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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington,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, 2007

OR

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

For the transition period from                             to                              

ANNUAL REPORT

PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

Commission file number:number 1-31227

COGENT COMMUNICATIONS GROUP, INC.


(Exact nameName of Registrant as Specified in Its Charter)

Delaware

52-2337274
(State or Other Jurisdiction of Incorporation)


Incorporation or Organization)

52-2337274

(I.R.S. Employer
Identification No.)


1015 31 st Street N.W.
Washington, D.C.
(Address of Principal Executive Offices)


20007
(Zip Code)

1015 31st Street N.W.

Washington, D.C. 20007

(Address of principal executive offices)

(202) 295-4200

(Registrant’s telephone number, including area code)Registrant's Telephone Number, Including Area Code

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

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

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

        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 registrantregistrant: (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 xý    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’sregistrant'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 filer ýAccelerated filer oNon-accelerated filer oSmaller reporting company o

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

As        The number of June 30, 2004, 802,142 shares outstanding of the registrant’sissuer's common stock, par value $0.001 per share, were outstanding. Asas of that date, theFebruary 15, 2008 was 47,912,864.

        The aggregate market value of the common stockCommon Stock held by non-affiliates of the registrant, was $4,652,425 based on athe closing price of $5.80$29.87 per share on June 29, 2007 as reported by the American Stock Exchange on such date. Directors, executive officers and 10% or greater shareholders are considered affiliates for purposes of this calculation but should not necessarily be deemed affiliates for any other purpose.NASDAQ Global Select Market was approximately $1.3 billion.

On March 25, 2005, the Company had 32,398,460 shares of common stock outstanding.

Documents Incorporated by Reference

Portions of our Definitive Information Statement for the 2005 Annual Meeting of Stockholders to be filed within 120 days after December 31, 2004 are incorporated herein by reference in response to Part III, Items 10 through 14, inclusive.



COGENT COMMUNICATIONS GROUP, INC.


FORM 10-K ANNUAL REPORT



FOR THE YEAR ENDED DECEMBER 31, 20042007

TABLE OF CONTENTS



Page

Part I—Financial Information

Item 1

Business

Business

3

Item 2

1A

Properties

15

Risk Factors		9

Item 3

2

Legal Proceedings

16

Description of Properties		17

Item 3

Legal Proceedings18
Item 4

Submission of Matters to a Vote of Security Holders

16

18


Part II—Other Information



Item 5

Market for Registrant’sthe Registrant's Common Equity and Related Stockholder Matters

17

19

Item 6

Selected Consolidated Financial Data

18

22

Item 7

Management’s

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

19

23

Item 7A

Quantitative and Qualitative Disclosures About Market Risk

37

39

Item 8

Financial Statements and Supplementary Data

38

40

Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

77

67

Item 9A

Controls and Procedures

77

67

Item 9B

Other Information

70


Part III



Item 10

Directors and Executive Officers of the Registrant

78

70

Item 11

Executive Compensation

78

70

Item 12

Security Ownership of Certain Beneficial Owners and Management

78

70

Item 13

Certain Relationships and Related Transactions

78

70

Item 14

Principal Accountant Fees and Services

78

70


Part IV



Item 15

Exhibits and Financial Statement Schedules

78

70

Signatures

91

75


DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the registrant's definitive proxy statement for the registrant's 2008 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,”"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, uncertainties and other factors, some of which are beyond our control, which could cause actual results to differ materially from those forecastforecasts 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.


2



PART I

ITEM 1.    BUSINESS
                BUSINESS

Overview

We are a leading facilities-based provider of low-cost, high-speed Internet access and Internet Protocol, or IP, communications services. Our network is specifically designed and optimized to transmit data using IP. IP networks are significantly less expensive to operate and are able to achieve higher performance levels than the traditional circuit-switched networks used by our competitors, thus giving us clear cost and performance advantages in our industry. We deliver our services to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations through over 8,700approximately 15,000 customer connections in North America and Europe.

Our primary on-net service is Internet access at a speed of 100 Megabits per second, much faster than typical Internet access currently offered to businesses. We offer this on-net service exclusively through our own facilities, which run all the way to our customers’customers' premises. Because of our integrated network architecture, we are not dependent on local telephone companies to serve our on-net customers. This allows us to earn much higher gross profit margins on our on-net business. Our typical customers in multi-tenant office buildings are law firms, financial services firms, advertising and marketing firms and other professional services businesses. We also provide on-net Internet access at a speed of one Gigabit per second and greater to certain bandwidth-intensive users such as universities, other ISPs and commercial content providers.providers at speeds of up to ten Gigabits per second. For the years ended December 31, 2007, 2006 and 2005 our on-net customers generated 79.0%, 70.6% and 57.9%, respectively, of our total net service revenue.

In addition to providing our on-net services, we also provide Internet connectivity to customers that are not located in buildings directly connected to our network. We serve these off-net customers using other carriers’carriers' facilities to provide the “last mile”"last mile" portion of the link from our customers’customers' premises to our network. For the years ended December 31, 2007, 2006 and 2005, our off-net customers generated 17.3%, 23.1%, and 33.0%, respectively, of our total net service revenue.

        Non-core services are those services we acquired and continue to support but do not actively sell. For the years ended December 31, 2007, 2006 and 2005, non-core services generated 3.7% and 6.3% and 9.1%, respectively, of our total net service revenue.

We also operate 3034 data centers comprising over 330,000approximately 300,000 square feet throughout North America and Europe that allow customers to colocateco-locate their equipment and access our network.

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 Internet service at attractive prices.

        Low Cost of Operation.    We offer a streamlined set of products on an integrated network that operates on a single protocol. Our network design allows us to avoid many of the costs associated with circuit-switched networks related to provisioning, monitoring and maintaining multiple transport protocols. We believe that our low cost of operation gives us greater pricing flexibility and an advantage in a competitive environment characterized by falling Internet access prices.

        Independent Network.    Our on-net service does not rely on infrastructure controlled by local incumbent telephone companies. We provide the entire network, including the last mile and the in-building wiring to the customer's suite. This gives us more control over our service, quality and pricing and allows us to provision services more quickly and efficiently. We are typically able to activate customer services in one of our on-net buildings in fewer than ten days.

        High Quality, Reliable Service.    We are able to offer high-quality Internet service due to our network, which was designed solely to transmit IP data, and dedicated intra-city bandwidth for each



customer. This design increases the speed and throughput of our network and from which we provide managed modem service.reduces the number of data packets dropped during transmission.

        Low Capital Cost to Grow Our Business.We have createdincurred relatively minimal indebtedness in growing our business because of our network by purchasingdesign of using Internet routers without additional legacy equipment and our strategy of acquiring optical fiber from carriersthe excess capacity in existing networks.

        Experienced Management Team.    Our senior management team is composed of seasoned executives with large amountsextensive expertise in the telecommunications industry as well as knowledge of unused fiberthe 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. Our senior management team has designed and directly connecting Internet routers to the existing optical fiber national backbone. We have expandedbuilt our network through 13 key acquisitions of financially distressed companies or their assets at a significant discount to their original cost. The overall impact of these acquisitions onand led the operation of our business has been to extend the physical reachintegration of our network in both North Americaassets, customers and Europe, expand the breadthservice offerings we acquired through 13 acquisitions.

        Convergence.    There is a clear industry and market trend for legacy products (e.g., TDM voice, Private Line, Frame Relay, and Asynchronous Transfer Mode) to converge on IP. Many of our service offerings,competitors will have to migrate their existing customers and increaseproducts to IP. This migration can be costly, lengthy, and risky. We do not face this challenge because our network and products are IP.

Our Strategy

        We intend to become the numberleading provider of customershigh quality Internet access and IP communications services and to whom we providecontinue to improve our services.

Recent Developments

In February 2005, the holdersprofitability and cash flow. The principal elements of our preferred stock electedstrategy include:

        Focus on Providing Low-Cost, High-Speed Internet Access and IP Connectivity.    We intend to convert all of their shares of preferred stock into sharesfurther 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 and virtual private networks. We intend to do so by continuing to offer our high-speed and high capacity services at competitive prices.

        Pursuing On-Net Customer Growth.    We intend to increase usage of our common stock, which we refer to as the Equity Conversion. As a result, we no longer have any shares of preferred stock outstanding.

On February 14, 2005, we filed a registration statement on a Form S-1 (Reg. No. 333-122821) with the Securitiesnetwork and Exchange Commission relating to the sale of up to $86.3 million ofoperational infrastructure by adding customers in our common stock in an underwritten public offering (the “Public Offering”). In connection with the Public Offering, our board of directors and holders of our securities holding the requisite number of common shares approved a 1-for-20 reverse stock split of our common stock. The reverse stock split was effected on March 24, 2005 and the 648 million shares of our common stock outstanding after the Equity Conversion were converted into


32.4 million shares of our common stock (the “Reverse Stock Split”). Unless otherwise indicated, all share information in this report reflects the Reverse Stock Split.

On February 24, 2005, we issued a subordinated note in the principal amount of $10.0 million to Columbia Ventures Corporation. The note was issued pursuant to a Note Purchase Agreement dated February 24, 2005. The note has an initial interest rate of 10% per annum and the interest rate increases by one percent on August 24, 2005, six months after the note was issued, and by a further one percent at the end of each successive six-month period up to a maximum of 17%. Interest on the note accrues and is payable on the note’s maturity date of February 24, 2009. We may prepay the note in whole or in part at any time. The terms of the note require that we pay all principal and accrued interest upon the occurrence of a liquidity event, which is defined as an equity offering in which we raise at least $30 million in net proceeds. Our Public Offering would constitute a liquidity event under the note. Accordingly, we will be required to use a portion of the proceeds of the Public Offering to repay the principal and accrued interest on the note. The note is subordinated to our debt to Cisco Systems Capital in the amount of $17.0 millionexisting on-net buildings, as well as upadding buildings to $10.0 million in debt under our accounts receivable linenetwork.

        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 credit described below. Columbia Ventures Corporation is owned by onethe unused capacity of our directors, Kenneth D. Peterson, Jr.,network and is a holder of approximately 9.6% of our common stock.add revenues with minimal incremental costs. We may also make additional acquisitions to add network assets at attractive prices.

In March 2005 we entered into a $10.0 million loan agreement with Silicon Valley Bank relating to a loan facility that provides us with a line of credit. On March 18, 2005, we borrowed $10.0 million under the line of credit of which $4.0 million is restricted and held by Silicon Valley Bank. We refer to this facility as our line of credit. The loans under the line of credit bear an interest rate of prime plus 1.5% per annum and may, in certain circumstances, be reduced to the prime rate plus 0.5%. The line of credit matures on January 31, 2007. Our obligations under the line of credit are secured by a first priority lien in certain of our accounts receivable and are guaranteed by all of our material domestic subsidiaries. The loan agreement and related agreements governing the line of credit contain certain customary representations and warranties, covenants, notice provisions and events of default.

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 Internet protocolIP traffic. ItWe believe that our network is more reliable and less costly fordelivers IP traffic at lower cost than networks built as overlays to traditional circuit-switched telephone networks.

Our network serves over 75100 metropolitan markets in North America and Europe and encompasses:

·

    •
    over 800900 multi-tenant office buildings strategically located in commercial business districts;

    ·

    •
    over 200300 carrier-neutral Internet aggregation facilities, data centers and single-tenant buildings;

    ·

    •
    over 150250 intra-city networks consisting of over 8,40010,400 fiber miles;

    ·


      •
      an inter-city network of more than 21,00026,900 fiber route miles; and

      ·       three

      •
      multiple leased high-capacity transatlantic circuits providing a transatlantic link betweenconnecting the North American and European portions of our network.

    We have created our network by purchasingacquiring optical fiber from carriers with large amounts of unused fiber and directly connecting Internet routers to theour 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 profitability with minimallimited incremental capital expenditures. We expect our 2008 capital expenditure rate to be similar to the rate we experienced in 2007.


    Inter-city Networks

    The North American portion of our        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 one or two strands of optical fiber that we have acquired from WilTel Communications and 360networks under pre-paid IRUs. The WilTel fiber route is approximately 12,500 miles in length and runs through allout of the metropolitan areas that we serve withmultiple fibers owned by the exception of Toronto, Ontario.carrier. We have installed the optical and electronic equipment necessary to amplify, regenerate, and route the optical signals along these networks. We have the right to use the WilTel fiber through 2020 and may extendunder long term agreements. We pay these providers fees for the term for two five-year periods without additional payment. To servemaintenance of the Toronto market, we lease two strands of optical fiber under pre-paid IRUs from affiliatesand provide our own equipment maintenance. The larger providers of 360networks. Thisour inter-city optical fiber runs from Buffalo to Toronto. The 360networks IRUs expireare WilTel (now part of Level 3) in 2020, after which title to the fiber is to be transferred to us. While the IRUs are pre-paid, we pay WilTel and affiliates of 360networks to maintain their respective fibers during the period of the IRUs. We own and maintain the electronic equipment that transmits data through the fiber. That equipment is located approximately every 40 miles along the network and in our metropolitan aggregation points and the on-net buildings we serve.

    In Spain we have approximately 1,300 route miles of fiber secured from La Red Nacional de los Ferrocarriles Espanoles. We have the right to use this fiber pursuant to an IRU that expires in 2012. In France, the United Kingdom, Belgium, the NetherlandsStates, LDCOM (now part of Neuf Cegetel in France, MTI in Germany, Telia Sonera in Europe, and Switzerland, we have approximately 5,400 route miles of fiber secured from Neuf Telecom and Telia. We have the right to use the Neuf Telecom fiber pursuant to an IRU that expiresRENFE (adif) in 2020.Spain.

    Intra-city Networks

            In Germany and Austria, we have approximately 1,800 route miles of fiber secured from MTI and Telia. We have the right to use the MTI fiber pursuant to an IRU that expires in 2019. We have the right to use all of our Telia fiber pursuant to an IRU expiring in 2011 with an option to extend to 2019.

    Intra-city Networks

    In each North American metropolitan area in which we provide high-speed on-net Internet access service, theour backbone network is connected to a router connected to one or more of our metropolitan optical networks. We create our intra-city networks by obtaining the right to use optical fiber from carriers with large amounts of dark fiber. These metropolitan networks also consist of optical fiber that runs from the central router in a market into routers located in our on-net buildings. TheIn 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 a connection to each on-net customer.

    The European intra-city networks for Internet access service use essentially the same architecture as in North America, with fiber rings connecting routers in each on-net building we serve to a central router. While these intra-city networks were originally built as legacy networks providing point-to-point services, we are using excess capacity on these networks to implement our IP network.

    Within the North American cities where we offer off-net Internet access service, we lease circuits typically T1 lines, from telecommunications carriers, primarily local telephone companies, to provide the last mile connection to the customer’scustomer'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 Europe,office buildings where we offer off-net Internet accessprovide service through leased E1 lines andto multiple tenants we have begun to deploy off-net aggregation equipment across our network.

    In-Building Networks

    We connect our routers to a cable containing 12 to 288 optical fiber strands that typically run from our equipment in the basement of the building through the building riser to the customer location. Service for customers is initiated by connecting a fiber optic cable from a customer’scustomer's local area network to the infrastructure in the building riser. The 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 used almost universally for the local area networks that businesses operate.


    Internetworking

    The Internet is an aggregation of interconnected networks. We interconnect our network with over 420 othermost major and hundreds of minor Internet Service Providers, or ISPs, at approximately 4070 locations. We interconnect our network through public and private peering arrangements. Public peering is the means by which ISPs have traditionally connected to each other at central, public facilities. Larger ISPs also 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’scustomer's traffic, such as email, to reach and be received from customer’scustomers of other ISPs. We are considered a Tier 1 ISP and, as a result, we have settlement-free peering arrangements with most other providers. 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 also engage in public peering arrangements in which each party also pays a fee to the owner of routing equipment that operates as the central exchange for all the participants. We do not treat our settlement-free peering arrangements as generating revenue or expense related to the traffic exchanged. Where we do not have a public or private settlement-free peering connection with an ISP, we exchange traffic through an intermediary, whereby such intermediary receives payment from us. LessCurrently, less than 2%1% of our traffic is handled this way.

    Network Management and Control

    Our primary network operations centers are located in Washington, D.C.D.C and Frankfurt.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. 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 high-speed Internet access and IP connectivity to small and medium-sized businesses, communications providers and other bandwidth-intensive organizations located in North America and Europe.

            The table below shows our primary service offerings:

    On-Net Services
    		Bandwidth (Mbps)
    Fiber5000.5
    Two Meg2.0
    Fast Ethernet100
    Gigabit Ethernet1,000
    10 Gigabit Ethernet10,000
    Colocation with Internet Access2 to 10,000
    Point-to-Point1.5 to 10,000
    Off-Net Services
    T1 or E11.5 or 2.0
    T3 or E345 or 34
    Ethernet10, 100 or 1,000

            We offer on-net services in 100 metropolitan markets. We serve over 1,200 buildings of which more than 1,050 are located in North America with the remainder located in Europe. 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 at $1,000 a month for month-to-month service. We offer lower prices for longer term commitments—typically $900 per month for a one year term and $800 per month for a two year term. We also offer Internet access services at higher speeds of up to ten Gigabits per second. These services are generally used by customers that have businesses, such as web hosting, 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 34 locations in North America and Europe. This service offers Internet access combined with rack space and power in a Cogent facility, allowing the customer to locate a server or other equipment at that location and connect to our Internet service. Our final on-net service offering is our "Point-to-Point" 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 emphasize the sale of on-net services because we believe that we have a competitive advantage in providing these services and our sales of these services generate higher gross profit margins.

            We offer off-net services to customers not located in our on-net buildings. These services are provided in the metropolitan markets in North America and Europe in which we offer on-net services and in approximately 5 additional markets. These services are generally provided to small and medium-sized businesses in approximately 2,700 off-net buildings. A significant amount of our off-net revenues were acquired revenues, which have historically churned at a greater rate than our on-net revenues. We expect the revenue from these off-net services to grow at a slower rate than our on-net revenues.

            We support certain non-core services assumed with certain of our acquisitions. These services include our managed modem service, voice services in Toronto, Canada, and legacy point-to-point services. Our managed modem service is offered to larger businesses and other Internet service providers that serve individuals that dial in to the Internet. The business or ISP is our customer for this service. Individuals make use of the dial-in access through arrangements with the business or ISP. We expect the revenue from these non-core services to decline. We do not actively sell these services and expect the growth of our on-net Internet services to compensate for this loss.

    Sales and Marketing

            Sales.We employ a relationship-baseddirect sales and marketing approach. We believe this approach and our commitment to customer service increases the effectiveness of our sales efforts. We market our services through four primary sales channels as summarized below:

    Direct Sales.   As of March 15, 2005,February 1, 2008, our direct sales force included 66204 full-time employees focused solely on acquiring and retaining on-net customers. Each member of ouremployees. Our outside direct sales force is assigned a specific market or territory, based on customer type and geographic location. Of these direct sales force employees, 54 have individual quota responsibility. Direct sales personnel are compensated with a base salary plus quota-based commissions and incentives. Each net-centric sales professional is assigned all of the on-net carrier-neutral facilities in a major metropolitan area. We use a customer relationship management system to efficiently track activity levels and sales productivity in particular geographic areas. Furthermore, our sales personnel work through direct face-to-face contact with potential customers in, or intending to locate in, 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.

    Telesales.   As of March 15, 2005, we employed 15 full-time outbound telemarketing Direct sales personnel in Herndon, Virginia. Of these telesales employees, 12 have individual quota responsibility and two are assigned to customer retention. Telesales personnel are compensated with a base salary plus quota-based commissions and incentives. We use a customer relationship management system to efficiently track activity levels and sales productivity.


    Agent Program.In the fall of 2004, we launched    We also have an agent program used as an alternate channel to distribute our products and services. The agent program consists of value-added resellers, IT consultants, and smaller telecom agents, who are managed by our direct sales personnel, and larger national or regional companies whose primary business is to sell telecommunications, data, and Internet services. The agent program includes over 60 agents and started generating revenues for us towards the end of 2004.110 agents.

            Marketing.Marketing.   As a result    Because of our focus on a direct sales approach,force, we have generally not spent funds on television, radio or print advertising. Our marketing efforts are designed to drive awareness of our products and services, identify qualified leads through various direct marketing campaigns and provide our sales force



    with product brochures, collateral materials 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 also is responsible for our product strategy and direction based upon primary and secondary market research and the advancement of new technologies.

    Our CompetitorsCompetition

    We face competition from incumbent carriers, Internet service providers and facilities-based network operators, many of whom are much biggerlarger than us, have significantly greater financial resources, better-established brand names and large, existing installed customer bases in the markets in 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, and we expect the level of competition to intensify in the future. Unlike some of our competitors, we 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 or IRUs obtained from their title holders.titleholders. We are reliantrely on the maintenance of such dark fiber to provide our on-net services to customers. We are also dependent on third-party providers, some of whom are our competitors, for the provision of T1 or E1 linesconnections to our off-net customers.

    We believe that competition is based on many factors, including price, transmission speed, ease of access and use, 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 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 and frame relay. While the Internet access speeds offered by traditional ISPs typically do not match our on-net offerings, these slower services are usually are priced lower than our offerings and thus provide competitive pressure on pricing, particularly for more price-sensitive customers. Additionally, some of our competitors have recently emerged from bankruptcy. Because the bankruptcy process allows for the discharge of debts and rejection of certain obligations, we may have less of an advantage with respect to these competitors. These and other downward pricing pressures have diminished, and may further diminish, the competitive advantages that we have enjoyed as the result of our service pricing.

    Regulation

    In the United States, the Federal Communications Commission (FCC) regulates common carriers’carriers' interstate services and state public utilities commissions exercise jurisdiction over intrastate basic telecommunications services. Our Internet service offerings are not currently regulated by the FCC or any state public utility commission. However, as we expand our offerings we may become subject to regulation in the U.S. at the federal and state levels and in other countries. The offerings of many of our competitors and vendors, especially incumbent local telephone companies, are subject to direct federal and state regulations. 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.

    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’sproperty's commercial tenants.


    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. in that providers of such services face fewer regulatory requirements than the incumbent local telephone company. This may change. Also, the Canadian government has requirements limiting foreign ownership of certain telecommunications facilities in Canada. We are not subject to these restrictions today. We will have to comply with these regulations to the extent these regulationsthey change and to the extent we begin using facilities in a manner that subjects us to these restrictions.

    Our newly acquired European subsidiaries operate in a more highly regulated environment for the types of services they provide. In many Western European 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 in Europe or other new markets, 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 liability.

    Employees

    As of December 31, 2004,February 1, 2008, we had 297431 employees. Twenty threeA union represents twenty-two of our employees in France are represented by a works counsel and a union.France. We believe at this time that we have a satisfactory relationsrelationship with our employees.

    Available Information

    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’sSEC's Internet web sitewebsite atwww.sec.govwww.sec.gov. You can find these reports and request a copy of our Code of EthicsConduct on our website atwww.cogentco.comwww.cogentco.com under the “Investor Relations”"Investor Relations" link.

    Risk Factors ITEM 1A.    RISK FACTORS

    If our operations do not consistently produce positive cash flow to pay for our growth or meet our operating and financing obligations, and we are unable to otherwise raise additional capital to meet these needs, our ability to implement our business plan will be materially and adversely affected.

    Until we can        We currently generate positive cash flow from our operations, we will continue to rely on our cash reserves and, potentially, additional equity and debt financings to meet our cash needs. Our future capital requirements likely will increase ifoperations. If we acquire or invest in additional businesses, assets, services or technologies.technologies we may need to raise additional capital beyond that available from our 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 maintenance of our network and facilities, and for other unanticipated expenses associated 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 through the issuance of debt or equity. We cannot assure you that we will have access to necessary capital, nor can we assure you that any such financing will be available on terms that are acceptable to usour stockholders or our stockholders.us. If additional funds are raised by issuing equity securities raises additional funds, substantial dilution to existing


    stockholders may result. If we do not add customers, we may be required to raise additional funds through the issuance of debt or equity.


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

    In order to become profitable and remain 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 to become profitable and remain consistently cash flow positive is dependent on a number of factors, including the turnover of existing customers and the revenue mix among customers. We may not succeed in adding customers if our sales and marketing plan is unsuccessful. In addition, many of our target customers are existing businesses that are already purchasing Internet access services from one or more providers, often under a contractual commitment, and it has been our experience that such target customers are often reluctant to switch providers due to costs 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 2.7% of our 2007 revenues, a migration of a few very large Internet users to their own networks could impair our growth.

    We have historically incurred operating losses and these losses may continue for the foreseeable future.

    Since we initiated operations in 2000, we have generated increasing operating losses and these losses may continue for the foreseeable future. In 2002, we had an operating loss of $62.3 million, in 2003 we had an operating loss of $81.2 million, and in 2004 we had an operating loss of $84.1 million. As of December 31, 2004, we had an accumulated deficit of $143.7 million. Continued 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.

    We are experiencing rapid growth of our business and operations and we may not be able to efficiently manage our growth.

    We have rapidly grown our company through acquisitions of companies, assets and customers as well as implementation of our own network expansion and the acquisition of new customers through our own 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:

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      expand, develop and retain an effective sales force and qualified personnel;

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      maintain the quality of our operations and our service offerings;

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      maintain and enhance our system of internal controls to ensure timely and accurate compliance with our regulatory reporting requirements; and

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      expand our accounting and operational information systems in order to support our growth.

    We may have to make significant capital expenditures to address these issues, which could negatively impact our financial position. If we fail to implement these measures successfully, our ability to manage our growth will be impaired.

    We may experience difficulties in implementing our business planexpansion in Eastern Europe and may incur related unexpected costs.costs and regulatory issues.

    During the first quarter of 2004,        In 2007, we completedbegan to expand our acquisitions of Firstmark, the parent holding company of LambdaNet Communications France SAS, or LambdaNet France, and LambdaNet Communications Espana SA, or LambdaNet Spain, andnetwork into Eastern Europe. We may have obtained the rights to certaindifficulty in acquiring dark fiber and other difficulties in making our network assetsoperational in this region. The expansion may cost more that were once part of Carrier 1 International S.A.we have planned. We also may experience regulatory issues. Finally, we may be unsuccessful in Germany. Prior to these


    transactions, we had only minimal European operations.selling our services in this region. If we are not successful in developing our market presence in Eastern Europe our operating results could be adversely affected.impacted.

    LambdaNet France and LambdaNet Spain operated a combined telecommunications network and shared operations systems with a formerly affiliated entity, LambdaNet Germany. We did not acquire LambdaNet Germany and we are currently settling claims for intercompany receivables due to and from LambdaNet France and LambdaNet Spain. If we are unable to settle such claims or we experience unforeseen obligations in connection with the separation, we could be subject to additional expenses.

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

    With part of the proceeds from the Public Offering, if consummated,        Currently, we plan to add approximately 100increase our carrier-neutral facilities and other on-net buildings to our networkby approximately 100 buildings in Europe.2008 from 1,217 at December 31, 2007. We may be unsuccessful at identifying appropriate buildings or negotiating favorable terms for acquiring access to such buildings, and consequently, may experience difficulty in adding customers to our European network and fully using the network’snetwork's capacity.


    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. WeTo date, we have already completed 13 acquisitions, including ten in the last two years.acquisitions. We compete with other companies for acquisition opportunities and we cannot assure you that we will be able to effect future acquisitions or strategic alliances on commercially reasonable terms or at all. Even if we enter into these transactions, we may experience:

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      delays in realizing the benefits we anticipate or we may nota failure to realize the benefits we anticipate;

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      difficulties or higher-than-anticipated costs associated with integrating any acquired companies, products or services into our existing business;

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      attrition of key personnel from acquired businesses;

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      unexpected costs or charges; or

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      unforeseen operating difficulties that require significant financial and managerial resources that would otherwise be available for the ongoing development or expansion of our existing operations.

    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 long-term agreements that we have acquired relating to long distance and local transport of data and IP traffic. If we are unable to satisfactorily renegotiate 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.

    10



    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.

    Revenues generated by the customer contracts that we have acquired have accounted for a substantial portion of our historical growth in netnon-core and off-net service revenue. Werevenues. However, following an acquisition, we have historically experienced a decline in revenue attributable to acquired customers as these customers’customers' contracts have expired and they have entered into standard Cogent customer contracts at generally lower rates or have chosen not to renew service with us. We anticipate that we will experience similar declines with respect to customers we have acquired or will acquire.

    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’sSchaeffer's knowledge of our business and our industry combined with his engineering backgrounddeep involvement in every aspect of our operations and industry experienceplanning make him particularly well-suited to lead our company.company and difficult to replace.


    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 public and private network providers who operate their own networks and interconnect them 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 dedicated network capacity and to maintain high network performance is dependent upon our ability to establish and maintain peering relationships. The terms and conditions of our peering 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 send 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 services, which could have a material adverse effect on our business. We have in the past encountered some disputes with certain of our providers regarding our peering arrangements, but we have generally been able to route our traffic through alternative peering arrangements, resolve such disputes, or terminate such peering arrangements with a minimal adverse impact on our business. In the past we had two such disputes that resulted in a temporary disruption of the exchange of traffic between our network and the network of the other carrier. We continue to experience resistance from certain incumbent telephone companies, especially in Europe, to the upgrade of settlement free peering connections necessary to accommodate the growth of traffic we send to 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 make some of our connections to other Internet networks pursuant to agreements through carriers that make data transmission capacity available to us at negotiated rates. In some instances these agreements have minimum and maximum volume commitments. If we fail to meet the minimum, or exceed the maximum, volume commitments, our costs may rise.

    Our Europeanbusiness could suffer because telephone companies and cable companies may provide better delivery of Internet content originating on their own networks.

            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 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 services would be negatively impacted if Internet content delivered by us was less easily received by consumers than Internet content delivered by others.

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

            We have $200.0 million of senior convertible notes outstanding. The holders of the notes have the right to compel us to repurchase for cash on June 15, 2014, June 15, 2017 and June 15, 2022, all or some of their notes. They also have the right to be paid the principal upon default and upon certain designated events, such as certain changes of control. We may not have sufficient funds to pay the principal at the time we are obligated to do so, which could result in bankruptcy, or we may only be able to raise the funds on unfavorable terms.


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

            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 right is exercised by the holders of the 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. 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.

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

    The nature of our European and Canadian business involves a number of risks, including:

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      fluctuations in currency exchange rates;

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      exposure to additional regulatory and legal requirements, including import restrictions and controls, exchange controls, tariffs and other trade barriers;

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      difficulties in staffing and managing our foreign operations;

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      changes in political and economic conditions; and

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      exposure to additional and potentially adverse tax regimes.

    As we continue to expand our European business,and Canadian businesses, 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 European and Canadian operations may have a material adverse effect on our business and results of operations.

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

    Our European and Canadian operations expose us to currency fluctuations and exchange rate risk. For example, while we record revenues and financial results from our European operations in euros, these results are reflected in our consolidated financial statements in U.S. dollars. Therefore, our reported results are exposed to fluctuations in the exchange rates between the U.S. dollar and the euro. In particular, weWe fund theour euro-based operating expenses and associated cash flow requirements of our European operations, including IRU obligations, in U.S. dollars. Accordingly, in the event that the euro strengthens versus the dollar to a greater extent than we anticipate, the expenses and cash flow requirements associated with our European operations may be significantly higher in U.S.-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 an 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, maintenance and pricing.


    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 facility 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 and our operating results.

    If the information systems that we depend on to support our customers, network operations, sales, billing and billingfinancial 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, and bill our customers for those services and prepare our financial statements depends upon the effective integration of our various information systems. If our systems, individually or collectively, fail or do not perform as expected, our ability to process and provision orders, to make timely payments to vendors, and to ensure that we collect revenue owed to us and prepare our financial statements would be adversely affected. Migration of acquired operations onto our information systems is an ongoing process that we have been able to manage with minimal negative impact on our operations or customers. However, due to the greater variance between non-U.S. information systems and our primary systems, the integration of our new European operations could increase the likelihood that these systems do not perform as desired. 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 prepare accurate and timely financial statements all of which would adversely affect our business and results of operations.

    We have historically incurred operating losses and these losses may continue for the foreseeable future.

            Since we initiated operations in 2000, we have generated operating losses and these losses may continue for the foreseeable future. In 2005 we had an operating loss of $62.1 million, in 2006 we had an operating loss of $46.6 million and in 2007 we had an operating loss of $29.9 million. As of December 31, 2007, we had an accumulated deficit of $296.0 million. Continued 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.

    We may have difficulty intercepting communications as required by the U.S. Communications Assistance for Law Enforcement Act.

            The U.S. Communications Assistance for Law Enforcement Act requires 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 the law. If we are unable to comply with the laws we could be subject to fines of up to $1.0 million per event and other penalties.

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

    Our        The carriers from whom we have obtained our inter-city and intra-city dark fiber is maintained by the carriers from whom it has been obtained. While we have not experienced material problems with interruption of service in the past, ifmaintain that fiber. If these carriers fail to maintain the fiber or disrupt our fiber connections for other reasons, such as business disputes with us orand governmental takings, our ability to provide service in the affected markets or parts of markets would be impaired. WeThe 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 service to our customers in connection with future service interruptions, and we may lose customers if delays are substantial.

    Our business depends on agreements with colocation operators, which we could fail to obtain or maintain.

            Our business depends upon access to customers in carrier neutral colocation 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 colocation centers allow any carrier to operate within the facility (for a standard fee). We expect to enter into additional colocation agreements as part of our growth plan. Current government regulations do not require colocation 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 in their colocation facilities because we offer low-cost, high capacity Internet service to their other customers. Any deterioration in our existing relationships with these colocation center operators could harm our sales and marketing efforts and could substantially reduce our potential customer base.

    Our business 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 thethese buildings. These agreements typically have terms of five to ten years.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 may elect not to renew or amend our access agreements. The initial term of most of our access agreements will conclude in the next several years. Most of these agreements have one or more automatic renewal periods and others may be renewed at the option of the landlord. 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 certaina 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.

    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 from increasing our revenues.


    Impairment of our intellectual property rights and our alleged infringement on other companies’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”"Cogent" in their corporate names. One company has informed us that it believes our use of the name “Cogent”"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.

    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 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 technology or services that make our services less attractive to potential customers. For example, some providers are introducing a new version of the Internet protocol (Ipv6) that we do not plan to introduce at this time. If this becomes important to Internet users our ability to compete may be lessened or we may have to incur additional costs in order to accommodate this technology.

    Our quarterly operatingWe issue projected results and estimates for future periods from time to time, and such projections and estimates are subject to substantial fluctuations and you should not rely on them as an indication of our future results.

    In the past our quarterly operating results have fluctuated dramatically based largely on one-time events, such as acquisitions, gains from debt restructurings, other initiatives and the erosion of non-core revenues. Some of these fluctuations were predictable, but some were unforeseen. The factors that have caused, and that may in the future cause, such quarterly variances are numerousinherent uncertainties and may work in combinationprove to cause such variances. These factors include:be inaccurate.

    ·       demand for        Financial information, results of operations and other projections that we may issue from time to time are based upon our services;

    ·       the impactassumptions 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 acquisitions, including the ability to achieve planned cost reductions;

    ·       our ability to meet the demand for our services;

    ·       changes in pricing policies by us and our competitors;

    ·       increased competition;


    ·       network outages or failures;

    ·       delays, reductions or interruptions from suppliers; and

    ·       changes in the North American or European economy.

    Many of these factorswhich are beyond our control. Accordingly,You should understand that certain unpredictable factors could cause our quarterly operatingactual results to differ from our expectations and those differences may vary significantlybe material. No independent expert participates in the future and period-to-period comparisonspreparation of these estimates. These estimates should not be regarded as a representation by us as to our results of operations may notduring such periods as there can be meaningful and should not be relied upon as indicatorsno assurance that any of our full year performance or future performance. Our share price may be subject to greater volatility due to these fluctuations in our operating results.

    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 public and private network providers who operate their own networks and interconnect them 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 dedicated network capacity and to maintain high network performance is dependent upon our ability to establish and maintain peering relationships. We cannot assure you that weestimates will be ablerealized. In light of the foregoing, we caution you not to continue to establish and maintain those relationships. The terms and conditions of our peering relationships may also be subject to adverse changes, which we may not be able to control. If we are not able to maintain or increase our peering relationships in all of our marketsplace undue reliance on favorable terms, we may not be able to provide our customers with high performance or affordable services, which could have a material adverse effect on our business. We have in the past encountered some disputes with certain of our providers regarding our peering arrangements, but we have consistently been able to route our traffic through alternative peering arrangements, resolve such disputes or terminate such peering arrangements, none of which have had the effect of adversely impacting our business.these estimates. These estimates constitute forward-looking statements.

    We make some of these connections pursuant to agreements that make data transmission capacity available to us at negotiated rates. In some instances these agreements have minimum and maximum volume commitments. If we fail to meet the minimum, or exceed the maximum, volume commitments, our rates and costs may rise.

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

    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 on the network could result in the interruption of customer service until we effect necessary repairs or install replacement equipment. Network failures, delays and errors could also result from natural disasters, power losses, security breaches, computer viruses, denial of service attacks and other natural or man-made events. Our off-net services are dependent on the networknetworks 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 liability for information disseminated through our network.

    The law relating to the liability 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 liability upon us for information carried on and disseminated through our network could require us to implement measures to reduce our exposure to such liability, 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 liability could harm our business.

    Legislation and government regulation could adversely affect us.

    As an enhanced service provider, we are not subject to substantial regulation by the FCC or the state public utilities commissions in the United States. Internet service is also subject to minimal regulation in Europe and in Canada. 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) 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 than we may become subject to or may have to collect from our customers, and the additional administrative costs of providing voice 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 could inhibit our ability to remain a low cost carrier.

    Much of the law related to the liability of Internet service providers remains unsettled. For example, many jurisdictions have adopted laws related to unsolicited commercial email or “spam”"spam" in the last several years. Other legal issues, such as the sharing of copyrighted information, transborder data flow, universal service, and liability for software viruses could become subjects of additional legislation and legal development. We cannot predict the impact of these changes on us. Regulatory changes could have a material adverse effect on our business, financial condition or results of operations.

    Recent terroristTerrorist activity throughout the world and military action to counter terrorism could adversely impact our business.

    The September 11, 2001 terrorist attacks in the United States and 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, and we are headquarteredour headquarters is in Washington, D.C., and we have significant operations in Paris and Madrid, cities that have historically been primary targets for such terrorist attacks.

    ITEM 2.    DESCRIPTION OF PROPERTIES

    We own no material real property in North America.        We lease ourand own space for offices, data centers, colocation facilities, and points-of-presence.


            Our headquarters facilities consistingfacility consists of approximately 15,370 square feet located in Washington, D.C. We also lease approximately 262,000 square feet of space in 42 locations in office buildings and data centers to house our colocation facilities, regional


    offices and operations centers. The lease for our headquarters is with an entity controlled by our Chief Executive Officer. The lease is year-to-year on market terms, and we anticipate that we will be able to renew this lease on substantially the same terms upon its expirationexpires on August 31, 2006. The terms of our other leases generally are for ten years with two five-year renewal options.2010.

            We believe that these facilities are generally in good condition and suitable for our operations. In addition to the above leases, we also have, from our acquisitions, leases for approximately 84,000 square feet of office space in 10 locations. Eight of these locations are currently sublet to third parties. Two are currently being marketed for sublease.

    Through the acquisition of our French and Spanish subsidiaries in January, 2004, we acquired three properties in France. All three properties are data centers and points-of-presence, or POP, facilities ranging in size from 11,838 to 18,292 square feet. We believe that the current market value of these properties is 5.1 million euros or approximately $6.6 million. On March 30, 2005, we sold one of the three properties, located in Lyon, France, for net proceedslease a total of approximately $5.1 million. Through our European subsidiaries, we also lease approximately 204,000414,000 square feet of space in office buildings and data centers63 locations to house our colocation facilities, corporate headquarters, regional offices and operations centers. Approximately 174,000 square feet of the total are used for active POP locations, which house our network equipment and provide colocation space for our customers and have an average size of 9,000 square feet. The termsremaining term of these leases generally are for nineranges from 6 months to 8 years with, an opportunityin many cases, options to terminate the lease every three years. Much of the general office space and non-active POP locations are currently on the market to be sublet to third parties.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 affect on our business, financial condition or results of operations. For a discussion of the significant proceedings in which we are involved, see Note 7 to our consolidated financial statements.

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

    On October 26, 2004, the holders        No matters were submitted to a vote of our securities, on an as-if-converted-to-common basis, holding insecurity holders during the aggregate approximately 72% of our common stock, approved by written consent the issuance of 3,700 shares our Series M participating convertible preferred stock and the amendment to our Fourth Amended and Restated Certificate of Incorporation in order to exempt the issuance of Series M preferred stock from certain antidilution rights held by the other holders of preferred stock. The shares of Series M preferred stock converted into approximately 5.7 million shares of our common stock in the Equity Conversion.quarter ended December 31, 2007.


    16



    PART II

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

    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.”"COI". Prior to February 5, 2002 no established public trading market for theour common stock existed.

    As of March 25, 2005,February 1, 2008, there were approximately 471155 holders of record of shares of our common stock holding approximately 32,398,460 shares48,025,164.shares of our common stock.

    The table below shows, for the quarters indicated, the reported high and low trading prices of our common stock on the American Stock Exchange, which are not split-adjusted.

     

     

    High

     

    Low

     

    Calendar Year 2003

     

     

     

     

     

     

     

     

     

    First Quarter

     

     

    $

    0.94

     

     

     

    $

    0.40

     

     

    Second Quarter

     

     

    3.23

     

     

     

    0.32

     

     

    Third Quarter

     

     

    2.39

     

     

     

    0.80

     

     

    Fourth Quarter

     

     

    1.98

     

     

     

    0.95

     

     

    Calendar Year 2004

     

     

     

     

     

     

     

     

     

    First Quarter

     

     

    $

    2.74

     

     

     

    $

    1.10

     

     

    Second Quarter

     

     

    2.19

     

     

     

    0.27

     

     

    Third Quarter

     

     

    0.40

     

     

     

    0.23

     

     

    Fourth Quarter

     

     

    2.00

     

     

     

    0.28

     

     

    Calendar Year 2005

     

     

     

     

     

     

     

     

     

    First Quarter (As of March 25, 2005)(1)

     

     

    $

    25.40

     

     

     

    $

    9.65

     

     

    stock.

