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SCHEDULE 14C INFORMATION

Information Statement Pursuant to Section 14(c) of
the Securities Exchange Act of 1934

Check the appropriate box:
ý   Preliminary Information Statement
o   Confidential, for Use of the Commission Only (as permitted by Rule 14c-5(d)(2))
o   Definitive Information Statement
 

 
COGENT COMMUNICATIONS GROUP, INC.
(Name of Registrant As Specified In Its Charter)

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Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 
 
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LOGO


1015 31st Street N.W.
Washington, D.C. 20007
(202) 295-4200


INFORMATION STATEMENT

        This Information Statement is being furnished to the stockholders of Cogent Communications Group, Inc., a Delaware corporation (the "Company") in connection with the proposed amendment and restatement of the Company's Second Amended and Restated Certificate of Incorporation. This proposal is described in more detail in this Information Statement. It is anticipated that this Information Statement will be first mailed to stockholders on or about February 10, 2003.

WE ARE NOT ASKING YOU FOR A PROXY AND
YOU ARE REQUESTED NOT TO SEND A PROXY.

Consent Date; Outstanding Shares; Voting Rights

        It is anticipated that on February 9, 2003 (the "Consent Date"), certain of the Company's stockholders who hold stock as of that date will act by written consent to approve the proposal described in this Information Statement. It is anticipated that as of the Consent Date, the Company's issued and outstanding capital stock will consist of:

        Holders of shares of our Common Stock and Existing Preferred Stock are entitled to the following number of votes on all matters on which they are entitled to a vote:

Dissenters' Rights of Appraisal

        Under the laws of the State of Delaware and the Company's charter documents, stockholders will not have the right to dissent and obtain payment for their shares in connection with the proposal described in this Information Statement.

Note Regarding Share and Per Share Data

        In connection with the completion of the merger of Allied Riser Communications Corporation ("Allied Riser") with a subsidiary of the Company, which is discussed in the footnotes to the financial statements accompanying this Information Statement, the Company completed a ten-for-one reverse stock split with respect to its common stock. All share and per-share information contained in and accompanying this Information Statement reflects the occurrence of that reverse stock split.


PROPOSAL NO. 1
AMENDMENT AND RESTATEMENT OF THE COMPANY'S CERTIFICATE OF INCORPORATION

        It is anticipated that in January, 2003, the board of directors will unanimously adopt, subject to stockholder approval, the Third Amended and Restated Certificate of Incorporation of the Company (the "Amended and Restated Charter"). It is anticipated that on February 9, 2003, stockholders holding capital stock of the Company representing a number of votes sufficient to approve the proposal will consent to approve the adoption of the Amended and Restated Charter. The Amended and Restated Charter will increase the number of authorized shares of the Company's Preferred Stock from 98,173,643 shares to 106,276,229 shares by authorizing 8,102,586 additional shares of preferred stock, 1,250,000 of which will be authorized but unissued and undesignated Preferred Stock, 3,426,293 of which will be designated Series D Participating Convertible Preferred Stock (the "Series D Preferred Stock") and 3,426,293 of which will be designated Series E Participating Convertible Preferred Stock (the "Series E Preferred Stock, and together with the Series D Preferred Stock, the "Additional Preferred Stock").

        The Additional Preferred Stock to be authorized by adoption of the Amended and Restated Charter will have rights and preferences similar to the Existing Preferred Stock as described more fully below. Adoption of the Amended and Restated Charter and issuance of the Preferred Stock will not affect the rights of the holders of currently outstanding Common Stock and the Existing Preferred Stock of the Company, except for effects incidental to increasing the number of shares of Preferred Stock outstanding, such as dilution of the earnings per share and voting rights of current holders of Common Stock and the Existing Preferred Stock and the issuance of additional shares with liquidation rights senior to the Common Stock. The Amended and Restated Charter will become effective upon filing of the Amended and Restated Charter with the Secretary of State of the State of Delaware immediately prior to the consummation of the Settlement Agreement and the Exchange Agreement, as described below.

Background

        On December 12, 2001, Allied Riser announced that certain holders of its 7.50% convertible subordinated notes due 2007 filed notices as a group with the Securities and Exchange Commission on Schedule 13D including copies of documents indicating that such group had filed suit in Delaware Chancery Court on December 6, 2001 against Allied Riser and its board of directors (the "Noteholder Litigation"). The suit alleges, among other things, breaches of fiduciary duties and default by Allied Riser under the indenture related to the notes, and requested injunctive relief to prohibit Allied Riser's merger with the Company. The plaintiffs amended their complaint on January 11, 2002 and subsequently served it on Allied Riser. On January 28, 2002, the Court held a hearing on a motion by the plaintiffs to preliminarily enjoin the merger. On January 31, 2002, the Court issued a Memorandum Opinion denying that motion. On July 23, 2002, the plaintiffs filed a motion for partial summary judgment in which they alleged that the merger was a "change of control" as defined by the indenture governing the Allied Riser notes. On November 7, 2002, the Court issued a ruling denying that motion. Instead, the Court determined that there had not been a "change of control," as defined in the indenture. This decision may be appealed by the plaintiffs.

        On March 27, 2002, certain holders of the Allied Riser notes filed an involuntary bankruptcy petition under Chapter 7 of the United Stated Bankruptcy Code against Allied Riser in United States Bankruptcy Court for the Northern District of Texas, Dallas Division. Three of the four petitioners are plaintiffs in the Delaware Chancery Court case described above. Petitioners contend that the acquisition of Allied Riser was a change of control that entitled them to declare the notes were accelerated and are now due and payable. The petition does not name the Company as a party. Management notes, however that pursuant to the terms of the supplemental indenture related to the notes, the Company is a co-obligor of the notes. On June 11, 2002, the Bankruptcy Court Judge ruled

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in Allied Riser's favor stating that the involuntary bankruptcy petition would be dismissed. On August 8, 2002, the judge issued a written order dismissing the petition.

        Allied Riser has timely made all interest and principal payments on the notes to date.

Proposed Settlement of Noteholder Litigation

        In order to end the distraction to management and diversion of resources caused by the actions of certain of the holders of the Allied Riser notes, including specifically the Noteholder Litigation, the Company determined in November of 2002 to attempt to reach a settlement with the noteholders who are party to the Noteholder Litigation. The Company entered into discussions with these noteholders which resulted in the Company, Allied Riser and the noteholders entering into a non-binding letter agreement relating to the settlement of the Noteholder Litigation and the mutual release of the claims by the noteholders, the Company, Allied Riser and certain former directors of Allied Riser. Pursuant to the terms of the letter agreement, the Company and Allied Riser, in consideration of the settlement of the Noteholder Litigation, agreed to exchange shares of Additional Preferred Stock and cash with the noteholders in return for their Allied Riser notes. The Company also agreed to reimburse the noteholders for their legal expenses in connection with the settlement in an amount up to $100,000.

        In order to consummate the settlement agreed to by these parties, the Company, Allied Riser and the holders of $106,789,000 in face value of the Allied Riser notes will enter into an Exchange Agreement, a Settlement Agreement and an Escrow Agreement. Pursuant to the Exchange Agreement, the Allied Riser noteholders will surrender to Allied Riser all of the notes that they hold, including accrued and unpaid interest thereon, in exchange for an aggregate cash payment by Allied Riser in the amount of $4,997,725 and an aggregate 3,426,293 shares of Series D Preferred Stock and 3,426,293 shares of Series E Preferred Stock.

        Pursuant to the Settlement Agreement, the Allied Riser noteholders will cause the Noteholder Litigation to be dismissed with prejudice and will deliver to the Company, Allied Riser and certain former directors of Allied Riser a general release in exchange for an aggregate cash payment by the Company of $4,880,256 and a general release from the Company, Allied Riser and certain former Allied Riser directors.

        The consummation of the transactions contemplated by the Exchange Agreement and the Settlement Agreement will be subject to the satisfaction of normal and customary conditions.

        Pursuant to the Escrow Agreement, the Company and Allied Riser will deposit with an escrow agent the aggregate cash payment in respect of the note exchange, the aggregate cash payment in respect of the settlement of the Noteholder Litigation, and a copy of the general release executed by the Company, Allied Riser and the former Allied Riser directors named in the Noteholder Litigation. The Allied Riser noteholders will deposit with the escrow agent the Allied Riser notes and executed copies of the general release executed by each noteholder. Upon delivery of the shares of Additional Preferred Stock, the escrow agent will be obligated to release the Allied Riser notes and a fully executed general release to the Company and Allied Riser, and the cash payment in respect of the Allied Riser note exchange, the cash payment in respect of the settlement of the Noteholder Litigation and a fully executed general release to the Allied Riser noteholders.

Terms of Series D Participating Convertible Preferred Stock and Series E Participating Convertible Preferred Stock

        The complete designation of rights and preferences of the Additional Preferred Stock is set forth in the Amended and Restated Charter, and is attached hereto as Appendix A. The Series D Preferred Stock will be pari-passu in all economic respects, including liquidation preference, rights to dividends, conversion, adjustments and dilution protection, to the Series C Preferred Stock. Series E Preferred

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Stock will be pari-passu in all economic respects to the Series C Preferred Stock except with respect to liquidation preference in which case the Series E Preferred Stock shall be pari passu with the Series A Preferred Stock and the Series B Preferred Stock. A summary of certain of the rights and preferences of the Additional Preferred Stock is set forth below.

        The holders of the Series D Preferred Stock and Series E Preferred Stock shall be entitled to receive noncumulative dividends pari passu with the holders of the Series C Preferred Stock and in preference to any dividend on any other shares of the Company's capital stock at the rate of 8% of the initial liquidation value per annum, when and as declared by the board of directors of the Company. The initial liquidation value for the Series D Preferred Stock and the Series E Preferred Stock shall be $1.2467 per share.

        Both the Series D Preferred Stock and Series E Preferred Stock may be converted at the election of it holder, at any time, into shares of Common Stock. The initial conversion rate shall be the same as the conversion rate of the Series C Preferred Stock and subject to adjustment as provided in the paragraph below (relating to antidilution). The Series D Preferred Stock and Series E Preferred Stock shall be automatically converted into Common Stock, at the then applicable conversion price (i) in the event that the holders of at least two-thirds of the outstanding Preferred Stock consent to such conversion and all shares of Preferred Stock are then converted and holders of Series D Preferred Stock and Series E Preferred Stock receive identical Common Stock (including with respect to registration under the Securities Act of 1933 as amended) as all other holders of the Preferred Stock or (ii) upon the closing of a firmly underwritten public offering of shares of Common Stock of the Company at an aggregated pre-money valuation of at least $500 million and for a total offering of not less than $50 million (before deduction of underwriters commissions and expenses).

        The conversion price of the Series D Preferred Stock and Series E Preferred Stock will be subject to adjustment to reduce dilution in the event that the Company issues additional equity securities (other than shares reserved as employee shares and other customary exclusions) at a purchase price less than the applicable conversion price. In such case, the applicable conversion price shall be adjusted so that it is equal to the purchase price of such additional equity securities. The conversion price will also be subject to proportional adjustment for stock splits, stock dividends, recapitalizations and the like.

        The Series D Preferred Stock and the Series E Preferred Stock and other classes of the Preferred Stock will vote together with the Common Stock and not as a separate class except as required by law. Each share of Series D Preferred Stock and Series E Preferred Stock shall have a number of votes equal to the number of shares of Common Stock then issuable upon conversion of such share of Series D Preferred Stock or Series E Preferred Stock.

        Upon any dissolution, liquidation, or winding up of the Company, the holders of outstanding shares of the Series D Preferred Stock and the Series E Preferred Stock will be entitled to receive, out of the assets of the Company remaining after all of the Company's debts and liabilities have been paid or otherwise provided for, but before any payments have been made to the holders of Common Stock

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or any other class or series of capital stock of the Company ranking junior in preference to the Series D Preferred Stock and the Series E Preferred Stock, an amount equal to $1.2467 per share (the "Series E Original Purchase Price") in the case of the Series E Preferred Stock, plus interest accruing on the Series E Original Purchase Price from the date the Series E Preferred Stock was issued through the date of such payment at an annual rate of interest equal to the three month London Interbank Offered Rate, plus one hundred and fifty (150) basis points and an amount equal to the greater of (1) $1.2467 per share (the "Series D Original Purchase Price") plus interest accruing on the Series D Original Purchase Price from the issue date of the Series D Preferred Stock through the date of such payment at an annual rate of interest equal to the three month London Interbank Offered Rate, plus one hundred and fifty (150) basis points, or (2) $2.0091 per share.

        After payment has been made in full to the holders of Preferred Stock of their respective liquidation preferences outlined above and subject to certain adjustments, all remaining assets of the Company available for distribution shall be distributed ratably to the holders of the Preferred Stock (on an as-converted-to-common-stock basis) and the holders of the Common Stock until, with respect to the Series D Preferred Stock and the Series E Preferred Stock, such time, if ever, as the amount distributed pursuant to the previous paragraph plus the amount distributed pursuant to the provisions of this paragraph equals, with respect to each outstanding share of Series D Preferred Stock and Series E Preferred Stock, $3.7401.

        The holders of Series D Preferred Stock and Series E Preferred Stock will have the right to vote for election of directors but will not have any contractual right to nominate or otherwise designate any members to the Company's board of directors.

Registration Rights Agreement and Stockholder Agreement

        The holders of the Series D Preferred Stock and Series E Preferred Stock will enter into a Second Amended and Restated Registration Rights Agreement, by and among the Company and the holders of the Existing Preferred Stock, which will provide for, among other things, registration rights with respect to common stock issued to the holders of the Company's Preferred Stock upon conversion of shares of Preferred Stock. The holders of the Series D Preferred Stock and Series E Preferred Stock will become parties to the Company's existing Amended and Restated Stockholders Agreement, dated October 16, 2001, by execution of an instrument of accession.

Dilutive Effect on Holders of Common Stock

        Upon the issuance of the Series D Preferred Stock and the Series E Preferred Stock, the equity interests of our existing common stockholders and preferred stockholders, as a percentage of the total number of shares of the Company's Common Stock assuming conversion of the Preferred Stock, will be diluted.

 
   Percentage of Outstanding Common Stock Owned
(Assuming Conversion of Preferred Stock)
  
Holder
   Before Issuance of Additional
Preferred Stock
   After Issuance of Additional
Preferred Stock
  
Common stockholders   25.7 % 24.4 %
Existing preferred stockholders   74.3 % 70.8 %
New preferred stockholders   —   4.8 %

        Additionally, as a result of the issuance of the Series D Preferred Stock and the Series E Preferred Stock, in the event of any dissolution, liquidation, or winding up of the Company, at least $6,884,000 will be paid in cash to the holders of the Series D Preferred Stock and at least $4,272,000 plus accrued

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interest will be paid in cash to the holders of the Series E Preferred Stock before any payment is made to the holders of Common Stock.

Vote Required

        The affirmative vote of the holders of a majority of the shares of Common Stock and Existing Preferred Stock (on an as-converted-to-common-stock-basis), voting as a single class, is required to approve the adoption of the Amended and Restated Charter. In addition, the affirmative vote of two-thirds of the shares of the Existing Preferred Stock is required to approve the adoption of the Amended and Restated Charter and the issuance of the Additional Preferred Stock. Stockholders holding at least a majority of the shares of Common Stock and Existing Preferred Stock (on an as-converted-to-common-stock-basis), voting as a single class, and the stockholders holding at least two-thirds of the shares of the Existing Preferred Stock will have acted by written consent to approve the adoption of the Amended and Restated Charter and the issuance of the Additional Preferred Stock.


SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

        The following table sets forth certain information with respect to the beneficial ownership of shares of the Company's capital stock as of January 15, 2003 by:

        Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares subject to options, warrants and securities convertible into common stock held by that person that are exercisable as of January 15, 2003 or exercisable within 60 days thereof are deemed beneficially owned. Except as indicated in the footnotes to this table, we believe that each stockholder named in the table has sole voting and investment power with respect to the shares set forth opposite such stockholder's name, except to the extent shared by a spouse under applicable law. This table is based on information supplied by officers, directors and principal stockholders. As of January 15, 2003, there were 98,627,463 shares of capital stock outstanding, of which 3,483,838 shares of Common Stock were outstanding, 26,000,000 shares of Series A Preferred Stock were outstanding, 19,370,223 shares of Series B Preferred Stock and 49,773,402 shares of Series C Preferred Stock were outstanding.

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        Unless otherwise noted, the address for each stockholder below is: c/o Cogent Communications Group, Inc., 1015 31st Street, N.W., Washington D.C. 20007.

 
   Common
   Series A Preferred
   Series B Preferred
   Series C Preferred
    
  
Name and Address
   Number
of Shares
   Percent of
Class
   Number
of Shares
   Percent of
Class
   Number
of Shares
   Percent of
Class
   Number
of Shares
   Percent of
Class
   Percent
Voting
Control(10)
  

Entities affiliated with Jerusalem
Venture Partners
Building One
Mahla, Jerusalem 91487
 
—
 
—
 
9,250,000
 
35.6
%
3,296,704
 
17.0
%
16,042,352
 
32.2
%
25.1
%

Entities affiliated with Worldview
Technology Partners
435 Tasso Street, #120
Palo Alto, CA 94301
 
—
 
—
 
9,250,000
 
35.6
%
3,296,704
 
17.0
%
9,625,411
 
19.3
%
19.7
%

Entities affiliated with Oak Investment Partners IX, LP
One Gorham Island
Westport, CT 06880
 
—
 
—
 
5,000,000
 
19.2
%
4,395,604
 
22.7
%
9,583,300
 
19.3
%
17.2
%

Entities affiliated with Boulder Ventures III, LP
4750 Owings Mills Blvd.
Owings Mill, MD 21117
 
—
 
—
 
2,000,000
 
7.7
%
659,340
 
3.4
%
1,203,176
 
2.4
%
3.4
%

Entities affiliated with Broadview Capital Partners
One Bridge Plaza
Fort Lee, NJ 07024
 
—
 
—
 
—
 
—
 
3,274,726
 
16.9
%
4,439,721
 
8.9
%
7.4
%

Entities affiliated with
Nassau Capital Partners
 
—
 
—
 
—
 
—
 
1,538,461
 
7.9
%
2,205,823
 
4.4
%
3.6
%

ACON Venture Partners, LP
345 California Street
Suite 3300
San Francisco, CA 94104
 
—
 
—
 
—
 
—
 
1,098,901
 
5.7
%
—
 
—
 
1.2
%

SMALLCAP World Fund, Inc.
3000 K Street, NW
Suite 230
Washington, D.C. 20007
 
—
 
—
 
—
 
—
 
1,098,901
 
5.7
%
4,973,129
 
10.0
%
5.4
%

Cisco Systems Capital Corporation(1)
 
710,216
 
20.4
%
—
 
—
 
—
 
—
 
—
 
—
 
5.7
%

David Schaeffer(2)
 
1,651,608
 
47.4
%
—
 
—
 
—
 
—
 
1,604,235
 
3.2
%
15.4
%

H. Helen Lee(3)
 
99,878
 
2.9
%
—
 
—
 
—
 
—
 
—
 
—
 
*
 

Erel Margalit(4)
 
—
 
—
 
9,250,000
 
35.6
%
3,296,704
 
16.6
%
16,042,352
 
32.2
%
25.1
%

James Wei(5)
 
—
 
—
 
9,250,000
 
35.6
%
3,296,704
 
16.6
%
9,625,411
 
19.3
%
19.7
%

Edward Glassmeyer(6)
 
—
 
—
 
5,000,000
 
19.2
%
4,395,604
 
22.2
%
9,583,300
 
19.3
%
17.2
%

Mark Schleifer(7)
 
11,874
 
*
 
—
 
—
 
—
 
—
 
—
 
—
 
*
 

Robert Beury(8)
 
12,763
 
*
 
—
 
—
 
—
 
—
 
—
 
—
 
*
 

Directors and executive officers as
a group (11 persons)(9)
 
1,833,983
 
52.6
%
23,500,000
 
90.4
%
14,307,034
 
72.2
%
41,295,019
 
83.0
%
77.5
%

8

*
Less than 1%

(1)
Constitutes the number of shares of common stock subject to warrants issued in connection with the Company's credit facility with Cisco Systems Capital Corporation.

(2)
Includes 135,000 shares of common stock held by the Schaeffer Descendant's Trust. Mr. Schaeffer disclaims beneficial ownership of such shares. Includes 291,608 shares which may be acquired upon exercise of stock options which are exercisable currently or within 60 days of January 15, 2003.

(3)
Includes 95,745 shares which may be acquired upon exercise of stock options which are exercisable currently or within 60 days of January 15, 2003.

(4)
Includes 28,589,056 shares of preferred stock held by entities affiliated with Jerusalem Venture Partners, of which Mr. Margalit is Managing General Partner, including: (a) JVP III, LP, (b) JVP III (Israel) LP, (c) JVP Entrepreneurs Fund LP, (d) JVP IV, LP, (e) JVP-IV-A LP, and (f) JVP IV (Israel) LP. Mr. Margalit disclaims beneficial ownership of such shares.

(5)
Includes 22,172,115 shares of preferred stock held by entities affiliated with Worldview Technology Partners, of which Mr. Wei is a general partner, including: (a) Worldview Technology Partners III, LP, (b) Worldview Technology International III, LP, (c) Worldview Strategy III, LP, (d) Worldview III Carrier Fund, LP, (e) Worldview Technology Partners IV, LP, (f) Worldview Technology International IV, LP, and (g) Worldview Strategy Partners IV, LP. Mr. Wei disclaims beneficial ownership of such shares.

(6)
Includes 18,978,904 shares of preferred stock held by: Oak Investment Partners IX, LP, Oak IX Affiliates Fund, LP, and Oak IX Affiliates (Annex), LP. Mr. Glassmeyer disclaims beneficial ownership of such shares.

(7)
Common shares include 11,874 shares which may be acquired upon exercise of stock options which are exercisable currently or within 60 days of January 15, 2003.

(8)
Common shares include 12,763 shares which may be acquired upon exercise of stock options which are exercisable currently or within 60 days of January 15, 2003.

(9)
See footnotes (1) through (7) above. Consists of David Schaeffer, H. Helen Lee, Mark Schleifer, Robert Beury, Erel Margalit, James Wei, Edward Glassmeyer, R. Brad Kummer, Neale D'Rozario, Timothy O'Neill, and Thaddeus Weed. Neale D'Rozario, the Company's Chief Information Officer, resigned his position with the Company effective January 16, 2003.

(10)
Based on beneficial ownership of shares, with all shares of Common Stock and Preferred Stock voting as a single class in accordance with the voting provisions of the Company's Certificate of Incorporation.

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

        You should read this Information Statement together with the financial statements and related notes and other information accompanying this Information Statement. The results discussed therein are not necessarily indicative of the results to be expected in any future periods. Certain matters discussed therein are forward-looking statements. This Information Statement may contain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements other than statements of historical fact are "forward-looking statements" for purposes of federal and state securities laws, including any projections of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words "may," "will," "estimate," "intend," "continue," "believe," "expect" or "anticipate" and other similar words. Such forward-looking statements may be contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations," (attached to this Information Statement in Appendix C) among other places.

        Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties. Key risks to our Company are described in our annual report on Form 10-K filed with the Securities and Exchange Commission. We do not intend, and undertake no obligation, to update any forward-looking statement.

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FINANCIAL INFORMATION REGARDING THE COMPANY

Financial Statements

        The Company's audited balance sheets as of December 31, 2001 and 2000 audited statements of operations, statements of stockholders' equity and statements of cash flows for the years ended 2001, 2000 and 1999 and related notes to the financial statements are attached to this Information Statement in Appendix B (the "Audited Financial Statements").

        The Company's unaudited condensed consolidated balance sheet as of September 30, 2002 and unaudited condensed statements of operations, and condensed consolidated statements of cash flows and related notes to the condensed consoldiated financial statements for the three and nine months ended September 30, 2002 and 2001 (the "Unaudited Financial Statements") are also attached to this Information Statement in Appendix B.

        Also included in this Information Statement is an unaudited pro forma consolidated balance sheet as of September 30, 2002 and unaudited pro forma consolidated statements of operations for the twelve months ending December 31, 2001 and nine months ending September 30, 2002 and the related notes to the unaudited pro forma consolidated balance sheet and the unaudited pro forma consolidated income statements (the "Pro Forma Financial Statements"). The Pro Forma Financial Statements give effect to the Company's issuance of 3,426,293 shares of Series D Preferred Stock and 3,426,293 shares of Series E Preferred Stock, which will be issued to the Participating Noteholders upon the consummation of the transactions contemplated by the Exchange Agreement and the Settlement Agreement and the cancellation of $106,789,000 in principal amount of, and the related accrued interest on, the Allied Riser notes and the payment of approximately $9.9 million in cash.

Supplementary Financial Information

        The following tables present unaudited quarterly financial information for the eleven quarters ended September 30, 2002. The Company believes this information reflects all adjustments (consisting only of normal recurring adjustments) that it considers necessary for a fair presentation of such information in accordance with generally accepted accounting principles. The results for any quarter are not necessarily indicative of results for any future period (in thousands, except per share data):

 
   Year-Ended December 31, 2002
  
 
   1st Quarter
   2nd Quarter
   3rd Quarter
  
Net Revenue   $ 3,542   $ 18,578   $ 15,960  
Operating loss   $ (16,684 ) $ (15,523 ) $ (16,875 )
Net loss   $ (17,959 ) $ (24,562 ) $ (25,409 )
Net loss applicable to common stock   $ (17,959 ) $ (24,562 ) $ (25,409 )
Basic and diluted net loss per common share   $ (6.81 ) $ (7.18 ) $ (7.33 )
Weighted average number of shares outstanding     2,637,951     3,421,710     3,464,403  

 
 
Year-Ended December 31, 2001
 
 
   1st Quarter
   2nd Quarter
   3rd Quarter
   4th Quarter
  
Net Revenue   $ —   $ 90   $ 657   $ 2,271  
Operating loss   $ (12,975 ) $ (14,527 ) $ (14,935 ) $ (18,657 )
Net loss   $ (12,794 ) $ (15,188 ) $ (17,448 ) $ (21,483 )
Net loss applicable to common stock   $ (12,794 ) $ (15,188 ) $ (17,448 ) $ (45,651 )
Basic and diluted net loss per common share   $ (9.12 ) $ (10.81 ) $ (12.39 ) $ (32.20 )
Weighted average number of shares outstanding     1,402,798     1,404,587     1,408,614     1,417,522  

11


 
 
Year-Ended December 31, 2000
 
 
   1st Quarter
   2nd Quarter
   3rd Quarter
   4th Quarter
  
Net Revenue   $ —   $ —   $ —   $ —  
Operating loss   $ (284 ) $ (1,510 ) $ (3,930 ) $ (8,499 )
Net loss   $ (161 ) $ (1,378 ) $ (2,432 ) $ (7,790 )
Net loss applicable to common stock   $ (161 ) $ (1,378 ) $ (2,432 ) $ (7,790 )
Basic and diluted net loss per common share   $ (0.12 ) $ (1.00 ) $ (1.75 ) $ (5.57 )
Weighted average number of shares outstanding     1,360,000     1,381,354     1,390,072     1,397,515  

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

        Attached to this Information Statement in Appendix C is management's discussion and analysis of the Company's financial condition, changes in financial condition and results of operations for each of the fiscal years and interim periods covered by the Audited Financial Statements and the Unaudited Financial Statements. We encourage you to read the full text of Appendix C to gain a better understanding of the Company's historical financial statements.

Subsequent Events

        In December 2002 the Company reached an agreement with one of its vendors to settle the litigation brought by that vendor against Allied Riser. Under this settlement, Allied Riser will make a cash payment to the vendor of approximately $1.6 million in 2003 and the vendor will dismiss the litigation and accept that cash payment as payment in full of amounts due to the vendor under the contracts that are the subject of the litigation.

Quantitative and Qualitative Disclosures About Market Risk

        All of our financial interests that are sensitive to market risk are entered into for purposes other than trading. Our primary market risk exposure is related to our marketable securities and credit facility. 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 $54.1 million at September 30, 2002, $51.7 million of which are considered cash equivalents and mature in 90 days or less and $2.4 million are short-term investments consisting of commercial paper.

        Our credit facility provides for secured borrowings at the 90-day London Interbank Offered Rate plus a specified margin based upon our leverage ratio, as defined in the agreement. The interest rate resets on a quarterly basis and was a weighted average of 6.8% as of September 30, 2002. Interest payments are deferred and begin in 2005. Borrowings are secured by a pledge of all of our assets. The credit facility matures on December 31, 2008. Borrowings may be repaid at any time without penalty subject to minimum payment amounts.

        If market rates were to increase immediately and uniformly by 10% from the level at September 30, 2002, the change to our interest sensitive assets and liabilities would have an immaterial effect on our financial position, results of operations and cash flows over the next fiscal year. A 10% increase in the weighted-average interest rate for the three-month period ended September 30, 2002 would have increased interest expense for the period by approximately $0.4 million.

12


UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

        The following unaudited pro forma consolidated financial statements and explanatory notes have been prepared to give effect to the proposed settlement of the Company's litigation with certain holders of Allied Riser convertible subordinated notes. In order to consummate the settlement, it is anticipated that in January 2003, the Company, Allied Riser and the holders of $106,789,000 in face value of the Allied Riser notes will enter into an Exchange Agreement, a Settlement Agreement and an Escrow Agreement. Pursuant to the Exchange Agreement, the Allied Riser noteholders will surrender to Allied Riser all of the notes that they hold including accrued and unpaid interest in exchange for a cash payment by Allied Riser in the amount of approximately $5.0 million and the issuance by the Company of 3,426,293 shares of Series D Preferred Stock and 3,426,293 shares of Series E Preferred Stock to Allied Riser, which will transfer such shares to the Allied Riser Noteholders (the "Exchange"). Pursuant to the Settlement Agreement, the Allied Riser noteholders will cause the noteholder litigation to be dismissed with prejudice and will deliver to the Company a general release in exchange for a cash payment by the Company of approximately $4.9 million and a general release from the Company, Allied Riser and certain former Allied Riser directors (the "Settlement").

        In accordance with Article 11 of Regulation S-X under the Securities Act, unaudited pro forma financial statements as of September 30, 2002, and for the nine months ended September 30, 2002, and the year ended December 31, 2001, have been prepared to reflect, for accounting purposes, the payment to settle the noteholder litigation and the payment of cash and issuance of preferred stock in exchange for the surrender $106,789,000 in face value of the notes plus any accrued interest.

        The following pro forma financial statements have been prepared based upon the historical financial statements of the Company. The pro forma financial statements should be read in conjunction with (a) the historical consolidated financial statements of the Company as of December 31, 2001 and 2000, for the years ended December 31, 2001 and 2000, and for the period from inception (August 9, 1999) to December 31, 1999, and the unaudited condensed consolidated financial statements as of September 30, 2002, and for the nine month period ended September 30, 2002, included in this proxy statement.

        The pro forma statements of operations assume that the Settlement and Exchange were completed on January 1, 2001. The pro forma balance sheet assumes that the Settlement and Exchange were completed on September 30, 2002. The pro forma financial statements are provided for illustrative purposes only, and are not necessarily indicative of the operating results that would have occurred if this transaction had been consummated at the beginning of the periods indicated, nor are they necessarily indicative of any future operating results.

