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TABLE OF CONTENTS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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



FORM 10-K

(Mark One)  

ý

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended December 31, 20122014

OR

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from                        to

Commission file number 1-31227000-51829

COGENT COMMUNICATIONS GROUP,HOLDINGS, INC.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
 52-233727446-5706863
(I.R.S. Employer
Identification No.)

1015 31st Street N.W.
Washington, D.C.

(Address of Principal Executive Offices)

 

20007
(Zip Code)

(202) 295-4200
Registrant's Telephone Number, Including Area Code

         Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.001 per share

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

         Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes oý    No ýo

         Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o    No ý

         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 ý    No o

         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

         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 to this Form 10-K. o

         Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerý Accelerated filero Non-accelerated filero
(Do not check if a
smaller reporting company)
 Smaller reporting companyo

         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

         The number of shares outstanding of the issuer's common stock, par value $0.001 per share, as of February 22, 201320, 2015 was 47,129,700.46,391,534.

         The aggregate market value of the Common Stock held by non-affiliates of the registrant, based on the closing price of $19.24$34.55 per share on June 29, 201230, 2014 as reported by the NASDAQ Global Select Market was approximately $845 million.$1.5 billion.

   


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COGENT COMMUNICATIONS GROUP,HOLDINGS, INC.
FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED DECEMBER 31, 20122014

TABLE OF CONTENTS

 
  
 Page 

Part I—Financial Information

    

Item 1

 

Business

  2 

Item 1A

 

Risk Factors

  9 

Item 2

 

Description of Properties

  2021 

Item 3

 

Legal Proceedings

  2022 

Item 4

 

Mine Safety Disclosures

  2022 

Part II—Other Information

    

Item 5

 

Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

  2123 

Item 6

 

Selected Consolidated Financial Data

  2325 

Item 7

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

  2527 

Item 7A

 

Quantitative and Qualitative Disclosures About Market Risk

  4143 

Item 8

 

Financial Statements and Supplementary Data

  4244 

Item 9

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  7076 

Item 9A

 

Controls and Procedures

  7076 

Part III

    

Item 10

 

Directors and Executive Officers of the Registrant

  7379 

Item 11

 

Executive Compensation

  7379 

Item 12

 

Security Ownership of Certain Beneficial Owners and Management

  7379 

Item 13

 

Certain Relationships and Related Transactions

  7379 

Item 14

 

Principal Accountant Fees and Services

  7379 

Part IV

    

Item 15

 

Exhibits and Financial Statement Schedules

  7480 

Signatures

  7986 

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DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the registrant's definitive proxy statement for the registrant's 20132015 annual shareholders meeting are incorporated by reference in Part III of this Form 10-K.


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        This report may contain forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not statements of historical facts, but rather reflect our current expectations concerning future results and events. You can identify these forward-looking statements by our use of words such as "anticipates," "believes," "continues," "expects," "intends," "likely," "may," "opportunity," "plans," "potential," "project," "will," and similar expressions to identify forward-looking statements, whether in the negative or the affirmative. We cannot guarantee that we actually will achieve these plans, intentions or expectations. These forward-looking statements are subject to risks and uncertainties including those discussed in Item 1A "Risk Factors" and other factors, some of which are beyond our control, which could cause actual results to differ materially from those forecasts or anticipated in such forward-looking statements.

        You should not place undue reliance on these forward-looking statements, which reflect our view only as of the date of this report. We undertake no obligation to update these statements or publicly release the result of any revisions to these statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events.


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PART I

ITEM 1.    BUSINESS

Overview

        We are a leadingDelaware corporation and we are headquartered in Washington, DC. We are a facilities-based provider of low-cost, high-speed Internet access and Internet Protocol or IP,("IP") communications services. Our network is specifically designed and optimized to transmit data using IP. We deliver our services primarily to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations in North America, Europe and Europe.Japan.

        We recently began expansion into the Japanese market.

offer on-net Internet access services exclusively through our own facilities, which run from our network to our customers' premises. We are not dependent on local telephone companies to serve our customers for our on-net Internet access services because of our integrated network architecture. We offer our on-net services to customers located in buildings that are physically connected to our network. Our on-net service consists of high-speed Internet access and IP connectivity ranging from 100 Megabits per second to 10100 Gigabits per second of bandwidth. We offerprovide our on-net services to customers located in buildings that are physically connected to our network. Because of our integrated network architecture, we are not dependent on local telephone companies to serve these on-net customers. We provide on-net Internet access services to our net-centric and corporate customers. Our primary on-netnet-centric customers include bandwidth-intensive users such as universities, other Internet service offeredproviders, telephone companies, cable television companies, web hosting companies, content delivery network companies and commercial content and application service providers. These net-centric customers obtain our services in colocation facilities and in our data centers. We operate data centers throughout North America and Europe that allow our customers to collocate their equipment and access our corporate customers is Internet access at a speed of 100 Megabits per second.network. Our corporate customers are located in multi-tenant office buildings and typically include law firms, financial services firms, advertising and marketing firms and other professional services businesses. Our

        In addition to providing our on-net services, offeredwe provide Internet connectivity to our net-centric customers include Internet access at speeds of up to 10 Gigabits per second. Our net-centric customers include certain bandwidth-intensive users such as universities, other Internet service providers, telephone companies, cable television companies, web hosting companies, content delivery networks and commercial content providers. These customers generally receive service in colocation facilities and in our data centers. For the years ended December 31, 2010, 2011 and 2012, our on-net customers generated 77.8%, 76.3% and 73.4%, respectively, of our total service revenue.

        Our off-net services are sold to businesses that are not located in buildings directly connected to our networknetwork. We provide this off-net service primarily by means ofto corporate customers using other carriers' facilities to provide the "last mile" access service lines obtainedportion of the link from other carriers, primarily in the form of point-to-point, TDM, POS, SDH and/or Carrier Ethernet circuits. For the years ended December 31, 2010, 2011 and 2012,customers' premises to our off-net customers generated 21.0%, 22.8%, and 25.8%, respectively, of our total service revenue.

        Ournetwork. We also provide certain non-core services which consist primarily of legacy services of companies whose assets or businesses we have acquired andthat resulted from acquisitions. We continue to support but do not actively sell primarily include voice services (only provided in Toronto, Canada). For the years ended December 31, 2010, 2011 and 2012,these non-core services generated 1.2%, 0.9% and 0.8%, respectively, of our total service revenue.

        We also operate 43 data centers comprising over 420,000 square feet throughout North America and Europe that allow customers to co-locate their equipment and access our network.services.

Competitive Advantages

        We believe we address many of the IP data communications needs of small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations by offering them high-quality, high-speed Internet service at attractive prices.

        Low Cost of Operation.    We offer a streamlined set of products on an integrated network. Our network design allows us to avoid many of the costs that our competitors incur associated with circuit-switched, TDM and TDMhybrid fiber coaxial networks related to provisioning, monitoring and maintaining multiple transport protocols. We believe that our low cost of operation also gives us greater pricing flexibility and a significant advantage in a competitive environment characterized by falling Internet access prices. We believe our value proposition is equal or superior to our competitors' in all of the on-net multi-tenant office buildings and carrier neutral data centers in which we operate.


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        Network.    Our on-net service does not rely on circuits that must be provisioned by a third party carrier. In on-net multi-tenant office buildings we provide our customers the entire network, including the last mile"last mile" and the in-building wiring connecting to our customer's suite. In carrier neutral data centers we are colocated with our customers so only a connection within-the-data center is required to provide our services. This gives us more control over our service, quality and pricing. It also allows us to provision services more quickly and efficiently than provisioning services on a third-party carrier network. We are typically able to activate service to our customers in one of our on-net buildings in approximately tenthirteen business days.


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        High Quality, Reliable Service.    We are able to offer high-quality Internet service due to our network (created solely to transmit IP data) and our dedicated intra-city bandwidth for each customer. This design increases the speed and throughput of our network and reduces the number of data packets dropped during transmission compared to traditional circuit-switched networks. We believe that we deliver a high level of technical performance because our network is optimized for IP traffic. We believe that our network is more reliable and delivers IP traffic at lower cost than networks built as overlays to traditional circuit-switched networks.

        High Traffic Network Footprint.    We have strategically chosen locations, such as over 1,3001,460 large multi-tenant office buildings in major North American cities and colocation facilities in North America and Europe with high levels of Internet traffic, to maximize our revenue opportunities and expand our margins. Our network is connected to our on-net multi-tenant office buildings where we offer our services to a diverse set of high-quality, low churn corporate customers within close physical proximity of each other. Our network is also directly connected to over 610700 carrier neutral colocation and data centers where our net-centric customers directly interconnect with our network. We operate 49 data centers across the United States and in Europe. These facilities comprise over 550,000 square feet of floor space and are directly connected to our network.

        Low Capital Cost to Grow Our Business.    We have a history of efficient network expansion and integration execution. We believe that we have incurred relatively lower costs in growing our business than our competitors because we use Internet routers without additional legacy equipment, we offer a streamlined set of products, and we have acquired optical fiber from the excess inventory in existing networks.

        Proven and Experienced Management Team.    Our senior management team is composed of seasoned executives with extensive expertise in the telecommunications industry as well as knowledge of the markets in which we operate. The members of our senior management team have an average of over 20 years of experience in the telecommunications industry and many have been working together at Cogent for several years. Several members of the senior management team have been working together at Cogent since 2000. Our senior management team has designed and built our network and led the integration of our network assets and customers we acquired through 13 significant acquisitions and managed the expansion and growth of our business.

Our Strategy

        We intend to become the leading provider of high-quality, high-speed Internet access and IP communications services and to continue to improve our profitability and cash flow. The principal elements of our strategy include:

        Focus on Providing Low-Cost, High-Speed Internet Access and IP Connectivity.    We intend to further load our high-capacity network to respond to the growing demand for high-speed Internet service generated by bandwidth-intensive applications such as streaming media, online gaming, video, voice over IP (VOIP), remote data storage, distributed computing, cloud services and virtual private networks. We intend to do so by continuing to offer our high-speed and high-capacity services at competitive prices.


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        Pursuing On-Net Customer Growth.    We intend to increase usage of our network and operational infrastructure by adding customers in our existing on-net buildings, as well as connecting more multi-tenant office buildings and carrier neutral data centers to our network. We emphasize our on-net service because our on-net service generatesservices generate greater profit margins and we have more control over service levels, quality, pricing and faster provisioning of services than our off-net services. Our fiber network connects directly to our on-net customers' premises and we pay no local access ("last mile") charges to other carriers to provide our on-net service.services. We are responding to this on-net revenue


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opportunity by increasing our sales and marketing efforts including increasing our number of sales representatives, implementing strategies to optimize sales productivity and expanding our on-net addressable market by adding service locations to our network.

        Selectively Pursuing Acquisition Opportunities.    In addition to adding customers through our sales and marketing efforts, we will continue to seek out acquisition opportunities that increase our customer base, allowing us to take advantage of the unused capacity on our network and to add revenues with minimal incremental costs. We may pursue acquisition opportunities that we believe expand our footprint, generate positive cash flow and may include off-net as well as on-net customers including complimentary businesses and those offering over the top applications such as VOIP. We may also make opportunistic acquisitions of network assets. Given our record of successful asset integration, we believe we can continue to successfully integrate new businesses as they are acquired. We may also make opportunistic acquisitions of network assets.

Our Network

        Our network is comprised of in-building riser facilities, metropolitan optical networks, metropolitan traffic aggregation points and inter-city transport facilities. We believe that we deliver a high level of technical performance because our network is optimized for IP traffic. We believe that our network is more reliable and delivers IP traffic at lower cost than networks built as overlays to traditional circuit-switched telephone networks.

        Our network serves over 180190 metropolitan markets in North America, Europe and Japan and encompasses:

        We have created our network by acquiring optical fiber from carriers with large amounts of unused fiber and directly connecting Internet routers to our existing optical fiber national backbone. We have expanded our network through key acquisitions of financially distressed companies or their assets at a significant discount to their original cost. Due to our network design and acquisition strategy, we believe we are positioned to grow our revenue and increase our profitability with limited incremental capital expenditures.

Inter-city Networks

        Our inter-city network consists of optical fiber connecting major cities in North America and Europe. The North American and European portions of our network are connected by transatlantic circuits. Our network was built by acquiring from various owners of fiber optic networks the right to use typically two strands of optical fiber out of the multiple fibers owned by the carrier.cable operator. We install the optical and electronic equipment necessary to amplify, regenerate, and route the optical signals along these networks. We have the right to use the optical fiber under long term agreements. We pay these


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providers our pro rata fees for the maintenance of the optical fiber and provide our own equipment maintenance.


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Intra-city Networks

        In each metropolitan area in which we provide our high-speed on-net Internet access services, our backbone network is connected to one or more routers that are connected to one or more of our metropolitan optical networks. We createcreated our intra-city networks by obtaining the right to use optical fiber from carriers with optical fiber networks in those cities. These metropolitan networks consist of optical fiber that runs from the central router in a market into routers located in our on-net buildings. In most cases the metropolitan fiber runs in a ring architecture, which provides redundancy so that if the fiber is cut, data can still be transmitted to the central router by directing traffic in the opposite direction around the ring. The router in the building provides the connection to each of our on-net customers.

        Within the cities where we offer our off-net Internet access services, we lease circuits from telecommunications carriers, primarily local telephone companies, to provide the last mile connection to our customer's premises. Typically, these circuits are aggregated at various locations in those cities onto higher-capacity leased circuits that ultimately connect the local aggregation route to our network.

In-Building Networks

        In office buildings where we provide service to multiple tenants we connect our routers to a cable typically containing 12 to 288 optical fiber strands that run from our equipment in the basement of the building through the building riser to the customer location. Our service is initiated by connecting a fiber optic cable from our customer's local area network to the infrastructure in the building riser. Ourriser giving our customer then has dedicated and secure access to our network using an Ethernet connection. We believe that Ethernet is the lowest cost network connection technology and is almost universally used for the local area networks that businesses operate.

Data Centers

        We operate 4349 data centers across the United States and in Europe. These facilities comprise over 420,000550,000 square feet of floor space and are directly connected to our network. Each location is equipped with secure access, uninterruptable power supplies (UPS), and backup generators. Our customers typically purchase bandwidth, rack space, and power within these facilities.

Internetworking

        The Internet is an aggregation of interconnected networks. We have settlement-free interconnections between our network and most major Internet Service Providers, or ISPs. We interconnect our network to other networks predominantly through private peering arrangements. Larger ISPs exchange traffic and interconnect their networks by means of direct private connections referred to as private peering.

        Peering agreements between ISPs are necessary in order for them to exchange traffic. Without peering agreements, each ISP would have to buy Internet access from every other ISP in order for its customer's traffic, such as email, to reach and be received from customers of other ISPs. We are considered a Tier 1 ISP and, as a result, we have settlement-free peering arrangements with other providers. We purchase no transit services or paid peering to reach any portion of the Internet. This allows us to exchange traffic with those ISPs without payment by either party. In such arrangements, each party exchanging traffic bears its own cost of delivering traffic to the point at which it is handed off to the other party. We do not treat our settlement-free peering arrangements as generating revenue or


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expense related to the traffic exchanged. However, we charge customers for transit services across our network. We do not sell paid peering. We directly connect with over 4,3605,200 total networks of which over 4,300approximately 40 are payingsettlement-free peers, the remaining networks are Cogent transit customers.


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Network Management and Customer Care

        Our primary network operations centers are located in Washington, D.C. and Madrid, Spain. These facilities provide continuous operational support in both North America and Europe. Our network operations centers are designed to immediately respond to any problems in our network. Our customer care call centers are located in Washington, D.C., Herndon, Virginia, Madrid, Spain, Paris, France, and Frankfurt, Germany. To ensure the quick replacement of faulty equipment in the intra-city and long-haul networks, we have deployed field engineers across North America and Europe. In addition, we have maintenance contracts with third-party vendors that specialize in optical and routed networks.

Our Services

        We offer our high-speed Internet access and IP connectivity services primarily to small and medium-sized businesses, communications providers and other bandwidth-intensive organizations located in North America, Europe and Europe. We recently began offering our services at a single location in Japan.

        The table below shows our primary service offerings:

On-Net Services
 Bandwidth
(Mbps)
 

Fast Ethernet

  100 

Gigabit Ethernet

  1,000 

10 Gigabit Ethernet

  10,000 

100 Gigabit Ethernet

100,000

Point-to-Point / Point to Multi-Point or VLPS

  10 to 2,000 

Colocation with Internet Access

  10 to 10,000 

 

Off-Net Services
 Bandwidth
(Mbps)
 

T1 or E1

1.5 or 2.0

T3 or E3

45 or 34

Ethernet

  10, 100 or 1,000 

        We offer on-net services in over 180190 metropolitan markets. We serve over 1,8602,120 on-net buildings. Our most popular on-net service in North America is our Fast Ethernet service, which provides Internet access at 100 megabits per second. We typically offer our Fast Ethernet (Internet access) service to our small and medium-sized business customers. We also offer Internet access services at higher speeds of up to 10100 Gigabits per second. These services are generally used by customers that have businesses, such as web hosting and ISP's that are Internet based and are generally delivered at data centers and carrier hotels. We believe that, on a per-Megabit basis, this service offering is one of the lowest priced in the marketplace. We also offer colocation services in 43our 49 data center locations in North America and Europe. This service offers Internet access combined with rack space and power in a Cogentour facility, allowing the customer to locate a server or other equipment at that location and connect to our Internet access service. Our final on-net service offering is our "Point-to-Point"Point-to-Point / Point to Multi-Point or Virtual Private Line service or "Layer 2" service. These point-to-point connections span North America and Europe and allow customers to connect geographically dispersed local area networks in a seamless manner. We offer lower prices for longer term and volume commitments. We emphasize the sale of our on-net services because we believe that we have a competitive advantage in providing these services and these services generate greater gross profit margins that are greater than our off-net services.

        In 2013 several providers of video services began using our on-net service to deliver movies and other video programing to consumers. Streaming video uses large bandwidth, e.g. 4- 10 Mbps for high definition or 4-K television. This caused significant growth in the traffic we sent to the major telephone and cable companies that provide most broadband connections to consumers in the U. S. These companies have refused or delayed increases to the capacity of the connection over which we exchange traffic with them. This results in a degradation of service for our customers and their customers. As


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streaming video usage grows in Europe the refusal of incumbent PTT residential service providers to upgrade connections has degraded service to our customers and their customers in Europe. (See the Risk Factor below for additional information on the exchange of traffic and settlement free peering.)

        We offer our off-net services to customers that are not located in our on-net buildings. These services are primarily provided in the metropolitan markets in North America and Europe in which we offer on-net services primarily dedicated Internet access, point to point, virtual private line services and Layer 2 services. These services are generally provided to small and medium-sized businesses in approximately 4,050over 4,300 off-net buildings.

        We support certain non-core services that we assumed with certain of our acquisitions. These services primarily include voice services (only provided in Toronto, Canada). We expect that the revenue from our non-core services will continue to decline. We do not actively sell these services and expect the growth of our Internet access services to compensate for this loss.

        No single customer accounted for more than 0.5%2.1% of our 20122014 revenues.

Sales and Marketing

        Direct Sales.    We employ a direct sales and marketing approach including telesales. As of February 1, 2013,2015, our sales force included 324454 full-time employees. Our quota bearing sales force includes 185343 employees with 258 employees focused primarily on the corporate market and 6485 employees focused primarily on the net-centric market. Our sales personnel work through direct face-to-face contact in addition to telesales with potential customers in, or intending to locate in, our on-net buildings. Through agreements with building owners, we are able to initiate and maintain personal contact with our customers by staging various promotional and social events in our on-net buildings.multi-tenant office buildings and carrier neutral data centers. Sales personnel are compensated with a base salary plus quota-based commissions and incentives. We use a customer relationship management system to efficiently track sales activity levels and sales productivity.

        Indirect Sales.    We also have recently begun an indirect sales program. Our indirect sales program includes several master agents with whom we have a direct relationship. Through our agreements with our master agents we are able to sell through to over 2,000 sub agents. All agents have access to selling to potential corporate customers and may sell all Cogent products. We have hired a direct channel team who manages these indirect relationships. The indirect channel team is compensated with a base salary plus quota-based commissions and incentives. We use our customer relationship management system to efficiently track indirect sales activity levels and the sales productivity of our agents under our indirect sales program.

Marketing.    Because of our historical focus on a direct sales force and a telesales, effort, we have not spent funds on television, radio or print advertising. Our marketing efforts are designed to drive awareness of our products and services, to identify qualified leads through various direct marketing campaigns and to provide our sales force with product brochures, collateral materials, in building marketing events and relevant sales tools to improve the overall effectiveness of our sales organization. In addition, we conduct public relations efforts focused on cultivating industry analyst and media relationships with the goal of securing media coverage and public recognition of our Internet communications services. Our marketing organization is responsible for our product strategy and direction based upon primary and secondary market research and the advancement of new technologies.

Competition

        We face competition from incumbent carriers, Internet service providers and facilities-based network operators, many of whom are much larger than us, have significantly greater financial resources, better-established brand names and large, existing installed customer bases in the markets in


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which we compete. We also face competition from other new entrants to the communications services market. Many of these companies offer products and services that are similar to our products and services.

        Unlike some of our competitors, we generally do not have title to most of the dark fiber that makes up our network. Our interests in that dark fiber are in the form of long-term leases under indefeasible rights of use, or IRUs, with providers some of which also compete with us. We rely on the third-party maintenance of such dark fiber to provide our on-net services to our customers. We are also dependent on third party providers, some of which compete with us, for the local loop facilities for the provision of connections to our off-net customers.

        We believe that competition is based on many factors, including price, transmission speed, ease of access and use, length of time to provision service, breadth of service availability, reliability of service, customer support and brand recognition. Because our fiber optic networks have been recently installed compared to those of the incumbent carriers, our state-of-the-art technology may provide us with cost, capacity, and service


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quality advantages over some existing incumbent carrier networks; however, our network may not support some of the services supported by these legacy networks, such as circuit-switched voice, ATM and frame relay. While the Internet access speeds offered by traditional ISPs serving multi-tenant office buildings using DSL typically do not match our on-net offerings in terms of throughput or quality, these slower services are usually priced lower than our offerings and thus provide competitive pressure on pricing, particularly for more price-sensitive customers. These and other downward pricing pressures particularly in carrier neutral data centers have diminished, and may further diminish, the competitive advantages that we have enjoyed as the result of the pricing of our service pricing.services. Increasingly, traditional ISPs are upgrading their services using optical fiber and cable technology so that they can match our transmission speed and quality.

Regulation

        In the United States, the Federal Communications Commission (FCC) regulates common carriers' interstate services and the state public utilities commissions exercise jurisdiction over intrastate basic telecommunications services. Our Internet service offerings are not currently regulated by state public utility commissions. The FCC has promulgated rules intended to regulate some aspects of the way traffic is handled by Internet service providers. In addition, the FCC is considering adopting rules that would bring aspects of Internet service under common carrier regulations pursuant to Title II of the U.S. Communications Act. We may become subject to additional regulation in the U.S.United States at the federal and state levels and in other countries. These regulations change from time to time in ways that are difficult for us to predict.

        In the United States, we are subject to the obligations set forth in the Communications Assistance for Law Enforcement Act, which is administered by the FCC. That law requires that we be able to intercept communications when required to do so by law enforcement agencies. We are required to comply or we may face significant fines and penalties. We are subject to similar requirements in other countries.

        There is no current legal requirement that owners or managers of commercial office buildings give access to competitive providers of telecommunications services, although the FCC does prohibit carriers from entering contracts that restrict the right of commercial multiunit property owners to permit any other common carrier to access and serve the property's commercial tenants. Also, many incumbent telephone and cable companies contend that they have no legal obligation to exchange Internet traffic with other Internet networks.

        Our subsidiary, Cogent Canada, offers voice and Internet services in Canada. Generally, the regulation of Internet access services and competitive voice services has been similar in Canada to that in the U.S.US in that providers of such services face fewer regulatory requirements than the incumbent local telephone company. This maycompanies which continue to be regulated in respect of their wholesale services as well of some of their retail services. There can be no guarantee, however, that the regulatory requirements applicable to Cogent Canada will not change. Also,To the Canadian government hasextent that there are any changes in these requirements, limiting foreign ownership of certain telecommunications facilities in Canada. We are not subject to these restrictions today. Wewe will have to comply with these regulations to the extent they change and to the extent we begin using facilities in a manner that subjects us to these restrictions.changes.


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        Our subsidiaries outside of the United States generally operate in more highly regulated environments for the types of services they provide. In many such countries, a national license or a notice filed with a regulatory authority is required for the provision of data and Internet services. In addition, our subsidiaries operating in member countries of the European Union are subject to the directives and jurisdiction of the European Union. We believe that each of our subsidiaries has the necessary licenses to provide its services in the markets where it operates today. To the extent we expand our operations or service offerings into new markets, in particularly in non EU member countries, we may face new regulatory requirements.

        The laws related to Internet telecommunications are unsettled and there may be new legislation and court decisions that may affect our services and expose us to burdensome requirements and liabilities.


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Employees

        As of February 1, 2013,2015, we had 605772 employees. Unions represent twenty-four26 of our employees in France. We believe that we have a satisfactory relationship with our employees.

Available Information

        We were incorporated in Delaware in 1999. We make available free of charge through our Internet website our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. The reports are made available through a link to the SEC's Internet website atwww.sec.gov. You can find these reports and request a copy of our Code of Conduct on our website atwww.cogentco.com under the "About Cogent" tab at the "Investor Relations" link.

ITEM 1A.    RISK FACTORS

If our operations doOur connections to the Internet require us to establish and maintain relationships with other providers, which we may not consistently produce positive cash flowbe able to paymaintain.

        The Internet is composed of various network providers who operate their own networks that interconnect at public and private interconnection points. Our network is one such network. In order to obtain Internet connectivity for our growthnetwork, we must establish and maintain relationships with other providers, including many providers that are customers, and incur the necessary capital costs to locate our equipment and connect our network at these various interconnection points.

        By entering into what are known as settlement-free peering arrangements, providers agree to exchange traffic between their respective networks without charging each other. Our ability to avoid the higher costs of acquiring paid dedicated network capacity (transit or meet our operatingpaid peering) and financing obligations, and we are unable to otherwise raise additional capital to meet these needs,maintain high network performance is dependent upon our ability to implementestablish and maintain peering relationships and to increase the capacity of these peering connections. The terms and conditions of our business plan willpeering relationships may also be materiallysubject to adverse changes, which we may not be able to control. For example, several network operators with large numbers of individual users are arguing that they should be able to charge or charge more to network operators and adversely affected.

        We currently generate positive cash flow from our operations. Webusinesses that carry large volumes of traffic requested by those users. If we are not consistently cash flow positive overall and we have limited funds availableable to us. If we do not become consistently cash flow positivemaintain or if we acquire or investincrease our peering relationships in additional businesses, assets, services or technologiesall of our markets on favorable terms, we may neednot be able to raise additional capital beyondprovide our customers with high performance or affordable or reliable services, which could cause us to lose existing and potential customers, damage our reputation and have a material adverse effect on our business. We have in the past had peering disputes with other network providers that available from our operating cash flow. We may also face unforeseen capital requirements for new technology required to remain competitive or to comply with new regulatory requirements, for unforeseen maintenanceresulted in a temporary disruption of the exchange of traffic between our network and facilities,the network of the other carrier. We have resolved the majority of such disputes through negotiations. We continue to experience resistance from certain broadband residential Internet service providers to upgrade the settlement-free peering connections


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necessary to accommodate the growth of the traffic that we exchange with such carriers. This results in a degradation of service to our customers and for other unanticipated expenses associatedtheir customers. The companies refusing to upgrade connections are incumbent cable and telephone providers in the U.S. and Europe.In 2013 the major incumbent telephone and cable companies in the United States began to refuse to upgrade our peering connections. This has continued throughout 2014 and to the present. We have experienced the same problem in Europe with running our business. In addition, if we do not retain existing customers or add new customers, our cash flow may be impaired and we may be required to raise additional funds throughincumbent telephone companies. As the issuanceuse of debt or equity.streaming video increases this problem is exacerbated. We cannot assure you that we will have accessbe able to necessary capital, nor can we assure you that any such financing will be available on terms that are acceptablecontinue to establish and maintain relationships with providers, favorably resolve disputes with providers, or increase the capacity of our stockholders or us. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders may result.interconnections with other providers.

We need to retain existing customers and continue to add new customers in order to become consistently profitable and cash flow positive.

        In order to become consistently profitable and consistently cash flow positive, we need to both retain existing customers and continue to add a large number of new customers. The precise number of additional customers required is dependent on a number of factors, including the turnover of existing customers, the pricing of our product offerings and the revenue mix among our customers. We may not succeed in adding customers if our sales and marketing plansefforts are unsuccessful. In addition, many of our targettargeted customers are existing businesses that are already purchasing Internet access services from one or more providers, often under a contractual commitment. It has been our experience that such targettargeted customers are often reluctant to switch providers due to costs and effort associated with switching providers. Further, as some of our customers grow larger they may decide to build their own Internet networks. While no single customer accounted for more than 0.5%2.1% of our 2012 revenues,2014 revenue, a migration of a few very large Internet users to their own networks, or to special networks that may be offered by major telephone and cable providers of last mile broadband connections to consumers, or the loss or reduced purchases from several significant customers could impair our growth, cash flow and profitability.

Our growth and financial health are subject to a number of economic risks.

        A downturn in the world economy, especially the economies of North America and Europe would negatively impact our growth. We would be particularly impacted by a decline in the development of new applications and businesses that make use of the Internet. Our revenue growth is predicated on


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growing use of the Internet that makes up for the declining prices of Internet service. An economic downturn could impact the Internet business more significantly than other businesses that are less dependent on new applications and growth in the use of those applications because of the retrenchment by consumers and businesses that typically occurs in an economic downturn.

Our business and operations are growing rapidly and we may not be able to efficiently manage our growth.

        We have rapidly grown our company through network expansion and obtaining new customers through our sales efforts. Our expansion places significant strains on our management, operational and financial infrastructure. Our ability to manage our growth will be particularly dependent upon our ability to:

If we fail to implement these measures successfully, our ability to manage our growth will be impaired.


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We may experience difficulties operating in implementing our expansion in Eastern Europe, Mexicocountries outside of the United States, Canada and Japan and may incur related unexpected costs and regulatory issues.Western Europe.

        We began to expandhave expanded our network into Eastern Europe, in 2007, into Mexico in 2009 and recently into Japan.on a limited basis to Tokyo, with further planned expansion to Hong Kong and Singapore. We have experienced difficulty in acquiringdifficulties, ranging from lack of dark fiber and other difficultiesto regulatory issues to slower revenue growth rates in making our network operational in Eastern European and Mexican markets. Our expansion may also cost more than we have planned and we may experience regulatory issues. Finally, we may be unsuccessful in selling our servicesoperating in these markets. If we are not successful in developing our market presence in Eastern Europe, Mexico and Japanthese regions our operating results and revenue growth could be adversely impacted.

We may experience delays and additional costs in expanding our on-net buildings.

        Currently, weWe plan on continuing to increase the number of carrier-neutral facilities and multi-tenant office buildings that are connected to our network. We may be unsuccessful at identifying appropriate buildings or negotiating favorable terms for acquiring access to such buildings, and consequently, we may experience difficulty in adding customers to our network and fully using our network's available capacity.