     
    		 High
    		 Low
    Calendar Year 2006      
    First Quarter $9.77 $5.13
    Second Quarter  12.41  7.79
    Third Quarter  11.77  7.78
    Fourth Quarter  17.00  11.14
    Calendar Year 2007      
    First Quarter $24.91 $15.74
    Second Quarter  30.09  22.07
    Third Quarter  34.90  20.08
    Fourth Quarter  30.16  19.67

    (1)          The high and low trading prices for the first quarter of 2005 give effect to our Reverse Stock Split.

    We have not paid any dividends on our common stock since our inception and do not anticipate paying any dividends in the foreseeable future. Any future determination to pay dividends will be at the discretion of our board of directors and will be dependent upon then-existing conditions, including our financial condition, results of operations, contractual restrictions, capital requirements, business prospects and other factors our board of directors deems relevant.


    Performance Graph

            The Company, in connection with its merger with Allied Riser Communications Corporation, began trading shares of its common stock on the American Stock Exchange in February 2002. On March 6, 2006, the Company's shares of Common Stock began trading on the NASDAQ National Market. The Company's common stock currently trades on the NASDAQ Global Select Market. The chart below compares the relative changes in the cumulative total return of the Company's Common Stock for the period December 31, 2002—December 31, 2007, against the cumulative total return for the same period of the (1) The Standard & Poor's 500 (S&P 500) Index and (2) an industry peer group consisting of Savvis Communications Corporation (NASDAQ: SVVS); Internap Network Services Corporation (NASDAQ: INAP); and Time Warner Telecom Inc. (NASDAQ: TWTC). The comparison assumes $100 was invested on December 31, 2002 in the Company's common stock, the S&P 500 Index and the industry peer group, with dividends, if any, reinvested.

    COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
    AMONG COGENT COMMUNICATIONS GROUP, INC. THE S&P 500 INDEX
    AND A PEER GROUP

    Value of $100 Invested on December 31, 2002.

     
    		 12/02
    		 12/03
    		 12/04
    		 12/05
    		 12/06
    		 12/07
    Cogent Communications Group 100.00 307.89 284.21 72.24 213.42 311.97
    S&P 500 100.00 128.68 142.69 149.70 173.34 182.87
    Peer Group(1) 100.00 513.27 226.31 235.85 639.14 548.98
    *
    $100 invested on 12/31/02 in stock or index-including reinvestment of dividends.
    Fiscal year ending December 31.


    Copyright © 2008, Standard & Poor's, a division of The McGraw-Hill Companies, Inc. All rights reserved. www.researchdatagroup.com/S&P.htm

    Unregistered Sales of Equity Securities and Use of Proceeds.

            On August 14, 2007, the Company announced that on August 14, 2007 its Board of Directors had authorized a plan to permit the repurchase of up to $50.0 million of shares of the Company's common stock in negotiated and open market transactions through December 31, 2008. As of December 31, 2007, the Company had purchased 445,990 shares of its common stock pursuant to this authorization for an aggregate of $9.9 million; approximately $40.1 million remained available for such negotiated and open market transactions concerning the Company's common stock. The Company may purchase shares from time to time depending on market, economic, and other factors. The authorization will continue unless withdrawn by the Board of Directors.

            The following table summarizes the Company's common stock repurchases during the fourth quarter of 2007 made pursuant to this authorization. During the quarter, the Company 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, 2007 0  0 193,989 $45,563,602
    November 1 - 30, 2007 217,001 $21.93 410,990 $40,805,206
    December 1 - 31, 2007 35,000 $20.07 445,990 $40,102,717

    ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA

    The annual financial information set forth below has been derived from theour audited consolidated financial statements included in this Report.statements. The information should be read in connection with, and is qualified in its entirety by reference to, Management's Discussion and Analysis, the consolidated financial statements and notes included elsewhere in this Report.report and in our SEC filings.

     

     

    Years Ended December, 31

     

     

     

    2000

     

    2001

     

    2002

     

    2003

     

    2004

     

     

     

    (dollars in thousands)

     

    CONSOLIDATED STATEMENT OF OPERATIONS DATA:

     

     

     

     

     

     

     

     

     

     

     

    Net service revenue

     

    $

    —

     

    $

    3,018

     

    $

    51,913

     

    $

    59,422

     

    $

    91,286

     

    Operating expenses:

     

     

     

     

     

     

     

     

     

     

     

    Cost of network operations

     

    3,040

     

    19,990

     

    49,091

     

    47,017

     

    63,466

     

    Amortization of deferred compensation—cost of network operations

     

    —

     

    307

     

    233

     

    1,307

     

    858

     

    Selling, general, and administrative

     

    10,845

     

    27,322

     

    33,495

     

    26,570

     

    40,382

     

    Amortization of deferred compensation—SG&A

     

    —

     

    2,958

     

    3,098

     

    17,368

     

    11,404

     

    Gain on settlement of vendor litigation

     

    —

     

    —

     

    (5,721

    )

    —

     

    —

     

    Terminated public offering costs

     

    —

     

    —

     

    —

     

    —

     

    779

     

    Restructuring charge

     

    —

     

    —

     

    —

     

    —

     

    1,821

     

    Depreciation and amortization

     

    338

     

    13,535

     

    33,990

     

    48,387

     

    56,645

     

    Total operating expenses

     

    14,223

     

    64,112

     

    114,186

     

    140,649

     

    175,355

     

    Operating loss

     

    (14,223

    )

    (61,094

    )

    (62,273

    )

    (81,227

    )

    (84,069

    )

    Settlement of note holder litigation

     

    —

     

    —

     

    (3,468

    )

    —

     

    —

     

    Interest income (expense) and other, net

     

    2,462

     

    (5,819

    )

    (34,545

    )

    (18,264

    )

    (10,883

    )

    Gains—lease debt restructurings

     

    —

     

    —

     

    —

     

    —

     

    5,292

     

    Gain—Allied Riser note settlement

     

    —

     

    —

     

    —

     

    24,802

     

    —

     

    Gain—Cisco credit facility—troubled debt restructuring

     

    —

     

    —

     

    —

     

    215,432

     

    —

     

    (Loss) income before extraordinary gain

     

    (11,761

    )

    (66,913

    )

    (100,286

    )

    140,743

     

    (89,660

    )

    Extraordinary gain—Allied Riser merger

     

    —

     

    —

     

    8,443

     

    —

     

    —

     

    Net (loss) income

     

    (11,761

    )

    (66,913

    )

    (91,843

    )

    140,743

     

    (89,660

    )

    Beneficial conversion of preferred stock

     

    —

     

    (24,168

    )

    —

     

    (52,000

    )

    (43,986

    )

    Net (loss) income applicable to common stock

     

    $

    (11,761

    )

    $

    (91,081

    )

    $

    (91,843

    )

    $

    88,743

     

    $(133,646

    )

    Net (loss) income applicable to common stock—basic

     

    $

    (170.16

    )

    $

    (1,295.60

    )

    $

    (564.45

    )

    $

    11.18

     

    $

    (175.03

    )

    Net (loss) income applicable common stock—diluted

     

    $

    (170.16

    )

    $

    (1,295.60

    )

    $

    (564.45

    )

    $

    11.18

     

    $

    (175.03

    )

    Weighted-average common shares—basic

     

    69,118

     

    70,300

     

    162,712

     

    7,935,831

     

    763,540

     

    Weighted-average common shares—diluted

     

    69,118

     

    70,300

     

    162,712

     

    7,938,898

     

    763,540

     

    CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END):

     

     

     

     

     

     

     

     

     

     

     

    Cash and cash equivalents

     

    $

    65,593

     

    $

    49,017

     

    $

    39,314

     

    $

    7,875

     

    $

    13,844

     

    Total assets

     

    187,740

     

    319,769

     

    407,677

     

    344,440

     

    378,586

     

    Long-term debt (including current portion) (net of unamortized discount of $78,140 in 2002, $6,084 in 2003 and $5,026 in 2004)

     

    77,936

     

    202,740

     

    347,930

     

    83,702

     

    126,382

     

    Preferred stock

     

    115,901

     

    177,246

     

    175,246

     

    97,681

     

    139,825

     

    Stockholders’ equity

     

    104,248

     

    110,214

     

    32,626

     

    244,754

     

    212,490

     

    OTHER OPERATING DATA:

     

     

     

     

     

     

     

     

     

     

     

    Net cash used in operating activities

     

    (16,370

    )

    (46,786

    )

    (41,567

    )

    (27,357

    )

    (26,425

    )

    Net cash used in  investing activities

     

    (80,989

    )

    (131,652

    )

    (19,786

    )

    (25,316

    )

    (2,701

    )

    Net cash provided by financing activities

     

    162,952

     

    161,862

     

    51,694

     

    20,562

     

    34,486

     

     
    		 Years Ended December 31,
    		 
     
    		 2003
    		 2004
    		 2005
    		 2006
    		 2007
    		 
     
    		 (dollars in thousands)

    		 
    CONSOLIDATED STATEMENT OF OPERATIONS DATA:                
    Service revenue, net $59,422 $91,286 $135,213 $149,071 $185,663 
    Operating expenses:                
    Network operations  47,017  63,466  85,794  80,106  87,548 
    Equity-based compensation expense—network operations  1,307  858  399  315  208 
    Selling, general, and administrative—SG&A  26,570  40,382  41,344  46,593  52,011 
    Equity-based compensation expense—SG&A  17,368  11,404  12,906  10,194  10,176 
    Terminated public offering costs  —  779  —  —  — 
    Lease restructuring charges  —  1,821  1,319  —  — 
    Depreciation and amortization  48,387  56,645  55,600  58,414  65,638 
      
    		 
    		 
    		 
    		 
    		 
    Total operating expenses  140,649  175,355  197,362  195,622  215,581 
      
    		 
    		 
    		 
    		 
    		 
    Operating loss  (81,227) (84,069) (62,149) (46,551) (29,918)
    Gains—lease obligation restructurings  —  5,292  844  255  2,110 
    Gain—Allied Riser note exchange  24,802  —  —  —  — 
    Gains—Cisco credit facility  215,432  —  842  —  — 
    Gains—dispositions of assets  —  —  3,372  254  95 
    Interest income (expense) and other, net  (18,264) (10,883) (10,427) (7,715) (3,312)
      
    		 
    		 
    		 
    		 
    		 
    Net income (loss)  140,743  (89,660) (67,518) (53,757) (31,025)
    Beneficial conversion charges  (52,000) (43,986) —  —  — 
      
    		 
    		 
    		 
    		 
    		 
    Net income (loss) applicable to common shareholders $88,743 $(133,646)$(67,518)$(53,757)$(31,025)
      
    		 
    		 
    		 
    		 
    		 
    Net income (loss) per common share available to common shareholders—basic and diluted $11.18 $(175.03)$(1.96)$(1.16)$(0.65)
      
    		 
    		 
    		 
    		 
    		 
    Weighted-average common shares—basic  7,935,831  763,540  34,439,937  46,343,372  47,800,159 
      
    		 
    		 
    		 
    		 
    		 
    Weighted-average common shares—diluted  7,938,838  763,540  34,439,937  46,343,372  47,800,159 
      
    		 
    		 
    		 
    		 
    		 
    CONSOLIDATED BALANCE SHEET DATA (AT PERIOD END):                
    Cash and cash equivalents $7,875 $13,844 $29,883 $42,642 $177,021 
    Total assets  344,440  378,586  351,373  336,876  455,325 
    Long-term debt (including capital leases and current portion) (net of unamortized discount of $5,026 in 2004, $3,478 in 2005, $1,213 in 2006 and $4,133 in 2007)  83,702  126,382  99,105  97,024  288,441 
    Preferred stock  97,681  139,825  —  —  — 
    Stockholders' equity  244,754  212,490  221,001  215,632  138,830 
    OTHER OPERATING DATA:                
    Net cash (used in) provided by operating activities  (27,357) (26,425) (9,062) 5,285  48,630 
    Net cash used in investing activities  (25,316) (2,701) (14,055) (19,478) (30,864)
    Net cash provided by financing activities  20,562  34,486  39,824  27,045  116,305 

    All share and per-share data in the table above reflects the 1-for-10 reverse stock split that occurred in connection with our merger with Allied Riser in February 2002 and the 1-for-20 Reverse Stock Split that occurred in March 2005. In February 2005, all of our preferred stock was converted into common stock in the Equity Conversion.

    18



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

    You should read the following discussion and analysis together with “Selected"Selected Consolidated Financial and Other Data”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. Our actual results could differ materially from those discussed here. Factors that could cause or contribute to these differences include those discussed in “Risk"Risk Factors,”" as well as those discussed elsewhere. You should read “Risk Factors”"Risk Factors" and “Cautionary Notice"Special Note Regarding Forward-Looking Statements.”"

    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. IP networks are significantly less expensive to operate and are able to achieve higher performance levels than the traditional circuit-switched networks used by our competitors when providing Internet access services, thus, we believe, giving us clear cost and performance advantages in our industry.advantages. We deliver our services to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations through over 8,700approximately 15,000 customer connections in North America and Europe. Our primary on-net service is Internet access at a speed of 100 Megabits per second, much faster than typical Internet access currently offered to businesses. We offer this on-net service exclusively through our own facilities, which run all the way to our customers’customers' premises.

    Our network is comprised of in-building riser facilities, metropolitan optical fiber networks, metropolitan traffic aggregation points and inter-city transport facilities. The network is physically connected entirely through our facilities to over 9801,215 buildings in which we provide our on-net services, including over 800910 multi-tenant office buildings. We also provide on-net services in carrier-neutral colocation facilities, data centers and single-tenant office buildings. Because of our integrated network architecture, we are not dependent on local telephone companies to serve our on-net customers. In addition to providing ourWe emphasize the sale of on-net services because we believe we have a competitive advantage in providing these services and our sales of these services generate higher gross profit margins than our off-net and non-core services.

            We also provide Internet connectivity to customers that are not located in buildings directly connected to our network. We serve these off-net customers using other carriers’carriers' facilities to provide the last mile portion of the link from our customers’customers' premises to our network. We emphasize the sale of on-netalso provide certain non-core services because sales of thesewhich are legacy services generate higher gross profit margins.which we acquired and continue to support but do not actively sell.

    We believe our key 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 incremental costs. Our greatest challengefocus is addingto add customers to our network in a way that maximizes its use and at the same time provides us with a customer mix that produces strong profit margins. We are responding to this challengeopportunity by increasing our sales and marketing efforts.efforts including increasing our number of sales representatives. In addition, we may add customers to our network through strategic acquisitions.

    We plan to expandare expanding our network to locations that we believe can be economically integrated and represent significant concentrations of Internet traffic. We believe that the relative maturitiesOne of our North American and European operations will result in the majority of this expansion occurring in Europe. We may identify locations that we desire to serve with our on-net product but cannot be cost effectively added to our network. The keykeys to developing a profitable business will be to carefully match the expense of extending our network to reach new customers with the revenue generated by those customers.


    We believe the two of the most important trends in our industry are the continued growth in Internet traffic and a corresponding decline in Internet access prices. As Internet traffic continues to grow and prices per


    unit of traffic continue to decline, we believe our ability to load our network and gain market share from less efficient network operators will expand. However, continued erosion in Internet access prices will likely have a negative impact on the rate at which we can increase our results of operations.revenues and our profit margins.

    We have grown our net service revenue from $3.0 million for the year ended December 31, 2001 to $91.3 million for the year ended December 31, 2004. Net service revenue is determined by subtracting our allowances for sales credit adjustments and unfulfilled purchase obligations from our gross service revenue. We have generated our revenue growth through the strategic acquisitions of communications network assets and customers, primarily from financially distressed companies, the continued expansion of our network of on-net buildings and the increase in customers generated by our sales and marketing efforts.

    Our net service revenue is derived from our on-net, off-net and non-core services, which comprised 55.5%, 26.4% and 18.1% of our net service revenue, respectively, for the year ended December 31, 2003 and 63.4%, 25.9% and 10.7% for the year ended December 31, 2004.        Our on-net service consists of high-speed Internet access and IP connectivity ranging from 0.5 Megabits per second to several10 Gigabits per second of bandwidth. We offer our on-net services to customers located in buildings that are physically connected to our network. Off-net services are sold to businesses that are connected to our network primarily by means of T1, T3, E1 and E3 and Ethernet link lines obtained from other carriers. Our non-core services, which consist of legacy services of companies whose assets or businesses we have acquired, include email, retail dial-up Internet access, shared web hosting, managed web hosting, managed security,modem services, voice services (only provided in Toronto, Canada), and point to point private line services, and services provided to LambdaNet Germany under a network sharing arrangement as discussed below.services. We do not actively market these non-core services and expect the net service revenue associated with them to continue to decline.

    We have grown our gross profit from $2.8 million for the year ended December 31, 2002 to $27.8 million for the year ended December 31, 2004. Our gross profit margin has expanded from 5.4% in 2002 to 30.5% for the year ended December 31, 2004. We determine gross profit by subtracting network operation expenses from our net service revenue (other than amortization of deferred compensation). The amortization of deferred compensation classified as cost of network services was $0.2 million, $1.3 million and $0.9 million for the years ended December 31, 2002, 2003 and 2004, respectively. We believe that our gross profit will benefit from the limited incremental expenses associated with providing service to new on-net customers. We have not allocated depreciation and amortization expense to our network operations expense.

    Due to our strategic acquisitions of network assets and equipment, we believe we are positioned to grow our revenue base and profitability without significant additional capital investments.base. We continue to purchase and deploy network equipment to other parts of our network to maximize the utilization of our assets without incurring significant additional capital expense. As a result,and to expand our network. Our future capital expenditures will be based primarily on our planned expansion of our network, the addition of on-net buildings and the concentration and growth of our customer base. We anticipate that our future capital expenditure rate will be less than our historical capital expenditure rate.

    We plan to use part of the proceeds ofcontinue to expand our Public Offering, if consummated,network and to increase our number of on-net buildings by approximately 100 primarilybuildings by adding carrier-neutral facilities in Europe, over the next 12 months.December 31, 2008 from 1,217 buildings at December 31, 2007. We expect our 2008 capital expenditures to be similar to our 2007 capital expenditure rate, or approximately $30.0 million.

    Historically, our operating expenses have exceeded our net service revenue resulting in operating losses of $62.3$62.1 million, $81.2$46.6 million and $84.1$29.9 million in 2002, 20032005, 2006 and 2004,2007, respectively. In each of these periods, our operating expenses consisted primarily of the following:

    ·

      •
      Network operations expenses, which consist primarily of the cost of leased circuits, sites and facilities; telecommunications license agreements, networklicenses, maintenance expenses, and salaries of, and expenses related to, employees who are directly involved with the maintenance and operation of our network, who we refer to as network employees.

      network.

      ·

      •
      Selling, general and administrative expenses, which consist primarily of salaries, bonusescommissions and related benefits paid to our non-network employees and related selling and administrative costs.

      ·costs including professional fees and bad debt expenses.

      •
      Depreciation and amortization expenses, which result from the depreciation of our property and equipment, including the assets and capitalized expenses associated with our network and the amortization of our intangible assets.

      ·       Amortization of deferred

      •
      Equity-based compensation expenses that resultsresult from the expensegrants of amortizing the fair value of our stock options and restricted stock granted to our employees.

      stock.

    Recent Developments

    Public Offering

    On February 14, 2005, we filed a registration statement to sell up to $86.3 million worth of shares of common stock in a public offering. There can be no assurances that the offering will be completed.

    Equity Conversion

    On February 15, 2005, the holders of our preferred stock converted all of their shares of preferred stock into shares of our common stock in the Equity Conversion. As a result, we no longer have outstanding shares of preferred stock and the liquidation preferences on our preferred stock have been eliminated.

    Subordinated Note

    On February 24, 2005, we issued a subordinated note in the principal amount of $10.0 million to Columbia Ventures Corporation. The note was issued pursuant to a Note Purchase Agreement dated February 24, 2005. Columbia Ventures Corporation is owned by one of the Company’s directors and shareholders.

    Line of Credit

    On March 9, 2005, we entered into a line of credit with a commercial bank. The line of credit provides for borrowings of up to $10.0 million and is secured by our accounts receivable. The borrowing base is determined primarily by the aging characteristics related to our accounts receivable. On March 18, 2005, we borrowed $10.0 million against our North American accounts receivable under the line of credit. Of this amount $4.0 million is restricted and held by the lender.

    Reverse Stock Split

    On March 24, 2005, we effected a 1-for-20 reverse stock split. Accordingly, all share and per share amounts in this report have been retroactively adjusted to give effect to this event.

    Building Sale

    On March 30, 2005, we sold a building we owned located in Lyon, France for net proceeds of approximately $5.1 million. This transaction resulted in a gain of approximately $3.9 million.

    Acquisitions

    Since our inception, we have consummated 13 acquisitions through which we have generated revenue growth, expanded our network and customer base and added strategic assets to our business. We have accomplished this primarily by acquiring financially distressed companies or their assets at a significant discount to their original cost. The overall impact of these acquisitions on the operation of our business has


    been to extend the physical reach of our network in both North America and Europe, expand the breadth of our service offerings, and increase the number of customers to whom we provide our services. The overall impact of these acquisitions on our balance sheet and cash flows has been to significantly increase the assets on our balance sheet, including cash in the case of the Allied Riser merger, increase our indebtedness and increase our cash flows from operations due to our increased customer base. A substantial portion of our historical growth in net service revenue has been generated by the customer contracts we have acquired. We have historically experienced a decline in revenue attributable to acquired customers as these customers’ contracts have expired and they have entered into standard Cogent customer contracts at generally lower rates or have chosen not to renew service with us. We anticipate that we will experience similar declines with respect to customers we have acquired or will acquire.

     Verio Acquisition

    In December 2004, we acquired most of the off-net Internet access customers of Verio Inc., a leading global IP provider and subsidiary of NTT Communications Corp. The acquired assets included over 3,700 customer connections located in 23 of our U.S. markets, customer accounts receivable and certain network equipment. We assumed the liabilities associated with providing services to these customers including vendor relationships, accounts payable, and accrued liabilities. We are integrating these acquired assets into our operations and onto our network.

    Acquisition of Aleron Broadband Services

    In October 2004, we acquired certain assets of Aleron Broadband Services, formally known as AGIS Internet, and $18.5 million in cash, in exchange for 3,700 shares of our Series M preferred stock, which converted into approximately 5.7 million shares of our common stock in the Equity Conversion. We acquired Aleron’s customer base and network, as well as Aleron’s Internet access and managed modem service. We are integrating these acquired assets into our operations and onto our network.

    Acquisition of Global Access

    In September 2004, we issued 185 shares of our Series L preferred stock in exchange for the majority of the assets of Global Access Telecommunications Inc. The Series L preferred stock issued in the transaction converted into approximately 0.3 million shares of our common stock in the Equity Conversion. Global Access provided Internet access and other data services in Germany. We acquired over 350 customers in Germany as a result of the acquisition and have completed the process of migrating these customers onto our network.

    Acquisition of UFO Group, Inc.

    In August 2004, we acquired certain assets of Unlimited Fiber Optics, Inc., or UFO, for 2,600 shares of our Series K preferred stock. The preferred stock issued in the merger converted into approximately 0.8 million shares of our common stock in the Equity Conversion. Among these assets is UFO’s customer base, which is comprised of data service customers located in San Francisco and Los Angeles. The acquired assets also included net cash of approximately $1.9 million and customer accounts receivable. We are in the process of integrating these acquired assets into our operations and onto our network and we expect to complete this integration in the second quarter of 2005.

    Acquisition of European Network

    In 2004 we expanded our operations into Europe through a series of acquisitions in which we acquired customers and extended our network, primarily in France, Spain, and Germany.


    In September 2003, we began exploring the possibility of acquiring LNG Holdings SA, or LNG, an operator of a European telecommunications network that was on the verge of insolvency. We determined that an acquisition of LNG in whole was not advisable at that time; however, the private equity funds that owned LNG refused to consider a transaction in which we would acquire only parts of the network. In order to prevent LNG from liquidating and to preserve our ability to structure an acceptable acquisition, in November 2003, our Chief Executive Officer formed a corporation that acquired a 90% interest in LNG in return for a commitment to cause at least $2 million to be invested in LNG’s subsidiary LambdaNet France and an indemnification of LNG’s selling stockholders by us and the acquiring corporation. In November 2003, we reached an agreement with investment funds associated with BNP Paribas and certain of our existing investors regarding the acquisition of the LNG networks in France, Spain and Germany.

    We completed the first step of the European network acquisition in January 2004. The investors funded a corporation that they controlled with $2.5 million and acquired Firstmark Communications Participation S.à r.l., now named Cogent Europe S.à r.l., the parent holding company of LambdaNet France and LambdaNet Spain, from LNG for one euro, or $1.30. As consideration, the investors, through the corporation they controlled, entered into a commitment to use reasonable efforts to cause LNG to be released from a guarantee of certain obligations of LambdaNet France and a commitment to fund LambdaNet France with $2.0 million. That corporation was then merged into one of our subsidiaries in a transaction in which the investors received 2,575 shares of Series I preferred stock that converted into approximately 0.8 million shares of our common stock in the Equity Conversion.

    The planned second step of the transaction was the acquisition of the German network of LNG. We attempted to structure an acceptable acquisition that would have entailed using $19.5 million allocated by the investors to restructure the existing bank debt of LambdaNet Germany; however, we subsequently concluded that it was unlikely that we could structure an acceptable acquisition of LambdaNet Germany and we began to seek an alternative German network acquisition in order to complete the European portion of our network and meet the conditions required to cause the investors to fund $19.5 million.

    In March 2004, we identified network assets in Germany formerly operated as part of the Carrier 1 network as an attractive acquisition opportunity. Pursuant to the November commitment, the investors funded a newly-formed Delaware corporation with $19.5 million, and the corporation through a German subsidiary acquired the rights to certain assets of the Carrier 1 network in return for 2.2 million euros, or $2.9 million. That corporation then was merged into one of our subsidiaries in a transaction in which the investors received shares of our Series J preferred stock that converted into approximately 6.0 million shares of our common stock in the Equity Conversion.

    Acquisition of Assets of Fiber Network Services

    In February 2003, we acquired the principal assets of Fiber Network Services, Inc., or FNSI, an Internet service provider in the midwestern United States, in exchange for options to purchase 6,000 shares of our common stock and the assumption of certain of FNSI’s liabilities.

    Acquisition of PSINet Assets

    In April 2002, we purchased the principal U.S. assets of PSINet, Inc. out of bankruptcy in exchange for $9.5 million and the assumption of certain liabilities. With the acquisition of PSINet assets we began to offer our off-net service and acquired significant non-core services.

    Allied Riser Merger

    In February 2002, we acquired Allied Riser Communications Corporation, a facilities-based provider of broadband data, video and voice communications services to small and medium-sized businesses in the United States and Canada in exchange for the issuance of approximately 0.1 million shares of our common


    stock. As a result of the merger, Allied Riser became a wholly-owned subsidiary. In connection with the merger, we became co-obligor under Allied Riser’s 71¤2% Convertible Subordinated Notes.

    Results of Operations

    Our management reviews and analyzes several key performance indicators in order to manage our business and assess the quality of and potential variability of our net service revenues and cash flows. These key performance indicators include:

    ·

      •
      net service revenues, which are an indicator of our overall business growth;

      ·growth and the success of our sales and marketing efforts;

      •
      gross profit, which is an indicator of both our service offering mix, competitive pricing pressures and the cost of our network operations;

      ·


        •
        growth in our on-net customer base, which is an indicator of the success of our on-neton net focused sales efforts;

        ·

        •
        growth in our on-net buildings; and



        •
        cash flows.

      ·       distribution of revenue across our service offerings.

      Year Ended December 31, 20032006 Compared to the Year Ended December 31, 20042007

      The following summary table presents a comparison of our results of operations for the year ended December 31, 20032005 and 20042006 with respect to certain key financial measures. The comparisons illustrated in the table are discussed in greater detail below.

       

       

      Year Ended
      December 31,

       

      Percent

       

       

       

      2003

       

      2004

       

      Change

       

       

       

      (in thousands)

       

       

       

      Net service revenue

       

      $

      59,422

       

      $

      91,286

       

      53.6

      %

      Network operations expenses(1)

       

      47,017

       

      63,466

       

      35.0

      %

      Gross profit(2)

       

      12,405

       

      27,820

       

      124.3

      %

      Selling, general, and administrative expenses(3)

       

      26,570

       

      40,382

       

      52.0

      %

      Restructuring charge

       

      —

       

      1,821

       

      —

       

      Terminated public offering costs

       

      —

       

      779

       

      —

       

      Depreciation and amortization expenses

       

      48,387

       

      56,645

       

      17.1

      %

      Gain—Cisco troubled debt restructuring

       

      215,432

       

      —

       

      —

       

      Gain—Allied Riser note exchange

       

      24,802

       

      —

       

      —

       

      Gains—lease obligations restructuring

       

      —

       

      5,292

       

      —

       

      Net income (loss)

       

      140,743

       

      (89,660

      )

      (163.7

      )%

       
      		 Year Ended December 31,
      		  
      		 
       
      		 Percent
      Change
      		 
       
      		 2006
      		 2007
      		 
       
      		 (in thousands)

      		  
      		 
      Net service revenue $149,071 $185,663 24.5%
       On-net revenues  105,275  146,604 39.3%
       Off-net revenues  34,416  32,123 (6.7)%
       Non-core revenues  9,380  6,936 (26.1)%
      Network operations expenses(1)  80,106  87,548 9.3%
      Gross profit(2)  68,965  98,115 42.3%
      Selling, general, and administrative expenses(3)  46,593  52,011 11.6%
      Equity-based compensation expense  10,509  10,384 (1.2)%
      Depreciation and amortization expenses  58,414  65,638 12.4%
      Gains—lease obligations and asset sales  509  2,205 333.2%
      Net loss  (53,757) (31,025)42.3%

      (1)
      Excludes amortizationequity-based compensation expense of deferred compensation of $1,307$315 and $858$208 in the years ended December 31, 20032006 and 2004,2007, respectively, which, if included would have resulted in a period-to-period change of 33.1%9.1%.



      (2)
      Excludes amortizationequity-based compensation expense of deferred compensation of $1,307$315 and $858$208 in the years ended December 31, 20032006 and 2004,2007, respectively, which if included would have resulted in a period-to-period change of 142.9%42.6%.



      (3)
      Excludes amortizationequity-based compensation expense of deferred compensation of $17,368$10,194 and $11,404$10,176 in the yearyears ended December 31, 20032006 and 2004,2007, respectively, which, if included would have resulted in a period-to-period change of 17.9%9.5%.


      Net Service Revenue.Our net service revenue increased 53.6%24.5% from $59.4$149.1 million for the year ended December 31, 20032006 to $91.3$185.7 million for the year ended December 31, 2007. The impact of exchange rates resulted in approximately $4.2 million of the $36.6 million increase in revenues. For the years ended December 31, 2006 and 2007, on-net, off-net and non-core revenues represented 70.6%, 23.1% and 6.3% and 79.0%, 17.3% and 3.7% of our net service revenues, respectively.

              Our on-net revenues increased 39.3% from $105.3 million for the year ended December 31, 2006 to $146.6 million for the year ended December 31, 2007. Our on-net revenues increased as we increased the number of our on-net customer connections by 43.9% from approximately 7,800 at December 31, 2006 to approximately 11,200 at December 31, 2007. On-net customer connections increased at a greater rate than on-net revenues due to a decline in the revenue per on-net customer connection. This decline is partly attributed to a shift in the customer connection mix. Due to the increase in the size of our sales force, we are now able to focus not only on customers who purchase high-bandwidth connections, as we have done historically, but also on customers who purchase lower-


      bandwidth connections. We expect to continue to focus our sales efforts on a broad mix of customers. Additionally, on-net customers who cancel their service, in general, have greater revenue per connection than new customers. These trends and, to a lesser extent, an increase in customers receiving a discount for purchasing longer term contracts, resulted in a reduction to our revenue per on-net connection. We believe that our on-net revenues as a percentage of total revenues will continue to increase as we are allocating the majority of our sales and marketing resources toward obtaining additional on-net customers.

              Our off-net revenues decreased 6.7% from $34.4 million for the year ended December 31, 2006 to $32.1 million for the year ended December 31, 2007. Our off-net customer connections declined 15.4% from approximately 3,500 at December 31, 2006 to approximately 3,000 at December 31, 2007. Off-net customer connections decreased at a greater rate than the decline in off-net revenues due to an increase in the revenue per off-net customer connection. Off-net customers who cancel their service, in general, have revenue per connection that is less than new off-net customers who generally purchase higher-bandwidth connections. Additionally, a significant amount of our off-net revenues were acquired revenues, which have historically churned at a greater rate than our on-net revenues. We expect the revenue from these off-net services to grow at a substantially slower rate than our on-net revenues as we are allocating the majority of our sales and marketing resources toward obtaining additional on-net customers.

              Our non-core revenues decreased 26.1% from $9.4 million for the year ended December 31, 2006 to $6.9 million for the year ended December 31, 2007. The number of our non-core customer connections declined 20.3% from approximately 1,000 at December 31, 2006 to approximately 800 at December 31, 2007. We do not actively market these acquired non-core services and expect that the net service revenue associated with them will continue to decline.

              Network Operations Expenses.    Our network operations expenses, excluding equity-based compensation expense, increased 9.3% from $80.1 million for the year ended December 31, 2006 to $87.5 million for the year ended December 31, 2007. The increase is primarily attributable to an increase in costs related to our network and facilities expansion activities partly offset by the decline in network operations expenses associated with the decline in our off-net and non-core revenues. The impact of exchange rates resulted in approximately $1.8 million of this $7.4 million increase in network operations expenses.

              Gross Profit.    Our gross profit, excluding equity-based compensation expense, increased 42.3% from $69.0 million for the year ended December 31, 2006 to $98.1 million for the year ended December 31, 2007. We determine gross profit by subtracting network operation expenses, excluding equity-based compensation expense, from our net service revenue and do not allocate depreciation and amortization expense to our network operations expense. The increase is primarily attributed to the increase in higher gross margin on-net revenues as a percentage of net service revenue. Our gross profit margin expanded from 46.3% for the year ended December 31, 2006 to 52.8% for the year ended December 31, 2007. Our gross profit has benefited from the limited incremental expenses associated with providing service to an increasing number of on-net customers and the decline in off-net revenues which carry a lower gross margin due to the associated leased circuit required to provide this service. Our gross profit margin may be impacted by the timing and amounts of disputed circuit costs and the additional costs of expanding our network and operating our existing network. We generally record disputed circuit costs amounts when billed by the vendor and reverse these amounts when the vendor credit has been received or the dispute has been otherwise resolved. We believe that our gross profit margin will continue to increase as we are allocating the majority of our sales and marketing resources toward obtaining additional on-net customers and as sales of these services generate higher gross profit margins than our off-net and non-core services.


              Selling, General, and Administrative Expenses ("SG&A").    Our SG&A expenses, excluding equity-based compensation expense, increased 11.6% from $46.6 million for the year ended December 31, 2006 to $52.0 million for the year ended December 31, 2007. SG&A expenses increased primarily from the increase in salaries and related costs required to support our expanding sales and marketing efforts. The impact of exchange rates resulted in approximately $1.4 million of this $5.4 million increase in SG&A expenses.

              Equity-based Compensation Expense.    Equity-based compensation expense is related to restricted stock and stock options. The total equity-based compensation expense decreased 1.2% from $10.5 million for the year ended December 31, 2006 to $10.4 million for the year ending December 31, 2004. The $31.92007. During 2007, we issued approximately 1.0 million increaseshares of restricted stock to our employees. These grants were valued at our closing stock price on the date of grant and will vest over periods ranging from two to four years. These grants resulted in net service revenue is attributable to $26.6approximately $7.1 million of net service revenue from the customers acquired in the Cogent Europe, UFO, Global Access, Aleron and Verio acquisitions and a $16.0 million increase in organic revenue. We define organic revenue as revenue derived from contracts obtained as a result of our sales efforts. Revenue from acquired customers who enter into contracts with us once their existing contracts expire or amend their acquired contract are reflected as organic revenue. These increases were partially offset by a $10.6 million decrease in revenue from the expiration or termination of customer contracts acquired from Allied Riser, PSINet and FNSI, although many of these customers entered into new contracts with us once their existing contracts expired, and as such, the revenue of these contracts is reflected in the increase in organic revenue. Forequity-based compensation expense for the year ended December 31, 2007. The increase was partly offset by a $6.8 million decrease in equity-based compensation expense associated with certain 2003 and 2004, on-net, off-net and non-core services represented 55.5%, 26.4% and 18.1% and 63.4%, 25.9% and 10.7%restricted stock grants which ended in August 2006 when these shares became fully vested. As of our net service revenues, respectively.

      Our net service revenueDecember 31, 2007 there was approximately $22.6 million of total unrecognized compensation cost related to our acquisitionsnon-vested equity-based compensation awards. That cost is included in our statementsexpected to be recognized over a weighted average period of operationsapproximately twenty-one months.

              Depreciation and Amortization Expenses.    Our depreciation and amortization expense increased 12.4% from the acquisition dates. Net service revenue from our January 5, 2004 Cogent Europe acquisition totaled approximately $23.3$58.4 million for the year ended December 31, 2004. Approximately $2.0 million of the Cogent Europe net service revenue during the period was derived from network sharing services rendered2006 to LambdaNet Communications Deutschland AG, or LambdaNet Germany. LambdaNet Germany was majority-owned by LNG Holdings until April 2004 when it was sold to an unrelated third party. In the first quarter of 2005, this network sharing arrangement was eliminated. Net service revenue from our UFO, Aleron and Verio acquisitions which occurred in August 2004, October 2004 and December 2004, respectively, totaled $5.8$65.6 million for the year ended December 31, 2004.

      Network Operations Expenses.   Our network operations expenses, excluding the amortization of deferred compensation, increased 35.0% from $47.0 million for the year ended December 31, 20032007 due to $63.5 million for the year ended December 31, 2004. The increase is primarily attributable to $15.4 million of costs incurred in connection with the operation of our European network after our Cogent Europe and Global Access acquisitions. For the year ended December 31, 2004, Cogent Europe recorded $1.8 million of costs associated with using the LambdaNet Germany network. In the first quarter of 2005, this network sharing arrangement was eliminated. Our total cost of network operations for the years ended December 31, 2003 and December 31, 2004 includes approximately $1.3 million and $0.9 million, respectively, of amortization of deferred compensation expense classified as cost of network operations.

      Gross profit. Our gross profit, excluding amortization of deferred compensation, increased 124.3% from $12.4 million for the year ended December 31, 2003 to $27.8 million for the year ended December 31, 2004. The $15.4 million increase is attributed to ouran increase in net service revenue.deployed fixed assets.

      Selling, General,        Gains—lease obligations and Administrative Expenses.   asset sales.Our SG&A expenses, excluding the amortization of deferred compensation, increased 52.0%    In September 2007, we entered into a settlement agreement under which we were released from $26.6 million for the year ended December 31, 2003 to $40.4 million for the year ended December 31, 2004. SG&A expenses increased primarily from the $13.2 million of SG&A expenses associated with our operations in Europe after our Cogent Europe and Global Access acquisitions. Our total SG&A expenses for the years ended December 31, 2003 and December 31, 2004 include $17.4 million and $11.4 million, respectively, of amortization of deferred compensation.

      Amortization of Deferred Compensation.   The total amortization of deferred compensation decreased from $18.7 million for the year ended December 31, 2003 to $12.3 million for the year ending December 31, 2004.

      Deferred compensation is related to restricted shares of Series H preferred stock granted to our employees primarily in October 2003obligation under our 2003 Incentive Award Plan and the amortization of $4.7 million of deferred compensation related to options for shares of Series H preferred stock. These


      options were granted to certain of our employees in the third quarter of 2004 with an exercise price on an as-converted basis below the trading price of our common stock on the grant date. We amortize deferred compensation costs on a straight-line basis over the service period.

      Restructuring charge.   In July 2004, we abandoned an office in Paris obtained in the Cogent Europe acquisition and relocated operations to another Cogent Europe facility. We recorded a total restructuring charge of approximately $1.8 million related to the remaining commitment on thefacility lease less our estimated sublease income.

      Withdrawal of Public Offering.   In May 2004, we filed a registration statement to sell shares of common stock in a public offering. In October 2004, we withdrew this registration statement and expensed the associated deferred costs of approximately $0.8 million.

      Depreciation and Amortization Expenses.   Our depreciation and amortization expense increased 17.1% from $48.4 million for the year ended December 31, 2003 to $56.6 million for the year ended December 31, 2004. Of this increase, $8.2 million resulted from depreciation and amortization of assets acquired in our Cogent Europe and Global Access acquisitions.