13



Cogent Communications Group, Inc. and Subsidiaries
Unaudited Pro Forma Consolidated Balance Sheet
As of September 30, 2002
(in thousands, except share amounts)

 
   Historical
Cogent
   Pro Forma
Adjustments
   Pro Forma
Cogent
  
ASSETS                    

Current assets:
 
 
 
 
 
 
 
 
 
 
  Cash and cash equivalents     51,669 (a) $ (9,878 ) $ 41,791  
  Short term investments     2,413           2,413  
  Accounts receivable, net of allowance for doubtful accounts of $3,847     5,432           5,432  
  Prepaid expenses and other current assets     3,665           3,665  
   
       
 
Total current assets     63,179           53,301  

Property and Equipment:
 
 
 
 
 
 
 
 
 
 
  Property and equipment     339,012           339,012  
  Accumulated depreciation and amortization     (34,076 )         (34,076 )
   
       
 
      304,936           304,936  
Other Assets     20,557           20,557  
Intangible Assets:                    
  Intangible assets     23,373           23,373  
  Accumulated amortization     (6,580 )         (6,580 )
   
       
 
      16,793           16,793  
   
       
 
Total assets   $ 405,465         $ 395,587  
   
       
 
LIABILITIES AND STOCKHOLDERS' EQUITY                    

Current Liabilities:
 
 
 
 
 
 
 
 
 
 
  Accounts payable     8,294           8,294  
  Accrued liabilities     24,761 (b) $ (2,670 )   22,091  
  Capital leases—current portion     3,794           3,794  
   
       
 
Total current liabilities     36,849           34,179  

Cisco credit facility
 
 
223,556
 
 
 
 
 
223,556
 
Convertible Notes—Allied Riser, net of discount of $79,745     37,235 (c) $ (33,991 )   3,244  
Capital leases, net of current     50,884           50,884  
Other long term liabilities     1,206           1,206  
   
       
 
Total liabilities     349,730           313,069  
   
       
 
Stockholders' Equity:                    
  Convertible preferred stock, Series A, $0.001 par value: 26,000,000 shares authorized, issued and outstanding, liquidation preference of $30,061     25,892           25,892  
  Convertible preferred stock, Series B, $0.001 par value: 20,000,000 shares authorized, 19,370,223 shares issued and outstanding, liquidation preference of $99,168     88,009           88,009  
  Convertible preferred stock, Series C, $0.001 par value: 52,137,643 shares authorized, 49,773,402 shares issued and outstanding, liquidation preference of $100,000     61,345           61,345  
  Convertible preferred stock, Series D, $0.001 par value: 3,426,293 shares authorized, 3,426,293 shares issued and outstanding, liquidation preference of $6,884        (d) $ 4,272     4,272  
  Convertible preferred stock, Series E, $0.001 par value: 3,426,293 shares authorized, 3,426,293 shares issued and outstanding, liquidation preference of $4,272        (d) $ 4,272     4,272  
  Common stock, $0.001 par value, 21,100,000 shares authorized 3,483,838 shares issued and outstanding     4           4  
  Additional paid-in capital     49,322           49,322  
  Deferred compensation     (6,985 )         (6,985 )
  Stock purchase warrants     9,013           9,013  
  Accumulated other comprehensive income (loss)     (12 )         (12 )
  Accumulated deficit     (170,853 )(e) $ 18,239     (152,614 )
   
       
 
Total stockholders equity     55,735           82,518  
   
       
 
Total liabilities & stockholders equity   $ 405,465         $ 395,587  
   
       
 

14


NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF SEPTEMBER 30, 2002


Cash paid under Exchange Agreement   $ 4,998  
Issuance of Series D preferred stock     4,272  
Issuance of Series E preferred stock     4,272  
   
 
Total consideration     13,542  
Book value of retired notes     (33,991 )
Accrued interest related to retired notes     (2,670 )
   
 
Gain from retirement of notes   $ 23,119  
   
 

15


Cogent Communications Group, Inc. and Subsidiaries
Unaudited Pro forma consolidated Statement of Operations
For the Year Ended December 31, 2001
(in thousands, except share and per share amounts)

 
   Historical
Cogent
   Pro Forma
Adjustments
   Pro Forma
Cogent
  
Net service revenue   $ 3,018         $ 3,018  

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Network operations (including $307 of amortization of
deferred compensation)		   $ 20,297           20,297  
  Selling, general and administrative (including $2,958 of amortization of deferred compensation)   $ 30,280           30,280  
  Legal settlement—Allied Riser noteholders        (a) $ 4,880     4,880  
  Gain on retirement of Allied Riser convertible notes        (b) $ (23,119 )   (23,119 )
  Depreciation and amortization   $ 13,535           13,535  
   
       
 
Total operating expenses     64,112           45,873  
Operating loss     (61,094 )         (42,855 )
Interest income     1,914 (c)   (198 )   1,716  
Interest expense     (7,945 )         (7,945 )
Other income     212           212  
   
       
 
Net Loss   $ (66,913 )       $ (48,872 )
   
       
 
Beneficial conversion of preferred stock   $ (24,168 )       $ (24,168 )
   
       
 
Net loss applicable to common stock   $ (91,081 )       $ (73,040 )
   
       
 
Weighted average common shares (basic and diluted)     1,406,007           1,406,007  
   
       
 
Basic and diluted net loss per common share   $ (64.78 )       $ (51.95 )
   
       
 

16


NOTES TO THE UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001


Cash paid under the Exchange   $ 4,998  
Issuance of Series D preferred stock     4,272  
Issuance of Series E preferred stock     4,272  
   
 
Total consideration     13,542  
Book value of retired notes     (33,991 )
Accrued interest related to retired notes     (2,670 )
   
 
Gain from retirement of notes   $ 23,119  
   
 

17


Cogent Communications Group, Inc. and Subsidiaries
Unaudited Pro forma consolidated Statement of Operations
For the Nine Months Ended September 30, 2002
(in thousands, except share and per share amounts)

 
   Historical
Cogent
   Pro Forma
Adjustments
   Pro Forma
Cogent
  
Net service revenue   $ 38,079         $ 38,079  

Operating expenses:
 
 
 
 
 
 
 
 
 
 
Network operations (including $180 of amortization
of deferred compensation)		     37,158           37,158  
  Selling, general and administrative (including $2,313 of amortization of deferred compensation)     26,021           26,021  
  Legal settlement—Allied Riser noteholders        (a) $ 4,880     4,880  
  Gain on retirement of Allied
Riser convertible notes		        (b)   (23,119 )   (23,119 )
  Depreciation and amortization     23,981           23,981  
   
       
 
Total operating expenses     87,160           68,921  
Operating loss     (49,081 )         (30,842 )
Interest income and other     2,136 (c) $ (113 )   2,023  
Interest expense     (25,512) (d) $ 9,923     (15,589 )
   
       
 
Loss before extraordinary item     (72,457 )         (44,408 )
Extraordinary gain—Allied Riser merger     4,528           4,528  
   
       
 
Net loss   $ (67,929 )       $ (39,880 )
   
       
 
Weighted average common shares (basic and diluted)     3,177,577           3,177,577  
   
       
 
Net loss per common share:                    
Net loss before extraordinary item   $ (22.80 )       $ (13.98 )
Extraordinary gain—per share   $ 1.42         $ 1.42  
   
       
 
Basic and diluted net loss per common share   $ (21.38 )       $ (12.55 )
   
       
 

18


NOTES TO THE UNAUDITED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002


Cash paid under Exchange Agreement   $ 4,998  
Issuance of Series D preferred stock     4,272  
Issuance of Series E preferred stock     4,272  
   
 
Total consideration     13,542  
Book value of retired notes     (33,991 )
Accrued interest related to retired notes     (2,670 )
   
 
Gain from retirement of notes   $ 23,119  
   
 

19

  By Order of the Board of Directors

 
David Schaeffer, Chairman and Chief Executive Officer

Dated: February 10, 2003
Washington, D.C.

20


Appendix A

THIRD AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
COGENT COMMUNICATIONS GROUP, INC.

Pursuant to Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware

(Originally incorporated under the same name on December 12, 2000)

        Cogent Communications Group, Inc., (the "Corporation"), a corporation organized and existing under, and by virtue, of the provisions of the General Corporation Law of the State of Delaware (the "General Corporation Law"), DOES HEREBY CERTIFY AS FOLLOWS:

        1.    That the name of the Corporation is Cogent Communications Group, Inc.

        2.    That on January 27, 2003 the Board of Directors duly adopted resolutions proposing to amend and restate the certificate of incorporation of this Corporation, declaring said amendment and restatement to be advisable and in the best interests of this Corporation and its stockholders, and authorizing the appropriate officers of this Corporation to solicit the approval of the stockholders therefor.

        3.    That in lieu of a meeting and vote of stockholders, consents in writing have been signed by holders of outstanding stock having not less than the minimum number of votes that is necessary to consent to this amendment and restatement, and, if required, prompt notice of such action shall be given in accordance with the provisions of Section 228 of the General Corporation Law.

        4.    This Third Amended and Restated Certificate of Incorporation restates and integrates and further amends the certificate of incorporation of the Corporation, as heretofore amended or supplemented.

        The text of the Corporation's certificate of incorporation is amended and restated in its entirety as follows:


ARTICLE 1. NAME.

        The name of the Corporation is Cogent Communications Group, Inc.


ARTICLE 2. REGISTERED OFFICE AND AGENT.

        The address of the registered office of the Corporation in the State of Delaware is 2711 Centerville Road, Suite 400, in the City of Wilmington, in the County of New Castle, 19808, Delaware. The name of its registered agent at such address is the Company Corporation.


ARTICLE 3. PURPOSE.

        The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law.


ARTICLE 4. CAPITAL STOCK.

        A.    Authorized Shares.    The total number of shares of capital stock of all classes that the Corporation will have the authority to issue is one hundred twenty seven million three hundred seventy six thousand two hundred twenty-nine (127,376,229) shares, of which: (i) twenty one million one

A-1

hundred thousand (21,100,000) shares, of a par value of $.001 per share, shall be of a class designated "Common Stock"; and (ii) one hundred six million two hundred seventy-six thousand two hundred twenty-nine (106,276,229) shares, of a par value of $.001 per share, of Preferred Stock, one million two-hundred and fifty thousand (1,250,000) of which shall be authorized but unissued Preferred Stock, twenty-six million (26,000,000) of which shall be of a series designated as the "Series A Participating Convertible Preferred Stock" (the "Series A Preferred Stock"), twenty million (20,000,000) of which shall be of a series designated as the "Series B Participating Convertible Preferred Stock" (the "Series B Preferred Stock,"), fifty-two million one hundred seventy-three thousand six hundred forty-three (52,173,643) of which shall be of a series designated as the "Series C Participating Convertible Preferred Stock" (the "Series C Preferred Stock"), three million four hundred twenty-six thousand two hundred ninety-three (3,426,293) of which shall be of a series designated as the "Series D Participating Convertible Preferred Stock" (the "Series D Preferred Stock"), and three million four hundred twenty-six thousand two hundred ninety-three (3,426,293) of which shall be of a series designated as the "Series E Participating Convertible Preferred Stock" (the "Series E Preferred Stock" and together with the Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred Stock, and the Series D Preferred Stock, and any other shares of preferred stock which may be issued, the "Preferred Stock").

        The authorized but unissued Preferred Stock may be issued in one or more additional series, each series to be appropriately designated by a distinguishing letter or title prior to the issue of any shares thereof. The Board of Directors is hereby authorized to fix or alter the dividend rights, dividend rate, conversion rights, voting rights, rights and terms of redemption including (sinking fund provisions, if any, the redemption price or prices, the liquidation preferences, any other qualifications, limitations, or restrictions thereof, of any wholly unissued series of Preferred Stock, and the number of shares constituting any such unissued series and the designation thereof, or any of them; and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series.

        Except as otherwise set forth in a certificate designating any currently authorized but unissued Preferred Stock, the designations, preferences, privileges and powers and relative, participating, optional or other special rights and qualifications, limitations or restrictions of the Preferred Stock and the Common Stock shall be as follows:

        B.    Preferred Stock.    

A-2

A-3

A-4

A-5

A-6

A-7

A-8

A-9

A-10

A-11

A-12

A-13

A-14

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        C.    Common Stock.    


ARTICLE 5. COMPROMISE OR ARRANGEMENT WITH CREDITORS.

        Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for the Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the Corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of the Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application had been made, be binding on all the creditors or

A-16


class of creditor, and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation.


ARTICLE 6. DIRECTORS LIABILITY; INDEMNIFICATION.

        A.    Indemnification.    The Corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law, as the same may be amended and supplemented from time to time, indemnify and advance expenses to, (i) its directors and officers, and (ii) any person who, at the request of the Corporation is or was serving as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, from and against any and all of the expenses, liabilities, or other matters referred to in or covered by said section as amended or supplemented (or any successor), for actions taken in such person's capacity as such a director, officer, employee or agent, and then only to the extent such person is not indemnified for such actions by such other corporation, partnership, joint venture, trust or other enterprise; provided, however, that except with respect to proceedings to enforce rights to indemnification, the by-laws of the Corporation may provide that the Corporation shall indemnify any director, officer or such person in connection with a proceeding (or part thereof) initiated by such director, officer or such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The Corporation, by action of its Board of Directors, may provide indemnification or advance expenses to employees and agents of the Corporation or other persons only on such terms and condition and to the extent determined by the Board of Directors in its sole and absolute discretion. The indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in their official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

        B.    Limitation of Liability.    No director of this Corporation shall be personally liable to the Corporation or its stockholders for any monetary damages for breaches of fiduciary duty as a director, notwithstanding any provision of law imposing such liability; provided that this provision shall not eliminate or limit the liability of a director, to the extent that such liability is imposed by applicable law, (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law (iii) under Section 174 or successor provisions of the General Corporation Law; or (iv) for any transaction from which the director derived an improper personal benefit. This provision shall not eliminate or limit the liability of a director for any act or omission if such elimination or limitation is prohibited by the General Corporation Law. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. If the General Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law, as so amended.

        C.    Prospective Amendment.    Any repeal or modification of this Article 6 shall be prospective and shall not affect the rights under this Article 6 in effect at the time of the alleged occurrence of any act or Omission to act giving rise to liability or indemnification.

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        Executed in the name of the Corporation by its President, who declares, affirms, acknowledges and certifies under penalties of perjury, that this is his free act and deed and the facts stated herein are true.

Dated: [                        ], 2003    

 
 
 
    COGENT COMMUNICATIONS GROUP, INC.

 
 
 
   
David Schaeffer
President

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Appendix B

INDEX TO FINANCIAL STATEMENTS

 
Condensed Consolidated Balance Sheets of Cogent Communications Group, Inc., and Subsidiaries as of December 31, 2001 and September 30, 2002
Condensed Consolidated Statements of Operations of Cogent Communications Group, Inc., and Subsidiaries for the Three and Nine Months Ended September 30, 2001 and September 30, 2002
Condensed Consolidated Statements of Cash Flows of Cogent Communications Group, Inc., and Subsidiaries for the Nine Months Ended September 30, 2001 and September 30, 2002
Notes to Interim Condensed Consolidated Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2000 and 2001
Consolidated Statements of Operations for the period from inception (August 9, 1999) to December 31, 1999 and for the years ended December 31, 2000 and December 31, 2001
Consolidated Statements of Changes in Stockholders' Equity for the period from inception (August 9, 1999) to December 31, 1999 and for the years ended December 31, 2000 and December 31, 2001
Consolidated Statements of Cash Flows for the period from inception (August 9, 1999) to December 31, 1999 and for the years ended December 31, 2000 and December 31, 2001
Notes to Consolidated Financial Statements
PSINET INC. STATEMENTS
Report of Independent Accountants
Statement of Assets Acquired and Liabilities Assumed as of December 31, 2001 and March 31, 2002 (unaudited)
Statements of Revenues and Direct Expenses for the year ended December 31, 2001 and the three months ended March 31, 2002 (unaudited) and March 31, 2001 (unaudited)
Notes to Statements
ALLIED RISER COMMUNICATIONS CORPORATION FINANCIAL STATEMENTS
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 2000 and 2001
Consolidated Statements of Income (Loss) for the years ended December 31, 1999, 2000 and 2001
Consolidated Statements of Stockholder's Equity for the years ended December 31, 1999, 2000 and 2001
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 2000 and 2001
Notes to Consolidated Financial Statements
NETRAIL, INC. FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants
Balance sheet as of December 31, 1999
Statement of operations—year ended December 31, 1999
Statement of stockholders' equity (capital deficit)—year ended December 31, 1999
Statement of cash flows—year ended December 31, 1999
Notes to financial statements—December 31, 1999
Report of Independent Certified Public Accountants
Consolidated balance sheet as of December 31, 2000
Consolidated statement of operations—year ended December 31, 2000
Consolidated statement of stockholders' equity (capital deficit)—year ended December 31, 2000
Consolidated statement of cash flows—year ended December 31, 2000
Notes to consolidated financial statements—December 31, 2000


COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND SEPTEMBER 30, 2002

(IN THOUSANDS, EXCEPT SHARE DATA)

 
   December 31, 2001
   September 30,
2002
(Unaudited)
  
Assets              
Current assets:              
Cash and cash equivalents   $ 49,017   $ 51,669  
Short term investments ($430 restricted, at September 30, 2002)     1,746     2,413  
Prepaid expenses and other current assets     2,171     3,665  
Accounts receivable, net of allowance for doubtful accounts of $112, and $3,847, respectively     1,156     5,432  
   
 
 
Total current assets     54,090     63,179  
Property and equipment:              
Property and equipment     249,057     339,012  
Accumulated depreciation and amortization     (13,275 )   (34,076 )
   
 
 
Total property and equipment, net     235,782     304,936  
Intangible assets:              
Intangible assets     11,740     23,373  
Accumulated amortization     (1,304 )   (6,580 )
   
 
 
Total intangible assets, net     10,436     16,793  
Other assets     19,461     20,557  
   
 
 
Total assets   $ 319,769   $ 405,465  
   
 
 
Liabilities and stockholders' equity              
Current liabilities:              
Accounts payable   $ 3,623   $ 8,294  
Accrued liabilities     3,462     24,761  
Current maturities, capital lease obligations     426     3,794  
   
 
 
Total current liabilities     7,511     36,849  
Cisco credit facility     181,312     223,556  
Convertible subordinated notes, net of unamortized discount of $79,745     —     37,235  
Capital lease obligations, net of current     20,732     50,884  
Other long-term liabilities     —     1,206  
   
 
 
Total liabilities     209,555     349,730  
   
 
 
Commitments and contingencies:              
Stockholders' equity:              
Convertible preferred stock, Series A, $0.001 par value; 26,000,000 shares authorized, issued, and outstanding; liquidation preference of $30,061     25,892     25,892  
Convertible preferred stock, Series B, $0.001 par value; 20,000,000 shares authorized; 19,370,223 shares issued and outstanding; liquidation preference of $99,168     90,009     88,009  
Convertible preferred stock, Series C, $0.001 par value; 52,173,643 shares authorized; 49,773,402 shares issued and outstanding; liquidation preference of $100,000     61,345     61,345  
Common stock, $0.001 par value; 21,100,000 shares authorized; 1,409,814 and 3,483,838 shares issued and outstanding, respectively     1     4  
Additional paid-in capital     38,724     49,322  
Deferred compensation     (11,081 )   (6,985 )
Stock purchase warrants     8,248     9,013  
Accumulated other comprehensive income (loss)     —     (12 )
Accumulated deficit     (102,924 )   (170,853 )
   
 
 
Total stockholders' equity     110,214     55,735  
   
 
 
Total liabilities and stockholders' equity   $ 319,769   $ 405,465  
   
 
 

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

B-1


COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002

(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)

 
   Three Months Ended
September 30, 2001
(Unaudited)
   Three Months Ended
September 30, 2002
(Unaudited)
  
Net service revenue (Note 1)   $ 657   $ 15,960  
Operating expenses:              
Network operations (including $56 of amortization of deferred compensation in 2002, none in 2001)     5,034     14,243  
Selling, general, and administrative (including $798 of amortization of deferred compensation in 2002, none in 2001)     7,589     9,654  
Depreciation and amortization     2,969     8,938  
   
 
 
Total operating expenses     15,592     32,835  
   
 
 
Operating loss     (14,935 )   (16,875 )
Interest income and other     435     226  
Interest expense     (2,948 )   (8,760 )
   
 
 
Net loss applicable to common stock   $ (17,448 ) $ (25,409 )
   
 
 
Basic and diluted net loss per common share   $ (12.39 ) $ (7.33 )
   
 
 
Weighted-average common shares (basic and diluted)     1,408,614     3,464,403  
   
 
 

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

B-2


COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002

(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)

 
   Nine Months Ended
September 30, 2001
(Unaudited)
   Nine Months Ended
September 30, 2002
(Unaudited)
  
Net service revenue (Note 1)   $ 747   $ 38,079  
Operating expenses:              
Network operations (including $180 of amortization of deferred compensation in 2002, none in 2001)     15,473     37,158  
Selling, general, and administrative (including $2,313 of amortization of deferred compensation in 2002, none in 2001)     21,756     26,021  
Depreciation and amortization     5,955     23,981  
   
 
 
Total operating expenses     43,184     87,160  
   
 
 
Operating loss     (42,437 )   (49,081 )
Interest income and other     1,763     2,136  
Interest expense     (4,756 )   (25,512 )
   
 
 
Loss before extraordinary item   $ (45,430 ) $ (72,457 )
   
 
 
Extraordinary gain — Allied Riser merger     —     4,528  
   
 
 
Net loss applicable to common stock   $ (45,430 ) $ (67,929 )
   
 
 
Net loss per common share:              
Loss before extraordinary item   $ (32.33 ) $ (22.80 )
Extraordinary gain     —     1.42  
   
 
 
Basic and diluted net loss per common share   $ (32.33 ) $ (21.38 )
   
 
 
Weighted-average common shares (basic and diluted)     1,405,333     3,177,577  
   
 
 

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

B-3


COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002
(IN THOUSANDS)

 
   Nine Months Ended
September 30, 2001
(Unaudited)
   Nine Months Ended
September 30, 2002
(Unaudited)
  
Cash flows from operating activities:              
Net loss   $ (45,430 ) $ (67,929 )
Adjustments to reconcile net loss to net cash used in operating activities —              
Extraordinary gain — Allied Riser merger     —     (4,528 )
Depreciation and amortization     5,955     23,981  
Amortization of debt costs     21     1,988  
Amortization of debt discount — convertible notes     —     4,481  
Amortization of deferred compensation     —     2,493  
Changes in assets and liabilities, net of acquisitions:              
Accounts receivable     (823 )   (3,066 )
Prepaid expenses and other current assets     5,455     3,125  
Accrued interest payable     1,056     13,908  
Other assets     (469 )   (2,693 )
Accounts payable, accrued and other liabilities     3,944     1,432  
   
 
 
Net cash used in operating activities     (30,291 )   (26,808 )
   
 
 
Cash flows from investing activities:              
Purchases of property and equipment     (72,157 )   (56,871 )
Purchases of short term investments     —     (667 )
Acquired cash and cash equivalents — Allied Riser merger     —     70,431  
Purchase of STOC minority interests     —     (3,617 )
Purchase of intangible assets     —     (167 )
Purchase of NetRail assets     (11,740 )      
Purchase of PSINet assets     —     (9,450 )
   
 
 
Net cash used in investing activities     (83,897 )   (341 )
   
 
 
Cash flows from financing activities:              
Borrowings under Cisco credit facility     69,376     31,914  
Proceeds from option exercises     15     —  
Repayment of capital lease obligations     (10,268 )   (2,102 )
   
 
 
Net cash provided by financing activities     59,123     29,812  
   
 
 
Effect of exchange rate changes on cash     —     (11 )
Net (decrease) increase in cash and cash equivalents     (55,065 )   2,652  
Cash and cash equivalents, beginning of period     65,593     49,017  
   
 
 
Cash and cash equivalents, end of period   $ 10,528   $ 51,669  
   
 
 
Supplemental disclosures of cash flow information:              
Cash paid for interest   $ 9,014   $ 10,438  
Cash paid for income taxes     —     —  
Non-cash financing activities —              
Capital lease obligations incurred     22,081     26,700  
Borrowing under credit facility for payment of loan costs and interest     —     10,331  

Allied Riser Merger
 
 
 
 
 
 
 
Fair value of assets acquired     —   $ 74,535  
Less: valuation of common stock, options & warrants issued           (10,967 )
Less: extraordinary gain           (4,528 )
         
 
Fair value of liabilities assumed         $ 59,040  
         
 
NetRail Acquisition              
Fair value of assets acquired     12,090     —  
Less: cash paid     (11,740 )      
   
       
Fair value of liabilities assumed     350        
   
       
PSINet Acquisition              
Fair value of assets acquired     —     16,602  
Less: cash paid           (9,450 )
         
 
Fair value of liabilities assumed           7,152  
         
 

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

B-4


COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001, AND 2002
(Unaudited)

1.    Organization and General:

Description of Business and Acquisitions

        Cogent Communications, Inc. ("Cogent") was formed on August 9, 1999, as a Delaware corporation and is located in Washington, DC. Cogent is a facilities-based Internet Services Provider ("ISP"), providing Internet access to businesses in over 30 major metropolitan areas in the United States and in Toronto, Canada. 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. The common and preferred shares of the Company include rights and privileges identical to the common and preferred shares of Cogent. This was a tax-free exchange that was accounted for by the Company at Cogent's historical cost. All of Cogent's options for shares of common stock were also converted to options of the Company.

        The Company's high-speed Internet access service is delivered to the Company's customers over a nationwide fiber-optic network. The Company's network is dedicated solely to Internet Protocol data traffic. The Company's network includes 30-year indefeasible rights of use ("IRUs") to a nationwide fiber-optic intercity network of approximately 12,500 route miles (25,000 fiber miles) of dark fiber from Williams Communications Group, Inc. These IRUs are configured in two rings that connect many of the major metropolitan markets in the United States. In order to extend the Company's national backbone into local markets, the Company has entered into leased fiber agreements for intra-city dark fiber from several providers. These agreements are primarily under 15-25 year IRUs. Since the Company's acquisition of certain assets of PSINet, Inc. ("PSINet"), the Company began operating a more traditional Internet service provider business, with lower speed connections provided by leased circuits obtained from telecommunications carriers (primarily local telephone companies). The Company utilizes leased circuits (primarily T-1 lines) to reach these customers.

Asset Purchase Agreement—PSINet, Inc.

        In January 2002, the Company entered into a due diligence agreement with PSINet, Inc. ("PSINet"). This agreement allowed the Company to undertake due diligence related to certain of PSINet's network operations in the United States. The Company paid a $3.0 million fee in January 2002 to PSINet in connection with this arrangement. In February 2002, the Company and PSINet entered into an Asset Purchase Agreement ("APA"). Pursuant to the APA, approved on March 27, 2002 by the bankruptcy court overseeing the PSINet bankruptcy, 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. The acquisition closed on April 2, 2002. The $3.0 million payment under the due diligence agreement was applied toward this amount resulting in a $6.5 million cash payment at closing. The acquired assets include certain of PSINet's accounts receivable, rights to 10,000 route miles pursuant to indefeasible rights of use, and intangible assets, including, customer contracts, settlement-free peering rights and the PSINet trade name. Assumed liabilities include certain leased circuit commitments, facilities leases, customer contractual commitments and collocation arrangements.

        The PSINet acquisition enabled the Company to immediately incorporate a revenue stream from a set of products that the Company believes complement its core offering of 100 Mbps Internet connectivity for $1,000 per month and reduced its costs of network operations from the acquisition of settlement-free peering rights. The Company plans to support and build on the PSINet brand name

B-5


that, the Company believes, is one of the most recognizable ISPs in the country. Under the PSINet label, Cogent is offering PSINet services, including Internet connectivity.

Merger Agreement—Allied Riser Communications Corporation

        On February 4, 2002, the Company acquired Allied Riser Communications Corporation ("Allied Riser"). Allied Riser provided broadband data 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 2.0 million shares, or 13.4% of its common stock, on a fully diluted basis, 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 necessary in-building networks as well as pre-negotiated building access rights with building owners and real estate investment trusts across the United States and in Toronto, Canada. Prior to the merger, Allied Riser had ceased providing its retail services to its customers. The Company is utilizing the Allied Riser in-building network and building access rights to provide its high speed Internet access service. The acquisition enabled the Company to accelerate its business plan and increase its footprint in the markets it serves.

NetRail Inc.

        On September 6, 2001, the Company paid approximately $11.7 million in cash for certain assets of NetRail, Inc, ("NetRail") a Tier-1 Internet service provider, in a sale conducted under Chapter 11 of the United States Bankruptcy Code. The purchased assets included certain customer contracts and the related accounts receivable, network equipment, and settlement-free peering arrangements.

Basis of Presentation

        The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the unaudited condensed consolidated financial statements reflect all normal recurring adjustments that the Company considers necessary for the fair presentation of the results of operations and cash flows for the interim periods covered, and of the financial position of the Company at the date of the interim consolidated balance sheet. Certain information and footnote disclosures normally included in the annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. The operating results for interim periods are not necessarily indicative of the operating results for the entire year. While the Company believes that the disclosures made are adequate to not make the information misleading, these interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Company's Annual Report on Form 10-K.

        The accompanying unaudited condensed consolidated financial statements include all wholly owned subsidiaries. All inter-company accounts and activity have been eliminated. Shared Technologies of Canada ("STOC") is owned by the Company's wholly owned subsidiary, ARC Canada. In March 2002, the shareholders representing the minority interest of STOC notified the Company that they had elected to exercise their rights to put their shares to the Company as provided under their shareholders' agreements. The Company paid approximately $3.6 million in April 2002 to purchase these minority interests.

        The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at

B-6


the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Business Risk and Liquidity

        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 availability of and access to intra-city dark fiber and multi-tenant office buildings, the availability and performance of the Company's network equipment, the availability of additional capital, the ability to meet the financial and operating covenants under its credit facility, the Company's 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 successfully market its products and services, the Company's ability to retain and attract key employees, and the Company's ability to manage its growth, among other factors. Although management believes that the Company will successfully mitigate these risks, management cannot give assurances that it will be able to do so or that the Company will ever operate profitably.

        One of the Company's suppliers of metropolitan fiber optic facilities, Metromedia Fiber Networks ("MFN"), filed for bankruptcy in May 2002 under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court. This has impacted the Company's operations by decreasing our ability to add new metropolitan fiber rings from MFN and the Company's ability to add new buildings to existing MFN rings. However, as the Company has several other providers of metropolitan fiber optic facilities the impact has not been material to our operations.

        On April 22, 2002, Williams Communications Group, Inc. filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. Williams Communications LLC, a wholly owned subsidiary of Williams Communications Group, has provided the Company with its national backbone fiber rings. Williams Communications LLC did not file a bankruptcy petition. On October 16, 2002, Williams announced that it has emerged from bankruptcy as WilTel Communications Group, Inc.

        MFN's and Williams' financial difficulties are characteristic of the telecommunications industry today. The Company's solution for metropolitan networks is to have a large number of providers and to develop the ability to construct its own fiber optic connections to the buildings the Company serves.

        The Company has obtained $177 million in venture-backed funding through the issuance of preferred stock. The Company has secured a $409 million credit facility (the "Facility") from Cisco Systems Capital Corporation ("Cisco Capital"). In connection with the Allied Riser merger, the Company acquired $70.4 million of cash and cash equivalents and assumed the obligations of Allied Riser including its convertible subordinated notes due in June 2007 totaling $117.0 million. Substantial time may pass before significant revenues are realized, and additional funds may be required to implement the Company's business plan. However, management expects that the proceeds from the issuance of preferred stock, the availability under the Facility (subject to continued covenant compliance) and the funds acquired in the Allied Riser merger, will be sufficient to fund the Company's expected activities through fiscal 2003. Although management believes that these expectations are reasonable, actual results could differ materially. The Company's future financial condition and results of operations are subject to change and to inherent risks and uncertainties. .

Financial Instruments

        The Company is party to letters of credit totaling $4.8 million as of September 30, 2002. These letters of credit are secured by certificates of deposit and commercial paper investments of $4.9 million that are restricted and included in short-term investments and deposits and other assets. No claims

B-7


have been made against these financial instruments. Management does not expect any losses from the resolution of these financial instruments and is of the opinion that the fair value is zero since performance is not likely to be required.

        At September 30, 2001 and 2002, the carrying amount of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and accrued expenses approximated fair value because of the short maturity of these instruments. The interest rate on the Company's credit facility resets on a quarterly basis; accordingly, as of September 30, 2002, the fair value of the Company's credit facility approximated its carrying amount. The Allied Riser convertible subordinated notes due in June 2007 have a face value of $117.0 million. The notes were recorded at their fair value of approximately $32.7 million at the merger date. The discount is accreted to interest expense through the maturity date. The fair value of the notes at September 30, 2002, was approximately $31.1 million.

Reclassifications

        Certain amounts in the December 31, 2001 financial statements have been reclassified in order to conform to the 2002 financial statement presentation. Such reclassifications had no impact on previously reported net loss or net stockholders' equity.

Comprehensive Income (Loss)

        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 did not have any significant components of "other comprehensive income," until the nine months ended September 30, 2002. Accordingly, reported net loss is the same as "comprehensive loss" for all other periods presented (amounts in thousands).

 
   Nine months ended
September 30, 2002
  
Net loss   $ (67,929 )
Currency translation     (12 )
   
 
Comprehensive loss     (67,941 )
   
 

Basic and Diluted Net Loss Per Common Share

        For the three and nine months ended September 30, 2001 and September 30, 2002, options to purchase 565,570 and 1,086,150 shares of common stock at weighted-average exercise prices of $10.59 and $4.62 per share, respectively, are not included in the computation of diluted earnings per share as they are anti-dilutive. For the three and nine months ended September 30, 2001, 45,809,783, shares of preferred stock, which were convertible into 4,580,978 shares of common stock, were not included in the computation of diluted earnings per share as a result of their anti-dilutive effect. For the three and nine months ended September 30, 2002, 95,143,625, shares of preferred stock, which were convertible into 10,091,261 shares of common stock, were not included in the computation of diluted earnings per share as a result of their anti-dilutive effect. For the three and nine months ended September 30, 2001 and September 30, 2002, warrants for 222,750 and 854,941 shares of common stock, respectively, were not included in the computation of diluted earnings per share as a result of their anti-dilutive effect. For the three and nine months ended September 30, 2002, approximately 245,000 shares of common stock issuable on the conversion of the Allied Riser convertible subordinated notes, were not included in the computation of diluted earnings per share as a result of their anti-dilutive effect.

B-8


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. All revenue is translated into United States dollars. Revenue for ARC Canada for the period from February 4, 2002 to September 30, 2002 was approximately $3.1 million. ARC Canada's total assets were approximately $3.9 million at September 30, 2002.

Revenue Recognition

        The Company recognizes service revenue in the month in which the service is provided. All expenses related to services provided are expensed as incurred. Cash received in advance of revenue earned is recorded as deferred revenue and is recognized over the service period or, in the case of installation fees, the estimated customer life.

        In September 2002, the Company invoiced certain customers for approximately $1.3 million representing amounts contractually due for unfulfilled minimum contractual obligations. The Company has recognized a corresponding sales allowance of $1.3 million against this revenue resulting in zero net revenue recognized. The Company will recognize net revenue as the amounts are collected as cash. The Company intends to vigorously seek payment of these amounts.

Recent Accounting Pronouncements

        In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which is effective for fiscal years beginning after June 15, 2002. The statement provides accounting and reporting standards for recognizing obligations related to asset retirement costs associated with the retirement of tangible long-lived assets. Under this statement, legal obligations associated with the retirement of long-lived assets are to be recognized at their fair value in the period in which they are incurred if a reasonable estimate of fair value can be made. The fair value of the asset retirement costs is capitalized as part of the carrying amount of the long-lived asset and expensed using a systematic and rational method over the assets' useful life. Any subsequent changes to the fair value of the liability will be expensed. Adoption of this standard is not expected to have a material impact on impact on our operations or financial position.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes FASB No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," but retains that statement's fundamental provisions for recognition and measurement of impairment of long-lived assets to be held and used and measurement of long-lived assets to be disposed of by sale. SFAS No. 144 also supersedes the accounting/reporting provisions of APB Opinion No. 30 for segments of a business to be disposed of, but retains APB 30's requirement to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. The adoption of this statement on January 1, 2002 did not have a material impact on our operations or financial position.

