 million in the current year. We expect losses from our European operations to increase in the future, as we increase working capital requirements and build-out our UTX facilities.

    We expect total operations and administration expenses to continue to increase in absolute dollars as we continue to increase personnel, expand the UIX databases and build-out corporate infrastructure. Ultimately, we expect operations and administration expense to significantly decrease as a percentage of revenues as we fully leverage our operating systems, our UIX databases and our infrastructure.

Operations and Administration (Stock Option Plan Compensation)

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

    Stock option compensation expense totaled $8.1 million for the year ended December 31, 1999 and $3.1 million for the year ended December 31, 2000. The substantial decrease in stock option plan compensation charges between periods is attributable to loans issued to three officers of the Company in connection with the exercise of stock options. This event resulted in a one-time stock option compensation charge of $4.6 million in the year ended December 31, 1999.

    There were 10,465,750 and 14,522,412 stock options outstanding at December 31, 1999 and 2000, respectively. We expect to recognize additional stock option plan compensation charges of approximately $16.8 million over the next four years, which includes $2.7 million of compensation charges related to a restricted stock award made in the first quarter of 2001 to certain executives and key employees.

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Depreciation and Amortization

    Depreciation expense includes depreciation of furniture, fixtures and equipment at our office facilities and of equipment at our UTX facilities. Depreciation expense increased by $4.2 million in the year ended December 31, 2000, compared with the prior year, as a result of six additional UTX facilities placed into operations during the fourth quarter of 2000 as well as additional equipment purchases for existing UTX facilities. We expect depreciation expense to increase substantially in the future as we continue to place our UTX facilities into service and purchase additional equipment for existing UTX facilities.

    Amortization expense, which increased $807,000 during the year ended December 31, 2000, as compared to prior year, relates to intangible assets acquired in connection with the purchases of Pacific Crest Networks, Inc., Stuff Software, Inc. and Tri-Quad Enterprises, Inc. in July 1999, November 1999 and July 2000, respectively.

Other Income (Expense)

    Other income totaled $691,000 and $8.5 million for the years ended December 31, 1999 and December 31, 2000. The increase in other income was attributable to our investment of substantially all of the proceeds from our public stock offering, in cash equivalents with original maturities of less than three months and marketable securities with original maturities of three to six months. Interest income for the year ended December 31, 2000 was partially offset by interest expense on notes payable and capital lease obligations.

Income Taxes

    From our inception through September 27, 1998, we elected to be treated as a subchapter S-corporation for income tax purposes. On September 27, 1998, we converted to a C-corporation. At December 31, 2000, we had approximately $60,284,000 of federal and state net operating loss carryforwards. These carryforwards may be available to offset future taxable income. Our federal and state net operating loss carryforwards expire at various dates beginning in 2018. Due to the uncertainty that we will generate future earnings sufficient to enable us to realize the benefit of these net operating loss carryforwards, we have recorded a valuation allowance for the full amount of our deferred tax asset. As a result, no income tax benefit has been recorded in our statement of operations. We assess the realizability of our deferred tax asset on an ongoing basis and adjust the valuation allowance based on this assessment. Additionally, Section 382 of the Internal Revenue Code of 1986, as amended, imposes annual limitations on the use of net operating loss carryforwards if there is a change in ownership, as defined, within any three year period. The utilization of certain net operating loss carryforwards may be limited due to our capital stock transactions.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1999

Revenues

    Revenues increased from $1.6 million for the year ended December 31, 1998 to $14.3 million for the year ended December 31, 1999. Substantially all of our revenues consisted of circuit revenues in each of these years. The increase in revenues was attributable to an increase in the volume of circuits sold, some of which were higher capacity and, therefore, generated greater revenues per circuit. In addition, there was an increase in the number of clients and additional sales to existing clients.

Cost of Circuit Access

    Cost of circuit access increased from $1.3 million for the year ended December 31, 1998 to $12.0 million for the year ended December 31, 1999. As a percentage of revenues, cost of circuit access increased from 77% for the year ended December 31, 1998 to 84% for the year ended December 31,

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1999. The increase in cost of circuit access in absolute dollars was primarily attributable to an increase in the volume of circuits sold, some of which were higher capacity and, therefore, generated greater cost per circuit. In addition, there was an increase in the number of clients and additional sales to existing clients. The increase in cost of circuit access as a percentage of revenues was in part attributable to the fact that we deliberately reduced our margins on certain high capacity circuits in an effort to attract large clients, and in part attributable to $350,000 of circuit charges incurred for circuits that were not immediately resold to clients.

Operations and Administration (Excluding Stock Option Plan Compensation)

    Operations and administration expenses increased from $1.5 million for the year ended December 31, 1998 to $13.5 million for the year ended December 31, 1999. The increase in operations and administration expenses was primarily attributable to an increase in personnel and continued expansion of our sales and marketing efforts. During the year ended December 31, 1999, we opened sales offices in Vienna, Virginia and San Jose, California. The number of our employees increased from 11 at December 31, 1998 to 135 at December 31, 1999. In addition, we incurred bad debt expense of $42,000 for the year ended December 31, 1998 and $867,000 for the year ended December 31, 1999. Approximately one-half of the increase in bad debt expense related to one substantial client account, which represented over four months of billings. We have revised our credit and collection procedures so that service is now discontinued within two months of non-payment. The remainder of the increase in bad debt expense was related to several smaller doubtful accounts. Finally, we sold Series D Preferred Stock to certain professional service providers during 1999 for $992,000 less than the deemed fair market value of the stock at the date of sale.