      Gain—Credit Facility Restructuring.   The restructuring of our Cisco credit facility on July 31, 2003an acquisition. This settlement agreement resulted in a gain of approximately $215.4$2.1 million. The gain resulting from the retirement of the amounts outstanding under the credit facility was determined as follows (in thousands):

      Cash paid

       

      $

      20,000

       

      Issuance of Series F preferred stock

       

      11,000

       

      Amended and Restated Cisco Note, principal plus future interest

       

      17,842

       

      Transaction costs

       

      1,167

       

      Total Consideration

       

      $

      50,009

       

      Amount outstanding under Cisco credit facility

       

      (262,812

      )

      Interest accrued under the Cisco credit facility

       

      (6,303

      )

      Book value of cancelled warrants

       

      (8,248

      )

      Book value of unamortized loan costs

       

      11,922

       

      Total Indebtedness prior to recapitalization

       

      $

      (265,441

      )

      Gain from recapitalization

       

      $

      215,432

       

      Gain—Allied Riser Note Exchange.   In connection with the exchange and settlement related to our 71¤2% Convertible Subordinated Notes we recorded a gain of approximately $24.8 million during the year ended December 31, 2003. This gain resulted from the difference between the $36.5 million net book value of the notes ($106.7 million face value less the related unamortized discount of $70.2 million) and $2.0 million of accrued interest, the cash consideration of $5.0 million and the $8.5 million estimated fair market value for the Series D and Series E preferred stock issued to the noteholders less approximately $0.2 million of transaction costs. The estimated fair market value for the Series D and Series E preferred stock was determined by using the price per share of our Series C preferred stock, which represented our most recent equity transaction for cash.

      Gain—Lease obligations restructuring.   In 2004, we re-negotiated several lease obligations for our intra-city fiber in France and Spain. These transactions resulted gains of approximately $5.3 million recorded as gains on lease obligation restructurings in the accompanying statement of operations for the year ended December 31, 2004.

      26



      In March 2004, Cogent France paid approximately $0.3 million and settled amounts due from and due to a vendor. The vendor leased Cogent France its office facility and intra-city IRU and was and continues to be a customer of Cogent France. The settlement agreement also restructured the IRU capital lease by reducing the 2.8 million euros, or $3.7 million, January 2007 lease payment by 1.0 million euros, or $1.3 million, and reducing the 2.5 million euros, or $3.3 million, January 2008 lease payment by 1.0 million euros, or $1.3 million. Under the settlement the lessor also agreed to purchase a minimum annual commitment of IP services from Cogent France. This transaction resulted in a reduction to the capital lease obligation and IRU asset of approximately $1.9 million.

      In November 2004,September 2006, Cogent Spain negotiated modifications to an IRU capital lease and note obligation with a vendor resulting in a 4.4 million euro, or $5.2 million, gain. In exchange for the return of one of two strands of leased optical fiber, Cogent Spainthat reduced its quarterly IRU lease payments modified its payments and eliminated accrued and future interest on its note obligation. The note obligation arose in 2003, when Cogent Spain, then LambdaNet España S.A, negotiated a settlement withextended the vendor that included converting certain amounts due under the capital lease into a note obligation. The 8.3 million euro, or $10.8 million, note obligation had a term of twelve years and bore interest at 5% with a two-year grace period and was repayable in forty equal installments. The first installment was due in 2005. The modified note is interest free and includes nineteen equal quarterly installments of approximately 0.2 million euros, or $0.3 million, and a final payment of 4.1 million euros, or $5.3 million, due in January 2010. Cogent Spain paid 0.2 million euros, or $0.3 million, at settlement.term. The modification to the note obligationthis IRU capital lease resulted in a gain of approximately $0.2$0.3 million. In 2006, we sold a building and land for net proceeds of $0.8 million. This sale resulted in a gain of approximately $0.3 million.

      Net Income (Loss).   Loss.Net income    Our net loss was $140.7$53.8 million for the year ended December 31, 20032006 as compared to a net loss of $(89.7)$31.0 million for the year ended December 31, 2004.2007. Our net loss decreased by $22.7 million primarily due to a $29.2 million increase in our gross profit partially offset by a $5.4 million increase in SG&A, and a $7.2 million increase in depreciation and amortization expense. Included in net incomeloss for the year ended December 31, 20032006 are gains from debt restructurings totaling $240.2of approximately $0.5 million. Included in net loss for the year ended December 31, 2007 are gains of approximately $2.2 million.

              Buildings On-net.    As of December 31, 2006 and 2007 we had a total of 1,107 and 1,217 on-net buildings connected to our network, respectively. We plan to increase our number of on-net buildings by approximately 100 buildings by December 31, 2008.


      Year Ended December 31, 20022005 Compared to the Year Ended December 31, 20032006

      The following summary table presents a comparison of our results of operations for the yearsyear ended December 31, 20022005 and 20032006 with respect to certain key financial measures. The comparisons illustrated in the table are discussed in greater detail below.

       

       

      Year Ended
      December 31,

       

      Percent

       

       

       

      2002

       

      2003

       

      Change

       

       

       

      (in thousands)

       

      Net service revenue

       

      $

      51,913

       

      $

      59,422

       

       

      14.5

      %

       

      Network operations expenses(1)

       

      49,091

       

      47,017

       

       

      (4.2

      )%

       

      Gross profit(2)

       

      2,822

       

      12,405

       

       

      340.0

      %

       

      Selling, general, and administrative expenses(3)

       

      33,495

       

      26,570

       

       

      (20.7

      )%

       

      Depreciation and amortization expenses

       

      33,990

       

      48,387

       

       

      42.4

      %

       

      Gain—Cisco troubled debt restructuring

       

      —

       

      215,432

       

       

      —

       

       

      Gain—Allied Riser note exchange

       

      —

       

      24,802

       

       

      —

       

       

      Net (loss) income

       

      (91,843

      )

      140,743

       

       

      253.2

      %

       

       
      		 Year Ended December 31,
      		  
      		 
       
      		 Percent
      Change
      		 
       
      		 2005
      		 2006
      		 
       
      		 (in thousands)

      		  
      		 
      Net service revenue $135,213 $149,071 10.2%
       On-net revenues  78,324  105,275 34.4%
       Off-net revenues  44,642  34,416 (22.9)%
       Non-core revenues  12,245  9,380 (23.4)%
      Network operations expenses(1)  85,794  80,106 (6.6)%
      Gross profit(2)  49,419  68,965 39.6%
      Selling, general, and administrative expenses(3)  41,344  46,593 12.7%
      Lease restructuring charge  1,319  — (100.0)%
      Equity-based compensation expense  13,305  10,509 (21.0)%
      Depreciation and amortization expenses  55,600  58,414 5.1%
      Gains—lease obligations, debt restructurings and asset sales  5,058  509 (89.9)%
      Net loss  (67,518) (53,757)20.4%

      (1)
      Excludes amortizationequity-based compensation expense of deferred compensation of $233$399 and $1,307$315 in the years ended December 31, 20022005 and 2003,2006, respectively, which, if included would have resulted in a period-to-period change of (2.0)(6.7)%.



      (2)
      Excludes amortizationequity-based compensation expense of deferred compensation of $233$399 and $1,307$315 in the years ended December 31, 20022005 and 2003,2006, respectively, which if included would have resulted in a period-to-period change of 328.7%40.0%.



      (3)
      Excludes amortizationequity-based compensation expense of deferred compensation of $3,098$12,906 and $17,368$10,194 in the years ended December 31, 20022005 and 2003,2006, respectively, which, if included would have resulted in a period-to-period change of 20.1%4.7%.

      Net Service Revenue.Our net service revenue increased 14.5%10.2% from $51.9$135.2 million for the year ended December 31, 20022005 to $59.4$149.1 million for the year ended December 31, 2003. This $7.5 million increase was primarily attributable to a $16.5 million, or a 99.5% increase in revenue from customers purchasing2006. For the years ended December 31, 2005 and 2006, on-net, off-net and non-core revenues represented 57.9%, 33.0% and 9.1% and 70.6%, 23.1% and 6.3% of our on-net Internet access service offerings, and a $3.7 million increase in off-net revenue attributable to the customers acquired in the FNSI acquisition. FNSI revenue is included in our consolidated net service revenue since the closing of the acquisition on February 28, 2003. The increase was partially offset by a $15.5 million, or 50.9% decline in net service revenue derivedrevenues, respectively.

            �� Our on-net revenues increased 34.4% from customers acquired in our April 2, 2002 acquisition of certain PSINet customer accounts, although many of these customers re-signed their contracts with us once their existing PSINet contracts expired and as such, the revenue of these contracts is reflected in the increase in net service revenue.

      Network Operations Expenses.   Our network operations expenses, excluding the amortization of deferred compensation, decreased 4.2% from $49.1$78.3 million for the year ended December 31, 20022005 to $47.0$105.3 million for the year ended December 31, 2003. This decrease was primarily2006. Our on-net revenues increased as we increased the number of our on-net customer connections from approximately 4,700 at December 31, 2005 to approximately 7,800 at December 31, 2006. On-net customer connections increased at a greater rate than on-net revenues due to a $2.0 million decrease duringdecline in the year ended December 31, 2003revenue per on-net customer connection. This decline is partly attributed to a shift in recurring and transitional PSINet circuit fees associated with providing our off-net services comparedthe customer connection mix. Due to the year ended December 31, 2002. This decreaseincrease in circuit fees was primarily driven bythe size of our sales force, we focused not only on customers who purchase high-bandwidth connections, as we have done historically, but also on customers who purchase lower-bandwidth connections. We expect to continue to focus our sales efforts on such a broad mix of customers. Additionally, on-net customers who cancel their service from our installed base of customers, in general, have revenue per connection that is larger than new customers. These trends resulted in a reduction in the number ofto our revenue per on-net connection.


              Our off-net customers that we served during 2003 and the termination of the transitional fees related to the PSINet acquisition.

      Gross Profit.   Our gross profit, excluding amortization of deferred compensation, increased 340.0%revenues decreased 22.9% from $2.8$44.6 million for the year ended December 31, 20032005 to $12.4$34.4 million for the year ended December 31, 2004. The $9.6 million increase is2006 primarily attributed to our $7.5 millionbecause a December 2004 acquisition of off-net customers resulted in a substantial increase in netthe number of our off-net customers in 2005 and many of these acquired customers either cancelled service revenue.

      Selling, General, and Administrative Expenses.   or re-priced their contracts at lower rates. Our SG&A expenses, excluding the amortization of deferred compensation,off-net customer connections declined from approximately 4,000 at December 31, 2005 to approximately 3,500 at December 31, 2006. Our non-core revenues decreased 20.7%23.4% from $33.5$12.2 million for the year ended December 31, 20022005 to $26.6$9.4 million for the year ending December 31, 2006. The number of our non-core customer connections declined from approximately 1,300 at December 31, 2005 to approximately 1,000 at December 31, 2006. We do not actively market these acquired non-core services.

              Network Operations Expenses.    Our network operations expenses, excluding equity-based compensation expense, decreased 6.6% from $85.8 million for the year ended December 31, 2003. SG&A for the years ended December 31, 2002 and December 31, 2003 included approximately $3.2 million and $3.9 million, respectively, of expenses related2005 to our allowance for uncollectable accounts. The decrease in SG&A expenses was due to a reduction in transitional activities associated with the Allied Riser, PSINet and FNSI acquisitions and a decrease in headcount during 2003 as compared to 2002.

      Amortization of Deferred Compensation.   The amortization of deferred compensation increased from $3.3$80.1 million for the year ended December 31, 20022006. The decrease is primarily attributable to $18.7a decline in leased circuit costs related to the decline in off-net revenues. We provide Internet connectivity to our off-net customers using other carriers' facilities to provide the last mile portion of the link from our customers' premises to our network and incur leased circuit costs to provide these services.

              Gross Profit.    Our gross profit, excluding equity-based compensation expense, increased 39.6% from $49.4 million for the year ended December 31, 2005 to $69.0 million for the year ended December 31, 2006. We determine gross profit by subtracting network operations expenses, excluding equity-based compensation expense, from our net service revenue and do not allocate depreciation and amortization expense to our network operations expense. The increase is primarily attributed to the increase in higher gross margin on-net revenues as a percentage of net service revenue. Our gross profit margin expanded from 36.5% for the year ended December 31, 2005 to 46.3% for the year ended December 31, 2006. Our gross profit has benefited from the limited incremental expenses associated with providing service to an increasing number of on-net customers and the decline in off-net revenues which carry a lower gross margin due to the associated leased circuit required to provide this service. Our gross profit margin may be impacted by the timing and amounts of disputed circuit costs. We 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 been otherwise resolved.

              Selling, General, and Administrative Expenses ("SG&A").    Our SG&A expenses, excluding equity-based compensation expense, increased 12.7% from $41.3 million for the year ended December 31, 2005 to $46.6 million for the year ended December 31, 2006. SG&A expenses increased primarily from the increase in salaries and related costs required to support our expanding sales and marketing efforts.

              Equity-based Compensation Expense.    Equity-based compensation expense is related to restricted stock and stock options. The total equity-based compensation expense decreased 21.0% from $13.3 million for the year ended December 31, 2005 to $10.5 million for the year ending December 31, 2003.2006. The increasedecrease is primarily attributed to a $3.4 million decrease in equity-based compensation expense associated with certain 2003 restricted stock grants which ended in August 2006 when these shares became fully vested. Equity-based compensation expense for the amortizationyear ended December 31, 2006 includes $0.7 million in compensation costs associated with the adoption of deferred compensation related to restricted shares of Series H preferred stock granted to our employees primarily in October 2003 under our 2003 Incentive Award Plan.Statement No. 123 (revised 2004),Share-Based Payment ("SFAS 123(R)") on January 1, 2006 using the modified-prospective-transition method.

      Depreciation and Amortization Expenses.Our depreciation and amortization expensesexpense increased 42.4%5.1% from $34.0$55.6 million for the year ended December 31, 20022005 to $48.4$58.4 million for the year ended December 31, 2003. This increase occurred primarily because we had more capital equipment and IRUs in service in 2003 than in the 2002. The increase was also attributable2006 due to an increase in amortizationdeployed fixed assets. In the fourth quarter of 2005, we revised the number of lease renewal periods used in determining the lease term for purposes of amortizing certain of our leasehold improvements. This resulted in a net increase in depreciation expense in the 2003 period over 2002. Amortization expense increased because we had more intangible assets during 2003 than in 2002.

      Settlement of Allied Riser Noteholder Litigation and Gain on Note Exchange.   In connection with the note exchange and settlement with certain Allied Riser note holders we recorded a gain of approximately $24.8 million during the year ended December 31, 2003. The gain resulted from the difference between the $36.5 million net book value of the notes ($106.7 million face value less an unamortized discount of $70.2 million) and $2.0 million of accrued interest and the consideration of approximately $5.0 million in$3.0 million.


              Lease restructuring charge.    In 2004, we abandoned the Paris office obtained in our Cogent Europe acquisition and located these operations in another Cogent Europe facility. In 2005, we revised our estimate for sublease income, and recorded an additional $1.3 million restructuring charge.

      cash        Gains—lease obligations, asset sales and debt restructurings.    In September 2005, Cogent Spain negotiated modifications to an IRU capital lease that reduced its quarterly IRU lease payments and extended the $8.5 million estimated fair market value for the Series D and Series E preferred stock issuedlease term. The modification to the noteholders less approximately $0.2 million of transaction costs.

      Gain on Cisco Recapitalization.   The restructuring of our previous Cisco credit facility on July 31, 2003IRU capital lease resulted in a gain of approximately $215.4$0.8 million. OnIn June 2005, we repaid our $17.0 million amended and restated Cisco note. The repayment resulted in a basic income and diluted income per share basisgain of $0.8 million representing the gain was $27.15 and $27.14 for the year ended December 31, 2003, respectively.

      Net (Loss) Income.   As a resultamount of the foregoing,estimated future interest payments that were not required to be paid. In 2005, we incurredsold a building and land for net proceeds of $5.1 million. This sale resulted in a gain of approximately $3.9 million.

              In September 2006, Cogent Spain negotiated modifications to an IRU capital lease that reduced its quarterly IRU lease payments and extended the lease term. The modification to this IRU capital lease resulted in a gain of approximately $0.3 million. In 2006, we sold another building and land for net proceeds of $0.8 million. This sale resulted in a gain of approximately $0.3 million.

              Net Loss.    Our net loss of $(91.8)was $67.5 million for the year ended December 31, 2002 and2005 as compared to a net incomeloss of $140.7$53.8 million for the year ended December 31, 2003.2006. Our net loss decreased by $13.8 million primarily due to a $19.5 million increase in our gross profit partially offset by a $5.2 million increase in SG&A, and a $2.8 million increase in depreciation and amortization expense. Included in net loss for the year ended December 31, 2005 is a $1.3 million lease restructuring charge and gains of approximately $5.1 million. Included in net loss for the year ended December 31, 2006 are gains of approximately $0.5 million.

              Buildings On-net.    As of December 31, 2005 and 2006 we had a total of 1,040 and 1,107 on-net buildings connected to our network, respectively.

      Liquidity and Capital Resources

      In assessing our liquidity, our management reviews and analyzes our current cash on-hand, ourbalances, short-term investments, accounts receivable, accounts payable, foreign exchange rates,accrued liabilities, capital expenditure commitments, and our required capital lease and debt payments and other obligations.

      During 2003, 2004 and 2005, we engaged in a series of transactions pursuant to which we significantly reduced our indebtedness and/or improved our liquidity. These included the following:

      ·       On March 30, 2005, Cogent France sold its building located in Lyon, France for net proceeds of approximately $5.1 million.

      ·       On March 9, 2005, we entered into a line of credit with a commercial bank. The line of credit provides for borrowings of up to $10.0 million and is secured by our accounts receivable. On March 18, 2005, we borrowed $10.0 million against our North American accounts receivable under the line of credit. Of this amount $4.0 million is restricted and held by the lender.

      ·       On February 24, 2005, we issued a subordinated note in the principal amount of $10.0 million to Columbia Ventures Corporation in exchange for $10 million in cash.

      ·       During 2004, in connection with our acquisitions of Aleron and UFO Group and the acquisition of our European Network, we acquired cash totaling approximately $42.2 million.

      ·       In March 2004, Cogent France reduced its obligation under its intra-city IRU by approximately $2.6 million.Cash Flows

      ·       In November 2004, Cogent Spain reduced its quarterly IRU lease payments, modified its payments and eliminated accrued and future interest on its note obligation resulting in a gain of approximately $5.2 million.

      ·In July 2003, we reduced the $269.1 million in principal amount of then-outstanding indebtedness and accrued interest under our Cisco Credit facility in exchange for a cash payment of $20.0 million, the issuance of 11,000 shares of our Series F preferred stock and the issuance of a $17.0 million Amended and Restated Promissory Note.

      ·       In March 2003, we entered an agreement with the holders of approximately $106.7 million in face value of 71¤2% Convertible Subordinated Notes pursuant to which the noteholders agreed to surrender their notes, including accrued and unpaid interest, in exchange for a cash payment of $5.0 million and the issuance of 3.4 million shares each of our Series D and Series E preferred stock and to dismiss with prejudice their litigation against Allied Riser, in exchange for a cash payment of $4.9 million.


      Cash Flows

      The following table sets forth our consolidated cash flows for the years ended December 31, 2002, 2003,2005, 2006, and 2004.2007.

       

       

      Year Ended December 31,

       

       

       

      2002

       

      2003

       

      2004

       

       

       

      (in thousands)

       

      Net cash used in operating activities

       

      $

      (41,567

      )

      $

      (27,357

      )

      $

      (26,425

      )

      Net cash used in by investing activities

       

      (19,786

      )

      (25,316

      )

      (2,701

      )

      Net cash provided by financing activities

       

      51,694

       

      20,562

       

      34,486

       

      Effect of exchange rates on cash

       

      (44

      )

      672

       

      609

       

      Net (decrease) increase in cash and cash equivalents during period

       

      $

      (9,703

      )

      $

      (31,439

      )

      $

      5,969

       

       
      		 Year Ended December 31,
      		 
       
      		 2005
      		 2006
      		 2007
      		 
       
      		 (in thousands)

      		 
      Net cash (used in) provided by operating activities $(9,062)$5,285 $48,630 
      Net cash used in investing activities  (14,055) (19,478) (30,864)
      Net cash provided by financing activities  39,824  27,045  116,305 
      Effect of exchange rates on cash  (668) (93) 308 
        
      		 
      		 
      		 
      Net increase in cash and cash equivalents during period $16,039 $12,759 $134,379 
        
      		 
      		 
      		 

      Net Cash Used in(Used in) Provided By Operating Activities.Net cash used in operating activities was $27.4 million for the year ended December 31, 2003 compared to $26.4 million for 2004.    Our primary sources of operating cash are 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 and employees. Our net incomeNet cash used in operating activities was $140.7$9.1 million for the year ended December 31, 20032005 compared to net cash provided by operating



      activities of $5.3 million for 2006. The increase in cash provided by operating activities was due to an increase in our operating profit partly offset by changes in operating assets and liabilities from a net lossuse of $89.7cash of $7.2 million for the year ended December 31, 2004. Net income for the year ended December 31, 2003 included2005 to a non-cash gainuse of $24.8 million related to our settlement with certain Allied Riser note holders and a non-cash gaincash of $215.4 million related to the restructuring of our Cisco credit facility. Net income for the year ended December 31, 2004 included a non-cash gain of $5.3 million related to our restructuring of certain lease obligations. Depreciation and amortization, including the amortization of deferred compensation and the debt discount on the Allied Riser notes was $70.2$11.6 million for the year ended December 31, 2003, and $70.02006. Net cash provided by operating activities was $5.3 million for the year ended December 31, 2004. Net2006 compared to net cash provided by operating activities of $48.6 million for 2007. The increase in cash provided by operating activities is due to an increase in our operating profit and an improvement in the changes in current inoperating assets and liabilities resulted in an increase to operatingfrom a use of cash of $1.9$11.6 million for the year ended December 31, 2003 and a decrease in operating2006 to an increase of cash of $0.6$4.9 million for the year ended December 31, 2004. Payments for accounts payable2007. The increase in the changes in operating assets and accrued liabilities approximated collections of accounts receivable forfrom the year ended December 31, 2003 and payments for accounts payable and accrued liabilities exceeded collections2006 to the year ended December 31, 2007 was primarily due to the timing of accounts receivable by $4.4certain vendor payments.

              Net Cash Used In Investing Activities.    Net cash used in investing activities was $14.1 million for the year ended December 31, 2004.

      Net cash used in operating activities was $41.62005, $19.5 million for the year ended December 31, 2002 compared to $27.42006 and $30.9 million for the year ended December 31, 2003. Net loss was $91.8 million for the year ended December 31, 2002. Net income was $140.7 million for the year ended December 31, 2003. Our net loss for the year ended December 31, 2002 includes an extraordinary gain of $8.4 million related to the Allied Riser merger. Net income for the year ended December 31, 2003 includes a non-cash gain of $215.4 million related to the restructuring of our credit facility with Cisco Capital and a $24.8 million non-cash gain related to the exchange of Allied Riser subordinated convertible notes. Depreciation and amortization including amortization of debt discount and deferred compensation was $45.9 million for the year ended December 31, 2002 and $70.2 million for the year ended December 31, 2003. Net changes in current assets and liabilities resulted in an increase to operating cash of $18.5 million for the year ended December 31, 2002 and an increase to operating cash of $1.9 million for the year ended December 31, 2003. Payments for accounts payable and accrued liabilities exceeded collections of accounts receivable by $16.2 million for the year ended December 31, 2002. Payments for accounts payable and accrued liabilities approximated collections of accounts receivable for the year ended December 31, 2003.

      Net Cash Used In By Investing Activities.   Net cash used in investing activities was $19.8 million for the year ended December 31, 2002, $25.3 million for the year ended December 31, 2003 and $2.7 million for the year ended December 31, 2004.2007. Our primary uses of investing cash during 20022005 were $75.2$17.3 million for the purchase of property and equipment, $9.6$0.9 million for the final payment on the purchase of intangible assetsa network in connection


      with our PSINet acquisition, $3.6 million in connection with our acquisition of the minority interest in Cogent Canada, Inc.Germany and $1.8$0.8 million for the net purchases of short termshort-term investments. Cash expenditures were partially offset during 2002 by the $70.4 million of cash and cash equivalents that we acquired in connection with the Allied Riser merger. Our primary useuses of investing cash during 2003 was $24.02006 were $21.5 million for the purchase of property and equipment in connection with the deployment of our network.equipment. Our primary uses of investing cash during 20042007 were $2.4$30.4 million for the purchase of property and equipment and $1.9$0.7 million for the purchasepurchases of a networkshort-term investments. Our primary source of investing cash in Germany.2005 was $5.1 million from the proceeds of the sales of assets. Our primary sources of investing cash in 2006 were $2.3$1.2 million from the proceeds of cash acquired from our acquisitions of Cogent Europeshort-term investments and Global Access and $6.8$0.9 million from the proceeds of the salesales of assets. Our primary source of investing cash in 2007 was $0.3 million from the proceeds of the sales of assets. The increase in purchases of property and equipment short term investments and a warrant.from the year ended December 31, 2006 to the year ended December 31, 2007 is primarily due to our increase in our network expansion activities.

      Net Cash Provided by Financing Activities.Financing activities provided net cash of $51.7$39.8 million for the year ended December 31, 2002, $20.62005, $27.0 million for the year ended December 31, 20032006 and $34.5$116.3 million for the year ended December 31, 2004. Net cash provided by financing activities during 2002 resulted principally from borrowings under our previous Cisco credit facility of $54.4 million, partially offset by $2.7 million in capital lease repayments. Net cash provided by financing activities during 2003 resulted principally from borrowings under our previous Cisco credit facility of $8.0 million and net proceeds of $40.6 million from the sale of our Series G preferred stock, partially offset by a $5.0 million payment related to the Allied Riser note exchange, a $20.0 million payment to Cisco Capital in connection with the Cisco recapitalization and $3.1 million in capital lease repayments.2007. Net cash from financing activities during 20042005 resulted from $42.4$63.7 million of acquired cash related tonet proceeds from our mergers with Symposium Gamma, Symposium Omega, UFO Group,June 2005 public offering, $10.0 million from the issuance of our subordinated note and Cogent Potomac.$10.0 million borrowed under our credit facility. Net cash used in financing activities for 2004 include a $1.22005 included $17.0 million payment to LNG Holdingsfor the repayment of our Cisco note, $10.0 million for the repayment of our subordinated note, $10.0 million for the repayment of the amount outstanding under our credit facility and $6.6$6.9 million forin principal payments under our capital leases. Net cash from financing activities during 2006 resulted from $36.5 million of net proceeds from our June 2006 public offering and $0.4 million from the proceeds from the exercises of stock options. Net cash used in financing activities for 2006 included $9.9 million in principal payments under our capital leases. Our primary source of financing cash for the year ended December 31, 2007 was $195.1 million of net proceeds from the issuance of our 1.00% Convertible Senior Notes and $1.1 million of proceeds from the exercises of stock options. Our primary use of financing cash for the year ended December 31, 2007 was $59.9 million for the purchase of shares of our common stock, $10.2 million for the repayment of our convertible subordinated notes on their June 15, 2007 maturity date and $9.8 million of principal payments under our capital lease obligations.

      Cash Position and Indebtedness

      Our total indebtedness, net of discount, at December 31, 2002, 2003 and 20042007 was $347.9 million, $83.7$288.4 million and $126.4 million, respectively. At December 31, 2004, our total cash and cash equivalents and short-term investments were $13.8$177.8 million. Our total indebtedness at December 31, 20042007 includes $103.4$92.6 million of the present value of capital lease obligations for dark fiber primarily under 15-25 year IRUs, of which approximately $7.5$7.7 million is considered a current liability.


      Subordinated NoteConvertible Senior Notes

      On February 24, 2005,        In June 2007, we issued a subordinated note in the1.00% Convertible Senior Notes (the "Notes") due June 15, 2027, for an aggregate principal amount of $10.0 million to Columbia Ventures Corporation in exchange for $10$200.0 million in cash. The note was issueda private offering for resale to qualified institutional buyers pursuant to a Note Purchase Agreement dated February 24, 2005. Columbia Ventures Corporation is owned by oneSEC Rule 144A. The Notes are unsecured and bear interest at 1.00% per annum. The 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 Company’s directorsvalue of the collateral. Interest is payable in cash semiannually in arrears on June 15 and shareholders. The note has an initial interest rate of 10% per annum and the interest rate increases by one percent on August 24, 2005, six months after the note was issued, and by a further one percent at the endDecember 15, of each successive six-month period up to a maximumyear, beginning on December 15, 2007. We received proceeds of 17%. Interest onapproximately $195.1 million after deducting the note accruesoriginal issue discount of 2.25% and is payable on the note’s maturity date of February 24, 2009.issuance costs. We may prepay the note in whole or in part at any time. The termsused $10.6 million of the note require the payment of allproceeds to repay principal and accrued interest on our existing convertible subordinated notes on June 15, 2007 and approximately $50.1 million to repurchase approximately 1.8 million shares of our common stock. These 1.8 million common shares were subsequently retired. We intend to use the remaining proceeds for general corporate purposes and to fund additional purchases of our common stock.

              The 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 Notes, subject to adjustment for certain events as set forth in the indenture. Upon conversion of the 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 Notes are convertible (i) during any fiscal quarter 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 price of the Notes falls below a certain threshold, or (iv) if we call the 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 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, or approximately 7.1 million shares. The Notes include an "Irrevocable Election of Settlement" whereby we may choose, in our sole discretion, and without the consent of the holders of the Notes, to waive our right to settle the conversion feature in either cash or stock or in any combination, at our option.

              The Notes may be redeemed by us at any time after June 20, 2014 at a redemption price of 100% of the principal amount plus accrued interest. Holders of the Notes have the right to require us 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 liquidity event, which is defined as an equity offeringredemption price of at least $30 million in net proceeds. Our Public Offering would constitute a liquidity event and would require us100% of the principal amount plus accrued interest.

              Under the terms of the Notes, we are required to use reasonable efforts to file and maintain a shelf registration statement with the SEC covering the resale of the Notes and the common stock issuable on the conversion of the Notes. If we fail to meet these terms, we will be required to pay special interest on the Notes 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. We filed a shelf registration statement registering the Notes and common stock issuable on conversion of the Notes in July 2007.

      Convertible Subordinated Notes

              Our $10.2 million 7.50% convertible subordinated notes were due on June 15, 2007. These notes and accrued interest were paid on June 15, 2007 with a portion of the proceeds offrom the offering to repay the principal and accrued interest on the note. The note is subordinated to the debt evidenced by the Amended and Restated Cisco Note, as well as our accounts receivable line of credit obtained in March 2005. Management believes that the terms of the note are at least as favorable as those we would have been able to obtain from an unaffiliated third party.Notes.


      Credit Facility

              

      Line of Credit

      On March 9, 2005, we entered into a line of credit facility with a commercial bank. The linecredit facility expired on April 1, 2007.

      Second $50.0 Million Common Stock Buyback Program

              In August 2007, our board of credit provides for borrowings ofdirectors approved a common stock buyback program. Under the buyback program we are authorized to purchase up to $10.0$50.0 million and is secured byof our accounts receivable. The borrowing base is determined primarily by the aging characteristics relatedcommon stock prior to December 31, 2008. During 2007, we purchased 445,990 shares of our accounts receivable. On March 18, 2005, we borrowed $10.0common stock at an average price of $22.19 per share for approximately $9.9 million against our North American accounts receivable under the lineprogram. From January 1, 2008 to February 26, 2008, we purchased 689,000 additional shares of credit. Of this amount $4.0our common stock at an average price of $18.59 per share for approximately $12.8 million is restricted and held by the lender. Borrowings under the line of credit accrue interest at the prime rate plus 1.5% and may, in certain circumstances, be reduced to the prime rate plus 0.5%. Our obligations under the line of credit are secured by a first priority lien in certain of our accounts receivable and are guaranteed by our material domestic subsidiaries. The agreements governing the line of credit contain certain customary representations and warranties, covenants, notice provisions and events of default.program. All purchased common shares were subsequently retired.

      Amended and Restated Cisco Note

      In connection with the Cisco recapitalization, we amended our credit agreement with Cisco Capital. The Amended and Restated Credit Agreement became effective at the closing of the recapitalization on July 31, 2003. Our remaining $17.0 million of indebtedness to Cisco is evidenced by a promissory note, which we refer to as the Amended and Restated Cisco Note. The Amended and Restated Cisco Note eliminated the covenants related to our financial performance. Cisco Capital retained its senior security interest in substantially all of our assets, except that we are permitted to subordinate Cisco Capital’s security interest in our accounts receivable.

      The Cisco recapitalization was considered a troubled debt restructuring under Statement of Financial Accounting Standards (SFAS) No. 15, Accounting by Debtors and Creditors of Troubled Debt Restructurings. Under SFAS No. 15, the Amended and Restated Cisco Note was recorded at its principal amount of $17.0 million plus the estimated future interest payments of $0.8 million.

      Convertible Subordinated Notes.

      In connection with the March 2003 exchange and settlement related to our Convertible Subordinated Notes, we eliminated $106.7 of principal and $2.0 million of accrued interest. The terms of the remaining $10.2 million of Convertible Subordinated Notes were not impacted by the exchange and settlement and they continue to be due on June 15, 2007.

      Contractual Obligations and Commitments

      The following table summarizes our contractual cash obligations and other commercial commitments as of December 31, 2004:2007.

       

       

      Payments due by period

       

       

       

      Total

       

      Less than
      1 year

       

      1-3 years

       

      4-5 years

       

      After
      5 years

       

       

       

      (in thousands)

       

      Long term debt

       

      $

      28,033

       

      $

      —

       

      $

      23,010

       

      $

      5,023

       

      $

      —

       

      Capital lease obligations

       

      169,296

       

      15,938

       

      27,602

       

      23,117

       

      102,639

       

      Operating leases(1)

       

      196,707

       

      27,283

       

      42,767

       

      30,551

       

      96,106

       

      Unconditional purchase obligations

       

      3,956

       

      264

       

      528

       

      528

       

      2,636

       

      Total contractual cash obligations

       

      397,992

       

      43,485

       

      93,907

       

      59,219

       

      201,381

       

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

      Long term debt(1) $213,000  2,000  4,000  4,000  203,000
      Capital lease obligations  154,705  15,651  28,919  21,612  88,523
      Operating leases(2)  224,710  34,669  54,836  43,034  92,171
      Unconditional purchase obligations(3)  47,722  15,734  3,780  3,770  24,438
        
      		 
      		 
      		 
      		 
      Total contractual cash obligations $640,137 $68,054 $91,535 $72,416 $408,132
        
      		 
      		 
      		 
      		 

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

      (2)
      These amounts include $199.3$225.4 million of operating lease, maintenance, building access and tenant license agreement obligations, reduced by sublease agreements of $2.6$0.7 million.



      (3)
      As of December 31, 2007, we had committed to additional dark fiber IRU lease agreements totaling approximately $40.4 million in future payments for fiber lease and maintenance services. These amounts are included in unconditional purchase obligations and are to be paid in periods of up to 20 years beginning once the related fiber is accepted.

      Capital Lease Obligations.The capital lease obligations above were incurred in connection with our 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 $103.4$92.6 million at December 31, 2004.2007. These leases generally have terms of 15 to 25 years.

      Letters of Credit.    We are also party to letters of credit totaling $1.7$1.0 million at December 31, 2004.2007. These obligations are fully secured by our restricted investments, and as a result, are excluded from the contractual cash obligations above.


      Future Capital Requirements

      We believe that our cash on hand which includesand cash obtained in 2005generated from our line of credit, subordinated note and building sale, together with cash flows from operations,operating activities will be adequate to meet our working capital, capital expenditure, debt service, common stock buyback program and other cash requirements for the foreseeable future if we execute our business plan. Our business plan assumes, among other things, the following:

      ·       our ability to maintain or increase the size of our current customer base; and

      ·       our ability to achieve expected cost savings as a result of the integration of our recent acquisitions into our business.

      Additionally, any        Any future acquisitions or other significant unplanned costs or cash requirements 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 that we serve, reduce our planned increase in our sales and marketing efforts, suspend or terminate our stock buyback program, 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 additional funds are raised by issuing equity securities raises additional funds, substantial dilution to existing stockholders may result.

      We may elect to purchase or otherwise retire the remaining $10.2 million face value of Allied Riser notes with cash, stock or assets from time to time in open market or privately negotiated transactions, either directly or through intermediaries where we believe that market conditions are favorable to do so. Such purchases may have a material effect on our liquidity, financial condition and results of operations.

      Public Offering

      On February 14, 2005, we filed a registration statement on a Form S-1 with the Securities and Exchange Commission relating to the sale of up to $86.3 million of our common stock in our Public Offering. There can be no assurances that the offering will be completed.

      Off-Balance Sheet Arrangements

      We do not have any 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 taxes

              Due to the uncertainty surrounding the realization of our net deferred tax asset, consisting primarily of net operating loss carry-forwards, we have recorded a valuation allowance for the full amount of our net deferred tax asset. Should we achieve taxable income, our deferred tax assets may be available to offset future income tax liabilities. We have combined net operating loss carry-forwards of approximately $1.0 billion. The federal and state net operating loss carry-forwards for the United States of approximately $407 million expire from 2023 to 2027. We have net operating loss carry-forwards related to our European operations of approximately $600 million, of which approximately $108 million of expire beginning in 2016. The remaining $492 million of European net operating loss carry-forwards do not expire. The federal and state net operating loss carry-forwards of Allied Riser Communications Corporation of approximately $183 million are subject to certain limitations on annual utilization due to the change in ownership as a result of the merger as prescribed by federal and state tax laws. Our other net operating loss carry-forwards could also be subject to certain additional limitations on annual utilization if certain changes in ownership have occurred or were to occur as prescribed by the laws in the respective jurisdictions. Should a change in ownership occur, or have occurred, we may be unable to benefit from the full amount of these net operating loss carry-forwards.

      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. On an on-going basis, we evaluate our estimates including those related to allowances for doubtful accounts, revenue allowances, long-lived assets, contingencies and litigation, and the carrying values of 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 andor that require complex, significant and subjective management judgments are discussed below. We have not experienced significant revisions to our assumptions except to the extent that they result from (1) variations in the trading price of our common stock which has caused us to revise the assumptions that we use in determining deferred compensation, (2) changes in the amount and aging of our accounts receivable which have caused us to revise the assumptions that we use in determining our allowance for doubtful accounts, (3) changes in interest rates which have caused us to revise the assumptions that we use in determining the present value of future minimum lease payments and (4) changes in estimated sub-lease income which has caused us to revise our restructuring accrual.

      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 or ratably over the estimated customer life.granted. Fees billed in connection with customer installations and other upfront charges are deferred and recognized ratably over the estimated customer life. We determine the estimated customer life using a historical analysis of customer retention. If our estimated customer life increases, we will recognize installation revenue over a longer period. We expense direct costs associated with sales as incurred.

      Allowances for Sales Credits and Unfulfilled Customer Purchase Obligations

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

      ·

        •
        Our allowance for sales credit adjustmentscredits is designed to account for reductionsrecorded as a reduction to our service revenue that occurto provide for situations when customers are granted a service termination of service adjustment for amounts billed in advance or a service level agreement credit or discount. This allowance is provided for by reducing our gross service revenue and is determined by actual credits granted during the period and an estimate of unprocessed credits. At any point in time this allowance is determined by the amount and nature of credits granted prior to the balance sheet date.

        ·

        •
        Our allowance for unfulfilled contractual customer purchase obligations is designed to account for the possible non-payment of amounts under agreements that we have with certain of our customers that place minimum purchase obligations on them. Although we vigorously seek payments due pursuant to these purchase obligations, we have historically collected only approximately 4%a small portion of these payments.billed obligations. In order to allow for this, we reduce our gross service revenue by the amount that has been invoiced to these customers. We reduce this allowance and recognize the related service revenue only upon the receipt of cash payments in respect of these invoices. At any point in time thisThis allowance is determined by the amount of unfulfilled contractual purchase obligations invoiced to our customers and with respect to which we are continuing to seek payment. Once we submit these accounts receivable to a third party collection agency, this allowance is reduced.


      Valuation Allowances for Doubtful Accounts Receivable and Deferred Tax Assets

      We have established allowances that we use in connection with valuing expense charges associated with uncollectible accounts receivable and our deferred tax assets.

      ·

        •
        Our valuation allowance for uncollectible accounts receivable is designed to account for the expense associated with writing off accounts receivable that we estimate will not be collected. We provide for this by increasing our selling, general and administrative expenses by the amount of receivables that we estimate will not be collected. We assess the adequacy of this allowance monthly by evaluating general factors, such as the length of time individual receivables are past due, historical collection experience, the economic and competitive environment, and changes in the credit-worthiness of our customers. We also assess the ability of specific customers to meet their financial obligations to us and establish specific allowances based on the amount we expect to collect from these customers. As of December 31, 2002, 2003 and 2004, respectively, our allowance for doubtful accounts receivable comprised, 26.8%, 36.1% and 19.2% of our total accounts receivable. For the years ended December 31, 2002, 2003 and 2004, our allowance for doubtful accounts expense accounted for 8.8%, 8.8% and 7.7% of our total SG&A expenses, respectively.

        ·

        •
        Our valuation allowance for our net deferred tax asset is designed to take into accountreflects the uncertainty surrounding the realization of our net operating lossesloss carry-forwards and our other deferred tax assets in the event that we record positive income for income tax purposes.assets. For federal and state tax purposes, our net operating loss carry-forwards, including those that we have generated through our operations and those acquired in the Allied Riser merger could be subject to significant limitations on annual use. To accountreflect for this uncertainty and the uncertainty

          of future taxable income we have recorded a valuation allowance for the full amount of our net deferred tax asset. As a result the value of our deferred tax assets on our balance sheet is zero.

      Impairment of Long-Lived Assets

      We review our long-lived assets, including property and equipment, and intangible assets with definite useful lives to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount should be addressed pursuant to the Financial Accounting Standards Board’sBoard's (FASB) Statement of Financial Accounting Standards (SFAS) No. 144,Accounting for the Impairment or Disposal of Long-Lived Assets. Pursuant to SFAS No. 144, impairment is determined by comparing the carrying value of these long-lived assets to our best estimate of future undiscounted cash flows expected to result from the use of the assets and their eventual disposition over the remaining useful life of the primary asset in the asset group. As of December 31, 2003 and December 31, 2004, we tested our long-lived assets for impairment.assets. In the event that there are changes in the planned use of our long-lived assets, or our expected future undiscounted cash flows are reduced significantly, our assessment of our ability to recover the carrying value of these assets under SFAS No. 144 could change. BecauseNo impairment existed at December 31, 2006 or 2007.