        In May 2002, the FASB issued SFAS No. 145. SFAS No. 145 rescinded three previously issued statements and amended SFAS No. 13, "Accounting for Leases." The statement provides reporting standards for debt extinguishments and provides accounting standards for certain lease modifications that have economic effects similar to sale-leaseback transactions. The statement is effective for certain lease transactions occurring after May 15, 2002 and all other provisions of the statement shall be effective for financial statements issued on or after May 15, 2002. Adoption of this standard did not have any impact on our financial position or the presentation of any transactions.

B-9


        On July 29, 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. Previous accounting guidance was provided by EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)."    SFAS 146 replaces Issue 94-3. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

2.    Pro Forma Amounts

        The acquisition of the assets of NetRail, Inc., and PSINet and the merger with Allied Riser were recorded in the accompanying financial statements under the purchase method of accounting. The purchase price allocations are preliminary and further refinements may be made. The operating results related to the acquired assets of NetRail, Inc. and PSINet and the merger with Allied Riser have been included in the consolidated statements of operations from the dates of acquisition. The NetRail acquisition closed on September 6, 2001. The Allied Riser merger closed on February 4, 2002. The PSINet acquisition closed on April 2, 2002.

        If the NetRail, Allied Riser and PSINet acquisitions had taken place at the beginning of 2001 and 2002 the unaudited pro forma combined results of the Company for the nine months ended September 30, 2001 and 2002 would have been as follows (amounts in thousands, except per share amounts).

 
   Nine Months Ended
September 30, 2001
   Nine Months Ended
September 30, 2002
  
Revenue   $ 68,228   $ 52,574  
Net loss before extraordinary items     (420,321 )   (86,990 )
Loss per share before extraordinary items — basic and diluted   $ (123.08 ) $ (25.23 )

        In management's opinion, these unaudited pro forma amounts are not necessarily indicative of what the actual results of the combined results of operations might have been if the NetRail, Allied Riser and PSINet acquisitions had been effective at the beginning of 2001 and 2002.

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3.    Property and Equipment:

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

 
   September 30, 2002
  
Owned assets:        
Network equipment   $ 187,338  
Software     6,536  
Office and other equipment     2,570  
Leasehold improvements     30,107  
System infrastructure     1,189  
Construction in progress     5,543  
   
 
      233,283  
Less — Accumulated depreciation and amortization     (28,591 )
   
 
      204,692  
Assets under capital leases:        
IRUs     105,729  
Less — Accumulated depreciation and amortization     (5,485 )
   
 
      100,244  
   
 
Property and equipment, net   $ 304,936  
   
 

        For the nine months ended September 30, 2001 and 2002, the Company capitalized interest of $3,975,000 and $600,000, respectively.

4.    Accrued Liabilities:

        Accrued liabilities consist of the following (in thousands):

 
   September 30, 2002
General operating expenditures   $ 17,405
Payroll and benefits     1,019
Taxes     1,469
Interest     3,368
Deferred revenue     1,500
   
Total   $ 24,761
   

B-11

5.    Intangible Assets:

        Intangible assets consist of the following (in thousands):

 
   September 30, 2002
  
Peering arrangements   $ 15,740  
Customer contracts     5,575  
Trade names     1,764  
Non-compete agreement     294  
   
 
Total     23,373  
Less — accumulated amortization     (6,580 )
   
 
Intangible assets, net   $ 16,793  
   
 

        Intangible assets are being amortized over periods ranging from 24 to 60 months. Amortization expense for the three and nine months ended September 30, 2002 was approximately $2.2 million and $5.3 million, respectively. Future amortization expense related to these intangible assets is expected to be $8.5 million, $7.0 million, $1.1 million, $59,000, and $29,000 for the twelve-month periods ending September 30, 2003, 2004, 2005, 2006 and 2007, respectively.

6.    Other Assets:

        Other assets consist of the following (in thousands):

 
   September 30, 2002
Prepaid expenses   $ 1,256
Deposits     5,522
Deferred financing costs, net     13,779
   
Total   $ 20,557
   

7.    Long-term Debt:

        In March 2000, Cogent entered into a $280 million credit facility with Cisco Capital. In March 2001, the credit facility was increased to $310 million. In October 2001, Cogent entered into a new agreement for $409 million (the "Facility"). This credit facility replaced the existing $310 million credit facility between Cisco Capital and Cogent. The Facility is available to finance the purchases of up to $270 million of Cisco network equipment, software and related services, to fund up to $64 million of working capital, and to fund up to $75 million of interest and fees related to the Facility. On January 31, 2002, the Facility was amended to modify certain covenants in connection with the Company's merger with Allied Riser. On April 17, 2002, the Facility was again amended to modify certain covenants in connection with the Company's acquisition of certain assets of PSINet. On November 6, 2002, the Facility was again amended to modify certain provisions and covenants that are reflected in the description below. If the Facility becomes unavailable, at any point in time, the Company may not have sufficient funds to fund current or anticipated levels of operation under its current business plan.

        Borrowings may be prepaid at any time without penalty and are subject to mandatory prepayment based upon excess cash flow or upon the receipt of a specified amount from the sale of the Company's securities, each as defined. Principal payments begin in March 2005. Borrowings accrue interest at the three-month LIBOR rate, established at the beginning of each calendar quarter, plus a stated margin. The margin is dependent upon the Company's leverage ratio, as defined, and may be reduced. Interest payments are deferred and begin in March 2006. The weighted-average interest rate on all borrowings

B-12


for the nine months ending September 30, 2002 was approximately 6.8 percent and was 6.8 percent at September 30, 2002. Borrowings are secured by a pledge of all of Cogent's assets and common stock. The Facility includes restrictions on Cogent's ability to transfer assets to the Company, except for certain operating liabilities. The Company has guaranteed Cogent's obligations under the Facility.

        Borrowings under the Facility are available in increments subject to Cogent's satisfaction of certain operational and financial covenants over time. Up to $40 million was available for additional equipment loans through September 30, 2002, of which $33.4 million was borrowed as of September 30, 2002. An additional $91.6 million of equipment loans became available on October 1, 2002. Up to $20 million was available to fund interest and fees related to the Facility through September 30, 2002 of which $16.8 million was borrowed as of September 30, 2002. An additional $55 million for funding interest and fees related to the Facility became available on October 1, 2002. An additional $10 million in working capital loans became available on October 1, 2002 and was borrowed in November 2002. An additional $25 million of working capital becomes available in $5.0 million monthly increments from May 2003 until September 2003. The aggregate balance of working capital loans is limited to 35 percent of outstanding equipment loans. Additional borrowings under the Facility for the purchase of products and working capital are available until December 31, 2004. Additional borrowings under the Facility for the funding of interest and fees are available until December 31, 2005. The Facility matures on December 31, 2008.

        At September 30, 2002, there were $177.8 million of equipment loans, $29.0 million of working capital loans and $16.8 million of interest and fee loans outstanding.

        Maturities of borrowings under the Facility are as follows (in thousands):

For the twelve months ending September 30,      
2003   $ —
2004     —
2005     8,359
2006     58,676
2007     74,519
Thereafter     82,002
   
    $ 223,556
   

Allied Riser Convertible Subordinated Notes

        On June 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 June 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. The Notes were convertible at the option of the holders into shares of Allied Riser's common stock at an initial conversion price of approximately 65.06 shares of Allied Riser common stock per $1,000 principal amount. The conversion ratio is adjusted upon the occurrence of certain events. The conversion rate was adjusted to approximately 2.09 shares of the Company's common stock per $1,000 principal amount in connection with the merger. 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.

B-13


        Maturities of the Notes are as follows (in thousands):

For the twelve months ending September 30,      
2003   $ —
2004     —
2005     —
2006     —
2007     116,980
   
    $ 116,980
   

8.    Commitments and Contingencies:

Capital Leases

        The Company has entered into lease agreements with several providers for intra-city and intercity dark fiber primarily under 15-25 year IRUs. These IRUs connect the Company's national backbone fiber 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 IRU asset. The Company acquired certain capital lease agreements related to equipment purchases in connection with the Allied Riser merger.

        The future minimum commitments under these agreements are as follows (in thousands):

For the twelve months ending September 30,        
2003   $ 7,587  
2004     7,256  
2005     6,049  
2006     5,655  
2007     4,926  
Thereafter     69,006  
   
 
Total minimum lease obligations     100,479  
Less — amounts representing interest     (45,801 )
   
 
Present value of minimum lease obligations     54,678  
Current maturities     (3,794 )
   
 
Capital lease obligations, net of current maturities   $ 50,884  
   
 

Fiber Leases and Construction Commitments

        The Company has agreements with several fiber providers for the construction of laterals to connect office buildings to metro fiber rings and for the leasing of these metro fiber rings and the lateral fiber. In June 2002, the Company expanded its inter-city network by entering into a lease agreement to that connected its network to the Toronto, Ontario market. These leases are generally for a period of 15-20 years and include renewal periods. The future commitments under these arrangements were approximately $31.9 million at September 30, 2002.

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 June 2000, the agreement was amended to increase the Company's previous commitment to purchase $150.1 million over four years to

B-14


$212.2 million over five years. In October 2001, the commitment was increased to purchase $270 million until December 2004. As of September 30, 2002, the Company has purchased approximately $177.8 million towards this commitment.

Litigation

Trademark

        In October 2000, the Company was notified that the use of the trade name Cogent Communications may conflict with pre-existing trademark rights. Management believes that this issue will be resolved without a material effect on the Company's financial position or results of operations.

Vendor Claims

        On July 26, 2001, in a case titled Hewlett-Packard Company v. Allied Riser Operations Corporation a/k/a Allied Riser Communications, Inc., Hewlett-Packard Company filed a complaint against a subsidiary of Allied Riser, Allied Riser Operations Corporation, in the 95th Judicial District Court, Dallas County, Texas, seeking damages of $18.8 million, attorneys' fees, interest, and punitive damages relating to various types of equipment allegedly ordered from Hewlett-Packard Company by Allied Riser Operations Corporation. Allied Riser has filed its answer generally denying Hewlett-Packard's claims. The Company intends to continue to vigorously contest this lawsuit.

        On January 16, 2002, Allied Riser received a letter from Hewlett-Packard Company alleging that certain unspecified contracts are in arrears, and demanding payment in the amount of $10.0 million. The letter does not discuss the basis for the claims or whether the funds sought are different from or in addition to the funds sought in the July 26, 2001 lawsuit and determined that they relate to lease obligations. Allied Riser, through its legal counsel, has made an inquiry of Hewlett-Packard's counsel to determine the basis for the claims in the letter. The Company intends to continue to vigorously contest this claim.

        Management believes that the amounts, if any, owed to Hewlett-Packard are significantly less than Hewlett-Packard's claims.

        One of the Company's subsidiaries, Allied Riser Operations Corporation, is involved in a dispute with its former landlord in Dallas, Texas. Allied Riser terminated the lease in March 2002 and the dispute is over whether it had the right to do so. The landlord has alleged that a default under the lease has occurred. Allied Riser Operations Corporation has informed the landlord that the lease was terminated as provided by its terms. On July 15, 2002, the landlord filed suit alleging that Allied Riser did not have the right to terminate the lease and claiming damages.

Note Holders

        The three matters discussed below are, management believes, related to an effort by a group of bondholders to pressure the Company into buying back the notes they hold. The bondholders involved are a group of hedge funds that own (the Company believes) more than 40% of the 7.50% convertible subordinated notes due 2007 that were issued by Allied Riser Communications Corporation in June 2000. Allied Riser is now a subsidiary of the Company and the Company has become a co-obligor on the bonds. Beginning in August 2001 these hedge funds have attempted to force the repurchase of the notes they hold.

B-15

Other Litigation

        The Company is subject to claims and lawsuits arising in the ordinary course of business. Management believes that the outcome of any such proceedings to which we are a party will not have a material adverse effect on the Company.

Operating Leases and 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 acquired building access agreements and operating leases for

B-16


facilities in connection with the Allied Riser merger. Future minimum annual commitments under these arrangements are as follows (in thousands):

Twelve months ending September 30,      
2003   $ 18,323
2004     18,217
2005     16,195
2006     13,167
2007     9,784
Thereafter     40,792
   
    $ 116,478
   

Connectivity, Maintenance and Transit Agreements

        In order to provide service, the Company has commitments with service providers to connect to the Internet. The Company also pays Williams a monthly fee per route mile over a minimum of 20 years for the maintenance of its two national backbone fibers. In certain cases, the Company connects its customers and the buildings it serves to its national fiber-optic backbone using intra-city and inter-city fiber under operating lease commitments from various providers under contracts that range from month-to-month charges to 36-month terms.

        Future minimum obligations related to these arrangements are as follows (in thousands):

Twelve months ending September 30,      
2003   $ 9,858
2004     4,514
2005     3,577
2006     3,649
2007     3,721
Thereafter     58,181
   
    $ 83,500
   

9.    Stockholders' Equity:

        On February 4, 2002, the Company issued approximately 2.0 million shares of its common stock to Allied Riser shareholders in connection with the merger. This represented approximately 0.0321679 shares of the Company's common stock in exchange for each share of Allied Riser's common stock, or approximately 13.4% of the Company's common stock, on a fully diluted basis. The Company also assumed Allied Risers outstanding warrants and options for approximately 150,000 and 5,000 shares, of the Company's common stock, respectively, on an as-converted basis.

        In August 2002, one of the Company's holders of Series B preferred stock converted 439,560 shares of Series preferred stock into 57,050 shares of common stock.

10.  Related Party:

        The Company's headquarters is located in an office building owned by an entity controlled by the Company's Chief Executive Officer. The Company paid $301,000 for the nine months ended September 30, 2002 in rent to this entity.

B-17


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Cogent Communications Group, Inc., and Subsidiaries:

        We have audited the accompanying consolidated balance sheets of Cogent Communications Group, Inc. (a Delaware corporation), and Subsidiaries (together the Company) as of December 31, 2000 and 2001, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the period from inception (August 9, 1999) to December 31, 1999, and for the years ended December 31, 2000 and 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cogent Communications Group, Inc., and Subsidiaries as of December 31, 2000 and 2001, and the results of their operations and their cash flows for the period from inception (August 9, 1999) to December 31, 1999, and for the years ended December 31, 2000 and 2001, in conformity with accounting principles generally accepted in the United States.

Vienna, Virginia
March 1, 2002 (except with respect to the matters discussed in
Note 14, as to which the date is March 27, 2002)

B-18


COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 2001
(IN THOUSANDS, EXCEPT SHARE DATA)

 
   2000
   2001
  
Assets              

Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents   $ 65,593   $ 49,017  
Short term investments     —     1,746  
Prepaid expenses and other current assets     3,281     2,171  
Accounts receivable, net of allowance for doubtful accounts of $112 in 2001     —     1,156  
   
 
 
Total current assets     68,874     54,090  
Property and equipment:              
  Property and equipment     111,991     249,057  
  Accumulated depreciation and amortization     (338 )   (13,275 )
   
 
 
Total property and equipment, net     111,653     235,782  
Intangible assets:              
  Intangible assets     —     11,740  
  Accumulated amortization     —     (1,304 )
   
 
 
Total intangible assets, net     —     10,436  
Other assets     7,213     19,461  
   
 
 
Total assets   $ 187,740   $ 319,769  
   
 
 
Liabilities and stockholders' equity              

Current liabilities:
 
 
 
 
 
 
 
Accounts payable   $ 2,601   $ 3,623  
Accrued liabilities     2,955     3,462  
Current maturities, capital lease obligations     10,697     426  
   
 
 
Total current liabilities     16,253     7,511  
Cisco credit facility     67,239     181,312  
Capital lease obligations, net of current     —     20,732  
   
 
 
Total liabilities     83,492     209,555  
   
 
 
Commitments and contingencies:              

Stockholders' equity:
 
 
 
 
 
 
 
Convertible preferred stock, Series A, $0.001 par value; 26,000,000 shares authorized, issued, and outstanding; liquidation preference of $29,417     25,892     25,892  
Convertible preferred stock, Series B, $0.001 par value; 20,000,000 shares authorized; 19,809,783 shares issued and outstanding; liquidation preference of $99,012     90,009     90,009  
Convertible preferred stock, Series C, $0.001 par value; 52,173,463 shares authorized; 49,773,402 shares issued and outstanding in 2001: none in 2000; liquidation preference of $100,000     —     61,345  
Common stock, $0.001 par value; 21,100,000 shares authorized; 1,400,698 and 1,409,814 shares issued and outstanding, respectively     1     1  
Additional paid-in capital     189     35,490  
Deferred compensation     —     (7,847 )
Stock purchase warrants     —     8,248  
Accumulated deficit     (11,843 )   (102,924 )
   
 
 
Total stockholders' equity     104,248     110,214  
   
 
 
Total liabilities and stockholders' equity   $ 187,740   $ 319,769  
   
 
 

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

B-19


COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (AUGUST 9, 1999) TO
DECEMBER 31, 1999, AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)

 
   1999
   2000
   2001
  
Service revenue   $ —   $ —   $ 3,018  
Operating expenses:                    
Network operations (including $307 of amortization of deferred compensation in 2001)     —     3,040     20,297  
Selling, general, and administrative (including $2,958 of amortization of deferred compensation in 2001)     82     10,845     30,280  
Depreciation and amortization     —     338     13,535  
   
 
 
 
Total operating expenses     82     14,223     64,112  
   
 
 
 
Operating loss     (82 )   (14,223 )   (61,094 )
Interest income     —     3,433     1,914  
Interest expense     —     (1,105 )   (7,945 )
Other income     —     134     212  
   
 
 
 
Net loss   $ (82 ) $ (11,761 ) $ (66,913 )
   
 
 
 
Beneficial conversion of preferred stock     —     —     (24,168 )
   
 
 
 
Net loss applicable to common stock   $ (82 ) $ (11,761 ) $ (91,081 )
   
 
 
 
Basic and diluted net loss per common share   $ (0.06 ) $ (8.51 ) $ (64.78 )
   
 
 
 
Weighted-average common shares (basic and diluted)     1,360,000     1,382,360     1,406,007  
   
 
 
 

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

B-20


COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (AUGUST 9, 1999) TO
DECEMBER 31, 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

 
    
    
    
    
    
   Convertible preferred stock—
Series A
   Convertible preferred stock—
Series B
   Convertible preferred stock—
Series C
    
    
  
 
   Common stock
    
    
    
    
    
  
 
   Additional
paid-in
capital
   Deferred
compensation
   Stock
purchase
warrants
    
    
    
    
    
    
   Accumulated
deficit
   Total
stockholders'
equity
  
 
   Shares
   Amount
   Shares
   Amount
   Shares
   Amount
   Shares
   Amount
  
Balance, August 9, 1999 (date of inception)   —   $ —   $ —   $ —   $ —   —   $ —   —   $ —   —   $ —   $ —   $ —  
  Issuance of common stock   1,360,000     1     99     —     —   —     —   —     —   —     —     —     100  
  Net loss   —     —     —     —     —   —     —   —     —   —     —     (82 )   (82 )
   
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 1999   1,360,000     1     99     —     —   —     —   —     —   —     —     (82 )   18  
  Exercises of stock options   40,698     —     90     —     —   —     —   —     —   —     —     —     90  
  Issuance of Series A convertible preferred stock, net   —     —     —     —     —   26,000,000     25,892   —     —   —     —     —     25,892  
  Issuance of Series B convertible preferred stock, net   —     —     —     —     —   —     —   19,809,783     90,009   —     —     —     90,009  
  Net loss   —     —     —     —     —   —     —   —     —   —     —     (11,761 )   (11,761 )
   
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, December 31, 2000   1,400,698     1     189     —     —   26,000,000     25,892   19,809,783     90,009   —     —     (11,843 )   104,248  
Exercises of stock options   9,116     —     21     —     —   —     —   —     —   —     —     —     21  
Issuance of stock purchase warrants   —     —     —     —     8,248   —     —   —     —   —     —     —     8,248  
Issuance of Series C convertible preferred stock, net   —     —     —     —     —   —     —   —     —   49,773,402     61,345     —     61,345  
Deferred compensation   —     —     11,112     (11,112 )   —   —     —   —     —   —     —     —     —  
Beneficial conversion — Series B
convertible preferred stock		   —     —     24,168     —     —   —     —   —     —   —     —     (24,168 )   —  
Amortization of deferred compensation   —     —     —     3,265     —   —     —   —     —   —     —     —     3,265  
Net loss   —     —     —     —     —   —     —   —     —   —     —     (66,913 )   (66,913 )
   
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2001   1,409,814   $ 1   $ 35,490   $ (7,847 ) $ 8,248   26,000,000   $ 25,892   19,809,783   $ 90,009   49,773,402   $ 61,345   $ (102,924 ) $ 110,214  
   
 
 
 
 
 
 
 
 
 
 
 
 
 

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

B-21


COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (AUGUST 9, 1999) TO DECEMBER 31, 1999,
AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001
(IN THOUSANDS)

 
   1999
   2000
   2001
  
Cash flows from operating activities:                    
Net loss   $ (82 ) $ (11,761 ) $ (66,913 )
Adjustments to reconcile net loss to net cash used in operating activities—                    
Depreciation and amortization, including debt costs     —     338     13,594  
Amortization of deferred compensation     —     —     3,265  
Changes in assets and liabilities:                    
  Accounts receivable     —     —     (1,156 )
  Prepaid expenses and other current assets     —     (3,281 )   1,107  
  Other assets     —     (7,213 )   (2,660 )
  Accounts payable and accrued liabilities     7     5,547     5,977  
   
 
 
 
Net cash used in operating activities     (75 )   (16,370 )   (46,786 )
   
 
 
 
Cash flows from investing activities:                    
Purchases of property and equipment     —     (80,989 )   (118,020 )
Purchases of short term investments     —     —     (1,746 )
Acquisition, including purchases of intangible assets     —     —     (11,886 )
   
 
 
 
Net cash used in investing activities     —     (80,989 )   (131,652 )
   
 
 
 
Cash flows from financing activities:                    
Borrowings under Cisco credit facility     —     67,239     107,632  
Collection of note from stockholder     —     25     —  
Proceeds from issuance of common stock     75     —     —  
Proceeds from option exercises     —     90     21  
Repayment of capital lease obligations     —     (37,156 )   (12,754 )
Deferred equipment discount     —     16,853     5,618  
Issuances of preferred stock, net of issuance costs     —     115,901     61,345  
   
 
 
 
Net cash provided by financing activities     75     162,952     161,862  
   
 
 
 
Net increase (decrease) in cash and cash equivalents     —     65,593     (16,576 )
Cash and cash equivalents, beginning of year     —     —     65,593  
   
 
 
 
Cash and cash equivalents, end of year   $ —   $ 65,593   $ 49,017  
   
 
 
 
Supplemental disclosures of cash flow information:                    
Cash paid for interest   $ —   $ 1,736   $ 8,943  
Cash paid for income taxes     —     —     —  
Non-cash financing activities —                    
  Capital lease obligations incurred     —     47,855     23,990  
  Warrants issued in connection with credit facility     —     —     8,248  
  Borrowing under credit facility for payment of loan costs and interest     —     —     6,441  

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

B-22


COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 2000, and 2001

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

Description of business

        Cogent Communications, Inc. ("Cogent") was formed on August 9, 1999, as a Delaware corporation and is located in Washington, D.C. Cogent is a facilities-based Internet Services Provider ("ISP"), providing Internet access to multi-tenanted office buildings in approximately 20 major metropolitan areas in the United States and in Toronto, Canada. 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. The common and preferred shares of the Company include rights and privileges identical to the common and preferred shares of Cogent. This was a tax-free exchange that was accounted for by the Company at Cogent's historical cost. All of Cogent's options for shares of common stock were also converted to options of the Company.

        The Company's high-speed Internet access service is delivered to the Company's customers over a nationwide fiber-optic network. The Company's network is dedicated solely to Internet Protocol data traffic. The Company's network includes 30-year indefeasible rights of use ("IRU's") to a nationwide fiber-optic intercity network of approximately 12,500 route miles (25,000 fiber miles) of dark fiber from Williams Communications, Inc. ("Williams"). These IRU's are configured in two rings that connect many of the major metropolitan markets in the United States. In order to extend the Company's national backbone into local markets, the Company has entered into leased fiber agreements for intra-city dark fiber from several providers. These agreements are primarily under 15-25 year IRU's.

Segments

        The Company's chief operating decision maker evaluates performance based upon underlying information of the Company as a whole. There is only one reporting segment.

Business risk, and liquidity

        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 availability of and access to intra-city dark fiber and multi-tenant office buildings, the availability and performance of the Company's network equipment, the availability of additional capital, the ability to meet the financial and operating covenants under its credit facility, the Company's 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 successfully market its products and services, the Company's ability to retain and attract key employees, and the Company's ability to manage its growth, among other factors. Although management believes that the Company will successfully mitigate these risks, management cannot give assurances that it will be able to do so or that the Company will ever operate profitably.

        One of the Company's suppliers of metropolitan fiber optic facilities, Metromedia Fiber Networks (MFN), has announced that it may file for bankruptcy in April 2002. This would impact the Company's operations mostly by decreasing our ability to add new metropolitan fiber rings from MFN and the Company's ability to add new buildings to existing MFN rings. However, as the Company has other providers of metropolitan fiber optic facilities the Company does not anticipate a significant impact.

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        MFN's financial difficulties are characteristic of the telecommunications industry today. Several of the Company's vendors, including Williams, Level 3 and Qwest, have been reported in the financial press to be experiencing financial difficulties. The Company does not expect Williams' difficulties to impact the Company because Williams has completed delivery of the Company's national fiber optic backbone. The Company's solution for metropolitan networks is to have a large number of providers and to develop the ability to construct its own fiber optic connections to the buildings the Company serves.

        The Company has obtained $177 million in venture-backed funding through the issuance of preferred stock. The Company has secured a $409 million credit facility (the "Facility") from Cisco Systems Capital Corporation ("Cisco Capital"). In August 2001, the Company entered into an agreement to merge with Allied Riser Communications Corporation ("Allied Riser") which closed on February 4, 2002. In connection with the merger, the Company acquired additional cash and assumed the obligations of Allied Riser including its convertible subordinated notes due in June 2007 totaling $117 million. Substantial time may pass before significant revenues are realized, and additional funds may be required to implement the Company's business plan. However, management expects that the proceeds from the issuance of preferred stock and the availability under the Facility (subject to continued covenant compliance) and the funds acquired in the Allied Riser merger, will be sufficient to fund the Company's current business plan through fiscal 2002.

Principles of consolidation

        The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts of the Company and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.

Revenue recognition

        The Company recognizes service revenue in the month in which the service is provided. All expenses related to services provided are expensed as incurred. Cash received in advance of revenue earned is recorded as deferred revenue and is recognized over the service period or, in the case of installation fees, the estimated customer life.

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.

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, 2000 and 2001, the Company's marketable securities consisted of money market accounts and commercial paper.

        The Company is party to a letter of credit totaling $450,000 as of December 31, 2001. This letter of credit is secured by a certificate of deposit that is restricted and included in short-term investments. No claims have been made against this financial instrument. Management does not expect any losses from the resolution of this financial instrument and is of the opinion that the fair value is zero since performance is not likely to be required.

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        At December 31, 2000 and 2001, the carrying amount of cash and cash equivalents, short-term investments, accounts receivable, accounts payable, and accrued expenses approximated fair value because of the short maturity of these instruments. The interest rate on the Company's credit facility resets on a quarterly basis; accordingly, as of December 31, 2000 and 2001, the fair value of the Company's credit facility approximated the carrying amount.

Credit risk

        The Company's assets that are exposed to credit risk consist of its cash equivalents, short-term investments 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. Revenues from the Company's wholesale and acquired customers are subject to a higher degree of credit risk than the Company's customers who purchase its retail service.

Reclassifications

        Certain amounts in the December 31, 2000 financial statements have been reclassified in order to conform to the 2001 financial statement presentation.

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. 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, interest, and the salaries and benefits of employees directly involved with construction activities. Expenditures for maintenance and repairs are expensed as incurred. The 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   Five to seven years
Leasehold improvements   Shorter of lease term or useful life; generally 10 to 15 years
Software   Five years
Office and other equipment   Three to five years
System infrastructure   Ten years

Long-lived assets

        Long-lived assets, which include property and equipment, and identifiable intangible assets to be held and used, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount should be addressed. Impairment is determined by comparing the carrying value to the estimated undiscounted future cash flows expected to result from the use of the assets and their eventual dispositions. The Company considers expected cash flows and estimated future operating

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results, trends and other available information in assessing whether the carrying value of the assets is impaired. 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 using quoted market prices or valuation techniques such as the discounted present value of expected future cash flows, appraisals, or other pricing models as appropriate. The Company believes that no such impairment existed as of December 31, 2000 and 2001.

        The Company's estimates of anticipated net revenues, the remaining estimated lives of tangible and intangible assets, or both, could be reduced significantly in the future due to changes in technology, regulation, available financing, or competition. As a result, the carrying amount of long-lived assets could be reduced materially in the future.

Use of estimates

        The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 could differ from those estimates.

Comprehensive Income

        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. Since the Company does not have any components of "other comprehensive income", reported net loss is the same as "comprehensive loss" for the periods presented.

Income taxes

        The Company accounts for income taxes in accordance with SFAS No. 109, "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

        The Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense related to fixed employee stock options is recorded only if on the date of grant the fair value of the underlying stock exceeds the exercise price. 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, or minimum value method for private companies, described in SFAS No. 123 had been applied to employee stock option grants.

Basic and Diluted Net Loss Per Common Share

        Net income (loss) per share is presented in accordance with the provisions of SFAS No. 128 "Earnings per 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 income or loss available to common stockholders by the weighted-average number of common shares outstanding for the period,

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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-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 preferred stock and conversion of participating convertible securities, if dilutive. Common stock equivalents have been excluded from the net loss per share calculation because their effect would be anti-dilutive.

        For the period from inception to December 31, 1999 and the years ended December 31, 2000 and 2001, options to purchase 46,950, 608,136 and 1,157,920 shares of common stock at weighted-average exercise prices of $0.10, $9.90 and $5.30 per share, respectively, are not included in the computation of diluted earnings per share as they are anti-dilutive. For the period from inception to December 31, 1999 and the years ended December 31, 2000 and 2001, 26,000,000, 45,809,783, and 95,583,185 shares of preferred stock, which were convertible into 2,600,000, 4,580,978, and 10,148,309 shares of common stock, were not included in the computation of diluted earnings per share as a result of their anti-dilutive effect. For the year ended December 31, 2001, warrants for 710,216 shares of common stock, were not included in the computation of diluted earnings per share as a result of their anti-dilutive effect.

Acquisitions

Allied Riser Merger

        In August 2001, the Company entered into an agreement to merge with Allied Riser. The merger closed on February 4, 2002. Under the terms of the merger agreement as amended in October 2001, the Company issued approximately 13.4% of its common stock, on a fully diluted basis, to the existing Allied Riser stockholders and became a public company listed on the American Stock Exchange.

NetRail Inc.

        On September 6, 2001, the Company paid approximately $12 million for certain assets of NetRail, Inc, ("NetRail") a Tier-1 Internet service provider, in a sale conducted under Chapter 11 of the United States Bankruptcy Code. Tier-1 service providers purchase Internet capacity from the major communications carriers and resell it to smaller service providers and other entities. The purchased assets included certain customer contracts and the related accounts receivable, network equipment, and settlement-free peering arrangements with other Tier-1 Internet service providers. As a result of the acquisition, the Company expects to reduce its cost of network services through the use of NetRail's settlement-free peering arrangements and increase its revenues by providing services to the acquired NetRail customers.

        The acquisition of the assets of NetRail, Inc. was recorded in the accompanying December 31, 2001 financial statements under the purchase method of accounting. The purchase price was primarily allocated to the settlement-free peering agreements acquired from NetRail, Inc., which had an estimated fair value of approximately $11.0 million. These contracts are being amortized over their average estimated contractual life of 3 years. The remainder of the purchase price was allocated to other current and non-current assets. The purchase price is preliminary and further refinements may be made. The operating results related to the acquired assets of NetRail, Inc. have been included in the consolidated statements of operations from the date of acquisition.

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        If the NetRail acquisition had taken place at the beginning of 2000 and 2001 the unaudited pro forma combined results of the Company for the year ended December 31, 2000 and 2001 would have been as follows (amounts in thousands, except per share amounts).

 
   Year Ended
December 31, 2000
   Year Ended
December 31, 2001
  
Revenue   $ 1,230   $ 4,676  
Net loss applicable to common stock     (16,405 )   (94,043 )
Net loss per share — basic and diluted   $ (11.87 ) $ (66.89 )

        In management's opinion, these unaudited pro forma amounts are not necessarily indicative of what the actual results of the combined results of operations might have been if the NetRail, Inc. asset acquisition had been effective at the beginning of 2000 and 2001.

2.    Property and equipment:

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

 
   December 31,
  
 
   2000
   2001
  
Owned assets:              
  Network equipment   $ 50,537   $ 126,796  
  Software     1,971     4,756  
  Office and other equipment     1,555     2,274  
  Leasehold improvements     64     16,690  
  System infrastructure     —     21,288  
  Construction in progress     10,009     5,230  
   
 
 
      64,136     177,034  
Less — Accumulated depreciation and amortization     (324 )   (11,726 )
   
 
 
      63,812     165,308  
Assets under capital leases:              
  IRUs     47,855     72,023  
Less — Accumulated depreciation and amortization     (14 )   (1,549 )
   
 
 
      47,841     70,474  
   
 
 
Property and equipment, net   $ 111,653   $ 235,782  
   
 
 

Capitalized interest

        In 2000 and 2001, the Company capitalized interest of $2,963,000 and $4,408,000, respectively. There was no interest capitalized in 1999.