Operations and Administration (Stock Option Plan Compensation)

    During 1998, we recorded a total of $2.0 million and during the year ended December 31, 1999, we recorded a total of $14.1 million in deferred stock option plan compensation as a result of granting options to employees and non-employees with per share exercise prices deemed to be below the fair market value of our common stock at the date of grant. Deferred stock option plan compensation is amortized over the vesting period of the related options. Amortization expense totaled $3.5 million for the year ended December 31, 1999. We expect to recognize additional deferred stock option plan compensation expense of approximately $11.9 million over the next four years, based upon options outstanding at December 31, 1999.

    In addition, during the year ended December 31, 1999 we recorded $4.6 million of stock option plan compensation expense, related to loans issued to three officers of the Company, in connection with exercise of stock options.

Depreciation

    Depreciation expense includes depreciation of furniture, fixtures and equipment at our office facilities and of equipment at our UTX facilities. We expect depreciation expense to increase substantially in the future as we continue to place our UTX facilities into service.

Interest Expense and Interest Income

    Interest expense increased from $27,000 for the year ended December 31, 1998 to $81,000 for the year ended December 31, 1999. The increase was attributable to additional borrowings under a term loan and line of credit facility used for general working capital requirements and to fund capital expenditures.

    Interest income increased from $8,000 for the year ended December 31, 1998 to $739,000 for the year ended December 31, 1999. The increase was attributable to investing a portion of the proceeds

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from our Series A, Series B, Series C, Series D and Series E preferred stock offerings in short-term money market instruments.

Income Taxes

    From our inception through September 27, 1998, we elected to be treated as a subchapter S-corporation for income tax purposes. On September 27, 1998, we converted to a C-corporation. At December 31, 1999, we had approximately $10,091,000 of federal and state net operating loss carryforwards. These carryforwards may be available to offset future taxable income. Our federal and state net operating loss carryforwards expire at various dates beginning in 2018. Due to the uncertainty that we will generate future earnings sufficient to enable us to realize the benefit of these net operating loss carryforwards, we have recorded a valuation allowance for the full amount of our deferred tax asset. As a result, no income tax benefit has been recorded in our statement of operations. We assess the realizability of our deferred tax asset on an ongoing basis and adjust the valuation allowance based on this assessment. Additionally, Section 382 of the Internal Revenue Code of 1986, as amended imposes annual limitations on the use of net operating loss carryforwards if there is a change in ownership, as defined, within any three year period. The utilization of certain net operating loss carryforwards may be limited due to our capital stock transactions.

Liquidity and Capital Resources

    On March 17, 2000 we completed an initial public offering of our common stock that resulted in the issuance of 12,650,000 shares of common stock at an offering price of $14.00 per share. Net proceeds related to this offering totaled $161.9 million. Until the time of our initial public offering, we had financed our operations primarily through private placements as well as through borrowings from stockholders and financial institutions. Since inception through December 31, 1999, we raised $63.4 million in capital through private placements of common and convertible preferred stock and common and preferred stock warrants. Our principal uses of cash are to fund operating losses, working capital requirements and capital expenditures. At December 31, 2000, we had $56.9 million in cash and cash equivalents and $50.4 million in short-term investments with original maturities between three and six months.

    On January 1, 2001, the Company added 4,542,817 shares to its 1999 Stock Plan. In accordance with the Plan, the maximum aggregate number of shares of the Company's common stock that may be optioned and sold is 10,000,000 shares, plus an annual increase to be added on the first day of the Company's fiscal year beginning in 2001 equal to the lesser of (i) 10,000,000 shares, (ii) 5% of the outstanding shares of common stock on such date, or (iii) a lesser amount determined by the Board.

    On January 1, 2001, the Company added 1,817,127 shares to its 1999 Employee Stock Purchase Plan. In accordance with the Plan, the maximum number of shares of the Company's common stock which shall be made available for sale shall be 500,000 shares plus an annual increase to be added on the first day of the Company's fiscal year beginning in 2001 equal to the lesser of (i) 3,000,000 shares, (ii) 2% of the outstanding shares of common stock on such date, or (iii) a lesser amount as determined by the Board.

    In March 2000, we entered into a lease commitment for office space located in Chicago, Illinois which serves as our new corporate headquarters. This commitment will result in lease payments of $4.7 million during fiscal 2001 and $67.2 million of future minimum lease payments through July 2012.

    In March 1999, we entered into a credit agreement with a bank under which we may request the bank to issue letters of credit or we may borrow up to a total of $4.0 million. The agreement provides that outstanding borrowings bear interest at the bank's prime rate. This agreement expired in April 2000 and we do not intend to renew this line of credit. The collateral cash balance in the amount of our outstanding letters of credit at December 31, 2000 was $546,000 and will expire April 1, 2001.

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    In December 1999, we entered into a credit agreement with a bank and borrowed $3.3 million. Outstanding borrowings bear interest at approximately 15% and are secured by specifically identified assets. The agreement expires in November 2002 and requires that we maintain an unrestricted cash balance of at least $15.0 million. As of December 31, 2000, the outstanding balance of this loan was $2.2 million.

    In June 2000, we entered into a credit agreement with a bank under which we may request the bank to issue letters of credit or we may borrow up to a total of $18.0 million. The agreement expires in June 2001 and supercedes the credit agreement entered into in September 1999. The agreement consists of Part A and Part B. Under Part A of the agreement we may request the bank to issue letters of credit or we may borrow up to a total of $12.0 million. Part A requires that we maintain a cash balance in a custodial account in an amount equal to the amount of borrowings and letters of credit outstanding up to $12.0 million. Letters of credit totaling $10.6 million were outstanding under Part A of the agreement as of December 31, 2000 and a $10.8 million cash balance was in a custodial account as of December 31, 2000.