      Convertible Senior Notes

              We evaluated the embedded conversion option of our best estimate1.00% Convertible Senior Notes (the "Notes") in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", EITF Issue No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's Own Stock" and EITF Issue No. 01-6 "The Meaning of undiscounted cash flows generated from these assets exceeds their carrying valueIndexed to a Company's Own Stock." We concluded that the embedded conversion option contained within the Notes should not be accounted for eachseparately because the conversion option is indexed to our common stock and would be classified within stockholders' equity, if issued on a standalone basis.

              We evaluated the terms of the periods presented,Notes for a beneficial conversion feature in accordance with EITF No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and EITF No. 00-27, "Application of Issue 98-5 to Certain Convertible Instruments." We concluded that there was no impairment pursuant to SFAS No. 144 exists. However, becausebeneficial conversion feature at the commitment date based on the conversion rate of the significant difficulties confrontingNotes relative to the telecommunications industry,commitment date stock price. We will continue to evaluate potential future beneficial conversion charges based upon potential future triggering conversion events.

      Equity-based Compensation

              Generally we believe that currentlygrant options for shares of our common stock to all new employees with a strike price equal to the market value at the grant date. We grant shares of restricted stock to our senior management team, board of directors and to certain employees who have met our service requirements on the grant date. We determine the fair value of grants of restricted stock by the closing trading price of our long-lived assets includingcommon stock on the grant date. Grants of shares of restricted stock vest over periods ranging from immediate vesting to over a four-year period. Compensation expense for all awards is recognized ratably over the service period.

              Effective January 1, 2006, we adopted FASB Statement No. 123(R),Share-Based Payment ("Statement 123(R)"), using the modified-prospective-transition method. The adoption of Statement 123(R) requires us to make additional estimates and judgments that affect our network assetsfinancial statements. These estimates include the following which impact the amount of compensation expense recorded under Statement 123(R).

          Expected Dividend Yield—We have never declared or paid dividends and IRUs are significantly belowhave no plans to do so in the amounts we originally paid for them and may beforeseeable future.


          Expected Volatility—We use the historical volatility since our June 2005 public offering to estimate expected volatility because less than their current depreciated cost basis. Our best estimate of future undiscounted cash flows is sensitive to changes in our estimated cash flows and any change in the lease period or in the designation3% of our primary asset infully diluted shares were publicly traded before that date.

          Risk-Free Interest Rate—We use the asset group.zero coupon U.S. Treasury rate during the quarter having a term that most closely resembles the expected term of the option.

          Business CombinationsExpected Term of the Option—We estimate the expected life of the option term by analyzing historical stock option exercises and other relevant data.

          Forfeiture Rates—We account for our business combinations pursuant to SFAS No. 141, Business Combinations. Under SFAS No. 141 we allocateestimate the cost of an acquired entityforfeiture rate based on historical data with further consideration given to the assets acquired and liabilities assumed


          based upon their estimated fair values atclass of employees to whom the date of acquisition. Intangible assets are recognized when they arise from contractual or other legal rights or if they are separable as defined by SFAS No. 141. We determine estimated fair values using quoted market prices, when available, present values determined at appropriate current interest rates, or multiples of monthly revenue for certain customer contracts. Consideration not in the form of cash is measured based upon the fair value of the consideration given.options were granted.

          Goodwill and Other Intangibles

        We account for our intangible assets pursuant to SFAS No. 142, Goodwill and Other Intangible Assets. Under SFAS No. 142 we determine the useful lives of our intangible assets based upon the expected use of the intangible asset, contractual provisions, obsolescence and other factors. We amortized our intangible assets on a straight-line basis. We presently have no intangible assets that are not subject to amortization.

        Other Accounting Policies

      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 that are reasonably assured in accordance with SFAS No. 13Accounting for Leases. We estimate the fair value of leased assets using market data for similar assets.

      We capitalize the direct costs incurred prior to an asset being ready for service as construction-in-progress. Construction-in-progress includesservice. These costs incurredinclude costs under the related construction contract interest, and the salaries and benefitscompensation costs of employees directly involved with construction activities. Our capitalization of these costs is sensitive to the percentagebased upon estimates of time and number offor our employees involved in construction activities.

              We estimate our litigation accruals based upon our estimate of the expected outcome after consultation with legal counsel.

              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 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.

      We estimate the fair market valueuseful lives of our Series H preferred stockproperty and equipment based upon historical usage with consideration given to technological changes and trends in the industry that could impact the asset utilization. We establish the number of common sharesrenewal option periods used in determining the Series H preferred stock converts intolease term, if any, for amortizing leasehold improvements based upon our assessment at the inception of the lease of the number of option periods that are reasonably assured in accordance with SFAS No. 13Accounting for Leases.

      Recent Accounting Pronouncements

              In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. In February 2008, the FASB issued FSP No. 157-1, "Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13" and FSP No. 157-2, "Effective Date of FASB Statement No. 157" as amendments to SFAS 157, which exclude lease transactions from the scope of SFAS 157 and also defer the effective date of the adoption of SFAS 157 for non-financial assets and non-financial liabilities that are nonrecurring. The provisions of SFAS 157 are effective for the fiscal year beginning January 1, 2008, except for certain non-financial assets and liabilities for which the effective date has been deferred to January 1, 2009. The adoption of SFAS 157 and its related



      pronouncements are not expected to have a material effect on our consolidated financial position, results of operations or cash flows.

              In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits entities to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 will be effective for the first fiscal year that begins after November 15, 2007. We will not adopt the alternative provided in this statement.

              In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. ("FIN") 48, "Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109." FIN No. 48 requires that management determine 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. We adopted the provisions of FIN No. 48 on January 1, 2007. As of the date of adoption of FIN No. 48, we did not have any accrued interest or penalties associated with any unrecognized tax positions, and there was no interest expense or expense associated with penalties recognized during the year ended December 31, 2007. The adoption of FIN No. 48 did not have a material effect on our results of operations or financial position.

              In June 2006, the Emerging Issues Task Force of the Financial Accounting Standards Board (the "EITF") reached a conclusion on EITF Issue No. 06-3 "How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement." The scope of EITF Issue No. 06-3 includes any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction between a seller and a customer, and may include, but is not limited to, sales, use, value added, and some excise taxes. The EITF Issue No. 06-3 requires that the presentation of taxes on either a gross basis (included in revenues and costs) or a net basis (excluded from revenues) and is an accounting policy decision that should be disclosed. We collect services and value added taxes from customers and record these amounts on a net basis, which is within the scope of EITF Issue No. 06-3. EITF Issue No. 06-3 applied to financial reports for interim and annual reporting periods beginning after December 15, 2006. The adoption of EITF Issue No. 06-3 did not have an impact on our results of operations or our financial position.

              In December 2007, the FASB issued SFAS No. 141R, "Business Combinations". SFAS 141R requires the acquiring entity in a business combination to record all assets acquired and liabilities assumed at their respective acquisition-date fair values, changes the recognition of assets acquired and liabilities assumed arising from contingencies, changes the recognition and measurement of contingent consideration, and requires the expensing of acquisition-related costs as incurred. SFAS 141R also requires additional disclosure of information surrounding a business combination, such that users of the entity's financial statements can fully understand the nature and financial impact of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The provisions of SFAS 141R will only impact us if we are party to a business combination after the pronouncement has been adopted.


      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 1.00% $200.0 million Convertible Senior Notes (the "Notes") have a fixed interest rate. The fair value of the Notes may increase or decrease for various reasons, including fluctuations in the market price of our common stock, onfluctuations in market interest rates and fluctuations in general economic conditions. Based upon the grant date. Thequoted market price at December 31, 2007, the fair market value of our Series H preferred stockNotes was approximately $184.0 million.

              Our interest income is sensitive to changes in the trading pricegeneral level of interest rates. However, based upon the nature and current level of our common stock.

      Recent Accounting Pronouncements

      In March 2004, the FASB ratified the consensuses reached by Emerging Issues Task Forceinvestments, which are primarily money market funds included in Issue No. 03-06, Participating Securitiescash and the Two-Class Method under FASB Statement No. 128 (“EITF 03-06”). EITF 03-06 clarifies the definitional issues surrounding participating securities and requires companies to restate prior earnings per share amounts for comparative purposes upon adoption. We adopted the provisions of EITF 03-06 in the second quarter of 2004, and restated our previously disclosed basic earnings per share amounts to include our participating securities in basic earnings per share when including such shares would have a dilutive effect. As a result of the adoption and for comparative purposes, basic income per share available to common shareholders decreased from $10.99 to $2.78 for the quarter ended March 31, 2003, from $271.84 to $12.64 for the quarter ended September 30, 2003, and from $229.18 to $11.18 for the year ended December 31, 2003.

      In December 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”). SFAS 123R requires all share-based payments to employees, including grants of stock options, to be recognized in the statement of operations based upon their fair values. We currently disclose the impact of valuing grants of stock options and recording the related compensation expense in a pro-forma footnote to our financial statements. Under SFAS 123R this alternativecash equivalents, we believe that there is no longer available. We will be required to adopt SFAS 123R in the third quarter of 2005 and as a result will record additional compensation expense in our statements of operations. The impact of the adoption of SFAS 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net (loss) income in the notes to our consolidated financial statements. We are currently evaluating the impact


      of the adoption of SFAS 123(R) on our financial position and results of operations, including the valuation methods and support for the assumptions that underlie the valuation of the awards.

      ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      All of our financial instruments that are sensitive to market risk are entered into for purposes other than trading. Our primary market riskmaterial interest rate exposure is related to our marketable securitiesinvestments.

      Foreign Currency Exchange Risk

              Our European and currency fluctuations of the euro and the Canadian dollar versus the United States dollar. We place our marketable securities investments in instruments that meet high credit quality standards as specified in our investment policy guidelines. Marketable securities were approximately $14.3 million at December 31, 2004, $13.8 million of which are considered cash equivalents and mature in 90 days or less and $0.5 million are short-term investments, $0.4 million of which are restricted for collateral against letters of credit. We also own commercial paper investments and certificates of deposit totaling $1.4 million that are classified as other long-term assets. These investments are also restricted for collateral against letters of credit.

      Our debt obligations at December 31, 2004 carry fixed interest rates and are not subject to changes in interest rates. Our $10.0 million line of credit which we entered into in March 2005 is indexed to the prime rate plus 1.5% and may, in certain circumstances be reduced to the prime rate plus 0.5%. Interest on our Amended and Restated Cisco Note will not accrue until February 2006, unless we default under the terms of the note. When the note accrues interest, interest accrues at the 90-day LIBOR rate plus 4.5%. Based upon the borrowing rates for debt arrangements with similar terms we estimate the fair value of our Allied Riser convertible subordinated notes at $8.6 million and the fair value of our Amended and Restated Cisco Note at $14.6 million. If interest rates were to increase by 10% we estimate that these fair values would be $8.3 million and $14.3 million, respectively.

      Our European operations expose us to potentially unfavorable adverse movements in foreign currency fluctuations andrate changes. We have not entered into forward exchange rate risk. For example, whilecontracts related to our foreign currency exposure. While we record revenues and financial results from our European and Canadian operations in euros and the Canadian dollar, respectively, these results are reflected in our consolidated financial statements in U.S. dollars. The assets and liabilities associated with our European and Canadian operations are translated into U.S. dollars and reflected in our consolidated financial statements in U.S. dollars. Therefore, our reported results are exposed to fluctuations in the exchange rates between the U.S. dollar and the euro.euro and the Canadian dollar. In particular,addition, we fund the euro-based operating expenses and associated cash flow requirements of our European operations, including IRU and expansion related obligations, in U.S. dollars. Accordingly, in the event that the euro strengthens versus the dollar to a greater extent than planned the revenues, expenses and cash flow requirementsflows associated with our European operations may be significantly higher in U.S.-dollar terms than planned.


      37



      ITEM 8.    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


      		Page

      Report of Independent Registered Public Accounting Firm

      39

      41

      Consolidated Balance Sheets as of December 31, 20032006 and 2004

      2007

      40

      42

      Consolidated Statements of Operations for the years endedYears Ended December 31, 2002,2005, December 31, 20032006 and December 31, 2004

      2007

      41

      43

      Consolidated Statements of Changes in Stockholders’Stockholders' Equity for the years endedYears Ended December 31, 2002,2005, December 31, 20032006 and December 31, 2004

      2007

      42

      44

      Consolidated Statements of Cash Flows for the years endedYears Ended December 31, 2002,2005, December 31, 20032006 and December 31, 2004

      2007

      45

      46

      Notes to Consolidated Financial Statements

      47


      38



      Report of Independent Registered Public Accounting Firm

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

      We have audited the accompanying consolidated balance sheets of Cogent Communications Group, Inc. and subsidiaries (the “Company”"Company") as of December 31, 20042006 and 2003,2007, and the related consolidated statements of operations, changes in stockholders’stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2004.2007. Our audits also included the financial statement schedulesschedule listed in the index at Item 15(a)2. These financial statements and schedulesschedule are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these financial statements and schedulesschedule 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,statements. An audit also includes assessing the accounting principles used and significant estimates made by management, andas 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, Inc. and subsidiaries at December 31, 20042006 and 2003,2007, and the consolidated results of their operations and their cash flows for the each of the three years in the period ended December 31, 2004,2007, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedules,schedule, when considered in relation to the basic financial statements taken as a whole, presentpresents fairly in all material respects the information set forth therein.

      As discussed in Note 1 to the consolidated financial statements, in 20042006, the Company adopted Emerging Issues Task Force IssueStatement of Financial Accounting Standards No. 03-06, Participating Securities123(R), Share Based Payment.

              We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cogent Communications Group, Inc.'s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and the Two Class Method under FASB Statement No. 128.our report dated February 26, 2008 expressed an unqualified opinion thereon.

      /s/ Ernst & Young LLP

      McLean, VA
      February 26, 2008


      /s/ ERNST & YOUNG LLP

      McLean, VA

      March 30, 2005

      39



      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

      CONSOLIDATED BALANCE SHEETS

      AS OF DECEMBER 31, 20032006 AND 20042007

      (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

       

       

      2003

       

      2004

       

      Assets

       

       

       

       

       

      Current assets:

       

       

       

       

       

      Cash and cash equivalents

       

      $

      7,875

       

      $

      13,844

       

      Short term investments ($173 and $355 restricted, respectively)

       

      3,535

       

      509

       

      Accounts receivable, net of allowance for doubtful accounts of $2,868 and $3,229, respectively

       

      5,066

       

      13,564

       

      Prepaid expenses and other current assets

       

      905

       

      4,224

       

      Total current assets

       

      17,381

       

      32,141

       

      Property and equipment:

       

       

       

       

       

      Property and equipment

       

      400,097

       

      475,105

       

      Accumulated depreciation and amortization

       

      (85,691

      )

      (137,830

      )

      Total property and equipment, net

       

      314,406

       

      337,275

       

      Intangible assets:

       

       

       

       

       

      Intangible assets

       

      26,947

       

      30,240

       

      Accumulated amortization

       

      (18,671

      )

      (27,115

      )

      Total intangible assets, net

       

      8,276

       

      3,125

       

      Asset held for sale

       

      —

       

      1,220

       

      Other assets ($2,188 and $1,370 restricted, respectively)

       

      4,377

       

      4,825

       

      Total assets

       

      $

      344,440

       

      $

      378,586

       

      Liabilities and stockholders’ equity

       

       

       

       

       

      Current liabilities:

       

       

       

       

       

      Accounts payable

       

      $

      7,296

       

      $

      16,090

       

      Accrued liabilities

       

      7,885

       

      21,808

       

      Current maturities, capital lease obligations

       

      3,646

       

      7,488

       

      Total current liabilities

       

      18,827

       

      45,386

       

      Amended and Restated Cisco Note—related party

       

      17,842

       

      17,842

       

      Capital lease obligations, net of current maturities

       

      58,107

       

      95,887

       

      Convertible subordinated notes, net of discount of $6,084 and $5,026, respectively

       

      4,107

       

      5,165

       

      Other long term liabilities

       

      803

       

      1,816

       

      Total liabilities

       

      99,686

       

      166,096

       

      Commitments and contingencies

       

       

       

       

       

      Stockholders’ equity:

       

       

       

       

       

      Convertible preferred stock, Series F, $0.001 par value; 11,000 shares authorized, issued and outstanding; liquidation preference of $11,000

       

      10,904

       

      10,904

       

      Convertible preferred stock, Series G, $0.001 par value; 41,030 shares authorized, 41,030 and 41,021 issued and outstanding, respectively; liquidation preference of $123,000

       

      40,787

       

      40,778

       

      Convertible preferred stock, Series H, $0.001 par value; 84,001 shares authorized, 53,372 and 45,821 shares issued and outstanding, respectively; liquidation preference of $7,731

       

      45,990

       

      44,309

       

      Convertible preferred stock, Series I, $0.001 par value; 3,000 shares authorized, none and 2,575 shares issued and outstanding, respectively; liquidation preference of $7,725

       

      —

       

      2,545

       

      Convertible preferred stock, Series J, $0.001 par value; 3,891 shares authorized, none and 3,891 shares issued and outstanding, respectively; liquidation preference of $58,365

       

      —

       

      19,421

       

      Convertible preferred stock, Series K, $0.001 par value; 2,600 shares authorized, none and 2,600 shares issued and outstanding, respectively; liquidation preference of $7,800

       

      —

       

      2,588

       

      Convertible preferred stock, Series L, $0.001 par value; 185 shares authorized, none and 185 shares issued and outstanding, respectively; liquidation preference of $2,781

       

      —

       

      927

       

      Convertible preferred stock, Series M, $0.001 par value; 3,701 shares authorized, none and 3,701 shares issued and outstanding, respectively; liquidation preference of $55,508

       

      —

       

      18,353

       

      Common stock, $0.001 par value; 75,000,000 shares authorized; 653,567 and 827,487 shares issued and outstanding, respectively

       

      1

       

      1

       

      Additional paid-in capital

       

      232,474

       

      236,692

       

      Deferred compensation

       

      (32,680

      )

      (22,533

      )

      Stock purchase warrants

       

      764

       

      764

       

      Treasury stock, 61,462 shares

       

      (90

      )

      (90

      )

      Accumulated other comprehensive income—foreign currency translation adjustment

       

      628

       

      1,515

       

      Accumulated deficit

       

      (54,024

      )

      (143,684

      )

      Total stockholders’ equity

       

      244,754

       

      212,490

       

      Total liabilities and stockholders’ equity

       

      $

      344,440

       

      $

      378,586

       

       
      		 2006
      		 2007
      		 
      Assets       
      Current assets:       
      Cash and cash equivalents $42,642 $177,021 
      Short term investments ($0 and $812 restricted, respectively)  80  812 
      Accounts receivable, net of allowance for doubtful accounts of $1,233 and $1,159, respectively  20,053  21,760 
      Prepaid expenses and other current assets  5,339  6,636 
        
      		 
      		 
      Total current assets  68,114  206,229 
      Property and equipment:       
      Property and equipment  512,321  561,907 
      Accumulated depreciation and amortization  (249,053) (316,487)
        
      		 
      		 
      Total property and equipment, net  263,268  245,420 
      Intangible assets, net  1,150  165 
      Deposits and other assets ($1,118 and $306 restricted, respectively)  4,344  3,511 
        
      		 
      		 
      Total assets $336,876 $455,325 
        
      		 
      		 
      Liabilities and stockholders' equity       
      Current liabilities:       
      Accounts payable $9,096 $12,868 
      Accrued and other current liabilities  11,779  12,891 
      Convertible subordinated notes, net of discount of $1,213  8,978  — 
      Current maturities, capital lease obligations  6,027  7,717 
        
      		 
      		 
      Total current liabilities  35,880  33,476 
      Capital lease obligations, net of current maturities  82,019  84,857 
      Convertible senior notes, net of discount of $4,133  —  195,867 
      Other long term liabilities  3,345  2,295 
        
      		 
      		 
      Total liabilities  121,244  316,495 
        
      		 
      		 
      Commitments and contingencies       
      Stockholders' equity:       
      Common stock, $0.001 par value; 75,000,000 shares authorized; 48,928,108 and 47,929,874 shares issued and outstanding, respectively  49  48 
      Additional paid-in capital  478,140  430,402 
      Stock purchase warrants  764  764 
      Accumulated other comprehensive income—foreign currency translation adjustment  1,638  3,600 
      Accumulated deficit  (264,959) (295,984)
        
      		 
      		 
      Total stockholders' equity  215,632  138,830 
        
      		 
      		 
      Total liabilities and stockholders' equity $336,876 $455,325 
        
      		 
      		 

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


      40



      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

      CONSOLIDATED STATEMENTS OF OPERATIONS

      FOR THE YEARS ENDED DECEMBER 31, 2002,2005, DECEMBER 31, 20032006 AND DECEMBER 31, 20042007

      (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)DATA)

       

       

      2002

       

      2003

       

      2004

       

      Service revenue, net

       

      $

      51,913

       

      $

      59,422

       

      $

      91,286

       

      Operating expenses:

       

       

       

       

       

       

       

      Network operations (including $233, $1,307 and $858 of amortization of deferred compensation, respectively)

       

      49,324

       

      48,324

       

      64,324

       

      Selling, general, and administrative (including $3,098, $17,368 and $11,404 of amortization of deferred compensation, and $3,209, $3,876 and $3,995 of bad debt expense, respectively)

       

      36,593

       

      43,938

       

      51,786

       

      Gain on settlement of vendor litigation

       

      (5,721

      )

      —

       

      —

       

      Restructuring charge

       

      —

       

      —

       

      1,821

       

      Terminated public offering costs

       

      —

       

      —

       

      779

       

      Depreciation and amortization

       

      33,990

       

      48,387

       

      56,645

       

      Total operating expenses

       

      114,186

       

      140,649

       

      175,355

       

      Operating loss

       

      (62,273

      )

      (81,227

      )

      (84,069

      )

      Gain—Cisco credit facility—troubled debt restructuring—related party

       

      —

       

      215,432

       

      —

       

      Gain—Allied Riser note exchange

       

      —

       

      24,802

       

      —

       

      Settlement of note holder litigation

       

      (3,468

      )

      —

       

      —

       

      Gains—lease and other obligation restructurings

       

      —

       

      —

       

      5,292

       

      Interest income and other

       

      1,739

       

      1,512

       

      2,119

       

      Interest expense

       

      (36,284

      )

      (19,776

      )

      (13,002

      )

      (Loss) income before extraordinary item

       

      $

      (100,286

      )

      $

      140,743

       

      $

      (89,660

      )

      Extraordinary gain—Allied Riser merger

       

      8,443

       

      —

       

      —

       

      Net (loss) income

       

      $

      (91,843

      )

      $

      140,743

       

      $

      (89,660

      )

      Beneficial conversion charges

       

      —

       

      (52,000

      )

      (43,986

      )

      Net (loss) income applicable to common shareholders

       

      $

      (91,843

      )

      $

      88,743

       

      $

      (133,646

      )

      Net (loss) income per common share:

       

       

       

       

       

       

       

      (Loss) income before extraordinary item

       

      $

      (616.34

      )

      $

      17.74

       

      $

      (117.43

      )

      Extraordinary gain

       

      51.89

       

      —

       

      —

       

      Basic net (loss) income per common share

       

      $

      (564.45

      )

      $

      17.74

       

      $

      (117.43

      )

      Beneficial conversion charge

       

      —

       

      $

      (6.55

      )

      $

      (57.61

      )

      Basic net (loss) income per common share available to common shareholders

       

      $

      (564.45

      )

      $

      11.18

       

      $

      (175.03

      )

      Diluted net (loss) income per common share—before extraordinary item

       

      $

      (616.34

      )

      $

      17.73

       

      $

      (117.43

      )

      Extraordinary gain

       

      51.89

       

      —

       

      —

       

      Diluted net (loss) income per common share

       

      $

      (564.45

      )

      $

      17.73

       

      $

      (117.43

      )

      Beneficial conversion charge

       

      —

       

      $

      (6.55

      )

      $

      (57.61

      )

      Diluted net (loss) income per common share available to common shareholders

       

      $

      (564.45

      )

      $

      11.18

       

      $

      (175.03

      )

      Weighted-average common shares—basic

       

      162,712

       

      7,935,831

       

      763,540

       

      Weighted-average common shares—diluted

       

      162,712

       

      7,938,898

       

      763,540

       

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

      41



      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
      FOR THE YEARS ENDED DECEMBER 31, 2002 DECEMBER 31, 2003 AND DECEMBER 31, 2004
      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

       

       

      Common Stock

       

      Additional
      Paid-in 

       

      Deferred

       

      Treasury

       

      Stock
      Purchase 

       

      Preferred Stock—A

       

      Preferred Stock—B

       

      Preferred Stock—C

       

       

       

      Shares

       

      Amount

       

      Capital

       

      Compensation

       

      Stock

       

      Warrants

       

      Shares

       

      Amount

       

      Shares

       

      Amount

       

      Shares

       

      Amount

       

      Balance at December 31, 2001

       

      70,491

       

       

      $ —

       

       

       

      $ 38,725

       

       

       

      $ (11,081

      )

       

       

      $ —

       

       

       

      $ 8,248

       

       

      26,000,000

       

      $ 25,892

       

      19,809,783

       

      $ 90,009

       

      49,773,402

       

      $ 61,345

       

      Exercises of stock options

       

      365

       

       

      —

       

       

       

                     1

       

       

       

                   —

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Issuance of common stock, options and warrants—Allied Riser merger

       

      100,484

       

       

      —

       

       

       

          10,233

       

       

       

                   —

       

       

       

           —

       

       

       

             764

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Deferred compensation adjustments

       

      —

       

       

      —

       

       

       

           (1,756

      )

       

       

            1,726

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Conversion of Series B convertible preferred stock 

       

      2,853

       

       

      —

       

       

       

             2,000

       

       

       

                   —

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      (439,560

      )

           (2,000

      )

      —

       

                   —

       

      Foreign currency translation

       

      —

       

       

      —

       

       

       

                   —

       

       

       

                   —

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Amortization of deferred compensation

       

      —

       

       

      —

       

       

       

                   —

       

       

       

            3,331

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Net loss

       

      —

       

       

      —

       

       

       

                   —

       

       

       

                   —

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Balance at December 31, 2002

       

      174,192

       

       

      —

       

       

       

          49,203

       

       

       

           (6,024

      )

       

       

           —

       

       

       

          9,012

       

       

      26,000,000

       

          25,892

       

      19,370,223

       

          88,009

       

      49,773,402

       

          61,345

       

      Cancellations of shares granted to employees

       

      —

       

       

      —

       

       

       

               (569

      )

       

       

                995

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Amortization of deferred compensation

       

      —

       

       

      —

       

       

       

                   —

       

       

       

          18,675

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Foreign currency translation

       

      —

       

       

      —

       

       

       

                   —

       

       

       

                   —

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Issuances of preferred stock, net

       

      —

       

       

      —

       

       

       

                   —

       

       

       

        (46,416

      )

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Conversion of preferred stock into common stock 

       

      538,786

       

       

      1

       

       

       

        183,753

       

       

       

                   —

       

       

       

           —

       

       

       

        (8,248

      )

       

      (26,000,000

      )

        (25,892

      )

      (19,362,531

      )

        (87,974

      )

      (49,773,402

      )

        (61,345

      )

      Cancellation of common stock—treasury
      stock

       

      (61,291

      )

       

      —

       

       

       

                   —

       

       

       

                  90

       

       

       

         (90

      )

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Shares returned to treasury—Allied Riser merger

       

      (171

      )

       

      —

       

       

       

                   —

       

       

       

                   —

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Common shares issued—Allied Riser merger

       

      2,051

       

       

      —

       

       

       

                   —

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

      Cancellation of Series B preferred stock

       

      —

       

       

      —

       

       

       

                   35

       

       

       

                   —

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      (7,692

      )

                 (35

      )

      —

       

                   —

       

      Issuance of options for common stock—FNSI acquisition

       

      —

       

       

      —

       

       

       

                   52

       

       

       

                   —

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Beneficial conversion charge

       

      —

       

       

      —

       

       

       

          52,000

       

       

       

                   —

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Reclassification of beneficial conversion charge to additional paid in capital

       

      —

       

       

      —

       

       

       

         (52,000

      )

       

       

                   —

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Net income

       

      —

       

       

      —

       

       

       

                   —

       

       

       

                   —

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Balance at December 31, 2003

       

      653,567

       

       

      —

       

       

       

        232,475

       

       

       

        (32,680

      )

       

       

         (90

      )

       

       

             764

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Cancellations of shares granted to employees

       

      —

       

       

      —

       

       

       

                   —

       

       

       

            4,966

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Amortization of deferred compensation

       

      —

       

       

      —

       

       

       

                   —

       

       

       

          12,262

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Foreign currency translation

       

      —

       

       

      —

       

       

       

                   —

       

       

       

                   —

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Issuances of preferred stock, net

       

      —

       

       

      —

       

       

       

                   —

       

       

       

           (2,370

      )

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Issuances of options for preferred stock

       

      —

       

       

      —

       

       

       

                   —

       

       

       

           (4,711

      )

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Conversion of preferred stock into common stock 

       

      173,920

       

       

      —

       

       

       

             3,808

       

       

       

                   —

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Beneficial conversion charge

       

      —

       

       

      —

       

       

       

          43,896

       

       

       

                   —

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Reclassification of beneficial conversion charge to additional paid in capital

       

      —

       

       

      —

       

       

       

         (43,896

      )

       

       

                   —

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Contribution of capital—LNG—related party

       

      —

       

       

      —

       

       

       

                410

       

       

       

                   —

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Net loss

       

      —

       

       

      —

       

       

       

                   —

       

       

       

                   —

       

       

       

           —

       

       

       

                —

       

       

      —

       

                   —

       

      —

       

                   —

       

      —

       

                   —

       

      Balance at December 31, 2004

       

      827,487

       

       

      $ 1

       

       

       

      $ 236,692

       

       

       

      $ (22,533

      )

       

       

      $ (90

      )

       

       

      $    764

       

       

      —

       

      $         —

       

      —

       

      $         —

       

      —

       

      $         —

       




      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)
      FOR THE YEARS ENDED DECEMBER 31, 2002 DECEMBER 31, 2003 AND DECEMBER 31, 2004
      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

       

       

      Preferred Stock—D

       

      Preferred Stock—E

       

      Preferred Stock—F

       

      Preferred Stock—G

       

      Preferred Stock—H

       

      Preferred Stock—I

       

       

       

      Shares

       

      Amount

       

      Shares

       

      Amount

       

      Shares

       

      Amount

       

      Shares

       

      Amount

       

      Shares

       

      Amount

       

      Shares

       

      Amount

       

      Balance at December 31, 2001

       

      —

       

      $        —

       

      —

       

      $        —

       

      —

       

      $         —

       

      —

       

      $         —

       

      —

       

      $         —

       

       

      —

       

       

       

      $     —

       

       

      Exercises of stock options

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Issuance of common stock, options and warrants—Allied Riser merger

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Deferred compensation adjustments

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Conversion of Series B convertible preferred stock

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Foreign currency translation

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Amortization of deferred compensation

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Net loss

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Balance at December 31, 2002

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Cancellations of shares granted to employees

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      (500

      )

      (426

      )

       

      —

       

       

       

      —

       

       

      Amortization of deferred compensation

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Foreign currency translation

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Issuances of preferred stock, net

       

      3,426,293

       

      4,272

       

      3,426,293

       

      4,272

       

      11,000

       

      10,904

       

      41,030

       

      40,787

       

      53,873

       

      46,416

       

       

      —

       

       

       

      —

       

       

      Conversion of preferred stock into common stock

       

      (3,426,293

      )

      (4,272

      )

      (3,426,293

      )

      (4,272

      )

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Cancellation of common stock—treasury stock

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Shares returned to treasury—Allied Riser merger

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Common shares issued—Allied Riser merger

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Cancellation of Series B preferred stock

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Issuance of options for common stock—FNSI acquisition

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Beneficial conversion charge

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Reclassification of beneficial conversion charge to additional paid in capital

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Net income

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Balance at December 31, 2003

       

      —

       

      —

       

      —

       

      —

       

      11,000

       

      10,904

       

      41,030

       

      40,787

       

      53,373

       

      45,990

       

       

      —

       

       

       

      —

       

       

      Cancellations of shares granted to employees

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      (5,127

      )

      (4,965

      )

       

      —

       

       

       

      —

       

       

      Amortization of deferred compensation

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Foreign currency translation

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Issuances of preferred stock, net

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      1,913

       

      2,370

       

       

      2,575

       

       

       

      2,545

       

       

      Issuances of options for preferred stock

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      4,711

       

       

      —

       

       

       

      —

       

       

      Conversion of preferred stock into common stock

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      (9

      )

      (9

      )

      (4,338

      )

      (3,797

      )

       

      —

       

       

       

      —

       

       

      Beneficial conversion charge

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Reclassification of beneficial conversion charge to additional paid in capital

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Contribution of capital—LNG

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

       

       

       

       

       

       

       

      Net loss

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

      —

       

       

      —

       

       

       

      —

       

       

      Balance at December 31, 2004

       

      —

       

      $        —

       

      —

       

      $        —

       

      11,000

       

      $ 10,904

       

      41,021

       

      $ 40,778

       

      45,821

       

      $ 44,309

       

       

      2,575

       

       

       

      $ 2,545

       

       




      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Continued)
      FOR THE YEARS ENDED DECEMBER 31, 2002 DECEMBER 31, 2003 AND DECEMBER 31, 2004
      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

      Preferred
      Stock—J

      Preferred
      Stock—K

      Preferred
      Stock —L

      Preferred
      Stock—M

      Foreign
      Currency
      Translation

      Accumulated

      Total
      Stockholder's

      Comprehensive

      Shares

      Amount

      Shares

      Amount

      Shares

      Amount

      Shares

      Amount

      Adjustment

      Deficit

      Equity

      Income (Loss)

      Balance at December 31, 2001

       

       

      —

       

       

      $        —

       

       

      —

       

       

       

      $     —

       

       

       

      —

       

       

       

      $  —

       

       

       

      —

       

       

      $        —

       

       

      $     —

       

       

       

      $ (102,924

      )

       

       

      $ 110,214

       

       

       

      $          —

       

       

      Exercises of stock options

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      1

       

       

       

      —

       

       

      Issuance of common stock, options and warrants—Allied Riser merger

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      10,997

       

       

       

      —

       

       

      Deferred compensation adjustments

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      (30

      )

       

       

      —

       

       

      Conversion of Series B convertible preferred stock

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      (0

      )

       

       

       

       

       

      Foreign currency translation

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      (44

      )

       

       

      —

       

       

       

      (44

      )

       

       

      (44

      )

       

      Amortization of deferred compensation

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      3,331

       

       

       

      —

       

       

      Net loss

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      (91,843

      )

       

       

      (91,843

      )

       

       

      (91,843

      )

       

      Balance at December 31, 2002

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      (44

      )

       

       

      (194,767

      )

       

       

      32,626

       

       

       

      (91,887

      )

       

      Cancellations of shares granted to employees

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      Amortization of deferred compensation

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      18,675

       

       

       

      —

       

       

      Foreign currency translation

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      672

       

       

       

      —

       

       

       

      672

       

       

       

      672

       

       

      Issuances of preferred stock, net

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      60,235

       

       

       

      —

       

       

      Conversion of preferred stock into common
      stock

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      (8,249

      )

       

       

      —

       

       

      Cancellation of common stock—treasury stock

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      (0

      )

       

       

      —

       

       

      Shares returned to treasury—Allied Riser
      merger

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      Common shares issued—Allied Riser merger

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      Cancellation of Series B preferred stock

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      Issuance of options for common stock—FNSI acquisition

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      52

       

       

       

      —

       

       

      Beneficial conversion charge

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      (52,000

      )

       

       

      —

       

       

       

      —

       

       

      Reclassification of beneficial conversion charge to additional paid in capital

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      52,000

       

       

       

      —

       

       

       

      —

       

       

      Net income

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      140,743

       

       

       

      140,743

       

       

       

      140,743

       

       

      Balance at December 31, 2003

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      628

       

       

       

      (54,024

      )

       

       

      244,754

       

       

       

      141,415

       

       

      Cancellations of shares granted to employees

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      1

       

       

       

      —

       

       

      Amortization of deferred compensation

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      12,262

       

       

       

      —

       

       

      Foreign currency translation

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      887

       

       

       

      —

       

       

       

      887

       

       

       

      887

       

       

      Issuances of preferred stock, net

       

       

      3,891

       

       

      19,421

       

       

      2,600

       

       

       

      2,588

       

       

       

      185

       

       

       

      927

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      25,481

       

       

       

      —

       

       

      Issuances of options for preferred stock

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      Conversion of preferred stock into common
      stock

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      3,701

       

       

      18,353

       

       

      —

       

       

       

      —

       

       

       

      18,355

       

       

       

      —

       

       

      Beneficial conversion charge

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      (43,896

      )

       

       

      —

       

       

       

      —

       

       

      Reclassification of beneficial conversion charge to additional paid in capital

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      43,896

       

       

       

      —

       

       

       

      —

       

       

      Contribution of capital—LNG

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      410

       

       

       

      —

       

       

      Net loss

       

       

      —

       

       

      —

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

       

      —

       

       

      —

       

       

      —

       

       

       

      (89,660

      )

       

       

      (89,660

      )

       

       

      (89,660

      )

       

      Balance at December 31, 2004

       

       

      3,891

       

       

      $ 19,421

       

       

      2,600

       

       

       

      $ 2,588

       

       

       

      185

       

       

       

      $ 927

       

       

       

      3,701

       

       

      $ 18,353

       

       

      $ 1,515

       

       

       

      $ (143,684

      )

       

       

      $ 212,490

       

       

       

      $ (88,773

      )

       




      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
      CONSOLIDATED STATEMENTS OF CASH FLOWS
      FOR THE YEARS ENDED DECEMBER 31, 2002, DECEMBER 31, 2003 AND DECEMBER 31, 2004
      (IN THOUSANDS)

       

       

      2002

       

      2003

       

      2004

       

      Cash flows from operating activities:

       

       

       

       

       

       

       

      Net (loss) income

       

      $

      (91,843

      )

      $

      140,743

       

      $

      (89,660

      )

      Adjustments to reconcile net (loss) income to net cash used in operating activities

       

       

       

       

       

       

       

      Depreciation and amortization, including amortization of debt issuance costs

       

      36,490

       

      49,746

       

      56,645

       

      Amortization of debt discount—convertible notes

       

      6,086

       

      1,827

       

      1,058

       

      Amortization of deferred compensation

       

      3,331

       

      18,675

       

      12,262

       

      Extraordinary gain—Allied Riser merger

       

      (8,443

      )

      —

       

      —

       

      Gain—Cisco credit facility troubled debt restructuring (Note 7)

       

      —

       

      (215,432

      )

      —

       

      Gain—Allied Riser note exchange

       

      —

       

      (24,802

      )

      —

       

      Gain on settlement of vendor litigation

       

      (5,721

      )

      —

       

      —

       

      Gain—sale of warrant

       

      —

       

      —

       

      (853

      )

      Gains—lease obligation restructurings

       

      —

       

      —

       

      (5,292

      )

      Gains and losses—other

       

      —

       

      —

       

      21

       

      Changes in assets and liabilities:

       

       

       

       

       

       

       

      Accounts receivable

       

      (2,894

      )

      712

       

      2,274

       

      Prepaid expenses and other current assets

       

      1,189

       

      744

       

      2,256

       

      Other assets

       

      1,134

       

      1,899

       

      1,565

       

      Accounts payable and accrued liabilities

       

      19,104

       

      (1,469

      )

      (6,701

      )

      Net cash used in operating activities

       

      (41,567

      )

      (27,357

      )

      (26,425

      )

      Cash flows from investing activities:

       

       

       

       

       

       

       

      Purchases of property and equipment

       

      (75,214

      )

      (24,016

      )

      (10,135

      )

      Purchases of intangible assets

       

      (9,617

      )

      (700

      )

      (317

      )

      Cash acquired in Allied Riser merger

       

      70,431

       

      —

       

      —

       

      Purchase of minority interests in Cogent Canada

       

      (3,617

      )

      —

       

      —

       

      (Purchases) sales of short term investments, net

       

      (1,769

      )

      (600

      )

      3,026

       

      Cash acquired—acquisitions

       

      —

       

      —

       

      2,336

       

      Purchase of fiber optic network in Germany

       

      —

       

      —

       

      (1,949

      )

      Proceeds from sale of equipment

       

      —

       

      —

       

      279

       

      Proceeds from sale of warrant

       

      —

       

      —

       

      3,449

       

      Proceeds from other assets—Cogent Europe acquisition

       

      —

       

      —

       

      610

       

      Net cash used in  investing activities

       

      (19,786

      )

      (25,316

      )

      (2,701

      )

      Cash flows from financing activities:

       

       

       

       

       

       

       

      Borrowings under Cisco credit facility

       

      54,395

       

      8,005

       

      —

       

      Exchange agreement payment—Allied Riser notes

       

      —

       

      (4,997

      )

      —

       

      Exchange agreement payment—Cisco credit facility debt restructuring

       

      —

       

      (20,000

      )

      —

       

      Proceeds from option exercises

       

      1

       

      —

       

      —

       

      Repayment of capital lease obligations

       

      (2,702

      )

      (3,076

      )

      (6,630

      )

      Repayment of advances from LNG Holdings—related party

       

      —

       

      —

       

      (1,242

      )

      Cash acquired—mergers

       

      —

       

      —

       

      42,358

       

      Issuances of preferred stock, net of issuance costs

       

      —

       

      40,630

       

      —

       

      Net cash provided by financing activities

       

      51,694

       

      20,562

       

      34,486

       

      Effect of exchange rate changes on cash

       

      (44

      )

      672

       

      609

       

      Net (decrease) increase in cash and cash equivalents

       

      (9,703

      )

      (31,439

      )

      5,969

       

      Cash and cash equivalents, beginning of year

       

      49,017

       

      39,314

       

      7,875

       

      Cash and cash equivalents, end of year

       

      $

      39,314

       

      $

      7,875

       

      $

      13,844

       

      Supplemental disclosures of cash flow information:

       

       

       

       

       

       

       

      Cash paid for interest

       

      $

      12,440

       

      $

      5,013

       

      $

      10,960

       

      Cash paid for income taxes

       

      —

       

      —

       

      —

       

      Non-cash financing activities—

       

       

       

       

       

       

       

      Capital lease obligations incurred

       

      33,027

       

      6,044

       

      968

       

       
      		 2005
      		 2006
      		 2007
      		 
      Service revenue, net $135,213 $149,071 $185,663 
      Operating expenses:          
      Network operations (including $399, $315 and $208 of equity-based compensation expense, respectively, exclusive of amounts shown separately)  86,193  80,421  87,756 
      Selling, general, and administrative (including $12,906, $10,194 and $10,176 of equity-based compensation expense, and $4,574, $2,584 and $2,005 of bad debt expense, respectively)  54,250  56,787  62,187 
      Lease restructuring charge  1,319  —  — 
      Depreciation and amortization  55,600  58,414  65,638 
        
      		 
      		 
      		 
      Total operating expenses  197,362  195,622  215,581 
        
      		 
      		 
      		 
      Operating loss  (62,149) (46,551) (29,918)
      Gain—Cisco credit facility  842  —  — 
      Gains—lease obligation restructurings  844  255  2,110 
      Gains—disposition of assets  3,372  254  95 
      Interest income and other  1,320  2,969  6,914 
      Interest expense  (11,747) (10,684) (10,226)
        
      		 
      		 
      		 
      Net loss $(67,518)$(53,757)$(31,025)
        
      		 
      		 
      		 
      Net loss per common share:          
      Basic and diluted net loss per common share $(1.96)$(1.16)$(0.65)
        
      		 
      		 
      		 
      Weighted-average common shares—basic and diluted  34,439,937  46,343,372  47,800,159 
        
      		 
      		 
      		 

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


      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
      CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)CHANGES IN STOCKHOLDERS' EQUITY
      FOR THE YEARS ENDED DECEMBER 31, 2002,2005 DECEMBER 31, 20032006 AND DECEMBER 31, 20042007
      (IN THOUSANDS)THOUSANDS, EXCEPT SHARE AMOUNTS)

       

       

      2002

       

      2003

       

      2004

       

      Borrowing under credit facility for payment of loan costs and interest

       

      14,820

       

      4,502

       

      —

       

      Issuance of Series I preferred stock for Symposium Gamma common stock

       

      —

       

      —

       

      2,575

       

      Issuance of Series J preferred stock for Symposium Omega common stock

       

      —

       

      —

       

      19,454

       

      Issuance of Series K preferred stock for UFO Group common stock

       

      —

       

      —

       

      2,600

       

      Issuance of Series L preferred stock for Global Access assets

       

      —

       

      —

       

      927

       

      Issuance of Series M preferred stock for Cogent Potomac common stock

       

      —

       

      —

       

      18,352

       

      Allied Riser Merger

       

       

       

       

       

       

       

      Fair value of assets acquired

       

      $

      74,791

       

       

       

       

       

      Less: valuation of common stock, options & warrants issued

       

      (10,967

      )

       

       

       

       

      Less: extraordinary gain

       

      (8,443

      )

       

       

       

       

      Fair value of liabilities assumed

       

      $

      55,381

       

       

       

       

       

      PSINet Acquisition

       

       

       

       

       

       

       

      Fair value of assets acquired

       

      16,602

       

      700

       

       

       

      Less: cash paid

       

      (9,450

      )

      (700

      )

       

       

      Fair value of liabilities assumed

       

      7,152

       

      —

       

       

       

      FNSI Acquisition

       

       

       

       

       

       

       

      Fair value of assets acquired

       

       

       

      3,018

       

       

       

      Less: valuation of options for common stock

       

       

       

      (52

      )

       

       

      Fair value of liabilities assumed

       

       

       

      2,966

       

       

       

      Symposium Gamma (Cogent Europe) Acquisition

       

       

       

       

       

       

       

      Fair value of assets acquired

       

       

       

       

       

      155,468

       

      Negative goodwill

       

       

       

       

       

      (77,232

      )

      Less: valuation of preferred stock

       

       

       

       

       

      (2,575

      )

      Fair value of liabilities assumed

       

       

       

       

       

      75,661

       

      Symposium Omega Acquisition

       

       

       

       

       

       

       

      Fair value of assets acquired

       

       

       

       

       

      19,454

       

      Less: valuation of preferred stock

       

       

       

       

       

      (19,454

      )

      Fair value of liabilities assumed

       

       

       

       

       

      —

       

      UFO Group Acquisition

       

       

       

       

       

       

       

      Fair value of assets acquired

       

       

       

       

       

      3,326

       

      Less: valuation of preferred stock

       

       

       

       

       

      (2,600

      )

      Fair value of liabilities assumed

       

       

       

       

       

      726

       

      Global Access Acquisition

       

       

       

       

       

       

       

      Fair value of assets acquired

       

       

       

       

       

      1,931

       

      Less: valuation of preferred stock

       

       

       

       

       

      (927

      )

      Fair value of liabilities assumed

       

       

       

       

       

      1,004

       

      Cogent Potomac (Aleron) Acquisition

       

       

       

       

       

       

       

      Fair value of assets acquired

       

       

       

       

       

      20,622

       

      Less: valuation of preferred stock

       

       

       

       

       

      (18,352

      )

      Fair value of liabilities assumed

       

       

       

       

       

      2,270

       

      Verio Acquisition

       

       

       

       

       

       

       

      Fair value of assets acquired

       

       

       

       

       

      4,493

       

      Fair value of liabilities assumed

       

       

       

       

       

      4,493

       

      See Note 7, which describes the Exchange Agreement with Cisco Capital and conversion of preferred stock under the Purchase Agreement where preferred stock was issued in connection with a troubled debt restructuring.