Our connections to the Internet require us to establish and maintain relationships with other providers, which we may not be able to maintain.

        The Internet is composed of various network providers who operate their own networks that interconnect at public and private interconnection points. Our network is one such network. In order to obtain Internet connectivity for our network, we must establish and maintain relationships with other providers and incur the necessary capital costs to locate our equipment and connect our network at these various interconnection points.

        By entering into what are known as settlement-free peering arrangements, providers agree to exchange traffic between their respective networks without charging each other. Our ability to avoid the higher costs of acquiring paid dedicated network capacity (transit or paid peering) and to maintain high network performance is dependent upon our ability to establish and maintain peering relationships and expand our customer base of other network operators. The terms and conditions of our peering


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relationships may also be subject to adverse changes, which we may not be able to control. For example, several network operators with large numbers of individual users are arguing that they should be able to charge or charge more to network operators and businesses that exchange traffic to those users. If we are not able to maintain or increase our peering relationships in all of our markets on favorable terms, we may not be able to provide our customers with high performance or affordable or reliable services, which could cause us to lose existing and potential customers, damage our reputation and have a material adverse effect on our business. We have in the past had peering disputes with other network providers that resulted in a temporary disruption of the exchange of traffic between our network and the network of the other carrier. We have resolved the majority of such disputes through negotiations. We continue to experience resistance from certain incumbent telephone companies to upgrade the settlement-free peering connections necessary to accommodate the growth of the traffic that we exchange with such carriers. We cannot assure you that we will be able to continue to establish and maintain relationships with providers or favorably resolve disputes with providers.

We may be required to censor content on the Internet, which we may find difficult to do and which may impact our ability to provide serviceour services in some countries as well as impact the growth of Internet usage, upon which we depend.

        Some governments attempt to limit access to certain content on the Internet. It is impossible for us (and other providers as far as we know) to filter all content that flows across the Internet connections we provide. For example, some content is encrypted when a secure web site is accessed. It is difficult to limit access to web sites that engage in practices that make it difficult to block them by blocking a fixed set of Internet addresses. Should any government require us to perform these types of blocking procedures we could experience difficulties ranging from incurring additional expenses to ceasing to provide service in that country. We could also be subject to penalties if we fail to implement the censorship.

We may not successfully make or integrate acquisitions or enter into strategic alliances.

        As part of our growth strategy, we intend to pursue selected acquisitions and strategic alliances. To date, we have completed 13 significant acquisitions. We compete with other companies for acquisition opportunities and we cannot assure you that we will be able to execute future acquisitions or strategic alliances on commercially reasonable terms, or at all. Even if we enter into these transactions, we may experience:

        In the past, our acquisitions have often included assets, service offerings and financial obligations that are not compatible with our core business strategy. We have expended management attention and other resources to the divestiture of assets, modification of products and systems as well as restructuring financial obligations of acquired operations. In most acquisitions, we have been successful in renegotiating the long-term agreements that we have acquired. If we are unable to satisfactorily renegotiate


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such agreements in the future or with respect to future acquisitions, we may be exposed to large claims for payment for services and facilities we do not need.


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        Consummating these transactions could also result in the incurrence of additional debt and related interest expense, as well as unforeseen contingent liabilities, all of which could have a material adverse effect on our business, financial condition and results of operations. Because we have purchased financially distressed companies or their assets, and may continue to do so in the future, we have not had, and may not have, the opportunity to perform extensive due diligence or obtain contractual protections and indemnifications that are customarily provided in corporate acquisitions. As a result, we may face unexpected contingent liabilities arising from these acquisitions. We may also issue additional equity in connection with these transactions, which would dilute our existing shareholders.

        Following an acquisition, we have experienced a decline in revenue attributable to acquired customers as these customers' contracts have expired and they have entered into our standard Cogent customer contracts at generally lower rates or have chosen not to renew service with us. We anticipate that we will experience similar revenue declines with respect to customers we may acquire in the future.

We depend upon our key employees and may be unable to attract or retain sufficient qualified personnel.

        Our future performance depends upon the continued contribution of our executive management team and other key employees, in particular, our Chairman and Chief Executive Officer, Dave Schaeffer. As founder of our company, Mr. Schaeffer's knowledge of our business and our industry combined with his deep involvement in every aspect of our operations and planning make him particularly well-suited to lead our company and difficult to replace.

Substantially all of our network infrastructure equipment is manufactured or provided by a single network infrastructure vendor.

        We purchase from Cisco Systems, Inc. (Cisco) the majority of the routers and transmission equipment used in our network. If Cisco fails to provide equipment on a timely basis or fails to meet our performance expectations, including in the event that Cisco fails to enhance, maintain, upgrade or improve its products, hardware or software we purchase from them when and how we need, we may be delayed or unable to provide services as and when requested by our customers. We also may be unable to upgrade our network and face greater difficulty maintaining and expanding our network. Transitioning from Cisco to another vendor would be disruptive because of the time and expense required to learn to install, maintain and operate the new vendor's equipment and to operate a multi-vendor network. Any such disruption could increase our costs, decrease our operating efficiencies and have an adverse effect on our business, results of operations and financial condition.

        Cisco may also be subject to litigation with respect to the technology on which we depend, including litigation involving claims of patent infringement. Such claims have been growing rapidly in the communications industry. Regardless of the merit of these claims, they can result in the diversion of technical and management personnel, or require us to obtain non-infringing technology or enter into license agreements for the technology on which we depend. There can be no assurance that such non-infringing technology or licenses will be available on acceptable terms and conditions, if at all.

Our business could suffer because telephone companies and cable companies may provide better delivery of Internet content originating on their own networks.networks that is better than content on the public Internet.

        Broadband connections provided by cable TV and telephone companies have become the predominant means by which consumers connect to the Internet. The providers of these broadband connections may treat Internet content or other broadband content delivered from different sources differently. The possibility of this has been characterized as an issue of "net neutrality." As many of our customers operate websites and services that deliver content to consumers our ability to sell our


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services would be negatively impacted if Internet content delivered by us was less easily received by consumers than Internet content delivered by others. We cannot predict whether or not the FCC and other regulators around the world will mandate an "open" Internet. We also do not know the extent to which the providers of broadband connections to consumers may favor certain content of providers in ways that may disadvantage us.

Our operations outside of the United States expose us to economic, regulatory and other risks.

        The nature of our operations outside of the United States involve a number of risks, including:

        As we continue to expand into other countries, our success will depend, in part, on our ability to anticipate and effectively manage these and other risks. Our failure to manage these risks and grow our operations outside the U.S.United States may have a material adverse effect on our business and results of operations.


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Fluctuations in foreign exchange rates may adversely affect our financial position and results of operations.

        Our operations outside the U.S.United States expose us to currency fluctuations and exchange rate risk. For example, while we record revenues and the financial results of our European operations in Euros, these results are reflected in our consolidated financial statements in U.S.US dollars. Therefore, our reported results are exposed to fluctuations in the exchange rates between the U.S.US dollar and the Euro. We may fund certain of our cash flow requirements of our operations outside of the United States in U.S.US dollars. Accordingly, in the event that the foreign currency strengthens against the U.S.US dollar to a greater extent than we anticipate, the cash flow requirements associated with these operations may be significantly greater in U.S.-dollarUS dollar terms than planned.

Our business could suffer delays and problems due to the actions of network providers on whom we are partially dependent.

        Our off-net customers are connected to our network by means of communications lines that are provided as services by local telephone companies and others. We may experience problems with the installation, maintenance and pricing of these lines and other communications links, which could adversely affect our results of operations and our plans to add additional customers to our network using such services. We have historically experienced installation and maintenance delays when the network provider is devoting resources to other services, such as traditional telephony. We have also experienced pricing problems when a lack of alternatives allows a provider to charge high prices for services in ana particular area. We attempt to reduce this problem by using many different providers so that we have alternatives for linking a customer to our network. Competition among the providers tends to improve installation intervals, maintenance and pricing.

Our network may be the target of potential cyber-attacks and other security breaches that could have significant negative consequences.

        Our business depends on our ability to limit and mitigate interruptions or degradation to our network availability. Our network, including our routers, may be vulnerable to unauthorized access,


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computer viruses, cyber-attacks, distributed denial of service (DDOS), and other security breaches. An attack on or security breach of our network could result in interruption or cessation of services, our inability to meet our service level commitments, and potentially compromise customer data transmitted over our network. We cannot guarantee that our security measures will not be circumvented, thereby resulting in network failures or interruptions that could impact our network availability and have a material adverse effect on our business, financial condition and operational results. We may be required to expend significant resources to protect against such threats, and may experience a reduction in revenues, litigation, and a diminution in goodwill, caused by a breach. Although our customer contracts limit our liability, affected customers and third parties may seek to recover damages from us under various legal theories.

Our network could suffer serious disruption if certain locations experience serious damage.

        There are certain locations through which a large amount of our Internet traffic passes. Examples are facilities in which we exchange traffic with other carriers, the facilities through which our transatlantic traffic passes, and certain of our network hub sites. If any of these facilities were destroyed or seriously damaged a significant amount of our network traffic could be disrupted. Because of the large volume of traffic passing through these facilities our ability (and the ability of carriers with whom we exchange traffic) to quickly restore service would be challenged. There could be parts of our network or the networks of other carriers that could not be quickly restored or that would experience substantially reduced service for a significant time. If such a disruption occurs, our reputation could be negatively impacted which may cause us to lose customers and adversely affect our ability to attract new customers, resulting in an adverse effect on our business and operating results.


TableWe may have difficulty and experience disruptions as we add features and upgrade our network

        We are in the process of Contentssignificantly upgrading our network and implementing new features and services. This process involves reconfiguring our network and making changes to our operating system. In doing so we may experience disruptions that affect our customers, our revenue, and our ability to grow. We may require additional resources to accomplish this work in a timely manner. That could cause us to incur unexpected expenses or delay portions of this effort to the detriment of our ability to provide service to our customers.

If the information systems that we depend on to support our customers, network operations, sales, billing and financial reporting do not perform as expected, our operations and our financial results may be adversely affected.

        We rely on complex information systems to operate our network and support our other business functions. Our ability to track sales leads, close sales opportunities, provision services, bill our customers for thoseour services and prepare our financial statements depends upon the effective integration of our various information systems. If our information systems, individually or collectively, fail or do not perform as expected, our ability to process and provision orders, to make timely payments to vendors, to ensure that we collect amounts owed to us and prepare our financial statements would be adversely affected. Such failures or delays could result in increased capital expenditures, customer and vendor dissatisfaction, loss of business or the inability to add new customers or additional services, and the inability to prepare accurate and timely financial statements all of which would adversely affect our business and results of operations.

We have historically incurred operating losses.

        Since we initiated operations in 2000 and through 2009, we generated operating losses. Operating losses may prevent us from pursuing our strategies for growth or may require us to seek unplanned additional capital and could cause us to be unable to meet our debt service obligations, capital expenditure requirements or working capital needs.

The utilization of certain of our net operating loss carryforwards areis limited and depending upon the amount of our taxable income we may be subject to paying income taxes earlier than planned.

        Due to the uncertainty surrounding the realization of our net deferred tax asset, we have recorded a valuation allowance for the substantial majority of our net deferred tax asset.        Section 382 of the Internal Revenue Code in the United States limits the utilization of net operating losses when ownership changes, as defined by that section, occur. We have performed an


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analysis of our Section 382 ownership changes and have determined that the utilization of certain of our net operating loss carryforwards in the United States is limited. Of the $390.6 million of net operating losses available at December 31, 2014 in the United States approximately $286 million are unavailable for use and approximately $81 million are limited for use under Section 382. Our net operating loss carryforwards outside of the United States totaling approximately $789 million are not subject to limitations similar to Section 382.

We may have difficulty intercepting communications as required by the U.S.United States Communications Assistance for Law Enforcement Act and similar laws of other countries.

        The U.S.United States Communications Assistance for Law Enforcement Act and the laws of other countries require that we be able to intercept communications when required to do so by law enforcement agencies. We may experience difficulties and incur significant costs in complying with these laws. If we are unable to comply with the laws we could be subject to fines in the United States of up to $1.0 million per event and equal or greater fines in other countries.

Our business could suffer from an interruption of service from our fiber providers.

        The carrierscable owners from whom we have obtained our inter-city and intra-city dark fiber maintain that dark fiber. We are contractually obligated under the agreements with these carriers to pay maintenance fees, and if we are unable to continue to pay such fees we would be in default under these agreements. If these carriers fail to maintain the fiber or disrupt our fiber connections due to our default or for other reasons, such as business disputes with us and governmental takings, our ability to provide service in the affected markets or parts of markets would be impaired unless we have or can obtain alternative fiber routes. TheSome of the companies that maintain our inter-city dark fiber and many of the companies that maintain our intra-city dark fiber are also competitors of ours. Consequently, they may have incentives to act in ways unfavorable to us. While we have successfully mitigated the effects of prior service interruptions and business disputes in the past, we may incur significant delays and costs in restoring


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service to our customers in connection with future service interruptions, and as a result we may lose customers.

Our business depends on agreements with carrier neutral data center operators, which we could fail to obtain or maintain.

        Our business depends upon access to customers in carrier neutral data centers, which are facilities in which many large users of the Internet house the computer servers that deliver content and applications to users by means of the Internet and provide access to multiple Internet access networks. Most carrier neutral data centers allow any carrier to operate within the facility (for a standard fee). We expect to enter into additional agreements with carrier neutral data center operators as part of our growth plan. Current government regulations do not require carrier neutral data center operators to allow all carriers access on terms that are reasonable or nondiscriminatory. We have been successful in obtaining agreements with these operators in the past and have generally found that the operators want to have us located in their facilities because we offer low-cost, high-capacity Internet service to their customers. Any deterioration in our existing relationships with these operators could harm our sales and marketing efforts and could substantially reduce our potential customer base. Increasing concentration in this industry, such as the mergers between Switch & Data Facilities Company, Inc. and Equinix, Inc., and Verizon Communications, Inc. and Terremark Worldwide, Inc. could negatively impact us if any such combined entities decide to discontinue operation of their facilities in a carrier neutral fashion.


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Our ability to serve customers in multi-tenant office buildings depends on license agreements with building owners and managers, which we could fail to obtain or maintain.

        Our on-net business depends upon our in-building networks. Our in-building networks depend on access agreements with building owners or managers allowing us to install our in-building networks and provide our services in these buildings. These agreements typically have terms of five to ten years, with one or more renewal options. Any deterioration in our existing relationships with building owners or managers could harm our sales and marketing efforts and could substantially reduce our potential customer base. We expect to enter into additional access agreements as part of our growth plan. Current federal and state regulations do not require building owners to make space available to us or to do so on terms that are reasonable or nondiscriminatory. While the FCC has adopted regulations that prohibit common carriers under its jurisdiction from entering into exclusive arrangements with owners of multi-tenant commercial office buildings, these regulations do not require building owners to offer us access to their buildings. Building owners or managers may decide not to permit us to install our networks in their buildings or they may elect not to renew or amend our access agreements. Most of these agreements have one or more automatic renewal periods and others may be renewed at the option of the landlord. A significant portion of these license agreements have or will have exhausted all automatic renewal periods and, as such, will be coming up for renewal in the near future. While we have historically been successful in renewing these agreements and no single building access agreement is material to our success, the failure to obtain or maintain a number of these agreements would reduce our revenue, and we might not recover our costs of procuring building access and installing our in-building networks in those locations.

We may not be able to obtain or construct additional building laterals to connect new buildings to our network.

        In order to connect a new building to our network we need to obtain or construct a lateral from our metropolitan network to the building. We may not be able to obtain fiber in an existing lateral at an attractive price from a provider and may not be able to construct our own lateral due to the cost of construction or municipal regulatory restrictions. Failure to obtain fiber in an existing lateral or to construct a new lateral could keep us from adding new buildings to our network and negatively impact our growth opportunities.


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Impairment of our intellectual property rights and our alleged infringement on other companies' intellectual property rights could harm our business.

        We are aware of several other companies in our and other industries that use the word "Cogent" in their corporate names. One company has informed us that it believes our use of the name "Cogent" infringes on their intellectual property rights in that name. If such a challenge is successful, we could be required to change our name and lose the goodwill associated with the Cogent name in our markets.

        Furthermore, we cannot assure you that the steps taken by us to protect our intellectual property rights will be adequate to deter misappropriation of proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. We also are subject to the risk of litigation alleging infringement of third party intellectual property rights. Any such claims could require us to spend significant sums in litigation, pay damages, develop non-infringing intellectual property or acquire licenses to the intellectual property that is the subject of the alleged infringement.

The sector in which we operate is highly competitive, and we may not be able to compete effectively.

        We face significant competition from incumbent carriers, Internet service providers and facilities-based network operators. Relative to us, many of these providers have significantly greater financial


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resources, more well-established brand names, larger customer bases, and more diverse strategic plans and service offerings.

        Intense competition from these traditional and new communications companies has led to declining prices and margins for many communications services, and we expect this trend to continue as competition intensifies in the future. Decreasing prices for high-speed Internet services have somewhat diminished the competitive advantage that we have enjoyed as a result of our service pricing.

        Our competitors may also introduce new technologies or services that could make our services less attractive to potential customers.

We issue projected results and estimates for future periods from time to time, and such projections and estimates are subject to inherent uncertainties and may prove to be inaccurate.

        Financial information, results of operations and other projections that we may issue from time to time are based upon our assumptions and estimates. While we believe these assumptions and estimates to be reasonable when they are developed, they are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. You should understand that certain unpredictable factors could cause our actual results to differ from our expectations and those differences may be material. No independent expert participates in the preparation of these estimates. These estimates should not be regarded as a representation by us as to our results of operations during such periods as there can be no assurance that any of these estimates will be realized. In light of the foregoing, we caution you not to place undue reliance on these estimates. These estimates constitute forward-looking statements.

Network failure or delays and errors in transmissions expose us to potential liability.

        Our network is part of the Internet which is a network of networks. Our network uses a collection of communications equipment, software, operating protocols and proprietary applications for the high-speed transportation of large quantities of data among multiple locations. Given the complexity of our network, it is possible that data will be lost or distorted. Delays in data delivery may cause significant losses to one or more customers using our network. Our network may also contain undetected design faults and software bugs that, despite our testing, may not be discovered in time to prevent harm to our network or to the data transmitted over it. The failure of any equipment or facility


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on our network could result in the interruption of customer service until we affect the necessary repairs or install replacement equipment. Network failures, delays and errors could also result from natural disasters, power losses, security breaches, computer viruses, distributed denial of service attacks and other natural or man-made events. Our off-net services are dependent on the network facilities of other providers or on local telephone companies. Network failures, faults or errors could cause delays or service interruptions, expose us to customer liability or require expensive modifications that could have a material adverse effect on our business.

As an Internet access provider, we may incur liabilities for information disseminated through our network.

        The law relating to the liabilities of Internet access providers and on-line services companies for information carried on or disseminated through their networks is unsettled. As the law in this area develops and as we expand our international operations, the potential imposition of liabilities upon us for information carried on and disseminated through our network could require us to implement measures to reduce our exposure to such liabilities, which may require the expenditure of substantial resources or the discontinuation of certain products or service offerings. Any costs that are incurred as a result of such measures or the imposition of liabilities could harmhave a material adverse effect on our business.


The holdersTable of our senior convertible notes have the right to convert their notes to common stock.Contents

        The holders of our senior convertible notes are under certain circumstances able to convert their notes into common stock at a conversion price of $49.18 per share of common stock and to obtain additional shares of common stock. If our share price exceeds $49.18 and the conversion rights are exercised by the holders of the convertible notes the number of our shares of common stock outstanding will increase which could reduce further appreciation in our stock price and impact our per share earnings and dividend payments. Rather than issue the stock we are permitted to pay the cash equivalent in value to the stock to be issued. We might not have sufficient funds to do this or doing so might have other detrimental impacts on us.

Changes in laws, rules, and enforcement could adversely affect us.

        As an Internet service provider, we are not subject to substantial regulation by the FCC or the state public utilities commissions in the United States. However, the FCC has recently promulgated limited rules applicable to Internet service providers and proposed changes to the contribution mechanism for the U.S.United States universal service fund or its successor broadband fund—the Connect America Fund—that might require contributions from Internet service providers. Internet service is also subject to minimal regulation in Western Europe and in Canada. In Eastern Europe and Mexico the regulation is greater, though not as extensive as the regulation for providers of voice services. If we decide to offer traditional voice services or otherwise expand our service offerings to include services that would cause us to be deemed a common carrier, we will become subject to additional regulation. Additionally, if we offer voice service using IP (voice over IP)(VOIP) or offer certain other types of data services using IP we may become subject to additional regulation. This regulation could impact our business because of the costs and time required to obtain necessary authorizations, the additional taxes that we may become subject to or may have to collect from our customers, and the additional administrative costs of providing these services, and other costs. Even if we do not decide to offer additional services, governmental authorities may decide to impose additional regulation and taxes upon providers of Internet service. All of these matters could inhibit our ability to remain a low-cost carrier and could have a material adverse effect on our business, financial condition orand our results of operations.

        Much of the law related to the liability of Internet service providers remains unsettled. Some jurisdictions have laws, regulations, or court decisions that impose obligations upon Internet access providers to restrict access to certain content. Other legal issues, such as the sharing of copyrighted information, trans bordertrans-border data flow, unsolicited commercial email ("spam"), universal service, and


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liability for software viruses could become subjects of additional legislation and legal development and changes in enforcement policies. In 2014, the anti-spam provisions of the Canadian Anti-Spam Legislation (CASL) went into effect. When fully implemented in 2017, CASL will include significant civil and criminal charges for companies that do not comply. We believe we are currently in compliance with CASL. We cannot predict the impact of these changes on us. They could have a material adverse effect on our business, financial condition orand our results of operations.

Governments may assert that we are liable for taxes which we have not collected from our customers and we may have to begin collecting a multitude of taxes if the United States Internet Tax Freedom Act expires and if the Federal Communications Commission subjects Internet services to the universal service fund tax.

        In the United States Internet services are generally not subject to taxes. Consequently, in the United States we collect few taxes from our customers even though most telecommunications services are subject to numerous taxes. Various local jurisdictions have asserted that some of our services should be subject to local taxes. If such jurisdictions assess taxes on prior years we may be subject to a liability for unpaid taxes that we may be unable to collect from our customers. Further, the United States Internet Tax Freedom Act expires at the end of October 2015. If it is allowed to expire we will become subject to numerous taxes that we will need to collect from our customers. The process of implementing a system to properly bill and collect such taxes may require significant resources. In addition, the FCC is considering changes to its universal services fund that could result in its application to Internet services. This too would require that we expend resources to collect this tax. Finally, the cumulative effect of these taxes levied on Internet services could discourage potential customers from using Internet services to replace traditional telecommunication services and negatively impact our ability to grow our business.


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Terrorist activity throughout the world, military action to counter terrorism and natural disasters could adversely impact our business.

        The continued threat of terrorist activity and other acts of war or hostility have had, and may continue to have, an adverse effect on business, financial and general economic conditions internationally. Effects from these events and any future terrorist activity, including cyber terrorism, may, in turn, increase our costs due to the need to provide enhanced security, which would adversely affect our business and results of operations. These circumstances may also damage or destroy the Internet infrastructure and may adversely affect our ability to attract and retain customers, our ability to raise capital and the operation and maintenance of our network access points. We are particularly vulnerable to acts of terrorism because our largest customer concentration is located in New York, our headquarters is located in Washington, D.C., and we have significant operations in Paris, Madrid and London, cities that have historically been targets for terrorist attacks. We are also susceptible to other catastrophic events such as major natural disasters, extreme weather, fire or similar events that could affect our headquarters, other offices, our network, infrastructure or equipment, which could adversely affect our business.

If we do not comply with laws regarding corruption and bribery, we may become subject to monetary or criminal penalties.

        The U.S.United States Foreign Corrupt Practices Act generally prohibits companies and their intermediaries from bribing foreign officials for the purpose of obtaining or keeping business. Other countries have similar laws to which we are subject. We currently take precautions to comply with these laws. However, these precautions may not protect us against liability, particularly as a result of actions that may be taken in the future by agents and other intermediaries through whom we have exposure under these laws even though we may have limited or no ability to control such persons. Our competitors include foreign entities that are not subject to the U.S.United States Foreign Corrupt Practices Act or laws of similar stringency, and hence we may be at a competitive disadvantage.

Allegations that the United States Government has intercepted Internet traffic may discourage use of the Internet and the use of United States based Internet service providers.

        Recent allegations have been made that the United States Government (through its National Security Agency) and other governments have allegedly intercepted Internet traffic on a massive scale. It has also been alleged that user information has been collected from various Internet-based services with and without the cooperation of the companies providing those services. Such allegations may discourage individuals and organizations from making use of Internet-based services due to privacy concerns and concerns that proprietary data can be compromised, This could impact our ability to grow our business, especially because we and other companies headquartered in the United States may be less favored by customers that perceive a connection between the activities of the United States Government and United States companies.

Risk Factors Related to Our Indebtedness

We have substantial debt which we may not be able to repay when due.

        Our total indebtedness, net of discount,including premium, at December 31, 20122014 was $395.4$610.8 million. As of December 31, 2012,In January 2011 we have $92.0issued $175.0 million in senior secured notes and in August 2013 we issued $65.0 million in senior secured notes. These $240.0 million of face valuesenior secured notes were due in 2018 and required interest payments totaling $20.1 million per year. In April 2014 we issued $200.0 million in senior unsecured notes. The $200.0 million of senior convertibleunsecured notes outstanding.are due in 2021 and require interest payments totaling $11.3 million per year. In February 2015, we issued $250.0 million of 5.375% senior secured notes. The holdersnew $250.0 million senior secured notes are due in March 2022 and require annual


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interest payments of $13.4 million. The proceeds from these new notes, have the right to compel us to repurchase forand cash on June 15, 2014, June 15, 2017 and June 15, 2022, all or somehand, will be used to redeem our $240.0 million of their convertible notes. They alsosenior secured notes at a premium of 104.188% in March 2015. All of our noteholders have the right to be paid the principal upon default and upon certain designated events, such as certain changes of control. In January 2011 we issued $175.0Our total indebtedness at December 31, 2014 also includes $166.5 million of capital lease obligations for dark fiber primarily under 15 - 20 year IRUs. The amount of our IRU capital lease obligations may be impacted due to our expansion activities, the timing of payments and fluctuations in senior secured notes that are due in 2018 and require interest payments totaling $14.7 million per year.foreign currency rates. We may not have sufficient funds to pay the interest and principal related to these obligations at the time we are obligated to do so, which could result in bankruptcy, or we may only be able to raise the necessary funds on unfavorable terms.

        Our total indebtedness at December 31, 2012 includes $137.9 millionWe began making dividend payments in the third quarter of 2012. In addition to our regular quarterly dividends, our board of directors has approved an additional return of capital lease obligationsprogram (the "Capital Program") for dark fiber primarily under 15 - 20 year IRUs. The amount of our IRUshareholders. Under the Capital Program we plan on returning capital lease obligations may be impacted due to our expansion activities,shareholders each quarter through either stock buybacks or a special dividend or a combination of stock buybacks and a special dividend. These payments reduce our cash balances and may impact our ability to pay the timing of paymentsinterest and fluctuations in foreign currency rates.


Table of Contentsprincipal on our debt obligations at the time we are obligated to do so.

Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our notes and our other indebtedness.

        We have substantial indebtedness. Our substantial debt may have important consequences. For instance, it could:

        Our ability to satisfy our obligations and to reduceincluding our total debt depends on our future operating performance and on economic, financial, competitive and other factors, many of which are beyond our control. Our business may not generate sufficient cash flow, and future financings may not be available to provide sufficient net proceeds, to meet these obligations or to successfully execute our business strategy.

Despite our leverage we may still be able to incur more debt. This could further exacerbate the risks that we and our subsidiaries face.

        We and our subsidiaries may incur additional indebtedness, including additional secured indebtedness, in the future. The terms of our debt indentures restrict, but do not completely prohibit, us from doing so. In addition, the indentures allow us to issue additional notes and other indebtedness secured by the collateral under certain circumstances. Moreover, we are not prevented from incurring other liabilities that do not constitute indebtedness as defined in the indentures, including additional capital lease obligations in the form of IRUs. These liabilities may represent claims that are effectively prior to the claims of our note holders. If new debt or other liabilities are added to our debt levels the related risks that we and our subsidiaries now face could intensify.


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The agreements governing our various debt obligations impose restrictions on our business and could adversely affect our ability to undertake certain corporate actions.

        The agreements governing our various debt obligations include covenants imposing significant restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. These covenants place restrictions on our ability to, among other things:


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        Our ability to comply with these agreements may be affected by events beyond our control, including prevailing economic, financial and industry conditions. These covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other corporate opportunities. The breach of any of these covenants or restrictions could result in a default under the agreements governing our debt obligations.

To service our indebtedness, we will require a significant amount of cash. However, our ability to generate cash depends on many factors many of which are beyond our control.

        Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures will depend on our ability to generate cash in the future, which, in turn, is subject to general economic, financial, competitive, regulatory and other factors, many of which are beyond our control.

        Our business may not generate sufficient cash flow from operations and we may not have available to us future borrowings in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. In these circumstances, we may need to refinance all or a portion of our indebtedness on or before maturity. We may not be able to refinance any of our indebtedness on commercially reasonable terms or at all. Without this financing, we could be forced to sell assets or secure additional financing to make up for any shortfall in our payment obligations under unfavorable circumstances. However, we may not be able to secure additional financing on terms favorable to us or at all and, in addition, the terms of the indentures governing our notes limit our ability to sell assets and also restrict the use of proceeds from such a sale. We may not be able to sell assets quickly enough or for sufficient amounts to enable us to meet our obligations, including our obligations under our notes.

ITEM 2.    DESCRIPTION OF PROPERTIES

        We lease space for offices, data centers, colocation facilities, and points-of-presence.

        Our headquarters facility consists of approximately 15,350 square feet located in Washington, D.C. The lease for our headquarters is with an entity controlled by our Chief Executive Officer. The lease expires on August 31, 2015.2016 and may be cancelled by us upon 60 days' notice. In the second quarter of 2015 we plan to move our headquarters to a larger different building, also located in Washington, D.C. and owned by an entity controlled by our Chief Executive Officer.


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        We also lease a total of approximately 540,000680,000 square feet of space for our data centers, regional offices and operations centers. The remaining term of these leases ranges from 5 months to 11 years with, in many cases, options to renew.

We believe that these facilities are generally in good condition and suitable for our operations.

ITEM 3.    LEGAL PROCEEDINGS

        We are involved in legal proceedings in the normal course of our business that we do not expect to have a material adverse effect on our business, financial condition or results of operations. For a discussion of the significant proceedings in which we are involved, see Note 6 to our consolidated financial statements.

ITEM 4.    MINE SAFETY DISCLOSURES

        Not applicable.


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PART II

ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        Our sole class of common equity is our common stock, par value $0.001, which is currently traded on the NASDAQ Global Select Market under the symbol "CCOI." Prior to March 6, 2006, our common stock traded on the American Stock Exchange under the symbol "COI." Prior to February 5, 2002, no established public trading market for our common stock existed.

        As of February 1, 2013,2015, there were approximately 181166 holders of record of shares of our common stock holding 46,874,349 shares46,428,143shares of our common stock.