Indefeasible rights of use agreements (IRUs)

        In April 2000, the Company entered into a dark fiber IRU contract with Williams for approximately 12,500 route miles (25,000 fiber miles) of dark fiber at a cost of approximately $27.5 million. Under this agreement, the Company paid $11.0 million in April 2000, $9.6 million in October 2000, $5.5 million in April 2001 and $1.4 million in October 2001. In June 2000, the Company exercised its right to lease an additional 12,500 route miles (the "Second IRU") for approximately $22.5 million. Under the Second IRU agreement the Company paid $9.0 million in June 2000, $9.0 million in December 2000, and $4.5 million in June 2001. These IRUs are for initial 20-year periods, with, under certain conditions, two renewal terms of five years each. Under these agreements,

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Williams also provides co-location services and maintenance on both fibers for additional monthly fees. In June 2000, the Company amended its product purchase agreement with Cisco Systems, Inc ("Cisco"). In connection with the amendment, Cisco agreed to pay the Company a total of $22.5 million, with $16.9 million paid in 2000 and $6.7 million paid in 2001. These payments are recorded as a deferred equipment discount and classified as a reduction of network equipment in the accompanying balance sheets. The deferred equipment discount is being amortized as a reduction to depreciation expense over a seven-year period as the related equipment is placed in service.

3.    Accrued Liabilities:

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

 
   2000
   2001
General operating expenditures   $ 648   $ 2,101
Payroll and benefits     282     1,206
Taxes     —     102
Interest     2,025     53
   
 
Total   $ 2,955   $ 3,462
   
 

4.    Intangible Assets:

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

 
   2000
   2001
  
Peering arrangements   $ —   $ 11,036  
Customer contracts     —     704  
   
 
 
Total     —   $ 11,740  
Less — accumulated amortization     —     (1,304 )
   
 
 
Intangible assets, net   $ —   $ 10,436  
   
 
 

        Intangible assets are being amortized over 36 months.

5.    Other assets:

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

 
   2000
   2001
Prepaid expenses   $ 945   $ 2,159
Deposits     196     1,655
Deferred financing costs     6,072     15,647
   
 
Total   $ 7,213   $ 19,461
   
 

6.    Long-term debt:

        In March 2000, Cogent entered into a $280 million credit facility with Cisco Capital. In March 2001, the credit facility was increased to $310 million. In October 2001, Cogent entered into a new agreement for $409 million (the "Facility"). This credit facility replaced the existing $310 million credit facility between Cisco Capital and Cogent. The October 2001 agreement matures on December 31, 2008 and is available to finance the purchases of Cisco network equipment, software and related services, to fund working capital, and to fund interest and fees related to the Facility. On

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January 31, 2002, the Facility was amended to modify certain covenants in connection with the Company's merger with Allied Riser.

        The Facility requires compliance with certain financial and operational covenants, among other conditions and restrictions. During 2001, Cogent violated certain debt covenants related to minimum customers and revenues. However, as of December 31, 2001, Cogent is in compliance with the agreement. The Company is subject to similar covenants in the future.

        Borrowings may be prepaid at any time without penalty and are subject to mandatory prepayment based upon excess cash flow or upon the receipt of a specified amount from the sale of the Company's securities, each as defined. Principal payments begin in March 2005. Borrowings accrue interest at the three-month LIBOR rate, established at the beginning of each calendar quarter, plus a stated margin. The margin is dependent upon the Company's leverage ratio, as defined, and may be reduced. Interest payments are deferred and begin in March 2006. The weighted-average interest rate on all borrowings for the years ending December 31, 2000 and 2001 was approximately 11.2% and 8.5%, respectively. Borrowings are secured by a pledge of all of Cogent's assets and common stock. The Facility includes restrictions on Cogent's ability to transfer assets to the Company, except for certain operating liabilities. The Company has guaranteed Cogent's obligations under the Facility.

        In June 2001, the Company borrowed $29.0 million of working capital loans under the March 2001 credit agreement. Warrants to purchase the Company's common stock were issued in connection with these working capital loans. The warrant exercise price was based upon the most recent significant equity transaction, as defined. This borrowing resulted in granting Cisco Capital warrants for 86,625 shares of the Company's common stock. In connection with the October 2001 agreement, the Company issued Cisco Capital warrants for an additional 623,591 shares of its common stock and incurred a $2.0 million closing fee. The closing fee was paid with the use of the credit facility. All warrants are exercisable for eight years from the grant date at exercise prices ranging from $12.47 to $30.44 per share, with the weighted-average exercise price of $18.10. These warrants have been valued at approximately $8.3 million using the Black-Scholes method of valuation and are recorded as deferred financing costs and stock purchase warrants in the accompanying December 31, 2001 balance sheet using the following assumptions—average risk free rates of 4.5 to 5.8 percent, estimated fair values of the Company's common stock of $11.25 to $40.95, expected lives of 8 years and expected volatility of 90%. The deferred financing costs are being amortized to interest expense over the term of the Facility.

        Borrowings under the Facility are available in increments subject to Cogent's satisfaction of certain operational and financial covenants over time. Up to $25 million is available for additional equipment loans through June 30, 2002, of which $1.3 million was borrowed as of December 31, 2001. An additional $100 million of equipment loans becomes available on July 1, 2002. Up to $16 million is available to fund interest and fees related to the Facility through June 30, 2002 of which $6.4 million was borrowed as of December 31, 2001. An additional $59 million for funding interest and fees related to the Facility becomes available on July 1, 2002. An additional $35 million in working capital loans becomes available on July 1, 2002. The aggregate balance of working capital loans is limited to 35 percent of outstanding equipment loans. Borrowings under the Facility for the purchase of products and working capital are available until December 31, 2004. Borrowings under the Facility for the funding of interest and fees are available until December 31, 2005.

        The Company began entering into equipment loans in August 2000. At December 31, 2001, there were $145.9 million of equipment loans, $29.0 million of working capital loans and $6.4 million of interest and fee loans outstanding. Subsequent to year-end, and through March 1, 2002, the Company borrowed an additional $5.8 million of equipment loans.

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        Maturities of borrowings under the Facility are as follows (in thousands):

For the year ending December 31      
2002   $ —
2003     —
2004     —
2005     434
2006     60,437
Thereafter     120,441
   
    $ 181,312
   

7.    Income taxes:

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

 
   December 31
  
 
   2000
   2001
  
Net operating loss carry-forwards   $ 3,889   $ 28,827  
Depreciation     (191 )   (1,102 )
Start-up expenditures     760     1,062  
Accrued liabilities     344     973  
Deferred compensation     —     1,325  
Valuation allowance     (4,802 )   (31,085 )
   
 
 
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, its deferred tax assets may be available to offset future income tax liabilities. The federal and state net operating loss carry-forwards of $71 million expire in 2019 to 2021. For federal and state tax purposes, the Company's net operating loss carry-forwards could be subject to certain limitations on annual utilization if certain changes in ownership were to occur as defined by federal and state tax laws.

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

 
   1999
   2000
   2001
  
Federal income tax (benefit) at statutory rates   (34.0 )% (34.0 )% (34.0 )%
State income tax (benefit) at statutory rates, net of Federal benefit   (6.6 ) (6.6 ) (6.6 )
Increase in valuation allowance   40.6   40.6   40.6  
   
 
 
 
Effective income tax rate   — % — % — %
   
 
 
 

8.    Commitments and contingencies:

Capital leases—Fiber 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 IRU's. These IRU's connect the Company's national backbone fiber 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

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that meet the criteria for treatment as capital leases are recorded as a capital lease obligation and IRU asset. The future minimum commitments under these agreements are as follows (in thousands):

For the year ending December 31        
2002   $ 2,253  
2003     2,253  
2004     2,253  
2005     2,253  
2006     2,253  
Thereafter     33,551  
   
 
Total minimum lease obligations     44,816  
Less — amounts representing interest     (23,658 )
   
 
Present value of minimum lease obligations     21,158  
Current maturities     (426 )
   
 
Capital lease obligations, net of current maturities   $ 20,732  
   
 

Metromedia Fiber Networks ("MFN")

        In February 2000, the Company entered into an agreement with MFN to lease fiber-optic cable for its intra-city fiber-optic rings and to provide the Company access to provide its service to certain multi-tenant office buildings. Each product order includes a lease of an intra-city fiber-optic ring for a period of up to 25 years and access to certain specified buildings in exchange for monthly payments. The agreement provides for a minimum commitment of 2,500 leased fiber miles and 500 connected buildings within five years from the effective date and penalties for early termination. Under the agreement, MFN also provides installation, maintenance, restoration, and network monitoring services. Each lease of an intra-city fiber-optic ring is treated as a capital lease and recorded once the Company has accepted the related fiber route.

Other Fiber Leases and Construction Commitments

        The Company has agreements with several fiber providers for the construction of laterals to connect office buildings to metro fiber rings and for the leasing of these metro fiber rings and the lateral fiber. These leases are generally for a period of 15-20 years and include renewal periods. The future commitment under these arrangements was approximately $60 million at December 31, 2001.

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 June 2000, the agreement was amended to increase the Company's previous commitment to purchase $150.1 million over four years to $212.2 million over five years. In October 2001, the commitment was increased to purchase $270 million until December 2004. As of December 31, 2001, the Company has purchased and ordered approximately $153 million towards this commitment.

Litigation

Trademark

        In October 2000, the Company was notified that the use of the trade name Cogent Communications may conflict with pre-existing trademark rights. Management believes that this issue will be resolved without a material effect on the Company's financial position or results of operations.

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Vendor Claims

        On July 26, 2001, in a case titled Hewlett-Packard Company v. Allied Riser Operations Corporation a/k/a Allied Riser Communications, Inc., Hewlett-Packard Company filed a complaint against a subsidiary of Allied Riser, Allied Riser Operations Corporation, in the 95th Judicial District Court, Dallas County, Texas, seeking damages of $18.8 million attorneys' fees, interest, and punitive damages relating to various types of equipment allegedly ordered from Hewlett-Packard Company by Allied Riser Operations Corporation. Management believes that this claim is without merit and Allied Riser has filed its answer generally denying Hewlett-Packard's claims. Management intends to continue to vigorously contest this lawsuit.

        On January 16, 2002, Allied Riser received a letter from Hewlett-Packard Company alleging that certain unspecified contracts are in arrears, and demanding payment in the amount of $10.0 million. The letter does not discuss the basis for the claims or whether the funds sought are different from or in addition to the funds sought in the July 26, 2001 lawsuit. Allied Riser, through its legal counsel, has made an inquiry of Hewlett-Packard's counsel to determine the basis for the claims in the letter. Management believes this claim is without merit and intends to vigorously contest this claim.

Note Holders Claims

        On December 12, 2001, Allied Riser announced that certain holders of its 7.50% convertible subordinated notes due 2007 filed notices as a group with the SEC on Schedule 13D including copies of documents indicating that such group had filed suit in Delaware Chancery Court on December 6, 2001 against Allied Riser and its board of directors alleging, among other things, breaches of fiduciary duties and requesting injunctive relief to prohibit Allied Riser's merger with Cogent, and alleging default by Allied Riser under the indenture related to the notes. The plaintiffs amended their complaint on January 11, 2002 and subsequently served it on Allied Riser. On January 28, 2002 the Court held a hearing on a motion by the plaintiffs to preliminarily enjoin the merger. On January 31, 2002 the Court issued a Memorandum Opinion denying that motion. Management believes that these claims are without merit, and intends to continue to vigorously contest this lawsuit.

Securities and Exchange Commission Request

        On February 21, 2002, the Division of Enforcement of the US Securities and Exchange Commission requested that the Company voluntarily provide it certain documents related to the fairness opinion delivered to the Allied Riser board of directors by Allied Riser financial advisor, Houlihan Lokey Howard & Zukin on August 28, 2001, and the Company's Series C preferred stock financing. The Company is complying with the request. The SEC has not informed the Company as to the reason for its request.

Operating leases and 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-

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tenant office buildings. Future minimum annual commitments under these arrangements are as follows (in thousands):

Year ending December 31      
2002   $ 7,090
2003     7,549
2004     7,723
2005     7,600
2006     6,831
Thereafter     40,858
   
    $ 77,651
   

        Rent expense was $723,000 in 2000 and $3,325,000 in 2001. There was no rent expense in 1999.

Connectivity, maintenance and transit agreements

        In order to provide its service, the Company has commitments with service providers to connect to the Internet. The Company also pays Williams a monthly fee per route mile over a minimum of 20 years for the maintenance of its two national backbone fibers. In certain cases, the Company connects its customers and the buildings it serves to its national fiber-optic backbone using intra-city and inter-city fiber under operating lease commitments from various providers. These contracts range from month-to-month charges to 36-month terms.

        Future minimum obligations as of December 31, 2001, related to these arrangements are as follows (in thousands):

Year ending December 31      
2002   $ 5,585
2003     5,127
2004     3,600
2005     3,648
2006     3,721
Thereafter     60,636
   
    $ 82,317
   

9.    Stockholders' equity:

        The Company has authorized 21,100,000 shares of $0.001 par value common stock, 26,000,000 shares of Series A Convertible Preferred Stock ("Series A"), and 20,000,000 shares of Series B Convertible Preferred Stock ("Series B") and 52,137,643 shares of Series C Participating Convertible Preferred Stock ("Series C"). The number of authorized shares of common stock was increased from 7,000,000 to 21,100,000 in October 2001 in connection with the Series C financing.

        In February 2000, the Company authorized and issued 26,000,000 shares of Series A preferred stock for $26 million. The Series A contains voting rights at one vote per share equal to the number of shares of common stock into which the Series A shares can be converted. The Series A is senior to the common stock and includes a stated liquidation preference of the original purchase price of $1.00 per share plus interest at the three-month LIBOR rate plus a stated percentage. Each share of Series A is convertible, at any time, at the option of the holder into shares of common stock at the rate of one share of common stock for each ten shares of Series A, subject to adjustment, and automatically converts under certain conditions, as noted below.

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        In July 2000, the Company issued 19,809,783 shares of Series B preferred stock for approximately $90 million. The Series B contains voting rights at one vote per share equal to the number of shares of common stock into which the Series B shares can be converted. The Series B is senior to the common stock and includes a stated liquidation preference of the original purchase price of $4.55 per share plus interest at the three-month LIBOR rate plus a stated percentage. Each share of Series B is convertible, at any time, at the option of the holder into shares of common stock at the rate of 1.2979 shares of common stock for each ten shares of Series B, subject to adjustment, and automatically converts under certain conditions, as noted below.

        The participation terms of the Series A and Series B provide that under a liquidation and after the liquidation preferences of the Series A and Series B noted above have been satisfied, all remaining assets of the Company are distributed ratably to all holders of preferred stock, as if converted to common stock, and to all holders of common stock. These distributions are made until the aggregate distribution to the Series A is $3.00 per share and the Series B is $9.10 per share, at which time all Series A and Series B preferred shares are considered redeemed and are canceled.

        In October 2001, the Company issued 49,773,402 shares of Series C preferred stock for approximately $62 million. The Series C contains voting rights at one vote per share equal to the number of shares into which the Series C can be converted. Upon liquidation, as defined, holders of Series C preferred stock are entitled to receive certain preferences to holders of common stock. In the event of a liquidation, before holders of common stock receive any distribution, holders of Series C preferred stock will receive a stated liquidation preference of an amount equal to the greater of (i) $2.0091 or (ii) $1.2467 per share plus interest at the three-month LIBOR rate plus a stated percentage.

        The participation terms of the Series C provide that under a liquidation and after the liquidation preferences of the Series A, Series B and Series C noted above have been satisfied, all remaining assets of the Company are distributed ratably to all holders of preferred stock, as if converted to common stock, and to all holders of common stock. These distributions are made until the aggregate distribution to the Series A and Series B is as noted above and the aggregate distribution to the Series C is $3.7401 per share, at which time all preferred shares are considered redeemed and are canceled.

        Holders of Series C preferred stock shall be entitled to receive, as declared, cash dividends at a rate of 8% of the original Series C preferred stock purchase price per annum. Any partial payment will be made ratably among the holders of Series C preferred stock. Except for acquisitions of common stock pursuant to agreements which permit the Company to repurchase such shares at cost upon termination of services to the Company or acquisitions of common stock in exercise of the Company's right of first refusal to repurchase such shares, the Company may not declare any dividends or make any other distribution on any other stock, called junior stock (Series A, Series B and common stock), until all dividends on the Series C preferred stock have been paid. If dividends are paid on any junior stock, the Company shall pay an additional dividend on all outstanding shares of Series C preferred stock in an amount per share equal (on an as-if-converted to common stock basis) to the amount paid or set aside for each share of junior stock.

        Series C preferred stock may be converted to common stock at any time. Each share of Series C is convertible into shares of common stock at the rate of one share of common stock for each ten shares of Series C, subject to adjustment.

        All shares of preferred stock will automatically be converted into common stock upon the election of 66.66% of the shareholders holding outstanding shares of preferred stock or immediately upon the closing of a firmly underwritten public offering in which the aggregate pre-money valuation is at least $500,000,000 and in which the gross cash proceeds are at least $50,000,000.

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        In the event of a stock split or reverse stock split, the applicable conversion prices will be proportionately decreased or increased. If the Company declares a common stock dividend or distribution, the conversion prices shall be adjusted by multiplying them by the quotient equal to the total number of shares of common stock issued and outstanding immediately prior to the issuance divided by the total number of shares of common stock issued and outstanding immediately prior to the issuance plus the number of shares of common stock issuable in payment of the dividend or distribution. If the Company declares a dividend payable in securities of the corporation other than common stock, the common stock is changed to a different type of stock, or if there is a capital reorganization, holders of preferred stock shall be entitled, upon conversion of their preferred stock, to receive an amount of securities or property equivalent to what they would have received if they had converted their preferred stock to common stock on the date of the dividend, reclassification, re-capitalization, or capital reorganization.

        If the Company issues or sells additional shares of common stock for a price which is less than the then-applicable Series A conversion price in the case of Series A preferred stock, the applicable Series B conversion price in the case of Series B preferred stock, or the applicable Series C conversion price in the case of Series C preferred stock, then the conversion prices shall be reduced to prices calculated as prescribed by the Company's certificate of incorporation.

Beneficial Conversion

        The October 2001 issuance of Series C preferred stock resulted in an adjustment of the conversion rate of the Series B preferred stock from 1.0 shares of common stock per ten shares of Series B preferred to 1.2979 shares of common stock per ten shares of Series B preferred. This equates to an additional 590,198 shares of common stock. This transaction resulted in a non-cash beneficial conversion charge of approximately $24.2 million that was recorded in the Company's fourth quarter 2001 financial statements as a reduction to retained earnings and earnings available to common shareholders and an increase to additional paid-in capital.

10.  Stock option plan:

        In 1999, the Company adopted its Equity Incentive Plan (the "Plan") for granting of options to employees, directors, and consultants under which 1,490,000 shares are reserved for issuance. Options granted under the Plan may be designated as incentive or nonqualified at the discretion of the Plan administrator. Stock options granted under the Plan generally vest over a four-year period and have a

B-36


term of ten years. Stock options exercised, granted, and canceled during the period from inception (August 9, 1999) to December 31, 2001, were as follows:

 
   Number of
options
   Weighted-average
exercise price
Outstanding at inception (August 9, 1999)   —   $ —
Granted   46,950   $ 0.10
Exercised   —   $ —
Cancellations   —   $ —
   
 
Outstanding at December 31, 1999   46,950   $ 0.10
Granted   634,503   $ 10.03
Exercised   (40,698 ) $ 2.22
Cancellations   (32,619 ) $ 7.78
   
 
Outstanding at December 31, 2000   608,136   $ 9.90
Granted   822,072   $ 4.04
Exercised   (9,116 ) $ 2.25
Cancellations   (263,172 ) $ 12.10
   
 
Outstanding at December 31, 2001   1,157,920   $ 5.30
   
 

        Options exercisable as of December 31, 1999, were 23,475 with a weighted-average exercise price of $0.10. The weighted-average remaining contractual life of the outstanding options at December 31, 1999, was approximately 9.7 years. Options exercisable as of December 31, 2000, were 36,946 with a weighted-average exercise price of $7.50. The weighted-average remaining contractual life of the outstanding options at December 31, 2000, was approximately 9.5 years. Options exercisable as of December 31, 2001, were 223,523 with a weighted- average exercise price of $7.24. The weighted-average remaining contractual life of the outstanding options at December 31, 2001, was approximately 9.4 years.

OUTSTANDING AND EXERCISABLE BY PRICE RANGE
As of December 31, 2001

Range of
Exercise Prices
   Number
Outstanding
12/31/2001
   Weighted
Average
Remaining
Contractual Life (years)
   Weighted-
Average
Exercise Price
   Number
Exercisable
As of 12/31/2001
   Weighted-
Average
Exercise Price
$0.10   9,425   7.65   $ 0.10   6,468   $ 0.10
$2.00   691,670   9.92   $ 2.00   60,163   $ 2.00
$2.50   95,292   8.23   $ 2.50   40,089   $ 2.50
$10.00   180,830   8.50   $ 10.00   70,569   $ 10.00
$15.00   180,703   8.98   $ 15.00   45,964   $ 15.00
   
 
 
 
 
$0.10 — $15.00   1,157,920   9.39   $ 5.30   223,253   $ 7.24
   
 
 
 
 

        Pro forma information regarding net loss required by SFAS No.123 has been determined as if the Company had accounted for its stock options under the minimum value method, while the Company was a private company, results in a pro forma net loss of $11,953,000 for 2000 and $83,000 for 1999. The weighted-average per share grant date fair value of options granted was $4.00 in 2000 and $0.05 in 1999. The fair value of these options was estimated at the date of grant using the minimum value method with the following weighted-average assumptions for the year ended December 31, 2000—an average risk-free rate of 5.25 percent, a dividend yield of 0 percent, and an expected life of 10 years, and for the year ended December 31, 1999—an average risk-free rate of 6.5 percent, a dividend yield of 0 percent, and an expected life of 10 years.

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        Pro forma information regarding net loss required by SFAS No.123 under the fair value method, which is required for public companies, results in a pro forma net loss of $70.5 million for 2001. The weighted-average per share grant date fair value of options granted was $14.85 in 2001. The fair value of these options was estimated at the date of grant with the following weighted-average assumptions —an average risk-free rate of 5.0 percent, a dividend yield of 0 percent, and an expected life of 5.0 years, and expected volatility of 128%.

Deferred Compensation Charge

        The Company recorded a deferred compensation charge of approximately $11.1 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 is being amortized over the vesting period of the related options which is generally four years. Compensation expense for the year ended December 31, 2001 was approximately $3.3 million. The total compensation charge is reduced when employees terminate prior to vesting.

11.  Related party:

        The Company's headquarters is located in an office building owned by an entity controlled by the Company's Chief Executive Officer. The Company paid $333,000 in 2000 and $453,000 in 2001 in rent to this entity. The Company was not charged for this space in 1999.

        In January 2000, the Company collected a $25,000 note receivable from its stockholder related to the stockholder's 1999 purchase of common shares.

12.  Quarterly financial information (unaudited):

 
   Three months ended
  
 
   March 31,
2000
   June 30,
2000
   September 30,
2000
   December 31,
2000
  
 
   (in thousands, except share and per share data)

  
Total revenue   $ —   $ —   $ —   $ —  
Operating loss     (284 )   (1,510 )   (3,930 )   (8,499 )
Net loss     (161 )   (1,378 )   (2,432 )   (7,790 )
Net loss per common share     (0.12 )   (1.00 )   (1.75 )   (5.57 )
Weighted-average number of shares outstanding     1,360,000     1,381,354     1,390,072     1,397,515  
 
   Three months ended
  
 
   March 31,
2001
   June 30,
2001
   September 30,
2001
   December 31,
2001
  
Total revenue   $ —   $ 90   $ 657   $ 2,271  
Operating loss     (12,975 )   (14,527 )   (14,935 )   (18,657 )
Net loss     (12,794 )   (15,188 )   (17,448 )   (21,483 )
Net loss applicable to common stock     (12,794 )   (15,188 )   (17,448 )   (45,651 )
Net loss per common share     (9.12 )   (10.81 )   (12.39 )   (32.20 )
Weighted-average number of shares outstanding     1,402,798     1,404,587     1,408,614     1,417,522  

        The net loss applicable to common stock for the fourth quarter of 2001 includes a non-cash beneficial conversion charge of $24.2 million.

B-38


13.  Subsequent events:

Stock Split

        All common share amounts, including the number of authorized, issued and outstanding shares, the conversion ratio of the Company's preferred stock, the exercise price and number of shares subject to stock options and warrants, and loss per share have been adjusted to reflect the 10 for 1 reverse stock split effected January 31, 2002.

Asset Purchase Agreement—PSINet, Inc.

        In January 2002, the Company entered into a due diligence agreement with PSINet, Inc. ("PSINet"). This agreement allowed the Company to undertake due diligence related to certain of PSINet's network operations in the United States. The Company paid a $3.0 million fee in January 2002 to PSINet in connection with this arrangement. In February 2002, Cogent and PSINET entered into an Asset Purchase Agreement ("APA"). Pursuant to the APA, and subject to bankruptcy court approval, Cogent agreed to acquire certain of PSINet's assets and acquire certain liabilities related to PSINet's operations in the United States for a total of $7.0 million. The assets include certain of PSINet's customer contracts, accounts receivable, rights to 10,000 route miles pursuant to IRUs, telecommunications and computer equipment, three web hosting data centers, and certain intangibles, including settlement free peering rights. Settlement free peering rights permit the transfer of data traffic to other carriers at no cost. Assumed liabilities include certain leased circuit commitments and collocation arrangements.

14.  Additional subsequent events:

Note Holders Claims

        On March 25, 2002, certain of the holders of Allied Riser's 7.50% convertible subordinated notes asserted that the merger constituted a change of control, and that as a result an event of default had occurred under the indenture. On March 27, 2002, based on such assertions, the Trustee under the indenture notified the Company that the principal amount of the notes and accrued interest is immediately due and payable. Management, after consultation with its legal advisors, does not believe that the merger qualifies as a change in control as defined in the indenture and is vigorously disputing the noteholders' assertion. However, in the event that the merger is deemed to be a change in control, the Company could be required by the noteholders to repurchase the $117.0 million in aggregate principal amount of the notes plus accrued interest.

        On March 27, 2002, certain holders of Allied Riser's notes filed an involuntary bankruptcy petition under Chapter 7 of the United States Bankruptcy Code against Allied Riser in United States Bankruptcy Court for the Northern District of Texas, Dallas Division. Management, after consultation with its legal advisors, believes that the claim is without merit and intends to vigorously contest it.

PSINet Acquisition

        On March 27, 2002, the bankruptcy court approved the acquisition. The transaction is expected to close in April 2002.

B-39


REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and
Shareholders of Cogent Communications Group, Inc.

        We have audited the accompanying Statement of Assets Acquired and Liabilities Assumed and the related Statement of Revenues and Direct Expenses of PSINet Inc. Project Phoenix as of and for the year ended December 31, 2001. These statements are the responsibility of the management of Cogent Communications Group, Inc. ("Cogent"). Our responsibility is to express an opinion on these statements based on our audit.

        We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in these statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of these statements. We believe that our audit provides a reasonable basis for our opinion.

        The accompanying statements were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission (for inclusion in Cogent's Current Report on Form 8-K) as described in Note 2 and are not intended to be a complete presentation of the financial position or results of operations of PSINet Inc.

        In our opinion, the statements referred to above present fairly, in all material respects, the assets acquired and liabilities assumed as of December 31, 2001 and the revenues and direct expenses for the year ended December 31, 2001, as described in Note 2, in conformity with accounting principles generally accepted in the United States of America.

        As discussed in Note 1, on April 2, 2002, Cogent acquired selected assets and liabilities of PSINet Inc. for a total cash purchase price of approximately $9.5 million.

/s/ PricewaterhouseCoopers LLP
Washington, D.C.
June 13, 2002

B-40


PSINET INC. PROJECT PHOENIX
STATEMENT OF ASSETS ACQUIRED
AND LIABILITIES ASSUMED

 
   December 31,
2001
   March 31,
2002
 
    
   (Unaudited)
ASSETS ACQUIRED:            
  Accounts receivable (net of allowance for doubtful accounts of $2,027,000 and $2,168,000, respectively)   $ 2,803,000   $ 2,738,000
  Other assets     134,000     134,000
  Fixed assets, net     9,626,000     8,889,000
    Total assets acquired     12,563,000     11,761,000
LIABILITIES ASSUMED:            
  Deferred revenue     2,386,000     2,472,000
    Total liabilities assumed     2,386,000     2,472,000
    Net assets acquired   $ 10,177,000   $ 9,289,000

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

B-41


PSINET INC. PROJECT PHOENIX
STATEMENTS OF REVENUES AND
DIRECT EXPENSES

 
   Year Ended
December 31, 2001
   Three-month
Period Ended
March 31,
2002
   Three-month
Period Ended
March 31,
2001
  
 
    
   (Unaudited)
   (Unaudited)
  
Revenues, net   $ 56,916,000   $ 14,105,000   $ 13,444,000  
Direct expenses:                    
  Cost of revenues     50,752,000     11,206,000     12,399,000  
  Sales and marketing     2,846.000     745,000     689,000  
  General and administrative     11,339,000     1,089,000     3,323,000  
  Depreciation and amortization     92,962,000     1,082,000     17,890,000  
  Impairment charges     295,521,000     —     —  
    Total direct expenses     453,420,000     14,122,000     34,301,000  
Excess of direct expenses over revenues   $ (396,504,000 ) $ (17,000 ) $ (20,857,000 )

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.

B-42


PSINET INC. PROJECT PHOENIX
NOTES TO STATEMENTS

1.    Business and Asset Purchase Agreement

        On February 26, 2002, a wholly-owned subsidiary of Cogent Communications Group, Inc. ("Cogent") entered into an agreement to acquire selected assets and liabilities of PSINet Inc.'s United States operations ("PSINet Project Phoenix"). The acquisition was consummated on April 2, 2002 (the "Close Date") for a total cash purchase price of approximately $9.5 million.

        PSINet Inc. ("PSINet") was organized in October 1989 and provided retail and wholesale Internet services and end-to-end information technology (IT) services, primarily to business customers. PSINet's services and products included dedicated and global dial-up access, managed services, collocation and shared hosting, enterprise resource planning system implementation, application development, application service provider offerings and managed applications. PSINet also provided wholesale and private label network connectivity and related services to other Internet service providers and telecommunications carriers to further utilize its network capacity. The provision of wholesale internet services, end-to-end IT solutions, and private label network connectivity and related services either ceased during 2001 or was not part of the acquired business noted above.

        On May 31, 2001, PSINet filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code. From May 31, 2001 through April 1, 2002, PSINet continued to operate their business as a debtor-in-possession.

        Assets acquired by Cogent included all accounts receivable balances, security deposits and prepayments related to acquired assets, certain owned telecommunications, computer and office equipment, certain leasehold improvements and certain indefeasible rights-of-use (IRU) capital lease agreements for fiber optic cable. Cogent also acquired certain assets and succeeded to certain agreements not reflected in PSINet's historical financial statements, prepared in accordance with accounting principles generally accepted in the United States of America. Such assets and agreements included customer contracts, certain intellectual property, the PSINet tradename, selected peering arrangements and operating leases for three web-hosting data centers, which were assumed on a prospective basis from the Close Date. Cogent has assumed the obligation to provide services to certain customers subsequent to the Close Date, including those for which PSINet had received payment for such services prior to April 2, 2002. As a result of these obligations, deferred revenues are reflected in the statement of assets acquired and liabilities assumed. Cogent also assumed certain leased circuits on a prospective basis from the Close Date.

2.    Basis of Presentation

        The accompanying statement of assets acquired and liabilities assumed as of December 31, 2001 and the statement of revenues and direct expenses for the year then ended has been prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission ("SEC") (for inclusion in Cogent's Current Report on Form 8-K). The net assets acquired constitute a business pursuant to rules and regulations of the Sec.

        The statement of assets acquired and liabilities assumed includes those United States assets and liabilities of PSINet which are subject to the asset purchase agreement, as described in more detail in Note 1 above and in Section 2 of the Asset Purchase Agreement dated February 26, 2002.

        The statement of revenues and direct expenses includes only those revenues and expenses directly related to the acquired assets in the United States. Although Cogent acquired all of PSINet U.S. accounts receivable, including accounts receivable arising from customer relationships that were not acquired by Cogent, only revenues related to the customer relationships that were acquired and which

B-43


will be served by Cogent on a prospective basis are included in this statement of revenues and direct expenses. Although Cogent did not acquire all of the U.S. fixed assets and software utilized by PSINet, the depreciation and other charges related to certain of these assets which were not acquired are included as direct expenses since they were necessary to support the revenue base of the acquired business during the periods presented. It was impracticable to allocate a certain portion of depreciation and other charges to the acquired business since such assets formed a network which, as a whole, was necessary to support the acquired revenue base. As such, all depreciation and other charges related to the aforementioned assets are included as direct expenses.

        Direct expenses also include an allocation of certain expenses directly attributable to the acquired business, the most significant of which relate to advertising, property taxes, licenses, building depreciation and internal communications charges. Allocation methodologies were based on relative percentages of the acquired business as compared to PSINet's United States business, including relative revenue, relative payroll costs, relative fixed asset balances and relative square feet of the owned headquarters building. The use of these allocation methodologies necessarily involved estimates and judgments; management believes the allocation methodologies and resulting percentages represent a reasonable and appropriate approach to allocating such direct expenses. Although the headquarters building is not being purchased by Cogent, a certain portion of the depreciation was allocated as a direct cost, given that the building was used for operating purposes to support the revenue base of the acquired business during the periods presented.

        All non-direct costs such as income taxes, treasury, accounting and legal services, goodwill amortization, interest expense and other non-operating expenses, have been excluded from this statement.