       
      		 Common Stock
      		  
      		  
      		  
      		  
      		 Preferred Stock—F
      		 Preferred Stock—G
      		 Preferred Stock—H
      		 Preferred Stock—I
      		 
       
      		 Additional Paid-in
      Capital
      		 Deferred Compensation
      		  
      		 Stock Purchase Warrants
      		 
       
      		 Shares
      		 Amount
      		 Treasury Stock
      		 Shares
      		 Amount
      		 Shares
      		 Amount
      		 Shares
      		 Amount
      		 Shares
      		 Amount
      		 
      Balance at December 31, 2004 827,487  1  236,692  (22,533) (90) 764 11,000  10,904 41,021  40,778 45,821  44,309 2,575  2,545 
      Total, December 31, 2004                                      
       Forfeitures of shares granted to employees (23,069) —  (686) 697  —  — —  — —  — (14) (11)—  — 
       Equity-based compensation —  —  —  13,306  —  — —  — —  — —  — —  — 
       Foreign currency translation —  —  —  —  —  — —  — —  — —  — —  — 
       Issuances of common stock, net 11,719,231  11  64,712  (1,150) —  — —  — —  — —  — —  — 
       Conversion of preferred stock into common stock 31,569,003  32  139,782  —  —  — (11,000) (10,904)(41,021) (40,778)(45,807) (44,298)(2,575) (2,545)
       Net loss —  —  —  —  —  — —  — —  — —  — —  — 
        
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      Balance at December 31, 2005 44,092,652  44  440,500  (9,680) (90) 764 —  — —  — —  — —  — 
      Total, December 31, 2005                                      
       Forfeitures of shares granted to employees (646) —  —  —  —  — —  — —  — —  — —  — 
       Adoption of SFAS 123(R)—reclassification of deferred compensation —  —  (9,680) 9,680  —  — —  — —  — —  — —  — 
       Equity-based compensation —  —  10,509  —  —  — —  — —  — —  — —  — 
       Foreign currency translation —  —  —  —  —  — —  — —  — —  — —  — 
       Issuances of common stock, net 4,732,500  5  36,474  —  —  — —  — —  — —  — —  — 
       Exercises of options 103,602  —  427  —  —  —                     
       Treasury stock retirement —  —  (90) —  90  —                     
       Net loss —  —  —  —  —  — —  — —  — —  — —  — 
        
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      Balance at December 31, 2006 48,928,108  49  478,140  —  —  764 —  — —  — —  — —  — 
      Total, December 31, 2006                                      
       Forfeitures of shares granted to employees (22,659) —  —  —  —  — —  — —  — —  — —  — 
       Equity-based compensation —  —  11,105  —  —  — —  — —  — —  — —  — 
       Foreign currency translation —  —  —  —  —  — —  — —  — —  — —  — 
       Issuances of common stock, net 1,033,404  1  —  —  —  — —  — —  — —  — —  — 
       Exercises of options 216,311  —  1,103  —  —  — —  — —  — —  — —  — 
       Common stock purchases and retirement (2,225,290) (2) (59,946) —  —  — —  — —  — —  — —  — 
       Net loss —  —  —  —  —  — —  — —  — —  — —  — 
        
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      Balance at December 31, 2007 47,929,874 $48 $430,402 $— $— $764 — $— — $— — $— — $— 
        
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      Total, December 31, 2007                                      

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


      46COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
      CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
      FOR THE YEARS ENDED DECEMBER 31, 2005 DECEMBER 31, 2006 AND DECEMBER 31, 2007
      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

       
      		 Preferred Stock—J
      		 Preferred Stock—K
      		 Preferred Stock—L
      		 Preferred Stock—M
      		  
      		  
      		  
      		  
      		 
       
      		 Foreign Currency
      Translation Adjustment
      		 Accumulated Deficit
      		 Total Stockholder's
      Equity
      		 Comprehensive
      Loss
      		 
       
      		 Shares
      		 Amount
      		 Shares
      		 Amount
      		 Shares
      		 Amount
      		 Shares
      		 Amount
      		 
      Balance at December 31, 2004 3,891  19,421 2,600  2,588 185  927 3,701  18,353  1,515  (143,684) 212,490    
      Total, Year Ended December 31, 2004                               (88,773)
       Forfeitures of shares granted to employees —  — —  — —  — —  —  —  —  —  — 
       Equity-based compensation —  — —  — —  — —  —  —  —  13,306  — 
       Foreign currency translation —  — —  — —  — —  —  (850) —  (850) (850)
       Issuances of common stock, net —  — —  — —  — —  —  —  —  63,573  — 
       Conversion of preferred stock into common stock (3,891) (19,421)(2,600) (2,588)(185) (927)(3,701) (18,353) —  —  —  — 
       Net loss —  — —  — —  — —  —  —  (67,518) (67,518) (67,518)
        
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      Balance at December 31, 2005 —  — —  — —  — —  —  665  (211,202) 221,001    
      Total, Year Ended December 31, 2005                               (68,368)
                                     
      		 
       Forfeitures of shares granted to employees —  — —  — —  — —  —  —  —  —  — 
       Adoption of SFAS 123(R)—reclassification of deferred compensation —  — —  — —  — —  —  —  —  —  — 
       Equity-based compensation —  — —  — —  — —  —  —  —  10,509  — 
       Foreign currency translation —  — —  — —  — —  —  973  —  973  973 
       Issuances of common stock, net —  — —  — —  — —  —  —  —  36,479  — 
       Exercises of options —  — —  — —  — —  —  —  —  427  — 
       Treasury stock retirement —  — —  — —  — —  —  —  —  —  — 
       Net loss —  — —  — —  — —  —  —  (53,757) (53,757) (53,757)
        
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      Balance at December 31, 2006 —  — —  — —  — —  —  1,638  (264,959) 215,632    
      Total, Year Ended December 31, 2006                               (52,784)
                                     
      		 
       Forfeitures of shares granted to employees —  — —  — —  — —  —  —  —  —  — 
       Equity-based compensation —  — —  — —  — —  —  —  —  11,105  — 
       Foreign currency translation —  — —  — —  — —  —  1,962  —  1,962  1,962 
       Issuances of common stock, net —  — —  — —  — —  —  —  —  1  — 
       Exercises of options —  — —  — —  — —  —  —  —  1,103  — 
       Common stock purchases and retirement —  — —  — —  — —  —  —  —  (59,948) — 
       Net loss —  — —  — —  — —  —  —  (31,025) (31,025) (31,025)
        
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      Balance at December 31, 2007 — $— — $— — $— — $— $3,600 $(295,984)$138,830    
        
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		 
      		    
      Total, Year Ended December 31, 2007                              $(29,063)
                                     
      		 

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



      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

      CONSOLIDATED STATEMENTS OF CASH FLOWS

      FOR THE YEARS ENDED DECEMBER 31, 2005, DECEMBER 31, 2006 AND DECEMBER 31, 2007

      (IN THOUSANDS)

       
      		 2005
      		 2006
      		 2007
      		 
      Cash flows from operating activities:          
      Net loss $(67,518)$(53,757)$(31,025)
      Adjustments to reconcile net loss to net cash (used in) provided by operating activities:          
       Depreciation and amortization  55,600  58,414  65,638 
       Amortization of debt discount—convertible notes  1,548  2,265  1,576 
       Equity-based compensation expense (net of amounts capitalized)  13,305  10,509  10,384 
       Gains—Cisco credit facility  (842) —  — 
       Gains—lease restructurings dispositions of assets and other, net  (3,983) (540) (2,853)
      Changes in assets and liabilities:          
       Accounts receivable  (3,645) (2,758) (399)
       Prepaid expenses and other current assets  34  (1,321) (679)
       Deposits and other assets  (3,700) 563  1,003 
       Accounts payable, accrued liabilities and other long-term liabilities  139  (8,090) 4,985 
        
      		 
      		 
      		 
       Net cash (used in) provided by operating activities  (9,062) 5,285  48,630 
        
      		 
      		 
      		 
      Cash flows from investing activities:          
      Purchases of property and equipment  (17,342) (21,526) (30,389)
      Purchases of intangible assets  (129) (100) — 
      (Purchases) maturities of short term investments  (774) 1,203  (732)
      Purchase of fiber optic network in Germany  (932) —  — 
      Proceeds from asset sales  5,122  945  257 
        
      		 
      		 
      		 
      Net cash used in investing activities  (14,055) (19,478) (30,864)
        
      		 
      		 
      		 
      Cash flows from financing activities:          
      Proceeds from issuance of senior convertible notes, net  —  —  195,147 
      Purchases of common stock  —  —  (59,949)
      Repayment of convertible subordinated notes  —  —  (10,187)
      Proceeds from sales of common stock, net  63,723  36,479  — 
      Repayment of capital lease obligations  (6,899) (9,861) (9,809)
      Proceeds from exercises of common stock options  —  427  1,103 
      Proceeds from issuance of subordinated note  10,000  —  — 
      Repayment of subordinated note  (10,000) —  — 
      Repayment of Cisco note  (17,000) —  — 
      Borrowings under credit facility  10,000  —  — 
      Repayments under credit facility  (10,000) —  — 
        
      		 
      		 
      		��
      Net cash provided by financing activities  39,824  27,045  116,305 
        
      		 
      		 
      		 
      Effect of exchange rate changes on cash  (668) (93) 308 
        
      		 
      		 
      		 
      Net increase in cash and cash equivalents  16,039  12,759  134,379 
      Cash and cash equivalents, beginning of year  13,844  29,883  42,642 
        
      		 
      		 
      		 
      Cash and cash equivalents, end of year $29,883 $42,642 $177,021 
        
      		 
      		 
      		 

      Supplemental disclosures of cash flow information:
       
       
       
       
       
       
       
       
       
       
      Cash paid for interest $12,598 $12,235 $9,248 
      Non-cash financing activities—          
      Capital lease obligations incurred  1,213  2,087  11,498 

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


      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      DECEMBER 31, 2002, 2003,2005, 2006 and 20042007

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

      Description of business

      Cogent Communications Group, Inc. (“Cogent”(the "Company") was formed on August 9, 1999, asis a Delaware corporation and is headquartered in Washington, DC. In 2001, Cogent formed Cogent Communications Group, Inc., (the “Company”), a Delaware corporation. Effective on March 14, 2001, Cogent’s stockholders exchanged all of their outstanding common and preferred shares for an equal number of shares of the Company, and Cogent became a wholly owned subsidiary of the Company. This was a tax-free exchange that was accounted for by the Company at Cogent’s historical cost.

      The Company is a leading facilities-based provider of low-cost, high-speed Internet access and Internet Protocol ("IP") communications services. The Company’sCompany's network is specifically designed and optimized to transmit data using IP. The Company delivers its services to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations through over 8,700approximately 15,000 customer connections in North America and Europe.

      The Company’s primary on-net service is Internet access at a speed of 100 Megabits per second, much faster than typical Internet access currently offered to businesses.        The Company offers this on-net serviceInternet access services exclusively through its own facilities, which run all the way to its customers’customers' premises. Because of its integrated network architecture, the Company is not dependent on local telephone companies to serve its on-net customers. The Company’s typicalCompany provides on-net Internet access to certain bandwidth-intensive users such as universities, other Internet service providers, telephone companies, cable television companies and commercial content providers at speeds up to 10 Gigabits per second. These customers generally receive service in colocation facilities and the Company's data centers. The Company also offers Internet access services in multi-tenant office buildings aretypically serving law firms, financial services firms, advertising and marketing firms and other professional services businesses. The Company also provides on-net Internetoperates data centers throughout North America and Europe that allow customers to collocate their equipment and access at a speed of one Gigabit per second and greater to certain bandwidth-intensive users such as universities, other ISPs and commercial content providers.the Company's network.

      In addition to providing on-net services, the Company also provides Internet connectivity to customers that are not located in buildings directly connected to its network. The Company serves these off-net customers using other carriers’carriers' facilities to provide the “last mile”"last mile" portion of the link from its customers’customers' premises to the Company’sCompany's network. The Company also operates 30 data centers throughout North America and Europeprovides certain non-core services that allow customersresulted from acquisitions. The Company continues to colocate their equipment and access our network, and from which the Company provides managed modem service.support but does not actively sell these non-core services.

      The Company has created its network by purchasingacquiring optical fiber from underlying carriers with large amounts of unused fiber and directly connecting Internet routers to this optical fiber. Through 2004, the existing optical fiber national backbone. The Company has expanded its network through several acquisitions of financially distressed companies or their assets. The overall impact of these acquisitionsSince then, it has primarily focused on the operationgrowth of its business has been to extend the physical reach of the Company’s network in both North America and Europe, expand the breadth of its service offerings, and increase the number of customers to whom the Company provides itson-net Internet access services.

      Recent Developments

      Reverse Stock Split

      In March 2005, the Company effected a 1-for-20 reverse stock split. Accordingly, all share and per share amounts have been retroactively adjusted to give effect to this event.


      Equity Conversion

      In February 2005, the Company’s holders of its preferred stock elected to convert all of their shares of preferred stock into shares of the Company’s common stock (the “Equity Conversion”). As a result, the Company no longer has outstanding shares of preferred stock and the liquidation preferences on preferred stock have been eliminated.

      Withdrawal of Public Offering

      In May 2004, the Company filed a registration statement to sell shares of common stock in a public offering. In October 2004, the Company withdrew the public offering and expensed the associated costs of approximately $0.8 million.

      Public Offering

      In February 2005, the Company filed a registration statement to sell up to $86.3 million of shares of its common stock in a Public Offering. There can be no assurances that the Public Offering will be completed. If the Public Offering is successful, substantial dilution to existing stockholders may result.

      Management’s Plans, Liquidity and Business Risks

      The Company has experienced losses since its inception in 1999 and as of December 31, 2004 has an accumulated deficit of $143.7 million and a working capital deficit of $13.2 million. The Company operates in the rapidly evolving Internet services industry, which is subject to intense competition and rapid technological change, among other factors. The successful execution of the Company’s business plan is dependent upon the Company’s ability to increase and retain its customers, its ability to integrate acquired businesses and purchased assets into its operations and realize planned synergies, the extent to which acquired businesses and assets are able to meet the Company’s expectations and projections, the Company’s ability to retain and attract key employees, and the Company’s ability to manage its growth and geographic expansion, among other factors.

      In February 2005, the Company issued a subordinated note for $10 million in cash (Note 15). In March 2005, the Company entered into a $10.0 million line of credit facility and borrowed $10.0 million under this facility, of which $4.0 million is restricted and held by the lender (Note 15). In March 2005, the Company sold its building located in Lyon, France for net proceeds of approximately 3.8 million euros ($5.1 million) (Note 15). Management believes that cash generated from the Company’s operations combined with the amounts received from these transactions is adequate to meet the Company’s future funding requirements. Although management believes that the Company will successfully mitigate its risks, management cannot give any assurance that it will be able to do so or that the Company will ever operate profitably.

      Any future acquisitions, other significant unplanned costs or cash requirements may require the Company to raise additional funds through the issuance of debt or equity. Such financing may not be available on terms acceptable to the Company or its stockholders, or at all. Insufficient funds may require the Company to delay or scale back the number of buildings that it serves or require the Company to restructure its business. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result.

      Acquisitions

      Since the Company’s inception, it has consummated several acquisitions through which it has generated revenue growth, expanded its network and customer base and added strategic assets to its business (Note 2).


      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-ownedwholly owned and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

      ReclassificationsReclassification

      Certain previously reported 2003December 31, 2006 balance sheet amounts have been reclassified in order to be consistent with the 2004 balance sheet presentation.

      Revenue recognition

      The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition.” The Company’s service offerings consist of telecommunications services generally under month-to-month or annual contracts and billed monthly in advance. Net 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 a new customer’s credit history and historical payment 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 and other non-refundable upfront charges are deferred and recognized ratably over the estimated customer life determined by a historical analysis of customer retention.

      The Company establishes a valuation allowance for collection of doubtful accounts and other sales credit adjustments. Valuation allowances for sales credits are established through a charge to revenue, while valuation allowances for doubtful accounts are established through a charge to selling, general and administrative expenses. The Company assesses the adequacy of these reserves on a monthly basis by evaluating general factors, such as the length of time individual receivables are past due, historical collection experience, the economic and competitive environment, changes in the credit worthiness of its customers and unprocessed customer cancellations. The Company believes that its established valuation allowances were adequate as of December 31, 2003 and 2004. If circumstances relating to specific customers change or economic conditions worsen such that the Company’s past collection experience and assessment of the economic environment are no longer relevant, the Company’s estimate of the recoverability of its trade receivables could be further reduced.

      The Company invoices certain customers for amounts contractually due for unfulfilled minimum contractual obligations and recognizes a corresponding sales allowance equal to this revenue resulting in the recognition of zero net revenue at the time the customer is billed. The Company recognizes net revenue as these billings are collected in cash. The Company vigorously seeks payment of these amounts.

      Network operations

      Network operations 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 maintenance fees, leased circuit costs, and access fees paid to office building owners.

      International Operations

      The Company began recognizing revenue from operations in Canada through its wholly owned subsidiary, ARC Canada effective with the closing of the Allied Riser merger on February 4, 2002. All2007 presentation.


      revenue is reported in United States dollars. Revenue for ARC Canada for the period from February 4, 2002 to DecemberCOGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      DECEMBER 31, 20022005, 2006 and the years ended December 31, 2003 and 2004 was $4.3 million, $5.6 million and $6.2 million, respectively. ARC Canada’s total assets were $11.8 million at December 31, 2003 and $11.4 million at December 31, 2004.2007

      The Company began recognizing revenue from operations in Europe effective with the January 5, 2004 acquisition of Cogent Europe. All revenue is reported in United States dollars. Revenue for the Company’s European operations for the year ended December 31, 2004 was $23.3 million. Cogent Europe’s total consolidated assets were $68.3 million at December 31, 2004.

      Foreign Currency Translation Adjustment and Comprehensive Income (Loss)

      The functional currency of ARC Canada is the Canadian dollar. The functional currency of Cogent Europe is the euro. The consolidated financial statements of ARC Canada, and Cogent Europe, are translated into U.S. 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 of the Company’s non-U.S. operations are accumulated and reported as a component of other comprehensive income in stockholders’ equity.

      Statement of Financial Accounting Standard (“SFAS”) No. 130, “Reporting of Comprehensive Income” requires “comprehensive income” and the components of “other comprehensive income” to be reported in the financial statements and/or notes thereto. The Company’s only components of “other comprehensive income” are currency translation adjustments for all periods presented.

      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 reevaluates such designation at each balance sheet date. At December 31, 2003 and 2004, the Company’s marketable securities consisted of money market accounts, certificates of deposit and commercial paper.

      The Company is party to letters of credit totaling approximately $1.7 million as of December 31, 2004 and $2.4 million at December 31, 2003. These letters of credit are secured by certificates of deposit and commercial paper investments of approximately $1.7 million at December 31, 2004 and $2.4 million at December 31, 2003 that are restricted and included in short-term investments and other assets.

      At December 31, 2003 and 2004, the carrying amount of cash and cash equivalents, short-term investments, accounts receivable, prepaid and other current assets, accounts payable, and accrued expenses approximated fair value because of the short maturity of these instruments. Based upon the borrowing rates for debt arrangements with similar terms the Company estimates the fair value of the Allied Riser convertible subordinated notes at $8.6 million and the fair value of its Amended and Restated Cisco Note at $14.6 million.

      The Allied Riser convertible subordinated notes due in June 2007 have a face value of $10.2 million. The notes were recorded at their fair value of approximately $2.9 million at the merger date. The resulting discount is being accreted to interest expense through the maturity date using the effective interest rate method.

      Short-Term Investments

      Short-term investments consist primarily of commercial paper and certificates of deposit with original maturities beyond three months, but less than 12 months. Such short-term investments are carried at cost, which approximates fair value due to the short period of time to maturity. Investments underlying our cash


      equivalents and short-term investments are classified as “available for sale” in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”.

      Credit risk

      The Company’s assets that are exposed to credit risk consist of its cash equivalents, short-term investments, other assets and accounts receivable. The Company places its cash equivalents and short-term investments 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, Western Europe and in Ontario Canada. Revenues from the Company’s net centric, formerly called “wholesale”, customers and customers obtained through business combinations are subject to a higher degree of credit risk than customers who purchase its traditional corporate, formerly called “retail”, service.

      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 usage with consideration given to technological changes and trends in the industry that could impact the network architecture and asset utilization. The direct costs incurred prior to an asset being ready for service are reflected as construction in progress. Interest is capitalized during the construction period based upon the rates applicable to borrowings outstanding during the period. Construction in progress includes costs incurred under the construction contract related to a specific building prior to that building being ready for service (a “lit building”). System infrastructure includes capitalized interest, the capitalized salaries and benefits of employees directly involved with construction activities and costs incurred by third party contracts to construct and install the Company’s long-haul backbone network. Expenditures for maintenance and repairs are expensed as incurred. 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.

      Depreciation and amortization periods are as follows:

      Type of asset

      Depreciation or amortization period

      Indefeasible rights of use (IRUs)

      Shorter of useful life or IRU lease agreement; generally 15 to 20 years, beginning when the IRU is ready for use

      Network equipment

      5 to 10 years

      Leasehold improvements

      Shorter of lease term or useful life; generally 10 to 15 years

      Software

      5 years

      Owned buildings

      40 years

      Office and other equipment

      2 to 5 years

      System infrastructure

      10 years

      Long-lived assets

      The Company’s long-lived assets include property and equipment and identifiable intangible assets to be held and used. These long-lived assets are currently reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be addressed pursuant to Statement of Financial Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Pursuant to SFAS No. 144, 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 and their eventual disposition. The cash flow projections used to make this assessment are consistent with the cash flow projections that management uses internally to assist in


      making key decisions. 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 is generally 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. Management evaluated these assets for impairment as of December 31, 2003 and 2004 in accordance with SFAS No. 144. Management believes that no such impairment existed as of December 31, 2003 or 2004. 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 under SFAS No. 144 would change.

      Because management’s best estimate of undiscounted cash flows generated from these assets exceeds their carrying value for each of the periods presented, no impairment pursuant to SFAS No. 144 exists. However, because of the significant difficulties confronting the telecommunications industry, management believes that the current fair value of our long-lived assets including our network assets and IRU’s are below the amounts the Company originally paid for them and may be less than their current depreciated cost basis.

      Asset retirement obligations

      In accordance with SFAS No. 143, “Accounting for Asset Retirement Obligations,” the fair value of a liability for an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The Company measures changes in the liability for an asset retirement obligation due to passage of time by applying an interest method of allocation to the amount of the liability at the beginning of the period. The interest rate used to measure that change is the credit-adjusted risk-free rate that existed when the liability was initially measured.

      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 thosethese estimates.

      Revenue recognition and allowance for doubtful accounts

              The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition." The Company's service offerings consist of telecommunications services provided under month-to-month or annual contracts billed monthly in advance. Net 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 a new customer's credit history and historical payment 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 estimated customer life determined by a historical analysis of customer retention.

              The Company invoices certain customers for amounts contractually due for unfulfilled minimum contractual obligations and recognizes a corresponding sales allowance equal to this revenue 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 net revenue as these billings are collected in cash.

              The Company establishes a valuation allowance for doubtful accounts and other sales credit adjustments. Valuation allowances for sales credits are established through a reduction of revenue, while valuation allowances for doubtful accounts are established through a charge to selling, general and administrative expenses. The Company assesses the adequacy of these reserves by evaluating general factors, such as the length of time individual receivables are past due, historical collection experience, and changes in the credit worthiness of its 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.

      Network operations

              Network operations 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 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.


      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      DECEMBER 31, 2005, 2006 and 2007

      Foreign currency translation adjustment and comprehensive income (loss)

              The functional currency of Cogent Canada is the Canadian dollar. The functional currency of Cogent Europe is the euro. The consolidated financial statements of Cogent Canada, and Cogent Europe, are translated into U.S. 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 of the Company's non-U.S. operations are accumulated and reported as a component of other comprehensive income (loss) in stockholders' equity.

              Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting of Comprehensive Income" requires "comprehensive income" and the components of "other comprehensive income" to be reported in the financial statements and/or notes thereto. The Company's only components of "other comprehensive income" are currency translation adjustments for all periods presented.

      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, 2006 and 2007, the Company's investments consisted of money market accounts (included in cash equivalents) and certificates of deposit.

              At December 31, 2006 and 2007, the carrying amount of cash and cash equivalents, short-term investments, accounts receivable, prepaid and other current assets, accounts payable, and accrued expenses approximated fair value because of the short-term nature of these instruments. Based upon the quoted market price at December 31, 2007, the fair value of the Company's $200.0 million convertible senior notes was approximately $184.0 million.

      Short-term investments

              Short-term investments consist of certificates of deposit with original maturities beyond three months, but less than twelve months. Such short-term investments are carried at amortized cost, which approximates fair value due to the short period of time to maturity. Investments underlying the Company's cash equivalents and short-term investments are classified as "held-to-maturity" in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities."

              The Company was party to letters of credit totaling approximately $1.0 million as of December 31, 2006 and December 31, 2007. These letters of credit are secured by certificates of deposit of approximately $1.1 million at December 31, 2006 and December 31, 2007, that are restricted and included in short-term investments and other assets.

      Credit risk

              The Company's assets that are exposed to credit risk consist of its cash and cash equivalents, short-term investments, other assets and accounts receivable. As of December 31, 2006 and 2007, approximately $37.4 million (4 funds) and $171.9 million (7 funds) of the Company's cash equivalents were invested in money market funds. The largest amount in an individual fund was $30.9 million at December 31, 2006 and $50.7 million at December 31, 2007. The Company places its cash equivalents and short-term investments 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


      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      DECEMBER 31, 2005, 2006 and 2007


      metropolitan areas in the United States, Europe and Canada. Receivables from the Company's net centric (wholesale) customers and customers obtained through business combinations are subject to a higher degree of credit risk than other 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 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. 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 based upon its assessment at the inception of the lease of the number of option periods that are reasonably assured in accordance with SFAS No. 13 "Accounting for Leases." 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 IRU lease agreement; generally 15 to 20 years, beginning when the IRU is ready for use
      Network equipment3 to 8 years
      Leasehold improvementsShorter of lease term or useful life
      Software5 years
      Owned buildings40 years
      Office and other equipment3 to 7 years
      System infrastructure5 to 10 years

      Long-lived assets

              The Company's long-lived assets include property and equipment and identifiable intangible assets. These long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be addressed pursuant to SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Pursuant to SFAS No. 144, 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. Management believes that no such impairment existed as of December 31, 2006 or 2007. 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 under SFAS No. 144 could change.


      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      DECEMBER 31, 2005, 2006 and 2007

      Asset retirement obligations

              In accordance with SFAS No. 143, "Accounting for Asset Retirement Obligations," the fair value of a liability for an asset retirement obligation is recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The Company records changes in the liability for an asset retirement obligation due to passage of time using the effective interest rate method. The interest rate used to measure that change is the credit-adjusted risk-free rate that existed when the liability was initially measured.

      Convertible Senior Notes

              The Company evaluated the embedded conversion option of its 1.00% Convertible Senior Notes (the "Notes") in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", EITF Issue No. 00-19 "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in a Company's Own Stock" and EITF Issue No. 01-6 "The Meaning of Indexed to a Company's Own Stock." The Company concluded that the embedded conversion option contained within the Notes should not be accounted for separately because the conversion option is indexed to the Company's common stock and would be classified within stockholders' equity, if issued on a standalone basis.

              The Company also evaluated the terms of the Notes for a beneficial conversion feature in accordance with EITF No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and EITF No. 00-27, "Application of Issue 98-5 to Certain Convertible Instruments." The Company concluded that there was no beneficial conversion feature at the commitment date based on the conversion rate of the Notes relative to the commitment date stock price. The Company continues to evaluate potential future beneficial conversion charges based upon potential future triggering conversion events.

      Income taxes

      The Company accounts for income taxes in accordance with SFAS No. 109, “Accounting"Accounting for Income Taxes.”" Under SFAS No. 109, 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 expense or benefits are based upon the changes in the assets or liability from period to period.

      Stock-based compensation

              In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. ("FIN") 48, "Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109." FIN No. 48 requires that management determine 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 accountsadopted the provisions of FIN No. 48 on January 1, 2007. As a result of adopting FIN No. 48, the Company did not recognize any previously unrecognized tax positions. The adoption of FIN No. 48 did not have a material effect on the Company's results of operations or financial position. The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. There was no interest expense or expense associated with penalties recognized during the year ended December 31, 2007.


      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      DECEMBER 31, 2005, 2006 and 2007

              The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The Company is subject to U.S. federal tax and state tax examinations for years from 2004 to 2007. The Company is subject to tax examinations in its foreign jurisdictions generally for years from 2001 to 2007. Management does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.

      Equity-based compensation

              Prior to January 1, 2006, the Company accounted for its stock option planequity-based compensation under the recognition and shares of restricted preferred stock granted under its 2003 Incentive Award Plan in accordance with themeasurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting"Accounting for Stock Issued to Employees,”Employees" ("Opinion 25"), and related interpretationsInterpretations, as permitted by SFAS No. 123, "Accounting for Stock-Based Compensation." Effective January 1, 2006, the Company adopted SFAS No. 123(R), "Share-Based Payment", using the intrinsicmodified-prospective transition method.

              Under the modified-prospective transition method, compensation cost recognized includes: (a) compensation cost for all equity-based payments granted prior to but not yet vested as of January 1, 2006, based on the grant date fair value, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value. Results for prior periods have not been restated. As such,a result of adopting SFAS No. 123(R), the Company's net loss for the year ended December 31, 2006, was approximately $0.7 million greater than if it had continued to account for share-based compensation expense relatedunder Opinion 25. Upon the adoption of SFAS No. 123(R), $9.7 million of deferred compensation was offset against additional paid-in-capital.

              Pro forma information regarding net loss and net loss per share is required by SFAS No. 123 and, in periods prior to fixedJanuary 1, 2006, had been determined as if the Company had accounted for its employee stock options and restricted shares is recorded only ifunder the fair value method. The fair value of each option grant was estimated on the date of grant using the fair value of the underlying stock exceeds the exercise price.Black-Scholes option-pricing model.

      The Company has adopted the disclosure only requirements of SFAS No. 123, “Accounting for Stock-Based Compensation,” which allows entities to continue to apply the provisions of APB Opinion


      No. 25 for transactions with employees and to provide pro forma net income disclosures as if the fair value based method of accounting described in SFAS No. 123 had been applied to employee stock option grants and restricted shares.        The following table illustrates the effect on net incomeloss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 for the year ended December 31, 2005 (in thousands except per share amounts):

       

       

      Year Ended
      December 31, 2002

       

      Year Ended
      December 31, 2003

       

      Year Ended
      December 31, 2004

       

      Net (loss) income available to common stock, as reported

       

       

      $

      (91,843

      )

       

       

      $

      88,743

       

       

       

      $

      (133,646

      )

       

      Add: stock-based employee compensation expense included in reported net loss, net of related tax effects

       

       

      3,331

       

       

       

      18,675

       

       

       

      12,262

       

       

      Deduct: total stock-based employee compensation expense determined under fair value based method, net of related tax effects

       

       

      (4,721

      )

       

       

      (19,866

      )

       

       

      (12,523

      )

       

      Pro forma—net (loss) income

       

       

      $

      (93,233

      )

       

       

      $

      87,552

       

       

       

      $

      (133,907

      )

       

      (Loss) income per share as reported—basic

       

       

      $

      (564.45

      )

       

       

      $

      11.18

       

       

       

      $

      (175.03

      )

       

      Pro forma (loss) income per share—basic

       

       

      $

      (572.99

      )

       

       

      $

      11.03

       

       

       

      $

      (175.38

      )

       

      (Loss) income per share as reported—diluted

       

       

      $

      (564.45

      )

       

       

      $

      11.18

       

       

       

      $

      (175.03

      )

       

      Pro forma (loss) income per share—diluted

       

       

      $

      (572.99

      )

       

       

      $

      11.03

       

       

       

      $

      (175.38

      )

       

       
      		 Year Ended
      December 31, 2005
      		 
      Net loss available to common shareholders, as reported $(67,518)
      Add: equity-based compensation expense included in reported net loss, net of related tax effects  13,305 
      Deduct: total stock-based employee compensation expense determined under fair value based method, net of related tax effects  (13,918)
        
      		 
      Pro forma—net loss available to common shareholders $(68,131)
        
      		 
      Loss per share available to common shareholders, as reported—basic and diluted $(1.96)
        
      		 
      Pro forma loss per share available to common shareholders—basic and diluted $(1.98)
        
      		 

              

      The weighted-average per share grant date fair value of options for common stock granted was $48.80$4.95 in 20022005, $6.16 in 2006 and $11.20$12.27 in 2003. There2007.


      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      DECEMBER 31, 2005, 2006 and 2007

              The following assumptions were no optionsused for common stock granted in 2004. The weighted-average per share grant datedetermining the fair value of options for Series H preferred stock granted in 2004 was $238.97. The fair value of these options was estimated at the date of grant using the Black-Scholes method with the following weighted-average assumptions for 2002—an average risk-free rate of 3.5 percent, a dividend yield of 0 percent, an expected life of 5.0three years and expected volatility of 162%, for 2003—an average risk-free rate of 3.5 percent, a dividend yield of 0 percent, an expected life of 5.0 years, and expected volatility of 197% and for 2004—an average risk-free rate of 4.0 percent, a dividend yield of 0 percent, an expected life of 5.0 years, and expected volatility of 151%. The weighted- average per share grant date fair value of Series H convertible preferred shares granted to employees in 2003 was $861.28 and $1,239.00 in 2004 and was determined using the trading price of the Company’s common stock on the date of grant. Each share of Series H preferred stock and options for Series H preferred stock converted into approximately 38 shares of common stock and options for approximately 38 shares of common stock in connection with the Equity Conversion.ended December 31, 2007:

       
      		 Year Ended
      December 31, 2005
      		 Year Ended
      December 31, 2006
      		 Year Ended
      December 31, 2007
      		 
      Dividend yield 0.0%0.0%0.0%
      Expected volatility—average 159.8%58.2%55.1%
      Risk-free interest rate—average 4.1%4.8%4.5%
      Expected life of the option term (in years) 5.0 5.0 5.9 

      Basic and Diluteddiluted net loss per common share

              Net Loss Per Common Share

      Net income (loss)loss per share is presented in accordance with the provisions of SFAS No. 128 “Earnings"Earnings per Share”.Share." SFAS No. 128 requires a presentation of basic EPS and diluted EPS. Basic 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, adjusted, using the if-converted method, for the effect of common stock equivalents arising from the assumed conversion of participating convertible securities, if dilutive. Diluted net loss per common share is based on the weighted- averageweighted-average number of shares of common stock outstanding during each period, adjusted for the effect of common stock equivalents arising from the assumed exercise of stock options, warrants, the conversion of debt, preferred stock and conversion of participating convertible securities, if dilutive. Using the "if-converted" method, the shares issuable upon conversion of the 1.00% Convertible Senior Notes (the "Notes") were anti-dilutive for the year ended December 31, 2007. Accordingly, their impact has been excluded from the computation of diluted loss per share. The Notes are convertible into shares of the Company's Common


      stock at an initial conversion price of $49.18 per share, yielding 4.1 million common shares, subject to certain adjustments set forth in the indenture. Common stock equivalents have also been excluded from the net loss per share calculationcalculations for 2002 and 2004all periods presented because their effect would be anti-dilutive.

      For the years ended December 31, 2002,2005, 2006 and 2004,2007 options to purchase 0.11.2 million, 1.2 million shares and 1.1 million shares of common stock at weighted-average exercise prices of $88.20$2.68, $2.73 and $2.30$5.75 per share, respectively, are not included in the computation of diluted earnings per share as they are anti-dilutive. Unvested restricted stock is not included in the computation of earnings per share until vested. For the years ended December 31, 20022005, 2006 and 2004, preferred stock, which was convertible into 0.52007, 0.3 million shares, 0.4 million shares and 31.61.2 million shares of commonunvested restricted stock, respectively, wasare not included in the computation of diluted earnings per share as a result of its anti-dilutive effect. For the years ended December 31, 2002 and 2004, approximately 6,300 shares, of common stock issuable on the conversion of the Allied Riser convertible subordinated notes and warrants were not included in the computation of diluted earnings per share as a result of their anti-dilutive effect.