    Under Part B of the agreement we may request the bank to issue letters of credit or we may borrow up to a total of $6.0 million. Outstanding borrowings under the agreement bear interest at the bank's prime rate and are secured by substantially all of our assets. Part B of the agreement requires that we maintain specified covenants. We were in compliance with all covenants at December 31, 2000. Letters of credit totaling $2.2 million were outstanding under Part B of the agreement as of December 31, 2000.

    Net cash used in operating activities increased from $6.9 million for the year ended December 31, 1999 to $36.7 million for the year ended December 31, 2000. The increase in net cash used was primarily due to increased net losses.

    In December 2000, we purchased $21.2 million of equipment for deployment in our UTX facilities. This purchase was recorded within accounts payable at year-end. We are currently in the process of obtaining financing for this equipment and anticipate having this financing arranged by the end of the first quarter of 2001.

    Net cash used in investing activities increased from $19.6 million for the year ended December 31, 1999 to $97.4 million for the year ended December 31, 2000. The increase in net cash used in investing activities relates to the purchases of property and equipment, primarily for the construction of our UTX facilities, and the purchase of Tri-Quad and short-term investments. We expect to substantially increase our investments in facilities and equipment over the next year as we increase our number of UTX facilities.

    At December 31, 2000 we had fifteen completed UTX facilities, all of which had been placed into operations. In addition to these facilities we intend to complete construction of sixteen additional facilities during 2001, for a total of thirty-one UTX facilities.

    In 2001 we plan to spend approximately $40.0 million to complete construction of sixteen smaller UTX facilities (fourteen in North America and two in Europe), support the continued enhancement of our UIX, upgrade UTX facilities for additional service demands, and continue build-out of sales and administrative offices. The smaller UTX facilities can range in size from 500 square feet to 2,000 square feet and are less capital intensive than the facilities that are currently operational. We will use part of the proceeds from our initial public stock offering, which occurred on March 17, 2000, for these capital expenditures, and do not anticipate needing additional outside funding in order to complete these projects.

    Net cash provided by financing activities increased from $63.7 million for the year ended December 31, 1999 to $152.9 million for the year ended December 31, 2000. The increase was primarily due to the receipt of net proceeds of $161.9 million from the public issuance of our common stock on March 17, 2000. We have invested these proceeds primarily in cash equivalents, with original

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maturities of less than three months, and marketable securities, with original maturities of between three and six months. We intend to continue investing surplus cash in similar securities; however, we may invest in marketable securities with maturities of up to eighteen months.

    Our future capital requirements will depend on a number of factors, including market acceptance of our services, the resources we devote to developing, selling and marketing our services and the rate at which we expand our UTX facilities. In addition, we plan to continue to evaluate possible investments in complementary businesses, products and technologies. Although we believe that the net proceeds from our initial public offering in March 2000, together with existing cash balances, will be sufficient to fund our operations at least until we become self-funding through operations, we may require additional financing within this time frame. Additional funding may not be available on terms acceptable to us, or at all.

FACTORS THAT MAY AFFECT FUTURE RESULTS

    In addition to the factors discussed elsewhere in this Form 10-K and the Company's other reports filed with the SEC, the following are important factors which could cause actual results or events to differ materially from those contained in any forward-looking statements made by or on behalf of the Company.

We have incurred substantial losses since our inception, and if we fail to increase our revenues, we will be unable to achieve and maintain profitability.

    We have incurred significant losses since inception and expect to continue to incur losses in the future. As of December 31, 2000, we had an accumulated deficit of $68.4 million. Although our revenues have grown from $14.3 million in the year ended December 31, 1999 to $51.1 million in the year ended December 31, 2000, we cannot be certain that our revenues will continue to grow, or that we will achieve sufficient revenues to achieve profitability. We expect to continue to incur significant and increasing expenses in order to:

•

expand sales and marketing activities to increase market acceptance;



•

expand our operational activities to further develop our business model;



•

expand our administrative organization to support the anticipated growth of our business;



•

expand and enhance our UIX databases; and



•

build out our UTX facilities.

    As a result, we will need to generate significantly higher revenues to achieve and maintain profitability. If we fail to generate higher revenues, we may continue to incur operating losses and net losses.

Our limited operating history makes forecasting difficult.

    We have a limited operating history and, therefore, limited meaningful historical financial data upon which to base our planned operating expenses. Specifically, our UTX business model is relatively new, and we have not operated our UIX databases in conjunction with our UTX facilities long enough to accurately predict trends in our business. Moreover, we have not built out enough UTX facilities to be able to test whether our strategy to utilize these facilities will work. Accordingly, we are subject to all of the risks that are associated with companies in an emerging industry and in an early stage of development, including:

•

undercapitalization;



•

cash shortages;



•

the unproven nature of our business model;

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•

the new and unproven nature of the market for our services;



•

the need to make significant expenditures and incur significant expenses as we develop our business, infrastructure and operations;



•

the lack of sufficient clients and revenues to sustain our operations and growth without additional financing;



•

difficulties in managing growth; and



•

limited experience in providing some of the services that we offer or plan to offer.

    For example, from time to time we enter into long-term agreements with communications transport suppliers for the supply and installation of communications network capacity. These agreements generally provide for monthly minimum revenue commitments from us, which we must negotiate based on forecasts of our future network capacity requirements. As of December 31, 2000, we were party to contracts that will impose minimum purchase commitments that we anticipate will total approximately $4.0 million per month by December 2001. If we fail to forecast our network capacity requirements accurately or fail to accurately forecast other aspects of our business, it will be difficult for us to become profitable.