        The statements are not indicative of the financial condition or results of operations of the acquired business on a prospective basis due to changes in the business, including, among other things, the bankruptcy proceedings of PSINet. Further, the omission or inclusion of various operating expenses in these statements may not be indicative of such expenses of the acquired business on a prospective basis.

        Given the nature of these statements, the preparation of cash flow information relating to operating, investing and financing activities of PSINet Project Phoenix was impracticable.

3.    Summary of Significant Accounting Policies

        Significant accounting policies not disclosed elsewhere in the statements are as follows:

Use of Estimates

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

Unaudited Interim Statements

        In the opinion of Cogent management, the accompanying unaudited statement of assets acquired and liabilities assumed as of March 31, 2002 and the unaudited statements of revenues and direct expenses for the three-month periods ended March 31, 2002 and 2001 contain all adjustments of a normal, recurring nature which are necessary for a fair statement of the results for the interim periods presented. The revenues and direct expenses are not necessarily indicative of results for the entire year.

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Revenue Recognition

        Revenue is recognized when persuasive evidence of an agreement exists, the terms are fixed or determinable, services are performed and collection is reasonably assured.

        Revenues from access and hosting services are recognized ratably over the terms of the contracts, which are generally one to three years. Revenues are recorded net of customer credits. Cash received in advance of revenue earned is recorded as deferred revenues.

Advertising Costs

        Advertising costs are expensed in the period incurred. Advertising expenses were $1,387,000 for the year ended December 31, 2001.

Concentrations of Credit Risk and Allowance for Doubtful Accounts

        Financial instruments that potentially present concentrations of credit risk consist of accounts receivable. Credit risk inherently increased after PSINet's voluntary petition for bankruptcy on May 31, 2001 and after customers became aware of the proposed acquisition by Cogent. The allowance for doubtful accounts was based on an analysis of all U.S. customers of PSINet since Cogent acquired all of PSINet's receivables, despite the fact that Cogent will only service a certain portion of the customers on a prospective basis. Bad debt expense of $491,000 for the year ended December 31, 2001 and of $123,000 (unaudited) and $141,000 (unaudited) for the three- month periods ended March 31, 2001 and 2002, respectively, relate only to the acquired customer base which will be served by Cogent on a prospective basis.

        No individual customer accounted for more than 10% of PSINet Project Phoenix' revenue for the year ended December 31, 2001 or accounts receivable at December 31, 2001.

Equipment and Leasehold Improvements

        Telecommunications, computer and office equipment is recorded at cost less accumulated depreciation, which is provided on the straight-line method over the estimated useful lives of the assets, which range from three to five years. Cost includes major expenditures for improvements and replacements that extend useful lives or increase capacity of the assets. Expenditures for maintenance and repairs are expensed as incurred. Leasehold improvements include costs associated with telecommunications equipment installations and building improvements and are depreciated over the shorter of the estimated useful life (generally five to seven years) or the related lease term.

Indefeasible Rights-of-use Agreements

        Indefeasible right-of-use (IRU) agreements represent the right to access and use certain dark and lit fiber facilities obtained under capital-lease agreements. The IRU agreements are recorded at their historical cost if paid up-front or at the net present value of the future minimum lease payments. The cost is being amortized on a straight-line basis over the respective terms of the arrangements, which range from six years to twenty years based on the amendments in effect at December 31, 2001. Cogent has purchased five IRU agreements in connection with the acquisition. PSINet entered into amendments for two IRU agreements during 2001 to reduce the terms of the agreements; these amendments did not change the capital lease classification of the arrangements. On April 2, 2002, one other IRU agreement was amended to reduce the term from 20 years to 8 years; this amendment also did not change the capital lease classification of the arrangement. Interest costs associated with significant capital additions are capitalized.

B-45


Impairment of Assets

        Management periodically evaluates the recoverability of its long-lived assets, including assets under IRU arrangements. When indicators of potential impairment are present, management evaluates the carrying value of these assets in relation to the operating performance of the business and future undiscounted cash flows expected to result from the use of these assets to determine if an impairment exists. If an impairment is present, the assets are reported at the lower of carrying value or fair value. See discussion of 2001 impairment charges in Note 4.

Fair Value of Financial Instruments

        Financial instruments consist of accounts receivable. The fair value of accounts receivable at December 31, 2001 approximates the net carrying value of such receivables at that date.

Recent Accounting Pronouncements

        In October 2001, the FASB issued SFAS No. 144, Accounting For The Impairment Or Disposal Of Long-Lived Assets. This statement replaces SFAS No. 121, Accounting For The Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for the recognition and measurement of the impairment of long-lived assets to be held and used and for those to be disposed of by sale. This statement applies to all long-lived assets, including discontinued operations, and replaces the provisions of APB Opinion No. 30 for the disposal of segments of a business. This statement requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. This statement is effective for PSINet beginning January 1, 2002. The adoption of SFAS No. 144 did not result in a material impact to the statements of PSINet Project Phoenix.

4.    Impairment of Assets

        In light of the difficulty in readily disposing of PSINet's U.S. assets in bankruptcy, management determined during the fourth quarter of 2001 that the estimated undiscounted cash flows associated with long-lived assets acquired would not be sufficient to recover the net book value of such assets. In accordance with SFAS No. 121, PSINet Project Phoenix recorded an impairment charge of approximately $295 million at December 31, 2001 to reflect its long-lived assets at estimated fair value. The fair values, as required by SFAS No. 121, did not consider the value of such assets in a forced sale or liquidation; rather, the values were based upon the purchase price paid by Cogent and allocated to the individual long-lived assets based upon industry fair value comparables (including recent Cogent acquisitions) for the related assets. Such fair value allocations necessarily involved the use of judgments and estimates which management believe to be reasonable and appropriate.

5.    Fixed Assets

        Fixed assets consisted of the following:

 
   December 31,
2001
   March 31,
2002
  
 
    
   (Unaudited)

  
Equipment   $ 940,000   $ 940,000  
Leasehold improvements     658,000     658,000  
Indefeasible rights-of-use agreements     8,028,000     8,028,000  
      9,626,000     9,626,000  
Less: Accumulated depreciation     —     (737,000 )
    $ 9,626,000   $ 8,889,000  

B-46

        The cost basis of the fixed assets at December 31, 2001 represents the new cost basis subsequent to the impairment write-down (Note 4). Equipment consists principally of telecommunications equipment and, to a lesser extent, office equipment. Leasehold improvements relate to the three web-hosting data center operating lease sites assumed by Cogent. IRU assets relate to five capital lease arrangements (Note 3).

6.    Commitments

        PSINet Project Phoenix has guaranteed monthly usage levels of data and voice communications with certain of its telecommunications vendors. In addition, PSINet Project Phoenix has separate operating and maintenance agreements related to the IRU's and non-cancelable operating leases for three web-hosting data centers. Charges under the operating and maintenance agreements expire in various years through 2019. The operating leases expire in various years through 2009. At December 31, 2001, future minimum lease payments under these agreements are as follows:

 
   Operating and
Maintenance
Agreements
   Operating
Leases
   Total
2002   $ 4,550,000   $ 1,646,000   $ 6,196,000
2003     1,925,000     1,446,000     3,371,000
2004     50,000     1,304,000     1,354,000
2005     51,000     1,343,000     1,394,000
2006     51,000     1,383,000     1,434,000
Thereafter     357,000     4,198,000     4,555,000
    $ 6,984,000   $ 11,320,000   $ 18,304,000

        Total operating and maintenance expense and rent expense for these operating leases totaled $13,985,000 and $2,091,000, respectively, for the year ended December 31, 2001.

B-47



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Director and Stockholder of
Allied Riser Communications Corporation:

        We have audited the accompanying consolidated balance sheets of Allied Riser Communications Corporation (a Delaware corporation) and subsidiaries (the "Company") (Note 1) as of December 31, 2001 and 2000, and the related consolidated statements of income (loss), shareholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Allied Riser Communications Corporation and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

Dallas, Texas,
  February 22, 2002 (except with respect
  to the matters discussed in Notes 15 and 16,
  as to which the dates are March 27, 2002
  and April 30, 2002, respectively)

B-48


ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS—DECEMBER 31, 2001 AND 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 
   2001
   2000
  
ASSETS  
CURRENT ASSETS:              
Cash and cash equivalents   $ 35,361   $ 29,455  
Short-term investments     42,711     212,107  
Accounts receivable, net of reserve of $1,452 and $196 in 2001 and 2000, respectively     859     3,912  
Prepaid expenses and other current assets     1,765     5,606  
  Total current assets     80,696     251,080  
PROPERTY AND EQUIPMENT, net     25,916     182,442  
REAL ESTATE ACCESS RIGHTS, net of accumulated amortization of $491 and $16,003 in 2001 and 2000, respectively     8,286     133,003  
GOODWILL AND OTHER INTANGIBLE ASSETS, net of accumulated amortization of $0 and $2,592 in 2001 and 2000, respectively     —     12,118  
OTHER ASSETS, net     8,069     11,060  
  Total assets   $ 122,967   $ 589,703  

LIABILITIES AND STOCKHOLDERS' EQUITY
 
CURRENT LIABILITIES:              
Accounts payable   $ 3,613   $ 17,904  
Accrued liabilities     12,946     21,037  
Current maturities of capital lease obligations     1,193     32,229  
Current maturities of debt     614     713  
  Total current liabilities     18,366     71,883  
CAPITAL LEASE OBLIGATIONS, net of current maturities     1,506     41,290  
LONG-TERM LIABILITIES:              
Long-term debt, net of current maturities     564     —  
Convertible notes (7.5% interest payable in stock or cash)     116,980     150,000  
  Total liabilities     137,416     263,173  
COMMITMENTS AND CONTINGENCIES (Note 8)              
STOCKHOLDERS' EQUITY:              
Common stock, $.0001 par value, 1,000,000,000 shares authorized, 61,994,000 and 58,561,000 outstanding as of December 31, 2001 and 2000, respectively (net of 1,899,000 and 675,000 treasury shares, respectively)     6     6  
Additional paid-in capital     508,963     460,137  
Warrants, authorizing the issuance of 4,246,000 and 7,377,000 shares as of December 31, 2001 and 2000, respectively     71,127     127,846  
Deferred compensation     (274 )   (13,501 )
Accumulated other comprehensive income (loss)     (893 )   (547 )
Accumulated deficit     (593,378 )   (247,411 )
  Total stockholders' (deficit) equity     (14,449 )   326,530  
  Total liabilities and stockholders' equity   $ 122,967   $ 589,703  

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

B-49


ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)

 
   2001
   2000
   1999
  
REVENUE:                    
Network services   $ 19,998   $ 10,969   $ 1,422  
Value added services     5,754     3,363     448  
  Total revenue     25,752     14,332     1,870  
OPERATING EXPENSES:                    
Network operations (including $513, $576, and $1,071 amortization of deferred compensation, respectively)     62,194     43,965     8,625  
Cost of value added services     4,126     2,356     128  
Selling expenses (including $1,486, $2,432, and $1,021 amortization of deferred compensation, respectively)     19,264     46,967     10,317  
General and administrative expenses (including $2,073, $6,410, and $12,589 amortization of deferred compensation, respectively)     47,895     67,173     38,570  
Depreciation and amortization     39,527     36,155     5,007  
Asset write-down (Note 3)     262,336     —     —  
Gain on settlement of capital lease obligations (Note 8)     (47,752 )   —     —  
  Total operating expenses     387,590     196,616     62,647  
OPERATING LOSS     (361,838 )   (182,284 )   (60,777 )
OTHER INCOME (EXPENSE):                    
Interest expense     (13,935 )   (9,348 )   (1,275 )
Interest and other income     7,518     18,224     4,564  
  Total other income (expense)     (6,417 )   8,876     3,289  
LOSS BEFORE INCOME TAXES     (368,255 )   (173,408 )   (57,488 )
INCOME TAX BENEFIT     7,578     —     —  
NET LOSS BEFORE EXTRAORDINARY ITEM     (360,677 )   (173,408 )   (57,488 )
EXTRAORDINARY GAIN FROM EXTINGUISHMENT OF DEBT, net of $7,578 provision for income taxes     14,710     —     —  
NET LOSS     (345,967 )   (173,408 )   (57,488 )
ACCRUED DIVIDENDS ON PREFERRED STOCK     —     —     (6,452 )
NET LOSS APPLICABLE TO COMMON STOCK   $ (345,967 ) $ (173,408 ) $ (63,940 )

NET LOSS PER COMMON SHARE
(BASIS AND DILUTED):
 
 
 
 
 
 
 
 
 
 
Loss before extraordinary item   $ (6.04 ) $ (3.18 ) $ (2.15 )
Extraordinary gain, net     0.25     —     —  
NET LOSS PER COMMON SHARE
(BASIS AND DILUTED)		   $ (5.79 ) $ (3.18 ) $ (2.15 )

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (basic and diluted)
 
 
59,704,000
 
 
54,472,000
 
 
29,736,000
 

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

B-50


ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

 
   Common Stock
    
   Warrants
    
    
    
    
    
  
 
    
    
    
   Accumulated
Other
Comprehensive
Income (Loss)
    
    
  
 
   Number
of
Shares
   Amount
   Additional
Paid-In
Capital
   Number
of
Shares
   Amount
   Deferred
Compensation
   Accumulated
Deficit
   Total
Shareholders'
Equity (Deficit)
   Comprehensive
Income (Loss)
  
BALANCE, December 31, 1998   25,716,000   $ 3   $ 375   —   $ —   $ —   $ (16,515 ) $ —   $ (16,137 ) $ —  
Net loss   —     —     —   —     —     —     (57,488 )   —     (57,488 )   (57,488 )
Other comprehensive income—foreign currency translation adjustment   —     —     —   —     —     —     —     —     —     —  
Comprehensive income (loss)                                                     $ (57,488 )
Issuance of common stock, net of stock repurchases and issuance costs   24,353,000     2     284,768   —     —     —     —     —     284,770        
Conversion of preferred stock   6,500,000     1     123,904   —     —     —     —     —     123,905        
Issuance of warrants   —     —     —   6,336,000     109,135     —     —     —     109,135        
Accrued cumulative dividends on preferred stock   —     —     (6,452 ) —     —     —     —     —     (6,452 )      
Deferred compensation   —     —     32,335   —     —     (32,335 )   —     —     —        
Amortization of deferred compensation   —     —     —   —     —     14,681     —     —     14,681        

BALANCE, December 31, 1999
 
56,569,000
 
 
6
 
 
434,930
 
6,336,000
 
 
109,135
 
 
(17,654
)
 
(74,003
)
 
—
 
 
452,414
 
 
 
 
Net loss   —     —     —   —     —     —     (173,408 )   —     (173,408 ) $ (173,408 )
Other comprehensive income—foreign currency translation adjustment   —     —     —   —     —     —     —     (547 )   (547 )   (547 )
Comprehensive income (loss)                                                     $ (173,955 )
Issuance of common stock, net of stock repurchases and issuance costs   1,280,000     —     5,278   —     —     —     —     —     5,278        
Issuance of warrants, net   —     —     —   1,753,000     33,375     —     —     —     33,375        
Exercise of warrants   712,000     —     14,664   (712,000 )   (14,664 )   —     —     —     —        
Deferred compensation   —     —     5,265   —     —     (5,265 )   —     —     —        
Amortization of deferred compensation   —     —     —   —     —     9,418     —     —     9,418        

BALANCE, December 31, 2000
 
58,561,000
 
 
6
 
 
460,137
 
7,377,000
 
 
127,846
 
 
(13,501
)
 
(247,411
)
 
(547
)
 
326,530
 
 
 
 
Net loss   —     —     —   —     —     —     (345,967 )   —     (345,967 ) $ (345,967 )
Other comprehensive income—foreign currency translation adjustment   —     —     —   —     —     —     —     (346 )   (346 )   (346 )
Comprehensive income (loss)                                                     $ (346,313 )
Issuance of common stock, net of stock repurchases and issuance costs   424,000     —     1,168   —     —     —     —     —     1,168        
Forfeiture of warrants, net   —     —     —   (122,000 )   94     —     —     —     94        
Exercise of warrants   3,009,000     —     56,813   (3,009,000 )   (56,813 )   —     —     —     —        
Deferred compensation   —     —     (9,155 ) —     —     9,155     —     —     —        
Amortization of deferred compensation   —     —     —   —     —     4,072     —     —     4,072        

BALANCE, December 31, 2001
 
61,994,000
 
$
6
 
$
508,963
 
4,246,000
 
$
71,127
 
$
(274
)
$
(593,378
)
$
(893
)
$
(14,449
)
 
 
 

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

B-51


ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

 
   2001
   2000
   1999
  
CASH FLOWS FROM OPERATING ACTIVITIES:                    
Net loss   $ (345,967 ) $ (173,408 ) $ (57,488 )
Adjustments to reconcile net loss to net cash used in operating activities—                    
  Depreciation and amortization     43,599     45,573     19,688  
  Extraordinary gain from extinguishment of debt, net     (14,710 )   —     —  
  Deferred income taxes     (7,578 )   —     —  
  Write-down of assets     262,336     —     —  
  Gain on settlement of capital lease obligations     (47,752 )   —     —  
  Loss on sale of assets     2,166     —     —  
  Other noncash expenses     1,799     —     —  
  Changes in assets and liabilities, net of the effect of acquisitions—                    
    Decrease (increase) in accounts receivable, net     60     (2,260 )   (239 )
    Decrease (increase) in prepaid expenses     3,175     515     (5,316 )
    Decrease (increase) in other assets     1,715     (4,673 )   1,299  
    (Decrease) increase in accounts payable, accrued liabilities, and deferred revenue     (16,278 )   15,718     11,799  
      Net cash used in operating activities     (117,435 )   (118,535 )   (30,257 )
CASH FLOWS FROM INVESTING ACTIVITIES:                    
Purchases of property and equipment     (7,254 )   (79,815 )   (28,790 )
Proceeds from sale of short-term investments     169,396     —     —  
Proceeds from sale of assets     301     —     —  
Purchases of short-term investments, net     —     (50,094 )   (162,013 )
Acquisition of businesses, net of cash acquired     (164 )   (14,745 )   —  
      Net cash provided by (used in) investing activities     162,279     (144,654 )   (190,803 )
CASH FLOWS FROM FINANCING ACTIVITIES:                    
Proceeds from convertible notes, net of offering cost     —     145,003     —  
Payments on capital lease obligations     (28,803 )   (6,023 )   (2,167 )
Payments of debt     (1,281 )   (391 )   —  
Proceeds from issuance of common stock and sale of subsidiary stock, net of issuance costs     547     1,728     284,770  
Payments on principal for convertible notes     (9,301 )   —     —  
Proceeds from issuance of preferred stock     —     —     51,000  
Credit facility origination fee     —     —     (1,350 )
      Net cash (used in) provided by financing activities     (38,838 )   140,317     332,253  
EFFECT OF EXCHANGE RATE CHANGES ON CASH     (100 )   (237 )   —  
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS     5,906     (123,109 )   111,193  
CASH AND CASH EQUIVALENTS, beginning of period     29,455     152,564     41,371  
CASH AND CASH EQUIVALENTS, end of period   $ 35,361   $ 29,455   $ 152,564  

SUPPLEMENTAL CASH FLOW DISCLOSURES:
 
 
 
 
 
 
 
 
 
 
Cash paid for interest   $ 14,125   $ 6,836   $ 569  
Noncash investing and financing activities     —     —     —  
  Equipment acquired under capital leases   $ 2,198   $ 67,501   $ 7,754  
  Accrued interest and dividends on convertible notes and preferred stock   $ 256   $ 500   $ 6,452  
  Warrants issued   $ 94   $ 33,375   $ 109,135  
  Deferred compensation   $ (9,155 ) $ 5,265   $ 32,335  
  Conversion of preferred stock   $ —   $ —   $ 123,904  
  Common stock issued for business acquisition (129,000 shares)   $ —   $ 4,011   $ —  
  Treasury shares issued for bonus payments (425,000 shares)   $ 1,138   $ —   $ —  

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

B-52


ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Organization and Nature of Operations:

        Allied Riser Communications Corporation (the "Company") is a facilities-based provider of broadband data, video, and voice communications services to small-and medium-sized businesses. The Company also provides professional services including web design, consulting, and hosting.

        These financial statements have been prepared using the historical basis of accounting and are based on the provisioning of in-building wholesale services by the Company and do not reflect any adjustments related to the merger of the Company with Cogent Communications Group, Inc. ("Cogent"), as discussed below.

        On July 24, 2001, the Company announced a number of initiatives to reduce its operating costs and refocus its business plan. These initiatives included the suspension of retail sales of broadband data applications and services in most markets in the United States, the transition of its retail customers to other service providers, the closure of its sales offices, and further reductions in the Company's workforce.

        On August 28, 2001, Cogent and the Company entered into a definitive agreement, which was subsequently amended on October 13, 2001, for the merger of the Company with Cogent. Cogent, headquartered in Washington, DC, is a privately held high-speed Internet service provider providing end-to-end Optical Ethernet connectivity to the Internet for businesses. Under the agreement, each share of the Company's common stock would be exchanged for Cogent common stock. The merger was conditioned upon, among other things, approval by the Company's stockholders, the approval for listing or quotation of the shares of Cogent common stock issued in the merger on a national securities exchange or the Nasdaq National Market, and the receipt of material consents.

        On September 21, 2001, the Company suspended its retail services in most of its markets in the United States and began pursuing the provision of in-building wholesale services of its broadband data network.

        On January 31, 2002, the Company's shareholders approved the merger with Cogent. On February 4, 2002, the merger with Cogent was consummated. As a result of this transaction, the Company became a wholly owned subsidiary of Cogent, and the Company's common stock was removed from listing on the NASDAQ Stock Market's National Market System. Pursuant to the terms of the merger agreement, Allied Riser shareholders received approximately .032 shares of Cogent common stock for each share of the Company's common stock held (the "Conversion Rate"). Cogent's common stock trades on the American Stock Exchange under the symbol COI. In addition to the exchange of the Company's common stock for common stock of Cogent, all warrants, stock options, and restricted stock of the Company outstanding as of the consummation of the merger were converted to warrants, stock options, and restricted stock of Cogent based on the Conversion Rate. Cogent also became a co-obligor of the Company's 7.5% convertible subordinated notes due in 2007 (Note 7) as a result of the merger.

        Additionally, during the third and fourth quarters of 2001, the Company sold four of the five data and communication service providers acquired by it in 2000 (Note 11).

2.    Summary of Significant Accounting Policies:

Consolidation

        The accompanying financial statements include all wholly owned subsidiaries and an approximately 68% owned subsidiary, Shared Technologies of Canada ("STOC"). STOC is owned by the Company's wholly owned subsidiary, ARC Canada. All intercompany accounts and activity have been eliminated.

B-53


Minority interest in STOC, is not presented in the accompanying financial statements because the minority interest is in a deficit position and the Company continues to record 100% of the losses of STOC. All results are reported in United States dollars.

        Pursuant to a shareholders agreement dated July 26, 2000, between the Company and the minority shareholders in STOC, effective October 31, 2001, such minority shareholders have the right to cause the Company to purchase their shares of STOC at a per share price determined by a formula described in the shareholders agreement. During January 2002, the minority shareholders of STOC exercised their right to require the Company to acquire the minority interest of STOC. The total consideration due to such selling shareholders is approximately $3,500,000.

Cash and Cash Equivalents

        Cash and cash equivalents consist of cash and marketable securities with original maturities of three months or less.

Short-Term Investments

        Short-term investments consist primarily of U.S. government and corporate fixed income securities with original maturities at date of purchase beyond three months and less than 12 months. Such short-term investments are carried at their accreted value as the Company intends to hold these securities to maturity. Also included in short-term investments are corporate fixed income securities with original maturities beyond 12 months for which management will exercise its redemption provision within the next 12 months. Unrealized gains and losses on these securities are not significant. As of December 31, 2001 and 2000, investments are carried at their original cost, which approximates fair market value.

Realization of Long-Lived Assets

        The Company periodically evaluates its long-lived assets, including property and equipment, real estate access rights, and goodwill and other intangible assets, to determine whether events or changes in circumstances have occurred that indicate the remaining asset balances may not be recoverable and an impairment loss should be recorded. Recoverability of assets is measured by comparing the carrying amount of an asset to the undiscounted future cash flows estimated to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair market value of the assets. During the second quarter of 2001, the Company recorded a write-down of $262,336,000 to reduce the carrying amount of long-lived assets to fair market value (Note 3). No such impairment was recorded during the years ended December 31, 2000 and 1999.

Property and Equipment

        Property and equipment are stated at cost and depreciated when placed in service using the straight-line method (Note 4). Interest is capitalized during the construction period of system infrastructure based on the rates applicable to borrowings outstanding during the period. Equipment held under capital lease obligations is amortized over the shorter of the lease term or estimated useful life of the asset. Repair and maintenance costs are expensed as incurred.

Real Estate Access Rights

        The Company has entered into agreements to issue warrants to its real estate partners in conjunction with acquiring real estate access rights. The warrants and the rights associated with the warrants may be adjusted if certain telecommunication license agreements are not executed in accordance with the parameters outlined in the warrant acquisition agreements. Accordingly, the final measurement date for the warrants is the date on which the telecommunication license agreements are

B-54


signed and the real estate partners effectively complete their performance element of the agreement. At the measurement date, the Company measures the fair market value of the warrants based on an acceptable pricing model. This asset is amortized over the term of the related telecommunication license agreement which is generally ten years (Note 3).

Goodwill and Other Intangible Assets

        The excess of the purchase price of the acquired businesses over the fair market value of the identifiable net assets of acquired businesses has been recorded as identifiable intangible assets, including customer lists and assembled workforce, with the remainder recorded as goodwill. Until the second quarter of 2001, the Company amortized goodwill and intangible assets over a three-year period. During the second quarter of 2001, the Company recorded a write-down of long-lived assets, including goodwill and other intangible assets, to reduce such assets to their fair market value (Note 3).

Self-insurance Reserves

        The Company is 100% or partially self-insured for certain employee medical claims. The Company has accrued for costs related to medical claims. At the time of an incident, the Company records a reserve for the incident's estimated outcome, which may be adjusted, as additional information becomes available. Total accrued claims liabilities represent all such reserves and the Company's estimate for incidents which may have been incurred but not reported as of the balance sheet date. Management believes that any additional cost incurred over amounts accrued will not have a material adverse effect on the Company's financial position or results of operations.

Treasury Stock

        Pursuant to a stockholders' agreement, the Company periodically repurchased shares of the Company's common stock. Shares repurchased are accounted for under the cost method.

Revenue Recognition

        Network services revenue includes broadband data, video, voice communication and installation services. Broadband data and video are subscription-based services generally provided to customers under month-to-month contracts. Voice communications and installation services are usage-based services. Installation service fees are non-recurring, non-refundable fees for access to the Company's network. Service revenues are recognized in the month in which the services are provided, except for installation service fees which are deferred and recognized over the estimated customer life. Upon termination of services, any remaining deferred service fees are recognized. Deferred service fees were approximately $135,000 and $1,166,000 at December 31, 2001 and 2000, respectively, and are included in accrued liabilities in the accompanying financial statements.

        Value added service revenue includes web design and consulting, professional services, and web hosting. Such services are recognized upon completion of services.

        During 2000, the Company adopted Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provides additional guidance on revenue recognition as well as criteria for when revenue is generally recognized and earned. The adoption of SAB No. 101 did not have a material effect on the Company's results of operation for the year ended December 31, 2001 and 2000.

B-55


Network Operations

        Network operations include payments to providers of transmission capacity, costs associated with customer care, customer installations, equipment maintenance, payments to real estate owners, property taxes, and content licensing costs. All expenses related to network services are recognized as incurred.

Cost of Value Added Services

        Cost of value added services includes direct costs and internal labor associated with web design and consulting, professional services, and web hosting. All expenses related to value added services are recognized as incurred.

Selling Expense

        Selling expense includes employee salaries, commissions, taxes, benefits, advertising, marketing, and promotional expenses and costs associated with leasing and operating sales demonstration centers.

Income Taxes

        Deferred income tax assets and liabilities are recorded for the differences between the tax and financial reporting basis of the assets and liabilities and are based on the enacted income tax rates which are expected to be in effect in the period in which the difference is expected to be settled or realized. A change in tax laws would result in adjustments to the deferred tax assets and liabilities. Management periodically evaluates whether it is more likely than not that some or all of the deferred tax assets will be realized. Adjustments are made to the related assets carrying values based on this periodic evaluation of realizability (Note 12).

Comprehensive Income (Loss)

        Comprehensive income (loss) is defined as the change in equity (net assets) of a business enterprise during a period as a result of transactions from other events and circumstances from non-owner sources. It consists of net income and other gains and losses affecting stockholders' equity that, under accounting principles generally accepted in the United States, are excluded from net income, such as unrealized gains and losses on investments available for sale, foreign currency translation gains and losses and minimum pension liability. Currency translation is the only item of other comprehensive income impacting the Company.

Net Income (Loss) Per Share

        Net income (loss) per share is presented in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per 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 income or loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock and resulted in the issuance of common stock.

        Restricted stock issued to employees is subject to repurchase by the Company until vested, and such unvested shares are not included in the weighted average number of common shares outstanding for the period. Shares of restricted stock outstanding were 88,000, 818,000, and 2,315,000 and as of December 31, 2001, 2000, and 1999, respectively.

        Options to purchase approximately 2,969,000, 8,738,000, and 1,504,000 shares of common stock, were outstanding as of December 31, 2001, 2000, and 1999, respectively. Warrants to purchase 4,246,000, 7,377,000, and 6,336,000 shares of common stock were outstanding as of December 31, 2001,

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2000, and 1999, respectively. In addition, certain equity instruments are contingently issuable and would be potentially dilutive securities upon issuance (Note 9).

        Diluted EPS are not presented as all potentially dilutive securities would be antidilutive due to the net loss incurred for the years ended December 31, 2001, 2000, and 1999.

Segments

        The Company's chief operating decision maker evaluates performance based upon underlying information of the Company as a whole. There are no additional reporting segments.

International Operations

        The Company recognized a total of $5,232,000, $1,992,000, and $0 of revenue from operations in Canada through its wholly owned subsidiary, ARC Canada, for the years ended December 31, 2001, 2000, and 1999, respectively. Long-lived assets of ARC Canada were $4,802,000 and $18,676,000 as of December 31, 2001 and 2000, respectively.

Use of Estimates in Financial Statements

        The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Management may be required to make significant estimates of, among other things, the fair value of long-lived assets, allowance for doubtful accounts, and amounts recorded for acquisition contingencies. Actual results may differ from those estimates.

Reclassifications

        Certain 2000 and 1999 balances have been reclassified to conform to the current year presentation.

Foreign Currency Translation

        For the Company's Canadian subsidiary, the local currency is the functional currency. All assets and liabilities are translated at exchange rates in effect at the end of the period, and income and expense items are translated at the average exchange rates for the period. Translation adjustments are reported as a separate component of stockholders' equity.

New Accounting Pronouncements

        In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment approach. The Company believes the adoption of SFAS Nos. 141 and 142 will not have a material effect on its financial position or results of operations.

        In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. This standard is effective for fiscal years beginning after June 15, 2002. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and related literature and establishes a single accounting model, based on the framework established in SFAS No. 121, for the

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impairment and disposal of long-lived assets. This standard is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company believes the adoption of SFAS Nos. 143 and 144 will not have a material effect on its financial position and results of operations.

3.    Asset Write-Down:

        During the second quarter of 2001, numerous adverse changes in the Company's industry and the economic environment as a whole, including significant declines in valuation of competitive telecommunications providers, continued weakness in the demand for information technology and telecommunications services, and business failures of several prominent companies in markets similar to the Company's caused the Company to conclude that its prospects for future cash flows had weakened and operating risks had increased. Additionally, during the second quarter of 2001, the Company made certain changes in its operations. Both these external and internal changes triggered a review of long-lived assets, including building and network-related assets, real estate access rights, property and equipment, and goodwill and other intangible assets. This review indicated that undiscounted cash flows expected to be generated by such assets were not sufficient to recover the historical book value of long-lived assets and that such assets should be reduced to fair value. The Company calculated the present value of estimated cash flows to determine management's estimate of fair market value for the building and system infrastructure and real estate access rights. To determine the value of other assets, including system equipment, furniture, fixtures, software, and equipment, the Company used the lower of the historical cost or management's estimate of fair market value. Based on the Company's evaluation of the present value of expected cash flows of its subsidiaries acquired in 2000, the Company concluded that related long-lived assets and goodwill should be written down. The total amount of write down by category is as follows:

 
   Amount of
Asset
Write-Down
Property and equipment—      
System infrastructure   $ 58,108,000
Other assets     78,051,000
Total property and equipment     136,159,000
Real estate access rights     116,449,000
Goodwill     9,728,000
Total   $ 262,336,000

        During 2001 and in connection with cost-cutting measures, the Company discontinued the use of certain software, thus reducing its useful life, which resulted in the recognition of $9,522,000 in accelerated depreciation expense. The Company will continue to evaluate its long-lived assets, including property and equipment and real estate access rights, to determine whether changes in circumstances have occurred that indicate the remaining asset balances may not be recoverable and an impairment loss should be recognized.

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4.    Property and Equipment, net:

        Property and equipment as of December 31 consist of the following:

 
   Average
Estimated
Useful
Lives
(Years)
   2001
   2000
  
Office equipment and information systems   4   $27,982,000   $ 38,526,000  
Furniture and fixtures   7   2,011,000     4,292,000  
Leasehold improvements   5   4,009,000     3,419,000  
System infrastructure   10   7,695,000     30,573,000  
System equipment   5   6,813,000     43,468,000  
Construction-in-progress       1,777,000     82,783,000  
        50,287,000     203,061,000  
Less—Accumulated depreciation and amortization       (24,371,000 )   (20,619,000 )
Property and equipment, net       $25,916,000   $ 182,442,000  

        Capitalized interest for the years ended December 31, 2001, 2000, and 1999, was approximately $1,143,000, $1,150,000, and $0, respectively.