        The table below shows, for the quarters indicated, the reported high and low trading prices of our common stock.


 High Low  High Low 

Calendar Year 2011

 

Calendar Year 2013

     

First Quarter

 $16.14 $13.10  $26.69 $22.79 

Second Quarter

 17.23 12.68  29.78 25.30 

Third Quarter

 17.99 12.23  33.10 28.05 

Fourth Quarter

 17.84 12.63  41.25 31.66 

Calendar Year 2012

 

Calendar Year 2014

     

First Quarter

 $20.24 $14.50  $43.50 $31.56 

Second Quarter

 19.65 16.67  37.91 32.88 

Third Quarter

 23.01 17.54  37.07 31.98 

Fourth Quarter

 23.77 20.30  36.28 29.70 

        On August 7, 2012, our board of directors approved the payment of a dividend of $0.10 perDividends on common share to holders of record on August 22, 2012. The $4.5 million dividend payment was made on September 12, 2012. On November 5, 2012, our board of directors approved the payment of a dividend of $0.11 per common share to holders of record on November 21, 2012. The $5.0 million dividend payment was made on December 12, 2012.stock

        Dividend payments are recorded as a reduction to retained earnings.in and increase our accumulated deficit. Dividends on unvested restricted shares of common stock are paid as the awards vest. On February 20, 2013,Our initial dividend payment was made in the third quarter of 2012. In addition to our regular quarterly dividends, our board of directors has approved an additional return of capital program (the "Capital Program") for our shareholders. Under the Capital Program we plan on returning capital to our shareholders each quarter through either stock buybacks or a special dividend or a combination of stock buybacks and a special dividend. The initial aggregate payment of a dividend of $0.12 per common share—to holders of record on March 4, 2013 with payment estimatedunder the Capital Program was at least $10.0 million each quarter and was increased to be approximately $5.5at least $12.0 million each quarter. Amounts paid under our Capital Program are in addition to our regular quarterly dividend payments. A summary of our quarterly dividends paid since our initial dividend payment and amounts paid under our Capital Program is included in Note 7 to be made on March 15, 2013.

our consolidated financial statements. The payment of any future quarterly dividends and any other returns of capital will be at the discretion of our board of directors and may be reduced, eliminated or increased and will be dependent upon our financial position, results of operations, available cash, cash flow, capital requirements and other factors deemed relevant by our board of directors.

        On January 26, 2011, we issuedThe indentures governing our 8.375% Senior Secured Notes (the "Senior Notes") due February 15, 2018, for an aggregate principal amount of $175.0 million in a private offering for resale to qualified institutional buyers pursuant to SEC Rule 144A. The indenture governing the Senior Notes,debt obligations, among other things, limits our ability and a guarantors' ability to incur indebtedness; to pay dividends or make other distributions; to make certain investments and other restricted payments; to create liens; consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; to incur restrictions on the ability of a subsidiary to pay dividends or make other payments; and to enter into certain transactions with our affiliates. See also Notes 4, 7 and 12 to our consolidated financial statements.

        We are a Delaware Corporation and under the General Corporate Law of the State of Delaware distributions may be restricted including a restriction that distributions, including stock purchases and dividends, do not result in an impairment of a corporations capital, as defined under Delaware Law.


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Performance Graph

        Our common stock currently trades on the NASDAQ Global Select Market. The chart below compares the relative changes in the cumulative total return of our common stock for the period from December 31, 2007—2009 to December 31, 2012,2014, against the cumulative total return for the same period of the (1) The Standard & Poor's 500 (S&P 500) Index and (2) the NASDAQ Telecommunications Index and (3) an industry peer group consisting of Internap Network Services Corporation (NASDAQ: INAP) and TW Telecom Inc. (NASDAQ: TWTC). Cogent's original industry peer group, selected in 2003, consisted of five companies. Only two of the original peer group companies remain publicly traded companies. The customized peer group is now too small to reflect a meaningful market comparison as intended by this graph. Accordingly, we have replaced the customized peer group with the NASDAQ Telecommunications Index. The customized industry peer group is included here for comparison purposes. The comparison below assumes $100 was invested on December 31, 20072009 in our common stock, the S&P 500 Index and the industry peer group,NASDAQ Telecommunications Index, with dividends, if any, reinvested.


COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Cogent Communications Group,Holdings, the S&P 500 Index,
and the NASDAQ Telecommunications Index and a Peer Group


*
$100 invested on 12/31/0709 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.

Please note Time Warner Telecom Inc. changed its name to TW Telecom Inc

Copyright© 20132015 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

 
 12/07 12/08 12/09 12/10 12/11 12/12 

Cogent Communications Group

 $100.00 $27.54 $41.59 $59.64 $71.24 $96.47 

S&P 500

  100.00  63.00  79.67  91.67  93.61  108.59 

NASDAQ Telecommunications

  100.00  57.58  72.97  86.05  90.30  89.62 

Peer Group

  100.00  40.33  81.12  82.71  92.58  120.33 
 
 12/09 12/10 12/11 12/12 12/13 12/14 

Cogent Communications Holdings Inc. 

 $100.00 $143.41 $171.30 $231.98 $424.08 $383.65 

S&P 500

  100.00  115.06  117.49  136.30  180.44  205.14 

NASDAQ Telecommunications Index

  100.00  107.95  96.16  100.40  139.11  148.69 

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

Issuer Purchases of Equity Securities

        In February 2011, we announced that ourOur Board of Directors had authorized a plan to permit the repurchase of up to $50.0 million of our common stock in negotiated and open market transactions. As


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of December 31, 2012, we had purchased 306,940 shares of our common stock pursuant to these authorizations for an aggregate of $4.2 million; approximately $45.82014 $37.2 million remained available for such negotiated and open market transactions concerning our common stock.stock


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through February 2016. We may purchase shares and our convertible notes from time to time depending on market, economic, and other factors.

        There were noThe following table summarizes our common stock repurchases during the fourth quarter of 20122014 made pursuant to this authorization. During the quarter, we did not purchase shares outside of this program, and all purchases were made by or on behalf of the Company and not by any "affiliated purchaser" (as defined by Rule 10b-18 of the Securities Exchange Act of 1934).


Issuer Purchases of Equity Securities

Period
 Total
Number of
Shares (or
Units)
Purchased
 Average Price
Paid per Share
(or (Unit)
 Total Number of
Shares (or Units)
Purchased as Part of
Publicly Announced
Plans or Programs
 Maximum Number (or
Approximate Dollar Value) of
Shares (or Units) that May
Yet Be Purchased Under the
Plans or Programs
 

October 1 - 31, 2014

  217,619 $31.27  217,619 $40,934,166 

November 1 - 30, 2014

  2,500 $31.47  2,500 $40,855,480 

December 1 - 31, 2014

  108,318 $33.89  108,318 $37,184,922 

Equity Compensation Plan Information

        The information required by this Item 5 regarding Securities Authorized for Issuance Under Equity Compensation Plans is incorporated in this report by reference to the information set forth under the caption "Equity Plan Information" in the 2013our 2015 Proxy Statement.

ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA

        The annual financial information set forth below has been derived from our audited consolidated financial statements. The information should be read in connection with, and is qualified in its entirety by reference to, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of


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Operations", the consolidated financial statements and notes included elsewhere in this report and in our SEC filings.


 Years Ended December 31,  Years Ended December 31, 

 2012 2011 2010 2009 2008  2014 2013 2012 2011 2010 

 (dollars in thousands)
  (dollars in thousands)
 

CONSOLIDATED STATEMENT OF OPERATIONS DATA:

            

Service revenue

 $316,973 $305,500 $263,416 $235,807 $215,489  $380,003 $347,979 $316,973 $305,500 $263,416 

Operating expenses:

            

Network operations

 143,113 131,650 118,653 102,603 92,727  159,405 149,718 143,113 131,650 118,653 

Equity-based compensation expense—network operations

 529 510 370 172 328  488 507 529 510 370 

Selling, general, and administrative

 72,091 69,799 65,793 68,470 62,917  98,596 79,030 72,091 69,799 65,793 

Equity-based compensation expense—SG&A

 7,794 7,185 6,267 8,435 17,548  9,083 8,212 7,794 7,185 6,267 

Gains on equipment exchanges

 (10,950)     

Asset impairments

   594  1,592      594 

Depreciation and amortization

 62,478 59,850 56,524 59,913 62,589  69,481 64,358 62,478 59,850 56,524 
           

Total operating expenses

 286,005 268,994 248,201 239,593 237,701  326,103 301,825 286,005 268,994 248,201 
           

Operating income (loss)

 30,968 36,506 15,215 (3,786) (22,212)

Gains—purchases of senior convertible notes

     23,075 

Operating income

 53,900 46,154 30,968 36,506 15,215 

Gains—lease obligation restructurings and releases

  2,739        2,739  

Interest expense and other, net

 (34,468) (33,663) (15,723) (14,612) (14,549)
           

(Loss) income before income taxes

 (3,500) 5,582 (508) (18,398) (13,686)

Income tax (provision) benefit

 (751) 1,960 1,177 1,247 (1,536)
           

Net (loss) income

 $(4,251)$7,542 $669 $(17,151)$(15,222)
           

Net (loss) income per common share—basic and diluted

 $(0.09)$0.17 $0.01 $(0.39)$(0.34)
           

Interest expense

 (49,945) (41,797) (36,319) (34,511) (16,682)

Interest income and other, net

 536 2,630 1,851 848 959 

Income (loss) before income taxes

 4,491 6,987 (3,500) 5,582 (508)

Income tax (expense) benefit

 (3,694) 49,702 (751) 1,960 1,177 

Net income (loss)

 $797 $56,689 $(4,251)$7,542 $669 

Net income (loss) per common share—basic

 $0.02 $1.22 $(0.09)$0.17 $0.01 

Net income (loss) income per common share—diluted

 $0.02 $1.21 $(0.09)$0.17 $0.01 

Dividends declared per common share

 $0.21      $1.17 $0.76 $0.21 $ $ 
           

Weighted-average common shares—basic

 45,514,844 45,180,485 44,633,878 44,028,736 44,563,727  45,960,720 46,286,735 45,514,844 45,180,485 44,633,878 
           

Weighted-average common shares—diluted

 45,514,844 45,704,052 44,790,753 44,028,736 44,563,727  46,349,670 46,996,804 45,514,844 45,704,052 44,790,753 
           

CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END):

            

Total assets

 606,531 597,651 376,103 354,995 347,793  $761,775 $755,101 $606,531 $597,651 $376,103 

Long-term debt (including capital leases and current portion) (net of unamortized discount of $9,494, $15,366, $20,758, $25,708 and $30,253, respectively)

 395,432 386,308 182,925 175,934 165,918 

Long-term debt (including capital leases and current portion) (net of unamortized discount of $0 , $3,099, $9,494, $15,366, and $20,758, respectively and including unamortized premium of $4,230 in 2014 and $5,423 in 2013)

 610,768 496,081 395,432 386,308 182,925 

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

        You should read the following discussion and analysis together with "Item 7.6. Selected Consolidated Financial Data" and our consolidated financial statements and related notes included in this report. The discussion in this report contains forward-looking statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The cautionary statements made in this report should be read as applying to all related forward-looking statements wherever they appear in this report. Factors that could cause or contribute to these differences include those discussed in "Item 1A. Risk Factors," as well as those discussed elsewhere. You should read "Item 1A. Risk Factors" and "Special Note Regarding Forward-Looking Statements." Our actual results could differ materially from those discussed here. Factors that could cause or contribute to these differences include, but are not limited to:

        Future economic instability in the global economy, which could affect spending on Internet services; the impact of changing foreign exchange rates (in particular the Euro to USDUS dollar and Canadian dollarsdollar to USDUS dollar exchange rates) on the translation of our non-USDnon-US dollar denominated revenues, expenses, assets and liabilities; legal and operational difficulties in new markets; the imposition of a requirement that we contribute to the U. S.United States Universal Service Fund; changes in government policy and/or regulation, including rules regarding data protection, cyber security and cyber security;net neutrality; increasing competition leading to lower prices for our services; our ability to attract new customers and to increase and maintain the volume of traffic on our network; the ability to maintain our Internet peering arrangements on favorable terms; our reliance on an equipment vendor, Cisco Systems Inc., and the potential for hardware or software problems associated with such equipment; the dependence of our network on the quality and dependability of third-party fiber providers; our ability to retain certain customers that comprise a significant portion of our revenue base; the management of network failures and/or disruptions; and outcomes in litigation as well as other risks discussed from time to time in our filings with the Securities and Exchange Commission, including, without limitation, this annual report on Form 10-K for the fiscal year ended December 31, 2012.10-K.

General Overview

        We are a leading facilities-based provider of low-cost, high-speed Internet access and IP communications services. Our network is specifically designed and optimized to transmit data using IP. We deliver our services primarily to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations in North America, Europe and Europe. We recently began expansion intoin Japan.

        Our on-net service consists of high-speed Internet access and IP connectivity ranging from 100 Megabits per second to 10100 Gigabits per second of bandwidth. We offer our on-net services to customers located in buildings that are physically connected to our network. We provide on-net Internet access to net-centric and corporate customers. Our net-centric customers include bandwidth-intensive users such as universities, other Internet service providers, telephone companies, cable television companies, web hosting companies, content delivery networks and commercial content and application service providers. These net-centric customers generally receive our serviceservices in colocation facilities and in our data centers. Our corporate customers are located in multi-tenant office buildings and typically include law firms, financial services firms, advertising and marketing firms and other professional services businesses.

        Our off-net services are sold to businesses that are connected to our network primarily by means of "last mile" access service lines obtained from other carriers, primarily in the form of point-to-point, Carriermetropolitan Ethernet TDM, POS, and/or SDH circuits. Our non-core services, which consist primarily of legacy services of companies whose assets or businesses we have acquired, primarily include voice services (only provided in Toronto, Canada). We do not actively market these non-core services and expect the service revenue associated with them to continue to decline.


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        Our network is comprised of in-building riser facilities, metropolitan optical fiber networks, metropolitan traffic aggregation points and inter-city transport facilities. Our network is physically connected entirely through our facilities to over 1,8602,125 buildings in which we provide our on-net services, including over 1,3001,466 multi-tenant office buildings. We also provide on-net services in carrier-neutral colocation facilities, Cogent controlled data centers and single-tenant office buildings. We operate 49 Cogent controlled data centers totaling 550,000 square feet. Because of our integrated network architecture, we are not dependent on local telephone companies to serve our on-net customers. We emphasize the sale of our on-net services because we believe we have a competitive advantage in providing these services and these services generate gross profit margins that are greater than the gross profit margins onof our off-net services.

        We believe our key growth opportunity is provided by our high-capacity network, which provides us with the ability to add a significant number of customers to our network with minimal direct incremental costs. Our focus is to add customers to our network in a way that maximizes its use and at the same time provides us with a profitable customer mix. We are responding to this opportunity by increasing our sales and marketing efforts including increasing our number of sales representatives and expanding our network to locations that we believe can be economically integrated and represent significant concentrations of Internet traffic. One of our keys to developing a profitable business will be to carefully match the cost of extending our network to reach new customers with the revenue expected to be generated by those customers. In addition, we may add customers to our network through strategic acquisitions.

        We believe some of the most important trends in our industry are the continued long-term growth in Internet traffic and a decline in Internet access prices on a per megabit basis within carrier neutral data centers and relatively flat pricing per corporate customer connection.basis. The effective price per megabit for our corporate customers is declining as the bandwidth utilization and connection size of our corporate customer connections increases. As Internet traffic continues to grow and prices per unit of traffic continue to decline, we believe we can continue to load our network and gain market share from less efficient network operators. However, continued erosion in Internet access prices will likely have a negative impact on the rate at which we can increase our revenues and our profitability. Our revenue may also be negatively affected if we are unable to grow our Internet traffic or if the rate of growth of Internet traffic does not offset thean expected decline in our per unit pricing. We do not know if Internet traffic will increase or decrease, or the rate at which it will growincrease or decrease. Changes in Internet traffic will be a function of the number of Internet users, the amount of time users spend on the Internet, the applications for which the Internet is used, the bandwidth intensity of these applications and the pricing of Internet services, and other factors.

        The growth in Internet traffic has a more significant impact on our net-centric customers who represent the majority of the traffic on our network and who tend to consume the majority of their allocated bandwidth on their connections. Net-centric customers tend to purchase their service on a price per megabit basis. Our corporate customers tend to utilize a small portion of their allocated bandwidth on their connections and tend to purchase their service on a per connection basis.

        We are a facilities-based provider of Internet access and communications services. Facilities-based providers require significant physical assets, or network facilities, to provide their services. Typically when a facilities-based network services provider begins providing its services in a new jurisdiction losses are incurred for several years until economies of scale have been achieved. Our foreign operations are primarily in Europe, Canada, Mexico and Japan. Europe accounts for roughly 75%80% of our foreign operations. Our European operations have incurred losses and will continue to do so until theour European customer base and revenues have grown sufficientlyenough to achieve sufficient economies of scale.


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        Due to our strategic acquisitions of network assets and equipment, we believe we are well positioned to grow our revenue base. We continue to purchase and deploy network equipment to parts of our network to maximize the utilization of our assets and to expand and increase the capacity of our


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network. Our future capital expenditures will be based primarily on the expansion of our network and the addition of on-net buildings and the concentration and growth of our customer base.buildings. We plan to continue to expand our network and to increase the number of on-net buildings we serve including multi-tenant office buildings and carrier neutral data centers. Many factors can affect our ability to add buildings to our network. These factors include the willingness of building owners to grant us access rights, the availability of optical fiber networks to serve those buildings, the cost to connect buildings to our network and equipment availability.

Results of Operations

Year Ended December 31, 20112014 Compared to the Year Ended December 31, 20122013

        Our management reviews and analyzes several key financial measures in order to manage our business and assess the quality of and potential variability of our service revenue, operating results and cash flows. The following summary table presentstables present a comparison of our results of operations for the years ended December 31, 20112014 and 20122013 with respect to certain key financial measures. The comparisons illustrated in the tabletables are discussed in greater detail below.


 Year Ended
December 31,
  
  Year Ended
December 31,
  
 

 Percent
Change
  Percent
Change
 

 2011 2012  2014 2013 

 (in thousands)
  
  (in thousands)
  
 

Service revenue

 $305,500 $316,973 3.8% $380,003 $347,979 9.2%

On-net revenues

 233,012 232,587 (0.2)% 281,874 254,952 10.6%

Off-net revenues

 69,640 81,928 17.6% 96,832 91,119 6.3%

Non-core revenues

 2,848 2,458 (13.7)% 1,297 1,908 (32.0)%

Network operations expenses(1)

 132,160 143,642 8.7% 159,893 150,225 6.4%

Selling, general, and administrative expenses(2)

 76,984 79,885 3.8% 107,679 87,242 23.4%

Depreciation and amortization expenses

 59,850 62,478 4.4% 69,481 64,358 8.0%

Gains on equipment transactions

 10,950 957 1,044.2%

Interest expense

 34,511 36,319 5.2% 49,945 41,797 19.5%

Release of lease obligation—gain

 2,739  (100.0)%

Income tax benefit (expense)

 1,960 (751) (138.3)%

Income tax (expense) benefit

 (3,694) 49,702 NM 

NM—Not meaningful

(1)
Includes non-cash equity-based compensation expense of $510$488 and $529$507 for 20112014 and 2012, respectively, which, if excluded would have resulted in a period-to-period change of 8.7%.2013, respectively.

(2)
Includes non-cash equity-based compensation expense of $7,185$9,083 and $7,794$8,212 for 20112014 and 2012, respectively, which, if excluded would have resulted in a period-to-period change2013, respectively.


 
 Year Ended
December 31,
  
 
 
 Percent
Change
 
 
 2014 2013 

Other Operating Data

          

Average Revenue Per Unit (ARPU)

          

ARPU—on net

 $631 $658  (4.2)%

ARPU—off-net

 $1,446 $1,590  (9.0)%

Average price per megabit

 $1.99 $2.61  (23.8)%

Customer Connections—end of period

          

On-net

  39,786  34,671  14.8%

Off-net

  6,074  5,088  19.4%

Non-core

  362  415  (12.8)%

Table of 3.3%.Contents

        Service Revenue.    Our service revenue increased 3.8%9.2% from $305.5 million for 20112013 to $317.0 million for 2012.2014. Exchange rates negatively impacted theour increase in service revenue by approximately $5.4$1.4 million. All foreign currency comparisons herein reflect results for 20122014 translated at the average foreign currency exchange rates for 2011.2013. For 20112014 and 2012,2013, on-net, off-net and non-core revenues represented 76.3%74.2%, 22.8%25.5% and 0.9%0.3% and 73.4%73.3%, 25.8%26.2% and 0.8%0.5% of our service revenue, respectively. In January 2012, our largest (net-centric) customer, who represented approximately 5.5% of our 2011 service revenue, was indicted by the U.S. government and as a result our on-net service to this customer and the associated revenue terminated in January 2012. The loss of this on-net net-centric customer negatively impacted our revenue growth rate in 2012.


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        Revenue from our corporate and net-centric customers represented 48.9%53.1% and 51.1%46.9% of our service revenue, respectively, for 2011,2014, and represented 51.5%51.6% and 48.5%48.4% of our service revenue, respectively, for 2012.2013. Revenue from corporate customers increased 9.2%12.3% from $149.4$179.6 million for 20112013 to $163.1$201.8 million for 2012.2014. Revenue from our net-centric customers decreased 1.4%increased 5.9% from $156.1$168.4 million for 20112013 to $153.8$178.2 million for 2012. The decrease in net-centric revenue is attributed to the loss of our largest net-centric customer noted above.2014.

        Our on-net revenue decreased 0.2%increased 10.6% from $233.0 million for 20112013 to $232.6 million for 2012.2014. We increased the number of our on-net customer connections by 17.1% to approximately 29,900 at14.8% from December 31, 2012 from approximately 25,500 at2013 to December 31, 2011. The loss of our largest on-net customer in January 2012 and the negative impact of foreign exchange negatively impacted our on-net revenue growth rate from 2011 to 2012. Additionally, our on-net2014. On-net customer connections increased at a greater rate than on-net revenues primarily due to the 4.2% decline in our on-net revenue due toARPU, primarily from a decline in ARPU for our net centric customers. ARPU is determined by dividing revenue for the period by the average revenuecustomer connections for that period. Our average price per megabit for our installed base of customers is determined by dividing the aggregate monthly recurring fixed charges for those customers by the aggregate committed data rate for the same customers. The decline in on-net customer connection, resulting primarily from our net-centric customers. This declineARPU is partly attributed to volume and term based pricing discounts. Further, ourAdditionally, on-net customers who cancel their service from our installed base of customers, in general, have an ARPU that is greater average revenue per connection than the ARPU for our new customers due to declining prices primarily for our on-net services sold to our net-centric customers. These trends and events resulted in athe reduction to our on-net ARPU and a 23.8% decline in our average revenueprice per on-net connection.megabit for our installed base of customers.

        Our off-net revenue increased 17.6%6.3% from $69.6 million for 20112013 to $81.9 million for 2012.2014. Our off-net customer connections increased 14.0%19.4% from approximately 3,900 at December 31, 20112013 to approximately 4,500 at December 31, 2012.2014. Our off-net revenuecustomer connections increased at a greater rate than our off-net customer connectionsrevenue due to an increasethe 9.0% decrease in our average revenue per off-net customer connection. Our off-net customers who cancel their service with us, in general, have a lower average revenue per connection than our new off-net customers who generally purchase higher-bandwidth connections which carry a higher revenue per connection.ARPU.

        Our non-core revenue decreased 13.7%32.0% from $2.8 million for 20112013 to $2.5 million for 2012.2014. The number of our non-core customer connections decreased 16.6%12.8% from approximately 560 at December 31, 20112013 to approximately 470 at December 31, 2012.2014. We do not actively market these acquired non-core services and expect that the service revenue associated with them will continue to decline.

        Network Operations Expenses.    Network operations expenses include the costs of personnel associated with service delivery, network management, and customer support, network facilities costs, fiber and equipment maintenance fees, leased circuit costs, and access and facilities fees paid to building owners. Non-cash equity-based compensation expense is included in network operations expenses consistent with the classification of the employee's salary and other compensation. Our network operations expenses, including non-cash equity-based compensation expense, increased 8.7%6.4% from $132.2 million for 20112013 to $143.6 million for 2012.2014. The increase is primarily attributable to an increase in costs related to our network and facilities expansion activities and the increase in our off-net revenue. When we provide our off-net services we also assume the cost of the associated tail-circuits. The impact of exchange rates resulted in a decrease of network operations expenses for 20122014 of approximately $2.4$0.4 million.

        Selling, General, and Administrative Expenses ("SG&A").    Our SG&A expenses, including non-cash equity-based compensation expense, increased 3.8%23.4% from $77.0 million for 20112013 to $79.9 million for 2012.2014. Non cash equity-based compensation expense is included in SG&A expenses consistent with the classification of the employee's salary and other compensation and was $7.2$8.2 million for 20112013 and $7.8$9.1 million for 2012. There were no significant variations in the components of our2014. SG&A expenses increased primarily from the year ended December 31, 2011an increase in salaries and related costs required to the year ended December 31, 2012.support our expansion and increases in our sales efforts and our headcount and a $5.0 million increase in our legal fees primarily associated with U.S. net neutrality and interconnection regulatory matters. The impact of exchange rates resulted in a decrease of approximately $1.3$0.3 million in SG&A expenses. Our


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sales force headcount increased by 12.3% from 407 at December 31, 2013 to 457 at December 31, 2014 and our total headcount increased by 9.9% from 706 at December 31, 2013 to 776 at December 31, 2014.

        Depreciation and Amortization Expenses.    Our depreciation and amortization expenses increased 8.0% from 2013 to 2014. The increase is primarily due to the depreciation expense associated with the increase related to newly deployed fixed assets more than offsetting the decline in depreciation expense from fully depreciated fixed assets.

        Gains on Equipment Transactions.    We exchanged certain used network equipment for new network equipment and cash consideration resulting in gains of $0.9 million for 2013 and $11.0 million for 2014, respectively. The gains are based upon the excess of the estimated fair value of the new network equipment over the carrying amount of the returned used network equipment and the cash paid.

        Interest Expense.    Our interest expense increased 19.5% from 2013 to 2014. Interest expense results from interest incurred on our $200.0 million of 5.625% senior unsecured notes that we issued on April 9, 2014, our $65.0 million of 8.375% senior secured notes that we issued on August 19, 2013, our $175.0 million of 8.375% senior secured notes that we issued on January 26, 2011, our $92.0 million of 1.00% convertible senior notes that we issued in June 2007, and interest on our capital lease obligations. Our increase in interest expense is attributed to interest expense related to the issuance of our $200.0 million of senior unsecured notes outstanding since April 9, 2014 and interest expense related to the issuance of our $65.0 million of Senior Secured Notes outstanding since August 19, 2013, partly offset by the decline of interest expense from our convertible notes that we repaid in June 2014.

        Income Tax (Expense) Benefit.    Our income tax benefit was $49.7 million for 2013 and our income tax expense was $3.7 million for 2014. The net income tax expense for 2014 includes United States federal income taxes of $2.5 million and state income taxes of $1.1 million.

        The net income tax benefit for 2013 includes income tax benefits of approximately $50.2 million resulting primarily from the reduction of the valuation allowance on net deferred tax assets related to our operations in the United States, and $0.5 million of income tax expense related to our European and Canadian operations. At each balance sheet date, we assess the likelihood that we will be able to realize our deferred tax assets. We consider all available positive and negative evidence in assessing the need for a valuation allowance. As of December 31, 2013, we recorded an income tax benefit of $50.2 million (including $49.3 million related to our US federal deferred tax assets) since we determined that we no longer required a valuation allowance against our US deferred tax assets. We continue to maintain a valuation allowance against our European and other foreign deferred tax assets and our deferred tax assets limited under Section 382 of the Internal Revenue Code in the United States. Section 382 limits the utilization of net operating losses when ownership changes, as defined by that section, occur. We have performed an analysis of our Section 382 ownership changes and we have determined that the utilization of certain of our net operating loss carryforwards in the United States is limited. Our net operating losses related to our foreign operations are generally not subject to similar limitations. Of the $390.6 million of net operating losses available at December 31, 2014 in the United States approximately $286 million are unavailable for use and approximately $81 million are limited for use under Section 382. Our net operating loss carryforwards outside of the United States totaling approximately $789 million are not subject to limitations similar to Section 382.

        Buildings On-net.    As of December 31, 2014 and 2013 we had a total of 2,125 and 1,990 on-net buildings connected to our network, respectively.


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Year Ended December 31, 2013 Compared to the Year Ended December 31, 2012

        Our management reviews and analyzes several key financial measures in order to manage our business and assess the quality of and variability of our service revenue, operating results and cash flows. The following summary tables present a comparison of our results of operations for the years ended December 31, 2013 and 2012 with respect to certain key financial measures. The comparisons illustrated in the tables are discussed in greater detail below.

 
 Year Ended
December 31,
  
 
 
 Percent
Change
 
 
 2013 2012 
 
 (in thousands)
  
 

Service revenue

 $347,979 $316,973  9.8%

On-net revenues

  254,952  232,587  9.6%

Off-net revenues

  91,119  81,928  11.2%

Non-core revenues

  1,908  2,458  (22.4)%

Network operations expenses(1)

  150,225  143,642  4.6%

Selling, general, and administrative expenses(2)

  87,242  79,885  9.2%

Depreciation and amortization expenses

  64,358  62,478  3.0%

Interest expense

  41,797  36,319  15.1%

Income tax benefit (expense)

  49,702  (751) NM 

NM—Not meaningful

(1)
Includes non-cash equity-based compensation expense of $507 and $529 for 2013 and 2012, respectively.

(2)
Includes non-cash equity-based compensation expense of $8,212 and $7,794 for 2013 and 2012, respectively.


 
 Year Ended
December 31,
  
 
 
 Percent
Change
 
 
 2013 2012 

Other Operating Data

          

Average Revenue Per Unit (ARPU)

          

ARPU—on net

 $658 $700  (5.9)%

ARPU—off-net

 $1,590 $1,629  (2.4)%

Average price per megabit

 $2.61 $3.39  (22.9)%

Customer Connections—end of period

          

On-net

  34,671  29,875  16.1%

Off-net

  5,088  4,465  14.0%

Non-core

  415  471  (11.9)%

        Service Revenue.    Our service revenue increased 9.8% from 2012 to 2013. Exchange rates positively impacted our increase in service revenue by approximately $1.8 million. All foreign currency comparisons herein reflect results for 2013 translated at the average foreign currency exchange rates for 2012. For 2013 and 2012, on-net, off-net and non-core revenues represented 73.3%, 26.2% and 0.5% and 73.4%, 25.8% and 0.8% of our service revenue, respectively.

        Revenue from our corporate and net-centric customers represented 51.6% and 48.4% of our service revenue, respectively, for 2013, and represented 51.5% and 48.5% of our service revenue, respectively, for 2012. Revenue from corporate customers increased 10.1% from $163.1 million for 2012 to $179.6 million for 2013. Revenue from our net-centric customers increased 9.4% from $153.8 million for 2012 to $168.4 million for 2013.