We have an unproven business model, and we cannot be sure that clients will widely accept our services.

    Our business strategy is unproven. To be successful, we must convince prospective clients to entrust their network capacity data and transport requirements to a company without a long and proven track record. We are not aware of any companies that have a directly comparable business, and we cannot be sure that clients will widely accept our services.

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

•

the speed, reliability and cost effectiveness of our services;



•

the willingness of clients to outsource the obtaining of circuits;



•

our ability to market our services effectively; and



•

the growth of the Internet.

    We may not be able to execute our business model if the markets for our services fail to develop or grow more slowly than anticipated, if competitors enter the market or if we are unable to expand our client base.

Our ability to implement and maintain our UIX databases is unproven. If we cannot increase the scope and accuracy of these databases as planned, our ability to cost-effectively facilitate the obtaining of circuits for our clients will be at risk.

    To be successful, we must increase and update information about pricing, capacity, availability and location of circuits contained in our databases. Our ability to cost effectively facilitate the supplying of circuits and to provide ongoing dedicated line circuit access depends upon the information we collect from our transport suppliers regarding their networks, which we include in our UIX databases. Our suppliers are not obligated to provide us with this information and could decide to stop providing this information to us at any time. Moreover, we cannot be certain that the information that our suppliers share with us is completely accurate or current. If we cannot continue to maintain and expand our UIX databases as planned, we may be unable to increase our revenues or to cost-effectively facilitate the supplying of the circuits, and we may never achieve profitability.

24

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

    The market for our UTX services is new and unproven. Our ability to generate revenues will suffer if the market for these services fails to develop, or develops more slowly than we expect. The growth of this market depends on several uncertain events or occurrences including:

•

our ability to remain a neutral intermediary between transport suppliers and the willingness of these suppliers to install their equipment in our UTX facilities;



•

our ability to successfully and cost-effectively market our services to a sufficiently large number of clients; and



•

the increased need for high speed communications network services.

    To date, we have derived substantially all of our revenues from providing on-going circuit access, and we have only limited experience providing our UTX services. At December 31, 2000, we had operational UTX facilities in Atlanta, Chicago, Dallas, Los Angeles, Miami, New York City (3 locations), Phoenix, Portland, San Francisco, Santa Clara, Seattle, Washington D.C., and Vienna, Virginia.

    However, clients may terminate their UTX contracts at any time, and our ability to generate revenues will suffer if we fail to maintain our existing clients and to attract new clients for our UTX services.

    One of our key strategies is to expand our business by opening additional UTX facilities in geographically diverse locations. In addition to our fifteen operational UTX facilities, we expect to construct sixteen additional smaller UTX facilities in the United States during 2001, for a total of 31 completed UTX sites. Construction of UTX facilities is expensive and time-consuming and will cause a significant strain on the capital resources and operation of our business. If we are unable to generate sufficient cash flows or raise sufficient funds, we may have to delay or abandon some or all of our development and expansion plans. A delay in the expansion of our UTX facilities may make it more difficult for us to respond to competitive pressures and establish our presence in the market.

    It usually takes us at least six months to select an appropriate location for a new UTX facility, construct the facility, install equipment and communications network infrastructure and hire operations and sales personnel. We must incur these costs before we have clients who purchase our services to be delivered from the UTX facilities. If the demand does not develop as we anticipate, we will have fixed costs without corresponding revenue and our business will be harmed.

Our ability to open UTX facilities is subject to a number of risks, including the following:

•

the availability of appropriate space for these facilities on reasonable terms;



•

competition for limited space in desirable locations from large, well-capitalized companies that may be more attractive tenants for potential landlords;



•

construction delays;



•

cost overruns;



•

equipment and material delays; and



•

inability to obtain necessary permits on a timely basis.

In addition, our costs will increase as we continue to open UTX facilities. These increased costs include:

•

leasing additional real estate;



•

expenses associated with hiring, training and managing new employees;

25

•

purchasing new equipment;



•

implementing power and redundancy systems;



•

implementing multiple communications connections; and



•

depreciation expense.

    An inability to establish additional UTX facilities as planned, to effectively manage our expansion or to attract sufficient clients to our UTX facilities would harm our ability to generate revenues.

If we cannot successfully aggregate circuits, this could limit our ability to increase our margins.

    We plan to actively manage circuits through our UTX facilities to deliver circuits to customers more quickly and to increase margins. We plan to achieve this by physically aggregating circuits on the same route. In order to physically aggregate circuits, we plan to deploy optical switches that would allow circuits to be optically switched between networks. However, we have not tested optical switches in our UTX facilities, and we cannot be sure that this equipment will function as expected. We may also face delays in installing optical switches. In addition, we cannot be sure that there will be enough circuits on routes between existing UTX facilities to allow us to cost-effectively aggregate these circuits. If we cannot successfully deploy optical switches or physically aggregate circuits, this could limit our ability to increase our margins.

If we cannot successfully operate our network operations center, we will be unable to provide monitoring, maintenance and restoration services to our clients.

    One of our primary business objectives is to provide our clients with network monitoring, maintenance and restoration services 24 hours a day, seven days a week through a network operations center. We recently began operating a network operations facility, however, we have only limited experience implementing services of this type. As a consequence, we cannot be sure that our efforts to provide these services will be successful. Our ability to implement this strategy will depend on many factors, including our ability to train, manage and retain employees.