      In March 2004, the FASB ratified the consensuses reached by Emerging Issues Task Force in Issue No. 03-06, Participating Securities and the Two-Class Method under FASB Statement No. 128 (“EITF 03-06”). EITF 03-06 clarifies the definitional issues surrounding participating securities and requires companies to restate prior earnings per share amounts for comparative purposes upon adoption. The Company adopted the provisions of EITF 03-06 in the second quarter of 2004, and restated its previously disclosed basic earnings per share amounts to include its participating securities in basic earnings per share when including such shares would have a dilutive effect. As a result of the adoption and for comparative purposes, basic income per share available to common shareholders decreased from $10.99 to $2.78 for the quarter ended March 31, 2003, from $271.84 to $12.64 for the quarter ended September 30, 2003, and from $229.18 to $11.18 for the year ended December 31, 2003.will be included as this stock vests.

      Recent accounting pronouncements

      The following details the determination of the diluted weighted average shares for the year ended December 31, 2003.

      Year Ended
      December 31, 2003

      Weighted average common shares outstanding—basic

      7,935,831

      Dilutive effect of stock options

      371

      Dilutive effect of warrants

      2,676

      Weighted average shares—diluted

      7,938,878

      There is no effect on net income for the year ended December 31, 2003, caused by the conversion of any of the above securities included in the diluted weighted average shares calculation. The weighted average common shares outstanding for 2003 includes participating securities since 2003 had net income. These securities were excluded in 2002 and 2004 as they are anti-dilutive for these periods.

      Recent Accounting Pronouncements

      In December 2004,September 2006, the FASB issued StatementSFAS No. 123 (revised 2004), Share-Based Payment (“157, "Fair Value Measurements" ("SFAS 123R”157"). SFAS 123R requires all share-based payments157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. In February 2008, the FASB issued FSP No. 157-1, "Application of FASB Statement No. 157 to employees, including grantsFASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of stock options,Lease Classification or Measurement under Statement 13" and FSP No. 157-2, "Effective Date of FASB Statement No. 157" as amendments to be recognized inSFAS 157, which exclude lease transactions from the statementscope of operations based upon their fair values. The Company currently disclosesSFAS 157 and also defer the impact of valuing grants of stock options and recording the related compensation expense in a pro-forma footnote to its financial statements. Under SFAS 123R this alternative is no longer available. The Company will be required to adopt SFAS 123R on July 1, 2005 and as a result will record additional compensation expense in its statements of operations. The impacteffective date of the adoption of SFAS 123(R) cannot157 for non-financial


      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      DECEMBER 31, 2005, 2006 and 2007


      assets and non-financial liabilities that are nonrecurring. The provisions of SFAS 157 are effective for the fiscal year beginning January 1, 2008, except for certain non-financial assets and liabilities for which the effective date has been deferred to January 1, 2009. The adoption of SFAS 157 and its related pronouncements are not expected to have a material effect on the Company's consolidated financial position, results of operations or cash flows.

              In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits entities to measure many financial instruments and certain other items at fair value that are not currently required to be predictedmeasured at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 will be effective for the first fiscal year that begins after November 15, 2007. The Company will not adopt the alternative provided in this time because it will dependstatement.

              In June 2006, the Emerging Issues Task Force of the Financial Accounting Standards Board (the "EITF") reached a conclusion on levels of share-based payments grantedEITF Issue No. 06-3 "How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the future. However, hadIncome Statement." The scope of EITF Issue No. 06-3 includes any tax assessed by a governmental authority that is both imposed on and concurrent with a specific revenue-producing transaction between a seller and a customer, and may include, but is not limited to, sales, use, value added, and some excise taxes. EITF Issue No. 06-3 requires that the presentation of taxes on either a gross basis (included in revenues and costs) or a net basis (excluded from revenues) and is an accounting policy decision that should be disclosed. The Company adoptedcollects services and value added taxes from customers and records these amounts on a net basis, which is within the scope of EITF Issue No. 06-3. EITF Issue No. 06-3 applied to financial reports for interim and annual reporting periods beginning after December 15, 2006. The adoption of EITF Issue No. 06-3 did not have any impact on the Company's results of operations or financial position.

              In December 2007, the FASB issued SFAS 123(R)No. 141R, "Business Combinations". SFAS 141R requires the acquiring entity in prior periods,a business combination to record all assets acquired and liabilities assumed at their respective acquisition-date fair values, changes the recognition of assets acquired and liabilities assumed arising from contingencies, changes the recognition and measurement of contingent consideration, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R also requires additional disclosure of information surrounding a business combination, such that users of the entity's financial statements can fully understand the nature and financial impact of the business combination. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that standard would have approximated the impactdate. The provisions of SFAS No. 123 as described in141R will only impact us if the disclosure of pro forma net (loss) income in the notes to these consolidated financial statements. The Company is currentlyparty to a business combination after the pronouncement has been adopted.


      evaluating the impact of the adoption of SFAS 123(R) on its financial positionCOGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      DECEMBER 31, 2005, 2006 and results of operations, including the valuation methods and support for the assumptions that underlie the valuation of the awards.

      Cash flows from financing activities2007

      In connection with the acquisitions of Cogent Europe, Symposium Omega, UFO and Cogent Potomac, certain of the Company’s shareholders invested in the entities that were used by the Company to acquire the operating assets and liabilities of the businesses acquired. As a result, these amounts are included in cash flows from financing activities in the accompanying consolidated statement of cash flows for 2004.

      2.   Acquisitions:

      Since the Company’s inception, it has consummated several acquisitions through which it has generated revenue growth, expanded its network and customer base and added strategic assets to its business. These acquisitions were recorded in the accompanying financial statements under the purchase method of accounting. The operating results have been included in the consolidated statements of operations from the acquisition dates.

      Verio Acquisition

      In December 2004, the Company acquired most of the off-net Internet access customers of Verio Inc., (“Verio”) a leading global IP provider and subsidiary of NTT Communications Corp. The acquired assets included over 3,700 customer connections located in twenty-three U.S. markets, customer accounts receivable and certain network equipment. The Company assumed the liabilities associated with providing services to these customers including vendor relationships, accounts payable, customer contractual commitments and accrued liabilities. The Company is integrating these acquired assets into its operations and onto its network.

      Aleron Broadband Services Acquisition and Merger with Cogent Potomac

      In October 2004, the Company acquired certain assets of Aleron Broadband Services, formally known as AGIS Internet (“Aleron”), and $18.5 million in cash, in exchange for 3,700 shares of its Series M preferred stock. The acquisition was effected through a merger with Cogent Potomac. The Series M preferred stock was convertible into approximately 5.7 million sharesof the Company’s common stock and converted into common stock in connection with the Equity Conversion. The Company acquired Aleron’s customer base and network, as well as Aleron’s Internet access and managed modem service. The Company is integrating these acquired assets into its operations and onto its network.

      Global Access Acquisition

      In September 2004, the Company issued 185 shares of Series L preferred stock to the shareholders of Global Access Telecommunications, Inc. (“Global Access”) in exchange for the majority of the assets of Global Access. The Series L preferred stock was convertible into approximately 0.3 million sharesof the Company’s common stock and converted into common stock in connection with the Equity Conversion. The estimated fair market value for the Series L preferred stock was determined by using the price per share of our Series J preferred stock. Global Access was headquartered in Frankfurt, Germany and provided Internet access and other data services in Germany. The acquired assets included customer contracts, accounts receivable and certain network equipment. Assumed liabilities include certain vendor relationships and accounts payable and accrued liabilities. The Company has completed the integration of these acquired assets into its operations and onto its network.

      55



      Merger with UFO Group, Inc.

      In August 2004, a subsidiary of the Company merged with UFO Group, Inc. (“UFO Group”). The Company issued 2,600 shares of Series K preferred stock in exchange for the outstanding shares of UFO Group. The Series K preferred stock was convertible into approximately 0.8 million sharesof the Company’s common stock and converted into common stock in connection with the Equity Conversion. The estimated fair market value for the Series K preferred stock was determined by using the price per share of our Series J preferred stock. Prior to the merger, UFO Group had acquired the majority of the assets of Unlimited Fiber Optics, Inc. (“UFO”). UFO’s customer base is comprised of data service customers and its network is comprised of fiber optic facilities located in San Francisco, Los Angeles and Chicago. The acquired assets included net cash of approximately $1.9 million, all of UFO’s customer contracts, customer accounts receivable and certain network equipment. Assumed liabilities include certain vendor relationships and accounts payable. The Company is in the process of integrating these acquired assets into its operations and onto its network and expects to complete this integration in the second quarter of 2005.

      Merger with Symposium Omega

      In March 2004, Symposium Omega, Inc., (“Omega”) a Delaware corporation and related party, merged with a subsidiary of the Company (Note 12). Prior to the merger, Omega had raised approximately $19.5 million in cash in a private equity transaction with certain existing investors in the Company and acquired the rights to a German fiber optic network. The German fiber optic network had no customers, employees or associated revenues. The Company issued 3,891 shares of Series J preferred stock to the shareholders of Omega in exchange for all of the outstanding common stock of Omega. The Series J preferred stock was convertible into approximately 6.0 million sharesof the Company’s common stock and converted into common stock in connection with the Equity Conversion. The accounting for the merger resulted in the Company recording cash of approximately $19.5 million and issuing Series J preferred stock. The German fiber optic network includes a pair of single mode fibers under a fifteen-year IRU, network equipment, and the co-location rights to facilities in approximately thirty-five points of presence in Germany. Approximately 1.5 million euro ($2.0 million) of the 2.2 million euro ($2.9 million) purchase price was paid through December 31, 2004 and the remaining 0.7 million euro payment ($0.9 million) was made in 2005.

      Merger with Symposium Gamma, Inc. and Acquisition of Firstmark Communications Participations S.à r.l. and Subsidiaries (“Firstmark”)

      In January 2004, a subsidiary of the Company merged with Symposium Gamma, Inc. (“Gamma”), a related party (Note 12). Immediately prior to the merger, Gamma had raised $2.5 million through the sale of its common stock in a private equity transaction with certain existing investors in the Company and new investors and in January 2004 acquired Firstmark for 1 euro. The merger expanded the Company’s network into Western Europe. Under the merger agreement all of the issued and outstanding shares of Gamma common stock were converted into 2,575 shares of the Company’s Series I preferred stock. The Series I preferred stock was convertible into approximately 0.8 million sharesof the Company’s common stock and converted into common stock in connection with the Equity Conversion. In 2004, Firstmark changed its name to Cogent Europe S.à r.l (“Cogent Europe”).

      Fiber Network Services, Inc. Acquisition

      On February 28, 2003, the Company purchased certain assets of Fiber Network Solutions, Inc. (“FNSI”) in exchange for the issuance of options for 6,000 shares of the Company’s common stock and the Company’s agreement to assume certain liabilities. The acquired assets include FNSI’s customer contracts


      and accounts receivable. Assumed liabilities include certain of FNSI’s accounts payable, facilities leases, customer contractual commitments and note obligations.

      PSINet, Inc. Acquisition

      In April 2002, the Company acquired certain of PSINet’s assets and certain liabilities related to its operations in the United States for $9.5 million in cash in a sale conducted under Chapter 11 of the United States Bankruptcy Code. The acquired assets include certain of PSINet’s accounts receivable and intangible assets, including customer contracts, settlement-free peering rights and the PSINet trade name. Assumed liabilities include certain leased circuit commitments, facilities leases and customer contractual commitments. With the acquisition of PSINet assets the Company began to offer off-net Internet access service and acquired significant non-core services.

      Merger—Allied Riser Communications Corporation

      On February 4, 2002, the Company acquired Allied Riser Communications Corporation (“Allied Riser”). Allied Riser provided broadband data, voice and video communication services to small- and medium-sized businesses located in selected buildings in North America, including Canada. Upon the closing of the merger on February 4, 2002, Cogent issued approximately 0.1 million shares, to the existing Allied Riser stockholders and became a public company listed on the American Stock Exchange. The acquisition of Allied Riser provided the Company with in-building networks, pre-negotiated building access rights with building owners and real estate investment trusts across the United States and in Toronto, Canada and the operations of Shared Technologies of Canada (“STOC”). STOC provides voice and data services in Toronto, Canada. In 2004, STOC changed its name to Cogent Canada.

      The following table summarizes the estimated fair values of the assets acquired and the liabilities assumed at the respective acquisition dates (in thousands) for our material acquisitions.

       

       

      Allied
      Riser

       

      PSINet

       

      Cogent
      Europe

       

      Current assets

       

      $

      71,502

       

      $

      4,842

       

      $

      17,374

       

      Property, plant & equipment

       

      —

       

      294

       

      55,862

       

      Intangible assets

       

      —

       

      12,166

       

      855

       

      Other assets

       

      3,289

       

      —

       

      4,145

       

      Total assets acquired

       

      $

      74,791

       

      $

      17,302

       

      $

      78,236

       

      Current liabilities

       

      20,621

       

      7,852

       

      25,118

       

      Long term debt

       

      34,760

       

      —

       

      49,683

       

      Other liabilities

       

      —

       

      —

       

      860

       

      Total liabilities assumed

       

      55,381

       

      7,852

       

      75,661

       

      Net assets acquired

       

      $

      19,410

       

      $

      9,450

       

      $

      2,575

       

      The intangible assets acquired in the PSINet acquisition were allocated to customer contracts ($4.7 million), peering rights ($5.4 million), trade name ($1.8 million), and a non-compete agreement ($0.3 million). These intangible assets are being amortized in periods ranging from two to five years. The purchase price allocations for the UFO, Aleron, Global Access and Verio acquisitions are not finalized and could change if assumed liabilities result in amounts different than their estimated amounts.

      The purchase price of Allied Riser was approximately $12.5 million and included the issuance of approximately 0.1 million shares of common stock valued at approximately $10.2 million, the issuance of warrants and options for the Company’s common stock valued at approximately $0.8 million and transaction expenses of approximately $1.5 million. The fair value of the common stock was determined by using the average closing price of Allied Risers’ common stock in accordance with SFAS No. 141. Allied


      Riser’s subordinated convertible notes were recorded at their fair value using their quoted market price at the merger date. The fair value of assets acquired was approximately $110.9 million resulting in negative goodwill of approximately $43.0 million. Negative goodwill was allocated to long-lived assets of approximately $34.6 million with the remaining $8.4 million recorded as an extraordinary gain.

      The merger with Cogent Europe was recorded in the accompanying financial statements under the purchase method of accounting. During the second quarter of 2004 the assumed liabilities were reduced by approximately $0.6 million as it was determined that an estimated assumed liability was not required to be paid resulting in an increase in negative goodwill resulting in a reduction of the long-lived asset balances. The purchase price of Cogent Europe was approximately $78.2 million, which includes the fair value of the Company’s Series I preferred stock of $2.6 million and assumed liabilities of $75.7 million. The fair value of assets acquired was approximately $155.5 million, which then gave rise to negative goodwill of approximately $77.3 million. Negative goodwill was allocated to long-lived assets, resulting in recorded assets acquired of $78.2 million.

      If the Cogent Europe acquisition had taken place at the beginning of 2003, the unaudited pro forma combined results of the Company for the year ended December 31, 2003 would have been as follows (amounts in thousands, except per share amounts).

       

       

      Year Ended
      December 31, 2003

       

      Revenue

       

       

      $

      85,952

       

       

      Net income

       

       

      218,269

       

       

      Net income per share—basic

       

       

      $

      24.99

       

       

      Net income per share—diluted

       

       

      $

      24.98

       

       

      In management’s opinion, these unaudited pro forma amounts are not necessarily indicative of what the actual results of the combined operations might have been if the Cogent Europe acquisition had been effective at the beginning of 2003. Cogent Europe’s results for the year ended December 31, 2003 include non-recurring gains of approximately $135 million. Because Cogent Europe’s results for the period from January 1, 2004 to January 4, 2004 were not material, the pro forma combined results for the year ended December 31, 2004 are not presented. Pro forma amounts for the UFO Group, Global Access, Aleron and Verio acquisitions are not presented as these acquisitions did not exceed the materiality reporting thresholds. In management’s opinion, these unaudited pro forma amounts are not necessarily indicative of what the actual results of the combined operations might have been if the Cogent Europe acquisition had been effective at the beginning of 2003.


      3.2.     Property and equipment and asset held for sale:equipment:

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

       

      December 31,

       

      		 December 31,
      		 

       

      2003

       

      2004

       

      		 2006
      		 2007
      		 

      Owned assets:

       

       

       

       

       

      		     

      Network equipment

       

      $

      186,204

       

      $

      221,480

       

      		 $244,688 $267,538 
      Leasehold improvements 68,452 75,865 
      System infrastructure 38,670 42,344 

      Software

       

      7,482

       

      7,599

       

      		 7,800 7,867 

      Office and other equipment

       

      4,120

       

      5,661

       

      		 7,395 8,720 

      Leasehold improvements

       

      50,387

       

      59,296

       

      Buildings

       

      —

       

      3,047

       

      		 1,418 1,623 

      Land

       

      —

       

      374

       

      		 125 139 

      System infrastructure

       

      32,643

       

      34,303

       

      Construction in progress

       

      988

       

      131

       

       
      		 
      		 

       

      281,824

       

      331,891

       

      		 368,548 404,096 

      Less—Accumulated depreciation and amortization

       

      (72,762

      )

      (116,682

      )

      		 (213,625) (272,321)
       
      		 
      		 

       

      209,062

       

      215,209

       

      		 154,923 131,775 

      Assets under capital leases:

       

       

       

       

       


       
       
       
       
       

      IRUs

       

      118,273

       

      143,214

       

      		 143,773 157,811 

      Less—Accumulated depreciation and amortization

       

      (12,929

      )

      (21,148

      )

      		 (35,428) (44,166)

       

      105,344

       

      122,066

       

      		 
      		 
      		 
       108,345 113,645 
       
      		 
      		 

      Property and equipment, net

       

      $

      314,406

       

      $

      337,275

       

      		 $263,268 $245,420 
       
      		 
      		 

              

      Depreciation and amortization expense related to property and equipment and capital leases was $26.6$53.7 million, $38.4$56.8 million and $48.3$64.5 million for the years ended December 31, 2002, 20032005, 2006 and 2004,2007, respectively.

        Asset Held for Salesales

      The        In 2005, the Company has finalized an agreement to sellsold a building and land it owns located in Lyon, France for net proceeds of 3.8 million euros ($5.1 million). These assets were acquired$5.1 million. This transaction resulted in a gain of approximately $3.9 million. In 2006, the Cogent Europe acquisition. The associatedCompany sold another building and land for net book valueproceeds of $1.2 million is classified as “Asset Held for Sale”$0.8 million. This transaction resulted in the accompanying consolidated balance sheet (See Note 15).a gain of approximately $0.3 million.

        Capitalized interest, labor and related costs

      In 2002 and 2003, the Company capitalized interest of $0.8 million and $0.1 million, respectively. There was no capitalized interest in 2004.        The Company capitalizes the salaries and related benefitscompensation cost of employees directly involved with its construction activities. The Company began capitalizing these costs in July 2000In 2005, 2006 and will continue to capitalize these costs while it is involved in construction activities. In 2002, 2003 and 2004,2007, the Company capitalized salaries and related benefitscompensation cost of $4.8$2.2 million, $2.6$2.1 million and $1.7$3.5 million, respectively. These amounts are included in system infrastructure.infrastructure costs.


      4.3.     Accrued liabilities and other current liabilities:

      Paris office lease—restructuring charge:charge

      In July 2004, the French subsidiary of Cogent Europe re-located its Paris headquarters. The estimated net present value of the remaining lease obligation, of the abandoned facility, net of estimated sub leasesublease income, was approximately $1.4 million and was recorded as a lease restructuring charge in July 2004. In December 2004, management2005, the Company revised its estimate for sublease income and


      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      DECEMBER 31, 2005, 2006 and 2007


      estimated that the estimated subnet present value of the remaining lease income which resulted inobligation increased by approximately $1.3 million and recorded an additional lease restructuring charge of $0.4 million.charge. A reconciliation of the amounts related to these contract termination costs is as follows (in thousands):

      Restructuring accrual

      Lease restructuring accrual
      		  
      		 
      Balance—December 31, 2004 $1,611 
      Amortization of discount  144 
      Charged to costs—2005  1,319 
      Effect of exchange rates  (236)
      Amounts paid  (1,286)
        
      		 
      Balance—December 31, 2005  1,552 
      Effect of exchange rates  40 
      Amortization of discount  114 
      Amounts paid  (1,313)
        
      		 
      Balance—December 31, 2006  393 
      Amortization of discount  7 
      Amounts paid  (400)
        
      		 
      Balance—December 31, 2007 $— 
        
      		 

      Acquired lease obligations

              In December 2004, the Company accrued for the net present value of estimated cash flows for amounts related to leases of abandoned facilities acquired in an acquisition. In 2005, the Company revised its estimate for sublease income and estimated that the net present value of the remaining lease obligation increased by approximately $1.6 million and recorded a corresponding increase to the acquired intangible assets. In August 2006, the Company placed one of these facilities into service and reversed the associated liability resulting in an increase to other income of approximately $0.4 million. In September 2007, the Company entered into a settlement agreement under which the Company was released from its obligation under one of the facility leases. This settlement agreement resulted in a gain of approximately $2.1 million recorded as a gain on lease restructurings in the accompanying


      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES

      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

      DECEMBER 31, 2005, 2006 and 2007


      consolidated statement of operations for the year ended December 31, 2007. A reconciliation of the amounts related to these contract termination costs is as follows (in thousands):

      Acquired unused lease obligations
      		  
      		 
      Assumed obligation—balance December 31, 2004 $1,894 
      Increase to obligation—2005  1,563 
      Amortization of discount  105 
      Amounts paid  (842)
        
      		 
      Balance—December 31, 2005  2,720 
      Amortization of discount  154 
      Facility placed into service  (395)
      Amounts paid  (725)
        
      		 
      Balance—December 31, 2006  1,754 
      Amortization of discount  82 
      Settlement amount  (1,325)
      Amounts paid  (441)
        
      		 
      Balance—December 31, 2007 (included in accrued and other current liabilities) $70 
        
      		 

      Asset retirement obligations

      2004

      Beginning balance—

              

      $

      —

      Charged to restructuring costs

      1,821

      Accretion

      145

      Amounts paid

      (355

      )

      Ending balance

      1,476

      Current portion (recorded as accrued liabilities)

      (1,229

      )

      Long term (recorded as other long term liabilities)

      382

      The Company provides for asset retirement obligations for certain points of presence in its networks. A reconciliation of the amounts related to these obligations as follows (in thousands):

      Asset Retirment Obligations

       

       

       

      2004

       

      Beginning balance

       

      $

      —

       

      Acquired balance—Cogent Europe

       

      1,226

       

      Accretion

       

      40

       

      Amounts paid

       

      (64

      )

      Ending balance

       

      1,202

       

      Current portion (recorded as accrued liabilities)

       

      (224

      )

      Long term (recorded as other long term liabilities)

       

      $

      978

       

      Asset retirement obligations
      		  
      		 
      Balance—December 31, 2004 $1,202 
      Effect of exchange rates  (128)
      Amortization of discount  45 
      Amounts paid  (274)
        
      		 
      Balance—December 31, 2005  845 
      Effect of exchange rates  101 
      Amortization of discount  40 
        
      		 
      Balance—December 31, 2006  986 
      Effect of exchange rates  119 
      Amortization of discount  47 
        
      		 
      Balance—December 31, 2007 (recorded as other long term liabilities) $1,152 
        
      		 

              

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

       

       

      2003

       

      2004

       

      General operating expenditures

       

      $

      4,941

       

      $

      9,575

       

      Restructuring accrual

       

      —

       

      1,229

       

      Due to LNG—related party (Note 12)

       

      —

       

      217

       

      Acquired lease accruals—Verio acquisition

       

      —

       

      1,832

       

      Deferred revenue

       

      486

       

      1,940

       

      Payroll and benefits

       

      419

       

      2,043

       

      Taxes

       

      1,584

       

      1,004

       

      Interest

       

      455

       

      3,968

       

      Total

       

      $

      7,885

       

      $

      21,808

       

      The current liabilities assumed in the Verio acquisition include $1.9 million for the present value of estimated net cash flows for amounts related to leases of abandoned facilities. No payments were made against these obligations in 2004.

       
      		 2006
      		 2007
      General operating expenditures $5,993 $4,976
      Lease restructuring accrual  393  —
      Acquired unused lease obligations  512  70
      Deferred revenue—short term  1,265  1,642
      Payroll and benefits  1,465  2,634
      Taxes—non-income based  585  985
      Interest  1,566  2,584
        
      		 
      Total $11,779 $12,891
        
      		 

      5.4.     Intangible assets:

      Intangible assets as of December 31 consist of the following (in thousands):

       

       

      2003

       

      2004

       

      Peering arrangements (weighted average life of 36 months)

       

      $

      16,440

       

      $

      16,440

       

      Customer contracts (weighted average life of 21 months)

       

      8,145

       

      10,948

       

      Trade name (weighted average life of 36 months)

       

      1,764

       

      1,764

       

      Other (weighted average life of 24 months)

       

      167

       

      167

       

      Non-compete agreements (weighted average life of 45 months)

       

      431

       

      431

       

      Licenses (weighted average life of 60 months)

       

      —

       

      490

       

      Total (weighted average life of 31 months)

       

      26,947

       

      30,240

       

      Less—accumulated amortization

       

      (18,671

      )

      (27,115

      )

      Intangible assets, net

       

      $

      8,276

       

      $

      3,125

       

       
      		 2006
      		 2007
      		 
      Peering arrangements $16,440 $16,440 
      Customer contracts  12,435  12,545 
      Trade name  1,764  1,764 
      Non-compete agreements  431  431 
      Licenses  615  711 
        
      		 
      		 
      Total  31,685  31,891 
      Less—accumulated amortization  (30,535) (31,726)
        
      		 
      		 
      Intangible assets, net $1,150 $165 
        
      		 
      		 

              

      Intangible assets are being amortized over periods ranging from 12 to 60 months. Intangible assets are amortized on a straight-line basis or using an accelerated method consistent with expected cash flows from the related assets. Amortization expense for the years ended December 31, 2002, 20032005, 2006 and 20042007 was approximately $7.4$2.0 million, $10.0$1.6 million and $8.3$1.1 million, respectively. Future amortization expense related to intangible assets of $0.2 million is expected to be $2.8 million, $0.1 million, $0.1 million, and $0.1 million forrecognized through the yearsyear ending December 31, 2005, 2006,2009.

      5.     Long-term debt and credit facility:

      Convertible Senior Notes

              In June 2007, and 2008, respectively.

      6.   Other assets and liabilities:

      Other long term assets as of December 31 consist of the following (in thousands):

       

       

      2003

       

      2004

       

      Prepaid expenses

       

      $

      378

       

      $

      255

       

      Deposits

       

      3,999

       

      4,570

       

      Total

       

      $

      4,377

       

      $

      4,825

       

      Other long term liabilities as of December 31 consist of the following (in thousands):

       

       

      2003

       

      2004

       

      Deposits

       

      $

      636

       

      $

      264

       

      Indemnification—LNG (Note 9)

       

      167

       

      167

       

      Restructuring accrual

       

      —

       

      382

       

      Asset retirement obligation

       

      —

       

      978

       

      Other

       

      —

       

      25

       

      Total

       

      $

      803

       

      $

      1,816

       

      Warrant sale

      In the Firstmark acquisition the Company obtained warrants to purchase ordinary shares of a company listed on the NASDAQ. The warrants were valued at the acquisition date at a fair market value of approximately $2.6 million under the Black-Scholes method of valuation. In January 2004, the Company exercised the warrants and sold the related securitiesissued 1.00% Convertible Senior Notes (the "Notes") due June 15, 2027, for proceeds of approximately $3.5 million resulting in a gain of approximately $0.9 million. The gain is included as a component of interest and other income in the accompanying condensed consolidated financial statements.


      7.   Long-term debt:

      Troubled Debt Restructuring—Cisco Credit Facility

      Prior to July 31, 2003, the Company was party to a $409 million credit facility with Cisco Systems Capital Corporation (“Cisco Capital”). On June 12, 2003, the Board of Directors approved a transaction with Cisco Systems, Inc. (“Cisco”) and Cisco Capital that restructured the Company’s indebtedness to Cisco Capital while at the same time selling Series G preferred stock to certain of the Company’s existing stockholders. The sale of Series G preferred stock was required to obtain the cash needed to complete the Cisco credit facility restructuring. On June 26, 2003, the Company’s stockholders approved these transactions. The Company entered into an agreement (the “Exchange Agreement”) with Cisco and Cisco Capital pursuant to which, among other things, Cisco and Cisco Capital agreed to cancel the principal amount of $262.8 million of indebtedness plus $6.3 million of accrued interest and return warrants exercisable for the purchase of common stock (the “Cisco Warrants”) in exchange for a cash payment by the Company of $20 million, the issuance of 11,000 shares of the Company’s Series F preferred stock, and the issuance of an amended and restated promissory note (the “Amended and Restated Cisco Note”) with an aggregate principal amount of $17.0$200.0 million underin a private offering for resale to qualified institutional buyers pursuant to SEC Rule 144A. The Notes are unsecured and bear interest at 1.00% per annum. The 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 modified credit facility (“AmendedCompany's subsidiaries and Restated Credit Agreement”). This transaction has been accountedto any secured debt the Company may issue, to the extent of the value of the collateral. Interest is 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 Notes of approximately $195.1 million, after deducting the original issue discount of 2.25% and issuance costs. The Company used $10.6 million of the proceeds to repay principal and accrued interest on its existing convertible subordinated notes on June 15, 2007 and used approximately $50.1 million of the net proceeds to repurchase approximately 1.8 million shares of its common stock concurrently with the Notes offering. These 1.8 million common shares were subsequently retired. The discount and other issuance costs are being amortized to interest expense using the effective interest method through June 15, 2014, which is the earliest put date. The Company intends to use the remaining proceeds for general corporate purposes and to fund the common stock buyback program discussed in Note 8.

      Conversion Process and Other Terms of the Notes

              The 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 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 Notes will receive additional shares of the Company's common stock. Upon conversion of the 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 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 Notes falls below a certain threshold, or (iv) if the Company calls the 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 troubled debt restructuring pursuantresult of adjustment or otherwise, result in the issuance of more than 35.5872 common shares per $1,000 principal amount or approximately 7.1 million common shares. The Notes include an "Irrevocable Election of Settlement" whereby the Company may choose, in its sole discretion, and without the consent of the holders of the Notes, to Statementwaive its right to settle the conversion feature in either cash or stock or in any combination at its option.

              The Notes may be redeemed by the Company at any time after June 20, 2014 at a redemption price of Financial Accounting Standards (“SFAS”) No. 15, “Accounting by Debtors and Creditors100% of Troubled Debt Restructurings”. Under SFAS No. 15, the Amended and Restated Cisco Note was recorded at its principal amount plus the total estimated future interest payments. The Company also entered into an agreement (the “Purchase Agreement”) with certainaccrued interest. Holders of the Company’s existing preferred stockholders (the “Investors”), pursuantNotes have the right to whichrequire the Company sold to repurchase for cash all or some of their notes on June 15, 2014, 2017 and 2022 and upon the Investors in several sub-series, 41,030 sharesoccurrence of certain designated events at a redemption price of 100% of the Company’s Series G preferred stock for $41.0 million in cash. On July 31, 2003, the Company, Cisco Capital, Cisco and the Investors closed on the Exchange Agreement and the Purchase Agreement. The closing of these transactions resulted in the following:

      Under the Purchase Agreement:principal amount plus accrued interest.

      ·Registration Rights       The Company issued 41,030 shares of Series G preferred stock in several sub-series for gross cash proceeds of $41.0 million;

      ·       The Company’s outstanding Series A, B, C, D and E preferred stock (“Existing Preferred Stock”) was converted into approximately 0.5 million shares of common stock. The conversion resulted in the elimination of the book values of these series of preferred stock and a corresponding increase to common stock based upon the common stock’s par value and an increase in additional paid in capital of $183.7 million.

      Under the Exchange Agreement:

      ·       The Company paid Cisco Capital $20.0 million in cash and issued to Cisco Capital 11,000 shares of Series F preferred stock;

      ·       The Company issued to Cisco Capital the $17.0 million Amended and Restated Cisco Note;

      ·       The default under the Cisco credit facility was eliminated;

      ·       The amount outstanding under the Cisco credit facility including accrued interest was cancelled;

      ·       The service provider agreement with Cisco was amended;

      ·       The Cisco Warrants were cancelled.

              

      62



      The gain resulting from the retirement of the amounts outstanding under the credit facility under the Exchange Agreement was determined as follows (in thousands):

      Cash paid

       

      $

      20,000

       

      Issuance of Series F preferred stock

       

      11,000

       

      Amended and Restated Cisco Note, principal plus future interest payments

       

      17,842

       

      Transaction costs

       

      1,167

       

      Total consideration

       

      50,009

       

      Amount outstanding under the Cisco credit facility

       

      (262,812

      )

      Interest accrued under the Cisco credit facility

       

      (6,303

      )

      Book value of cancelled warrants

       

      (8,248

      )

      Book value of unamortized Cisco credit facility loan costs

       

      11,922

       

      Gain—Cisco credit facility—troubled debt restructuring

       

      $

      (215,432

      )

      On a basic income and diluted income per share basis the gain was $27.14 for the year ended December 31, 2003.

      Under the Amended and Restated Credit Agreement Cisco Capital’s obligation to make additional loans to the Company was terminated. Additionally the Amended and Restated Credit Agreement eliminated the Company’s financial performance covenants. Cisco Capital retained its senior security interest in substantially all of the Company’s assets, however, the Company may subordinate Cisco Capital’s security interest in the Company’s accounts receivable to another lender. The Amended and Restated Cisco Note was issued under the Amended and Restated Credit Agreement and is to be repaid in three installments. No interest is payable, nor does interest accrue on the Amended and Restated Cisco Note for the first 30 months, unless the Company defaults under the terms of the AmendedNotes, the Company is required to use reasonable efforts to file and Restated maintain a shelf registration statement with the SEC covering the resale of the Notes and the common stock issuable on conversion of the Notes. If the Company fails to meet these terms, the Company will be required to pay special interest on the Notes 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 Notes and common stock issuable upon conversion of the Notes in July 2007.

      Convertible Subordinated Notes—Allied Riser

              The Company's $10.2 million 7.50% convertible subordinated notes were recorded at their fair value of approximately $2.9 million in connection with the Allied Riser merger in 2002. The discount was amortized to interest expense through the maturity date. The notes and accrued interest were fully paid in June 2007.

      Credit Agreement. Principal and interest is paid as follows:Facility

              The Company had a $7.0credit facility with a commercial bank that provides for borrowings up to $20.0 million principal payment is due in February 2006, a $5.0 million principal payment plus interest accrued is due in February 2007, and a final principal payment of $5.0 million plus interest accrued is due in February 2008. When the Amended and Restated which matured on April 1, 2007.

      Cisco Note accrues interest, interest accrues at

              In June 2005, the 90-day LIBOR rate plus 4.5%.

      Company used a portion of the proceeds from its June 2005 public offering to repay its $17.0 million amended and restated Cisco note. The Amended and Restated Cisco Note isnote was subject to mandatory prepayment in full without prepayment penalty, upon the occurrence of the closing of any change in control of the Company, the completion of any equity financing or receipt of loan proceeds in excess of $30.0 million, the achievement by the Company of four consecutive quarters of positive operating cash flow of at least $5.0 million, or the mergermillion. The repayment of the Company resulting in a combined entity with an equity value greater than $100.0 million, each of these events is defined in the agreement. The debt is subject to partial mandatory prepayment in an amount equal to the lesser of $2.0 million or the amount raised if the Company raises less than $30.0 million in a future equity financing.

      Allied Riser convertible subordinated notes

      On September 28, 2000, Allied Riser completed the issuance and sale in a private placement of an aggregate of $150.0 million in principal amount of its 7.50% convertible subordinated notes due September 15, 2007 (the “Notes”). At the closing of the merger between Allied Riser and the Company, approximately $117.0 million of the Notes were outstanding.

      In January 2003, the Company, Allied Riser and the holders of approximately $106.7 million in face value of the Allied Riser notes entered into an exchange agreement and a settlement agreement. Pursuant to the exchange agreement, these note holders surrendered their notes, including accrued and unpaid interest, in exchange for a cash payment of approximately $5.0 million, 3.4 million shares of the Company’s Series D preferred stock and 3.4 million shares of the Company’s Series E preferred stock. Pursuant to the settlement agreement, these note holders dismissed their litigation with prejudice in exchange for the cash


      payment. These transactions closed in March 2003 when the agreed amounts were paid and the Company issued the Series D and Series E preferred shares. The settlement and exchange transactions together eliminated $106.7 million in face amount of the notes due in June 2007, interest accrued on these notes since the December 15, 2002 interest payment, all future interest payment obligations on these notes and settled the litigation with note holders. As of December 31, 2002, the Company had accrued the amount payable under the settlement agreement, net of a recovery of $1.5 million under its insurance policy. This resulted in a net expense of $3.5 million recorded in 2002. The $4.9 million payment required under the settlement agreement was paid in March 2003. The Company received the $1.5 million insurance recovery in April 2003. The exchange agreement resulted in a gain of approximately $24.8$0.8 million recorded in March 2003. The gain resulted fromrepresenting the difference between the $36.5 million net book valueamount of the notes ($106.7 face value less the related discount of $70.2 million) and $2.0 million of accruedestimated future interest and the exchange consideration which included $5.0 million in cash and the $8.5 million estimated fair market value for the Series D and Series E preferred stock less approximately $0.2 million of transaction costs. The estimated fair market value for the Series D and Series E preferred stock was determined by using the price per share of our Series C preferred stock, which represented the Company’s most recent equity transaction for cash.payments.


      The terms of the remaining $10.2 million of Notes were not impacted by these transactions and they continue to be due on June 15, 2007. These $10.2 million notes were recorded at their fair value of approximately $2.9 million at the merger date. The discount is accreted to interest expense through the maturity date. The Notes are convertible at the option of the holders into approximately 1,050 shares of the Company’s common stock. Interest is payable semiannually on June 15 and December 15, and is payable, at the election of the Company, in either cash or registered shares of the Company’s common stock. The Notes are redeemable at the Company’s option at any time on or after the third business day after June 15, 2004, at specified redemption prices plus accrued interest.

      8.6.     Income taxes:

      The net deferred tax asset is comprised of the following (in thousands):

       

      December 31

       

      		 December 31
      		 

       

      2003

       

      2004

       

      		 2006
      		 2007
      		 

      Net operating loss carry-forwards

       

      $

      234,059

       

      $

      283,860

       

      		 $319,768 $344,145 

      Depreciation

       

      (23,627

      )

      (36,823

      )

      		 (38,370) (26,007)

      Start-up expenditures

       

      3,724

       

      3,379

       

      		 2,838 3,160 

      Accrued liabilities

       

      3,633

       

      726

       

      Deferred compensation

       

      10,255

       

      15,230

       

      		 4,783 6,060 

      Other

       

      28

       

      16

       

      		 (482) 77 

      Valuation allowance

       

      (228,072

      )

      (266,388

      )

      		 (288,537) (327,435)
       
      		 
      		 

      Net deferred tax asset

       

      $

      —

       

      $

      —

       

      		 $— $— 
       
      		 
      		 

              

      Due to the uncertainty surrounding the realization of its net deferred tax asset, the Company has recorded a valuation allowance for the full amount of its net deferred tax asset. Should the Company achieve profitability,taxable income, its deferred tax assets may be available to offset future income tax liabilities. The Company has combined net operating loss carry-forwards of approximately $788 million.$1.0 billion. The federal and state net operating loss carry-forwards for the United States of approximately $374$407 million expire in 2020from 2023 to 2024.2027. The Company has net operating loss carryforwardscarry-forwards related to its European operations of approximately $414 million, $52$600 million, of which approximately $108 million expire between 2005 and 2009 and $362beginning in 2016. The remaining $492 million of whichEuropean net operating loss carry-forwards do not expire. The federal and state net operating loss carry-forwards of Allied Riser Communications Corporation as of February 4, 2002 of approximately $183 million are subject to certain limitations on annual utilization due to the change in ownership as a result of the merger as definedprescribed by federal and state


      tax laws. The Company’sCompany's net operating loss carry-forwards could also be subject to certain additional limitations on annual utilization if certain changes in ownership have occurred or were to occur as definedprescribed by the laws in the respective jurisdictions.

      Under Section 108(a)(1)(B) of the Internal Revenue Code of 1986 gross income does not include amounts that would be includible in gross income by reason of the discharge of indebtedness to the extent that a non-bankrupt taxpayer is insolvent. Under Section 108(a)(1)(B) the Company believes that its gains on the settlement of debt with certain Allied Riser note holders and its debt restructuring with Cisco Capital for financial reporting purposes did not result in taxable income. However, these transactions resulted in a reduction to the Company’s net operating loss carry forwards of approximately $20 million in 2003 and resulted in further reductions to the Company’s net operating loss carry forwards of approximately $290 million in 2004.

      The following is a reconciliation of the Federal statutory income tax rate to the effective rate reported in the financial statements.