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        Our on-net revenue increased 9.6% from 2012 to 2013. We increased the number of our on-net customer connections by 16.1% from December 31, 2012 to December 31, 2013. On-net customer connections increased at a greater rate than on-net revenues primarily due to the 5.9% decline in our on-net ARPU, primarily from a decline in ARPU for our net centric customers. ARPU is determined by dividing revenue for the period by the average customer connections for that period. Our average price per megabit for our installed base of customers is determined by dividing the aggregate monthly recurring fixed charges for those customers by the aggregate committed data rate for the same customers. The decline in on-net ARPU is partly attributed to volume and term based pricing discounts. Additionally, on-net customers who cancel their service from our installed base of customers, in general, have an ARPU that is greater than the ARPU for our new customers due to declining prices primarily for our on-net services sold to our net-centric customers. These trends resulted in the reduction to our on-net ARPU and a 22.9% decline in our average price per megabit for our installed base of customers.

        Our off-net revenue increased 11.2% from 2012 to 2013. Our off-net customer connections increased 14.0% from December 31, 2012 to December 31, 2013. Our off-net customer connections increased at a greater rate than our off-net revenue due to the 2.4% decrease in our off-net ARPU.

        Our non-core revenue decreased 22.4% from 2012 to 2013. The number of our non-core customer connections decreased 11.9% from December 31, 2012 to December 31, 2013. We do not actively market these acquired non-core services and expect that the service revenue associated with them will continue to decline.

        Network Operations Expenses.    Network operations expenses include the costs of personnel associated with service delivery, network management, and customer support, network facilities costs, fiber and equipment maintenance fees, leased circuit costs, and access and facilities fees paid to building owners. Non-cash equity-based compensation expense is included in network operations expenses consistent with the classification of the employee's salary and other compensation. Our network operations expenses, including non-cash equity-based compensation expense, increased 4.6% from 2012 to 2013. The increase is primarily attributable to an increase in costs related to our network and facilities expansion activities and the increase in our off-net revenue. When we provide our off-net services we also assume the cost of the associated tail-circuits. The impact of exchange rates resulted in an increase of network operations expenses for 2013 of approximately $0.8 million.

        Selling, General, and Administrative Expenses ("SG&A").    Our SG&A expenses, including non-cash equity-based compensation expense, increased 9.2% from 2012 to 2013. Non cash equity-based compensation expense is included in SG&A expenses consistent with the classification of the employee's salary and other compensation and was $7.8 million for 2012 and $8.2 million for 2013. SG&A expenses increased primarily from an increase in salaries and related costs required to support our expansion and increases in our sales efforts and our headcount. The impact of exchange rates resulted in an increase of approximately $0.5 million in SG&A expenses. Our sales force headcount increased by 24.1% from 328 at December 31, 2012 to 407 at December 31, 2013.

        Depreciation and Amortization Expenses.    Our depreciation and amortization expenses increased 4.4%3.0% from $59.9 million for 20112012 to $62.5 million for 2012.2013. The increase is primarily due to the depreciation expense associated with the increase related to newly deployed fixed assets more than offsetting the decline in depreciation expense from fully depreciated fixed assets. The impact of exchange rates resulted in a decreasean increase of approximately $0.8$0.3 million in depreciation and amortization expenses.

        Interest Expense.    Interest expense results from interest incurred on our $65.0 million of senior secured notes issued on August 19, 2013, our $175.0 million of senior secured notes issued inon January 26, 2011, our $92.0 million of 1.00% convertible senior notes issued in June 2007, and interest on our capital lease obligations. Our interest expense increased 5.2%15.1% from $34.5 million for 20112012 to $36.3 million for 2012.2013. The increase is attributed to approximately $1.1$1.6 million of interest expense related to the issuance of our senior notes$65.0 million of Senior Secured Notes since they were outstanding for only a portion of 20112013 and to an increase in our capital lease obligations. The impact of exchange rates resulted in a decreasean increase in our interest expense for 20122013 of approximately $0.5$0.2 million.


        Release

Table of Lease Obligation-Gain.    In 2011, the requirements for extinguishment were met and we were released from an obligation under an IRU capital lease obligation totaling $2.7 million resulting in a gain. The IRU asset related to this obligation had been fully impaired in 2008 when it was determined that the IRU asset was no longer in use.Contents

        Income Tax Benefit (Expense).    Our income tax benefit was $2.0$49.7 million for 20112013 and our income tax expense was $0.8 million for 2012. The net income tax benefit for 20112013 includes income tax expense for the United Statesbenefits of approximately $3.4$50.2 million related to state income taxes (including approximately $3.0 million related to uncertain tax benefits) an income tax benefit of $6.3 million resulting primarily from the reduction of the valuation allowance on net deferred tax assets related to our operations in certain jurisdictions in the United States, and $0.9$0.5 million of income tax expense related to our European and Canadian operations. At each balance sheet date, we assess the likelihood that we will be able to realize our deferred tax assets. We consider all available positive and negative evidence in assessing the need for a valuation allowance. As of December 31, 2013, we recorded an income tax benefit of $50.2 million (including $49.3 million related to our US federal deferred tax assets) since we determined that we no longer required a valuation allowance against our US deferred tax assets. We continue to maintain a valuation allowance against our European and other foreign deferred tax assets and our deferred tax assets limited under Section 382 of the Internal Revenue Code in the United States. Section 382 limits the utilization of net operating losses when ownership changes, as defined by that section, occur. We have performed an analysis of our Section 382 ownership changes and we have determined that the utilization of certain of our net operating loss carryforwards in the United States is limited. Our net operating losses related to our foreign operations are generally not subject to similar limitations.

        The net income tax expense for 2012 includes United States state income taxes of $1.4 million and a state income tax benefit of $2.4 million resulting from the reversal of uncertain tax benefits due to the expiration of specific state statutes of limitation and the closing of a state income tax audit, $1.7 million of income tax expense related to our Canadian operations and $0.1 million of income tax expense related to our European operations.

        Buildings On-net.    As of December 31, 20112013 and 2012 we had a total of 1,7441,990 and 1,867 on-net buildings connected to our network, respectively.

Year Ended December 31, 2010 Compared to the Year Ended December 31, 2011

        Our management reviews and analyzes several key financial measures in order to manage our business and assess the quality of and potential variability of our service revenues and cash flows. The following summary table presents a comparison of our results of operations for the years ended


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December 31, 2010 and 2011 with respect to certain key financial measures. The comparisons illustrated in the table are discussed in greater detail below.

 
 Year Ended
December 31,
  
 
 
 Percent
Change
 
 
 2010 2011 
 
 (in thousands)
  
 

Service revenue

 $263,416 $305,500  16.0%

On-net revenues

  205,004  233,012  13.7%

Off-net revenues

  55,294  69,640  25.9%

Non-core revenues

  3,118  2,848  (8.7)%

Network operations expenses(1)

  119,023  132,160  11.0%

Selling, general, and administrative expenses(2)

  72,060  76,984  6.8%

Asset impairment

  594    (100.0)%

Depreciation and amortization expenses

  56,524  59,850  5.9%

Interest expense

  16,682  34,511  106.9%

Release of lease obligation—gain

    2,739  100.0%

Income tax benefit

  1,177  1,960  66.5%

(1)
Includes non-cash equity-based compensation expense of $370 and $510 for 2010 and 2011, respectively, which, if excluded would have resulted in a period-to-period change of 11.0%.

(2)
Includes non-cash equity-based compensation expense of $6,267 and $7,185 for 2010 and 2011, respectively, which, if excluded would have resulted in a period-to-period change of 6.1%.

        Service Revenue.    Our service revenue increased 16.0% from $263.4 million for 2010 to $305.5 million for 2011. Exchange rates positively impacted the increase in service revenues by approximately $3.9 million. All foreign currency comparisons herein reflect results for 2011 translated at the average foreign currency exchange rates for 2010. For 2010 and 2011, on-net, off-net and non-core revenues represented 77.8%, 21.0% and 1.2% and 76.3%, 22.8% and 0.9% of our service revenue, respectively. Our largest customer accounted for 5.5% of our 2011 revenue. In January 2012, our largest (net-centric) customer was indicted by the U.S. government and as a result our on-net service to this customer and the associated revenue terminated in January 2012. The loss of this on-net net-centric customer negatively impacted our revenue growth rate in 2012.

        Revenue from our corporate and net-centric customers represented 49.4% and 50.6% of our service revenue, respectively, for 2010, and represented 48.9% and 51.1% of our service revenue, respectively, for 2011. Revenue from corporate customers increased 14.9% from $130.1 million for 2010 to $149.4 million for 2011. Revenue from our net-centric customers increased 17.0% from $133.3 million for 2010 to $156.1 million for 2011.

        Our on-net revenue increased 13.7% from $205.0 million for 2010 to $233.0 million for 2011. Our on-net revenue increased as we increased the number of our on-net customer connections by 22.3% from approximately 20,900 at December 31, 2010 to approximately 25,500 at December 31, 2011. On-net customer connections increased at a greater rate than on-net revenue due to a decline in the average revenue per on-net customer connection—primarily resulting from the pricing per connection related to our net-centric customers. This decline in the average revenue per on-net customer connection is partly attributed to volume and term based pricing discounts. Additionally, on-net customers who cancel or renew their service from our installed base of customers, in general, have greater average revenue per connections than new or renewed customers. These trends resulted in a reduction to our average revenue per on-net connection.


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        Our off-net revenue increased 25.9% from $55.3 million for 2010 to $69.6 million for 2011. Our off-net customer connections increased 11.0% from approximately 3,500 at December 31, 2010 to approximately 3,900 at December 31, 2011. Off-net revenue increased at a greater rate than off-net customer connections due to an increase in the average revenue per off-net customer connection. Off-net customers who cancel their service, in general, have an average revenue per connection and per connection bandwidth speed that is less than the average revenue per connection for new off-net customers who generally purchase higher-bandwidth connections.

        Our non-core revenue decreased 8.7% from $3.1 million for 2010 to $2.8 million for 2011. The number of our non-core customer connections decreased 12.8% from approximately 650 at December 31, 2010 to approximately 560 at December 31, 2011. We do not actively market these acquired non-core services and expect that the service revenue associated with them will continue to decline.

        Network Operations Expenses.    Network operations expenses include costs associated with service delivery, network management, and customer support. This includes the costs of personnel and related operating expenses associated with these activities, network facilities costs, fiber and equipment maintenance fees, leased circuit costs, and access and facilities fees paid to building owners. Non cash equity-based compensation expense is included in network operations expenses consistent with the classification of the employee's salary and other compensation. Our network operations expenses increased 11.0% from $119.0 million for 2010 to $132.2 million for 2011. The increase in network operations expenses is primarily attributable to an increase in costs related to our network and facilities expansion activities including personnel and related operating expenses and an increase in our off-net revenues. When we provide off-net revenues we also assume the cost of the associated tail-circuits. The impact of exchange rates resulted in an increase of network operations expenses for 2011 of approximately $1.5 million.

        Selling, General, and Administrative Expenses ("SG&A").    Our SG&A expenses increased 6.8% from $72.1 million for 2010 to $77.0 million for 2011. Non cash equity-based compensation expense is included in SG&A expenses consistent with the classification of the employee's salary and other compensation and was $6.3 million for 2010 and $7.2 million for 2011. SG&A expenses increased primarily from the increase in salaries and related costs required to support our expansion efforts including an increase in our sales and marketing efforts. The impact of exchange rates resulted in an increase of approximately $0.9 million in SG&A expenses.

        Asset Impairment.    In 2010, we recorded an impairment charge of $0.6 million related to certain property and equipment that were no longer in use. There were no such charges in 2011.

        Depreciation and Amortization Expenses.    Our depreciation and amortization expense increased 5.9% from $56.5 million for 2010 to $59.9 million for 2011. The increase is primarily due to the depreciation expense associated with the increase related to newly deployed fixed assets more than offsetting the decline in depreciation expense from fully depreciated fixed assets and an adjustment to our asset retirement obligations, discussed below. The impact of exchange rates resulted in an increase of approximately $0.6 million in depreciation and amortization expenses.

        In the first quarter of 2010, we revised our estimates of the cash flows that we believed will be required to settle our leased facility asset retirement obligations at the end of the respective lease terms, which resulted in a reduction to our asset retirement obligation liability. These revisions reduced our asset retirement obligation liability by $0.9 million with an offsetting reduction to depreciation and amortization of $0.7 million and selling, general and administrative expenses of $0.2 million.

        Interest Expense.    Interest expense results from interest incurred on our $175.0 million of Senior Notes issued in January 2011, our $92.0 million of 1.00% convertible senior notes (the "Convertible Notes") issued in June 2007, and interest on our capital lease obligations. Our interest expense


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increased 106.9% from $16.7 million for 2010 to $34.5 million for 2011. The increase is attributed to approximately $14.0 million of interest expense related to the issuance of our Senior Notes and to an increase in our capital lease obligations. The impact of exchange rates resulted in an increase in our interest expense for 2011 of approximately $0.3 million.

        Release of Lease Obligation-Gain.    In 2011, the requirements for extinguishment were met and we were released from an obligation under an IRU capital lease obligation totaling $2.7 million resulting in a gain. The IRU asset related to this obligation had been fully impaired in 2008 when it was determined that the IRU asset was no longer in use.

        Income Tax Benefit.    Our income tax benefit was $1.2 million for 2010 and $2.0 million for 2011. The net income tax benefit for 2010 includes income taxes for the United States of approximately $0.7 million for state income taxes (including approximately $0.3 million related to uncertain tax benefits), $0.1 million of income tax provision related to our European operations offset by a tax benefit of $1.5 million from the reduction of the remaining valuation allowance on net deferred tax assets related to our Canadian operations and $0.6 million related to a refund of federal alternative minimum taxes. The net income tax benefit for 2011 includes income taxes for the United States of approximately $3.4 million for state income taxes (including approximately $3.0 million related to uncertain tax benefits) a tax benefit of $6.3 million from the reduction of the valuation allowance on net deferred tax assets related to our operations in certain state and municipal jurisdictions in the United States, and, $0.3 million and $0.6 million of income tax provision related to our European and Canadian operations, respectively.

        Buildings On-net.    As of December 31, 2010 and 2011 we had a total of 1,579 and 1,744 on-net buildings connected to our network, respectively.

Liquidity and Capital Resources

        In assessing our liquidity, management reviews and analyzes our current cash balances, short-term investments, accounts receivable, accounts payable, accrued liabilities, capital expenditure and operating expense commitments, and required capital lease, interest and debt payments and other obligations.

        The following table sets forth our consolidated cash flows for the years ended December 31, 2010, 2011,2014, 2013, and 2012.


 Year Ended December 31,  Year Ended December 31, 

 2010 2011 2012  2014 2013 2012 

 (in thousands)
  (in thousands)
 

Net cash provided by operating activities

 $71,477 $75,814 $79,943  $73,046 $81,851 $79,943 

Net cash used in investing activities

 (52,227) (45,812) (44,196) (59,942) (48,981) (44,196)

Net cash (used in) provided by financing activities

 (18,874) 152,636 (27,204) (26,627) 24,584 (27,204)

Effect of exchange rates on cash

 (22) (714) 535  (3,553) 127 535 
       

Net increase in cash and cash equivalents during the year

 $354 $181,924 $9,078 
       

Net (decrease) increase in cash and cash equivalents during the year

 $(17,076)$57,581 $9,078 

        Net Cash Provided By Operating Activities.    Our primary source of operating cash is receipts from our customers who are billed on a monthly basis for our services. Our primary uses of operating cash are payments made to our vendors, employees and interest payments made to our capital lease vendors and our note holders. Net cash provided by operating activities was $71.5 million for 2010, $75.8 million for 2011 and $79.9 million for 2012. The increasesOur changes in cash provided by operating activities are primarily due to increaseschanges in our operating profit and working capital management.changes in our interest payments. Cash provided by operating activities for 20112014, 2013 and 2012 includes interest payments of $8.1$26.3 million, $15.6 million and $14.7$15.6 million, respectively, under our note obligations, further described below. Our initial $2.7 million semi-annual


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respectively, underinterest payment on our $65.0 million of senior secured notes further described below. Our future operating cash flow will be impacted by annualwas paid in February 2014 and our initial $5.8 million semi-annual interest paymentspayment on our $200.0 million of $14.7 million related to our senior secured notes.unsecured notes was paid in October 2014.

        Net Cash Used In Investing Activities.    Net cash used in investing activities was $52.2 million for 2010, $45.8 million for 2011 and $44.2 million for 2012.    Our primary use of investing cash is for purchases of property and equipment. These amounts were $52.8$60.0 million, $45.9$49.0 million and $44.3 million for 2010, 20112014, 2013 and 2012, respectively. The annual changes in purchases of property and equipment are primarily due to the timing and scope of our network expansion activities including geographic expansion and adding buildings to our network.

        Net Cash (Used In) Provided By Financing Activities.    Financing activities used cash of $18.9 million for 2010 and $27.2 million for 2012. Financing activities provided cash of $152.6 million for 2011. Our primary useuses of cash for financing cash isactivities are for dividend payments, stock purchases, principal payments under our capital lease obligations. These amounts were $19.1 million, $15.5 millionobligations, and $16.8 million for 2010, 2011 and 2012, respectively. Additionally, financing activities include amountsin 2014 the repayment of our senior convertible notes. Amounts paid under our stock buyback program. These amountsprogram were $3.0$58.6 million for 20112014 and $1.3 million for 2012. There were no stock purchases in 2010. In January 2011, we issued our 8.375% Senior Secured Notes (the "Senior Notes") due February 15, 2018, for an aggregate principal amount of $175.0 million. We received net proceeds of approximately $170.5 million after deducting $4.5 million of issuance costs.2013. We began paying a quarterly dividend on our common stock in the third quarter of 2012. During 2012 we paid $9.5 million for our third and fourth quarter dividend payments. During 2014 and 2013 we paid $54.2 million and $35.4 million for our quarterly dividend payments, respectively and our dividend payments have primarily increased from increases in our regular quarterly dividend per share amount. Principal payments under our capital lease obligations were $18.2 million, $11.2 million and $16.8 million for 2014, 2013 and 2012, respectively, and are impacting by the timing and extent of our network expansion activities. Our financing activities also include proceeds from and repayments of our debt offerings. In 2014 we repaid our $92.0 million of senior convertible notes at par and we received net proceeds of $195.8 million from the issuance of our senior unsecured notes. In August 2013, we received $69.9 million of net proceeds from the issuance of $65.0 million of senior secured notes that were issued at a premium of $5.9 million.

Indebtedness

        Our total indebtedness, net of discount,including premium, at December 31, 20122014 was $395.4$610.8 million. Our total indebtedness at December 31, 20122014 includes $137.9$166.5 million of capital lease obligations for dark fiber primarily under 15-20 year IRUs. Our total cash and cash equivalents were $247.3$287.8 million at December 31, 2012.2014.

Senior Secured Notesunsecured notes

        In January 2011, we issued our Senior Notes forOn April 9, 2014, Cogent Communications Finance, Inc. ("Cogent Finance"), a newly formed financing subsidiary of Cogent Communications Group, Inc. ("Group"), completed an offering at par of $200.0 million in aggregate principal amount of $175.0 million5.625% Senior Notes due 2021 (the "2021 Notes"). The 2021 Notes were sold in a private offeringofferings for resale to qualified institutional buyers pursuant to SEC Rule 144A. The Senioroffering closed into escrow pursuant to an escrow agreement, dated as of April 9, 2014 (the "Escrow Agreement"). The term "Issuer" refers to Cogent Finance prior to the release of the funds from the escrow account (such date of release, the "Escrow Release Date") and to Group after the Escrow Release Date. As a condition to releasing the funds from escrow we redeemed our remaining outstanding Convertible Notes are securedon June 20, 2014 (the "Redemption Transaction"). After consummation of the Redemption Transaction, Cogent Finance merged with Group, with Group continuing as the surviving corporation (the "Finance Merger"). At the time of consummation of the Finance Merger, Group assumed the obligations of Cogent Finance under the 2021 Notes and bear interest at 8.375% per annum. Interestthe indenture governing the 2021 Notes (the "Indenture") and Group and each of Group's domestic subsidiaries became party to the Indenture pursuant to a supplemental indenture to the Indenture and the obligations under the Indenture became obligations solely of Group and each of Group's domestic subsidiaries. Cogent Communications Holdings, Inc. ("Holdings") also provided a guarantee of the 2021 Notes but Holdings is payable in cash semiannually in arrearsnot subject to any of the covenants under the Indenture. After the conditions to the release of the escrow proceeds were satisfied, on February 15 and August 15,June 25, 2014 (the "Escrow Release


Table of each year, beginning on August 15, 2011. We received netContents

Date") the proceeds of approximately $170.5 million after deducting $4.5 million of issuance costs. We intend to usefrom the 2021 Notes were released. The net proceeds from the Senior Notesoffering were $195.8 million after deducting discounts and commissions and offering expenses. The net proceeds from the offering are intended to be used for general corporate purposes and/or repurchases of our common stock or our Convertible Notes or a special dividend or recurring dividends.purposes.

        The Senior2021 Notes were issued pursuant to, and are fullygoverned by the Indenture between Cogent Finance and the trustee. The 2021 Notes bear interest at a rate of 5.625% per year and will mature on April 15, 2021. Interest began to accrue on the 2021 Notes on April 9, 2014 and will be paid semi-annually on April 15 and October 15, commencing on October 15, 2014. Following the Escrow Release Date, the 2021 Notes became Group's senior unsecured obligations and are guaranteed on a senior unsecured basis by the Company. The 2021 Notes are effectively subordinated in right of payment to all of Group's and each guarantor's secured basis, jointly and severally, by eachindebtedness, including the Group's existing $240.0 million of our existing domesticsenior secured notes and future material domestic subsidiaries, subject to certain exceptions and permitted liens. Under certain circumstances, subsidiaries may be released from these guarantees without the consent of the holders of the Senior Notes. The Senior Notes and the guarantees are secured by (i) first priority liens on substantially all of our and our guarantors' assets, (ii) all of the equity interests inindebtedness, if any, of our domestic subsidiaries and (iii) 65% of the equity interests of our first-tier foreign subsidiaries held by us and our guarantors. The Senior Notes and the guarantees represent our and the guarantors' senior secured obligations and effectively rank equally and ratably with all of our and the guarantors' existing and future first lien obligations, to the extent of the value of the collateralassets securing such indebtedness, subject to permitted liens;indebtedness. The 2021 Notes are structurally subordinated to any existing and future indebtedness and liabilities of non-guarantor subsidiaries and rank equallyequal in right of payment with Group's and each guarantor's unsecured indebtedness that is not subordinated in right of payment to the 2021 Notes. The 2021 Notes will rank senior in right of payment to Group's and each guarantor's future subordinated debt, if any; and will be structurally subordinated in right of payment to all indebtedness and other liabilities of ourany of the Group's subsidiaries that are not guarantors, which will only consist of immaterial subsidiaries and the guarantors' existing and future senior indebtedness.


Tableforeign subsidiaries that do not guarantee other indebtedness of ContentsGroup.

        The SeniorWe may redeem the 2021 Notes, may be redeemed, in whole or in part, at any time prior to FebruaryApril 15, 20152017 at a price equal to 100% of the principal amount plus a "make-whole"an "applicable" premium, plus accrued and unpaid interest, if any, to the date of redemption. The Senior"applicable" premium means, with respect to a note at any date of redemption, the greater of (i) 1.0% of the then-outstanding principal amount of such note and (ii) the excess of (A) the present value at such date of redemption of (1) the redemption price of 104.219% plus (2) all remaining required interest payments due on such note through April 15, 2017 (excluding accrued but unpaid interest to the date of redemption), computed using a discount rate equal to the Treasury Rate as of such date of redemption plus 50 basis points, over (B) the then-outstanding principal amount of such note. We may also redeem the 2021 Notes, are redeemable, in whole or in part, at any time on or after FebruaryApril 15, 20152017 at the applicable redemption prices specified under the indenture governing the Senior2021 Notes plus accrued and unpaid interest, if any, to the date of redemption. The redemption prices (expressed as a percentage of the principal amount) are 104.219% during the 12-month period beginning on April 15, 2017, 102.813% during the 12-month period beginning on April 15, 2018, 101.406% during the 12-month period beginning on April 15, 2019 and 100.0% during the 12-month period beginning on April 15, 2020 and thereafter. In addition, we may redeem up to 35% of the Senior2021 Notes before FebruaryApril 15, 20142017 with the net cash proceeds from certain equity offerings.offerings at a redemption price of 105.625% of the principal amount plus accrued and unpaid interest. If we experience specific kinds of changes of control, we must offer to repurchase all of the Senior2021 Notes at a purchase price of 101%101.0% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date.

        The indenture governing the Senior2021 Notes, among other things, limits our ability and our guarantors' ability to incur indebtedness; to pay dividends or make other distributions; to make certain investments and other restricted payments; to create liens; consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; to incur restrictions on the ability of a subsidiary to pay dividends or make other payments; and to enter into certain transactions with our affiliates. Limitations on the ability to incur additional indebtedness (excluding IRU agreements incurred in the normal course of business and certain refinancing of existing debt) include a restriction on incurring additional indebtedness if our consolidated leverage ratio, as defined in the Indenture is greater than 5.0. Permitted investments and payments that are not restricted include an amount of up to $150.0 million. This amount may be increased by our consolidated cash flow, as defined in the Indenture as long as our consolidated leverage ratio is less than 4.25. Holdings had cash and cash equivalents totaling $66.0 million as of


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December 31, 2014 which are not subject to these limitations. As of December 31, 2014 permitted investments and payments that are not restricted totaled $149.8 million (including $65.8 million at Holdings). An additional $48.6 million is available for permitted investments and payments if our consolidated leverage ratio becomes less than 4.25.

Summarized Financial Information of Holdings

        Holdings is a guarantor under the 2021 Notes. Under the indenture we are required to disclose financial information of Holdings including its assets, liabilities and its operating results ("Holdings Financial Information"). The Holdings Financial Information as of and for the year ended December 31, 2014 is detailed below (in thousands).

 
 December 31,
2014
 
 
 (Unaudited)
 

Cash and cash equivalents

 $65,993 

Prepaid expenses

  595 

Total assets

 $66,588 

Investment from subsidiaries

 $111,270 

Common stock

  46 

Retained deficit

  (44,728)

Total equity

 $66,588 


 
 Year Ended
December 31,
2014
 
 
 (Unaudited)
 

Equity-based compensation expense

  7,039 

Interest income

  17 

Net loss

 $(7,022)

Senior Secured Notes

        In March 2015, our 8.375% Senior Secured Notes (the "Senior Notes") are expected to be redeemed with the proceeds of the February 2015 issuance of $250.0 million of 5.375% senior secured notes as described in Note 12 to our consolidated financial statements.

        On January 26, 2011 and on August 19, 2013, we issued our Senior Notes due February 15, 2018, for aggregate principal amounts of $175.0 million and $65.0 million, respectively, in private offerings for resale to qualified institutional buyers pursuant to SEC Rule 144A. The Senior Notes were secured and bore interest at 8.375% per annum. Interest was payable in cash semiannually in arrears on February 15 and August 15, of each year. On January 26, 2011, we received net proceeds of $170.5 million after deducting $4.5 million of issuance costs from issuing $175.0 million of Senior Notes. On August 19, 2013, we received net proceeds of approximately $69.9 million after deducting $1.0 million of issuance costs from issuing $65.0 million of Senior Notes. The Senior Notes sold in August 2013 were sold at 109.00% of par value. The $5.9 million premium was being amortized as a reduction to interest expense to the maturity date using the effective interest rate method. The net proceeds from the Senior Notes were intended to be used for general corporate purposes, the buyback of our Convertible Notes and/or repurchases of our common stock or special or recurring dividends to our stockholders.


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Convertible Senior Notes

        In June 2007, we issued our Convertible Notes due June 15, 2027, for an aggregate principal amount of $200.0 million in a private offering for resale to qualified institutional buyers pursuant to SEC Rule 144A. The Convertible Notes arewere scheduled to mature on June 15, 2027, were unsecured, and bearbore interest at 1.00% per annum. The Convertible Notes will rank equally with any future senior debt and senior to any future subordinated debt and will be effectively subordinated to all of our subsidiary's existing and future liabilities and to any secured debt that we may issue to the extent of the value of the collateral. Interest iswas payable in cash semiannually in arrears on June 15 and December 15, of each year, beginning on December 15, 2007. We received net proceeds from the issuance of the Convertible Notes of approximately $195.1 million, after deducting the original issue discount of 2.25% and issuance costs.

The discount and other issuance costs were being amortized to interest expense using the effective interest method through June 15, 2014, which was the earliest put date. In 2008, we purchased an aggregate of $108.0 million of face value of ourthe Convertible Notes for $48.6 million in cash in a series of transactions. These transactions resultedresulting in a gain of $23.1 million in the year ended December 31, 2008. After these transactions there is $92.0 million of face value of our Convertible Notes outstanding. We may purchase additional Convertible Notes.

        The Convertible Notes are convertible into shares of our common stock at an initial conversion price of $49.18 per share, or 20.3355 shares for each $1,000 principal amount of Convertible Notes, subject to adjustment for certain events as set forth in the indenture. Upon conversion of the Convertible Notes we will have the right to deliver shares of our common stock, cash or a combination of cash and shares of our common stock. The Convertible Notes are convertible (i) during any fiscal quarterremaining after the fiscal quarter ending September 30, 2007, if the closing sale price of our common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds 130% of the conversion price in effect on the last trading day of the immediately preceding fiscal quarter, or (ii) specified corporate transactions occur, or (iii) the trading pricethese purchase transactions.

        Holders of the Convertible Notes falls belowhad the right to require us to repurchase for cash all or some of their notes on June 15, 2014, 2017 and 2022 at a certain threshold, or (iv) if we call the Convertible Notes for redemption or (v) on or after April 15, 2027, until maturity. In addition, following specified corporate transactions, we will increase the conversion rate for holders who elect to convert Convertible Notes in connection with such corporate transactions, provided that in no event may the shares issued upon conversion, as a resultprice of adjustment or otherwise, result in the issuance of more than 35.5872 common shares per $1,000 principal amount. The Convertible Notes include an "Irrevocable Election of Settlement" whereby we may choose, in our sole discretion, and without the consent100% of the holdersprincipal amount plus accrued interest. Holders of $58.5 million of principal amount of the Convertible Notes issued a repurchase notice to waive our right to settle the conversion feature in either cash or stock or in any combination, at our option.


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Convertible Notes principal amount plus accrued interest. The Convertible Notes may behave been redeemed by us at any time on and after June 20, 2014 at a redemption price of 100% of the principal amount plus accrued interest. Holders ofOn June 20, 2014 we redeemed the Convertible Notes have the right to require us to repurchase for cash all or some of their Convertible Notes on June 15, 2014, 2017 and 2022 and upon the occurrence of certain designated events at a redemption price of 100% of theremaining $33.5 million principal amount plus accrued interest.of our Convertible Notes.

Common Stock Buyback Program

        In June 2007, we used approximately $50.1 million of the net proceeds from our issuance of our Convertible Notes to repurchase approximately 1.8 million shares of our common stock. In August 2007, ourOur board of directors has approved a $50.0 million common stock buyback program. In June 2008, our board of directors approved an additional $50.0 million forthrough February 29, 2016, purchases of our common stock to occur prior to December 31, 2009. In February 2011, our board of directors approved an additional $50.0 million of purchases of our common stock. In the years ended December 31, 2011 and 2012, weunder a buyback program (the "Buyback Program"). We purchased approximately 0.2 million, and 0.11.7 million shares of our common stock respectively, for approximately $3.0$58.6 million and $1.3 million, respectively and there was $45.8 million available for additional purchases at December 31, 2012. There were no purchases induring the year ended December 31, 2010. All purchased2014. There were no purchases of common shares were subsequently retired. In February 2013, our boardstock during 2013. As of directors extendedDecember 31, 2014 there was a total of $37.2 million available under the February 2011 program through February 2014.Buyback Program.