    If we fail to successfully operate a network operations center, we may not be able to monitor network operations effectively or troubleshoot circuits in a cost-effective manner, which would cause us to lose clients and make it difficult for us to attract new clients.

Although we plan to continue expanding international operations, we have limited experience operating internationally.

    An important component of our strategy is to expand into international markets, such as Europe, Asia and South America, and we recently opened offices in London, England, and Amsterdam, the Netherlands. However, we have limited experience operating internationally. The risks inherent in conducting our business internationally include:

•

unexpected changes in regulatory requirements and trade barriers;



•

unexpected changes in national and international (including European Union and World Trade Organization) regulatory requirements and trade barriers;



•

challenges in staffing and managing foreign operations;



•

differences in technology standards;



•

employment laws and practices in foreign countries;



•

longer payment cycles and problems in collecting accounts receivable;



•

inability to obtain access to transport capacity;



•

political instability;

26

•

fluctuations in currency exchange rates and imposition of currency exchange controls; and



•

potentially adverse tax consequences.

    In addition, in order to expand internationally, we may enter into joint ventures or outsourcing agreements with third parties, acquire complementary businesses or operations, or establish and maintain new operations outside of the United States. We may not control or manage some or all of these operations. As a result, we may be required to depend on third parties for the management of these international operations. If these foreign operations are not successful, they could significantly damage our reputation, which would harm our ability to attract new clients and retain existing clients.

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

    The market for the services we provide is highly fragmented. In addition, the market in which we operate is new, rapidly evolving and highly competitive. We believe that at this time no single competitor competes directly with us with respect to all of the services we offer; however, we currently or potentially compete with a variety of companies, including some of our transport suppliers, with respect to our products and services individually, including:

•

national and local carriers, such as AT&T, Broadwing, Qwest, Sprint, WorldCom and Williams Communications;



•

companies that provide collocation facilities, such as AboveNet Communications (MFN), AT&T, Colo.com, Equinix, Exodus Communications, Global Center, and Layer One



•

companies that engage in "bandwidth trading", resale, and arbitrage of circuit connectivity such as Arbinet, Bandwidth.com, Enron, and RateExchange;



•

competitive access providers, such as AT&T, ELI, ICG Communications, WorldCom, XO Communications, FiberNet, Pathnet, and Telseon; and



•

incumbent local exchange carriers, such as Verizon, BellSouth and SBC Communications.

    We expect to face additional competition from new market entrants in the future as there are few substantial barriers to entry in our market. Significant new competitors could arise from increased consolidation and strategic alliances in the telecommunications industry. Other new entrants could enter the market with a business model similar to ours. Our target markets may support only a limited number of competitors. Operations in such markets with multiple competitive providers may be unprofitable for one or more of such providers. Prices in both the long distance business and the data transmission business have declined significantly in recent years and are expected to continue to decline.

    Moreover, while recent regulatory initiatives allow carriers such as us to interconnect with incumbent local exchange carrier facilities and to obtain unbundled network elements from incumbent local exchange carriers, certain initiatives also provide increased pricing flexibility for, and relaxation of regulatory oversight of, the incumbent local exchange carrier. This may present incumbent local exchange carriers with an opportunity to subsidize services that compete with our services with revenues generated from non-competitive services. This would allow incumbent local exchange carriers to offer competitive services at lower prices. Existing laws also restrict the regional Bell operating companies from fully competing with us in the market for interstate and international long distance telecommunications services, but also permit the Federal Communications Commission, the FCC, to lessen or remove some restrictions. If FCC decisions under existing law, or future amendments to Federal telecommunications laws, permit the regional Bell operating companies to compete fully with us in this market, our revenues from these services could be reduced if these companies are able to attract a substantial portion of our customers.

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

27

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

•

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



•

larger customer bases;



•

longer operating histories; and



•

more established relationships in the industry.

    Our competitors may be able to use these advantages to:

•

expand their offerings more quickly;



•

adapt to new or emerging technologies and changes in customer requirements more quickly;



•

take advantage of acquisitions and other opportunities more readily;



•

enter into strategic relationships to rapidly grow the reach of their networks and capacity;



•

devote greater resources to the marketing and sale of their services; and



•

adopt more aggressive pricing and incentive policies, which could drive down margins.

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

If we have difficulties or delays in delivering circuits to our clients, our ability to generate revenue will suffer and 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 and accepted by the client. Once we agree to facilitate the supply of a circuit for a client, we negotiate with one or more transport suppliers and manage the personnel and field technicians of multiple vendors. A client can withdraw its order with minimal liability at any time before accepting the circuit. We may experience difficulties in facilitating the supply of circuits if our transport suppliers run out of capacity, forcing us to look for alternative sources of capacity on short notice. If we are unable to facilitate the supply of a circuit in a timely manner or fail to obtain client acceptance of the circuit, we will be unable to recognize access revenues for that circuit, and our operating results would be adversely affected. Furthermore, since our clients may cancel orders at any time before accepting the circuit, we may find it difficult to forecast revenue and plan our expenses accordingly.

The unpredictability of our quarterly results may adversely affect the trading price of our common stock.

    Our revenues and operating results will vary significantly from quarter to quarter due to a number of factors, many of which we cannot control and any of which may cause our stock price to fluctuate. These factors include the following:

•

uncertainty regarding timing for supplying circuits or failure to obtain client acceptance of circuits;



•

timing of the completion of new UTX facilities;



•

costs related to acquisitions of technology or businesses;



•

decisions by existing clients not to renew services on a timely basis when existing client contracts terminate;



•

the amount of unused circuit capacity that we hold;

28

•

general economic conditions as well as those specific to the Internet and related industries;



•

Internet growth and demand for Internet infrastructure; and



•

labor issues with our suppliers.