5.    Other Assets, net:

        Other assets primarily include deferred debt issuance costs and long-term deposits as required by lease agreements. Deferred debt issuance was recorded upon issuance of $150,000,000 convertible notes and is being amortized over the life of the related agreement. Unamortized deferred debt issuance costs as of December 31, 2001 and 2000, were approximately $3,072,000 and $4,639,000, respectively, net of accumulated amortization of $837,000 and $358,000, respectively. Deposits required by lease agreements were approximately $4,166,000 and $5,202,000 as of December 31, 2001 and 2000, respectively, and are refundable upon expiration of the related agreements.

6.    Accrued Liabilities:

        Accrued liabilities as of December 31 consist of the following:

 
   2001
   2000
Property and equipment additions   $ 258,000   $ 334,000
General operating expenses     12,297,000     15,707,000
Due to former stockholders of an acquired company     —     1,168,000
Deferred revenue     135,000     1,166,000
Interest     256,000     2,662,000
Accrued liabilities   $ 12,946,000   $ 21,037,000

7.    Debt:

        In March 1999, the Company entered into a credit facility under which the Company could borrow up to $45,000,000 subject to certain conditions. The Company paid an origination fee of $1,350,000, which was fully amortized to interest expense during 2000 and 1999. During June 2000, the Company terminated this facility. No amounts had been drawn under this facility at the date of termination.

        On June 28, 2000, the Company completed the issuance and sale in a private placement of an aggregate of $150,000,000 in principal amount of its 7.50% convertible subordinated notes due June 15, 2007 (the "Notes"). The Company incurred expenses of approximately $4,997,000, of which

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approximately $4,500,000 represented underwriting fees and approximately $497,000 represented other expenses related to the offering. The net offering proceeds to the Company after total expenses were approximately $145,003,000. The Notes may be converted at the option of the holders into shares of the Company's common stock at an initial conversion price of $15.37 per share, which may be adjusted based on certain antidilution provisions in the indenture related to the Notes (the "Indenture"). 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. During 2000, a shelf registration statement on Form S-3 (Commission File No. 333-50026) was filed with the Securities and Exchange Commission registering the Notes for resale, registering the shares of common stock issuable upon conversion of the Notes, and registering shares of common stock as payment-in kind interest on the Notes.

        On May 11, 2001, the Company commenced a tender offer to purchase any and all of the Notes for a purchase price of $280 in cash per $1,000 of principal amount of Notes, plus accrued but unpaid interest on the Notes up to but excluding the date on which the Company deposited the funds with the depositary to purchase the accepted Notes. On June 12, 2001, the Company announced the completion of the tender offer, accepting for purchase $26,400,000 of the aggregate principal amount of the Notes, representing approximately 17.6% of the $150,000,000 aggregate principal amount of the Notes outstanding prior to the tender offer. The Company paid $8,360,000 in cash, including $968,000 for accrued but unpaid interest, to complete the tender offer. An extraordinary gain of $11,718,000, net of $6,037,000 in income taxes, was recognized as a result of the early extinguishment of a portion of the aggregate principal amount of the Notes. The extraordinary gain also includes $486,000 of expenses incurred with the offer and a $767,000 write-off of associated debt issuance costs.

        The Company announced on December 12, 2001, that it had initiated the repurchase of certain of its Notes at a discount rate from the face value of the notes in limited open market or negotiated transactions. The Company accepted for purchase $6,620,000 aggregate in principal amount of the Notes. The Company paid $2,076,000 in cash, including $167,000 for accrued but unpaid interest, to complete the repurchase. An extraordinary gain of $2,992,000, net of $1,541,000 in income taxes, was recognized. The extraordinary gain also includes a $178,000 write-off of associated debt issuance costs.

        Total interest expense incurred during 2001 and 2000 related to the Notes was approximately $9,505,000 and $5,719,000, respectively.

        The Indenture includes a provision requiring the repurchase of the Notes at the option of the holders upon a change in control as defined in the Indenture. Management does not believe that the merger (Notes 1 and 15) is deemed a change in control as defined in the Indenture.

8.    Commitments and Contingencies:

        Outlined below are commitments and contingencies for the Company's operating leases, capital leases, connectivity contracts, legal proceedings, acquisition commitments, and employee retention plan. From time to time, the Company may decide to use cash for early retirement of such commitments and contingencies. As a result of the Company's suspension of retail operations, the Company is continuing its efforts to terminate contractual obligations that are not required in connection with the Company's ongoing business. As a result, certain contractual obligations without future benefit may be terminated which may result in contractual commitments being paid in periods prior to those outlined below, which may accelerate the recognition of these expenses.

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Operating Leases

        The Company has entered into various operating lease agreements, with expirations through 2008, for leased space and equipment. Future minimum lease obligations as of December 31, 2001, related to the Company's operating leases are as follows:

2002   $10,656,000
2003   11,089,000
2004   9,348,000
2005   5,375,000
2006   2,576,000
Thereafter   1,570,000
Total minimum lease obligations   $40,614,000

        During 2001, the Company paid $1,175,000 to settle certain operating leases prior to their expiration, which terminated $9,223,000 in future obligations. Total operating lease expenses for the years ended December 31, 2001, 2000, and 1999, was approximately $8,061,000 (including $1,175,000 of termination fees), $9,321,000, and $1,946,000, respectively.

Capital Leases

        The Company has entered into various capital leases for equipment. Future minimum lease obligations as of December 31, 2001, related to the Company's capital leases are as follows:

2002   $1,014,000  
2003   1,011,000  
2004   875,000  
2005   88,000  
Total minimum lease obligations   2,988,000  
Less—Amounts representing interest   (289,000 )
Present value of minimum lease obligations   2,699,000  
Current maturities   (1,193,000 )
Capital lease obligations, net of current maturities   $1,506,000  

        On October 9, 2001, the Company and its wholly owned subsidiary, Allied Riser Operations Corporation, entered into a settlement and mutual release agreement in connection with certain of its capital lease agreements. Pursuant to the terms of the settlement and mutual release agreement, in exchange for the payment of $12,500,000 by the Company to the lessor, the lessor released the Company and its subsidiaries from any and all obligations to the lessor and its affiliates under the capital lease agreement and amounts payable under various maintenance agreements with respect to equipment leased by the Company or its subsidiaries from the lessor. The Company recognized a gain of $47,752,000 as a result of this settlement. The title to the equipment subject to the capital lease agreements was transferred to the Company pursuant to the settlement, and the lessor has agreed to release all liens on and security interests in such equipment.

Connectivity Contracts

        In order to provide its services, the Company must connect each in-building network to a central facility in each metropolitan area, usually over broadband lines that are leased from other carriers. At this metropolitan hub, the Company aggregates and disseminates network traffic for Internet connectivity. The Company has secured contracts that range from monthly to five years for local transport and up to three years for national intercity transport. The Company incurs fixed monthly charges for local connectivity. For national connectivity, the Company incurs fixed monthly charges plus

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incremental charges for customer usage above a certain volume. In addition, in the event the Company fails to meet its minimum volume commitments for national connectivity, it may be obligated to pay underutilization charges.

        Future minimum obligations as of December 31, 2001, related to the Company's connectivity contracts are as follows:

2002   $2,856,000
2003   1,476,000
2004   517,000
2005   452,000
2006   16,000
Total minimum lease obligations   $5,317,000

        During 2001, the Company paid $1,486,000 to settle certain connectivity contracts prior to their expiration, which terminated $4,506,000 in future obligations. Subsequent to December 31, 2001, the Company paid $350,000 to settle additional connectivity contracts prior to their expiration, which terminated $429,000 in future obligations included in the above table.

Legal Proceedings

        On July 26, 2001, in a case titled Hewlett-Packard Company v. Allied Riser Operations Corporation a/k/a Allied Riser Communications, Inc., Hewlett-Packard Company filed a complaint against the Company's subsidiary, Allied Riser Operations Corporation, in the 95th Judicial District Court, Dallas County, Texas seeking damages of $18,775,000, attorneys' fees, interest and punitive damages relating to various types of equipment allegedly ordered from Hewlett-Packard Company by Allied Riser Operations Corporation. The Company believes this claim is without merit and has filed its answer generally denying Hewlett-Packard's claims. The Company intends to vigorously contest this lawsuit, and no financial provision has been included in the December 31, 2001, financial statements in connection with this litigation.

        On January 16, 2002, the Company received a letter from Hewlett-Packard Company alleging that certain unspecified contracts are in arrears, and demanding payment in the amount of $10,000,000. The letter does not discuss the basis for the claims or whether the funds sought are different from or in addition to the funds sought in the July 26, 2001, lawsuit. The Company, through its legal counsel, has made an inquiry of Hewlett-Packard's counsel to determine the basis for the claims in the letter. Management believes this claim is without merit and intends to vigorously contest this claim. No financial provision has been included in the December 31, 2001, financial statements in connection with this litigation.

        On December 6, 2001, certain holders of the Notes filed notices as a group with the SEC on Schedule 13D including copies of documents indicating that such group had filed a suit against the Company and its board of directors alleging, among other things, breaches of fiduciary duties and requesting injunctive relief to prohibit the Company's merger with Cogent, and alleging default by the Company under the indenture related to the Notes. The plaintiffs amended their complaint on January 11, 2002 and subsequently served it on the Company. On January 28, 2002 the Delaware Chancery Court (the "Court") held a hearing on a motion by the plaintiffs to preliminarily enjoin the merger. On January 31, 2002 the Court issued a Memorandum Opinion denying that motion. The Company continues to believe that these claims are without merit, and intends to continue to vigorously contest this lawsuit. No financial provision has been included in the December 31, 2001, financial statements in connection with this litigation (Note 15).

        On February 21, 2002, the Division of Enforcement of the SEC requested that Cogent voluntarily provide it certain documents related to the fairness opinion delivered to the Company's board of

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directors by the Company's financial advisor, Houlihan Lokey Howard & Zukin on August 28, 2001, and Cogent's Series C preferred stock financing. Cogent and the Company have complied with the request. The SEC has not informed Cogent or the Company as to the reason for its request. However, management believes that the SEC inquiry was caused by the submission of a letter to the SEC by counsel to plaintiffs in the Court case described above questioning the disclosure in the registration statement and prospectus filed in conjunction with the merger of the Company into a subsidiary of Cogent (Note 1).

Acquisition Commitments

        During 2000, the Company completed five acquisitions (Note 11). In connection with these acquisitions, additional amounts were potentially payable to the former owners and employees of the acquired companies and were contingent upon the achievement of certain performance levels. During 2001 and in connection with the disposition of four of the acquired companies (Note 11), the Company paid $780,000 in cash and released from restriction 346,000 shares of common stock as a result of the termination of certain of the employment agreements that provided for such additional contingent payments. Warrants underlying 250,000 shares of common stock, issued during 2000 in connection with acquisitions, were forfeited as a result of the termination of certain employment agreements (Note 9). Additionally, 1,179,000 shares of restricted stock were forfeited by terminated employees which resulted in the reversal of related deferred compensation (Note 10). As of December 31, 2001, the Company had settled all performance-based acquisition commitments.

Employee Retention Plan

        During the third quarter of 2001, the board of directors established an employee retention plan and as part of such plan directed that a pool of up to approximately $5,200,000 be set aside for bonus, severance, and retention payments for remaining employees. All such amounts were expensed during 2001. As of December 31, 2001, the Company had accrued $2,449,000, included in accrued liabilities, for payments to be made after December 31, 2001.

9.    Equity:

Common Stock

        Pursuant to an investment agreement dated November 23, 1998, and in connection with a preferred investment (see below), the Company issued to a group of investors approximately 13,270,000 shares of common stock for $.0015 per share and approximately 7,291,000 shares of common stock for $.0015 per share to a second group of investors in December 1998.

        During 1998, accrued interest totaling $980,000 was contributed by an investor and a real estate owner. As both are related parties of the Company, the contribution was accounted for as a capital transaction and included in the accompanying consolidated statements of stockholders' equity.

        In April 1999, the Company issued 125,000 shares of common stock for consulting services previously received.

        In August 1999, the Company issued 6,059,000 shares of common stock to a group of financial sponsors and to real estate partners in connections with a preferred stock investment (see Preferred Stock).

        On October 29, 1999, the Company raised gross proceeds of approximately $305,470,000 in its initial public offering. The Company sold 16,970,550 shares of common stock at a price of $18 per share.

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        During the years ended December 31, 2001 and 2000, the Company repurchased 1,649,000 and 579,000 shares of unvested restricted common stock, and warrants underlying 3,009,000 and 712,000 shares of stock were exercised (see Warrants). During the year ended December 31, 2001, the Company issued 425,000 shares of common stock from treasury in lieu of cash bonus payments for services rendered in 2000. During the year ended December 31, 2001, the Company issued 32,000 shares of common stock in connection with obligations related to prior acquisitions. During the years ended December 31, 2001 and 2000, 409,000 and 236,000 shares of common stock, respectively, were issued in connection with the Company's employee stock purchase plan. Stock options underlying 1,207,000 and 16,000 shares of common stock of the Company were exercised by employees during the year ended December 31, 2001 and 2000, respectively.

Preferred Stock

        In November and December 1998, the Company issued to groups of investors, 41 and 25 shares of Series A convertible redeemable preferred stock, for $41,000,000 and $25,000,000 in cash, respectively.

        In August 1999, the Company issued 17 shares of Series B preferred stock to a group of financial sponsors and 34 shares of Series B preferred stock to real estate partners and their affiliates for approximately $51,000,000 in cash.

        The holders of the preferred stock were entitled to certain rights including: redemption, conversion, dividends, and liquidation preference, as defined in the investment agreement. As a result of the redemption provision, the preferred stock was classified outside of stockholders' equity (deficit).

        Simultaneous with the Company's initial public offering and pursuant to contractual agreements with the preferred stockholders, all of the outstanding shares of preferred stock were converted into 6,500,000 shares of common stock. Upon the conversion, accrued dividends of $6,904,000 on the preferred stock were waived and recorded as a contribution to capital.

Warrants

        The Company has issued to real estate partners and their affiliates warrants to acquire shares of common stock in exchange for the right, pursuant to telecommunications license agreements, to install its broadband data network in these real estate entities' buildings. The warrants are exercisable upon the occurrence of certain events, as defined in the warrant acquisition agreements.

        The number of warrants the Company is obligated to issue may be adjusted if certain telecommunication license agreements are not executed and delivered in accordance with the parameters outlined in the warrant acquisition agreements. Accordingly, the date for determining the final value of the warrants is the date on which the telecommunication license agreements are signed and delivered, as defined, and the real estate partners effectively complete their performance element of the warrant acquisition agreement. At the measurement date, the Company measured the fair market value of the warrants based on an acceptable pricing model. The warrants also are subject to forfeiture as a result of subsequent events of default by the real estate partners as outlined in the warrant acquisition agreement.

        During the years ended December 31, 2001 and 2000, the Company entered into warrant agreements for the issuance of 40,000 and 1,085,000 shares of common stock, net of adjustments for certain telecommunication license agreements that were not executed and delivered in accordance with parameters outlined in the warrant acquisition agreements, respectively. Warrants underlying 3,009,000 and 712,000 shares of common stock, valued at $56,813,000 and $14,664,000, were exercised during the years ended December 31, 2001 and 2000, respectively.

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        During the years ended December 31, 2001 and 2000, the Company issued warrants underlying 85,000 and 150,000 shares of common stock, respectively, in exchange for services which resulted in an expense of $88,000 and 2,396,000, respectively.

        During the year ended December 31, 2000, the Company issued warrants underlying up to 250,000 shares of common stock in connection with acquisitions. The exercise of these warrants was contingent upon future events and were forfeited during 2001 as a result of the termination of certain employment agreements (Note 8).

        As of December 31, 2001, the Company has entered into warrant acquisition agreements for the issuance of 7,967,000 shares of common stock. As of December 31, 2001, warrants underlying 3,721,000 shares of common stock had been exercised.

10.  Stock Compensation:

Restricted Stock Awards

        During 1998 and early 1999, the Company issued approximately 5,753,000 shares of common stock to management, current and former employees and non-employee stockholders for $.0015 per share. With respect to the stockholders who are employees of the Company, subscription agreements provide that the shares shall be restricted, non-transferable, and subject to repurchase by the Company until vested. Upon issuance of the shares to the employees in 1998, certain shares were vested based on employees' prior service with the Company. Unvested shares vest over four years in equal monthly installments commencing upon their issuance. Pursuant to contractual arrangements, vesting of shares may accelerate upon the occurrence of a qualifying business combination or a combination of a qualifying business combination and termination of employment without cause. The accelerated vesting provisions differ based upon the employee's position with the Company. There are no accelerated vesting provisions related to performance criteria. Upon the resignation or termination of an employee for any reason, all unvested shares will be subject to repurchase by the Company at the price paid by the employee.

        The following table presents the activity related to restricted stock for the years presented:

 
   Granted
   Vested
   Repurchased
   Outstanding
and Unvested
1999   1,143,000   1,122,000   153,000   2,315,000
2000   —   942,000   555,000   818,000
2001   —   179,000   551,000   88,000

        On February 4, 2002, all outstanding restricted stock was released from restriction and converted to common stock of Cogent as a result of the merger with Cogent (Note 1).

Equity Based Compensation Plans

        Effective June 1, 1999, the Company adopted the 1999 Amended and Restated Stock Option and Equity Incentive Plan (the "1999 Plan") under which 5,000,000 shares of common stock are authorized for issuance. Effective June 15, 2000, the Company adopted the Allied Riser Communications Corporation 2000 Stock Option and Equity Incentive Plan (the "2000 Plan") under which 8,500,000 shares of common stock are authorized for issuance (the 1999 Plan and the 2000 Plan, together the "Plans"). The shares authorized under the Plans, subject to adjustments, are available for award to employees, officers, directors, or consultants. Pursuant to the Plans, the Company's board of directors may grant stock options, stock appreciation rights, restricted shares, deferred shares and certain tax offset payments. The terms of any particular grant, including any performance-based requirements, vesting terms and other restrictions are determined by the Board or by the Compensation Committee of the Board. The exercise price of nonstatutory options may be above, at or below fair market value

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of the common stock on the grant date. The exercise price of incentive stock options must not be less than the fair market value on the grant date. The right to purchase shares under the stock options agreements typically vest over a four-year period. The exercise period of options may be set by the Board or the Committee but may not exceed ten years for incentive stock options. As of December 31, 2001, there were 9,255,000 shares available for future grants. No options were granted outside of the Plans.

        The Company accounts for stock options and other employee awards under the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." Had compensation costs for the Plans been determined based on the fair market value of the options as of the grant dates, consistent with the method prescribed in SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net loss applicable to common stock and net loss per common share would have resulted in the pro forma amounts indicated below (dollars in thousands, exception per share data):

 
   2001
   2000
   1999
  
Net loss:              
As reported   $(345,967 ) $(173,408 ) $(63,940 )
Pro forma   (353,198 ) (195,244 ) (66,167 )
Net loss per common share:              
As reported   $(5.79 ) $(3.18 ) $(2.15 )
Pro forma   (5.92 ) (3.58 ) (2.23 )

        No diluted earnings per share are presented as the Company has generated net losses and all potentially dilutive securities would be antidilutive.

        The weighted average fair market value of options granted during each of the years ended December 31, 2001, 2000, and 1999, were $2.14, $6.81, and $13.25, respectively. The fair market value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 
   2001
   2000
   1999
Expected dividend yield   —   —   —
Expected stock price volatility   193%   106%   107%
Average risk-free interest rate   4.80%   6.02%   5.30%
Expected life of options (years)   6   6   6

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        The following table summarizes stock option activity for the year ended December 31, 2001 and 2000:

 
   Options
Outstanding
   Weighted
Average
Exercise
Price
Balance at December 31, 1999   1,504,417   $ 9.0532
Granted—          
  Option price equal to fair market value   6,146,769   $ 9.3198
  Option price greater than fair market value   1,151,414     5.4631
  Option price less than fair market value   1,388,000     1.6250
  Total granted   8,686,183     7.5745
  Exercised   (45,805 )   0.3336
  Canceled   (1,407,258 )   13.1782
Balance at December 31, 2000   8,737,537   $ 6.9645

Granted—
 
 
 
 
 
  Option price equal to fair market value   204,566   $ 0.8851
  Option price greater than fair market value   377,884     2.8142
  Option price less than fair market value   —     —
  Total granted   582,450     2.1367
  Exercised   (1,207,519 )   0.0117
  Canceled   (5,143,014 )   9.2918
Balance at December 31, 2001   2,969,454   $ 5.0824

        As of December 31, 2001 and 2000, 878,208 and 735,601 of options outstanding, respectively, were exercisable. On February 4, 2002, all outstanding options became vested and exercisable as a result of the merger with Cogent (Note 1).

        The following table summarizes information about the Company's outstanding and exercisable stock options at December 31, 2001:

 
   Options Outstanding
    
    
    
 
    
   Options Exercisable
 
    
   Weighted-
Average
Remaining
Contractual
Life (Years)
    
Range of Exercise Prices
   Outstanding
as of
December 31,
2001
   Weighted-
Average
Exercise
Price
   Exercisable
as of
December 31,
2001
   Weighted-
Average
Exercise
Price
  $0.0000—4.9688   2,596,059   8.88   $ 3.5142   735,599   $ 3.4727
  $4.9688—9.9375   78,300   8.69     7.4925   25,701     7.5049
  $9.9375—14.9063   9,500   8.42     12.5000   3,760     12.5000
  $14.9063—19.8750   271,728   8.45     17.8326   106,935     17.8344
  $19.8750—24.8438   1,767   8.15     23.2806   772     23.2808
  $24.8438—29.8125   7,600   8.13     27.3421   3,474     27.3481
  $29.8125—34.7813   2,000   8.33     34.7500   874     34.7500
  $34.7813—39.7500   2,500   8.25     39.7500   1,093     39.7500
    2,969,454   8.83   $ 5.0824   878,208   $ 5.5662

2000 Employee Stock Purchase Plan

        Beginning July 2000, the Company established an employee stock purchase plan, the Allied Riser Communications Corporation 2000 Employee Stock Purchase Plan (the "ESPP"), the terms of which allow qualified employees (as defined) to participate in the purchase of designated shares of the Company's common stock at a price equal to the lower of 85% of the closing price on the first or last

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day of the offering period. Offering periods begin on the first day of each fiscal quarter and end on the last day of each fiscal quarter. Under the ESPP, the Company issued 409,000 and 236,000 shares of common stock during 2001 and 2000 at an average price per share of $1.30 and $2.60, respectively. Effective October 2001, the Company suspended the ESPP.

Compensation Charge

        The Company completed an initial public offering ("IPO") of its common stock on October 29, 1999. The estimated fair market value of the Company's common stock (as implied by the IPO price) exceeded management's determination of fair market value of each stock option grant and restricted stock grant made prior to the IPO. As of December 31, 2000, $3,650,000 of stock compensation recorded upon completion of the IPO was being deferred and amortized over the remaining estimated employee service period. The total compensation charge is reduced if and when employees terminate prior to vesting.

        During the years ending December 31, 2001, 2000, and 1999, certain employees were terminated, resulting in a reduction of $7,041,000, $7,982,000, and $0, respectively, of the deferred compensation recorded upon completion of the IPO. Net amortization expense (reversal of previously recognized amortization expense) related to this deferred compensation was $(3,665,000), $6,022,000, and $14,681,000, for the years ended December 31, 2001, 2000, and 1999, respectively. As of December 31, 2001, the balance of unamortized deferred compensation recorded upon completion of the IPO was $274,000 and is being deferred and amortized over the remaining estimated employee service period.

        In connection with acquisitions of businesses during 2000, the Company entered into various employment agreements with former owners and employees of the acquired companies pursuant to which the Company issued restricted shares of common stock to such persons. As of December 31, 2000, $6,082,000 was being deferred and amortized over the remaining estimated employee service period. During the year ended December 31, 2001, the deferred compensation recorded upon consummation of the acquisitions was reduced by $1,834,000 to reflect the termination of certain of the employment agreements and the stock price as of December 31, 2001. During the year ended December 31, 2001, amortization expense related to this deferred compensation was $4,248,000.

        During 2000, the Company issued approximately 1,388,000 nonstatutory stock options with an exercise price less than fair market value on the date of grant in connection with the employment of senior management. As of December 31, 2000, $3,769,000 was being deferred and amortized over the remaining vesting period. During the year ended December 31, 2001, deferred compensation recorded upon the issuance of the stock options was reduced by $280,000 to reflect the termination of certain employees, and amortization expense related to this deferred compensation was $3,489,000. As of December 31, 2001, all of the related stock options had been exercised.

11.  Acquisitions and Dispositions:

        During the second and third quarters of 2000, the Company acquired all of the outstanding stock of four high-speed data communication and professional services companies and 68% of the outstanding stock of Shared Technologies of Canada (the "acquired companies"). The purchase of each acquired company was accounted for under the purchase method of accounting for business combinations. Accordingly, the accompanying consolidated statements of operations do not include the results of operations related to the acquired companies prior to each of their respective acquisition dates.

        The Company purchased the acquired companies for an initial aggregate purchase price of $16,021,000 in cash, of which $1,168,000 was payable at December 31, 2000, and 129,000 shares of common stock of the Company valued at approximately $4,011,000. The purchase price may be adjusted if certain performance targets are achieved (Note 8). The aggregate fair market value of

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tangible assets acquired was $8,337,000 and liabilities assumed were $12,651,000. The total excess of the purchase price over the fair market value of the net tangible assets for the acquired companies has been allocated to real estate access rights (approximately $8,892,000) with the remainder allocated to goodwill and other intangible assets (approximately $13,652,000). The Company was amortizing goodwill and other intangible assets over a three-year period (Note 3). Real estate access rights are being amortized over the life of the related telecommunication license agreements. The five acquisitions accounted for $12,747,000 and $6,733,000 of the total revenues generated by the Company in 2001 and 2000, respectively.

        The following table presents the unaudited pro forma results of operations of the Company for the years ending December 31, 2000 and 1999, as if these acquisitions had been consummated at the beginning of each period presented. The unaudited pro forma results are prepared for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisitions occurred at the beginning of the periods presented or the results which may occur in the future:

 
   Year Ended December 31,
  
 
   2000
   1999
  
 
   (Unaudited)

  
Revenues   $ 23,034,000   $ 13,018,000  
Net loss before extraordinary items     (178,207,000 )   (64,840,000 )
Net loss applicable to common stock     (178,207,000 )   (71,292,000 )
Net loss per share, basic and diluted     (3.27 )   (2.40 )

        On August 7, 2001, the Company sold its subsidiary, Winterlink, Inc. On September 14, 2001, the Company sold substantially all of the assets and liabilities of its subsidiary, DirectCorporateLink.net, Inc. On October 3, 2001, the Company sold its subsidiary, Rockynet.com, Inc. and on October 4, 2001, the Company sold all of the membership interests of its subsidiary, Netrox, L.L.C. The Company recorded a $1,979,000 loss (included in general and administrative expenses) in connection with the disposition of these data and communication service providers acquired in 2000. The Company does not expect these transactions to have a material impact on the results of its ongoing operations.

12.  Income Taxes:

        The differences between the statutory federal income tax rates and the Company's effective income tax rate for the years ended December 31, are as follows:

 
   2001
   2000
   1999
Computed statutory tax expense   (34.0)%   (34.0)%   (34.0)%
Deferred compensation   0.4%   1.9%   8.7%
Other nondeductible expense   0.4%   0.4%   0.1%
Valuation allowance   33.2%   31.7%   25.2%

        Deferred taxes reflect the impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as incurred by tax laws and regulations.

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        The following table discloses the components of the deferred tax amounts at December 31:

 
   2001
   2000
  
Deferred tax assets-              
Temporary difference for basis in and depreciation of property and equipment   $ 92,228,000   $ 1,682,000  
Start-up costs     1,536,000     2,329,000  
Real estate access rights     7,653,000     5,832,000  
Net operating loss     84,317,000     63,240,000  
Other     3,358,000     1,270,000  
  Total deferred tax assets     189,092,000     74,353,000  
Deferred tax liability     —     —  
Net deferred tax asset     189,092,000     74,353,000  
Less—Valuation allowance     (189,092,000 )   (74,353,000 )
  Net deferred tax amount   $ —   $ —  

        The Company had approximately $248,000,000 of net operating loss carry forward for federal income tax purposes at December 31, 2001. The net operating loss carry forward will expire in the years 2018 through 2021, if not previously utilized. As a result of the merger with Cogent (Note 1), the utilization of net operating loss carry forward will be significantly limited under the Internal Revenue Code Section 382.

        Under existing income tax law, all operating expenses incurred prior to a company commencing its principal operations are capitalized and amortized over a five-year period for tax purposes. On November 23, 1998, the Company commenced its principal operations for tax purposes and no longer capitalizes operating expenses as start-up costs.

        A valuation allowance must be provided when it is more likely than not that some portion of the deferred tax asset will not be realized. Management has decided to record this allowance due to the uncertainty of future operating results. In subsequent periods, the Company may reduce the valuation allowance, provided that utilization of the deferred tax asset is more likely than not, as defined by SFAS No. 109, "Accounting for Income Taxes."

13.  Related Parties:

        The Company has entered into telecommunication license agreements with numerous real estate owners, managers, and certain minority interest owners of STOC ("minority interest owners") to acquire access to and the right to install and operate its broadband data network in their buildings. Most of these real estate owners, managers, and minority interest owners received warrants in connection with this access and nine of these entities purchased equity in the Company (Note 9). In accordance with the telecommunication license agreements, the Company pays fees which vary proportionally (above a fixed minimum) with gross revenues generated in the respective buildings to these owners. In addition, the Company leases office space from numerous real estate owners. Pursuant to these obligations, the Company paid $10,874,000, $4,216,000, and $1,047,000, for rent and fees during the years ended December 31, 2001, 2000, and 1999, respectively. The Company also provides broadband data, video, and voice communication services to certain real estate owners, managers, and minority interest owners.

        One of the Company's initial investors has interests in entities from which the Company periodically purchases fiber-optic cable and other materials and, prior to 2000, purchased insurance and legal services. For the years ended December 31, 2001, 2000, and 1999, the Company had purchases of approximately $767,000, $8,809,000, and $2,451,000, respectively, for fiber-optic cable and $192,000 in 1999 for insurance and legal services.

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        One of the underwriters for the initial public offering described in Note 10 provides financial advisory and consulting services to the Company. Affiliates of this entity own common stock and warrants of the Company.

14.  Quarterly Financial Information (Unaudited):

 
   Three Months Ended
 
   March 31,
2001
   June 30,
2001
   September 30,
2001
   December 31,
2001
 
   (in thousands, except per share data)
Total revenue   $ 7,929   $ 8,573   $ 7,725   $ 1,525
Asset write-down     —     (262,336 )   —     —
Gain on settlement of capital lease obligations     —     —     —     47,752
Operating income (loss)     (42,689 )   (307,104 )   (37,323 )   25,278
Net income (loss) before extraordinary item     (43,310 )   (302,872 )   (39,649 )   25,154
Extraordinary gain from extinguishment of debt, net     —     11,718     —     2,992
Net income (loss)   $ (43,310 ) $ (291,154 ) $ (39,649 ) $ 28,146

Net income (loss) per common share—
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) before extraordinary item   $ (0.75 ) $ (5.02 ) $ (0.66 ) $ 0.42
Extraordinary gain, net     —     0.20     —     0.05
Net income (loss) per common share   $ (0.75 ) $ (4.82 ) $ (0.66 ) $ 0.47

Weighted average number of shares outstanding
 
 
58,121
 
 
60,372
 
 
59,978
 
 
60,329

 
 
Three Months Ended
 
 
   March 31,
2000
   June 30,
2000
   September 30,
2000
   December 31,
2000
  
 
   (in thousands, except per share data)

  
Total revenue   $ 1,358   $ 1,972   $ 4,403   $ 6,599  
Operating loss     (41,194 )   (46,933 )   (49,347 )   (44,809 )
Net loss     (37,025 )   (44,068 )   (47,217 )   (45,098 )
Net loss applicable to common stock   $ (37,025 ) $ (44,068 ) $ (47,217 ) $ (45,098 )
Net loss per common share   $ (.69 ) $ (.81 ) $ (.87 ) $ (.81 )

Weighted average number of shares outstanding
 
 
53,318
 
 
54,272
 
 
54,565
 
 
55,644
 

15.  Subsequent Events:

        On March 25, 2002, certain of the holders of the Company's 7.50% convertible subordinated Notes asserted that the merger with Cogent (Note 1) constituted a change of control, and as a result, an event of default had occurred under the indenture. On March 27, 2002, based on such assertions, the Trustee under the indenture notified Cogent that the principal amount of the Notes and accrued interest is immediately due and payable. Management, after consultation with its legal advisors, does not believe that the merger qualifies as a change in control as defined in the indenture and is vigorously disputing the noteholders' assertion. However, in the event that the merger is deemed to be a change in control, the Company could be required by the noteholders to repurchase the $116,980,000 in aggregate principal amount of the Notes plus accrued interest. If the Company were required to repurchase the Notes, such event would have a material adverse impact on the financial position of the Company.

        On March 27, 2002, certain holders of the Company's Notes filed an involuntary bankruptcy petition under Chapter 7 of the United States Bankruptcy Code against Allied Riser in United States Bankruptcy Court for the Northern District of Texas, Dallas Division. Management, after consultation with its legal advisors, believes that the claim is without merit and intends to vigorously contest it.

16.  Additional Subsequent Event:

        The Company is involved in a dispute with its former landlord in Dallas, Texas. The Company terminated the lease in March 2002, and the dispute is over whether the Company had the right to do so. The landlord has alleged that a default under the lease has occurred. The Company has informed the landlord that the lease was terminated as provided by its terms.