Dividends on Common Stock and Return of Capital Program

        On August 7, 2012,Our initial quarterly dividend payment was made in the third quarter of 2012. In addition to our regular quarterly dividends, our board of directors has approved an additional return of capital program (the "Capital Program") for our shareholders. Under the Capital Program we plan on returning additional capital to our shareholders each quarter through either stock buybacks or a special dividend or a combination of stock buybacks and a special dividend. The aggregate payment under the Capital Program was initially at least $10.0 million each quarter and was increased to be at least $12.0 million each quarter. Amounts paid under our Capital Program are in addition to our regular quarterly dividend payments. A summary of a dividend of $0.10 per common share. Theour quarterly dividends paid since our initial dividend payment totaling $4.5 million wasand amounts paid on September 12, 2012under the Capital Program are included in Note 7 to holders of record as of August 22, 2012. On November 5, 2012, our board of directors approved the payment of a dividend of $0.11 per common share. On December 12, 2012, a dividend payment totaling $5.0 million was paid to holders of record as of November 21, 2012. On February 20, 2013, our board of directors approved the payment of a dividend of $0.12 per common share to holders of record on March 4, 2013 and the dividend payment totaling $5.5 million will be paid on March 15, 2013.consolidated financial statements.

        The payment of any future quarterly dividends and any other returns of capital will be at the discretion of our board of directors and may be reduced, eliminated or increased and will be dependent upon our financial position, results of operations, available cash, cash flow, capital requirements and other factors deemed relevant by our board of directors.


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Contractual Obligations and Commitments

        The following table summarizes our contractual cash obligations and other commercial commitments as of December 31, 2012.2014.

 
 Payments due by period 
 
 Total Less than
1 year
 1 - 3 years 3 - 5 years After 5 years 
 
 (in thousands)
 

Convertible Notes(1)

 $93,358 $920 $92,438 $ $ 

Senior Notes(2)

  255,609  14,656  29,312  29,312  182,329 

Capital lease obligations(3)

  299,995  29,968  40,537  38,938  190,552 

Operating leases and other(4)

  313,257  48,631  78,091  55,846  130,689 

Unconditional purchase obligations(5)

  75,960  24,853  25,397  2,292  23,418 
            

Total contractual cash obligations

 $1,038,179 $119,028 $265,775 $126,388 $526,988 
            
 
 Payments due by period 
 
 Total Less than
1 year
 1 - 3 years 3 - 5 years After 5 years 
 
 (in thousands)
 

Debt(1)

  583,475  31,350  62,700  272,550  216,875 

Capital lease obligations(2)

  355,775  33,848  44,147  43,964  233,816 

Operating leases(3)

  158,000  31,938  42,875  29,015  54,172 

Unconditional purchase obligations(4)

  35,819  16,242  1,914  1,887  15,776 

Total contractual cash obligations

 $1,133,069 $113,378 $151,636 $347,416 $520,639 

(1)
The Convertible Notes are assumed to be outstanding until June 15, 2014 which is the earliest put date and theseThese amounts include interest and principal payment obligations on the Convertible Notes to the put date.

Tableour $240.0 million of Contents

(2)
The $175.0 million Senior Notes were issued in January 2011 and these amounts include interest and principal payment obligations through the maturity date of February 15, 2018.2018 and interest and principal payments on our $200.0 million of 2021 Notes through the maturity date of April 15, 2021. In March 2015, our Senior Notes are expected to be redeemed with the proceeds of the February 2015 issuance of $250.0 million of 5.375% senior secured notes. See Note 12 to our consolidated financial statements.

(3)(2)
The capital lease obligations above were incurred in connection with IRUs for inter-city and intra-city dark fiber underlying substantial portions of our network. These capital leases are presented on our balance sheet at the net present value of the future minimum lease payments, or $137.9$166.5 million at December 31, 2012.2014. These leases generally have initial terms of 15 to 20 years

(4)(3)
These amounts include amounts due under our operating lease, building access and tenant license agreement obligations.leases.

(5)(4)
As of December 31, 2012, we had committed to additionalThese amounts include amounts due under unconditional purchase obligations including dark fiber IRU operating and capital lease agreements totaling approximately $35.7 million in future principal and interest payments.entered into prior to December 31, 2014. In January 2013,2015, we entered into an amended equipment purchase agreement with a vendor which require usvendor. Under the purchase agreement we are required to order $37purchase a total of $28.9 million of equipment through 2016.during the eighteen month term.

Due to uncertainty regarding the completion of tax audits and possible outcomes, an estimate of the timing of payments related to uncertain tax positions and interest cannot be made and these amounts are excluded from the contractual cash obligations above. See Note 5—Income Taxes.

Future Capital Requirements

        We believe that our cash on hand and cash generated from our operating activities will be adequate to meet our working capital, capital expenditure, debt service, dividend payments and other cash requirements for the next twelve months if we execute our business plan.

        Any future acquisitions or other significant unplanned costs or cash requirements in excess of amounts we currently hold may require that we raise additional funds through the issuance of debt or equity. We cannot assure you that such financing will be available on terms acceptable to us or our stockholders, or at all. Insufficient funds may require us to delay or scale back the number of buildings and markets that we add to our network, reduce our planned increase in our sales and marketing efforts, or require us to otherwise alter our business plan or take other actions that could have a material adverse effect on our business, results of operations and financial condition. If issuing equity securities raises additional funds, substantial dilution to existing stockholders may result.


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        We may need to or elect to refinance all or a portion of our indebtedness at or before maturity and we cannot provide assurances that we will be able to refinance any such indebtedness on commercially reasonable terms or at all. In addition, we may elect to secure additional capital in the future, at acceptable terms, to improve our liquidity or fund acquisitions or for general corporate purposes. In addition, in an effort to reduce future cash interest payments as well as future amounts due at maturity or to extend debt maturities, we may, from time to time, issue new debt, enter into debt for debt, or cash transactions to purchase our outstanding debt securities in the open market or through privately negotiated transactions. We will evaluate any such transactions in light of the existing market conditions. The amounts involved in any such transaction, individually or in the aggregate, may be material.

Off-Balance Sheet Arrangements

        We do not have relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.

Income taxesTaxes

        Due to the uncertainty surrounding the realization of our net deferred tax asset, we have recorded a valuation allowance for a substantial majority of our net deferred tax asset.        Section 382 of the Internal Revenue Code in the United States limits the utilization of net operating losses when ownership changes, as defined by that section, occur. We have performed an analysis of our Section 382 ownership changes and have determined that the utilization of certain of our net operating loss carryforwards in the United States is limited.


Table Of the $390.6 million of Contentsnet operating losses available at December 31, 2014 in the United States approximately $286 million are unavailable for use under Section 382 and approximately $81 million are limited for use under Section 382. Our net operating loss carryforwards outside of the United States totaling approximately $789 million are not subject to limitations similar to Section 382.

Critical Accounting Policies and Significant Estimates

        Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

        The accounting policies we believe to be most critical to understanding our financial results and condition or that require complex, significant and subjective management judgments are discussed below.

Revenue Recognition

        We recognize service revenue when the services are performed, evidence of an arrangement exists, the fee is fixed and determinable and collection is probable. Service discounts and incentives offered to certain customers are recorded as a reduction of revenue when granted. Fees billed in connection with customer installations are deferred and recognized ratably over the longer of estimated customer life or


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contract term. We determine the estimated customer life using a historical analysis of customer retention and contract terms. If our estimated customer life and contract terms increase, we will recognize installation revenue over a longer period. We expense the direct costs associated with sales as incurred.

Allowances for Sales Credits and Unfulfilled Customer Purchase Obligations

        We have established allowances to account for sales credits and unfulfilled contractual purchase obligations.

Valuation Allowances for Doubtful Accounts Receivable and Deferred Tax Assets

        We have established allowances associated with uncollectible accounts receivable and certain of our deferred tax assets.


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Capital Lease Obligations

        We record assets and liabilities under capital leases at the lesser of the present value of the aggregate future minimum lease payments or the fair value of the assets under lease. We establish the number of renewal option periods used in determining the lease term, if any, based upon our assessment at the inception of the lease of the number of option periods for which failure to renew the lease imposes a penalty on us in such amount that renewal appears to be reasonably assured. Useful lives are determined based on historical usage with consideration given to technological changes and trends in the industry that could impact the asset utilization. We estimate the fair value of leased assets primarily using estimated replacement cost data for similar assets.

Other Accounting PoliciesAccruals for Contingencies

        We capitalize the direct costs incurred prior to an asset being ready for service. These costs include costs under the related construction contract and the compensation costs of employees directly involved with construction activities. Our capitalization of these costs is based upon estimates of time for our employees involved in construction activities.

        We estimate our litigation accruals based upon our estimate of the expected outcome after consultation with legal counsel. In the normal course of business we are involved in other legal activities and claims. Because such matters are subject to many uncertainties and the outcomes are not predictable with assurance, the liability related to these legal actions and claims cannot be determined with certainty. In accordance with the accounting guidance for contingencies, we accrue our estimate of a contingent liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Where it is probable that a liability has been incurred and there is a range of expected loss for which no amount in the range is more likely than any other amount, we accrue at the low end of the range. We review our accruals at least quarterly and adjust them to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular matter. Judgment is required in estimating the ultimate outcome of any dispute resolution process, as well as any other amounts that may be incurred to conclude the negotiations or settle any litigation. Actual results may differ from these estimates under different assumptions or conditions and such differences could be material.

        We estimate our accruals for disputed leased circuit obligations based upon the nature and age of the dispute. Our network costs are impacted by the timing and amounts of disputed circuit costs. We


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generally record these disputed amounts when billed by the vendor and reverse these amounts when the vendor credit has been received or the dispute has otherwise been resolved.

Recent Accounting Pronouncements

Recent Accounting Pronouncements—to be Adopted

        On May 28, 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for us on January 1, 2017. Early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We estimateare evaluating the useful lives ofeffect that ASU 2014-09 will have on our propertyconsolidated financial statements and equipment based upon historical usage with consideration given to technological changes and trends inrelated disclosures. We have not yet selected a transition method nor have we determined the industry that could impact the asset utilization. We establish the number of renewal option periods used in determining the lease term, if any, for amortizing leasehold improvements based upon our assessment at the inceptioneffect of the lease of the number of option periods that are reasonably assured.

        We recognize a liability for the estimated fair value of legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset in the period incurred. The fair value of the obligation is also capitalized as property, plant and equipment and then amortized over the estimated remaining useful life of the associated asset. Increases to the asset retirement obligation liability due to the passage of time are recognized as accretion expense and included within selling, general and administrative expenses. Changes in the liability due to revisions to future cash flows are recognized by increasing or decreasing the liability with the offset adjusting the carrying amount of the related long-lived asset. To the extent that the downward revisions exceed the carrying amount of the related long-lived asset initially recorded when the asset retirement obligation liability was established, we record the remaining adjustment as a reduction to depreciation expense, to the extent of historical depreciation of the related long-lived asset, and then to selling, general and administrative expense.standard on our ongoing financial reporting.


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ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        We are exposed to certain market risks. These risks, which include interest rate risk and foreign currency exchange risk, arise in the normal course of business rather than from trading activities.

Interest Rate Risk

        Our cash flow exposure due to changes in interest rates related to our debt is limited as our Convertible Notes and Senior Notesnote obligations have fixed interest rates. The fair value of our Convertible Notes and Senior Notesnote obligations may increase or decrease for various reasons, including fluctuations in the market price of our common stock, fluctuations in market interest rates and fluctuations in general economic conditions.

        Our interest income is sensitive to changes in the general level of interest rates. However, based upon the nature and current level of our investments, which consist of cash and cash equivalents, we believe that there is no material interest rate exposure related to our investments.

Foreign Currency Exchange Risk

        Our operations outside of the U.S.United States expose us to potentially unfavorable adverse movements in foreign currency rate changes. We have not entered into forward exchange contracts related to our foreign currency exposure. While we record financial results and assets and liabilities from our international operations in the functional currency, which is generally the local currency, these results are reflected in our consolidated financial statements in U.S.US dollars. Therefore, our reported results are exposed to fluctuations in the exchange rates between the U.S.US dollar and the local currencies, in particular the Euro, the Canadian dollar and Mexican Peso. In addition, we may fund certain cash flow requirements of our international operations in U.S.US dollars. Accordingly, in the event that the local currencies strengthen versus the U.S.US dollar to a greater extent than planned, the revenues, expenses and cash flow requirements associated with our international operations may be significantly higher in U.S.-dollarUS-dollar terms than planned. Changes in foreign currency rates could adversely affect our operating results.


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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 
 Page 

Report of Independent Registered Public Accounting Firm

  4345 

Consolidated Balance Sheets as of December 31, 20122014 and 20112013

  4446 

Consolidated Statements of Comprehensive Income (Loss) for Each of the Three Years Ended December 31, 20122014

  4547 

Consolidated Statements of Changes in Stockholders' Equity for Each of the Three Years Ended December 31, 20122014

  4648 

Consolidated Statements of Cash Flows for Each of the Three Years Ended December 31, 20122014

  4749 

Notes to Consolidated Financial Statements

  4850 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Cogent Communications Group,Holdings, Inc.

        We have audited the accompanying consolidated balance sheets of Cogent Communications Group,Holdings, Inc. and subsidiaries (the "Company") as of December 31, 20122014 and 2011,2013, and the related consolidated statements of comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2012.2014. Our audits also included the financial statement schedule listed in the index at 15(a) 2. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cogent Communications Group,Holdings, Inc. and subsidiaries at December 31, 20122014 and 2011,2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2012,2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cogent Communications Group,Holdings, Inc.'s internal control over financial reporting as of December 31, 2012,2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 27, 20132015 expressed an unqualified opinion thereon.

  /s/ Ernst & Young LLP

McLean, VA
February 27, 20132015


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COGENT COMMUNICATIONS GROUP,HOLDINGS, INC., AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF DECEMBER 31, 20122014 AND 20112013

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


 2012 2011  2014 2013 

Assets

      

Current assets:

      

Cash and cash equivalents

 $247,285 $238,207  $287,790 $304,866 

Accounts receivable, net of allowance for doubtful accounts of $3,083 and $3,345, respectively

 23,990 25,029 

Accounts receivable, net of allowance for doubtful accounts of $1,707 and $1,871, respectively

 33,089 30,628 

Prepaid expenses and other current assets

 9,978 10,051  18,762 18,777 
     

Total current assets

 281,253 273,287  339,641 354,271 

Property and equipment:

      

Property and equipment

 889,229 836,047  1,047,590 985,084 

Accumulated depreciation and amortization

 (578,054) (528,069) (686,829) (643,891)
     

Total property and equipment, net

 311,175 307,978  360,761 341,193 

Deposits and other assets ($442 and $457 restricted, respectively)

 14,103 16,386 
     

Deferred tax assets—noncurrent

 48,963 50,861 

Deposits and other assets ($389 and $448 restricted, respectively)

 12,410 8,776 

Total assets

 $606,531 $597,651  $761,775 $755,101 
     

Liabilities and stockholders' equity

      

Current liabilities:

      

Accounts payable

 $14,734 $14,199  $13,287 $14,098 

Accrued and other current liabilities

 26,519 21,944  32,151 31,465 

Convertible senior notes—current portion, net of discount of $3,099

  88,879 

Current maturities, capital lease obligations

 10,487 11,700  14,594 9,252 
     

Total current liabilities

 51,740 47,843  60,032 143,694 

Senior secured notes

 175,000 175,000 

Senior secured notes including premium of $4,230 and $5,423, respectively

 244,230 245,423 

Senior unsecured notes

 200,000  

Capital lease obligations, net of current maturities

 127,461 122,996  151,944 152,527 

Convertible senior notes, net of discount of $9,494 and $15,366, respectively

 82,484 76,612 

Other long term liabilities

 10,067 11,199  21,775 19,965 
     

Total liabilities

 446,752 433,650  677,981 561,609 
     

Commitments and contingencies

      

Stockholders' equity:

      

Common stock, $0.001 par value; 75,000,000 shares authorized; 47,116,644 and 45,893,347 shares issued and outstanding, respectively

 47 46 

Common stock, $0.001 par value; 75,000,000 shares authorized; 46,398,729 and 47,334,218 shares issued and outstanding, respectively

 46 47 

Additional paid-in capital

 497,349 489,021  460,576 508,256 

Accumulated other comprehensive income

 667 (582) (6,462) 2,136 

Accumulated deficit

 (338,284) (324,484) (370,366) (316,947)
     

Total stockholders' equity

 159,779 164,001  83,794 193,492 
     

Total liabilities and stockholders' equity

 $606,531 $597,651  $761,775 $755,101 
     

   

The accompanying notes are an integral part of these consolidated balance sheets.


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COGENT COMMUNICATIONS GROUP,HOLDINGS, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 20122014

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)


 2012 2011 2010  2014 2013 2012 

Service revenue

 $316,973 $305,500 $263,416  $380,003 $347,979 $316,973 

Operating expenses:

        

Network operations (including $529, $510 and $370 of equity-based compensation expense, respectively, exclusive of amounts shown separately)

 143,642 132,160 119,023 

Selling, general, and administrative (including $7,794, $7,185 and $6,267 of equity-based compensation expense, respectively)

 79,885 76,984 72,060 

Asset impairment

   594 

Network operations (including $488, $507 and $529 of equity-based compensation expense, respectively), exclusive of amounts shown separately

 159,893 150,225 143,642 

Selling, general, and administrative (including $9,083, $8,212 and $7,794 of equity-based compensation expense, respectively)

 107,679 87,242 79,885 

Gains on equipment transactions

 (10,950)   

Depreciation and amortization

 62,478 59,850 56,524  69,481 64,358 62,478 
       

Total operating expenses

 286,005 268,994 248,201  326,103 301,825 286,005 
       

Operating income

 30,968 36,506 15,215  53,900 46,154 30,968 

Release of lease obligation (Note 6)

  2,739  

Interest income and other

 1,851 848 959  536 2,630 1,851 

Interest expense

 (36,319) (34,511) (16,682) (49,945) (41,797) (36,319)
       

(Loss) income before income taxes

 (3,500) 5,582 (508)

Income (loss) before income taxes

 4,491 6,987 (3,500)

Income tax (expense) benefit

 (751) 1,960 1,177  (3,694) 49,702 (751)
       

Net (loss) income

 $(4,251)$7,542 $669 
       

Net income (loss)

 $797 $56,689 $(4,251)

Comprehensive (loss) income:

        

Net (loss) income

 $(4,251)$7,542 $669 

Net income (loss)

 $797 $56,689 $(4,251)

Foreign currency translation adjustment

 1,249 (1,626) (932) (8,598) 1,469 1,249 
       

Comprehensive (loss) income

 $(3,002)$5,916 $(263) $(7,801)$58,158 $(3,002)
       

Basic and diluted net (loss) income per common share

 $(0.09)$0.17 $0.01 
       

Basic net income (loss) per common share

 $0.02 $1.22 $(0.09)

Diluted net income (loss) per common share

 $0.02 $1.21 $(0.09)

Dividends declared per common share

 $0.21    $1.17 $0.76 $0.21 
       

Weighted-average common shares—basic

 45,514,844 45,180,485 44,633,878  45,960,720 46,286,735 45,514,844 
       

Weighted-average common shares—diluted

 45,514,844 45,704,052 44,790,753  46,349,670 46,996,904 45,514,844 
       

   

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


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COGENT COMMUNICATIONS GROUP,HOLDINGS, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 20122014

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)


 Common Stock  
 Accumulated
Other
Comprehensive
Income
  
  
  Common Stock  
 Accumulated
Other
Comprehensive
Income
  
  
 

 Additional
Paid-in
Capital
 Accumulated
Deficit
 Total
Stockholder's
Equity
  Additional
Paid-in
Capital
 Accumulated
Deficit
 Total
Stockholder's
Equity
 

 Shares AmountAccumulated
Other
Comprehensive
Income
 Shares AmountAccumulated
Other
Comprehensive
Income

Balance at December 31, 2009

 44,853,974 $45 $475,158 $1,976 $(332,695)$144,484
            

Forfeitures of shares granted to employees

 (61,800)      

Equity-based compensation

   7,305   7,305 

Foreign currency translation

    (932)  (932)

Issuances of common stock

 999,500 1    1 

Exercises of options

 46,836  274   274 

Net income

     669 669 
             

Balance at December 31, 2010

 45,838,510 $46 $482,737 $1,044 $(332,026)$151,801 
             

Forfeitures of shares granted to employees

 (33,038)      

Equity-based compensation

   8,620   8,620 

Foreign currency translation

    (1,626)  (1,626)

Issuances of common stock

 224,920      

Exercises of options

 95,311  633   633 

Common stock purchases and retirement

 (232,356)  (2,969)   (2,969)

Net income

     7,542 7,542 
             

Balance at December 31, 2011

 45,893,347 $46 $489,021 $(582)$(324,484)$164,001  45,893,347 $46 $489,021 $(582)$(324,484)$164,001 
             

Forfeitures of shares granted to employees

 (82,580)       (82,580)      

Equity-based compensation

   9,164   9,164    9,164   9,164 

Foreign currency translation

    1,249  1,249     1,249  1,249 

Issuances of common stock

 1,338,120 1    1  1,338,120 1    1 

Exercises of options

 42,341  404   404  42,341  404   404 

Common stock purchases and retirement

 (74,584)  (1,265)   (1,265) (74,584)  (1,265)   (1,265)

Excess income tax benefit

   25   25    25   25 

Dividends paid

     (9,549) (9,549)     (9,549) (9,549)

Net (loss)

     (4,251) (4,251)     (4,251) (4,251)
             

Balance at December 31, 2012

 47,116,644 $47 $497,349 $667 $(338,284)$159,779  47,116,644 $47 $497,349 $667 $(338,284)$159,779 
             

Forfeitures of shares granted to employees

 (46,335)      

Equity-based compensation

   9,557   9,557 

Foreign currency translation

    1,469  1,469 

Issuances of common stock

 175,500      

Exercises of options

 88,409  1,218   1,218 

Excess income tax benefit

   132   132 

Dividends paid

     (35,352) (35,352)

Net income

     56,689 56,689 

Balance at December 31, 2013

 47,334,218 $47 $508,256 $2,136 $(316,947)$193,492 

Forfeitures of shares granted to employees

 (35,290)      

Equity-based compensation

   10,385   10,385 

Foreign currency translation

    (8,598)  (8,598)

Issuances of common stock

 792,550  1   1 

Exercises of options

 38,379  533   533 

Common stock purchases and retirement

 (1,731,128) (1) (58,582)   (58,583)

Excess income tax benefit

   (17)   (17)

Dividends paid

     (54,216) (54,216)

Net income

     797 797 

Balance at December 31, 2014

 46,398,729 $46 $460,576 $(6,462)$(370,366)$83,794 

   

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


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COGENT COMMUNICATIONS GROUP,HOLDINGS, INC., AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR EACH OF THE THREE YEARS ENDED DECEMBER 31, 20122014

(IN THOUSANDS)


 2012 2011 2010  2014 2013 2012 

Cash flows from operating activities:

        

Net (loss) income

 $(4,251)$7,542 $669 

Net income (loss)

 $797 $56,689 $(4,251)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

        

Depreciation and amortization

 62,478 59,850 56,524  69,481 64,358 62,478 

Asset impairment

   594 

Amortization of debt discount—convertible notes

 6,031 5,609 4,950 

Amortization of debt discount and premium

 1,976 6,086 6,031 

Equity-based compensation expense (net of amounts capitalized)

 8,323 7,695 6,637  9,571 8,719 8,323 

Gain—release of lease obligation

  (2,739)  

Gains—dispositions of assets and other, net

 (971) (96) (208)

Changes in assets and liabilities:

 

Gains—equipment transactions and other, net

 (10,382) (1,001) (971)

Deferred income taxes

 3,163 (50,069) 2,692 

Changes in operating assets and liabilities:

       

Accounts receivable

 1,247 (1,554) (1,603) (3,938) (6,293) 1,247 

Prepaid expenses and other current assets

 459 (1,238) (1,257) (2,338) (3,642) 459 

Deferred income taxes

 2,692 (5,735) (1,436)

Deposits and other assets

 (436) 343 (888) 219 770 (436)

Accounts payable, accrued liabilities and other long-term liabilities

 4,371 6,137 7,495  4,497 6,234 4,371 
       

Net cash provided by operating activities

 79,943 75,814 71,477  73,046 81,851 79,943 
       

Cash flows from investing activities:

        

Purchases of property and equipment

 (44,337) (45,856) (52,757) (60,032) (49,031) (44,337)

Proceeds from asset sales

 141 44 530  90 50 141 
       

Net cash used in investing activities

 (44,196) (45,812) (52,227) (59,942) (48,981) (44,196)
       

Cash flows from financing activities:

        

Net proceeds from issuance of senior unsecured notes

 195,824   

Net proceeds from issuance of senior secured notes

  170,512    69,882  

Repayment of convertible notes

 (91,978)   

Dividends paid

 (9,549)    (54,216) (35,352) (9,549)

Principal payments of capital lease obligations

 (16,794) (15,540) (19,148) (18,208) (11,164) (16,794)

Purchases of common stock

 (1,265) (2,969)   (58,582)  (1,265)

Proceeds from exercises of common stock options

 404 633 274  533 1,218 404 
       

Net cash (used in) provided by financing activities

 (27,204) 152,636 (18,874) (26,627) 24,584 (27,204)
       

Effect of exchange rate changes on cash

 535 (714) (22) (3,553) 127 535 
       

Net increase in cash and cash equivalents

 9,078 181,924 354 

Net (decrease) increase in cash and cash equivalents

 (17,076) 57,581 9,078 

Cash and cash equivalents, beginning of year

 238,207 56,283 55,929  304,866 247,285 238,207 
       

Cash and cash equivalents, end of year

 $247,285 $238,207 $56,283  $287,790 $304,866 $247,285 
       

Supplemental disclosures of cash flow information:

        

Cash paid for interest

 $26,107 $24,602 $11,925  $46,531 $34,511 $26,107 

Cash paid for income taxes

 428 810 303  1,896 822 428 

Non-cash financing activities—capital lease obligations incurred

 17,805 41,959 23,291 

Non-cash investing and financing activities:

       

Capital lease obligations incurred

 28,707 33,428 17,805 

Fair value of equipment acquired in leases

 174 8,029 273 

Non-cash component of network equipment obtained in exchange transactions

 11,031 934 1,127 

   

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


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COGENT COMMUNICATIONS GROUP,HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of the business and summary of significant accounting policies:

DescriptionReorganization and merger

        On May 15, 2014, pursuant to the Agreement and Plan of the business

Reorganization (the "Merger Agreement") by and among Cogent Communications Group, Inc. ("Group"), a Delaware corporation, Cogent Communications Holdings, Inc., a Delaware corporation ("Holdings") and Cogent Communications Merger Sub, Inc., a Delaware corporation ("Merger Sub"), Group adopted a new holding company organizational structure whereby Group is now a wholly owned subsidiary of Holdings. Holdings is a "successor issuer" to Group pursuant to Rule 12g-3(a) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In connection with the succession, the common stock of Holdings is deemed to be registered under Section 12(b) of the Exchange Act by operation of law.

        The holding company organizational structure was effected by a merger (the "Merger") structured as a tax-free transaction and conducted pursuant to Section 251(g) of Delaware General Corporation Law which provides for the formation of a holding company structure without a vote of the stockholders of the constituent corporations. Because the holding company organizational structure has occurred at the parent company level, the remainder of the Company's subsidiaries, operations and customers were not affected by the Merger. Accordingly, the historical financial statements reflect the effect of the reorganization for all periods presented. Under the terms of the Merger Agreement, Merger Sub merged with and into Group, with Group surviving the Merger and becoming a direct, wholly owned subsidiary of Holdings.

        Pursuant to the Merger Agreement, all of the outstanding capital stock of Group was converted, on a share for share basis, into the common stock of Holdings. As a result, each former stockholder of Group became the owner of an identical number of shares of common stock of Holdings, evidencing the same proportional interests in the Company (as defined below) and having the same designations, rights, powers and preferences, qualifications, limitations and restrictions, as those that the stockholder held in Group. Additionally, each outstanding option to purchase shares of common stock of Group was automatically converted into an option to purchase, upon the same terms and conditions, an identical number of shares of Holding's common stock. Each outstanding restricted share of common stock of Group was also converted into a restricted share of common stock of Holdings upon the same terms and conditions. The directors and executive officers of the Company immediately after completion of the Merger are comprised of the same persons who were directors of and executive officers of Group immediately prior to the Merger.

        References to the "Company") for events that occurred prior to May 15, 2014 refer to Cogent Communications Group, Inc. and its subsidiaries and on and after May 15, 2014 the "Company" refers to Cogent Communications Holdings, Inc. and its subsidiaries.

Description of business

        The Company is a Delaware corporation and is headquartered in Washington, DC. The Company is a facilities-based provider of low-cost, high-speed Internet access and Internet Protocol ("IP") communications services. The Company's network is specifically designed and optimized to transmit data using IP. The Company delivers its services primarily to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations in North America, Europe and Europe. The Company recently began expansion into Japan.


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COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Description of the business and summary of significant accounting policies: (Continued)

        The Company offers on-net Internet access services exclusively through its own facilities, which run from its network to its customers' premises. The Company is not dependent on local telephone companies to serve its customers for its on-net Internet access services because of its integrated network architecture. The Company offers its on-net services to customers located in buildings that are physically connected to its network. The Company's on-net service consists of high-speed Internet access and IP connectivity ranging from 100 Megabits per second to 10100 Gigabits per second of bandwidth. The Company provides its on-net Internet access services to its net-centric and corporate customers. The Company's net-centric customers include bandwidth-intensive users such as universities, other Internet service providers, telephone companies, cable television companies, web hosting companies, content delivery network companies and commercial content and application service providers. These net-centric customers generally receive serviceobtain the Company's services in colocation facilities and in the Company's data centers. The Company operates data centers throughout North America and Europe that allow its customers to collocate their equipment and access the Company's network. The Company's corporate customers are located in multi-tenant office buildings and typically include law firms, financial services firms, advertising and marketing firms and other professional services businesses.

        In addition to providing its on-net services, the Company provides Internet connectivity to customers that are not located in buildings directly connected to its network. The Company provides this off-net service primarily to corporate customers using other carriers' facilities to provide the "last mile" portion of the link from the customers' premises to the Company's network. The Company also provides certain non-core services that resulted from acquisitions. The Company continues to support but does not actively sell these non-core services.

Summary of significant accounting policies

Principles of consolidation

        The consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles and include the accounts of the Company and all of its wholly-owned and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of estimates

        The preparation of consolidated financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from these estimates.