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

    We expect our operating expenses to increase significantly in future periods. Our operating expenses are largely based on anticipated revenue trends, and a high percentage of our expenses are, and will continue to be, fixed in the short term due in large part to our construction of our UTX facilities. As a result, fluctuations in our revenue for the reasons set forth above, or for any other reason, could cause significant variations in our operating results from quarter to quarter and could result in substantial operating losses.

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

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

    Our clients depend on our ability to provide ongoing dedicated circuit access. The operation of these circuits depends on the networks of third party transport suppliers, such as MCI WorldCom or Williams Communications. The networks of transport suppliers and clients who may use our UTX facilities may be interrupted by failures in or damage to these facilities. Our facilities and the ongoing circuit access we provide may be interrupted as a result of various events, many of which we cannot control, including:

•

fire;



•

human error;



•

earthquakes, floods and other natural disasters;



•

train derailments or similar disasters along communications rights-of-way;



•

power loss;



•

telecommunications failures; or



•

sabotage or vandalism.

    We may be subject to legal claims and be liable for losses suffered by our clients for disruptions to circuits or damage to client equipment resulting from failures at our facilities or on the networks of third party providers. In addition, we may be subject to legal claims and be liable for losses suffered by clients and carriers who use our UTX facilities. Our contracts with our clients and with carriers who use our UTX facilities attempt to eliminate our liability for consequential or punitive damages and for damage to client equipment not caused by our gross negligence or willful acts. However, those provisions may not protect us from being held liable for those damages. We generally provide outage credits to our clients if circuit disruptions occur. If our circuit failure rate is high, we may incur significant expenses related to circuit outage credits, which would reduce our revenues. We would also incur significant expenses in investigating and addressing the causes of such circuit failures, which would divert resources from the expansion of our services and cause our business to suffer. Clients may seek to terminate their contracts with us if there is a circuit failure. In addition, if our circuit failure rate is high, our reputation could be harmed, which would make it difficult for us to retain and attract clients.

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We depend on several large clients, and the loss of one or more of these clients, or a significant decrease in total revenues from any of these clients, could significantly reduce our revenue and income.

    Historically, a substantial portion of our revenues has come from a limited number of clients. For example, for the year ended December 31, 1999, our largest client accounted for approximately 38% of our total revenues, and for the year ended December 31, 2000, our four largest clients accounted for approximately 61% of our total revenues. We have a number of significant revenue contracts with these customers. These contracts expire on various dates between November 2000 and March 2005. If we lose one or more large clients, or if one or more of our large clients reduces the services they purchase from us and we fail to add new clients, our revenues could decline and our results of operations would suffer.

Our clients may fail to pay or be unable to pay their obligations to us in a timely manner or at all.

    Some of our clients may have limited operating histories and may have inadequate financial resources to meet all of their obligations. We recorded a substantial bad debt expense during the year ended December 31, 1999 primarily in connection with the failure by one of our clients to pay its bills. Although we continue to improve our credit approval process, if other clients are unable to meet their obligations to us, we may incur additional bad debt expenses, which could harm our cash flows and results of operations.

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

    Our communications services are subject to both federal and state regulation. In providing our interstate and international communications services, we must comply with federal telecommunications laws and regulations prescribed by the FCC. At the state level, we are subject to state laws and to regulation by state public utility commissions. As we expand internationally, we will also become subject to regulation by foreign authorities and, in some markets, supra-national authorities, such as the European Union.

    These laws and regulations are subject to frequent changes and different interpretations, and therefore, it is difficult for us to assess the impact of these factors on our operations. The current domestic and international trend is toward deregulation of telecommunications and Internet services. However, we cannot be certain that this trend will continue, and it is possible that changes in regulatory policies could limit our ability to compete in some markets. The implementation, modification, interpretation and enforcement of laws and regulations vary and can limit our ability to provide many of our services.

    We have been required to obtain authorization from the FCC and many state public utilities commissions to offer particular types of telecommunications services. Pursuant to these authorizations, we have to comply with a variety of regulatory obligations on an ongoing basis. We cannot assure you that the FCC or state commissions will grant us required authority (or do so in a timely manner), or refrain from taking action against us if we are found to have violated any requirements of their rules. If authority is not obtained or if our schedules of prices, terms, and conditions are not filled, or are not updated, or otherwise do not fully comply with the rules of the FCC or state regulatory agencies, third parties or regulators could challenge our ability to offer our services. Such challenges could cause us to incur substantial legal and administrative expenses.

Required regulatory approvals may interfere with or delay corporate transactions.

    As a regulated company, we are required to obtain the approval of the FCC and certain state regulators before engaging in certain types of transactions, including mergers, acquisitions of other regulated companies, sales of all or substantial parts of our business, issuance of stock, and incurrence

30

of debt obligations. The particular types of transactions that require approval differ in each jurisdiction. In several states, any transaction that results in a transfer of 10% or more of our voting stock may require prior approval. If we cannot obtain the required approvals, or if we encounter substantial delays in obtaining them, we may not be able to enter into transactions on favorable terms and our flexibility in operating our business will be limited. If our flexibility is limited, we may not be able to optimize our operating results.

Telecommunications regulations of other countries may restrict our operations.