       

      2002

       

      2003

       

      2004

       

      		 2005
      		 2006
      		 2007
      		 

      Federal income tax (benefit) at statutory rates

       

      34.0

      %

      34.0

      %

      34.0

      %

      State income tax (benefit) at statutory rates, net of Federal benefit

       

      7.6

       

      (3.7

      )

      6.6

       

      Federal income tax benefit at statutory rates 34.0%34.0%34.0%
      State income tax benefit at statutory rates, net of Federal benefit 4.0 4.0 4.0 

      Impact of foreign operations

       

      —

       

      —

       

      (0.4

      )

      		 (0.4)(0.6)(0.8)

      Impact of permanent differences

       

      5.3

       

      (53.0

      )

      0.1

       

      Non-deductible expenses 0.1 7.5 4.7 

      Change in valuation allowance

       

      (46.9

      )

      22.7

       

      (40.3

      )

      		 (37.7)(44.9)(41.9)
       
      		 
      		 
      		 

      Effective income tax rate

       

      —

      %

      —

      %

      —

      %

      		 —%—%—%
       
      		 
      		 
      		 

      9.7.     Commitments and contingencies:

      Capital leases—Fiberfiber lease agreements

      The Company has entered into lease agreements with several providers for intra-city and inter-city dark fiber primarily under 15-25 year IRUs certain of which includewith additional renewal options.terms. These IRUs connect the Company’sCompany's international backbone fibers with the multi-tenant office buildings and the customers served by the Company. Once the Company has accepted the related fiber route, leases of intra-city and inter-city fiber-optic rings that meet the criteria for



      treatment as capital leases are recorded as a capital lease obligation and an IRU asset. The future minimum commitmentspayments under these agreements are as follows (in thousands):

      For the year ending December 31,

       

       

       

      2005

       

      $

      15,938

       

      2006

       

      13,996

       

      2007

       

      13,606

       

      2008

       

      11,549

       

      2009

       

      11,568

       

      Thereafter

       

      102,639

       

      Total minimum lease obligations

       

      169,296

       

      Less—amounts representing interest

       

      (65,921

      )

      Present value of minimum lease obligations

       

      103,375

       

      Current maturities

       

      (7,488

      )

      Capital lease obligations, net of current maturities

       

      $

      95,887

       


      For the year ending December 31,    
      2008 $15,651 
      2009  12,025 
      2010  16,894 
      2011  10,809 
      2012  10,803 
      Thereafter  88,523 
        
      		 
      Total minimum lease obligations  154,705 
      Less—amounts representing interest  (62,131)
        
      		 
      Present value of minimum lease obligations  92,574 
      Current maturities  (7,717)
        
      		 
      Capital lease obligations, net of current maturities $84,857 
        
      		 

      Capital lease obligation amendments

      In 2004, the Company re-negotiated several lease obligations for its intra-city fiber in France and Spain. These transactions resulted gains of approximately $5.3 million recorded as gains on lease obligation restructurings in the accompanying statement of operations for the year ended December 31, 2004.

      In March 2004, Cogent France paid approximately $0.3 million and settled amounts due from and due to a vendor. The vendor leased Cogent France its office facility and an intra-city IRU and was and continues to be a customer of Cogent France. The settlement agreement also restructured the IRU capital lease by reducing the 2.8 million euro ($3.6 million) January 2007 lease payment by 1.0 million euros ($1.3 million) and reducing the 2.5 million euro ($3.3 million) January 2008 lease payment by 1.0 million euros ($1.3 million). Under the settlement the lessor also agreed to purchase a minimum annual commitment of IP services from Cogent France. This transaction resulted in a reduction to the capital lease obligation and IRU asset of approximately $1.9 million.

      In November 2004,        Cogent Spain negotiated modifications to ancertain of its IRU capital lease and note obligation with a vendor. In exchange for the return of one of two strands of leased optical fiber, Cogent Spainobligations. These modifications have generally reduced its quarterly IRU lease payments modified its payments and eliminated accrued and future interest on its note obligation. The note obligation aroseextended the lease terms. A 2005 lease modification resulted in 2003, when Cogent Spain, then LambdaNet España S.A, negotiated a settlement with the vendor that included converting certain amounts due under the capitalgain of approximately $0.8 million. A 2006 lease into a note obligation. The 8.3 million euro ($10.8 million) note obligation had a term of twelve years and bore interest at 5% with a two-year grace period and was repayable in forty equal installments. The first installment was due in 2005. The modified note is interest free and includes nineteen equal quarterly installments of 0.2 million euros ($0.3 million) and a final payment of 4.1 million euros ($5.3 million) due in January 2010. Cogent Spain paid 0.2 million euros ($0.3 million) at settlement. The modification to the note obligation resulted in a gain of approximately $0.3 million. The modification to the IRU capital leaseThese transactions resulted in a gain of approximately $4.9 million. The transaction resulted in a gaingains since the differencedifferences between the carrying valuevalues of the old IRU obligationobligations and the net present valuevalues of the new IRU obligation wasobligations were greater than the carrying valuevalues of the related IRU asset. The IRU asset had been significantly reduced due to the allocation of negative goodwill to the long-lived assets of Cogent Europe in the acquisition.assets.

      Fiber Leases and Construction Commitments

      One of the Company’s agreements for the leasing of metro fiber rings includes minimum specified commitments. The future minimum commitment under this arrangement is approximately $4.0 million.

      Cisco equipment purchase commitment

      In March 2000, the Company entered into a five-year agreement to purchase from Cisco minimum annual amounts of equipment, professional services, and software. In October 2001, the commitment was increased to purchase a minimum of $270 million through December 2004. As of July 31, 2003, the Company had purchased approximately $198.1 million towards this commitment and had met all of the minimum annual purchase commitment obligations. As part of the Company’s restructuring of the Cisco credit facility this agreement was amended. The amended agreement has no minimum purchase commitment but does have a requirement that the Company purchase Cisco equipment for its network equipment needs. No financing is provided and the Company is required to pay Cisco in advance for any purchases.


      Current and Potential Litigationpotential litigation

      In October 2004, the Company settled a dispute with a vendor over the amount invoiced by the vendor for telecommunications services. The settlement payment of $0.3 million was made in October 2004 and was less than the $1.0 million that had previously been recorded in accounts payable. As a result, approximately $0.7 million was recorded as a reduction to the cost of network operations in the third quarter of 2004.

      The Company is also involved in a dispute over services provideddisputes with certain telephone companies that provide it local circuits or leased optical fibers. The total amount claimed by andthese vendors is approximately $4.4 million. The Company does not believe any of these amounts are owed to Lambdanet Germany during the time LambdaNet Germany was a sister company of the Company’s Frenchthese providers and Spanish subsidiaries (Note 12). Cogent France and Cogent Spain are no longer sister companies of LambdaNet Germany. The Company intends to vigorously defend its position related to these charges and believes that it has defenses and offsetting claims against LambdaNet Germany.adequately reserved for any potential liability.

      In 2003, a counterclaim was filed against the Company by a former employee in state court in California. The former employee asserted primarily that additional commissions were due to the employee. The Company had filed a claim against this employee for breach of contract among other claims. A judgment was awarded to the former employee and the Company has appealed this decision.

      The Company has been made aware of several other companies in its own and in other industries that use the word “Cogent”"Cogent" in their corporate names. One company has informed the Company that it believes the Company’sCompany's use of the name “Cogent”"Cogent" infringes on its intellectual property rights in that name. If such a challenge is successful, the Company could be required to change its name and lose the goodwillvalue associated with the Cogent name in its markets. Management does not believe such a challenge, if successful, would have a material impact on the Company’sCompany's business, financial condition or results of operations.

      In December 2003 several former employeesthe normal course of business the Company’s Spanish subsidiary filed claims related to their termination of employment. The Company intends to continue to vigorously defend its position related to these charges and feels that it has adequately reserved for the potential liability.

      The Company is involved in other legal proceedings inactivities and claims. Because such matters are subject to many uncertainties and the normal course of business which managementoutcomes are not predictable with 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’sCompany's financial condition.condition or results of operations.

      Operating leases, maintenance and tenant license agreements

      The Company leases office space, network equipment sites, and facilities under operating leases. The Company also enters into building access agreements with the landlords of its targeted multi- tenant office buildings. The Company pays monthly fees for the maintenance of its intra-city and intercity leased dark fiber and in certain cases the



      Company connects its customers to its network under operating lease commitments for fiber. Future minimum annual commitmentspayments under these arrangements are as follows (in thousands):

      2005

       

      $

      28,461

       

      2006

       

      24,264

       

      2007

       

      19,668

       

      For the year ending December 31,
      		  

      2008

       

      16,944

       

      		 $35,145

      2009

       

      13,832

       

      		 29,333
      2010 25,706
      2011 22,696
      2012 20,357

      Thereafter

       

      96,106

       

      		 92,171

       

      $

      199,275

       

      		 
       $225,408
       

              

      Rent expense relatesExpenses related to leased office space andthese arrangements was $3.3$36.8 million in 2002, $2.32005, $33.8 million in 20032006 and $7.0$40.5 million in 2004.2007. The Company has subleasedsublet certain office space and facilities. Future minimum payments


      under these sub leasesub-lease agreements are approximately $1.2$0.5 million, $0.8 million, $0.4$0.1 million, and $0.2$0.1 million for the years ending December 31, 20052008 through December 31, 2008,2010, respectively.

      Shareholder IndemnificationUnconditional purchase obligations

      In November 2003 the Company’s Chief Executive Officer acquired LNG Holdings S.A. (“LNG”). LNG, through its LambdaNet group        Unconditional purchase obligations for equipment and services totaled approximately $7.3 million at December 31, 2007 and are expected to be fulfilled within one year. As of subsidiaries, operated a carriers’ carrier fiber optic transport business in Europe. In connection with this transaction,December 31, 2007 the Company provided an indemnificationhad committed to certain former LNG shareholders.additional dark fiber IRU lease agreements totaling approximately $40.4 million in future payments for fiber lease and maintenance payments to be paid over periods of up to 20 years. These obligations begin when the related fiber is accepted, which is expected to occur in 2008. Future minimum payments under these obligations are approximately, $8.4 million, $1.9 million, $1.9 million, $1.9 million, and $1.9 million for the years ending December 31, 2008 to December 31, 2012 and approximately $24.4 million, thereafter.

      Defined contribution plan

              The Company provided the indemnificationsponsors a 401(k) defined contribution plan that, effective in connection with its plan to acquire certain subsidiaries of LNG (Note 12).August 2007, provides for a Company match. The guarantee is without expirationCompany match for 2007 was approximately $0.1 million and covers claims related to LNG’s LambdaNet subsidiaries and actions takenwas paid in respect thereof including actions related to the transfer of ownership interests in LNG. Should the Company be required to perform the Company will defend the action and may attempt to recover from LNG and other involved entities.cash.

      8.     Stockholders' equity:

      Authorized shares

              The Company has recorded a long-term liability75.0 million of approximately $0.2 million forauthorized $0.001 par value common shares 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 estimated fair valuecommon stock when determined by the Company's Board of this obligation.Directors.

      10.   Stockholders’ equity:Second $50.0 Million Common Stock Buyback Program

      In June 2003,August 2007, the Company’sCompany's board of directors and shareholders approved a common stock buyback program (the "Buyback Program"). Under the Buyback Program, the Company is authorized to purchase up to $50.0 million of its common stock prior to December 31, 2008. During 2007 the Company purchased approximately 446,000 shares of its common stock at an amended and restated charter that eliminatedaverage price of $22.19 per share for approximately $9.9 million. From January 1, 2008 to February 26, 2008, the reference toCompany purchased approximately 689,000 additional shares of its common stock at an average price of $18.59 per share for approximately $12.8 million. All purchased common shares were subsequently retired.


      Treasury stock retirement

              In September 2006, the Company’s Series A, B, C, D, and ECompany retired its 61,462 shares of treasury stock. As a result, $0.1 million of treasury stock was offset against additional paid-in-capital.

      Equity conversion

              In February 2005, holders of the Company's preferred stock (“Existing Preferred Stock”). In March 2005, the Company’s boardelected to convert all of directors and shareholders approved an amended and restated charter that increased the numbertheir shares of authorizedpreferred stock into 31.6 million shares of the Company’s common stock to 75.0 million shares and designated 10,000 shares of undesignated preferred stock.

      On July 31, 2003 and in connection with the Company’s restructuring of its debt with Cisco Capital, all of the Company’s Existing Preferred Stock was converted into approximately 0.5 million shares ofCompany's common stock. At the same timeAs a result, the Company issued 11,000 shares of Series F preferred stock to Cisco Capital under the Exchange Agreement and issued 41,030 shares of Series G preferred stock for gross proceeds of $41.0 million to the Investors under the Purchase Agreement.

      In January 2004, Gamma merged with a subsidiary of the Company. Under the merger agreement, all of the issued andno longer has outstanding shares of Gamma common stock were converted into 2,575 sharespreferred stock. The accounting for this transaction resulted in the elimination of the Company’s Series I preferred stock and the Company became Gamma and Cogent Europe’s sole shareholder.

      On March 30, 2004, Omega merged with a subsidiary of the Company. Prior to the merger Omega had raised approximately $19.5 million in cash and acquired the rights to acquire a German fiber optic network. The Company issued 3,891 shares of Series J preferred stock to the shareholders of Omega in exchange for all of the outstanding common stock of Omega.

      On August 12, 2004, UFO Group merged with a subsidiary of the Company. Prior to the merger UFO Group had raised net cash of approximately $2.1 million and acquired the rights to acquire the majority of the assets of Unlimited Fiber Optics, Inc. The Company issued 2,600 shares of Series K preferred stock to the shareholders of UFO Group in exchange for all of the outstanding common stock of UFO Group.

      On September 15, 2004, the Company issued 185 shares of Series L preferred stock to the shareholders of Global Access in exchange for the majority of the assets of Global Access.

      On October 26, 2004, the Company merged with Potomac. The Company issued 3,700 shares of Series M preferred stock in exchange for all of the outstanding common shares of Potomac. Prior to the merger, Potomac had acquired the majority of the assets of Aleron.

      Each sharebalances of the Series F preferred stock, Series G preferred stock, Series H preferred stock, Series I preferred stock, Series J preferred stock, Series K preferred stock, Series Lthrough M preferred stock and Series M preferred stock (collectively,an increase of approximately $139.8 million to additional paid-in-capital.

      Public offerings

              On June 13, 2005, the “New Preferred”) may be converted intoCompany sold 10.0 million shares of common stock at $6.00 per share in a public offering. On June 16, 2005, the


      election of its holder at any time. The Series F, Series G, Series I, Series J, Series K, Series L and Series M preferred stock were convertible into 3.4 million, 12.7 million, 0.8 million, 6.0 million, 0.8 million, 0.3 million and 5.7 underwriters exercised their option to purchase an additional 1.5 million shares of the Company’s common stock respectively. In March 2005, the New Preferred was converted into voting common stock. In connection with the Equity Conversion, the liquidation preferences on the New Preferred were also eliminated.

      Warrants and options

      Warrantsat $6.00 per share. This public offering resulted in net proceeds to purchase shares of the Company’s common stock were issued to Cisco Capital in connection with working capital loans under the Company’s credit facility. On July 31, 2003 these warrants were cancelled as part of the restructuring of the Company’s debt to Cisco Capital.

      In connection with the February 2002 merger with Allied Riser, the Company assumed warrants issued by Allied Riser that convert into approximately 5,000 shares of $63.7 million, after underwriting, legal, accounting and printing costs.

              On June 7, 2006, the Company’s common stock. All warrants are exercisable at exercise prices ranging from $0 to $9,500 per share. These warrants were valued at approximately $0.8Company sold 4.35 million using the Black-Scholes method of valuation and are recorded as stock purchase warrants using the following assumptions—average risk free rate of 4.7 percent, an estimated fair value of the Company’s common stock of $5.32, expected live of 8 years and expected volatility of 207.3%.

      In connection with the February 2003 purchase of certain assets of FNSI options for 6,000 shares of common stock at $9.00 per share were issued toand certain former FNSI vendors. The fair value of these options was estimated at $52,000 at the date of grant with the following weighted-average assumptions—an average risk-free rate of 3.5 percent, a dividend yield of 0 percent, an expected life of 10.0 years, and expected volatility of 128%.

      Dividends

      The Cisco credit facility and the Company’s line of credit prohibit the Company from paying cash dividends and restricts the Company’s ability to make other distributions to its stockholders.

      Beneficial Conversion Charges

      Beneficial conversion charges of $2.5selling shareholders sold 6.0 million $19.5 million, $2.6 million, $0.9 million and $18.5 million were recorded on January 5, 2004, March 30, 2004, August 12, 2004, September 15, 2004, and October 26, 2004 respectively, since the price per common share at which the Series I, Series J, Series K, Series L and Series M preferred stock converts into were less than the quoted trading price of the Company’s common stock on that date.


      11.   Stock option plans:

      Equity Incentive Plan

      In 1999, the Company adopted its Equity Incentive Plan (the “Plan”) for granting of options to employees, directors, and consultants under which 74,500 shares of common stock are reserved for issuance. Options granted under the Plan may be designated as incentive or nonqualified at the discretionsame price in a public offering. This public offering resulted in net proceeds to the Company, after underwriting, legal, accounting and printing costs of approximately $36.5 million.

      9.     Stock option and award plan:

      Incentive Award Plan

              The compensation committee of the board of directors adopted and the stockholders approved, the Company's 2004 Incentive Award Plan, administrator.as amended (the "Award Plan"). Stock options granted under the Award Plan generally vest over a four-year period and have a term of ten years. Stock options exercised, granted, and canceled during the period from December 31, 2001 to December 31, 2004, were as follows:

       

       

      Number of
      options

       

      Weighted-average
      exercise price

       

      Outstanding at December 31, 2001

       

       

      57,896

       

       

       

      $

      106.00

       

       

      Granted

       

       

      7,694

       

       

       

      $

      38.60

       

       

      Exercised

       

       

      (365

      )

       

       

      $

      2.60

       

       

      Cancellations

       

       

      (13,561

      )

       

       

      $

      138.80

       

       

      Outstanding at December 31, 2002

       

       

      51,664

       

       

       

      $

      88.20

       

       

      Granted

       

       

      7,859

       

       

       

      $

      9.80

       

       

      Exercised

       

       

      —

       

       

       

      $

      —

       

       

      Cancellations

       

       

      (53,443

      )

       

       

      $

      85.60

       

       

      Outstanding at December 31, 2003

       

       

      6,080

       

       

       

      $

      9.03

       

       

      Granted

       

       

      —

       

       

       

      $

      —

       

       

      Exercised

       

       

      —

       

       

       

      $

      —

       

       

      Cancellations

       

       

      (5

      )

       

       

      $

      40.00

       

       

      Outstanding at December 31, 2004

       

       

      6,075

       

       

       

      $

      9.00

       

       

      Options exercisable under the Plan asGrants of December 31, 2002, were 25,342 with a weighted-average exercise price of $95.60. Options exercisable as of December 31, 2003, were 6,002 with a weighted-average exercise price of $9.03. Options exercisable as of December 31, 2004, were 6,033 with a weighted-average exercise price of $9.00. The weighted-average remaining contractual life of the outstanding options at December 31, 2004, was approximately 8.2 years.

      OUTSTANDING AND EXERCISABLE BY PRICE RANGE—2000 PLAN
      As of December 31, 2004

      Range of Exercise
      Prices

       

       

       

      Number
      Outstanding
      12/31/2004

       

      Weighted Average
      Remaining
      Contractual Life
      (years)

       

      Weighted-Average
      Exercise Price

       

      Number
      Exercisable
      As of
      12/31/2004

       

      Weighted-Average
      Exercise Price

       

      $9.00

       

       

      6,075

       

       

       

      8.16

       

       

       

      $

      9.00

       

       

       

      6,033

       

       

       

      $

      9.00

       

       

      Offer to exchange—Series H Preferred Stock and 2003 and 2004 Incentive Award Plans (“2004 Plan”)

      In September 2003, the Compensation Committee (the “Committee”) of the board of directors adopted and the stockholders approved, the Company’s 2003 Incentive Award Plan (the “Award Plan”). The Award Plan reserved 54,001 shares of Series H preferredrestricted stock for issuance under the Award Plan. In September 2003, the Company offered its employees the opportunity to exchange eligible outstanding stock options and certain common stock for restricted shares of Series H preferred stock under the Award Plan. In 2004, the Company’s board of directors and shareholders approved the Company’s 2004 Incentive Award Plan that increased the shares of Series H preferred stock available for grant as either restricted shares or options for restricted sharesgranted under the Award Plan vest over periods ranging from 54,001immediate vesting to 84,001 shares. In July 2004, the


      Company began granting options for Series H preferred stock. Each share of Series H preferred stock and each option for Series H preferred stock was convertible into approximately 38 shares of common stock and were converted in connection with the Equity Conversion. The Series H preferred shares were valued using the trading price of the Company’s common stock on the grant date. For restricted shares granted under the offer to exchange, the vesting period was 27% upon grant with the remaining shares vesting ratably over a three year periodfour-year period. Certain option and share grants provide for share and options grants to newly hired employees; the shares generally vest 25% after one year with the remaining sharesaccelerated vesting ratably over three years. Compensation expenseif there is recognized ratably over the service period.

      Stock options for Series H preferred stock exercised, granted, and canceled under the 2004 Plan during the year ended December 31, 2004, were as follows:

       

       

      Number of
      Options

       

      Weighted-average
      exercise price

       

      Outstanding at December 31, 2003

       

       

      —

       

       

       

      $

      —

       

       

      Granted

       

       

      27,499

       

       

       

      $

      87.24

       

       

      Cancellations

       

       

      (61

      )

       

       

      $

      237.20

       

       

      Outstanding at December 31, 2004

       

       

      27,438

       

       

       

      $

      230.77

       

       

      OUTSTANDING AND EXERCISABLE BY PRICE RANGE—2004 PLAN
      As of December 31, 2004

      Range of Exercise
      Prices

       

       

       

      Number
      Outstanding
      12/31/2004

       

      Weighted Average
      Remaining
      Contractual Life
      (years)

       

      Weighted-Average
      Exercise Price

       

      Number
      Exercisable
      As of 
      12/31/2004

       

      Weighted-Average
      Exercise Price

       

      $0.01 (granted below market value)

       

       

      17,500

       

       

       

      9.69

       

       

       

      $

      0.01

       

       

       

      —

       

       

       

      $

      —

       

       

      $192.31 to $361.54

       

       

      9,812

       

       

       

      9.51

       

       

       

      $

      231.63

       

       

       

      877

       

       

       

      $

      230.77

       

       

      $569.23 to $1,230.77

       

       

      126

       

       

       

      9.93

       

       

       

      $

      569.23

       

       

       

      —

       

       

       

      $

      —

       

       

      $0.01 to $1,230.77

       

       

      27,438

       

       

       

      9.63

       

       

       

      $

      86.91

       

       

       

      877

       

       

       

      $

      230.77

       

       

      Shares of Series H preferred stock granted, converted into common stock and canceled under the 2003 and 2004 Plan during the years ended December 31, 2003 and December 31, 2004, were as follows:

      Number of
      Shares

      Outstanding at December 31, 2002

      —

      Granted (weighted average fair value of $861.28)

      53,873

      Converted into common stock

      —

      Cancellations

      (500

      )

      Outstanding at December 31, 2003

      53,373

      Granted (weighted average fair value of $1,239.00)

      1,913

      Converted into 166,844 shares of common stock

      (4,338

      )

      Cancellations

      (5,127

      )

      Outstanding at December 31, 2004

      45,821

      71



      Vested shares do not expire and were 25,833 as of December 31, 2004.

      Deferred Compensation Charges—Stock Options and Restricted Stock

      The Company recorded a deferred compensation charge of approximately $14.3 millionchange in the fourth quarter of 2001 related to options granted at exercise prices below the estimated fair market value of the Company’s common stock on the date of grant. The deferred compensation charge was amortized over the service period of the related options which was generally four years. In connection with the October 2003 offer to exchange and granting of Series H preferred stock the remaining $3.2 million unamortized balance of deferred compensation is now amortized over the vesting period of the Series H preferred stock.

      In July 2004, the Company began granting options for Series H preferred stock, 17,500 of which were granted with an exercise price below the trading price of the Company’s common stock on grant date. These option grants resulted in additional deferred compensation of $4.7 million recorded during the third quarter of 2004. Deferred compensation for these option grants was determined by multiplying the difference between the exercise price and the market value of the Series H preferred stock on grant date times the number of options granted and is being amortized over the service period.

      Under the offer to exchange, the Company recorded a deferred compensation charge of approximately $46.1 million in the fourth quarter of 2003. The Company has also granted additional shares of Series H preferred to its new employees resulting in an additional deferred compensation.control. For grants of restricted stock, when an employee terminates prior to full vesting the total remaining deferred compensation charge is reduced, the employee retains their vested shares and the employees’employees' unvested shares are returned to the plan. For grants of options for restrictedcommon stock, when an employee terminates prior to full vesting the total remaining deferred compensation charge is reduced, previously recorded deferred compensation is reversed and the employee may elect to exercise their vested options for a period of ninety days and any of the employees’ unvested options are returned to the plan. Deferred compensationCompensation expense for all awards is recognized ratably over the grantingservice period. Shares issued to satisfy awards are provided from the Company's authorized shares. In April 2007, the Award Plan was amended to increase the number of Series H preferred restrictedauthorized shares was determined using the trading priceby 2.0 million. As of December 31, 2007, of the Company’s common stock on5.8 million authorized shares under the grant date.

      The amortizationAward Plan there were a total of deferred compensation970,000 shares available for grant.


              Stock options activity under the Company's Award Plan during the period from December 31, 2006 to December 31, 2007, was as follows:

       
      		 Number of
      Options
      		 Weighted-average
      exercise price
      Outstanding at December 31, 2006 1,152,976 $2.73
      Granted 244,919 $21.84
      Cancelled (64,230)$15.19
      Exercised—intrinsic value $4.5 million; cash received $1.1 million (212,811)$5.05
        
      		   
      Outstanding at December 31, 2007—$20.4 million intrinsic value and 7.3 years weighted-average remaining contractual term 1,120,854 $5.75
        
      		   
      Exercisable at December 31, 2007—$17.0 million intrinsic value and 6.8 years weighted-average remaining contractual term 757,034 $1.20
      Expected to vest—$18.0 million intrinsic value and 7.0 years weighted-average remaining contractual term 881,156 $3.36

              Stock options outstanding and exercisable under the Award Plan by price range at December 31, 2007 were as follows:

      Range of Exercise Prices
      		 Number Outstanding 12/31/2007
      		 Weighted Average Remaining Contractual Life (years)
      		 Weighted-Average Exercise Price
      		 Number Exercisable As of 12/31/2007
      		 Weighted-Average Exercise Price
      $0.00 to $0.01 (granted below market value) 624,782 6.72 $0.00 611,071 $0.00
      $4.39 to $6.00 241,758 7.01 $5.55 130.606 $5.72
      $6.20 to $25.46 228,652 9.05 $19.12 14,463 $9.25
      $25.50 to $33.56 25,662 9.45 $28.58 894 $32.00
        
      		 
      		 
      		 
      		 
      $0.00 to $33.56 1,120,854 7.32 $5.75 757,034 $1.20
        
      		 
      		 
      		 
      		 

              Compensation expense related to stock options and restricted stock was approximately $3.3$13.3 million, $10.5 million and $10.4 million for the years ended December 31, 2005, December 31, 2006 and December 31, 2007, respectively. As of December 31, 2007 there was approximately $22.6 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 twenty-one months. In January 2007 and 2008, the Company granted approximately 51,000 vested shares of common stock to its non-management Directors resulting in approximately $0.9 million and $1.2 million of equity-based compensation expense, respectively. In January 2008, the Company granted approximately 620,000 shares of common stock to certain employees resulting in approximately $14.7 million of equity-based compensation expense to be amortized over the service periods of three to four years.


              A summary of the Company's non-vested restricted stock awards as of December 31, 2007 and the changes during the year ended December 31, 2002, $18.7 million for2007 is as follows:

      Non-vested awards
      		 Shares
      		 Weighted-Average Grant Date Fair Value
      Non-vested at December 31, 2006 370,480 $17.66
      Granted 1,033,404 $25.08
      Vested (179,207)$11.36
      Forfeited (22,659)$25.46
        
      		 
      Non-vested at December 31, 2007 1,202,018 $22.64
        
      		 

              The weighted average per share grant date fair value of restricted stock granted to employees was $4.93 in 2005 (200,000 shares), $18.63 in 2006 (382,500 shares) and $25.08 in 2007 (1,033,404 shares). The fair value was determined using the year endedquoted 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 ending December 31, 20032005, 2006 and $12.32007 was approximately $6.0 million, for the year ended December 31, 2004.$4.1 million and $4.3 million, respectively.

      12.10.   Related party transactions:

      Office lease and equipment purchases

      The Company’sCompany's headquarters is located in an office building owned by an entity controlled by the Company’sCompany's Chief Executive Officer. The Company paid $410,000$0.4 million in 2002, $367,0002005, $0.4 million in 20032006 and $409,000$0.6 million in 20042007 in rent and related costs to this entity. The lease expires in August 2006.2010. In 2007, the Company purchased approximately $0.2 million of equipment from an equipment vendor. One of the Company's directors is also a director of the equipment vendor.

      LNG Holdings S.A (“LNG”SA ("LNG")

      In November 2003,2006 and 2007, the Company paid approximately 90% of the stock of$0.2 million and $34,000, respectively, for professional services performed for LNG, the then parenta company to Firstmark, now named Cogent Europe, was acquired by Symposium Inc. (“Symposium”) a Delaware corporation. The acquisition was for no consideration and in return for a commitment to cause at least $2 million to be invested in LNG’s subsidiary LambdaNet France and an indemnification of LNG’s selling stockholderscontrolled by the Company and Symposium. Symposium is wholly owned by the Company’sCompany's Chief Executive Officer. In January 2004, LNG transferred its interest in Firstmark to Symposium Gamma, Inc. (“Gamma”), a Delaware corporation, in return for $1 and a commitment by Gamma to invest at least $2 million in the operations of Firstmark’s French subsidiary—now called Cogent France. Prior to the transfer, Gamma had raised approximately $2.5 million in a private equity transaction with certain existing investors in the


      Company and new investors. In January 2004, Gamma transferred $2.5 million to Cogent France and, by so doing, fulfilled the $2.0 million commitment. Symposium continues to own approximately 90% of the stock of LNG. LNG operates as a holding company. Its subsidiaries hold assets related to their former telecommunications operations. In connection with this transaction2007, the Company provided an indemnification to certain former LNG shareholders.

      In January 2004, 215.1received reimbursement for approximately $0.1 million euros ($279.6 million) of Firstmark’s total debt of 216.1 million euros ($280.9 million) owed to its previous parent LNG, and other amounts payable of 4.9 million euros ($6.4 million) owed to LNG were assigned to Symposium Gamma, Inc. (“Gamma”) at their fair market value of 1 euro in connection with Gamma’s acquisition of Firstmark. Prior to the Company’s merger with Gamma, and advanced as part of the Gamma merger, LNG transferred 1.0 million euros ($1.3 million) to Cogent France. Cogent France repaid the 1.0 million euros ($1.3 million) toprofessional fees paid for LNG in March 2004. Accordingly, 215.1 million euros ($279.6 million) of the total 216.1 million euros ($280.9 million) of the debt obligation and 4.9 million euros ($6.4 million) of the other amounts payable eliminate in the consolidation of these financial statements.2006.

      Gamma and Omega11.   Geographic information:

      Gamma and Omega are considered related parties to the Company since both entities had raised cash in private equity transactions with certain existing investors in the Company. Gamma was formed in order to acquire Firstmark. Omega was formed in order to acquire the rights to the German fiber optic network that was acquired by the Company in 2004. In December 2003, Gamma was capitalized with approximately $2.5 million in exchange for 100% of Gamma’s common stock. In March 2004, Omega was capitalized with approximately $19.5 million in exchange for 100% of Omega’s common stock.

      In 2004, Cogent Europe’s subsidiaries provided network services to and in turn utilized the network of LambdaNet Communications AG (“Lambdanet Germany”) in order for each entity to provide services to certain of their customers under a network sharing agreement. Lambdanet Germany was a majority owned subsidiary of LNG from November 2003 until April 2004 when Lambdanet Germany was sold to an unrelated party. During the year ended December 31, 2004 Cogent Europe recorded revenue of $2.0 million from Lambdanet Germany and network costs of $1.8 million under the network sharing agreement. As of December 31, 2004 and for 2004, Cogent Europe had recorded net amounts due from Lambdanet Germany of $2.0 million and net amounts due to Lambdanet Germany of $2.0 million. The Company is currently in negotiations with the new owner of Lambdanet Germany over the terms of settling these amounts.

      Marketing and Service Agreement

      The Company has entered into an agency sales and mutual marketing agreement with CTC Communications Corp., a company owned indirectly by one of the Company’s directors. CTC is also a customer and the Company recorded approximately $70,000 of revenue from CTC for the year ended December 31, 2004.

      Customer Agreement with Cisco Systems Capital Corporation

      In connection with the UFO acquisition we acquired Cisco as a customer. Cisco is a company stockholder and lender. The Company recorded revenue from Cisco of approximately $160,000 for the year ended December 31, 2004.

      Vendor Settlement—-Nortel

      In 2004 the Company participated with LNG in the settlement of various disputes with Nortel Networks UK Limited and Nortel Networks France SAS, or Nortel. The dispute was regarding payments


      owed by Cogent France and LNG as well as disputes over ongoing maintenance and software licensing for Nortel equipment deployed in the Company’s European operations.

      In connection with the settlement, the Company committed to pay approximately 0.5 million euros ($0.6 million) as settlement in full of all amounts owed to Nortel through June 30, 2004. In addition, the Company committed to pay approximately 0.6 million euros ($0.8 million) for equipment maintenance services to be delivered by Nortel during the second half of 2004 and to enter into a new services agreement to extend certain maintenance and other services arrangements with Nortel through 2007. Under the terms of the settlement, if the Company terminates the agreement before the end of 2007 without cause, the Company would be required to pay a penalty of 1.0 million euros ($1.3 million) The settlement also included a commitment to pay 0.5 million euros ($0.7 million) over three years for right-to-use software licenses for certain Nortel equipment.

      Vendor Settlemen— Iberbanda

      Cogent Spain and LNG settled a number of disputes between those entities and Iberbanda, a Spanish entity from whom Cogent Spain had been leasing space and obtaining services. In the settlement, LNG released to Iberbanda a 0.3 million euro ($0.4 million) bond that had been put in place by LNG with the Spanish government as part of a bid for the right to construct a wireless network. In consideration for LNG’s release of the bond, Iberbanda settled a claim for approximately 0.7 million euros ($0.9 million) of back rent due and service charges. The rent related to the former Madrid offices of Cogent Spain. In addition, Cogent Spain granted a credit for services to Iberbanda in the amount of 0.2 million euros ($0.3 million) and agreed to pay approximately 80,000 euros ($104,000) in cash over a period of 18 months. LNG’s release of the 0.3 million euros ($0.4 million) euro bond has been recorded as a contribution of capital from a shareholder as a result of the Company’s Chief Executive Officer’s ownership of LNG.

      Reimbursement for Services Provided by LNG Employees

      In January 2005, the Company reimbursed LNG approximately 40,000 euros ($52,000) of the approximate 190,000 euros ($269,000) for salaries paid to two employees of LNG that were providing Cogent Europe accounting and management services during 2004. In November 2004, these two employees became employees of Cogent Europe. The remaining 150,000 euros ($217,000) is reflected in accrued liabilities on the accompanying December 31, 2004 balance sheet.

      13.   Quarterly financial information (unaudited):

       

       

      Three months ended

       

       

       

      March 31,
      2003

       

      June 30,
      2003

       

      September 30,
      2003

       

      December 31,
      2003

       

       

       

      (in thousands, except share and per share amounts)

       

      Net service revenue

       

      $

      14,233

       

      $

      15,519

       

      $

      15,148

       

       

      $

      14,522

       

       

      Cost of network operations, including amortization of deferred compensation

       

      10,739

       

      12,282

       

      12,067

       

       

      13,236

       

       

      Operating loss

       

      (14,880

      )

      (16,568

      )

      (15,901

      )

       

      (33,878

      )

       

      Gain—Cisco credit facility—troubled debt restructuring

       

      —

       

      —

       

      215,432

       

       

      —

       

       

      Gain—Allied Riser note exchange

       

      24,802

       

      —

       

      —

       

       

      —

       

       

      Net (loss) income

       

      1,914

       

      (22,796

      )

      196,462

       

       

      (34,837

      )

       

      Net (loss) income applicable to common stock

       

      1,914

       

      (22,796

      )

      144,462

       

       

      (34,837

      )

       

      Net (loss) income per common share—basic

       

      2.78

       

      (130.80

      )

      12.64

       

       

      (52.77

      )

       

      Net (loss) income per common share—diluted

       

      2.58

       

      (130.80

      )

      12.64

       

       

      (52.77

      )

       

      Weighted-average number of shares outstanding—basic

       

      688,233

       

      174,192

       

      11,426,017

       

       

      660,229

       

       

      Weighted-average number of shares outstanding—
      diluted

       

      692,257

       

      174,192

       

      11,429,777

       

       

      660,229

       

       


       

       

      Three months ended

       

       

       

      March 31,
      2004

       

      June 30,
      2004

       

      September 30,
      2004

       

      December 31,
      2004

       

       

       

      (in thousands, except share and per share amounts)

       

      Net service revenue

       

      $

      20,945

       

      $

      20,387

       

       

      $

      21,736

       

       

       

      $

      28,218

       

       

      Cost of network operations, including amortization of deferred compensation

       

      15,947

       

      13,486

       

       

      14,510

       

       

       

      20,381

       

       

      Operating loss

       

      (21,939

      )

      (19,218

      )

       

      (20,160

      )

       

       

      (22,752

      )

       

      Gains—lease obligations restructuring

       

      —

       

      —

       

       

      —

       

       

       

      5,292

       

       

      Net loss

       

      (24,170

      )

      (22,225

      )

       

      (23,041

      )

       

       

      (20,224

      )

       

      Net loss applicable to common stock

       

      (46,198

      )

      (22,225

      )

       

      (26,496

      )

       

       

      (38,727

      )

       

      Net loss income per common share—basic

       

      (35.94

      )

      (29.51

      )

       

      (28.58

      )

       

       

      (24.66

      )

       

      Net loss income per common share—diluted

       

      (35.94

      )

      (29.51

      )

       

      (28.58

      )

       

       

      (24.66

      )

       

      Weighted-average number of shares outstanding—basic

       

      672,457

       

      753,130

       

       

      806,151

       

       

       

      820,125

       

       

      Weighted-average number of shares outstanding—
      diluted

       

      672,457

       

      753,130

       

       

      806,151

       

       

       

      820,125

       

       

      The net losses applicable to common stock for the third quarter of 2003, first quarter of 2004, third quarter of 2004 and fourth quarter of 2004 include non-cash beneficial conversion charges of $52.0 million, $22.0 million, $3.5 million and $18.5 million, respectively.

      14.   Segment 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 performance. The Company operates ashas one operating segment. Below are the Company’sCompany's net revenues and long lived assets by geographic theaterregion (in thousands):

       

      Year Ended
      December 31,
      2004

       

      		 Years Ended December 31,

      Net Revenues

       

       

       

       

       


      		 2005
      		 2006
      		 2007
      Service Revenue, net      

      North America

       

       

      $

      68,009

       

       

      		 $108,260 $117,475 $144,696

      Europe

       

       

      23,277

       

       

      		 26,953 31,596 40,967
       
      		 
      		 

      Total

       

       

      $

      91,286

       

       

      		 $135,213 $149,071 $185,663
       
      		 
      		 

       
      		 December 31, 2006
      		 December 31, 2007
      Long lived assets, net      
      North America $221,942 $198,621
      Europe  42,476  46,964
        
      		 
      Total $264,418 $245,585
        
      		 

      12.   Quarterly financial information (unaudited):

       

       

      December 31,
      2004

       

      Long lived assets, net

       

       

       

       

       

      North America

       

       

      $

      287,204

       

       

      Europe

       

       

      54,416

       

       

      Total

       

       

      $

      341,620

       

       

      15.   Subsequent events:

      Subordinated Note

      On February 24, 2005, the Company issued a subordinated note in the principal amount of $10.0 million to Columbia Ventures Corporation, a stockholder, in exchange for $10.0 million in cash. The note was issued pursuant to a Note Purchase Agreement dated February 24, 2005. The note has an initial interest rate of 10% per annum and the interest rate increases by one percent on August 24, 2005, six months after the note was issued, and by a further one percent at the end of each successive six-month period up to a maximum of 17%. Interest on the note accrues and is payable on the note’s maturity date of February 24, 2009. The Company may prepay the note in whole or in part at any time. The terms of the

       
      		 Three months ended
      		 
       
      		 March 31, 2006
      		 June 30,
      2006
      		 September 30, 2006
      		 December 31, 2006
      		 
       
      		 (in thousands, except share and per share amounts)

      		 
      Service revenue, net $34,447 $36,155 $37,954 $40,515 
      Network operations, including equity-based compensation expense  20,442  20,177  19,432  20,371 
      Operating loss  (14,318) (13,545) (10,645) (8,044)
      Gains—asset sales and lease obligations  —  —  255  254 
      Net loss  (16,441) (15,491) (11,854) (9,971)
      Net loss per common share—basic and diluted  (0.38) (0.34) (0.24) (0.21)
      Weighted-average number of shares outstanding—basic and diluted  43,841,837  45,099,826  48,463,130  48,510,716 
       
      		 Three months ended
      		 
       
      		 March 31, 2007
      		 June 30,
      2007
      		 September 30, 2007
      		 December 31, 2007
      		 
       
      		 (in thousands, except share and per share amounts)

      		 
      Service revenue, net $43,621 $45,108 $46,969 $49,965 
      Network operations, including equity-based compensation expense  21,064  21,502  22,771  22,460 
      Operating loss  (7,482) (7,743) (7,941) (6,753)
      Gains—asset sales and lease obligations  13  —  2,110  82 
      Net loss  (9,404) (9,192) (5,423) (7,006)
      Net loss per common share—basic and diluted  (0.19) (0.19) (0.12) (0.15)
      Weighted-average number of shares outstanding—basic and diluted  48,655,385  48,378,853  47,073,070  46,885,843 

      note require the payment of all principal and accrued interest upon the occurrence of a liquidity event, which is defined as an equity offering of at least $30 million in net proceeds. The note is subordinated to the debt evidenced by the Amended and Restated Cisco Note, as well as our accounts receivable line of credit obtained in March 2005. Management believes that the terms of the note are at least as favorable as those the Company would have been able to obtain from an unaffiliated third party.