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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Description of the business and summary of significant accounting policies: (Continued)

Revenue recognition and allowance for doubtful accounts

        The Company's service offerings consist of on-net and off-net telecommunications services. Fixed fees are billed monthly in advance and usage fees are billed monthly in arrears. Revenues from telecommunication services are recognized when the services are performed, evidence of an arrangement exists, the fee is fixed and determinable and collection is probable. The probability of collection is determined by an analysis of credit history for new customers and historical payment


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COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Description of the business and summary of significant accounting policies: (Continued)

patterns for existing customers. Service discounts and incentives related to telecommunication services are recorded as a reduction of revenue when granted. Fees billed in connection with customer installations are deferred and recognized ratably over the longer of the contract term or the estimated customer life. The Company expenses the direct costs associated with sales as incurred.

        The Company invoices certain customers for amounts contractually due for unfulfilled minimum contractual obligations and recognizes a corresponding sales allowance equal to the amount invoiced resulting in the recognition of no net revenue at the time the customer is billed. The Company vigorously seeks payment of these amounts. The Company recognizes revenue for these billings as they are collected.

        The Company establishes an allowance for doubtful accounts and other sales credit adjustments related to its trade receivables. Trade receivables are recorded at the invoiced amount and can bear interest. Allowances for sales credits are established through a reduction of revenue, while allowances for doubtful accounts are established through a charge to selling, general, and administrative expenses as bad debt expense. The Company assesses the adequacy of these reserves by evaluating factors, such as the length of time individual receivables are past due, historical collection experience, and changes in the credit worthiness of its customers. The Company also assesses the ability of specific customers to meet their financial obligations and establishes specific allowances related to these customers. If circumstances relating to specific customers change or economic conditions change such that the Company's past collection experience and assessment of the economic environment are no longer appropriate, the Company's estimate of the recoverability of its trade receivables could be impacted. Accounts receivable balances are written-off against the allowance for doubtful accounts after all means of internal collection activities have been exhausted and the potential for recovery is considered remote. The Company recognized bad debt expense, net of recoveries, of approximately $5.1$3.7 million, $4.3$3.5 million and $4.3$5.1 million for the years ended December 31, 2014, 2013 and 2012, 2011respectively.

Gross Receipts Taxes

        Revenue recognition standards include guidance relating to any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and 2010, respectively.a customer and may include, but is not limited to, gross receipts taxes and certain state regulatory fees. The Company records certain excise taxes billed to its customers on a gross basis in its consolidated statements of operations.

Network operations

        Network operations expenses include the costs of personnel and related operating expenses associated with service delivery, network management, and customer support, network facilities costs, fiber and equipment maintenance fees, leased circuit costs, and access fees paid to building owners. The Company estimates its accruals for any disputed leased circuit obligations based upon the nature and age of the dispute. Network operations costs are impacted by the timing and amounts of disputed circuit costs. The Company generally records these disputed amounts when billed by the vendor and reverses these amounts when the vendor credit has been received or the dispute has otherwise been resolved. The Company does not allocate depreciation and amortization expense to its network operations expense.


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COGENT COMMUNICATIONS GROUP,HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Description of the business and summary of significant accounting policies: (Continued)

Foreign currency translation adjustment and comprehensive income (loss)

        The consolidated financial statements of the Company's non-U.S.non-US operations are translated into U.S.US dollars using the period-end foreign currency exchange rates for assets and liabilities and the average foreign currency exchange rates for revenues and expenses. Gains and losses on translation of the accounts are accumulated and reported as a component of other comprehensive lossincome (loss) in stockholders' equity. The Company's only components of "other comprehensive loss"income (loss)" are currency translation adjustments for all periods presented. The Company considers the majority of its investments in its foreign subsidiaries to be long-term in nature. The Company's foreign exchange transaction gains (losses), including where its investments in its foreign subsidiaries are not considered to be long-term in nature, are included within interest income and other on the consolidated statements of comprehensive income (loss).

Financial instruments

        The Company considers all highly liquid investments with an original maturity of three months or less at purchase to be cash equivalents. The Company determines the appropriate classification of its investments at the time of purchase and evaluates such designation at each balance sheet date.

        At December 31, 20122014 and December 31, 2011,2013, the carrying amount of cash and cash equivalents, accounts receivable, prepaid and other current assets, accounts payable, and accrued expenses approximated fair value because of the short-term nature of these instruments. The Company measures its cash equivalents at amortized cost, which approximates fair value based upon quoted market prices (Level 1). Based upon recent trading prices (Level 2—market approach) at December 31, 2012,2014 the fair value of the Company's $92.0$200.0 million convertible senior unsecured notes was approximately $89.0 million. Based upon recent trading prices (Level 2—market approach) at December 31, 2012,$196.0 million and the fair value of the Company's $175.0$240.0 million senior secured notes was approximately $191.7$250.8 million.

        The Company was party to letters of credit totaling approximately $0.4 million as of December 31, 20122014 and $0.4 million as of December 31, 2011.2013. These letters of credit are secured by investments that are restricted and included in deposits and other assets.

Concentrations of credit risk

        The Company's assets that are exposed to credit risk consist of its cash and cash equivalents, other assets and accounts receivable. As of December 31, 20122014 and 2011,2013, the Company's cash equivalents were invested in demand deposit accounts, overnight investments and money market funds. The Company places its cash equivalents in instruments that meet high-quality credit standards as specified in the Company's investment policy guidelines. Accounts receivable are due from customers located in major metropolitan areas in the United States, Europe, Canada and Mexico. Receivables from the Company's net-centric (wholesale) customers are generally subject to a higher degree of credit risk than the Company's corporate customers.

        The Company relies upon an equipment vendor for the majority of its network equipment and is also dependent upon many third-party fiber providers for providing its services to its customers.

Property and equipment

        Property and equipment are recorded at cost and depreciated once deployed using the straight-line method over the estimated useful lives of the assets. Useful lives are determined based on historical


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COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Description of the business and summary of significant accounting policies: (Continued)

usage with consideration given to technological changes and trends in the industry that could impact the asset utilization. System infrastructure costs include the capitalized compensation costs of employees directly involved with construction activities and costs incurred by third party contractors.


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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Description of the business and summary of significant accounting policies: (Continued)

        Assets and liabilities under capital leases are recorded at the lesser of the present value of the aggregate future minimum lease payments or the fair value of the assets under lease. Leasehold improvements include costs associated with building improvements. The Company determines the number of renewal option periods, if any, included in the lease term for purposes of amortizing leasehold improvements and the lease term of its capital leases based upon its assessment at the inception of the lease for which the failure to renew the lease imposes a penalty on the Company in such amount that a renewal appears to be reasonably assured. Expenditures for maintenance and repairs are expensed as incurred.

        Depreciation and amortization periods are as follows:

Type of asset
 Depreciation or amortization period

Indefeasible rights of use (IRUs)

 Shorter of useful life or the IRU lease agreement; generally 15 to 20 years

Network equipment

 3 to 8 years

Leasehold improvements

 Shorter of lease term, including reasonably assured renewal periods, or useful life

Software

 5 years

Owned buildings

 40 years

Office and other equipment

 3 to 7 years

System infrastructure

 5 to 10 years

Long-lived assets

        The Company's long-lived assets include property and equipment. These long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment is determined by comparing the carrying value of these long-lived assets to management's probability weighted estimate of the future undiscounted cash flows expected to result from the use of the assets. In the event an impairment exists, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the asset, which would be determined by using quoted market prices or valuation techniques such as the discounted present value of expected future cash flows, appraisals, or other pricing models. In the event there are changes in the planned use of the Company's long-term assets or the Company's expected future undiscounted cash flows are reduced significantly, the Company's assessment of its ability to recover the carrying value of these assets could change.

Asset retirement obligations

        The Company's asset retirement obligations consist of restoration requirements for certain leased facilities. The Company recognizes a liability for the present value of the estimated fair value of contractual obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset in the period


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COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Description of the business and summary of significant accounting policies: (Continued)

incurred. The present value of the fair value of the obligation is also capitalized as property, plant and equipment and then amortized over the estimated remaining useful life of the associated asset.

        Increases to the asset retirement obligation liability due to the passage of time are recognized within selling, general and administrative expenses in the Company's consolidated statements of operations. Changes in the liability due to revisions to estimates of future cash flows are recognized by


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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Description of the business and summary of significant accounting policies: (Continued)

increasing or decreasing the liability with the offset adjusting the carrying amount of the related long-lived asset.

Equity-based compensation

        The Company recognizes compensation expense for its share-based payments granted to its employees based on their grant date fair values with the expense being recognized on a straight-line basis over the requisite service period. The Company begins recording equity-based compensation expense related to performance awards when it is considered probable that the performance conditions will be met. Equity-based compensation expense is recognized in the statement of operations in a manner consistent with the classification of the employee's salary and other compensation.

Debt with conversion options

        The Company separately accounts for the liability and equity components of convertible debt instruments in a manner that reflects the issuer's nonconvertible debt borrowing rate when interest cost is recognized. The amortization of the resulting discount on the debt is recognized as part of interest expense in the Company's consolidated statements of operations.

        The Company estimates the fair value of convertible notes on the issuance date. The fair value that is assigned to the liability component of convertible notes is determined using interest rates of similar debt that exclude a conversion feature and then applying that effective interest rate to the cash flows associated with the convertible notes to calculate the present value.

Income taxes

        The Company's deferred tax assets or liabilities are computed based upon the differences between financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or benefits are based upon the changes in the assets or liability from period to period. At each balance sheet date, the Company assesses the likelihood that it will be able to realize its deferred tax assets. Valuation allowances are established when management determines that it is "more likely than not" that some portion or all of the deferred tax asset may not be realized. The Company considers all available positive and negative evidence in assessing the need for a valuation allowance including its historical operating results, ongoing tax planning, and forecasts of future taxable income, on a jurisdiction by jurisdiction basis. The Company reduces its valuation allowance if the Company concludes that it is "more likely than not" that it would be able to realize its deferred tax assets.

        Management determines whether a tax position is more likely than not to be sustained upon examination based on the technical merits of the position. Once it is determined that a position meets this recognition threshold, the position is measured to determine the amount of benefit to be recognized in the financial statements. The Company adjusts its estimated liabilities for uncertain tax positions periodically because of ongoing examinations by, and settlements with, the various taxing authorities, as well as changes in tax laws, regulations and interpretations. The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of its income tax expense.


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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Description of the business and summary of significant accounting policies: (Continued)

Basic and diluted net (loss) income per common share

        Basic earnings per share ("EPS") excludes dilution for common stock equivalents and is computed by dividing net income or (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based on the weighted-average number of shares of common stock outstanding during each period, adjusted for the effect of dilutive common stock equivalents, if dilutive.equivalents.


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COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Description of the business and summary of significant accounting policies: (Continued)

        Shares of restricted stock are included in the computation of basic EPS as they vest and are included in diluted EPS, to the extent they are dilutive, determined using the treasury stock method. As of December 31, 2014, 2013 and 2012, 2011 and 2010, 1.71.3 million, 0.81.0 million and 1.21.7 million unvested shares of restricted common stock, respectively, are not included in the computation of basic (loss) income per share, as thethese shares were not vested.

vested and as of December 31, 2014, 0.4 million anti-dilutive shares of restricted common stock are excluded from the computation of diluted income per share. Using the "if-converted" method, the shares issuable upon conversion of the Company's 1.00% Convertible Senior Notesconvertible senior notes (the "Convertible Notes") were anti-dilutive for all periods.the years ended December 31, 2013 and 2012. Accordingly, thethat impact has been excluded from the computation of diluted (loss) incomeloss per share. The Convertible Notes arewere convertible into 1.9 million shares of the Company's common stock at an initial conversion price of $49.18 per share, yielding 1.9 million shares subject to certain adjustments set forth in the indenture.

        The Company computes the dilutive effect of outstanding options using the treasury stock method. For the years ended December 31, 2012, 20112013 and 2010 options to purchase 0.2 million, 0.1 million2012. The Convertible Notes were repaid in June 2014 and 0.2 million shares of common stock, respectively, at weighted-average exercise prices of $14.87 and $17.62 and $17.84 per share, respectively, are not included in the computation of diluted (loss) income per share as the effect would be anti-dilutive.no longer outstanding.

        The following details the determination of the diluted weighted average shares for the year ended December 31, 20112014 and 2010:2013:


 Year Ended
December 31,
2011
 Year Ended
December 31,
2010
  Year Ended
December 31,
2014
 Year Ended
December 31,
2013
 

Weighted average common shares—basic

 45,180,485 44,633,878  45,960,720 46,286,735 

Dilutive effect of stock options

 83,192 76,336  59,196 76,884 

Dilutive effect of restricted stock

 440,375 80,539  329,754 633,285 
     

Weighted average common shares—diluted

 45,704,052 44,790,753  46,349,670 46,996,904 
     

Recent accounting pronouncements—adoptedpronouncements

        On May 28, 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The Financial Accounting Standards Board ("FASB") recently issued amendments to the presentation of comprehensive income which becameASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard is effective for interim and annual periods beginning after December 15, 2011. The amendments eliminated the previous reporting option of displaying components of other comprehensive income within the statement of changes in stockholders' equity. Under the new guidance, the Company was required to presentbeginning on January 1, 2017. Early application is not permitted. The standard permits the use of either a single continuous statement of comprehensive incomethe retrospective or an income statement immediately followed by a statement of comprehensive income.cumulative effect transition method. The Company elected to presentis evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a single continuous statementtransition method nor has it determined the effect of comprehensive income.the standard on its ongoing financial reporting.


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COGENT COMMUNICATIONS GROUP,HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Description of the business and summary of significant accounting policies: (Continued)

        In May 2011, the FASB issued ASU 2011-04 relating to fair value measurement (FASB ASC Topic 820), which amends current guidance to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this pronouncement for its fiscal year beginning January 1, 2012. The adoption of this pronouncement did not have a material effect on the Company's consolidated financial statements.

2. Property and equipment:

        Property and equipment consisted of the following (in thousands):


 December 31,  December 31, 

 2012 2011  2014 2013 

Owned assets:

      

Network equipment

 $375,230 $363,287  $432,848 $404,426 

Leasehold improvements

 127,497 115,155  161,470 147,718 

System infrastructure

 71,769 64,463  86,749 79,811 

Software

 9,369 9,221  9,562 9,531 

Office and other equipment

 10,558 9,690  12,893 12,521 

Building

 1,471 1,440  1,353 1,532 

Land

 125 122  115 130 
     

 596,019 563,378  704,990 655,669 

Less—Accumulated depreciation and amortization

 (472,024) (438,298) (553,113) (521,290)
     

 123,995 125,080  151,877 134,379 

Assets under capital leases:

      

IRUs

 293,210 272,669  342,600 329,415 

Less—Accumulated depreciation and amortization

 (106,030) (89,771) (133,716) (122,601)
      208,884 206,814 

 187,180 182,898 
     

Property and equipment, net

 $311,175 $307,978  $360,761 $341,193 
     

        Depreciation and amortization expense related to property and equipment and capital leases was $62.4$69.5 million, $59.7$64.3 million and $56.5$62.4 million, for the years ended December 31, 2014, 2013 and 2012, 2011 and 2010, respectively.

Capitalized construction costs

        The Company capitalizes the compensation cost of employees directly involved with its construction activities. In 2012, 20112014, 2013 and 2010,2012, the Company capitalized compensation costs of $7.2$7.6 million, $7.1$7.4 million and $5.9$7.2 million respectively. These amounts are included in system infrastructure costs.

        In 2014, 2013 and 2012 the Company exchanged certain used network equipment for new network equipment and cash consideration. The fair value of the equipment received was estimated to be $23.1 million, $2.0 million and $1.7 million resulting in gains of $10.8 million, $0.9 million and $0.7 million respectively. The estimated fair value of the equipment received was based upon the cash consideration price the Company pays for the new network equipment on a standalone basis (Level 3).


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COGENT COMMUNICATIONS GROUP,HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Property and equipment: (Continued)

Asset impairment

        In 2010, the Company recorded an impairment charge for certain property and equipment that was no longer in use totaling $0.6 million.

3. Accrued and other liabilities:

        Accrued and other current liabilities as of December 31 consist of the following (in thousands):


 2012 2011  2014 2013 

Operating accruals

 $8,283 $7,204  $11,286 $11,539 

Deferred revenue—current portion

 4,132 3,978  4,307 4,174 

Payroll and benefits

 2,358 2,160  3,371 2,952 

Taxes—non-income based

 692 1,210  1,359 1,128 

Interest

 11,054 7,392  11,828 11,672 
     

Total

 $26,519 $21,944  $32,151 $31,465 
     

4. Long-term debt:

Asset retirement obligationsSenior unsecured notes

        In 2010,On April 9, 2014, Cogent Communications Finance, Inc. ("Cogent Finance"), a newly formed financing subsidiary of Group, completed an offering at par of $200.0 million in aggregate principal amount of 5.625% Senior Notes due 2021 (the "2021 Notes"). The 2021 Notes were sold in private offerings for resale to qualified institutional buyers pursuant to SEC Rule 144A. The offering closed into escrow pursuant to an escrow agreement, dated as of April 9, 2014 (the "Escrow Agreement"). The term "Issuer" refers to Cogent Finance prior to the Company determined that its estimates of restoration costs for its leased facility asset retirement obligations were too high based on current costs to restore and changes in the expected timingrelease of the paymentfunds from the escrow account (such date of those costs duerelease, the "Escrow Release Date") and to Group after the Escrow Release Date. As a condition to releasing the funds from escrow Group redeemed its remaining outstanding Convertible Notes on June 20, 2014 (the "Redemption Transaction"). After consummation of the Redemption Transaction, Cogent Finance merged with Group, with Group continuing as the surviving corporation (the "Finance Merger"). At the time of consummation of the Finance Merger, Group assumed the obligations of Cogent Finance under the 2021 Notes and the indenture governing the 2021 Notes (the "Indenture") and Group and each of Group's domestic subsidiaries became party to the extensionsIndenture pursuant to a supplemental indenture to the Indenture and the obligations under the Indenture became obligations solely of lease terms. AsGroup and each of Group's domestic subsidiaries. Holdings also provided a result, the Company revised its estimatesguarantee of the cash flows that it believed2021 Notes but Holdings is not subject to the covenants under the Indenture. After the conditions to the release of the escrow proceeds were satisfied, on June 25, 2014 (the "Escrow Release Date") the proceeds from the 2021 Notes were released. The net proceeds from the offering were $195.8 million after deducting commissions and offering expenses. Issuance costs are included in deposits and other assets. The net proceeds from the offering are intended to be used for general corporate purposes.

        The 2021 Notes were issued pursuant to, and are governed by the Indenture between Cogent Finance and the trustee. The 2021 Notes bear interest at a rate of 5.625% per year and will mature on April 15, 2021. Interest began to accrue on the 2021 Notes on April 9, 2014 and will be requiredpaid semi-annually on April 15 and October 15, commencing on October 15, 2014. Following the Escrow Release Date, the 2021 Notes became Group's senior unsecured obligations and are guaranteed on a senior unsecured basis by the Company. The 2021 Notes are effectively subordinated in right of payment to settle its leased facility asset retirement obligations atall of Group's and each guarantor's secured indebtedness, including Group's existing $240.0 million of senior secured notes, described below, and future secured indebtedness, if any, to the endextent of the respective lease terms, which resulted in a reduction to the Company's asset retirement obligation liability. As a resultvalue of the revisionsassets securing such indebtedness. The 2021 Notes are equal in the estimated amountright of payment with Group's and timingeach guarantor's unsecured indebtedness that is not subordinated in right of cash flows for its asset retirement obligations the Company reduced its asset retirement obligation liability by $0.9 million with an offsetting reduction to depreciation and amortization of $0.7 million and selling, general and administrative expenses of $0.2 million.

        A reconciliation of the amounts related to these obligations is as follows (in thousands):

Asset retirement obligations
  
 

Balance—December 31, 2009

 $1,208 

Effect of exchange rates

  (77)

Revision to estimated obligation

  (909)

Amortization of discount

  11 
    

Balance—December 31, 2010

  233 

Effect of exchange rates

  (5)

Amortization of discount

  11 
    

Balance—December 31, 2011

  239 

Effect of exchange rates

  5 

Amortization of discount

  12 
    

Balance—December 31, 2012 (recorded as other long term liabilities)

 $256 
    

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COGENT COMMUNICATIONS GROUP,HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Long-term debt: (Continued)

payment to the 2021 Notes. The 2021 Notes will rank senior in right of payment to Group's and each guarantor's future subordinated debt, if any; and will be structurally subordinated in right of payment to all indebtedness and other liabilities of any of the Group's subsidiaries that are not guarantors, which will only consist of immaterial subsidiaries and foreign subsidiaries that do not guarantee other indebtedness of Group.

        Group may redeem the 2021 Notes, in whole or in part, at any time prior to April 15, 2017 at a price equal to 100% of the principal amount plus an "applicable" premium, plus accrued and unpaid interest, if any, to the date of redemption. The "applicable" premium means, with respect to a note at any date of redemption, the greater of (i) 1.0% of the then-outstanding principal amount of such note and (ii) the excess of (A) the present value at such date of redemption of (1) the redemption price of 104.219% plus (2) all remaining required interest payments due on such note through April 15, 2017 (excluding accrued but unpaid interest to the date of redemption), computed using a discount rate equal to the Treasury Rate as of such date of redemption plus 50 basis points, over (B) the then-outstanding principal amount of such note. Group may also redeem the 2021 Notes, in whole or in part, at any time on or after April 15, 2017 at the applicable redemption prices specified under the indenture governing the 2021 Notes plus accrued and unpaid interest, if any, to the date of redemption. The redemption prices (expressed as a percentage of the principal amount) are 104.219% during the 12-month period beginning on April 15, 2017, 102.813% during the 12-month period beginning on April 15, 2018, 101.406% during the 12-month period beginning on April 15, 2019 and 100.0% during the 12-month period beginning on April 15, 2020 and thereafter. In addition, the Company may redeem up to 35% of the 2021 Notes before April 15, 2017 with the net cash proceeds from certain equity offerings at a redemption price of 105.625% of the principal amount plus accrued and unpaid interest. If Group experiences specific kinds of changes of control, Group must offer to repurchase all of the 2021 Notes at a purchase price of 101.0% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date.

        The indenture governing the 2021 Notes, among other things, limits Group's and its restricted subsidiaries ability to incur indebtedness; to pay dividends or make other distributions; to make certain investments and other restricted payments; to create liens; consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; to incur restrictions on the ability of a subsidiary to pay dividends or make other payments; and to enter into certain transactions with its affiliates. Limitations on the ability to incur additional indebtedness (excluding IRU agreements incurred in the normal course of business and certain refinancing of existing debt) include a restriction on incurring additional indebtedness if the Company's consolidated leverage ratio, as defined in the Indenture is greater than 5.0. Permitted investments and payments that are not restricted include an amount of up to $150.0 million. This amount may be increased by the Company's consolidated cash flow, as defined in the Indenture as long as the Company's consolidated leverage ratio is less than 4.25. Holdings had cash and cash equivalents totaling $66.0 million as of December 31, 2014 which are not subject to these limitations.

Senior secured notes

        On January 26, 2011,As described in Note 12, the Company issuedexpects to redeem its 8.375% Senior Secured Notes (the "Senior Notes") in March 2015.


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COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Long-term debt: (Continued)

        On January 26, 2011 and on August 19, 2013, the Company issued its Senior Notes due February 15, 2018, for an aggregate principal amountamounts of $175.0 million and $65.0 million, respectively, in a private offeringofferings for resale to qualified institutional buyers pursuant to SEC Rule 144A. The Senior Notes arewere secured and bearbore interest at 8.375% per annum. Interest iswas payable in cash semiannually in arrears on February 15 and August 15, of each year, beginning on August 15, 2011. Theyear. On January 26, 2011, the Company received net proceeds of approximately $170.5 million after deducting $4.5 million of issuance costs (includedfrom issuing $175.0 million of Senior Notes. On August 19, 2013, the Company received net proceeds of $69.9 million after deducting $1.0 million of issuance costs from issuing $65.0 million of Senior Notes. The Senior Notes sold in August 2013 were sold at 109.00% of par value. The $5.9 million premium was being amortized as a reduction to interest expense to the maturity date using the effective interest rate method. Issuance costs are included in deposits and other assets inassets. The net proceeds from the accompanying balance sheets). InSenior Notes were intended to be used for general corporate purposes, the years ended December 31, 2012 and 2011,buyback of the Company incurred approximately $15.2 million and $14.0 millionCompany's Convertible Notes if the holders exercise their put, and/or repurchases of interest expense, respectively, relatedits common stock or Convertible Notes or special or recurring dividends to the Senior Notes.Company's stockholders.

        The Senior Notes arewere fully guaranteed on a senior secured basis, jointly and severally, by each of the Company's existing domestic and future material domestic subsidiaries, subject to certain exceptions and permitted liens. Under certain circumstances, the Company's subsidiaries may be released from these guarantees without the consent of the holders of the Senior Notes. The Senior Notes and the guarantees arewere secured by (i) first priority liens on substantially all of the Company's and guarantors' assets, (ii) all of the equity interests in any of its domestic subsidiaries and (iii) 65% of the equity interests of its first-tier foreign subsidiaries held by the Company and its guarantors. The Senior Notes and the guarantees represent the Company's and the guarantors' senior secured obligations and effectively rankranked equally and ratably with all of its and the guarantors' existing and future first lien obligations, to the extent of the value of the collateral securing such indebtedness, subject to permitted liens; arewere structurally subordinated to any existing and future indebtedness and liabilities of non-guarantor subsidiaries and rankranked equally in right of payment with all of its and the guarantors' existing and future senior indebtedness. Holdings was also a guarantor of the Senior Notes, however, Holdings' guarantee was unsecured and thus its guarantee was not secured by any of Holdings assets. Holdings was also not subject to the covenants under the indenture governing the Senior Notes.

        The Company maycould redeem the Senior Notes, in whole or in part, at any time prior to February 15, 2015 at a price equal to 100% of the principal amount plus a "make-whole" premium, plus accrued and unpaid interest, if any, to the date of redemption. The "make whole" premium means, with respect to a note at any date of redemption, the greater of (i) 1.0% of the then-outstanding principal amount of such note and (ii) the excess of (A) the present value at such date of redemption of (1) the redemption price of such note at February 15, 2015,104.188%, plus (2) all remaining required interest payments due on such note through February15,February 15, 2015 (excluding accrued but unpaid interest to the date of redemption), computed using a discount rate equal to the Treasury Rate as of such date of redemption plus 50 basis points, over (B) the then-outstanding principal amount of such note. The Company maycould also redeem the Senior Notes, in whole or in part, at any time on or after February 15, 2015 at the applicable redemption prices specified under the indenture governing the Senior Notes plus accrued and unpaid interest, if any, to the date of redemption. The redemption prices (expressed as a percentage of the principal amount) are 104.118%were 104.188% during the 12-month period beginning on February 15, 2015, 102.094% during the 12-month period beginning on February 15, 2016 and 100.0% during the 12-month period beginning on February 15, 2017 and thereafter. In addition, the Company may


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COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Long-term debt: (Continued)

could redeem up to 35% of the Senior Notes before February 15, 2014 with the net cash proceeds from certain equity offerings at a redemption price of 108.375% of the principal amount plus accrued and unpaid interest. If the Company experiencesexperienced specific kinds of changes of control, the Company must offerhave offered to repurchase all of the Senior Notes at a purchase price of 101.0% of their principal amount, plus accrued and unpaid interest, if any, to the repurchase date.


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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Long-term debt: (Continued)

        The Company must offer to purchase with the proceeds of certain sales of assets totaling $20.0 million or greater, Senior Notes at 100.0% of the principal value of the notes plus accrued and unpaid interest. In the event of default, as defined in the indenture, holders of not less than 25.0% in aggregate principal amount of the Senior Notes then outstanding may declare all unpaid principal and accrued interest on all Senior Notes to be due and immediately payable.

        The indenture governing the Senior Notes, among other things, limits the Company's ability and its guarantors' ability to incur indebtedness; to pay dividends or make other distributions; to make certain investments and other restricted payments; to create liens; consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; to incur restrictions on the ability of a subsidiary to pay dividends or make other payments; and to enter into certain transactions with its affiliates.

Convertible senior notes

        In June 2007, the Company issued its Convertible Notes for an aggregate principal amount of $200.0 million in a private offering for resale to qualified institutional buyers pursuant to SEC Rule 144A. The Convertible Notes were scheduled to mature on June 15, 2027, arewere unsecured, and bearbore interest at 1.00% per annum. The Convertible Notes will rank equally with any future senior debt and senior to any future subordinated debt and will be effectively subordinated to all existing and future liabilities of the Company's subsidiaries and to any secured debt the Company may issue, to the extent of the value of the collateral. Interest iswas payable in cash semiannually in arrears on June 15 and December 15, of each year, beginning on December 15, 2007. The Company received net proceeds from the issuance of the Convertible Notes of approximately $195.1 million, after deducting the original issue discount of 2.25% and issuance costs. The discount and other issuance costs arewere being amortized to interest expense using the effective interest method through June 15, 2014, which iswas the earliest put date. In 2008, the Company purchased an aggregate of $108.0 million of face value of the Convertible Notes for $48.6 million in cash in a series of transactions.

Conversion process and other termstransactions resulting in $92.0 million of principal amount of the Convertible Notes remaining after these purchase transactions.

        The Convertible Notes are convertible into shares of the Company's common stock at an initial conversion price of $49.18 per share, or 20.3355 shares for each $1,000 principal amount of Convertible Notes, subject to adjustment for certain events as set forth in the indenture. Depending upon the price of the Company's common stock at the time of conversion, holders of the Convertible Notes will receive additional shares of the Company's common stock. Upon conversion of the Convertible Notes, the Company will have the right to deliver shares of its common stock, cash or a combination of cash and shares of its common stock. The Convertible Notes are convertible (i) during any fiscal quarter after the fiscal quarter ending September 30, 2007, if the closing sale price of the Company's common stock for 20 or more trading days in a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter exceeds 130% of the conversion price in effect on the last trading day of the immediately preceding fiscal quarter, or (ii) specified corporate transactions occur, or (iii) the trading price of the Convertible Notes falls below a certain threshold, or (iv) if the Company calls the Convertible Notes for redemption, or (v) on or after April 15, 2027, until maturity. In addition, following specified corporate transactions, the Company will increase the conversion rate for holders who elect to convert notes in connection with such corporate transactions, provided that in no event may the shares issued upon conversion, as a result of adjustment or otherwise, result in the issuance of more than 35.5872 common shares per $1,000 principal amount. The Convertible Notes


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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Long-term debt: (Continued)

include an "Irrevocable Election of Settlement" whereby the Company may choose, in its sole discretion, and without the consent of the holders of the Convertible Notes, to waive its right to settle the conversion feature in either cash or stock or in any combination at its option. The Convertible Notes may be redeemed by the Company at any time after June 20, 2014 at a redemption price of 100% of the principal amount plus accrued interest.        Holders of the Convertible Notes havehad the right to require the Company to repurchase for cash all or some of their notes on June 15, 2014, 2017 and 2022 and upon the occurrence of certain designated events at a redemption price of 100% of the principal amount plus accrued interest.

Registration rights

        Under the terms Holders of $58.5 million of principal amount of the Convertible Notes issued a repurchase notice to the Company is required to use reasonable efforts to file and maintainon June 16, 2014 the Company repaid $58.5 million of Convertible Notes principal amount plus accrued interest. The Convertible Notes may have been redeemed by the Company at any time on and after June 20, 2014 at a shelf registration statement withredemption price of 100% of the SEC coveringprincipal amount plus accrued interest. On June 20, 2014 the resaleCompany redeemed the remaining $33.5 million principal amount of the Convertible Notes and the common stock issuable on conversionNotes.