    We will be subject to the regulatory regimes in each of the countries in which we conduct business. Local regulations range from permissive to restrictive, depending upon the country. Changes to existing regulations of foreign countries may decrease the opportunities that are available for us to enter into those markets, or may increase our legal, administrative or operational costs, or may constrain our activities in other ways that we cannot necessarily anticipate. Any of these developments could impair our efforts to develop foreign operations.

We expect to incur operational and management inefficiencies when we acquire new businesses.

    Part of our expansion strategy includes acquiring businesses and technologies that we believe will complement our existing business. For example, in 1999 we acquired two companies, in July 2000 we completed our third acquisition, and we may acquire additional companies in the future. These acquisitions will likely involve some or all of the following risks:

•

difficulty of assimilating acquired operations and personnel and information systems;



•

potential disruption of our ongoing business;



•

diversion of resources;



•

possible inability of management to maintain uniform standards, controls, procedures and policies;



•

possible difficulty of managing our growth;



•

risks of entering markets in which we have little experience; and



•

potential impairment of relationships with employees or clients.

    We may need to complete these transactions in order to remain competitive. We cannot be sure that we will be able to obtain required financing for these transactions or that these transactions will occur.

We expect to require additional third-party financing, and if we cannot obtain this financing on commercially reasonable terms, our ability to expand our business will suffer.

    Although we believe our existing cash balances will be sufficient to fund our business until we become self-funding through operations, our ability to meet our planned growth may require substantial cash resources. We expect that the anticipated expansion of our UTX facilities, construction of sixteen additional facilities in the year 2001 (at an estimated average cost of $500,000 to $2.0 million per facility), and our anticipated funding of negative cash flow from operating activities, will require substantial capital. In addition, part of our expansion strategy includes acquiring complementary businesses and technology, which may require us to raise additional funds. We do not expect to generate significant cash flow from operations in the near term. Accordingly, our ability to meet our additional future capital needs will depend upon our ability to renegotiate, extend or replace our credit facilities, obtain supplemental financing or raise additional capital. Additional debt financing may limit our financial and operating flexibility. We may not be able to renegotiate or replace our credit and equipment lease facilities on a timely basis, on acceptable terms or at all. Additional equity financing

31

may not be available or may be dilutive to existing stockholders. If we are unable to obtain future financing when needed or on acceptable terms we may have to delay or abandon our development and expansion plans, which could materially adversely affect our growth and ability to compete.

We must expand our marketing and sales operations substantially to increase market awareness and sales of our services.

    Our services require a sophisticated sales effort that targets key people within our prospective clients' organizations. This sales effort requires the efforts of select personnel as well as specialized system and consulting engineers within our organization. We have recently expanded our sales force and plan to hire additional marketing and sales personnel, and system and consulting engineers, particularly individuals with experience in the telecommunications industry. Competition for these individuals is intense, and we may not be able to hire the number of qualified sales personnel and system and consulting engineers we need. In addition, we may substantially increase our budget as part of our marketing program. If we are unable to expand our marketing and sales operations, or our marketing efforts are not successful, we may not be able to increase market awareness or sales of our products and services, which may prevent us from achieving and maintaining profitability.

If we do not continue to expand our client support organization substantially, clients may significantly reduce purchases of our services.

    We recently hired a number of additional personnel for our client support organization and will need to continue to increase our staff to support new clients and the expanding needs of existing clients. Our client support organization is responsible for providing our clients with technical and operational support, and for identifying and developing opportunities to provide additional services to our existing clients. Competition for qualified client support personnel is intense because few people have the necessary level of technical skills and experience in telecommunications provisioning and network management. If we fail to further expand our client support organization, we may be limited in our ability to gain more business from existing clients, and we may be unable to obtain or maintain current information regarding our clients' and suppliers' communications networks, which could limit our ability to provision future circuits for our clients.

If we do not establish and maintain key client relationships, our revenues may decline.

    Our success will depend upon our ability to develop and manage key client relationships in order to generate additional revenues from existing clients. Our ability to develop and manage our client relationships depends on, among other things:

•

our ability to maintain the timeliness and quality of our services in facilitating the supply of circuits;



•

our ability to deliver our clients additional services, such as network monitoring, maintenance and troubleshooting services;



•

our ability to expand our client support organization with additional, qualified personnel; and



•

performance by the transport suppliers with whom we contract to provide circuits to our clients.

    If we fail to establish and maintain these client relationships, our revenues may stagnate or decline.

If we fail to manage expansion effectively, our ability to increase our services and client base could suffer.

    Our ability to successfully offer our services and implement our business plan in a rapidly evolving market requires effective planning and management. We continue to increase the scope of our

32

operations and have substantially increased the number of our employees. At December 31, 1997, we had five employees while at December 31, 2000, we had approximately 430 full-time employees. In addition, we plan to continue to hire a significant number of employees. This growth has placed, and our anticipated growth in future operations will continue to place, a significant strain on our management systems and resources. We expect that we will need to continue to improve our financial and managerial controls, reporting systems and procedures, and will need to continue to expand, train and manage our work force. Furthermore, we expect that we will be required to manage multiple relationships with various clients, suppliers and other third parties. We cannot be sure that we will be able to manage our expansion effectively.

If we fail to successfully complete the implementation of our management information systems, we may not be able to operate or manage our business effectively.

    We are in the process of augmenting our management information systems to facilitate management of client orders, client service, billing and financial applications. Our ability to manage our business could be harmed if we fail to successfully and promptly:

•

implement all applications of our management information systems;



•

integrate all the client records and the billing, ordering, inventory, management, accounting and other financial information systems of the businesses we have acquired or may acquire into our management information systems;



•

identify all of our information and processing needs;



•

repair "bugs" and design defects that may exist in our management information systems;



•

implement a wide area network connecting our main offices and our UTX facilities in different geographic locations; or



•

maintain and upgrade our management information systems as necessary.