      Line of Credit

      In March 2005, the Company entered into a line of credit with a commercial bank. The line of credit provides for borrowings of up to $10.0 million and is secured by our accounts receivable. The borrowing base is determined primarily by the aging characteristics related to our accounts receivable. On March 18, 2005, we borrowed $10.0 million against our North American accounts receivable. Of this amount $4.0 million is restricted and held by the lender. The line of credit matures on January 31, 2007. Borrowings under the line of credit accrue interest at the prime rate plus 1.5% and may, in certain circumstances, be reduced to the prime rate plus 0.5%. The Company’s obligations under the line of credit are secured by a first priority lien in certain of our accounts receivable and are guaranteed by the Company’s material domestic subsidiaries, as defined. The agreements governing the line of credit contain certain customary representations and warranties, covenants, notice provisions and events of default.

      Building Sale

      On March 30, 2005, we sold a building we owned located in Lyon, France for net proceeds of 3.8 million euros ($5.1 million). This transaction resulted in a gain of approximately 2.9 million euros ($3.9 million).


      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’sCommission'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:

        •
        a documented organizational structure and division of responsibility;

        •
        established policies and procedures, including a code of conduct to foster a strong ethical climate which is communicated throughout the company;

        •
        regular reviews of our financial statements by qualified individuals; and

        •
        the careful selection, training and development of our people.

              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 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.

              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. Based upon these criteria, we believe that, as of December 31, 2007, our system of internal control over financial reporting was effective.

              The independent registered public accounting firm, Ernst & Young LLP, has audited our 2007 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 2007 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, Inc.

      February 26, 2008



      By:
      /s/        DAVID SCHAEFFER      
      David Schaeffer
      Chief Executive Officer



      /s/        THADDEUS WEED      
      Thaddeus Weed
      Chief Financial Officer




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

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

              We have audited Cogent Communications Group, Inc.'s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Cogent Communications Group, 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, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, 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, Inc. and subsidiaries as of December 31, 2006 and 2007, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2007 of Cogent Communications Group, Inc. and subsidiaries and our report dated February 26, 2008 expressed an unqualified opinion thereon.

      /s/ Ernst & Young LLP

      McLean, VA
      February 26, 2008


      ITEM 9B.    OTHER INFORMATION

      Not applicable.

      77



      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 2004 Definitive Information2008 Proxy Statement for the 20042008 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 caption “Executive Officers Compensation”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 2004 Definitive Information Statement.2008 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"Security Ownership of Certain Beneficial Owners and Management”Management" in the 2004 Definitive Information2008 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”"Certain Transactions" in the 2004 Definitive Information2008 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 “Principal Accountant Fees and Services”"Relationship With Independent Public Accountants" in the 2004 Definitive Information2008 Proxy Statement.


      PART IV

      ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

      (a)

      1.

      1.

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

      "



      2.

      2.


      Financial Statement Schedules. The Financial Statement SchedulesSchedule described below areis filed as part of the report.




      Description



      Schedule I—Condensed Financial Information of Registrant
      (Parent Company Information)
      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.

      (b)

      2.1

      Exhibits.

      Exhibit

      Description

      2.1

      Agreement and Plan of Merger, dated as of August 28, 2001, by and among Cogent, Allied Riser and the merger subsidiary (incorporated by reference to Appendix A to our Registration Statement on Form S-4, Commission File No. 333-71684, filed on October 16, 2001)

      2.2

      Amendment No. 1 to the Agreement and Plan of Merger, dated as of October 13, 2001, by and among Cogent, Allied Riser and the merger subsidiary (incorporated by reference to Appendix B to our Registration Statement on Form S-4, Commission File No. 333-71684, filed on October 16, 2001)

      2.3

      Asset Purchase Agreement, dated February 26, 2002, by and among Cogent Communications Group, Inc., PSINet, Inc. et al. (previously filed as Exhibit 2.1 to our Current Report on Form 8-K, dated February 26, 2002, and incorporated herein by reference)

      2.4

      Agreement and Plan of Merger, dated as of January 2, 2004, among Cogent Communications Group, Inc., Lux Merger Sub, Inc. and Symposium Gamma, Inc., (previously filed as Exhibit 2.1 to our Periodic Report on Form 8-K, filed on January 8, 2004, and incorporated herein by reference.

      reference)

      2.5


      2.2



      Agreement and Plan of Merger, dated as of March 30, 2004, among Cogent Communications Group, Inc., DE Merger Sub, Inc. and Symposium Omega, Inc. (incorporated by reference to Exhibits 2.6 of our Annual Report on Form 10-K for the year ended December 31, 2003, filed on March 30, 2004)

      2.6


      2.3



      Agreement and Plan of Merger, dated as of August 12, 2004, among Cogent Communications Group, Inc., Marvin Internet, Inc., and UFO Group, Inc. (filed herewith)

      (previously filed as Exhibit 2.6 to our Annual Report on Form 10-K, filed on March 31, 2005, and incorporated herein by reference)

      2.7


      2.4



      Asset Purchase Agreement, dated as of September 15, 2004, between Global Access telecommunications Inc., Symposium Gamma, Inc. and Cogent Communications Group, Inc. (filed herewith)

      (previously filed as Exhibit 2.7 to our Annual Report on Form 10-K, filed on March 31, 2005, and incorporated herein by reference)

      2.8


      2.5



      Agreement and Plan of Merger, dated as of October 26, 2004, among Cogent Communications Group, Inc., Cogent Potomac, Inc. and NVA Acquisition, Inc. (filed herewith)

      (previously filed as Exhibit 2.8 to our Annual Report on Form 10-K, filed on March 31, 2005, and incorporated herein by reference)

      2.9


      2.6



      Agreement for the Purchase and Sale of Assets, dated December 1, 2004, among Cogent Communications Group, Inc., SFX Acquisition, Inc. and Verio Inc. (filed herewith)

      (previously filed as Exhibit 2.9 to our Annual Report on Form 10-K, filed on March 31, 2005, and incorporated herein by reference)


      3.1


      Form of
      Fifth Amended and Restated Certificate of Incorporation (filed herewith)

      3.2

      Amended Bylaws of Cogent Communications Group, Inc. (incorporated by reference(previously filed as Exhibit 3.1 to Exhibit 3.6 of our Annual Report on Form 10-K, for the year ended December 31, 2003, filed on March 30, 2004)

      31, 2005, and incorporated herein by reference)

      4.1


      3.2


      First Supplemental
      Amended and Restated Bylaws in effect from September 17, 2007 (previously filed as Exhibit 3.1 to our Quarterly Report on Form 10-Q, filed on November 8, 2007, and incorporated herein by reference)


      4.1

      Indenture among Allied Riser Communications Corporation,related to the Convertible Senior Notes due 2027, dated as issuer,June 11, 2007, between Cogent Communications Group, Inc. and Wells Fargo Bank, N.A., as co-obligor, and Wilmington Trust Company,trustee (including form of 1.00% Convertible Senior Notes due 2027) (previously filed as trustee (incorporated by reference to Exhibit 4.44.1 to our Registration Statement on Form S-4, as amended by a Form POS AM (Post-Effective Amendment No. 2), Commission File No. 333-71684, filed February 4, 2002)

      4.2

      Indenture, dated as of July 28, 2000 by and between Allied Riser Communications Corporation and Wilmington Trust Company, as trustee, relating to Allied Riser’s 7.50% Convertible Subordinated Notes due 2007 (incorporated by reference to Exhibit 4.5 to our Registration Statement on Form S-4, as amended by a Form POS AM (Post-Effective Amendment No. 1), Commission File No. 333-71684, filed January 25, 2002)

      10.1

      Sixth Amended and Restated Stockholders Agreement of Cogent Communications Group, Inc., dated as of February 9, 2005 (incorporated by reference to Exhibit 10.1 to our CurrentPeriodic Report on Form 8-K, filed on February 11, 2005)

      June 12, 2007, and incorporated herein by reference)

      10.2


      4.2



      Form of 1.00% Convertible Senior Notes due 2027 ((previously filed as Exhibit A to the Exhibit 4.1 to our Periodic Report on Form 8-K, filed on June 12, 2007, and incorporated herein by reference)


      4.3

      Registration Rights Agreement, dated as of June 11, 2007, by and among Cogent Communications Group, Inc. and Bear, Stearns & Co. Inc., UBS Securities LLC, RBC Capital Markets Corporation and Cowen and Company,  LLC (previously filed as Exhibit 4.3 to our Periodic Report on Form 8-K, filed on June 12, 2007, and incorporated herein by reference)

      10.1

      Seventh Amended and Restated Registration Rights Agreement of Cogent Communications Group, Inc., dated August 12,October 26, 2004 (filed herewith)


      10.3

      Exchange Agreement, dated(previously filed as of June 26, 2003, by and among Cogent Communications Group, Inc., Cogent Communications, Inc., Cogent Internet, Inc., Cisco Systems, Inc. and Cisco Systems Capital Corporation, (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed on August 7, 2003)

      10.4

      Third Amended and Restated Credit Agreement, dated as of July 31, 2003, by and among Cogent Communications, Inc., Cogent Internet, Inc., Cisco Systems Capital Corporation, and the other Lenders party thereto (incorporated by reference to Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, filed on August 14, 2003)

      10.5

      Settlement Agreement, dated as of March 6, 2003, between Cogent Communications Group, Inc., Allied Riser Communications Corporation and the several noteholders named therein (incorporated by reference to 10.710.2 to our Annual Report on Form 10-K, filed on March 31, 2003)

      2005, and incorporated herein by reference)


      10.6


      10.2


      Exchange Agreement, dated as of March 6, 2003, between Cogent Communications Group, Inc., Allied Riser Communications Corporation and the several noteholders named therein (incorporated by reference to 10.8 to our Annual Report on Form 10-K filed on March 31, 2003)

      10.7

      Closing Date Agreement, dated as of March 6, 2003, between Cogent Communications Group, Inc., Allied Riser Communications Corporation and the several noteholders named therein (incorporated by reference to 10.17 to our Annual Report on Form 10-K filed on March 31, 2003)

      10.8

      General Release, dated as of March 6, 2003, Cogent Communications Group, Inc., Allied Riser Communications Corporation and the several noteholders named therein (incorporated by reference to 10.18 to our Annual Report on Form 10-K filed on March 31, 2003)

      10.9


      Fiber Optic Network Leased Fiber Agreement, dated February 7, 2000, by and between Cogent Communications, Inc. and Metromedia Fiber Network Services, Inc., as amended July 19, 2001 (incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-4, Commission File No. 333-71684, filed on October 16, 2001) *

      10.10


      10.3



      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) *

      10.11


      10.4



      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)

      10.12


      10.5



      Form of Restricted Stock Agreement relating to Series H Participating Convertible Preferred Stock (incorporated by reference to Exhibit 10.2 to our Registration Statement on Form S-8, Commission File No. 333-108702, filed on September 11, 2003)

      10.13


      10.6



      Lease for Headquarters Space by and between 6715 Kenilworth Avenue Partnership and Cogent Communications Group, 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)

      10.14


      10.7



      Renewal of Lease for Headquarters Space, by and between 6715 Kenilworth Avenue Partnership and Cogent Communications Group, 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)

      10.15


      10.8



      The Amended and Restated Cogent Communications Group, Inc. 2000 Equity Plan (incorporated by reference to Exhibit 10.12 to our Registration Statement on Form S-4, Commission File No. 333-71684, filed on October 16, 2001)

      10.16


      10.9



      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)


      10.17


      10.10



      2004 Incentive Award Plan of Cogent Communications Group, Inc. (incorporated by reference to Appendix A to our Definitive Information Statement on Schedule 14C,(as amended and restated through June 20, 2007 and filed on September 22, 2004)

      herewith)

      10.18


      10.11



      Dark Fiber Lease Agreement dated November 21, 2001, by and between Cogent Communications, Inc. and Qwest Communications Corporation (incorporated by reference to Exhibit 10.13 to our Registration Statement on Form S-4, as amended by a Form S-4/A (Amendment No. 2), Commission File No. 333-71684, filed on December 7, 2001)

      10.19


      10.12



      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)

      10.20


      10.13



      Mark Schleifer Employment Agreement with Cogent Communications Group, Inc., dated September 18, 2000 (incorporated by reference to Exhibit 10.21 to our Annual Report on Form 10-K, filed on March 31, 2003)

      10.21


      10.14



      R. Reed Harrison Employment Agreement with Cogent Communications Group, Inc., dated July 1, 2004 (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q, filed on August 16, 2004)

      10.22


      10.15


      Participating Convertible Preferred Stock Purchase Agreement, dated as of June 26, 2003, by and among Cogent Communications Group, Inc. and each of the several Investors signatory thereto (incorporated by reference to 10.3 to our Report on Form 8-K filed on August 7, 2003)

      10.23

      Conversion and Lock-up Letter Agreement, dated as of February 9, 2005, by and among Cogent Communications Group, Inc. and each of the several stockholders signatory thereto (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on February 15, 2005)

      10.24

      Conversion and Lock-up Letter Agreement, dated as of February 9, 2005, by and among Cogent Communications Group, Inc., Dave Schaeffer and the Schaeffer Descendents Trust (incorporated by reference to Exhibit 10.3 of our Current Report on Form 8-K filed on February 15, 2005)

      10.25


      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)


      10.26


      10.16


      Note Purchase Agreement by and among Cogent Communications Group, Inc. and Columbia Ventures Corporation dated February 24, 2005 (incorporated by reference to Exhibit 10.1 of our Current Report on Form 8-K filed on February 28, 2005)

      10.27


      Extension of Lease for Headquarters Space, by and between 6715 Kenilworth Avenue Partnership and Cogent Communications Group, Inc., dated February 3, 2005 (filed herewith)

      (previously filed as Exhibit 10.27 to our Annual Report on Form 10-K, filed on March 31, 2005, and incorporated herein by reference)

      14.1


      10.17


      Code
      Notice of Business ConductGrant, dated November 4, 2005, made to David Schaeffer (previously filed as Exhibit 10.1 to our Periodic Report on Form 8-K, filed on November 7, 2005, and Ethicsincorporated herein by reference)


      10.18

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

      10.19

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

      10.20

      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)

      10.21

      Jeffery S. Karnes Employment Agreement with Cogent Communications Group, Inc., dated May 17, 2004 (previously filed as Exhibit 10.25 to our Annual Report on Form 10-K, filed on March 14, 2007, and incorporated herein by reference)

      10.22

      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)

      10.23

      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)

      10.24

      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)

      10.25

      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)

      10.26

      Form of Restricted Stock Agreement made to Vice Presidents and certain other employees on January 1, 2008 (filed herewith)

      21.1


      10.27



      Form of Restricted Stock Agreement made to Mr. Schaeffer on January 1, 2008 (filed herewith)


      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)

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

      81



      Schedule I

      Cogent Communications Group, Inc.
      Condensed Financial Information of Registrant
      (Parent Company Only)
      Condensed Balance Sheets
      As of December 31, 2003 and December 31, 2004
      (in thousands, except share data)

       

       

      2003

       

      2004

       

      ASSETS

       

       

       

       

       

      Current Assets:

       

       

       

       

       

      Due from Cogent Communications, Inc.

       

      $

      17

       

      $

      18

       

      Total current assets

       

      17

       

      18

       

      Other Assets:

       

       

       

       

       

      Due from Cogent Communications, Inc.

       

      60,286

       

      60,286

       

      Due from Cogent France

       

      —

       

      2,611

       

      Investment in Allied Riser, Inc.

       

      20,746

       

      20,746

       

      Investment in Symposium Omega.

       

      —

       

      19,454

       

      Investment in UFO Group, Inc.

       

      —

       

      2,600

       

      Investment in Cogent Germany.

       

      —

       

      927

       

      Investment in Cogent Potomac

       

      —

       

      18,503

       

      Investment in Cogent Communications, Inc.

       

      178,147

       

      178,147

       

      Total assets

       

      $

      259,196

       

      $

      303,292

       

      LIABILITIES AND STOCKHOLDERS’ EQUITY

       

       

       

       

       

      Liabilities:

       

       

       

       

       

      Due to Cogent Communications, Inc.

       

      $

      2,239

       

      $

      2,464

       

      Total liabilities

       

      2,239

       

      2,464

       

      Stockholders Equity:

       

       

       

       

       

      Convertible preferred stock, Series F, $0.001 par value; 11,000 shares authorized, issued and outstanding; liquidation preference of $11,000

       

      10,904

       

      10,904

       

      Convertible preferred stock, Series G, $0.001 par value; 41,030 shares authorized, 41,030 and 41,021 issued and outstanding, respectively; liquidation preference of $123,000

       

      40,787

       

      40,778

       

      Convertible preferred stock, Series H, $0.001 par value; 84,001 shares authorized, 53,372 and 45,821 shares issued and outstanding, respectively; liquidation preference of $7,731 

       

      45,990

       

      44,309

       

      Convertible preferred stock, Series I, $0.001 par value; none and 3,000 shares authorized, none and 2,575 shares issued and outstanding, respectively; liquidation preference of $7,725

       

      —

       

      2.545

       

      Convertible preferred stock, Series J, $0.001 par value; none and 3,891 shares authorized, issued and outstanding, respectively; liquidation preference of $58,365

       

      —

       

      19,421

       

      Convertible preferred stock, Series K, $0.001 par value; none and 2,600 shares authorized, issued and outstanding, respectively; liquidation preference of $7,800

       

      —

       

      2,588

       

      Convertible preferred stock, Series L, $0.001 par value; none and 185 shares authorized, issued and outstanding, respectively; liquidation preference of $2,781

       

      —

       

      927

       

      Convertible preferred stock, Series M, $0.001 par value; none and 3,701 shares authorized, issued and outstanding, respectively; liquidation preference of $55,508

       

      —

       

      18,353

       

      Common stock, $0.001 par value; 75,000,000 shares authorized; 653,567 and 827,487 shares issued and outstanding, respectively

       

      1

       

      1

       

      Treasury stock, 61,462 shares

       

      (90

      )

      (90

      )

      Additional paid in capital

       

      232,474

       

      236,281

       

      Deferred compensation

       

      (32,680

      )

      (22,533

      )

      Stock purchase warrants

       

      764

       

      764

       

      Accumulated deficit

       

      (41,193

      )

      (53,420

      )

      Total stockholders’ equity

       

      256,957

       

      300,828

       

      Total liabilities & stockholders equity

       

      $

      259,196

       

      $

      303,292

       

      The accompanying notes are an integral part of these balance sheets

      82



      Cogent Communications Group, Inc.
      Condensed Financial Information of Registrant
      (Parent Company Only)
      Condensed Statement of Operations
      For the Years Ended December 31, 2003 and 2004
      (in thousands)

       

       

      2003

       

      2004

       

      Operating expenses:

       

       

       

       

       

      Amortization of deferred compensation

       

      $

      18,675

       

      $

      12,262

       

      Total operating expenses

       

      18,675

       

      12,262

       

      Operating loss

       

      (18,675

      )

      (12,262

      )

      Interest income—Cogent France

       

      —

       

      35

       

      Net loss

       

      (18,675

      )

      (12,227

      )

      Beneficial conversion charge related to preferred stock

       

      (52,000

      )

      (43,986

      )

      Net loss applicable to common stock

       

      $

      (70,675

      )

      $

      (56,213

      )

      The accompanying notes are an integral part of these statements

      83



      Cogent Communications Group, Inc.
      Condensed Financial Information of Registrant
      (Parent Company Only)
      Condensed Statement of Cash Flows
      For the Years Ended December 31, 2003 and 2004
      (in thousands)

       

       

      2003

       

      2004

       

      Cash flows from operating activities:

       

       

       

       

       

      Net loss

       

      $

      (18,675

      )

      $

      (12,227

      )

      Adjustments to reconcile net income (loss) to net cash used in operating activities:

       

       

       

       

       

      Amortization of deferred compensation

       

      18,675

       

      12,262

       

      Changes in Assets and Liabilities:

       

       

       

       

       

      Accrued interest—Cogent France

       

      —

       

      (35

      )

      Net cash used in operating activities

       

      —

       

      —

       

      Net increase (decrease) in cash and cash equivalents

       

      —

       

      —

       

      Cash and cash equivalents—beginning of period

       

      —

       

      —

       

      Cash and cash equivalents—end of period

       

      $

      —

       

      $

      —

       

      Supplemental cash flow disclosures:

       

       

       

       

       

      Non-cash financing & investing activities:

       

       

       

       

       

      Investment in Cogent Communications, Inc.

       

      $

      60,286

       

      $

      —

       

      Investment in Symposium Omega.

       

      —

       

      19,454

       

      Investment in UFO Group, Inc.

       

      —

       

      2,600

       

      Investment in Cogent Germany.

       

      —

       

      927

       

      Investment in Cogent Potomac

       

      —

       

      18,503

       

      The accompanying notes are an integral part of these statements

      84



      COGENT COMMUNICATIONS GROUP, INC.
      CONDENSED FINANCIAL INFORMATION OF REGISTRANT
      (Parent Company Only)
      AS OF DECEMBER 31, 2003 AND DECEMBER 31, 2004

      Note A: Background and Basis for Presentation

      Cogent Communications, Inc. (“Cogent”) was formed on August 9, 1999, as a Delaware corporation and is headquartered in Washington, DC. In 2001, Cogent formed Cogent Communications Group, Inc., (the “Company”), a Delaware corporation. Effective on March 14, 2001, Cogent’s stockholders exchanged all of their outstanding common and preferred shares for an equal number of shares of the Company, and Cogent became a wholly owned subsidiary of the Company. This was a tax-free exchange that was accounted for by the Company at Cogent’s historical cost.

      The Company is a leading facilities-based provider of low-cost, high-speed Internet access and Internet Protocol communications services. The Company’s network is specifically designed and optimized to transmit data using IP. The Company delivers its services to small and medium-sized businesses, communications service providers and other bandwidth-intensive organizations through over 8,700 customer connections in North America and Europe.

      The Company’s primary on-net service is Internet access at a speed of 100 Megabits per second, much faster than typical Internet access currently offered to businesses. The Company offers this on-net service exclusively through its own facilities, which run all the way to its customers’ premises. Because of its integrated network architecture, the Company is not dependent on local telephone companies to serve its on-net customers. The Company’s typical customers in multi-tenant office buildings are law firms, financial services firms, advertising and marketing firms and other professional services businesses. The Company also provides on-net Internet access at a speed of one Gigabit per second and greater to certain bandwidth-intensive users such as universities, other ISPs and commercial content providers.

      In addition to providing on-net services, the Company also provides Internet connectivity to customers that are not located in buildings directly connected to its network. The Company serves these off-net customers using other carriers’ facilities to provide the “last mile” portion of the link from its customers’ premises to the Company’s network. The Company also operates 30 data centers throughout North America and Europe that allow customers to colocate their equipment and access our network, and from which the Company provides managed modem service.

      The Company has created its network by purchasing optical fiber from carriers with large amounts of unused fiber and directly connecting Internet routers to the existing optical fiber national backbone. The Company has expanded its network through several acquisitions of financially distressed companies or their assets. The overall impact of these acquisitions on the operation of its business has been to extend the physical reach of the Company’s network in both North America and Europe, expand the breadth of its service offerings, and increase the number of customers to whom the Company provides its services.

      Reverse Stock Split

      On March 24, 2005, the Company effected a 1-for-20 reverse stock split. Accordingly, all share and per share amounts have been retroactively adjusted to give effect to this event.


      Equity Conversion

      In February 2005, the Company’s holders of its preferred stock elected to convert all of their shares of preferred stock into shares of the Company’s common stock (the “Equity Conversion”). As a result, the Company no longer has outstanding shares of preferred stock and the liquidation preferences on preferred stock have been eliminated.

      Withdrawal of Public Offering

      In May 2004, the Company filed a registration statement to sell shares of common stock in a public offering. In October 2004, the Company withdrew the public offering.

      Public Offering

      The Company has filed a registration statement to sell up to $86.3 million shares of common stock in an underwritten public offering. There can be no assurances that the Public Offering will be completed.

      Note B: Management’s Plans, Liquidity and Business Risks

      The Company has experienced losses since its inception in 1999 and as of December 31, 2004 has an accumulated deficit of $53.4 million. The Company operates in the rapidly evolving Internet services industry, which is subject to intense competition and rapid technological change, among other factors. The successful execution of the Company’s business plan is dependent upon the Company’s ability to increase and retain its customers, its ability to integrate acquired businesses and purchased assets into its operations and realize planned synergies, the performance of the Company’s network equipment, the extent to which acquired businesses and assets are able to meet the Company’s expectations and projections, the Company’s ability to retain and attract key employees, and the Company’s ability to manage its growth and geographic expansion, among other factors.

      In February 2005, the Company issued a subordinated note for $10 million in cash. In March 2005, the Company entered into a $10.0 million line of credit facility and borrowed $10.0 million under this facility, of which $4.0 million is restricted and held by the lender. In March 2005, the Company sold its building located in Lyon, France for net proceeds of approximately $5.1 million. Management believes that cash generated from the Company’s operations combined with the amounts received from these transactions is adequate to meet the Company’s future funding requirements. Although management believes that the Company will successfully mitigate its risks, management cannot give assurances that it will be able to do so or that the Company will ever operate profitably. maturity date.

      Note C: Accounting for Investments

      The Company accounts for its investments in its subsidiaries at cost.

      Acquisition of Aleron Broadband Services (“Aleron”)

      In October 2004, the Company acquired certain assets of Aleron Broadband Services, formally known as AGIS Internet in exchange for 3,700 shares of its Series M preferred stock. The Series M preferred stock was convertible into approximately 5.7 million shares
      of the Company’s common stock and converted into common stock in connection with the Equity Conversion. The Company acquired Aleron’s customer base and network, as well as Aleron’s Internet access and managed modem service.

      Acquisition of Global Access

      In September 2004, the Company issued 185 shares of Series L preferred stock to the shareholders of Global Access Telecommunications, Inc. (“Global Access”) in exchange for the majority of the assets of Global Access. The Series L preferred stock was convertible into approximately 0.3 million sharesof the


      Company’s common stock and converted into common stock in connection with the Equity Conversion. The estimated fair market value for the Series L preferred stock was determined by using the price per share of the Company’s Series J preferred stock. Global Access was headquartered in Frankfurt, Germany and provided Internet access and other data services in Germany.

      Merger with UFO Group, Inc.

      In August 2004, a subsidiary of the Company merged with UFO Group, Inc. (“UFO Group”). The Company issued 2,600 shares of Series K preferred stock in exchange for the outstanding shares of UFO Group. The Series K preferred stock was convertible into approximately 0.8 million sharesof the Company’s common stock and converted into common stock in connection with the Equity Conversion. The estimated fair market value for the Series K preferred stock was determined by using the price per share of the Company’s Series J preferred stock.

      Merger with Symposium Omega

      In March 2004, Symposium Omega, Inc., (“Omega”) a Delaware corporation and related party, merged with a subsidiary of the Company (Note 12). Prior to the merger, Omega had raised approximately $19.5 million in cash in a private equity transaction with certain existing investors in the Company and acquired the rights to a German fiber optic network. The German fiber optic network had no customers, employees or associated revenues. The Company issued 3,891 shares of Series J preferred stock to the shareholders of Omega in exchange for all of the outstanding common stock of Omega. The Series J preferred stock was convertible into approximately 6.0 million sharesof the Company’s common stock and converted into common stock in connection with the Equity Conversion.

      Merger with Symposium Gamma, Inc. and Acquisition of Firstmark Communications Participations S.à r.l. and Subsidiaries (“Firstmark”)

      In January 2004, a subsidiary of the Company merged with Symposium Gamma, Inc. (“Gamma”). Immediately prior to the merger, Gamma had raised $2.5 million through the sale of its common stock in a private equity transaction with certain existing investors in the Company and new investors and in January 2004, acquired Firstmark for 1 euro. The merger expanded the Company’s network into Western Europe. Under the merger agreement all of the issued and outstanding shares of Gamma common stock were converted into 2,575 shares of the Company’s Series I preferred stock. The Series I preferred stock was convertible into approximately 0.8 million sharesof the Company’s common stock and converted into common stock in connection with the Equity Conversion. In 2004, Firstmark changed its name to Cogent Europe S.à r.l (“Cogent Europe”).

      Note D: Stockholders Equity

      In June 2003, the Company’s board of directors and shareholders approved an amended and restated charter that eliminated the reference to the Company’s Series A, B, C, D, and E preferred stock (“Existing Preferred Stock”). In March 2005, the Company’s board of directors and shareholders approved an amended and restated charter that increased the number of authorized shares of the Company’s common stock to 75.0 million shares and designated 10,000 shares of undesignated preferred stock.

      On July 31, 2003 and in connection with the Company’ restructuring of its debt with Cisco Capital, all of the Company’s Existing Preferred Stock was converted into approximately 0.5 million shares of common stock. At the same time the Company issued 11,000 shares of Series F preferred stock to Cisco Capital under the Exchange Agreement and issued 41,030 shares of Series G preferred stock for gross proceeds of $41.0 million to the Investors under the Purchase Agreement.


      In January 2004, Symposium Gamma Inc. (“Gamma”) merged with a subsidiary of the Company. Under the merger agreement, all of the issued and outstanding shares of Gamma common stock were converted into 2,575 shares of the Company’s Series I preferred stock and the Company became Gamma and Cogent Europe’s sole shareholder.

      On March 30, 2004, Symposium Omega, Inc., (“Omega”) merged with a subsidiary of the Company. Prior to the merger Omega had raised approximately $19.5 million in cash and acquired the rights to acquire a German fiber optic network. The Company issued 3,891 shares of Series J preferred stock to the shareholders of Omega in exchange for all of the outstanding common stock of Omega.

      On August 12, 2004, UFO Group, Inc., (“UFO Group”) merged with a subsidiary of the Company. Prior to the merger UFO Group had raised net cash of approximately $2.1 million and acquired the rights to acquire the majority of the assets of Unlimited Fiber Optics, Inc. The Company issued 2,600 shares of Series K preferred stock to the shareholders of UFO Group in exchange for all of the outstanding common stock of UFO Group.

      On September 15, 2004, the Company issued 185 shares of Series L preferred stock to the shareholders of Global Access Telecommunications Inc. (“Global Access”) in exchange for the majority of the assets of Global Access.

      On October 26, 2004, the Company merged with Cogent Potomac, Inc. (“Potomac”). The Company issued 3,700 shares of Series M preferred stock in exchange for all of the outstanding common shares of Potomac. Prior to the merger, Potomac had acquired the majority of the assets of Aleron Broadband Services LLC (“Aleron”).

      Each share of the Series F preferred stock, Series G preferred stock, Series H preferred stock, Series I preferred stock, Series J preferred stock, Series K preferred stock, Series L preferred stock and Series M preferred stock (collectively, the “New Preferred”) may be converted into shares of common stock at the election of its holder at any time. The Series F, Series G, Series I, Series J, Series K, Series L and Series M preferred stock were convertible into 3.4 million, 12.7 million, 0.8 million, 6.0 million, 0.8 million, 0.3 million and 5.7 million shares of the Company’s common stock, respectively. In March 2005, the New Preferred was converted into voting common stock. The liquidation preferences on the New Preferred were also eliminated.

      Dividends

      Cogent’s Cisco credit facility and the Company’s line of credit prohibit the Company from paying cash dividends and restricts the Company’s ability to make other distributions to its stockholders.

      Beneficial Conversion Charges

      Beneficial conversion charges of $2.5 million, $19.5 million, $2.6 million, $0.9 million and $18.5 million were recorded on January 5, 2004, March 30, 2004, August 12, 2004, September 15, 2004, and October 26, 2004 respectively, since the price per common share at which the Series I, Series J, Series K, Series L and Series M preferred stock converts into were less than the quoted trading price of the Company’s common stock on that date.

      Note E: Deferred Compensation Charges—Stock Options and Restricted Stock

      In September 2003, the Compensation Committee (the “Committee”) of the board of directors adopted and the stockholders approved, the Company’s 2003 Incentive Award Plan (the “Award Plan”). The Award Plan reserved 54,001 shares of Series H preferred stock for issuance under the Award Plan. In September 2003, the Company offered its employees the opportunity to exchange eligible outstanding stock options and certain common stock for restricted shares of Series H preferred stock under the Award


      Plan. In 2004, the Company’s board of directors and shareholders approved the Company’s 2004 Incentive Award Plan that increased the shares of Series H preferred stock available for grant as either restricted shares or options for restricted shares under the Award Plan from 54,001 to 84,001 shares. In July 2004, the Company began granting options for Series H preferred stock. Each share of Series H preferred stock and each option for Series H preferred stock was convertible into approximately 38 shares of common stock and were converted in connection with the Equity Conversion. The Series H preferred shares were valued using the trading price of the Company’s common stock on the grant date. For restricted shares granted under the offer to exchange, the vesting period was 27% upon grant with the remaining shares vesting ratably over a three year period and for share and options grants to newly hired employees; the shares generally vest 25% after one year with the remaining shares vesting ratably over three years.

      The Company recorded a deferred compensation charge of approximately $14.3 million in the fourth quarter of 2001 related to options granted at exercise prices below the estimated fair market value of the Company’s common stock on the date of grant. The deferred compensation charge was amortized over the vesting period of the related options which was generally four years. In connection with the October 2003 offer to exchange and granting of Series H preferred stock the remaining $3.2 million unamortized balance of deferred compensation is now amortized over the vesting period of the Series H preferred stock.

      In July 2004, the Company began granting options for Series H preferred stock, 17,500 of which were granted with an exercise price below the trading price of the Company’s common stock on grant date. These option grants resulted in additional deferred compensation of $4.7 million recorded during the third quarter of 2004. Deferred compensation for these option grants was determined by multiplying the difference between the exercise price and the market value of the Series H preferred stock on grant date times the number of options granted and is being amortized over the service period.

      Under the offer to exchange, the Company recorded a deferred compensation charge of approximately $46.1 million in the fourth quarter of 2003. The Company has also granted additional shares of Series H preferred to its new employees resulting in an additional deferred compensation. For grants of restricted stock, when an employee terminates prior to full vesting, the total remaining deferred compensation charge is reduced, the employee retains their vested shares and the employees’ unvested shares are returned to the plan. For grants of options for restricted stock, when an employee terminates prior to full vesting, the total remaining deferred compensation charge is reduced, previously recorded deferred compensation is reversed and the employee may elect to exercise their vested options for a period of ninety days and any of the employees’ unvested options are returned to the plan. Deferred compensation for the granting of Series H preferred restricted shares was determined using the trading price of the Company’s common stock on the grant date.

      The amortization of deferred compensation expense related to stock options and restricted stock was approximately $18.7 million for the year ended December 31, 2003 and $12.3 million for the year ended December 31, 2004.

      89



      Schedule II



      COGENT COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES
      VALUATION AND QUALIFYING ACCOUNTS
      (in thousands)

      Description

       

       

       

      Balance at
      Beginning of
      Period

       

      Charged to
      Costs and
      Expenses(a)

       

      Acquisitions

       

      Deductions

       

      Balance at
      End of
      Period

       

      Allowance for doubtful accounts (deducted from accounts receivable), (in thousands)

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

      Year ended December 31, 2002

       

       

      $

      112

       

       

       

      $

      3,887

       

       

       

      $

      2,863

       

       

       

      $

      4,839

       

       

       

      $

      2,023

       

       

      Year ended December 31, 2003

       

       

      $

      2,023

       

       

       

      $

      5,165

       

       

       

      $

      125

       

       

       

      $

      4,445

       

       

       

      $

      2,868

       

       

      Year ended December 31, 2004

       

       

      $

      2,868

       

       

       

      $

      4,406

       

       

       

      $

      2,247

       

       

       

      $

      6,292

       

       

       

      $

      3,229

       

       

      Allowance for Credits (deducted from accounts receivable), (in thousands)

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

      Year ended December 31, 2002

       

       

      $

      —

       

       

       

      $

      200

       

       

       

      $

      —

       

       

       

      $

      —

       

       

       

      $

      200

       

       

      Year ended December 31, 2003

       

       

      $

      200

       

       

       

      $

      —

       

       

       

      $

      —

       

       

       

      $

      50

       

       

       

      $

      150

       

       

      Year ended December 31, 2004

       

       

      $

      150

       

       

       

      $

      140

       

       

       

      $

      —

       

       

       

      $

      140

       

       

       

      $

      150

       

       

      Allowance for Unfulfilled Purchase Obligations (deducted from accounts receivable), (in thousands)

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

      Year ended December 31, 2002

       

       

      $

      —

       

       

       

      $

      2,038

       

       

       

      $

      —

       

       

       

      $

      2,023

       

       

       

      $

      15

       

       

      Year ended December 31, 2003

       

       

      $

      15

       

       

       

      $

      1,317

       

       

       

      $

      —

       

       

       

      $

      1,015

       

       

       

      $

      317

       

       

      Year ended December 31, 2004

       

       

      $

      317

       

       

       

      $

      537

       

       

       

      $

      1,254

       

       

       

      $

      1,944

       

       

       

      $

      164

       

       

      Restructuring accrual), (in thousands)

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

       

      Year ended December 31, 2004

       

       

      $

      —

       

       

       

      $1,821

       

       

       

      $

      —

       

       

       

      $

      345

       

       

       

      $

      1,476

       

       

      Description
      		 Balance at
      Beginning of
      Period
      		 Charged to
      Costs and Expenses(a)
      		 Deductions
      		 Balance at
      End of
      Period
      Allowance for doubtful accounts (deducted from accounts receivable)            
      Year ended December 31, 2005 $3,229 $4,831 $6,623 $1,437
      Year ended December 31, 2006 $1,437 $3,410 $3,614 $1,233
      Year ended December 31, 2007 $1,233 $2,705 $2,779 $1,159

      Allowance for Credits (deducted from accounts receivable)
       
       
       
       
       
       
       
       
       
       
       
       
      Year ended December 31, 2005 $150 $33 $— $183
      Year ended December 31, 2006 $183 $— $61 $122
      Year ended December 31, 2007 $122 $— $98 $24

      Allowance for Unfulfilled Customer Purchase Obligations (deducted from accounts receivable)
       
       
       
       
       
       
       
       
       
       
       
       
      Year ended December 31, 2005 $164 $2,008 $1,767 $405
      Year ended December 31, 2006 $405 $1,585 $1,406 $584
      Year ended December 31, 2007 $584 $2,134 $1,611 $1,107

      Lease restructuring accrual
       
       
       
       
       
       
       
       
       
       
       
       
      Year ended December 31, 2005 $1,611 $1,319 $1,378 $1,552
      Year ended December 31, 2006 $1,552 $114 $1,273 $393
      Year ended December 31, 2007 $393 $7 $400 $—

      (a)
      Bad debt expense, net of recoveries, was approximately $3.2$4.6 million for the year ended December 31, 2002 and $3.92005, $2.6 million for the year ended December 31, 20032006 and $4.0$2.0 million for the year ended December 31, 2004.2007.

      90
      SIGNATURES



              

      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, INC.


      Dated: March 31, 2005

      February 27, 2008


      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

      March 31, 2005

      David Schaeffer


      (Principal Executive Officer)

      February 27, 2008


      /s/        THADDEUS G. WEED

      Thaddeus G. Weed



      Chief Financial Officer

      March 31, 2005

      Thaddeus G. Weed


      (Principal Financial and Accounting Officer)



      February 27, 2008


      /s/        EDWARD GLASSMEYEREREL MARGALIT      

      Erel Margalit



      Director


      March 31, 2005


      February 27, 2008

      Edward Glassmeyer


      /s/        TIMOTHY WEINGARTEN      
      Timothy Weingarten



      Director



      February 27, 2008


      /s/        EREL MARGALITSTEVEN BROOKS      

      Steven Brooks



      Director


      March 31, 2005


      February 27, 2008

      Erel Margalit


      /s/        RICHARD T. LIEBHABER      
      Richard T. Liebhaber



      Director



      February 27, 2008


      /s/        JEAN-JACQUES BERTRANDDAVID BLAKE BATH      

      David Blake Bath



      Director


      March 31, 2005


      February 27, 2008

      Jean-Jacques Bertrand


      /s/        TIMOTHY WEINGARTENLEWIS H. FERGUSON III      

      Lewis H. Ferguson III



      Director


      March 31, 2005

      Timothy Weingarten

      /s/ STEVEN BROOKS

      Director

      March 31, 2005

      Steven Brooks

      /s/ MICHAEL CARUS

      Director

      March 31, 2005

      Michael Carus

      /s/ KENNETH D. PETERSON, JR.

      Director

      March 31, 2005

      Kenneth D. Peterson, Jr.


      February 27, 2008

      91




      QuickLinks

      COGENT COMMUNICATIONS GROUP, INC. FORM 10-K ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2007
      TABLE OF CONTENTS
      DOCUMENTS INCORPORATED BY REFERENCE
      SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
      PART I
      PART II
      Report of Independent Registered Public Accounting Firm
      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2006 AND 2007 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2005, DECEMBER 31, 2006 AND DECEMBER 31, 2007 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
      COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2005, DECEMBER 31, 2006 AND DECEMBER 31, 2007 (IN THOUSANDS)
      MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
      Report of Independent Registered Public Accounting Firm On Internal Control over Financial Reporting
      PART III
      PART IV
      Schedule II COGENT COMMUNICATIONS GROUP, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (in thousands)
      SIGNATURES