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors
NetRail, Inc.
Atlanta, Georgia

        We have audited the accompanying balance sheet of NetRail, Inc. as of December 31, 1999, and the related statements of operations, stockholders' equity (capital deficit) and cash flows for the year ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

        We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NetRail, Inc. at December 31, 1999, and the results of its operations and its cash flows for the year ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America.

        The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plan in regards to these matters is also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Atlanta, Georgia
March 24, 2000
(except for Note 12 which
is as of August 31, 2000)

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NETRAIL, INC.
BALANCE SHEET
DECEMBER 31, 1999

Assets (Notes 2, 4 and 12)        
Current        
Cash and cash equivalents   $ 185,007  
Receivables:        
  Trade, net of allowance of $119,000     207,697  
  Shareholder     107,580  
  Subscriptions receivable for debentures     225,000  
Advances to employee     125,000  
Prepaid line costs     495,668  
Other prepaid expenses     93,906  
Total current assets     1,439,858  
Property and equipment (Note 5)        
Leasehold improvements     704,619  
Computer equipment     1,039,482  
Capitalized equipment leases     13,319,716  
Furniture and equipment     73,385  
      15,137,202  

Less accumulated depreciation
 
 
(3,032,822
)
      12,104,380  

Goodwill, net
 
 
1,430,000
 
Deposits     434,822  
Other     93,750  
    $ 15,502,810  

See accompanying notes to financial statements.

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NETRAIL, INC.
BALANCE SHEET
DECEMBER 31, 1999

Liabilities and Stockholders' Equity (Capital Deficit)        
Current        
  Subordinated convertible debentures (Note 3)   $ 9,500,000  
  Convertible notes payable due JAFCO (Note 4)     1,782,334  
  Accounts payable     1,373,822  
  Accrued interest     1,533,439  
  Accrued other     216,172  
  Current maturities of notes payable due Ascend (Note 5)     1,228,500  
Current maturities of capitalized lease obligations (Note 8)     1,702,044  
Total current liabilities     17,336,311  
Notes payable due Ascend, less current maturities (Note 5)     3,771,500  
Capitalized lease obligations, less current maturities (Note 8)     11,137,793  
Total liabilities     32,245,604  
Commitments (Note 8)        
Series A convertible redeemable preferred stock (Notes 4, 6, and 12) 10% cumulative; $0.01 par value; 7,500,000 shares authorized        
  Class I — 1,136,438 shares outstanding     4,067,166  
  Class II — no shares issued or outstanding     —  
  Class III — no shares issued or outstanding     —  
      4,067,166  

Stockholders' equity (capital deficit) (Note 7)
 
 
 
 
Common stock, $.01 par value, 45,000,000 shares authorized; 6,912,546 shares issued and outstanding (Note 12)     69,125  
  Additional paid-in capital     1,884,157  
  Accumulated deficit     (22,763,242 )
Total stockholders' equity (capital deficit)     (20,809,960 )
    $ 15,502,810  

See accompanying notes to financial statements.

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NETRAIL, INC.
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999

Revenues (Note 2)   $ 1,715,711  
Operating expenses:        
Network operations     9,663,343  
Selling, general and administrative     4,333,037  
Depreciation and amortization     2,997,995  
      16,994,375  

Operating loss
 
 
(15,278,664
)
Interest expense     2,100,326  
Net loss     (17,378,990 )
Accretive dividend (Note 6)     48,000  
Cumulative dividend (Note 6)     317,000  
Net loss available to common shareholders   $ (17,743,990 )

See accompanying notes to financial statements.

B-75


NETRAIL, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(CAPITAL DEFICIT)
YEAR ENDED DECEMBER 31, 1999

 
   Shares of
Common Stock
   Common
Stock
   Additional
Paid-in
Capital
   Accumulated
Deficit
   Total
  
Balance, at December 31, 1998   6,912,546   $ 69,125   $ 1,609,157   $ (5,336,252 ) $ (3,657,970 )
Issuance of stock warrants   —     —     275,000     —     275,000  
Accretion of liquidation preference (Note 6)   —     —     —     (48,000 )   (48,000 )
Net loss   —     —     —     (17,378,990 )   (17,378,990 )
Balance, at December 31, 1999   6,912,546   $ 69,125   $ 1,884,157   $ (22,763,242 ) $ (20,809,960 )

See accompanying notes to financial statements.

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NETRAIL, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999

Operating activities        
Net loss   $ (17,378,990 )
Adjustments to reconcile loss to cash used by operating activities:        
  Depreciation and amortization     2,997,995  
  Allowance for doubtful accounts     77,000  
  Imputed interest expense     100,000  
  Other     31,250  
  Change in operating assets and liabilities:        
    Accounts receivables     (174,598 )
    Other receivables     7,037  
    Advances to employee     (250,000 )
    Prepaid expenses and other     (578,023 )
    Accounts payable     574,032  
    Accrued expenses     1,688,355  
Cash used by operating activities     (12,905,942 )
Investing activities        
Property and equipment additions     (859,074 )
Deposits     (387,642 )
Cash used by investing activities     (1,246,716 )
Financing activities        
Proceeds from debt     14,668,200  
Repayment of debt     (487,000 )
Principal payments on capitalized leases     (146,020 )
Cash provided by financing activities     14,035,180  
Net change in cash and cash equivalents     (117,478 )
Cash and cash equivalents, beginning of period     302,485  
Cash and cash equivalents, end of period   $ 185,007  

See accompanying notes to financial statements.

B-77


NETRAIL, INC.
NOTES TO FINANCIAL STATEMENTS

1.    Summary of Significant Accounting Policies

Nature of Operations and Basis of Presentation

        NetRail, Inc., a Delaware corporation ("NetRail" or the "Company") is a tier-one Internet data communications carrier providing wholesale access to Internet service providers. The Company is based in Atlanta, Georgia and is in the process of completing the build-out of its national network. The Company currently offers service in approximately 40 cities throughout the United States.

        The Company was organized in 1994 as NetRail, Inc., a Virginia Corporation ("NetRail of Virginia"), based in Washington, D.C. On October 15, 1997, Maxnet, Inc., a Georgia Corporation, acquired 95% of the outstanding share capital of NetRail of Virginia. On December 24, 1997, NetRail was incorporated in the state of Delaware, and, on December 29, 1997, NetRail of Virginia was merged with and into NetRail with NetRail being the surviving Corporation.

Significant Business Risks

        The Company's operations are subject to a number of significant risks and uncertainties, including those associated with significant indebtedness and the ability to meet obligations; continuing losses, negative cash flow and fluctuations in operating results; funding expansion; acquisitions and strategic alliances, including their integration; managing rapid growth and expansion; acquisition and utilization of bandwidth; dependence on key personnel; dependence on suppliers; financing arrangement terms that may restrict operations; possible Year 2000 issues; regulatory issues; competition in the Internet services industry; technology trends and evolving industry standards; and delivering reliable service. The Company's inability to effectively manage these significant business risks could have a material adverse effect on future results of operations or financial condition.

Use of Estimates

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

Revenue Recognition

        Revenue and related direct costs from customer contracts are recognized ratably over the terms of the contracts, which are generally one to three years in length. Cash received in advance of revenues earned is recorded as deferred revenue.

Advertising Costs

        Advertising costs are expensed as incurred and amounted to $182,100 in 1999.

Cash and Cash Equivalents

        All highly liquid investments with an original maturity of three months or less are classified as cash equivalents.

Concentrations of Credit Risk and Significant Customers

        Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company's cash and investment policies limit investments to short-term, investment grade instruments. Concentrations of credit risk

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with respect to accounts receivable are limited due to the large number and geographic dispersion of customers comprising the Company's customer base.

        During 1999, one customer accounted for approximately $290,000 or 17% of aggregate revenue.

Property and Equipment

        Property and equipment is recorded at cost less accumulated depreciation, which is provided on the straight-line method over the estimated useful lives of the assets as follows: computer equipment, furniture and fixtures are depreciated over five to ten years; leasehold improvements are amortized over the shorter of the life of the lease or ten years; assets under capital leases are depreciated over the shorter of the life of the lease or five years.

        The Company finances most of its data communications equipment and other fixed assets under capital lease agreements. The assets and liabilities under capital leases are recorded at the lesser of the present value of aggregate future minimum lease payments or the fair value of the assets under lease.

Goodwill

        Goodwill represents the excess of cost over the fair value of assets acquired (refer to Nature of Operations and Basis of Presentation). The Company reviews goodwill to assess recoverability based upon undiscounted cash flow analysis. Impairment, if any, is measured based upon discounted cash flow analyses and is recognized in operating results in the period in which an impairment in value is determined. Goodwill is amortized over seven years.

Long-lived Assets

        The Company periodically assesses whether there has been a permanent impairment of its long-lived assets, in accordance with Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. When any such impairment exists, the related assets will be written down to fair value.

Income Taxes

        The Company accounts for income taxes under the asset and liability method which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. The Company provides a valuation allowance on net deferred tax assets when management concludes that it is more likely than not that such assets will not be realized.

Stock Compensation

        The Company accounts for its stock option plans under APB Opinion No. 25, "Accounting for Stock Issued to Employees". Pro forma information regarding net income as calculated under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," is disclosed herein. (See Note 9).

2.    Future Prospects

        The Company has incurred significant operating losses and absorbed significant cash in its operating activities in 1999 and has a working capital deficiency and a net capital deficiency at December 31, 1999. These operating losses and operating cash flow deficiencies are expected to continue in the foreseeable future until such time as the build-out of the Company's national network is completed and the Company is able to fully implement its business plan. The foregoing matters raise substantial doubt about the ability of the Company to continue as a going concern. Management's plans include raising additional financing to fund the completion of the Company's national network, repay short-term obligations, fund current operating losses and provide working capital. There can be no

B-79


assurances, however, that the Company will obtain the necessary financing or, with such financing, will achieve profitability.

        The accompanying financial statements do not include any adjustments relating to the recoverability and classifications of recorded asset amounts or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.

3.    Subordinated Convertible Debentures

        In August and November 1999, the Company issued, in four separate closings, an aggregate of $9,500,000 in Subordinated Convertible Notes (the "Notes") to selected accredited investors. The Notes are subordinated in payment of principal and interest to the Company's obligations to its senior lender, Ascend Communications, Inc. (Note 5).

        The Notes issued in August 1999 (the "August Notes") aggregated $6,000,000 and bear interest at 12% per annum. The August Notes were scheduled to mature on October 25, 1999, subject to the Company's right to extend the maturity date until February 28, 2000. The Company exercised its right to extend the maturity date to February 28, 2000 and, subsequently, the Company and the Note holders agreed to extend the maturity date to June 30, 2000. The August Notes are convertible into the Company's Series A Preferred Stock, Class II at a rate of either $1.50 per share (for two Note holders who are members of the Company's Board) or $1.38 per share (for other Note holders, as adjusted).

        The Notes issued in November 1999 (the "November Notes") aggregated $3,500,000 and bear interest at 10% per annum. The November Notes were scheduled to mature 90 days after issuance, subject to the Company's right to extend the maturity date until June 30, 2000. The Company exercised its right to extend the maturity date to June 30, 2000. The November Notes are convertible into the Company's Series A Preferred Stock, Class II at a variable conversion rate to be determined upon the completion of an anticipated venture capital offering in 2000.

        In connection with the issuance of the Notes, warrants to acquire an aggregate of 436,455 shares of the Company's common stock were granted to noteholders at various exercise prices approximating the then fair value of the common stock. A total of $275,000 was assigned to the value of the common stock warrants, which is being reflected as additional interest cost during the term of the Notes.

4.    Convertible Notes Payable Due JAFCO

        On May 13, 1998, the Company received $495,000 in proceeds from the issuance of a 10% secured convertible promissory note payable to JAFCO. Upon the Company's receipt and issuance of at least $2 million in preferred stock, the $495,000 convertible note automatically converts into preferred stock on the same terms and conditions and at the same per share rate as the preferred stock issued, otherwise, all principal and interest was scheduled to become due and payable on August 14, 1998. The convertible note is collateralized by substantially all assets of the Company. In August 1999, the $495,000 note was converted to Series A preferred stock.

        During 1999, JAFCO advanced $2,792,000 in cash to the Company, of which $1,009,666 was converted to Series A preferred stock. At December 31, 1999, $1,782,334 of such advances remain outstanding. These advances are payable upon demand and bear interest at 8%.

5.    Notes Payable Due Ascend

        On June 26, 1998, The Company obtained a $5 million working capital facility in the form of a secured promissory note (the "Note") from Ascend Communications, Inc. ("Ascend"), the Company's principal supplier of data communications equipment. The terms of the Note provided for an initial funding of $3 million in 1998 with the remaining funding of $2 million in 1999.

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        Interest on the advances accrues at the prime rate of interest and is payable monthly. Principal on the $3 million advance is payable in 30 monthly installments, based on a five-year amortization term, with the first installment due in the seventh month after the date of the first advance. Principal on the $2 million advance is payable in 24 monthly installments, based on a five year amortization term, with the first installment due in the seventh month after the date of the first advance. Principal and accrued interest becomes immediately due and payable on the earlier of the effective date of an Initial Public Offering or the date of a Change of Control, as defined. The advances under the Note are collateralized by a security interest in all goods and equipment financed by the lender under the Note. At December 31, 1999, the Company had advances outstanding of $5 million.

        In connection with entering into the Note, the Company issued 180,000 warrants to acquire 180,000 shares of common stock at $3.33 per share, adjustable for dilutive issuances. An additional 120,000 warrants to acquire 120,000 shares of common stock at $4.33 per share were issued in February 1999 in connection with a revision of certain repayment terms under the Note. The exercise price of the warrants exceeds the fair value of the Company's common stock at the date such warrants were issued, accordingly, no value has been assigned to the warrants for financial reporting purposes.

        At December 31, 1998, the Company was in default of the Note and, separately, in default of its capital lease obligations with Ascend. On October 19, 1999, the Company entered into a forebearance agreement with Ascend whereby Ascend agreed to restructure the payment terms under the Note to defer the commencement of the scheduled due dates for principal and interest payments until June 1, 2000. In connection with the foregoing, the Company will be required to make a single lump sum payment of $1.5 million to Ascend in May 2000, which is to be applied first to outstanding interest in arrears, second to outstanding capital lease obligations in arrears, and finally to future installments due under the Note.

        Future minimum principal payments under the terms of the restructured note are as follows:

Year
   Amount
2000   $ 1,228,500
2001     878,000
2002     2,893,500
    $ 5,000,000

        The Company is currently in negotiations with Ascend regarding the nature, amount and repayment terms of the existing financing arrangements as well as possible future financing arrangements.

6.    Series A Convertible Redeemable Preferred Stock

        The Company is authorized to issue up to 22,500,000 shares of its convertible redeemable preferred stock under three designated classes as follows: Series A Preferred Stock Class I—7,500,000 shares authorized; Series A Preferred Stock Class II—7,500,000 shares authorized; Series A Preferred Stock Class III—7,500,000 shares authorized.

Series A Preferred, Class I

        On December 30, 1997, the Company issued 2,058,000 shares of Series A Convertible Redeemable Preferred Stock ("Redeemable Preferred Stock") at a price of $1.10 per share (liquidation value of $1.26 per share) for aggregate proceeds of $2,264,000. This Redeemable Preferred Stock was subsequently designated as Series A Preferred, Class I. Each preferred share is convertible into common stock on a one-for-one basis, subject to certain antidilution provisions. Dividends are payable only when, as and if declared by the Board of Directors at a rate of 10%, as amended, and are

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cumulative. The Redeemable Preferred Stock may be redeemed, at the option of the holder, in three annual installments beginning on the fifth anniversary of the original issue date.

        In August 1999, the Company issued an additional 1,351,314 shares of its Series A Preferred, Class I Redeemable Preferred Stock in exchange for the conversion of $1,707,166 of notes payable.

        At December 31, 1999, the aggregate liquidation value of the Series A, Class I Preferred Stock amounted to $4,898,100 including cumulative dividends-in-arrears of $591,000.

Series A Preferred, Class II

        At December 31, 1999, none of the Series A Preferred, Class II stock has been issued. These shares are being reserved for issuance in the event the holders of the Subordinated Convertible Debentures exercise their conversion rights (Note 3).

Series A Preferred, Class III

        At December 31, 1999, none of the Series A Preferred, Class III stock has been issued (Note 12).

7.    Equity Transactions

        During 1999, the Company issued an aggregate of 1,606,455 common stock warrants, including 1,050,000 issued to a senior officer of the Company (Notes 3, 5, and 9).

8.    Commitments

(a)
Leases

        The Company leases certain office facilities and equipment. Commitments for minimum rentals under non-cancelable leases at the end of 1999 are as follows:

 
   Capitalized
Leases
   Operating
Leases
2000   $ 3,127,370   $ 300,488
2001     6,647,944     305,932
2002     4,781,922     307,390
2003     1,144,875     314,040
2004     —     159,678
Thereafter     —     175,432
Total minimum lease payments     15,702,111   $ 1,562,960
Less amount representing interest     2,862,274      
Present value of net minimum lease payments   $ 12,839,837      

        Rent expense for 1999 was approximately $554,000.

(b)
Reseller Agreement

        In November 1999, the Company entered into a reseller agreement, which provides the Company with certain DSL internet access. The Company has committed to provide a total of 25,000 customer DSL circuits through December 31, 2000, with minimum quarterly commitment goals. To the extent that such commitment goals are not met, the Company is required to pay $20 per month for each additional circuit required to meet the minimum circuit level. The maximum amount payable under the minimum commitment requirement is approximately $2,250,000.

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(c)
Employment Agreements

        The Company has entered into employment agreements with certain executives which provide for, among others things, base salary, incentive compensation, stock options and severance considerations.

9.    Stock Based Compensation

        During 1998, the Company adopted The 1998 Stock Option Plan (the "1998 Plan"). The 1998 Plan provides for the granting to key employees of either incentive stock options or nonqualified stock options to purchase shares of the Company's common stock reserved for issuance under the 1998 Plan.

        Under the 1998 Plan, 4,500,000 shares of common stock of the Company have been reserved for option grants. The exercise price of all options shall be the fair market value of the common stock as of the option grant date. Options vest 25% after twelve full months of continuous service and ratably thereafter with full vesting after 57 months.

        A summary of stock option activity is as follows:

 
   Shares
   Weighted
Average
Exercise
Price
Outstanding as of December 31, 1998   519,000     0.48
Granted   1,597,200     1.63
Exercised   —     —
Cancelled   (90,000 )   0.48
Outstanding as of December 31, 1999   2,026,200   $ 1.39

        During 1999, the Company issued warrants to a senior officer, in connection with his employment, to purchase 1,050,000 shares of the Company's common stock at a price of $1.67 per share. The warrants are exercisable over five years. The warrants vest as follows: (a) 600,000 vest upon issuance; (b) 450,000 vest upon the closing of a corporate transaction as defined.

        The weighted average fair value of options and warrants granted during the year ended December 31, 1999 was $0.81. The weighted average remaining life of options and warrants outstanding at December 31, 1999 was 4 years. The range of exercise prices was $0.48 to $1.67. As of December 31, 1999, options and warrants of 866,700 shares were exercisable.

        The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized for stock options granted. Had compensation cost been determined based on the fair value at the grant date for awards in 1998 and 1999, consistent with the provisions of the Standard, the Company's pro forma net loss would have been increased by $540,000 to $17,918,000.

        The fair value of stock options used to compute pro forma net loss applicable to common shareholders is the estimated present value at grant date using the Black-Scholes option-pricing model with the following weighted average assumptions for 1999, expected volatility of 60%; a risk free interest rate of 6.2%; expected option life of 5 years; and dividend yield of 0.00%.

10.  Income Taxes

        The Company has incurred significant operating losses and tax losses in all periods presented, accordingly, no income taxes have been incurred during any of the reporting periods. As of December 31, 1999, the Company has available approximately $20 million of net operating loss carryforwards available to offset future taxable income, which expire in 2014, and which give rise to a notional deferred tax asset of approximately $8 million. The Company has provided a 100% valuation

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allowance against this deferred tax asset as management is unable to determine that it is more likely than not that such deferred tax asset will be realized.

11.  Supplemental Cash Flow Information

        During 1999, debt was converted to Series A Preferred Stock in the amount of $1,707,166 and capitalized lease obligations were assumed in the amount of $12,474,105.

        Cash paid for interest was $703,512 in 1999.

12.  Subsequent Events

        During February 2000, the Company issued approximately $10 million of its Series A Preferred Stock, Class III, at a price of $10 per share. The preferred stock is convertible at the option of the holder, into common stock, at a price per share equal to the greater of (a) $5 per share or (b) $1 per share less than the price at which the Company sells its common stock in its next sale of such securities including the sale of at least $10 million liquidation amount. The preferred stock is redeemable, at the option of the holders of at least two-thirds of the outstanding shares of preferred stock, beginning five years from the date of issuance.

        In August 2000, the Company approved a 3 for 1 common stock split. The stock split has been reflected in the accompanying financial statements, and all applicable references to the number of common shares have been restated. Appropriate adjustments have been made in the conversion ratios of shares of convertible preferred stock and in the exercise price and number of shares subject to stock options.

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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Shareholders of NetRail, Inc.
Atlanta, Georgia

        We have audited the accompanying consolidated balance sheet of NetRail, Inc. and Subsidiaries (a Delaware corporation) as of December 31, 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

        We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NetRail, Inc. and Subsidiaries at December 31, 2000, and the consolidated results of their operations and their cash flows for the year ended December 31, 2000, in conformity with accounting principles generally accepted in the United States.

        The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has suffered recurring losses from operations, has a capital deficiency and is in Chapter 11 bankruptcy. These matters raise substantial doubt about its ability to continue as a going concern. Management's plan in regards to these matters is also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Atlanta, Georgia
November 14, 2001

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NETRAIL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET

 
   As of December 31, 2000
  
 
   (In thousands, except share amounts)

  
Assets        
Current        
Cash and cash equivalents, including $2,600 of restricted cash   $ 15,430  
Receivables:        
  Trade, net of allowance of $1,213     1,547  
  Prepaid and other     5  

Total current assets
 
 
16,982
 
Property and equipment:        
Capitalized equipment leases     28,025  
Less: accumulated depreciation     (8,611 )
      19,414  

Other
 
 
14
 
Total Assets   $ 36,410  

Liabilities and Stockholders' Equity
 
 
 
 
Current        
Accounts payable and accrued liabilities   $ 4,937  
Line of credit     2,500  
Capital lease obligations     25,685  
Current maturities of notes payable     1,834  
Total current liabilities   $ 34,956  
Commitments and contingencies        
Stockholders' Equity        
Series A convertible preferred stock 10% non-cumulative; $0.01 par value; 11,000,000 shares authorized 4,056,222 shares outstanding; liquidation preference of $26,941     41  
Series B convertible preferred stock 10% non-cumulative; $0.01 par value; 8,000,000 shares authorized 4,850,000 shares issued and outstanding; liquidation preference of $52,500     49  
Other preferred stock; 6,000,000 shares authorized zero shares issued and outstanding     —  
Common stock, $.01 par value, 225,000,000 shares authorized; 8,406,237 shares issued and outstanding     84  
Additional paid-in capital     78,102  
Accumulated deficit     (76,822 )
Total stockholders' equity     1,454  
Total liabilities and stockholders' equity   $ 36,410  

See auditors' report and accompanying notes.

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NETRAIL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS

 
   Year Ended
December 31, 2000
  
 
   (In thousands)

  
Revenues   $ 9,524  

Operating expenses:
 
 
 
 
Network operations     30,960  
Selling, general and administrative     18,711  
Impairment of long-lived assets     11,946  
Depreciation and amortization     1,023  
Total operating expenses     62,640  
Operating loss     (53,116 )
Other income (expenses)        
Interest expense     (3,082 )
Gain on disposal of fixed assets     1,119  
Interest income     1,068  
      (895 )

Net loss before tax
 
 
(54,011
)
Provision for income tax     —  
Net loss   $ (54,011 )

See auditors' report and accompanying notes.

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NETRAIL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2000
(In thousands, except share amounts)

 
   Shares of
Common
Stock
   Common
Stock
   Additional
Paid-in
Capital
   Series A
Preferred
Stock
Shares
   Series A
Preferred
Stock
Amount
   Series B
Preferred
Stock
Shares
   Series B
Preferred
Stock
Amount
   Accumulated
Deficit
   Total
Stockholders'
Equity
  
Balance December 31, 1999   6,912,546   $ 69   $ 1,884   1,136,438   $         $     $ (22,763 ) $ (20,810 )
Issuance of Series A Class II Preferred Stock                   260,844                         $ —  
Issuance of Series A Class III Preferred Stock                   1,000,000                         $ —  
Issuance of Series A Class IV Preferred Stock                   1,162,940                         $ —  
Issuance of Series A Class V Preferred Stock                   496,000                         $ —  
Issuance of Series B Preferred Stock               47,767             4,850,000     49         $ 47,816  
Amendment to articles of incorporation               24,861         41                   $ 24,902  
Exercise of stock options   76,500     —     37                             $ 37  
Issuance of common stock   1,417,191     15     3,755                             $ 3,770  
Accretion of dividends               48                         (48 ) $ —  
Repurchase of Ascend Warrants               (250 )                           $ (250 )
Net loss                                         (54,011 ) $ (54,011 )

Balances December 31, 2000
 
8,406,237
 
$
84
 
$
78,102
 
4,056,222
 
$
41
 
4,850,000
 
$
49
 
$
(76,822
)
$
1,454
 

See auditors' report and accompanying notes.

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NETRAIL, INC. AND SUBSIDIARIES
STATEMENT OF CASH FLOWS

 
   Year Ended
December 31,
2000
  
 
   (in thousands,
except share amounts)

  
Operating activities        
Net loss   $ (54,011 )
Adjustments to reconcile net loss to cash used by operating activities:        
  Depreciation and amortization     7,051  
  Gain on retirement     (1,119 )
  Impairment of long-lived assets     11,946  
  Allowance for doubtful accounts     (1,171 )
  Change in operating assets and liabilities:        
    Receivables     (168 )
    Prepaid and other     1,223  
    Accounts payable & accrued liabilities     1,874  

Cash used by operating activities
 
 
(34,375
)

Investing activities
 
 
 
 
Property and equipment additions     (8,462 )
Investment in related party     (2,500 )
Cash used by investing activities     (10,962 )

Financing activities
 
 
 
 
Proceeds from line of credit     2,500  
Proceeds from borrowings of debt, net     1,693  
Proceeds from common stock issued     37  
Proceeds from preferred stock issued, net     59,101  
Principal payments on capitalized leases     (2,749 )
Cash provided by financing activities     60,582  
Net change in cash and cash equivalents     15,245  
Cash and cash equivalents, beginning of year     185  
Cash and cash equivalents, end of year   $ 15,430  

Cash paid for interest $4 million
 
 
 
 

Supplemental Disclosure of Non-Cash Activities

Issuance of 1.8 million shares of Series A preferred stock in exchange for retirement of $9.5 million of debt.

Issuance of 1.4 million shares of common stock in exchange for retirement of $3.5 million of debt and $220 of accrued interest.

Capital lease obligations incurred—$17.3 million

See auditors' report and accompanying notes.

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NETRAIL, INC. AND SUBSIDIARIES
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000

1.    Summary of Significant Accounting Policies

Nature of Operations and Basis of Presentation

        During 2000, NetRail, Inc., a Delaware corporation ("NetRail" or the "Company") was a tier-one Internet data communications carrier providing wholesale access to Internet service providers. The Company was based in Atlanta, Georgia. The Company offered service in approximately 40 cities throughout the United States. In July 2001 the Company filed for bankruptcy protection under Chapter 11 of the U.S Bankruptcy Code.

        The Company was organized in 1994 as NetRail, Inc., a Virginia Corporation ("NetRail of Virginia"), based in Washington, D.C. On October 15, 1997, Maxnet, Inc., a Georgia Corporation, acquired 95% of the outstanding share capital of NetRail of Virginia. On December 24, 1997, NetRail was incorporated in the state of Delaware, and, on December 29, 1997, NetRail of Virginia was merged with and into NetRail with NetRail being the surviving Corporation.

Significant Business Risks, Chapter 11 Bankruptcy Filing and Asset Impairment

        The Company's operations are subject to a number of significant risks and uncertainties, including those associated with significant indebtedness and the ability to meet obligations; continuing losses, negative cash flow and fluctuations in operating results; funding expansion; acquisitions and strategic alliances, including their integration; managing rapid growth and expansion; acquisition and utilization of bandwidth; dependence on key personnel; dependence on suppliers; financing arrangement terms that may restrict operations; regulatory issues; competition in the Internet services industry; technology trends and evolving industry standards; and delivering reliable service. The Company's inability to effectively manage these significant business risks could have a material adverse effect on future results of operations or financial condition.

        The Company has incurred significant operating losses and absorbed significant cash in its operating activities and has a working capital deficiency and a net capital deficiency at December 31, 2000. These operating losses and operating cash flow deficiencies continued into 2001. The foregoing matters raised substantial doubt about the ability of the Company to continue as a going concern. Management's plans included obtaining additional financing to fund the Company's operating losses and working capital requirements and were planning on completing a merger with 360 Networks, Inc. ("360").

        In July 2001 the Company filed for bankruptcy protection under Chapter 11 of the U.S Bankruptcy Code. In September 2001, certain of the Company's assets (including selected accounts receivable and equipment), and contracts, (including peering arrangements and selected customer contracts), were sold to Cogent Communications Group, Inc. ("Cogent") for approximately $12 million in cash. The Company ceased operations in September 2001 and the NetRail estate began distributing the remaining assets to the Company's creditors under the supervision of the bankruptcy court.

        The Company has two wholly-owned subsidiaries, NetRail Colocation Co., and NetRail Leasing Company. The stock of these subsidiaries was sold to Cogent in September 2001.

Segments

        The Company's chief operating decision maker evaluates performance based upon underlying information of the Company as a whole. There are no additional reporting segments.

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Principles of Consolidation

        The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts of the Company and its subsidiaries. All significant inter-company balances and transactions have been eliminated in consolidation.

Revenue Recognition

        Revenue is recognized as the related services are provided. Cash received in advance of revenues earned is recorded as deferred revenue.

Advertising Costs

        Advertising costs are expensed as incurred and amounted to $304,000 in 2000.

Cash and Cash Equivalents

        All highly liquid investments with an original maturity of three months or less are classified as cash equivalents.

Concentrations of Credit Risk

        Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company's cash and investment policies limit investments to short-term, investment grade instruments. The Company's cash balances at each financial institution exceed the FDIC insured limitation or are held at institutions that are uninsured. Cash in excess of FDIC insurance limitation was approximately $13.5 million at December 31, 2000. The accounting loss due to credit risk on the accounts receivable is the balance of the accounts receivable less the allowance for doubtful accounts.

Restricted cash

        As of December 31, 2000, $2.6 million of cash was restricted as collateral to the Company's $2.5 million line of credit.

Economic dependency:

        During 2000, two customers accounted for approximately $2.9 million or 30% of aggregate revenue.

Property and Equipment

        Property and equipment is recorded at cost less accumulated depreciation, which is provided on the straight-line method over the estimated useful lives of the assets as follows: computer equipment, furniture and fixtures are depreciated over five to ten years; leasehold improvements are amortized over the shorter of the life of the lease or ten years; assets under capital leases are depreciated over the shorter of the life of the lease or five years.

        The Company finances most of its data communications equipment and other fixed assets under capital lease agreements. The assets and liabilities under capital leases are recorded at the lesser of the present value of aggregate future minimum lease payments or the fair value of the assets under lease.

Use of Estimates

        The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 amounts could differ from those estimates.

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Comprehensive Income

        During the period presented the Company has not had any transactions that are required to be reported in comprehensive income.

Intangible Assets

        Intangible assets consisted of goodwill resulting from the excess of cost over fair value of assets acquired in previous years and was being amortized over seven years. The Company reviews goodwill to assess recoverability based upon undiscounted cash flow analysis. Impairment, if any, is measured based upon undiscounted cash flow analyses and is recognized in operating results in the period in which an impairment in value is determined. In 2000, the Company determined that the carrying value of goodwill was unrecoverable because the assets acquired were no longer being used and wrote off the net book value of $1.1 million as an asset impairment charge.

Impairment of Long-lived Assets

        The Company periodically assesses whether there has been a permanent impairment of its long-lived assets, in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." When any such impairment exists, the related assets are written down to fair value. In 2000, due to its deteriorating financial condition, the Company determined that its long-lived assets including its investment in a privately held company, goodwill and certain of its property and equipment had been impaired.

        In 2000 the Company acquired preferred stock of a privately held company for $2.5 million. The privately held company has never generated income and continues to use rather than provide cash from operating activities. As a result the investment was written down to the estimated future cash flows of $0.

        The Company had goodwill on books from an acquisition in 1997. The balance of goodwill was written down to zero which is the estimated undiscounted cash flow expected from this asset.

        The Company had property and equipment consisting of computer equipment, office furniture and fixtures, and leasehold improvements with a net book value of $8.3 million. The Company used the undiscounted cash flow method to determine the fair value of the property and equipment which was estimated to be zero.

        The net book value of its assets under capital lease obligations at December 31, 2000 was $19.4 million (cost of $28.0 million less accumulated depreciation of $8.6 million) and in excess of the related obligations totaling $25.7 million. Accordingly, since these assets were returned to the respective vendors to settle these obligations under the July 2001 bankruptcy filing, these assets are reflected at their cost less their related accumulated depreciation on the accompanying December 31, 2000 consolidated balance sheet.

Income Taxes

        The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets, and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax basis of assets and liabilities. The Company provides a valuation allowance on net deferred tax assets when management concludes that it is more likely than not those such assets will not be realized.

Stock Compensation

        The Company accounts for its stock option plans under APB Opinion No. 25, "Accounting for Stock Issued to Employees".