        As of the Convertible Notes. If the Company fails to meet these terms, the Company will be required to pay special interest onDecember 31, 2013, the Convertible Notes were classified as a current liability since the earliest put date in the amount of 0.25% for the first 90 days after the occurrence of the failure to meet and 0.50% thereafter. In addition to the special interest, additional interest of 0.25% per annum will accrue in the event of default, as defined in the indenture. The Company filed a shelf registration statement registering the Convertible Notes and common stock issuable upon conversion of the Convertible Notes in July 2007.

June 2014 was within one year. The Company separately accounted for the debt and equity components of its Convertible Notes in a manner that reflected its nonconvertible unsecured debt borrowing rate. The debt and equity components for the Convertible Notes were as follows (in thousands):

 
 December 31, 
 
 2012 2011 

Principal amount of convertible senior notes

 $91,978 $91,978 

Unamortized discount

  (9,494) (15,366)

Net carrying amount

  82,484  76,612 

Additional paid-in capital

  74,933  74,933 

        At December 31, 2012, the unamortized discount had a remaining recognition period of approximately 1.5 years. The amount of interest expense recognized and effective interest rate for the years ended December 31, 2012, 2011 and 2010 were as follows (in thousands):

 
 Year Ended December 31, 
 
 2012 2011 2010 

Contractual coupon interest

 $920 $920 $920 

Amortization of discount and costs

  5,886  5,405  4,964 
        

Interest expense

 $6,806 $6,325 $5,884 
        

Effective interest rate

  8.7% 8.7% 8.7%
 
 December 31,
2013
 

Principal amount of convertible senior notes

 $91,978 

Unamortized discount

  (3,099)

Net carrying amount

  88,879 

Additional paid-in capital

  74,933 

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COGENT COMMUNICATIONS GROUP,HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. Long-term debt: (Continued)

        The amount of interest expense recognized and effective interest rate for the Convertible Notes were as follows (in thousands):

 
 Year Ended December 31, 
 
 2014 2013 2012 

Contractual coupon interest

 $419 $920 $920 

Amortization of discount and costs

  3,106  6,409  5,886 

Interest expense

 $3,525 $7,329 $6,806 

Effective interest rate

  8.7% 8.7% 8.7%

Long-term debt maturities

        The aggregate future contractual maturities of long-term debt were as follows as of December 31, 20122014 (in thousands):

For the year ending December 31,
  
 

2013

 $ 

2014

   

2015

   

2016

   

2017

   

Thereafter(1)

  266,978 
    

Total

 $266,978 
    

(1)
The Convertible Notes mature
For the year ending December 31,
  
 

2015

 $ 

2016

   

2017

   

2018

  240,000 

2019

   

Thereafter

  200,000 

Total

 $440,000 

        As described in June 2027. Holders ofNote 12, the $92.0$240.0 million of ConvertibleSenior Notes have the rightdue in 2018 are expected to require the Company to repurchase for cash all or some of their notes on June 15, 2014, 2017 and 2022 at a redemption price of 100% of the principal amount plus accrued interest.be redeemed in March 2015.

5. Income taxes:

        The components of income (loss) income before income taxes consist of the following (in thousands):

 
 Years Ended December 31, 
 
 2012 2011 2010 

Domestic

 $20,411 $27,832 $14,360 

Foreign

  (23,911) (22,250) (14,868)
        

Total (loss) income before income taxes

 $(3,500)$5,582 $(508)
        

        The (provision) benefit for income taxes is comprised of the following (in thousands):

 
 Years Ended December 31, 
 
 2012 2011 2010 

Current:

          

Federal

 $ $ $563 

State

  2,285  (3,432) (724)

Foreign

  (344) (369) (128)

Deferred:

          

State

  (1,245) 6,334   

Foreign

  (1,447) (573) 1,466 
        

Total income tax (provision) benefit

 $(751)$1,960 $1,177 
        
 
 Years Ended December 31, 
 
 2014 2013 2012 

Domestic

 $31,645 $30,779 $20,411 

Foreign

  (27,154) (23,792) (23,911)

Total income (loss) before income taxes

 $4,491 $6,987 $(3,500)

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COGENT COMMUNICATIONS GROUP,HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Income taxes: (Continued)

        The income tax (expense) benefit is comprised of the following (in thousands):

 
 Years Ended December 31, 
 
 2014 2013 2012 

Current:

          

Federal

 $(126)$ $ 

State

  (243) (83) 2,285 

Foreign

  (169) (284) (344)

Deferred:

          

Federal

  (2,352) 49,317   

State

  (824) 995  (1,245)

Foreign

  20  (243) (1,447)

Total income tax (expense) benefit

 $(3,694)$49,702 $(751)

Our consolidated temporary differences comprising our net deferred tax assets at December 31, 2012 and 2011 are as follows (in thousands):


 December 31,  December 31, 

 2012 2011  2014 2013 

Deferred Tax Assets:

      

Net operating loss carry-forwards

 $345,000 $335,899  $366,686 $402,484 

Depreciation and amortization

 4,187 7,857  7,769 3,110 

Tax credits

 2,758 2,437  2,208 2,775 

Equity-based compensation

 849  

Accrued liabilities and other

 6,138 5,343  20,705 3,748 

Equity-based compensation

  566 
     

Total gross deferred tax assets

 358,083 352,102  398,217 412,117 
     

Deferred Tax Liabilities:

      

Convertible notes

 3,415 5,620   1,150 

Equity-based compensation

 600    248 
     

Total gross deferred tax liabilities

 4,015 5,620   1,398 
     

Net deferred tax assets before valuation allowance

 354,068 346,482  398,217 410,719 

Valuation allowance

 (347,882) (337,698) (345,250) (354,537)
     

Net deferred tax asset

 $6,186 $8,784  $52,967 $56,182 
     

        At each balance sheet date, the Company assesses the likelihood that it will be able to realize its deferred tax assets. The Company considers all available positive and negative evidence in assessing the need for a valuation allowance. At December 31, 2010, the Company concluded that it was more likely than not that it would be able to realize its remaining Canadian deferred tax assets. Accordingly, the Company reduced the remaining valuation allowance related to these deferred tax assets and recorded an income tax benefit of $1.5 million in the year ended December 31, 2010. At December 31, 2011,2013, the Company concluded that it was more likely than not that it would be able to realize certain of its US Federal and state deferred tax assets primarily as a result of expected future US Federal taxable income related to its operations in certain state and municipal jurisdictions in the United States. Accordingly, the Company reduced the valuation allowance related to these deferred tax assets and recorded an income tax benefit of $6.3$52.2 million in the year ended December 31, 2011. As of December 31, 2012 and 2011, the2013. The Company maintainedmaintains a full valuation allowance against its other deferred tax assets consisting primarily of net operating loss carryforwards.carryforwards related to its foreign operations in Europe and Mexico and net


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COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Income taxes: (Continued)

operating losses in the United States that are limited for use under Section 382 of the Internal Revenue Code.

        As of December 31, 2012,2014, the Company has combined net operating loss carry-forwards of approximately $1.1$1.2 billion. This amount includes federal and state net operating loss carry-forwards in the United States of approximately $362.0$390.6 million, net operating loss carry-forwards related to its European, Mexican, Canadian Mexican and Japanese operations of approximately $735.5$786.3 million, $2.9$1.8 million, $1.4$0.4 million and $0.1 million, respectively. Section 382 of the Internal Revenue Code in the United States limits the utilization of net operating losses when ownership changes, as defined by that section, occur. The Company has performed an analysis of its Section 382 ownership changes and has determined that the utilization of certain of its net operating loss carryforwards in the United States is limited.limited and for those carryforwards with limitations the Company continues to maintain a valuation allowance. Of the $390.6 million of net operating losses available at December 31, 2014 in the United States approximately $286 million are unavailable for use and approximately $81 million are limited for use under Section 382. Our net operating loss carryforwards outside of the United States totaling approximately $789 million are not subject to limitations similar to Section 382. The net operating loss carryforwards in the United States and Canada will expire, if unused, between 20222024 and 2029. The net operating loss carry-forwards related to the Company's Canadian operations expire if


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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Income taxes: (Continued)

unused, between 2026 and 2027.2034. The net operating loss carry-forwards related to the Company's Mexican and Japanese operations expire if unused, between 2019 and 2022. The net operating loss carry-forwards related to the Company's Japanese operations will expire in 2020 and 2021.2024. The net operating loss carry-forwards related to the Company's European operations include $576.4$641.7 million that do not expire and $159.1$144.6 million that expire between 20132015 and 2027.2029.

        The Company has not provided for United States deferred income taxes or foreign withholding taxes on its undistributed earnings for certain non-US subsidiaries earnings or cumulative translation adjustments because these earnings and adjustments are intended to be permanently reinvested in operations outside the United States.

        In the normal course of business the Company takes positions on its tax returns that may be challenged by taxing authorities. The Company evaluates all uncertain tax positions to assess whether the position will more likely than not be sustained upon examination. If the Company determines that the tax position is more likely than not to be sustained, the Company records the amount of the benefit that is more likely than not to be realized when the tax position is settled. This liability, including accrued interest and penalties, is included in other long-term liabilities in the accompanying balance sheets and was $1.7$1.0 million as of December 31, 20122014 and $3.9$1.1 million as of December 31, 2011. During the year ended December 31, 2012, the Company reduced its Canadian deferred tax assets by $0.7 million as a result of Canadian unrecognized tax benefits of an equal amount being recognized during 2012. During the years ended December 31, 2012, 2011 and 2010, the Company (reversed) recognized approximately $(0.6) million, $0.8 million and $0.1 million in interest and penalties related to its uncertain tax positions. During 2012, the Company reversed approximately $3.3 million of its liability (that included approximately $1.0 million of accrued interest and penalties) for uncertain tax positions due to the resolution of certain state income tax issues pursuant to the completion of an audit, and, from the expiration of certain statutes of limitation.2013. The Company expects that its liability for uncertain tax positions will decrease by approximately $0.4$0.1 million during the twelve months ended December 31, 2013,2015, due to the expiration of certain statutes of limitation, however, actual changes in the liability for uncertain tax positions could be different than currently expected. If recognized, changes in the Company's total unrecognized tax benefits would impact the Company's effective income tax rate. The roll-forward of the liability for uncertain tax positions is below and excludes interest and penalties.


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COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Income taxes: (Continued)

        A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):


 Years Ended December 31,  Years Ended December 31, 

 2012 2011 2010  2014 2013 2012 

Beginning balance of unrecognized tax benefits

 $2,875 $698 $504  $1,000 $1,312 $2,875 

Change attributable to tax positions taken during a prior period

 745 2,177 194  82 (51) 745 

Decrease attributable to settlements with taxing authorities

 (1,655)    (160)   (1,655)

Decrease attributable to lapses of statutes of limitation

 (653)    (56) (261) (653)
       

Ending balance of unrecognized tax benefits

 $1,312 $2,875 $698  $866 $1,000 $1,312 
       

        The Company or one of its subsidiaries files income tax returns in the U.S.US federal jurisdiction and various state and foreign jurisdictions. The Company is subject to U.S.US federal tax and state tax examinations for years 2004 to 2012.2014. The Company is subject to tax examinations in its foreign jurisdictions generally for years 2005 to 2012.


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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Income taxes: (Continued)2014.

        The following is a reconciliation of the Federal statutory income taxes to the amounts reported in the financial statements (in thousands).

 
 Years Ended December 31, 
 
 2012 2011 2010 

Federal income tax benefit (provision) at statutory rates

 $1,225 $(1,954)$178 

Effect of:

          

State income taxes, net of federal benefit

  (387) (1,368) (153)

State tax credits

  315  146  17 

Impact of foreign operations

  (2,744) (2,561) (1,858)

Foreign branch tax benefit

  9,374  9,385  5,045 

Foreign exchange effect on tax assets

  3,882  (4,133) (4,572)

Net operating loss limitation

  (1,081)    

Non-deductible expenses

  (2,707) (854) (735)

Alternative minimum tax

      564 

Changes in tax reserves

  1,552  (2,969) (302)

Other

  4  276   

Changes in valuation allowance

  (10,184) 5,992  2,993 
        

Income tax (provision) benefit

 $(751)$1,960 $1,177 
        
 
 Years Ended December 31, 
 
 2014 2013 2012 

Federal income tax (expense) benefit at statutory rates

 $(1,572)$(2,445)$1,225 

Effect of:

          

State income taxes, net of federal benefit

  (590) (454) (1,152)

Impact of foreign operations

  (267) 95  147 

Non-deductible expenses

  (659) (461) (2,549)

Changes in tax reserves

  165  503  1,552 

Other

  (191) 277  4 

Changes in valuation allowance—US

  (580) 52,187  22 

Income tax (expense) benefit

 $(3,694)$49,702 $(751)

6. Commitments and contingencies:

Capital leases—fiber lease agreements

        The Company has entered into lease agreements with numerous providers of dark fiber primarily under 15-20 year IRUs typically with additional renewal terms. Once the Company has accepted the related fiber route, leases that meet the criteria for treatment as capital leases are recorded as a capital lease obligation and an IRU asset. The interest rate used in determining the present value of the aggregate future minimum lease payments is determined by adding a premium to the U.S.US treasury


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COGENT COMMUNICATIONS GROUP,HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Commitments and contingencies: (Continued)

interest rate for the lease term. The future minimum payments under these agreements are as follows (in thousands):

For the year ending December 31,
  
   
 

2013

 $29,968 

2014

 20,194 

2015

 20,343  $33,848 

2016

 19,502  22,089 

2017

 19,436  22,058 

2018

 21,988 

2019

 21,976 

Thereafter

 190,552  233,816 
   

Total minimum lease obligations

 299,995  355,775 

Less—amounts representing interest

 (162,047) (189,237)
   

Present value of minimum lease obligations

 137,948  166,538 

Current maturities

 (10,487) (14,594)
   

Capital lease obligations, net of current maturities

 $127,461  $151,944 
   

Release of lease obligation

        In the year ended December 31, 2011, the requirements for extinguishment were met and the Company was released from an obligation under an IRU capital lease obligation totaling $2.7 million resulting in a gain. The IRU asset related to this obligation had been fully impaired in 2008 when it was determined that the IRU asset was no longer in use.

Current and potential litigation

        In accordance with the accounting guidance for contingencies, the Company accrues its estimate of a contingent liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Where it is probable that a liability has been incurred and there is a range of expected loss for which no amount in the range is more likely than any other amount, the Company accrues at the low end of the range. The Company reviews its accruals at least quarterly and adjusts them to reflect the impact of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular matter. The Company has taken certain positions related to its obligations for leased circuit costsand dark fiber obligations for which it is reasonably possible could result in a loss of up to $1.2$2.1 million in excess of the amount accrued at December 31, 2012.2014.

        Certain former sales employees of the Company filed a collective action against the Company in December 2011 in the United States District Court, Southern District of Texas, Houston Division alleging misclassification of the Company's sales employees throughout the U.S.United States in violation of the Fair Labor Standards Act. The lawsuit seeks to recover pay for allegedly unpaid overtime and other damages, including attorney's fees. In January 2013,March 2014, the judge de-certified the collective action. Each of the former employees that opted-in to the collective action retained the right to file an individual action. Approximately 70 former employees did so. The Company has reached oral settlements in a former sales employee filednumber of the cases that were filed. These settlements still require settlement agreements to be signed by all parties and, in certain instances, court approval. Upon final resolution of the Superior Courtpending settlements, three cases will remain. In several of Santa Clara County, California a lawsuit alleging misclassificationthe remaining cases, the plaintiffs seek certification of sales employees under California wage and hour laws. The lawsuit seeks certification as a class or collective action and seeksrelated to recover pay for allegedly unpaid overtime and other damages, including attorney's fees.the employees in that jurisdiction. The Company denies boththe claims and believes that the claims for unpaid overtime in each case are without merit. The Company believes its classification of sales employees is in compliance with applicable law.


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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Commitments and contingencies: (Continued)

        In the normal course of business the Company is involved in other legal activities and claims. Because such matters are subject to many uncertainties and the outcomes are not predictable with


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COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Commitments and contingencies: (Continued)

assurance, the liability related to these legal actions and claims cannot be determined with certainty. Management does not believe that such claims and actions will have a material impact on the Company's financial condition or results of operations. Judgment is required in estimating the ultimate outcome of any dispute resolution process, as well as any other amounts that may be incurred to conclude the negotiations or settle any litigation. Actual results may differ from these estimates under different assumptions or conditions and such differences could be material.

Operating leases and building access agreements

        The Company leases office space, network equipment sites, and data center facilities under operating leases. The Company also enters into building access agreements with the landlords of multi-tenant office buildings. The Company pays fees for the maintenance of its leased dark fiber and inIn certain cases the Company enters into operating lease commitments for fiber. Future minimum annual payments under these arrangements are as follows (in thousands):

For the year ending December 31,
  
   
 

2013

 $48,664 

2014

 41,440 

2015

 36,651  $31,947 

2016

 31,212  24,025 

2017

 24,634  18,852 

2018

 15,891 

2019

 13,124 

Thereafter

 130,689  54,172 
    $158,011 

 $313,290 
   

        Expenses related to these arrangements were $55.8$39.1 million in 2012, $55.72014, $36.4 million in 20112013 and $53.5$33.8 million in 2010.2012.

Unconditional purchase obligations

        Unconditional purchase obligations for equipment and services totaled approximately $40.3$6.6 million at December 31, 2012 that includes a $37 million equipment purchase agreement with a vendor. Under the equipment purchase agreement the Company is required to order equipment through 2016.2014. As of December 31, 2012,2014, the Company had also committed to additional dark fiber IRU capital and operating lease agreements totaling approximately $35.7$29.2 million in future payments to be paid over periods of up to 20 years. These obligations begin when the related fiber is accepted, which is generally expected to occur in 2013.2015. Future minimum payments under these obligations are approximately, $24.9$16.2 million, $21.2$1.0 million, $4.2$0.9 million, $1.1$0.9 million and $1.2$1.0 million for the years ending December 31, 20132015 to December 31, 2017,2019, respectively, and approximately $23.4$15.8 million, thereafter.

Defined contribution plan

        The Company sponsors a 401(k) defined contribution plan that provides for a Company matching payment. The Company matching payments were approximately$0.5 million for 2014, $0.4 million for 2012,2013 and $0.4 million for 2011 and $0.3 million 20102012 and were paid in cash.


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COGENT COMMUNICATIONS GROUP,HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Stockholders' equity:

Authorized shares

        The Company has 75.0 million shares of authorized $0.001 par value common stock and 10,000 authorized but unissued shares of $0.001 par value preferred stock. The holders of common stock are entitled to one vote per common share and, subject to any rights of any series of preferred stock, dividends may be declared and paid on the common stock when determined by the Company's Boardboard of Directors.directors.

Common stock buybacks

        In June 2008, theThe Company's board of directors has approved $50.0 million offor purchases of the Company's common stock under a buyback program to occur prior to(the "Buyback Program"). At December 31, 2009. In February 2011,2014, there was approximately $37.2 million remaining for purchases under the Company's board of directors approved an additional $50.0 million of purchases of the Company's common stock.Buyback Program. During the yearyears ended December 31, 20122014 and 2011,2012, the Company purchased approximately 0.11.7 million and 0.20.1 million shares of its common stock respectively, for approximately $1.3$58.6 million and $3.0$1.3 million, respectively. These common shares were subsequently retired. There were no purchases of the Company's common stock in 2010.2013.

Dividends on common stock and return of capital program

        On August 7, 2012, the Company's board of directors approved the payment of a dividend of $0.10 per common share to holders of record on August 22, 2012. The $4.5 million dividend payment was made on September 12, 2012. On November 5, 2012, the Company's board of directors approved the payment of a dividend of $0.11 per common share to holders of record on November 21, 2012. The $5.0 million dividend payment was made on December 12, 2012.        Dividends are recorded as a reduction to retained earnings. Dividends on unvested restricted shares of common stock are paid as the awards vest. On February 20,The Company's initial quarterly dividend payment was made in the third quarter of 2012. In addition to the Company's regular quarterly dividends, in 2013, the Company's board of directors approved an additional return of capital program (the "Capital Program") for the Company's shareholders. Under the Capital Program the Company plans on returning additional capital to the Company's shareholders each quarter through either stock buybacks or a special dividend or a combination of stock buybacks and a special dividend until the Company's net debt to trailing twelve months EBITDA, as adjusted, ratio reaches an amount specified by the Company's board of directors. The aggregate payment of a dividend of $0.12 per common share—estimatedunder the Capital Program initially was at least $10.0 million each quarter and was increased to be approximately $5.5 million—at least $12.0 million each quarter. Amounts paid under the Capital Program are in addition to holdersthe Company's regular quarterly dividend payments.

        A summary of recordthe Company's quarterly dividends paid since its initial dividend payment is as follows (in thousands, except per share amounts):

Dividend Period
 Amount per
Common Share
 Record Date Payment Date Total
Dividends
Paid
 

Q3 2012

 $0.10 August 22, 2012 September 12, 2012 $4,537 

Q4 2012

 $0.11 November 21, 2012 December 12, 2012 $5,012 

Q1 2013

 $0.12 March 4, 2013 March 15, 2013 $5,489 

Q2 2013

 $0.13 May 31, 2013 June 18, 2013 $6,145 

Q3 2013

 $0.14 September 5, 2013 September 25, 2013 $6,512 

Q4 2013

 $0.37 November 27, 2013 December 20, 2013 $17,206 

Q1 2014

 $0.39 March 7, 2014 March 27, 2014 $18,352 

Q2 2014

 $0.17 May 30, 2014 June 18, 2014 $7,882 

Q3 2014

 $0.30 August 29, 2014 September 19, 2014 $13,792 

Q4 2014

 $0.31 November 26, 2014 December 12, 2014 $14,190 

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COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. Stockholders' equity: (Continued)

        A summary of the Company's amounts paid under the Capital Program is as follows (in thousands, except per share amounts):

Dividend Period
 Capital
Program
Amount
 Stock Buyback
Amount
During the
Period
 Stock Buyback
Amount Greater
than Capital
Program Amount?
 Payment Under
Capital Program
Paid As
Dividend(1)
 Amount Per
Share Paid As
Dividends
Under the
Capital Program
 

Q3 2013

 $10,000 $ No $ $ 

Q4 2013

 $10,500 $ No $10,186 $0.22 

Q1 2014

 $10,500 $14,196 Yes $10,707 $0.23 

Q2 2014

 $10,500 $17,888 Yes $ $ 

Q3 2014

 $12,000 $15,943 Yes $ $ 

Q4 2014

 $12,000 $10,555 No $ $ 

(1)
Under the Capital Program if the amount spent on March 4, 2013 withstock buybacks during a quarter is less than the program amount the difference is added to the dividend payment for the following quarter. Since the stock buyback amount for the fourth quarter of 2014 was $10.6 million and less than the Capital Program amount of $12.0 million an additional $1.4 million or $0.03 per share will be added to be made on March 15, 2013.

the first quarter 2015 regular dividend.

        The payment of any future dividends and any other returns of capital will be at the discretion of the Company's board of directors and may be reduced, eliminated or increased and will be dependent upon the Company's financial position, results of operations, available cash, cash flow, capital requirements and other factors deemed relevant by the Company's board of directors. The Company is a Delaware Corporation and under the General Corporate Law of the State of Delaware distributions may be restricted including a restriction that distributions, including stock purchases and dividends, do not result in an impairment of a corporation's capital, as defined under Delaware Law.

8. Stock option and award plan:

Incentive award plan

        The Company has angrants restricted stock and options for common stock under its award plan, the 2004 Incentive Award Plan, as amended (the "Award Plan"), under which grants of restricted stock and options for common stock are made.. Stock options granted under the Award Plan generally vest over a four-year period and have a term of ten years. Grants of shares of restricted stock granted under the Award Plan generally vest over periods ranging from three to four years. Compensation expense for all awards is recognized over the service period. Awards with graded vesting terms are recognized on a straight-line basis. Certain option and share grants provide for accelerated vesting if there is a change in control, as defined. For grants of restricted stock, when an employee terminates prior to full vesting the employee retains their vested shares and the employees' unvested shares are returned to the plan. For grants of options for common stock, when an employee terminates prior to full vesting, the employee may elect to exercise their vested options for a


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COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Stock option and award plan: (Continued)

period of ninety days and any unvested options are returned to the plan. Shares issued to satisfy awards are provided from the Company's authorized shares. As of December 31, 20122014 there were a total of 0.20.4 million shares available for grant.grant under the Award Plan.


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        The Company has granted restricted shares that are subject to certain performance conditions based upon the Company's operating metrics. The Company recorded approximately $0.1 million, $1.1 million
COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Stock option and $0.2 million, respectively, of equity-based compensation expense related to the restricted shares subject to performance conditions in the years ended December 31, 2012, 2011 and 2010, respectively.award plan: (Continued)

        The accounting for equity-based compensation expense requires the Company to make estimates and judgments that affect its financial statements. These estimates include the following.

        The weighted-average per share grant date fair value of options was $8.32 in 2014, $9.44 in 2013 and $9.00 in 2012, $7.90 in 2011 and $5.44 in 2010.2012. The following assumptions were used for determining the fair value of options granted in the three years ended December 31, 2012:2014:


 Years Ended December 31,  Years Ended December 31, 
Black-Scholes Assumptions
 2012 2011 2010  2014 2013 2012 

Dividend yield

 1.3% 0.0% 0.0% 3.6% 2.0% 1.3%

Expected volatility

 61.6% 63.2% 65.3% 37.0% 58.5% 61.6%

Risk-free interest rate

 0.7% 1.6% 1.8% 1.6% 0.8% 0.7%

Expected life of the option term (in years)

 4.8 4.9 5.2  4.6 4.8 4.8 

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COGENT COMMUNICATIONS GROUP,HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

8. Stock option and award plan: (Continued)

        Stock option activity under the Company's Award Plan during the period fromyear ended December 31, 2011 to December 31, 2012,2014, was as follows:

 
 Number of
Options
 Weighted-Average
Exercise Price
 

Outstanding at December 31, 2011

  257,442 $13.17 

Granted

  61,086 $19.37 

Cancelled

  (37,699)$16.57 

Exercised—intrinsic value $0.4 million; cash received $0.4 million

  (42,341)$9.53 
       

Outstanding at December 31, 2012—$1.9 million intrinsic value and 5.7 years weighted-average remaining contractual term

  238,488 $14.87 
       

Exercisable at December 31, 2012—$1.6 million intrinsic value and 4.6 years weighted-average remaining contractual term

  177,983 $14.10 
       

Expected to vest—$1.8 million intrinsic value and 5.4 years weighted-average remaining contractual term

  223,784 $14.60 
       
 
 Number of
Options
 Weighted-Average
Exercise Price
 

Outstanding at December 31, 2013

  175,578 $19.36 

Granted

  83,540 $35.11 

Cancelled and expired

  (31,842)$31.01 

Exercised—intrinsic value $0.8 million; cash received $0.5 million

  (38,379)$14.19 

Outstanding at December 31, 2014—$2.0 million intrinsic value and 6.7 years weighted-average remaining contractual term

  188,897 $25.41 

Exercisable at December 31, 2014—$1.7 million intrinsic value and 4.7 years weighted-average remaining contractual term

  105,709 $19.78 

Expected to vest—$1.9 million intrinsic value and 6.3 years weighted-average remaining contractual term

  169,527 $24.43 

        A summary of the Company's non-vested restricted stock awards as of December 31, 20122014 and the changes during the year ended December 31, 20122014 are as follows:

Non-vested awards
 Shares Weighted-Average
Grant Date
Fair Value
  Shares Weighted-Average
Grant Date
Fair Value
 

Non-vested at December 31, 2011

 892,217 $11.34 

Non-vested at December 31, 2013

 1,039,323 $18.69 

Granted

 1,338,120 $17.74  792,550 $34.57 

Vested

 (464,169)$12.42  (513,937)$19.33 

Forfeited

 (82,580)$11.62  (35,290)$18.23 
     

Non-vested at December 31, 2012

 1,683,588 $16.12 
     

Non-vested at December 31, 2014

 1,282,646 $28.26 

        The weighted average per share grant date fair value of restricted stock granted to employees was $34.57 in 2014 (0.8 million shares) $27.82 in 2013 (0.2 million shares) and $17.74 in 2012 (1.3 million shares), $14.09 in 2011 (0.2 million shares) and $9.17 in 2010 (1.2 million shares). The fair value was determined using the quoted market price of the Company's common stock on the date of grant. The fair value of shares of restricted stock vested in the years ended December 31, 2014, 2013 and 2012 2011 and 2010 was approximately $8.8$19.0 million $7.7$21.7 million and $2.1$8.8 million, respectively.

        Equity-based compensation expense related to stock options and restricted stock was approximately $8.3$9.6 million, $7.7$8.7 million, and $6.6$8.3 million for the years ended December 31, 2014, 2013, and 2012, 2011,respectively. The income tax benefit related to stock options and 2010, respectively.restricted stock was $2.1 million, $2.5 million, and $0 for the years ended December 31, 2014, 2013, and 2012, respectively The Company capitalized compensation expense related to stock options and restricted stock of approximately $0.8 million $0.9 million and $0.7 million for each of the years ended December 31, 2012, 2011,2014, 2013, and 2010, respectively.2012. As of December 31, 20122014 there was approximately $19.6$31.1 million of total unrecognized compensation cost related to non-vested equity-based compensation awards. That cost is expected to be recognized over a weighted average period of approximately 2.52.9 years.


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COGENT COMMUNICATIONS GROUP,HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Related party transactions:

Office lease

        The Company's headquarters is located in an office building owned by Niobium LLC (a successor to 6715 Kenilworth Avenue Partnership). The two owners of the company are the Company's Chief Executive Officer, who has a 51% interest in the partnership and his wife who has a 49% interest. The Company paid $0.5 million in 2014, $0.6 million in 2013 and $0.6 million in 2012, 2011 and in 2010respectively, for rent and related costs (including taxes and utilities) to this company, respectively. In November 2012, theThe lease was extended an additional two years throughends on August 31, 2015.2016 and is cancellable by the Company upon 60 days' notice. The Company's audit committee reviews and approves all transactions with related parties.

10. Geographic information:

        Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing the Company's performance. The Company has one operating segment. Below are the Company's service revenues and long lived assets by geographic region (in thousands):


 Years Ended December 31,  Years Ended December 31, 

 2012 2011 2010  2014 2013 2012 

Service Revenue

        

North America

 $253,396 $240,116 $205,052  $301,400 $274,320 $253,396 

Europe

 63,577 65,384 58,364  78,603 73,659 63,577 
       

Total

 $316,973 $305,500 $263,416  $380,003 $347,979 $316,973 
       

 


 December 31,
2012
 December 31,
2011
  December 31,
2014
 December 31,
2013
 

Long lived assets, net

      

North America

 $225,060 $225,598  $266,713 $251,352 

Europe

 86,162 82,445  94,082 89,879 
     

Total

 $311,222 $308,043  $360,795 $341,231 
     

        The majority of North American revenue consists of services delivered within the United States.