    In addition, our ability to efficiently operate our business could suffer if the software which runs our information systems malfunctions.

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

    Our future success depends upon the continued services of our executive officers and other key sales, marketing and support personnel. We do not have "key person" life insurance policies covering any of our employees. In addition, we depend on the ability of a relatively new management team to effectively execute our strategies. We recently hired several of our key employees. Because some members of our management team have worked together only for a short period of time, we need to integrate these officers into our operations.

    We will need to hire additional personnel in our communications provisioning, sales, marketing and support areas in the future, and we believe our success depends, in large part, upon our ability to attract and retain these key employees. Competition for these persons is intense, especially in the communications provisioning area. In particular, we have experienced difficulty in hiring qualified network engineers, and we may not be successful in attracting and retaining these individuals. The loss of the services of any of our key employees, the inability to attract or retain qualified personnel in the future, or delays in hiring required personnel could limit our ability to generate revenues.

33

Because we have no patented technology and have limited ability to protect our proprietary information, competitors may more easily enter our market and harm our ability to generate revenues.

    We have no patented technology that would preclude or inhibit competitors from entering our market. We rely on a combination of copyright, trademark, service mark and trade secret laws and contractual restrictions to establish and protect our intellectual property. We have applied for registration of certain of our service marks in the United States and in other countries, and have obtained a registration for one of our service marks in Switzerland. Even if additional registrations are granted, we may be limited in the scope of services for which we may exclusively use our service marks. We enter into confidentiality agreements with our employees, consultants and partners, and we control access to, and distribution of, our proprietary information. Our intellectual property may be misappropriated or a third party may independently develop similar intellectual property. Moreover, the laws of certain foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States. Unauthorized use of any of our proprietary information could expose us to competition, which would harm our ability to attract new and existing clients and generate revenues.

Certain stockholders will continue to have substantial control over Universal Access, Inc. and could delay or prevent a change in corporate control.

    Internet Capital Group, Inc., funds affiliated with ComVentures and other stockholders, directors and officers, in the aggregate, beneficially own approximately 53% of our outstanding common stock. These stockholders, acting alone or together, would be able to influence significantly all matters requiring approval by our stockholders, including the election of directors and the approval of mergers or other business combination transactions.

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

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

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

    Our current stockholders hold a substantial number of shares of our common stock, substantially all of which they are able to sell in the public market. Sales of a substantial number of shares of our common stock or market expectations that these sales may occur could cause our stock price to fall. In addition, the sale of these shares could impair our ability to raise necessary capital to issue additional common stock.

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

    The market price of our common stock may fluctuate significantly in response to a number of factors, some of which are beyond our control, including:

•

quarterly variations in operating results;



•

changes in financial estimates by securities analysts;



•

changes in market valuations of Internet-related companies;



•

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

34

•

any loss of a major customer;



•

additions or departures of key personnel;



•

any deviations in net revenues or in losses from levels expected by securities analysts;



•

future sales of common stock; and



•

volume fluctuations, which are particularly common among highly volatile securities of Internet-related companies.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we may invest in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the principal amount of our investment will probably decline. To minimize this risk, we maintain our portfolio of cash equivalents and short-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 on such funds fluctuates with the prevailing interest rate. As of December 31, 2000, all of our investments were in cash equivalents and short-term investments, except for a $2.0 million long-term minority investment.

    We have operated primarily in the United States and all sales to date have been made in U.S. dollars. Accordingly, we have not had any material exposure to foreign currency rate fluctuations.

Interest Rate Sensitivity

    We maintain our cash equivalents and short-term investments primarily in a portfolio comprised of commercial paper, money market funds, and investment grade debt securities. As of December 31, 2000, all of our investments had maturities of less than six months. Accordingly, we do not believe that our investments have significant exposure to interest rate risk.

Exchange Rate Sensitivity

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The financial statements and supplementary data required with respect to this Item 8 are listed in Item 14(a)(1) and (a)(2) and filed as part of this Form 10-K on the pages indicated.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

    None.

35

PART III.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11.  EXECUTIVE COMPENSATION

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information required by Items 10, 11, 12 and 13 of Part III of this annual report on Form 10-K is incorporated by reference from and will be contained in the Company's definitive proxy statement for its annual meeting of stockholders to be filed with the commission by April 30, 2001.

36

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) FINANCIAL STATEMENTS

UNIVERSAL ACCESS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE

TABLE OF CONTENTS

    All other schedules have been omitted because the required information is included in the financial statements or notes thereto or because they are not required.

(b) REPORTS ON FORM 8-K

    None filed in 4th quarter.

(c) EXHIBITS

37

Report of Independent Accountants

To the Board of Directors and
  Stockholders of Universal Access, Inc.

    In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) present fairly, in all material respects, the financial position of Universal Access Inc. and its subsidiaries at December 31, 1999 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. The financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Chicago, Illinois
January 26, 2001

38

UNIVERSAL ACCESS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

(In thousands, except share data)

The accompanying notes are an integral part of these consolidated financial statements.

39

UNIVERSAL ACCESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(In thousands, except per share data)

The accompanying notes are an integral part of these consolidated financial statements.

40

UNIVERSAL ACCESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(In thousands)

    The accompanying notes are an integral part of these consolidated financial statements.

41

UNIVERSAL ACCESS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND COMPREHENSIVE LOSS
Page 1 of 2
(In thousands, except share data)