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COGENT COMMUNICATIONS GROUP,HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Quarterly financial information (unaudited):


 Three months ended  Three months ended 

 March 31,
2012
 June 30,
2012
 September 30,
2012
 December 31,
2012
  March 31,
2014
 June 30,
2014
 September 30,
2014
 December 31,
2014
 

 (in thousands, except share and per share amounts)
  (in thousands, except share and per share amounts)
 

Service revenue

 $76,888 $77,817 $79,656 $82,612  $92,937 $94,623 $95,691 $96,749 

Network operations, including equity-based compensation expense

 34,338 35,112 36,541 37,651  38,836 39,605 40,407 41,046 

Operating income

 5,968 7,801 8,032 9,169  12,907 14,309 13,614 13,066 

Net (loss)

 (2,090) (1,791) (94) (276)

Net (loss) per common share—basic and diluted

 (0.05) (0.04) (0.00) (0.01)

Weighted-average number of common shares—basic and diluted

 45,241,418 45,313,804 45,377,732 45,492,847 

Net income (loss)

 125 1,208 (184) (352)

Net income (loss) per common share—basic

 0.00 0.03 (0.00) (0.01)

Net income (loss) per common share—diluted

 0.00 0.03 (0.00) (0.01)

Weighted-average number of common shares—basic

 46,409,735 45,897,449 45,629,079 45,229,125 

Weighted-average number of common shares—diluted

 46,907,360 46,294,966 45,629,079 45,229,125 

 


 Three months ended  Three months ended 

 March 31,
2011
 June 30,
2011(1)
 September 30,
2011
 December 31,
2011(2)
  March 31,
2013
 June 30,
2013
 September 30,
2013
 December 31,
2013(1)(2)
 

 (in thousands, except share and per share amounts)
  (in thousands, except share and per share amounts)
 

Service revenue

 $73,460 $75,580 $77,367 $79,093  $84,553 $85,803 $87,761 $89,859 

Network operations, including equity-based compensation expense

 31,773 33,249 33,619 33,522  37,309 37,076 37,441 38,400 

Operating income

 7,358 8,671 9,576 10,899  9,905 11,601 12,577 12,065 

Net (loss) income

 (278) 2,115 281 5,424 

Net (loss) income per common share—basic and diluted

 (0.01) 0.05 0.01 0.12 

Net income

 361 1,607 2,122 52,599 

Net income per common share—basic

 0.01 0.03 0.05 1.14 

Net income per common share—diluted

 0.01 0.03 0.05 1.10 

Weighted-average number of common shares—basic

 44,731,858 45,021,507 45,080,859 45,044,733  45,537,607 46,040,692 46,171,194 46,302,926 

Weighted-average number of common shares—diluted

 44,731,858 45,548,725 45,559,972 45,582,580  46,435,677 46,769,184 46,823,167 48,800,560 

(1)
In the second quarter of 2011 the Company recognized a gain on the release of a lease obligation. (SeeAs described in Note 6)

(2)
In5, during the fourth quarter of 20112013 the Company recorded adjustments related toreversed its valuation allowance against its US federal and certain state deferred income taxes. These adjustments recognized approximately $6.3tax assets.

(2)
Diluted earnings per share for the fourth quarter of 2013 assumed the conversion of the Convertible Notes since the Convertible Notes were dilutive this quarter. The assumed conversion of the Convertible Notes was anti-dilutive for the other periods presented. Diluted earnings per share for the fourth quarter of 2013 is determined by adding back $1.2 million of deferred tax assetsinterest expense from the Convertible Notes to net income and approximately $2.9including 1.9 million for uncertain tax positions. (See Note 5)shares from the assumed conversion of the Convertible Notes in the weighted-average number of common dilutive shares.

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COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. Subsequent Events:

Purchase agreement

        In January 2015, the Company entered into an equipment purchase agreement with a vendor. Under the purchase agreement the Company is required to purchase a total of $28.9 million of equipment during the eighteen month term.

Dividends

        On February 24, 2015, the Company's board of directors approved the payment of the Company's regular quarterly dividend of $0.32 per common share and a $1.4 million dividend ($0.03 per share) under the Company's Capital Program. The total dividend for the first quarter of 2015 of $0.35 per share will be paid to holders of record on March 11, 2015. This estimated $15.8 million dividend payment is expected to be made on March 26, 2015.

Debt redemption and new debt issuance

        In March 2015, Group is expected to redeem its $240.0 million 8.375% Senior Notes with the proceeds from its February 2015 issuance of $250.0 million of 5.375% senior secured notes (the "New Secured Notes") and existing cash on hand. The Company deposited $251.6 million with the trustee for the benefit of the holders of the Senior Notes in order to redeem on March 12, 2015 the entire outstanding amount of Senior Notes at a redemption price of 104.188% of the $240.0 million principal amount thereof plus accrued and unpaid interest. As a result of this transaction the Company expects to incur a loss on redemption of approximately $9.0 million in the first quarter of 2015.

        The New Secured Notes will mature on March 1, 2022 and interest will accrue at 5.375% beginning on February 20, 2015 and will be paid semi-annually in arrears on March 1 and September 1 of each year, commencing on September 1, 2015. The indenture governing the New Secured Notes provides that the Company and each of the Company's existing domestic subsidiaries and future material domestic subsidiaries guarantee the New Secured Notes, subject to certain exceptions and permitted liens. The New Secured Notes are also secured by a pledge of all of the equity interests in Group's domestic subsidiaries and 65% of the equity interests in Group's first-tier foreign subsidiaries. The New Secured Notes and the subsidiary guarantees will be the Company's and the subsidiary guarantors' senior indebtedness and will rankpari passu in right of payment with all of the Company's and the subsidiary guarantors' existing and future senior indebtedness, effectively senior to Group's senior unsecured indebtedness to the extent of the value of the collateral securing the New Secured Notes and the subsidiary guarantees, including Group's $200.0 million 2021 Notes that were issued on April 9, 2014 and senior to any of the Company's and the subsidiary guarantors' future subordinated indebtedness. The New Secured Notes will be structurally subordinated to the liabilities of the non-guarantor subsidiaries and will be effectively subordinated to the Company's and the subsidiary guarantors' secured indebtedness to the extent of the value of the collateral securing such indebtedness on a basis senior to the New Secured Notes and the subsidiary guarantees. Holdings is also a guarantor of the New Secured Notes; however Holdings's guarantee is unsecured and thus its guarantee is not secured by any of the Holdings assets. Holdings is also not subject to the covenants under the indenture governing the New Secured Notes.

        The New Secured Notes may be redeemed prior to December 1, 2021 (three months prior to the maturity date of the Notes) in whole or from time to time in part, at a redemption price equal to the sum of (1) 100% of the principal amount plus accrued and unpaid interest, if any, to, but not including,


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COGENT COMMUNICATIONS HOLDINGS, INC., AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

12. Subsequent Events: (Continued)

the redemption date, and (2) a make-whole premium, if any. The make-whole premium is the excess of (1) the net present value, on the redemption date, of the principal being redeemed or paid and the amount of interest (exclusive of interest accrued to the date of redemption) that would have been payable if such redemption had not been made, over (2) the aggregate principal amount of the notes being redeemed or paid. Net present value shall be determined by discounting, on a semi-annual basis, such principal and interest at the reinvestment rate (as determined in the indenture governing the New Secured Notes) from the respective dates on which such principal and interest would have been payable if such redemption had not been made. In addition, at any time on or after December 1, 2021 (three months prior to the maturity date of the Notes), the Issuer may redeem the Notes, in whole and or in part, at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest, if any, to, but not including, the redemption date.

        The indenture governing the New Secured Notes, among other things, limits Group's and its restricted subsidiaries' ability to incur indebtedness; to pay dividends or make other distributions; to make certain investments and other restricted payments; to create liens; consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; to incur restrictions on the ability of a subsidiary to pay dividends or make other payments; and to enter into certain transactions with its affiliates.


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

        None.

ITEM 9A.    CONTROLS AND PROCEDURES

        We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

        As required by SEC Rule 13a-15(b), an evaluation was performed under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and our principal financial officer, concluded that the design and operation of these disclosure controls and procedures were effective at the reasonable assurance level.

        There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.


MANAGEMENT'S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING

        We are responsible for the preparation and integrity of our published financial statements. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and, accordingly, include amounts based on judgments and estimates made by our management. We also prepared the other information included in the annual report and are responsible for its accuracy and consistency with the financial statements.

        We are responsible for establishing and maintaining a system of internal control over financial reporting, which is intended to provide reasonable assurance to our management and Board of Directors regarding the reliability of our financial statements. The system includes but is not limited to:

        There are inherent limitations in the effectiveness of any system of internal control, including the possibility of human error and the circumvention or overriding of controls. Also, the effectiveness of an internal control system may change over time. We have implemented a system of internal control that


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was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.

        As required by Rule 13a-15(d) of the Exchange Act, we have assessed our internal control system in relation to criteria for effective internal control over financial reporting described in "Internal Control—Integrated Framework" issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.Commission (2013 Framework). Based upon these criteria, we believe that, as of December 31, 2012,2014, our system of internal control over financial reporting was effective.

        The independent registered public accounting firm, Ernst & Young LLP, has audited our 20122014 financial statements. Ernst & Young LLP was given unrestricted access to all financial records and related data, including minutes of all meetings of stockholders, the Board of Directors and committees of the Board. Ernst & Young LLP has issued an unqualified report on our 20122014 financial statements as a result of the audit and also has issued an unqualified report on our internal control over financial reporting which is attached hereto.

Cogent Communications Group,Holdings, Inc.

February 27, 20132015

By:

 

/s/ DAVID SCHAEFFER

  David Schaeffer
  Chief Executive Officer

By:

 

/s/ THADDEUS WEED

  Thaddeus Weed
  Chief Financial Officer

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Report of Independent Registered Public Accounting Firm
On Internal Control over Financial Reporting

The Board of Directors and Stockholders of Cogent Communications Group,Holdings, Inc.

        We have audited Cogent Communications Group,Holdings, Inc.'s internal control over financial reporting as of December 31, 2012,2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). Cogent Communications Group,Holdings, Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

        We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        In our opinion, Cogent Communications Group,Holdings, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012,2014, based on the COSO criteria.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cogent Communications Group,Holdings, Inc. and subsidiaries as of December 31, 20122014 and 2011,2013, and the related consolidated statements of comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 20122014 of Cogent Communications Group,Holdings, Inc. and subsidiaries and our report dated February 27, 20132015 expressed an unqualified opinion thereon.

  /s/ Ernst & Young LLP

McLean, VA
February 27, 20132015


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PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information required by this Item 10 is incorporated in this report by reference to the information set forth under the captions entitled "Election of Directors," "The Board of Directors and Committees," and "Section 16(a) Beneficial Ownership Reporting Compliance" in the 2013our 2015 Proxy Statement for the 20132015 Annual Meeting of Stockholders, which is expected to be filed with the Commission within 120 days after the close of our fiscal year.

ITEM 11.    EXECUTIVE COMPENSATION

        The information required by this Item 11 is incorporated in this report by reference to the information set forth under the captions entitled "The Board of Directors and Committees," "Executive Compensation", "Employment Agreements", "Compensation Committee Report on Executive Compensation," and "Compensation Committee Interlocks and Insider Participation" in the 2013our 2015 Proxy Statement.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this Item 12 is incorporated in this report by reference to the information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the 2013our 2015 Proxy Statement.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this Item 13 is incorporated in this report by reference to the information set forth under the caption "Certain Transactions" in the 2013our 2015 Proxy Statement.

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

        The information required by this Item 14 is incorporated in this report by reference to the information set forth under the caption "Relationship With Independent Public Accountants" in the 2013our 2015 Proxy Statement.


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PART IV

ITEM 15.    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1. Financial Statements.    A list of financial statements included herein is set forth in the Index to Financial Statements appearing in "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA."

 

 

2.

 

Financial Statement Schedules.    The Financial Statement Schedule described below is filed as part of the report.

        Schedule II—Valuation and Qualifying Accounts.

        All other financial statement schedules are not required under the relevant instructions or are inapplicable and therefore have been omitted.

(b)
Exhibits

 3.12.1 Fifth AmendedAgreement and Restated Plan of Reorganization, dated as of May 15, 2014, by and among Cogent Communications Group, Inc., Cogent Communications Holdings, Inc. and Merger Sub (previously filed as Exhibit 2.1 to our Current Report on Form 8-K, filed on May 15, 2014, and incorporated herein by reference).


3.1


Certificate of Incorporation of Cogent Communications Holdings, Inc. (previously filed as Exhibit 3.1 to our AnnualCurrent Report on Form 10-K,8-K, filed on March 31, 2005,May 15, 2014, and incorporated herein by reference).

 

3.2

 

AmendedBylaws of Cogent Communications Holdings, Inc., as amended and Restated Bylaws in effect from September 17, 2007restated by the Board of Directors on November 3, 2014 (previously filed as Exhibit 3.13.2 to our QuarterlyCurrent Report on Form 10-Q,8-K, filed on November 8, 2007,5, 2014, and incorporated herein by reference).

 

4.1

 

Indenture related to the Convertible5.625% Senior Notes due 2027,2021, dated as June 11, 2007,of April 9, 2014, between Cogent Communications Finance, Inc. (to which Cogent Communications Group, Inc. is successor by merger) and Wells Fargo Bank, N.A.,Wilmington Trust, National Association, as trustee (including form of 1.00% Convertible Senior Notes due 2027) (previously filed(filed as Exhibit 4.1 to our PeriodicCurrent Report on Form 8-K, filed on June 12, 2007,April 10, 2014, and incorporated herein by reference).

 

4.2

 

Form of 1.00% Convertible5.625% Senior Notes due 2027 ((previously2021 (previously filed as Exhibit A to the Exhibit 4.1 to our PeriodicCurrent Report on Form 8-K, filed on June 12, 2007,April 10, 2014, and incorporated herein by reference)

 

4.3

 

Registration Rights Agreement,First Supplemental Indenture related to the 5.625% Senior Notes due 2021, dated as of June 11, 2007, by and23, 2014, among Cogent Communications Group, Inc., Cogent Communications Holdings, Inc., the subsidiary guarantors named therein and Bear, Stearns & Co. Inc., UBS Securities LLC, RBC Capital Markets Corporation and Cowen and Company, LLCWilmington Trust, National Association, as trustee (previously filed as Exhibit 4.34.1 to our PeriodicCurrent Report on Form 8-K, filed on June 12, 2007,26, 2014, and incorporated herein by reference).

 

4.4

 

Indenture related to the 8.375% Senior Secured Notes due 2018, dated as of January 26, 2011, among Cogent Communications Group, Inc., the guarantors named therein and Wilmington Trust FSB, as trustee and collateral agent (including form of 8.375% Senior Secured Notes due 2018 attached as Exhibit A thereto) (previously filed as Exhibit 4.1 to our PeriodicCurrent Report on Form 8-K, filed on February 1, 2011, and incorporated herein by reference).

 

4.5

 

Form of 8.375% Senior Secured Notes due 2018 (previously filed as Exhibit A to the Exhibit 4.1 to our PeriodicCurrent Report on Form 8-K, filed on February 1, 2011, and incorporated herein by reference).

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4.6First Supplemental Indenture related to the 8.375% Senior Secured Notes due 2018, dated as of August 19, 2013, among Cogent Communications Group, Inc., the guarantors named therein and Wilmington Trust, National Association (successor by merger to Wilmington Trust FSB), as trustee and collateral agent (previously filed as Exhibit 4.1 to our Current Report on Form 8-K, filed on August 20, 2013, and incorporated herein by reference).


4.7


Second Supplemental Indenture related to the 8.375% Senior Secured Notes due 2018, dated as of June 23, 2014, among Cogent Communications Group, Inc., Cogent Communications Holdings, Inc. and Wilmington Trust, National Association (successor by merger to Wilmington Trust FSB), as trustee (previously filed as Exhibit 4.2 to our Current Report on Form 8-K, filed on June 26, 2014, and incorporated herein by reference).


4.8


Indenture related to the 5.375% Senior Secured Notes due 2022, dated as of February 20, 2015, among Cogent Communications Group, Inc., the guarantors named therein and Wilmington Trust, National Association, as trustee and collateral agent (previously filed as Exhibit 4.1 to our Current Report on Form 8-K, filed on February 20, 2015).


4.9


Form of 5.375% Senior Secured Notes due 2022 (previously filed as Exhibit 4.2 to our Current Report on Form 8-K, filed on February 20, 2015).

 

10.1

 

Dark Fiber IRU Agreement, dated April 14, 2000, between WilTel Communications, Inc. and Cogent Communications, Inc., as amended June 27, 2000, December 11, 2000, January 26, 2001, and February 21, 2001 (incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-4, Commission File No. 333-71684, filed on October 16, 2001)*

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10.2

10.2
David Schaeffer Employment Agreement with Cogent Communications Group, Inc., dated February 7, 2000 (incorporated by reference to Exhibit 10.6 to our Registration Statement on Form S-4, Commission File No. 333-71684, filed on October 16, 2001)

 

10.3

 

Lease for Headquarters Space by and between 6715 Kenilworth Avenue Partnership and Cogent Communications, Inc., dated September 1, 2000 (incorporated by reference to Exhibit 10.10 to our Registration Statement on Form S-4, Commission File No. 333-71684, filed on October 16, 2001)

 

10.4

 

Renewal of Lease for Headquarters Space, by and between 6715 Kenilworth Avenue Partnership and Cogent Communications , Inc., dated August 5, 2003 (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed on November 14, 2003).

 

10.5

 

2003 Incentive Award Plan of Cogent Communications Group, Inc. (incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-8, Commission File No. 333-108702, filed on September 11, 2003).

 

10.6

 

2004 Incentive Award PlanExtension of Lease for headquarters space to August 31, 2016, by and between Niobium LLC (successor to 6715 Kenilworth Avenue Partnership) and Cogent Communications, Group, Inc., dated as amended and restated through February 21, 2012of August 6, 2014 (previously filed as Exhibit 10.710.3 to our AnnualQuarterly Report on Form 10-K,10-Q, filed on February 27, 2012,August 7, 2014, and incorporated herein by reference). See also Exhibit 10.31 below. Niobium LLC is owned by the Company's CEO, David Schaeffer, and his wife.

 

10.7

 

Robert N. Beury, Jr. Employment Agreement with Cogent Communications Group, Inc., dated June 15, 2000 (incorporated by reference to Exhibit 10.20 to our Annual Report on Form 10-K, filed on March 31, 2003).

 

10.8

 

Timothy G. O'Neill Employment Agreement with Cogent Communications Group, Inc., dated as of September 25, 2003 (previously filed as Exhibit 10.29 to our Annual Report on Form 10-K, filed on February 27, 2012, and incorporated herein by reference).

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10.9

 

Brad Kummer Employment Agreement with Cogent Communications Group, Inc., dated January 11, 2000, (incorporated by reference to Exhibit 10.23 to our Registration Statement on Form S-1, Commission File No. 333-122821, filed on February 14, 2005).

 

10.10

 

Extension of Lease for Headquarters Space, by and between 6715 Kenilworth Avenue Partnership and Cogent Communications, Inc., dated February 3, 2005 (previously filed as Exhibit 10.27 to our Annual Report on Form 10-K, filed on March 31, 2005, and incorporated herein by reference).

 

10.11

 

Extension of Lease for Headquarters Space to August 31, 2006, by and between 6715 Kenilworth Avenue Partnership and Cogent Communications, Inc., dated July 21, 2005 (previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-K,10-Q, filed on August 15, 2005, and incorporated herein by reference).

 

10.12

 

Option for extension of Lease for Headquarters Space to August 31, 2007, by and between 6715 Kenilworth Avenue Partnership and Cogent Communications, Inc., dated July 21, 2005 (previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-K,10-Q, filed on August 15, 2005, and incorporated herein by reference).

 

10.13

 

Extension of Lease for headquarters space to August 31, 2010, by and between 6715 Kenilworth Avenue Partnership and Cogent Communications Group, Inc., dated June 20, 2006 (previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed on August 8, 2006, and incorporated herein by reference).

 

10.14

 

Jeffery S. KarnesErnest Ortega Employment Agreement with Cogent Communications Group, Inc., dated May 17, 2004August 1, 2013 (previously filed as Exhibit 10.2510.1 to our AnnualCurrent Report on Form 10-K,8-K, filed on March 14, 2007,August 1, 2013, and incorporated herein by reference).

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10.15

 

David Schaeffer Amendment No. 2 to Employment Agreement with Cogent Communications Group, Inc., dated as of March 12, 2007 (previously filed as Exhibit 10.26 to our Annual Report on Form 10-K, filed on March 14, 2007, and incorporated herein by reference).

 

10.16

 

Robert N. Beury, Jr. Employment Agreement with Cogent Communications Group, Inc., dated as of March 12, 2007 (previously filed as Exhibit 10.27 to our Annual Report on Form 10-K, filed on March 14, 2007, and incorporated herein by reference).

 

10.17

 

Thaddeus G. Weed Employment Agreements, dated September 25, 2003 through October 26, 2006 (previously filed as Exhibit 10.28 to our Annual Report on Form 10-K, filed on March 14, 2007, and incorporated herein by reference).

 

10.18

 

Amendment No. 3 to Employment Agreement of Dave Schaeffer, dated as of August 7, 2007 (previously filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q, filed on August 8, 2007, and incorporated herein by reference).

 

10.19

 

Form of Restricted Stock Agreement madeAward to Vice Presidents and certain other employees on January 1, 2008) (incorporated by reference toErnest Ortega, previously filed as Exhibit 10.2610.2 to our AnnualPeriodic Report on Form 10-K,8-K, filed on February 27, 2008)August 1, 2013, and incorporated herein by reference).

 

10.20

 

Form of Restricted Stock Agreement made to Mr. Schaeffer on January 1, 2008) (incorporated by reference to Exhibit 10.27 to our Annual Report on Form 10-K, filed on February 27, 2008).

 

10.21

 

Extension of Lease for headquarters space to August 31, 2012 and addition of 3rd floor office space, by and between 6715 Kenilworth Avenue Partnership and Cogent Communications Group, Inc., dated as of August 7, 2008 (previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed on August 8, 2008, and incorporated herein by reference).

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10.22

 

Amendment No. 4 to Employment Agreement of Dave Schaeffer, dated as of February 26, 2010 (previously filed as Exhibit 10.25 to our Annual Report on Form 10-K, filed on March 1, 2010, and incorporated herein by reference).

 

10.23

 

Form of Restricted Stock Award made to Mr. SchaefferVice Presidents on April 15, 2010 (incorporated by reference to Exhibit 10.210.3 to our PeriodicCurrent Report on Form 8-K, filed on April 20, 2010, and incorporated herein by reference).

 

10.24

 

Form of Restricted Stock Award to Vice Presidents on April 15, 2010 (incorporated by reference to Exhibit 10.3 to our Periodic Report on Form 8-K, filed on April 20, 2010, and incorporated herein by reference)


10.25


Amendment No. 5 to Employment Agreement of Dave Schaeffer, dated April 7, 2010 (previously filed as Exhibit 10.1 to our PeriodicCurrent Report on Form 8-K, filed on April 7, 2010, and incorporated herein by reference).

 

10.2610.25

 

Extension of Lease for headquarters space to August 31, 2013 and addition of 1st floor office space, by and between 6715 Kenilworth Avenue Partnership and Cogent Communications Group, Inc., dated as of August 5, 2011 (previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed on August 8, 2011, and incorporated herein by reference).

 

10.2710.26

 

Amendment to Lease Agreement for headquarters space reducing leased square footage of office space, by and between 6715 Kenilworth Avenue Partnership and Cogent Communications, Inc., dated as of February 22, 2012 (previously filed as Exhibit 10.30 to our Annual Report on Form 10-K, filed on February 27, 2012, and incorporated herein by reference).

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10.28
10.27

 

Extension of Lease for headquarters space to August 31, 2015, by and between Niobium LLC (successor to 6715 Kenilworth Avenue Partnership) and Cogent Communications Group, Inc., dated as of November 7, 2012 (previously filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q, filed on November 7, 2012, and incorporated herein by reference) Niobium LLC is owned by the Company's CEO, David Schaeffer, and his wife.


10.28


Form of Restricted Stock Award dated April 19, 2012—monthly vest (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K, filed on April 23, 2012, and incorporated herein by reference).

 

10.29

 

Form of Restricted Stock Award dated April 19, 2013—monthly2012—cliff vest (incorporated by reference to Exhibit 10.1 to our PeriodicCurrent Report on Form 8-K, filed on April 23, 2012, and incorporated herein by reference).

 

10.30

 

Form of Restricted StockCogent Communications Holdings, Inc. 2004 Incentive Award datedPlan (as amended through April 19, 2013—cliff vest (incorporated by reference to17, 2014) (previously filed as Exhibit 10.1 to our PeriodicCurrent Report on Form 8-K, filed on April 23, 2012,18, 2014, and incorporated herein by reference).

 

10.31

 

Assignment and Assumption Agreement, dated as of May 15, 2014, by and between Cogent Communications Group, Inc. and Cogent Communications Holdings, Inc. assuming the obligations of the 2004 Incentive Award Plan (previously filed as Exhibit 10.1 to our Current Report on Form 8-K, filed on May 5, 2014, and incorporated herein by reference).


10.32


Amendment No. 6 to Employment Agreement of Cogent Communications Group, Inc.,Dave Schaeffer, dated April 7, 2010 (previously filed as amendedExhibit 10.4 to our Quarterly Report on Form 10-Q, filed on August 7, 2014, and restated through February 20, 2013incorporated herein by reference).


(subject10.33


Restricted Stock Award to ratificationMr. Schaeffer dated August 6, 2014—monthly vest ((previously filed as Exhibit 10.5 to our Quarterly Report on Form 10-Q, filed on August 7, 2014, and incorporated herein by stockholders atreference).


10.34


Restricted Stock Award to Mr. Schaeffer dated August 6, 2014—cliff vest (previously filed as Exhibit 10.6 to our Quarterly Report on Form 10-Q, filed on August 7, 2014, and incorporated herein by reference).

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10.35Restricted Stock Award, dated as of November 3, 2014, between the annual meetingCompany and Thaddeus ("Tad") Weed (previously filed Exhibit 10.1 to be heldour Current Report on April 18, 2013)Form 8-K, filed on November 5, 2014, and incorporated herein by reference).


10.36


(filed herewith)Restricted Stock Award, dated as of November 3, 2014, between the Company and Ernest Ortega (previously filed Exhibit 10.2 to our Current Report on Form 8-K, filed on November 5, 2014, and incorporated herein by reference).


10.37


Restricted Stock Award, dated as of November 3, 2014, between the Company and Robert Beury (previously filed Exhibit 10.3 to our Current Report on Form 8-K, filed on November 5, 2014, and incorporated herein by reference).


10.38


Restricted Stock Award, dated as of November 3, 2014, between the Company and Timothy O'Neill (previously filed Exhibit 10.4 to our Current Report on Form 8-K, filed on November 5, 2014, and incorporated herein by reference).

 

21.1

 

Subsidiaries (filed herewith)

 

23.1

 

Consent of Ernst & Young LLP (filed herewith)

 

31.1

 

Certification of Chief Executive Officer (filed herewith)

 

31.2

 

Certification of Chief Financial Officer (filed herewith)

 

32.1

 

Certification of Chief Executive Officer (filed herewith)

 

32.2

 

Certification of Chief Financial Officer (filed herewith)

 

99.1

 

Policy Against Excise Tax Gross-ups on "Golden Parachute" Payments, with effect from April 7, 2010 (previously filed as Exhibit 99.1 to our PeriodicCurrent Report on Form 8-K, filed on April 7, 2010, and incorporated herein by reference).

 

101.101

 

The following materials from the Annual Report on Form 10-K of Cogent Communications Group, Inc. for the year ended December 31, 2012,2014, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Income (Loss), (iii) Consolidated Statements of Changes in Stockholders' Equity. (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements†.Statements.

Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

*
Confidential treatment requested and obtained as to certain portions. Portions have been omitted pursuant to this request where indicated by an asterisk.

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Schedule II


COGENT COMMUNICATIONS GROUP,HOLDINGS, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

Description
 Balance at
Beginning of
Period
 Charged to
Costs and
Expenses
 (Deductions) Balance at
End of
Period
  Balance at
Beginning of
Period
 Charged to
Costs and
Expenses
 (Deductions) Balance at
End of
Period
 

Allowance for doubtful accounts (deducted from accounts receivable)(a)

          

Year ended December 31, 2010

 $2,516 $5,456 $(5,508)$2,464 

Year ended December 31, 2011

 $2,464 $6,299 $(5,418)$3,345 

Year ended December 31, 2012

 $3,345 $6,058 $(6,320)$3,083  $3,345 $6,058 $(6,320)$3,083 

Year ended December 31, 2013

 $3,083 $4,731 $(5,943)$1,871 

Year ended December 31, 2014

 $1,871 $5,046 $(5,210)$1,707 

Allowance for Unfulfilled Customer Purchase Obligations (deducted from accounts receivable)

          

Year ended December 31, 2010

 $1,796 $4,934 $(5,154)$1,576 

Year ended December 31, 2011

 $1,576 $4,870 $(4,587)$1,859 

Year ended December 31, 2012

 $1,859 $6,888 $(7,065)$1,682  $1,859 $6,888 $(7,065)$1,682 

Year ended December 31, 2013

 $1,682 $4,690 $(4,228)$2,144 

Year ended December 31, 2014

 $2,144 $5,082 $(5,678)$1,548 

Deferred tax valuation allowance

          

Year ended December 31, 2010

 $340,132 $10,103 $(6,545)$343,690 

Year ended December 31, 2011

 $343,690 $2,467 $(8,459)$337,698 

Year ended December 31, 2012

 $337,698 $10,217 $(33)$347,882  $370,293 $18,200 $(33)$388,460 

Year ended December 31, 2013

 $388,460 $5,542 $(39,465)$354,537 

Year ended December 31, 2014

 $354,537 $10,436 $(19,723)$345,250 

(a)
Bad debt expense, net of recoveries, was approximately $3.7 million for the year ended December 31, 2014, $3.5 million for the year ended December 31, 2013 and $5.1 million for the year ended December 31, 2012, $4.3 million for the year ended December 31, 2011 and $4.3 million for the year ended December 31, 2010.2012.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  COGENT COMMUNICATIONS GROUP,HOLDINGS, INC.

Dated: February 27, 20132015

 

By:

 

/s/ DAVID SCHAEFFER

    Name: David Schaeffer
    Title: Chairman and Chief Executive Officer

        Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
 
Title
 
Date

 

 

 

 

 
/s/ DAVID SCHAEFFER

David Schaeffer
 Chairman and Chief Executive Officer (Principal Executive Officer) February 27, 20132015

/s/ THADDEUS G. WEED

Thaddeus G. Weed

 

Chief Financial Officer (Principal Financial and Accounting Officer)

 

February 27, 2013

/s/ EREL MARGALIT

Erel Margalit


Director


February 27, 20132015

/s/ TIMOTHY WEINGARTEN

Timothy Weingarten

 

Director

 

February 27, 20132015

/s/ STEVEN BROOKS

Steven Brooks

 

Director

 

February 27, 20132015

/s/ RICHARD T. LIEBHABER

Richard T. Liebhaber

 

Director

 

February 27, 20132015

/s/ DAVID BLAKE BATH

David Blake Bath

 

Director

 

February 27, 20132015

/s/ MARC MONTAGNER

Marc Montagner

 

Director

 

February 27, 20132015