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Stock Split

        During 2000, the Company approved a 3 for 1 common stock split. The stock split has been reflected in the beginning balances of the accompanying financial statements, and all applicable references to the number of common shares have been restated. Appropriate adjustments have been made in the conversion ratios of shares of convertible preferred stock and in the exercise price and number of shares subject to stock options.

2.    Debt

Subordinated Convertible Notes

        In August and November 1999, the Company issued, in four separate closings, an aggregate of $9.5 million in Subordinated Convertible Notes (the "Notes") to selected accredited investors. The Notes were subordinated in payment of principal and interest to the Company's obligations to its Senior Lender.

        The Notes issued in August 1999 (the "August Notes") aggregated $6.0 million and bore interest at 12% per annum. The August Notes were scheduled to mature on October 25, 1999, subject to the Company's right to extend the maturity date until February 28, 2000. The Company exercised its right to extend the maturity date to February 28, 2000 and, subsequently, the Company and the Note holders agreed to extend the maturity date to June 30, 2000. In June 2000, $4.8 million of the August Notes were converted into 1,162,940 shares of Series A Class IV preferred stock and $1.2 million of the August Notes were converted into 260,844 shares of Series A Class II preferred stock.

        The Notes issued in November 1999 (the "November Notes") aggregated $3.5 million and bore interest at 10% per annum. The November Notes were scheduled to mature 90 days after issuance, subject to the Company's right to extend the maturity date until June 30, 2000. The Company exercised its right to extend the maturity date to June 30, 2000. In June 2000, the notes were converted into 1.4 million shares of common stock.

        In connection with the issuance of the Notes, warrants to acquire an aggregate of 459,306 shares of the Company's common stock were granted to noteholders at prices between $1.67 and $2.66 per share. All warrants were outstanding and exercisable at December 31, 2000.

Vendor Note

        In 1998, the Company obtained a $5 million working capital facility in the form of a secured promissory note (the "Vendor Note") from a vendor. The terms of the Vendor Note provided for an initial funding of $3 million in 1998 with the remaining funding of $2 million in 1999. In 1998, the Company was in default of the Vendor Note and, separately, in default of its capital lease obligations with the vendor. In October 1999, the Company entered into a forbearance agreement and the vendor agreed to restructure the payment terms under the Vendor Note to defer the commencement of the scheduled due dates for principal and interest payments until June 2000. In connection with entering into the Vendor Note, the Company issued warrants to acquire 180,000 shares of common stock at $3.33 per share, adjustable for dilutive issuances. Additional warrants to acquire 120,000 shares of common stock at $4.33 per share were issued in February 1999 in connection with a revision of certain repayment terms under the Vendor Note. The exercise price of the warrants exceeds the fair value of the Company's common stock at the date such warrants were issued, accordingly, no value was assigned to the warrants for financial reporting purposes.

        In 2000, $1.2 million was repaid with cash and $2.2 million was retired as a vendor credit on exchange for the return of certain network equipment. The Company also agreed to repurchase warrants issued to the vendor for 300,000 shares of its common stock for $250,000. These transactions resulted in net reduction to the balance outstanding on the Vendor Note of $1.9 million. At

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December 31, 2000, $1.8 million of such advances remained outstanding. Due to the Company's July 2001 bankruptcy filing, this amount is recorded as a current liability on the accompanying balance sheet. The note bears interest at 7.5% per annum.

        The vendor claims that the Vendor Note is secured by all of the Company's assets, however, support for this assertion has not been located. This matter is being resolved by the bankruptcy court.

Demand Obligations

        During 1999, an investor advanced $2.8 million in cash to the Company of which $1.0 million was converted into Series A Class I preferred stock. At December 31, 1999, $1.8 million of such advances remained outstanding. These advances are payable upon demand and bore interest at 8%. During 2000, the Company repaid $582,000 of these advances and converted the remaining $1.2 million of principal into 120,000 shares of Series A Class V preferred stock.

        During January and February 2000, the Company borrowed a total of $2.35 million from certain individuals in the form of demand notes. These notes were due on demand and accrued interest at 8%. In March 2000, these notes were converted into 235,000 shares of Series A Class III preferred stock.

Line of Credit

        In 2000, the Company entered into a $2.5 line of credit agreement and borrowed $2.5 million under the agreement. This borrowing is secured by $2.6 million of cash equivalents held by the lender. The line of credit was paid subsequent to year-end.

3.    Commitments and Contingencies

Litigation

        The Company is involved in certain litigation arising in the ordinary course of business. Management believes that such litigation will be resolved without material effect on the Company's financial position or results of operations.

        A former employee has sued the Company for damages in excess of $200,000 claiming breach of an employment contract. The Company disputes this claim. The Company filed for bankruptcy prior to the beginning of discovery. This matter is being resolved by the bankruptcy court.

        One of the Company's vendors has filed a $1.0 million claim against the Company for breach of contract. This claim was in the initial stages of discovery when the Company filed for bankruptcy.

Leases and commitments

        In 2000, the Company entered into several equipment leases accounted for as capital lease obligations totaling approximately $17.3 million. The obligations at December 31, 2000 for these leases and those entered into in prior years totaled $25.7 million. These obligations are secured by the related equipment and are recorded as current liabilities due to the Company's July 2001 bankruptcy filing and the return of the related equipment to retire these obligations.

        Minimum lease payments are as follows:

Total payments   $ 29.8 million
less: amount representing interest   $ 4.1 million
    $ 25.7 million

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        The Company leases certain office facilities and equipment and has contractual commitments for leasing circuits. Commitments for minimum rentals under these obligations at the end of 2000 were as follows:

 
   Operating Leases
2001   $ 3,585,000
2002     1,778,000
2003     678,000
2004     526,000
2005     502,000
Thereafter     842,000
Total minimum payments   $ 7,911,000

        Certain of these leases were assumed by Cogent in September 2001.

4.    Stockholder's Equity

        During 1998, the Company adopted the 1998 Stock Option Plan. During 2000 the Company adopted the 2000 Stock Option Plan. There are a total of 7.3 million shares of common stock reserved for issuance under these plans, Options granted under these plans vest 25% after one year and vest ratably thereafter with full vesting after 57 months. A summary of stock option activity under these plans is as follows:

 
   Shares
   Weighted Avg
Exercise Price
Outstanding as of December 31, 1999   2,026,200   $ 1.39
Granted   4,865,565     2.59
Exercised   (76,500 )   0.58
Outstanding as of December 31, 2000   6,815,265   $ 2.23

        During 1999, the Company issued warrants to a senior officer, in connection with his employment, to purchase 1,050,000 shares of the Company's common stock at a price of $1.67 per share. The warrants are exercisable over five years. The warrants vest as follows: (a) 600,000 vest upon issuance; (b) 450,000 vest upon the closing of a corporate transaction as defined.

        The weighted average fair value of options granted during the year ended December 31, 2000 was approximately $1.52. The weighted average remaining life of options and warrants outstanding at December 31, 2000 was approximately 4 years.

        The Company has adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based Compensation". Accordingly, no compensation cost has been recognized for stock options granted. Had compensation cost been determined based on the fair value at the grant date for awards in 2000 consistent with the provisions of the Standard, the Company's net loss would not have been materially different than the amount reported in the accompanying statement of operations. The fair value of stock options used to compute pro forma net loss applicable to common shareholders was determined using the Black-Scholes option- pricing model with the following assumptions; expected volatility of 60%, a risk free rate of 6%, expected life of 5 years and no dividend yield.

        The following summarizes the stockholder equity transactions during 2000.

        In March 2000, the Company sold 765,000 shares of Series A Class III preferred stock for net proceeds of $7.5 million in cash. In May 2000, the Company sold 376,000 shares of Series A Class V preferred stock for net proceeds of $3.7 million in cash. In June 2000, the Company sold 4.8 million shares of Series B preferred stock for net proceeds of $47.8 million in cash.

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        In 2000, the Company retired a total of $13 million of its debt in exchange for issuances of common and Series A preferred stock. The Company issued 260,844 shares of Series A Class II preferred stock in exchange for the retirement of $1.2 million of debt. The Company issued 235,000 shares of Series A Class III preferred stock in exchange for the retirement of $2.35 million of debt. The Company issued 1.2 million share of Series A Class IV preferred stock in exchange for the retirement of $4.8 million of debt. The Company issued 120,000 shares of Series A Class V preferred stock in exchange for the retirement of $1.2 million of debt. The Company also issued warrants to purchase 75,000 shares of common stock at $3.17 per share in exchange for the accrued interest on the related notes. The warrants were valued at $60,000 which approximates the accrued interest on the related notes. The Company also issued 1.4 million shares of common stock in exchange for the retirement of $3.5 million of debt and $220,000 of accrued interest.

        All classes of Series A preferred and the Series B preferred stock (collectively, the "Preferred Stock") are convertible into common stock at the option of the holder at specified prices and carry a liquidation preference based upon the original issue price plus a non-cumulative dividend of 10% per annum. The holders of Preferred Stock are entitled to the number of votes equal to the number of common shares into which the Preferred Stock converts. The Series A Preferred Shares are convertible into common shares at the following conversion rates:

        The holders of Preferred Stock are entitled to receive, when declared, non-cumulative cash dividends of 10% per annum of the original issue price of each class of Preferred Stock. The original issue prices per share of each class of Preferred Stock were as follows:

        The redemption rights of the Series A Preferred Stock were eliminated when the Articles of Incorporation were restated on June 7, 2000. As a result of the restatement, all Preferred Stock is included in the equity section of the financial statements.

        Upon any liquidation, dissolution, or winding up of the Corporation, whether voluntarily or involuntarily, before any distributions or payment shall be made to the holders of Common stock, the holders of Series A and Series B Preferred Stock are entitled to liquidation rights before any of the Common stockholders on an equivalent basis.

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5.    Income Taxes

        The Company has incurred significant operating losses and tax losses. As of December 31, 2000, the Company had available approximately $71.2 million of net operating loss carry forwards available to offset future taxable income. The deferred tax assets as a result of this net operating loss is $26.8 million and the Company has provided a 100% valuation allowance against this deferred tax asset. The losses will begin to expire in 2017.

6.    Related Party Transactions

        In 2000, the Company invested $2.5 million in a company affiliated with the Company via common management. In 2000, the Company recorded revenue of $122,000 from this affiliate and had accounts receivable of $92,000 outstanding at December 31, 2000.

7.    Subsequent Events

        In February 2001, the Company entered into an agreement to merge with 360Networks, Inc. in an all-stock transaction. 360Networks, Inc. loaned the Company approximately $3.6 million in connection with this transaction. In June 2001, the agreement was terminated.

        In July 2001, the Company filed for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code. In September 2001, Cogent Communications Group, Inc. purchased certain contracts and assets from the NetRail Inc. estate for approximately $12 million in cash. The Company has since ceased operations and the distributions of the remaining assets are under the supervision of the bankruptcy court.

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Appendix C

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General Overview

        Cogent was formed on August 9, 1999 as a Delaware corporation. We began invoicing our customers for our services in April 2001. We provide our high-speed Internet access service to our customers for monthly fees. We recognize service revenue in the month in which the service is provided. Customer cash receipts for service received in advance of revenue earned is recorded as deferred revenue and recognized as revenue over the service period or, in the case of installation charges, over the estimated customer life. Our April 2, 2002 acquisition of certain assets of PSINet, Inc. added a new element to our operations in that in addition to our current high-speed Internet access business, we began operating a more traditional Internet service provider business, with lower speed connections provided by leased circuits obtained from telecommunications carriers (primarily local telephone companies).

        As Cogent began to serve customers, we began to incur additional elements of network operations costs, including building access agreement fees, network maintenance costs, circuit costs and transit costs. Transit costs include the costs of transporting our customers' Internet traffic to and from networks that compose the Internet and with which we do not have a direct settlement-free peering agreement. Circuit costs include the costs of connections provided by leased circuits obtained from telecommunications carriers (primarily local telephone companies).

        Merger with Allied Riser Communications Corporation.    On August 28, 2001, we entered into an agreement to merge with Allied Riser Communications Corporation. Allied Riser provided broadband data 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 2.0 million shares, or 13.4% of its common stock, on a fully diluted basis, to the existing Allied Riser stockholders. The merger agreement required Cogent to assume the outstanding obligations of Allied Riser as of the closing date. We believe the acquisition of Allied Riser provided us with in-building networks as well as pre-negotiated building access rights with building owners and real estate investment trusts across the United States and in Toronto, Canada. Prior to the merger, Allied Riser had ceased providing its retail services to its customers. We are utilizing the Allied Riser in-building network and building access rights to provide our high speed Internet access service. We believe that the acquisition has enabled us to accelerate our business plan and increase our footprint in the markets we serve.

        Acquisition of NetRail Inc. Assets.    On September 6, 2001, Cogent acquired for approximately $11.7 million in cash the major assets of NetRail, Inc. through a sale conducted under Chapter 11 of the United States Bankruptcy Code. The assets include certain customer contracts and the related accounts receivable, network equipment, and settlement-free peering arrangements. Settlement-free peering rights permit the transfer of data traffic to and from other carriers without payment between the carriers. NetRail's facilities and traffic have been integrated with our network. We believe that the acquisition has reduced our costs of network operations from the availability of NetRail's Tier-1 settlement-free peering arrangements.

        Acquisition of PSINet assets.    On April 2, 2002, we closed our transaction to purchase certain assets of PSINet, Inc. Pursuant to the asset purchase agreement approved on March 27, 2002 by the bankruptcy court overseeing the PSINet bankruptcy, we acquired certain of PSINet's assets and assumed certain liabilities related to its operations in the United States for a total of $9.5 million in cash. The assets include certain of PSINet's accounts receivable, rights to 10,000 route miles pursuant to indefeasible rights of use, and certain intangible assets including settlement-free peering rights,

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customer contracts and the PSINet trade name. Assumed liabilities include certain leased circuit commitments, facilities leases, customer contractual commitments and collocation arrangements. This acquisition added a new element to our operations in that in addition to our current high-speed Internet access business, we began operating a more traditional Internet service provider business, with lower speed connections provided by leased circuits obtained from telecommunications carriers (primarily local telephone companies). We believe that the PSINet acquisition has provided us with a revenue stream from a set of products that complement our core offering of 100 Mbps Internet connectivity for $1,000 per month. We plan to support and build the PSINet brand name, which we believe is one of the most recognizable ISPs in the country. Under the PSINet label, we are offering PSINet services, including Internet connectivity.

        Williams Communications Bankruptcy.    On April 22, 2002, Williams Communications Group, Inc. filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. Williams Communications LLC, a wholly owned subsidiary of Williams Communications Group, has provided the Company with its national backbone fiber rings. Williams Communications LLC did not file a bankruptcy petition. On October 16, 2002, Williams announced that it has emerged from bankruptcy as WilTel Communications Group, Inc

        Metromedia Fiber Networks ("MFN") and Other Telecommunications Companies.    One of our suppliers of metropolitan fiber optic facilities, MFN, filed for bankruptcy in May 2002 under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court. This has impacted our operations by decreasing our ability to add new metropolitan fiber rings from MFN and our ability to add new buildings to existing MFN rings. However, as the Company has several other providers of metropolitan fiber optic facilities the impact has not been material to our operations. MFN's financial difficulties are characteristic of the telecommunications industry today. Several of our vendors, have been reported in the financial press to be experiencing financial difficulties. Our solution for metropolitan networks is to have a large number of providers and to develop the ability to construct our own fiber optic connections to the buildings we serve.

Results of Operations

Three and Nine Months Ended September 30, 2002 Compared to the Three and Nine Months Ended September 30, 2001

        Net Revenue.    Net revenue for the three months ending September 30, 2002 was $16.0 million compared to $657,000 for the three months ending September 30, 2001. Net revenue for the nine months ending September 30, 2002 was $38.1 million compared to $747,000 for the nine months ending September 30, 2001. The increases in net revenue are attributed to the increase in customers purchasing our service offerings including the customers acquired in the PSINet, Allied Riser and NetRail acquisitions.

        Net revenue for the three months ending September 30, 2002 was $16.0 million compared to $18.6 million for the three months ending June 30, 2002. This decline resulted from cancellations from customers acquired in the PSINet acquisition more than offsetting the increase in net revenues from new installations of the Company's original product offering.

        In September 2002, the Company invoiced certain customers for approximately $1.3 million representing amounts contractually due for unfulfilled minimum contractual obligations. The Company has recognized a corresponding sales allowance of $1.3 million against this revenue resulting in zero net revenue recognized. The Company will recognize net revenue as the amounts are collected as cash. The Company intends to vigorously seek payment for these amounts.

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        Network Operations Costs.    Network operations costs are primarily comprised of the following elements:

        The cost of network operations was $14.2 million for the three months ended September 30, 2002 compared to $5.0 million for the three months ended September 30, 2001. The cost of network operations was $37.2 million for the nine months ended September 30, 2002 compared to $15.5 million for the nine months ended September 30, 2001. These increases were primarily due to an increase in the number of leased network facilities, circuit fees commencing in April 2002 related to the PSINet customers acquired, an increase in maintenance fees on our IRU's and network equipment, an increase in transit charges associated with an increase in network traffic, an increase in headcount, and an increase in the number of building access agreements and the related fees, including the building access agreements acquired in the February 2002 Allied Riser merger. These increases are partially offset by the elimination of temporary leased transmission capacity charges in 2002. The cost of temporary leased transmission capacity was $4.2 million for the nine months ended September 30, 2001. There were no such costs for the nine months ended September 30, 2002. Leased transmission capacity costs were incurred until the remaining segments of our nationwide fiber-optic intercity network were placed in service. As this leased capacity of the network was replaced with our dark fiber IRUs, the related cost of network operations decreased and depreciation and amortization expense increased. We believe that the cost of network operations will increase as Cogent continues to construct its network, acquire additional office building access agreements, and service an increasing number of customers.

        Selling, General, and Administrative Expenses.    Selling, general and administrative expenses, or SG&A, primarily include salaries and related administrative costs. SG&A increased to $9.7 million for the three months ended September 30, 2002 from $7.6 million for the three months ended September 30, 2001. SG&A increased to $26.0 million for the nine months ended September 30, 2002 from $21.8 million for the nine months ended September 30, 2001. SG&A for the three and nine months ended September 30, 2002 includes approximately $0.8 million and $2.3 million, respectively of amortization of deferred compensation. SG&A expenses increased primarily from an increase in activities required to support our increase in customers and expanding operation. We capitalize the salaries and related benefits of employees directly involved with our construction activities. We began capitalizing these costs in July 2000 and will continue to capitalize these costs while our network is under construction. We believe that SG&A expenses will continue to increase primarily due to costs required to support our expanded operations and increase in customers.

        Depreciation and Amortization.    Depreciation and amortization expense increased to $8.9 million for the three months ended September 30, 2002 from $3.0 million for the three months ended September 30, 2001. Depreciation and amortization expense increased to $24.0 million for the nine months ended September 30, 2002 from $6.0 million for the nine months ended September 30, 2001. These expenses include the depreciation of the capital equipment required to support our network and

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the amortization of our IRUs and the amortization of intangible assets. Amortization expense related to intangible assets for the three and nine months ended September 30, 2002 was approximately $2.2 million and $5.3 million, respectively. There were no intangible assets in 2001 until the September 7, 2001 acquisition of certain assets of NetRail. Accordingly, amortization expense related to intangible assets for the three and nine months ended September 30, 2001 was not material. Depreciation expense increased because we had more capital equipment and IRUs in service in 2002 than in the same period in 2001. We begin to depreciate our capital assets once the related assets are placed in service. We believe that future depreciation and amortization expense will continue to increase due to the acquisition of additional network equipment, existing equipment being placed in service, and the amortization of our capital lease IRUs.

        Interest Income and Expense.    Interest income decreased to $0.2 million for the three months ended September 30, 2002 from $0.4 million for the three months ended September 30, 2001. Interest income increased to $2.1 million for the nine months ended September 30, 2002 from $1.8 million for the nine months ended September 30, 2001 Interest income relates to interest earned on our marketable securities which includes money market accounts and commercial paper. The change in interest income resulted from an increase in marketable securities either partly or fully offset by a reduction in interest rates.

        Interest expense increased to $8.8 million for the three months ended September 30, 2002 from $2.9 million for the three months ended September 30, 2001. Interest expense increased to $25.5 million for the nine months ended September 30, 2002 from $4.8 million for the nine months ended September 30, 2001. The increase in interest expense results from an increase in borrowings and capital leases in 2002 and the interest expense associated with the Allied Riser convertible subordinated notes partially offset by a reduction in interest rates. Interest expense includes interest charged on our vendor financing facility, capital lease agreements, the Allied Riser convertible subordinated notes and the amortization of deferred financing costs. Cogent began borrowing under its credit facility with Cisco Capital in August 2000 and had borrowed $223.6 million at September 30, 2002 and $136.6 million at September 30, 2001. We capitalized $0.6 million of interest expense for the nine months ended September 30, 2002 and $4.0 million for the nine months ended September 30, 2001. The reduction in capitalized interest resulted from a reduction in the dollar value of our network under construction during the period and a reduction in interest rates. We began capitalizing interest in July 2000 and will continue to capitalize interest expense while our network is under construction. Borrowings accrue interest at the three-month LIBOR rate, established at the beginning of each calendar quarter, plus a stated margin.

        Income Taxes.    We recorded no income tax expense or benefit for the three or nine months ended September 30, 2002 or the three or nine months ended September 30, 2001. Due to the uncertainty surrounding the realization of our net operating losses and our other deferred tax assets, we have recorded a valuation allowance for the full amount of our net deferred tax asset. For federal and state tax purposes, our net operating loss carry-forwards could be subject to certain limitations on annual utilization if certain changes in ownership were to occur as defined by federal and state tax laws. For federal and state tax purposes, our net operating loss carry-forwards acquired in the Allied Riser merger will be subject to certain limitations on annual utilization due to the change in ownership as defined by federal and state tax laws. Should we achieve profitability, Allied Riser's net deferred tax assets may be available to offset future income tax liabilities.

        Earnings Per Share.    Basic and diluted net loss per common share applicable to common stock decreased to $(7.33) for the three months ended September 30, 2002 from $(12.39) for the three months ended September 30, 2001. Basic and diluted net loss per common share applicable to common stock decreased to $(21.38) for the nine months ended September 30, 2002 from $(32.33) for the nine months ended September 30, 2001. The weighted-average shares of common stock outstanding

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increased to 3,464,403 shares for the three months ended September 30, 2002 from 1,408,614 shares for the three months ended September 30, 2001, and increased to 3,177,577 for the nine months ended September 30, 2002 from 1,405,333 shares for the nine months ended September 30, 2001 due to the issuance of approximately 2.0 million shares of common stock to the Allied Riser shareholders on February 4, 2002. The Allied Riser merger resulted in an extraordinary gain of $4.5 million, or $1.42 per common share for the nine months ended September 30, 2002. The loss per common share, excluding the impact of the extraordinary gain, was ($22.80) for the nine months ended September 30, 2002.

        For the three and nine months ended September 30, 2001 and September 30, 2002, options to purchase 565,570 and 1,086,150 shares of common stock at weighted-average exercise prices of $10.59 and $4.62 per share, respectively, are not included in the computation of diluted earnings per share as they are anti-dilutive. For the three and nine months ended September 30, 2001, 45,809,783, shares of preferred stock, which were convertible into 4,580,978 shares of common stock, were not included in the computation of diluted earnings per share as a result of their anti-dilutive effect. For the three and nine months ended September 30, 2002, 95,143,625, shares of preferred stock, which were convertible into 10,091,261 shares of common stock, were not included in the computation of diluted earnings per share as a result of their anti-dilutive effect. For the three and nine months ended September 30, 2001 and September 30, 2002, warrants for 222,750 and 854,941 shares of common stock, respectively, were not included in the computation of diluted earnings per share as a result of their anti-dilutive effect. For the three and nine months ended September 30, 2002, approximately 245,000 shares of common stock issuable on the conversion of the Allied Riser convertible subordinated notes, were not included in the computation of diluted earnings per share as a result of their anti-dilutive effect.

Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000

        Revenue.    Revenue for the year ending December 31, 2001 was $3.0 million compared to no revenue for the year ending December 31, 2000. We began invoicing our customers in April 2001. Revenue related to the customer contracts acquired in the NetRail acquisition was $1.2 million for the period from September 7, 2001 to December 31, 2001.

        Network Operations.    Network operations costs for the year ended December 31, 2001 were primarily comprised of five elements:

        The cost of network operations was $20.3 million for the year ended December 31, 2001 compared to $3.0 million for the year ended December 31, 2000. The cost of network operations for the year ended December 31, 2001 includes approximately $0.3 million of amortization of deferred compensation. We believe that the cost of network operations will increase as Cogent continues to construct its network, acquire additional office building access agreements, and service an increasing number of customers. The cost of temporary leased transmission capacity was $3.9 million for the year ended December 31, 2001 compared to $0.9 million in the year ended December 31, 2000. These costs were incurred until the remaining segments of Cogent's nationwide fiber-optic intercity network were

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placed in service. Cogent cancelled the one remaining leased-line segment in December 2001. As this leased capacity of the network was replaced with Cogent's dark fiber IRUs, the related cost of network operations decreased and depreciation and amortization expense increased. As of December 31, 2001, all of the approximately 12,500 route miles of the nationwide fiber-optic intercity network had been delivered to Cogent.

        Selling, General, and Administrative Expenses.    Selling, general and administrative expenses, or SG&A, primarily include salaries and the related administrative costs associated with an increase in the number of employees. SG&A increased to $30.3 million for the year ended December 31, 2001 from $10.8 million for the year ended December 31, 2000. SG&A for the year ended December 31, 2001 includes approximately $3.0 million of amortization of deferred compensation. SG&A expenses increased primarily from an increase in employees and related expenses required to support Cogent's growth. We had 133 employees at December 31, 2001 versus 186 employees at December 31, 2000. On October 9, 2001, Cogent reduced its staff by approximately 50 employees and re-aligned portions of its organizational structure to streamline its operations and better focus its activities. The weighted-average number of employees for 2001 was 210. Cogent capitalizes the salaries and related benefits of employees directly involved with its construction activities. Cogent began capitalizing these costs in July 2000 and will continue to capitalize these costs while its network is under construction. Cogent believes that SG&A expenses will continue to increase primarily due to the expected growth in the number of employees and related costs required to support its operations and customers.

        Depreciation and Amortization.    Depreciation and amortization expense increased to $13.5 million for the year ended December 31, 2001 from $0.3 million for the year ended December 31, 2000. These expenses represent the depreciation of the capital equipment required to support Cogent's network and the amortization of the Company's IRU's. These amounts increased because Cogent had more capital equipment and IRU's in service in 2001 than in the same period in 2000. Cogent begins the depreciation and amortization of its capital assets once the related assets are placed in service. Cogent believes that future depreciation and amortization expense will continue to increase due to the acquisition of additional network equipment, existing equipment being placed in service, and the amortization of Cogent's capital lease IRUs.

        Interest Income and Expense.    Interest income decreased to $1.9 million for the year ended December 31, 2001 from $3.4 million for the year ended December 31, 2000. Interest income relates to interest earned on Cogent's marketable securities. Cogent's marketable securities consisted of money market accounts and commercial paper. The reduction in interest income is primarily due to a reduction in interest rates for 2001 compared to 2000.

        Interest expense increased to $7.9 million for the year ended December 31, 2001 from $1.1 million for the year ended December 31, 2000. The increase in interest expense results from an increase in borrowings in 2001 partially offset by a reduction in interest rates and an increase in capitalized interest. Interest expense relates to interest charged on Cogent's borrowing on its vendor financing facility and its capital lease agreements. Cogent began borrowing under its credit facility with Cisco Capital in August 2000 and had borrowed $181.3 million at December 31, 2001 and $67.2 million at December 31, 2000. Cogent incurred $24.0 million and $47.9 million of capital lease obligations related to IRUs for the years ended December 31, 2001 and December 31, 2000, respectively. Cogent capitalized $4.4 million of interest for the year ended December 31, 2001 and $3.0 million for the year ended December 31, 2000. Cogent began capitalizing interest in July 2000 and will continue to capitalize interest expense while its network is under construction. Borrowings accrue interest at the three-month LIBOR rate, established at the beginning of each calendar quarter, plus a stated margin.

        Income Taxes.    Cogent recorded no income tax expense or benefit for the year ended December 31, 2001 or the year ended December 31, 2000. The federal and state net operating loss carry-forwards of approximately $71.0 million at December 31, 2001 expire between 2019 and 2021.

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Due to the uncertainty surrounding the realization of the Company's net operating losses and its other deferred tax assets, Cogent has recorded a valuation allowance for the full amount of its net deferred tax asset. For federal and state tax purposes, Cogent's net operating loss carry-forwards could be subject to certain limitations on annual utilization if certain changes in ownership were to occur as defined by federal and state tax laws. Should Cogent achieve profitability, its net deferred tax asset may be available to offset future income tax liabilities.

        Earnings Per Share.    Basic and diluted net loss per common share applicable to common stock increased to $(64.78) for the year ended December 31, 2001 from $(8.51) for the year ended December 31, 2000. The net loss applicable to common stock for the year ended December 31, 2001 includes a $24.2 million non-cash beneficial conversion charge related to the Company's Series B preferred stock. The weighted-average shares of common stock outstanding increased to 1,406,007 shares at December 31, 2001 from 1,382,360 shares at December 31, 2000, due to exercises of options for Cogent's common stock.

        For the years ended December 31, 2000 and 2001, options to purchase 608,136 and 1,157,920 shares of common stock at weighted-average exercise prices of $9.90 and $5.30 per share, respectively, are not included in the computation of diluted earnings per share as they are anti-dilutive. For the years ended December 31, 2000 and 2001, 45,809,783, and 95,583,185 shares of preferred stock, which were convertible into 4,580,978, and 10,148,309 shares of common stock respectively, were not included in the computation of diluted earnings per share as a result of their anti-dilutive effect. For the year ended December 31, 2001, warrants for 710,216 shares of common stock, were not included in the computation of diluted earnings per share as a result of their anti-dilutive effect.

Year Ended December 31, 2000 Compared to the Period from Inception (August 9, 1999) to December 31, 1999

        Revenue.    We began recognizing revenue and invoicing our customers in April 2001. Therefore, there was no reported revenue for the year ended December 31, 2000 and the period from inception (August 9, 1999) to December 31, 1999.

        Network Operations.    Network operations costs for 2000 primarily included five elements:

        The cost of network operations was $3.0 million in 2000 and there were no such costs in 1999. Cogent believes that cost of network operations will increase as Cogent continues to construct its network, acquire additional office building access agreements, and service its customers. The cost of temporary leased private-line transmission capacity was $0.9 million for 2000 and there were no such costs in 1999. As this leased capacity of the network was replaced with Cogent's dark fiber IRUs, the related cost of network operations decreased and depreciation and amortization expense increased. As of December 31, 2000 approximately 5,100 route miles of the approximately 12,500 route miles ordered by Cogent had been delivered.

        Selling, General, and Administrative Expenses.    SG&A expenses increased from $0.08 million for the period from inception (August 9, 1999) to December 31, 1999 to $10.8 million in 2000. SG&A expenses increased primarily due to an increase in employees and related expenses required to support

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Cogent's growth. Cogent had 186 employees at December 31, 2000 versus three employees at December 31, 1999.

        Depreciation and Amortization.    Depreciation and amortization expense was $0.3 million in 2000 and there was no depreciation and amortization expense in 1999. These expenses represent the depreciation of the capital equipment required to support Cogent's network and there was no capital equipment in 1999. Cogent begins the depreciation and amortization of its capital assets once the related assets are placed in service and it believes that future depreciation and amortization expense will continue to increase due to the acquisition of additional network equipment and the amortization of Cogent's capital lease IRUs.

        Interest Income and Expense.    Interest income was $3.4 million in 2000 and there was no interest income in 1999. Interest income relates to interest earned on Cogent's marketable securities. Marketable securities at December 31, 2000 consisted of money market accounts and commercial paper all with original maturities of three months or less.

        Interest expense was $1.1 million in 2000 and there was no interest expense in 1999. Interest expense relates to interest charged on Cogent's borrowing on a financing facility provided by Cisco Capital and capital lease agreements. Cogent began borrowing under its vendor credit facility in August 2000 and had borrowed $67.2 million at December 31, 2000. Borrowings accrue interest at the three-month LIBOR rate, established at the beginning of each calendar quarter, plus a stated margin. Cogent incurred $47.9 million of capital lease obligations in 2000 related to its 30-year IRUs for its nationwide fiber optic intercity network. Cogent capitalized $3.0 million of interest expense in 2000. Cogent will continue to capitalize interest expense while its network is under construction.

        Income Taxes.    Cogent recorded no income tax expense or benefit for 2000 or 1999. Cogent's federal and state net operating loss carry-forwards of $9.6 million at December 31, 2000 expire between 2019 and 2020. Due to the uncertainty surrounding the realization of the Company's net operating losses and its other deferred tax assets, Cogent has recorded a valuation allowance for the full amount of its net deferred tax asset. Should Cogent achieve profitability, its net deferred tax asset may be available to offset future income tax liabilities. For federal and state tax purposes, Cogent's net operating loss carry-forwards could be subject to certain limitations on annual utilization if certain changes in ownership were to occur as defined by federal and state tax laws.

        Earnings Per Share.    Basic and diluted net loss per common share increased to $(8.51) for 2000 from $(0.06) in 1999. The weighted-average shares of common stock outstanding increased to 1,382,360 shares at December 31, 2000 from 1,360,000 shares at December 31, 1999, due to exercises of options for Cogent's common stock. For the years ended December 31, 2000 and 1999, options to purchase 608,136 and 46,950 shares of common stock at weighted-average exercise prices of $9.90 and $0.10 per share, respectively, are not included in the computation of diluted earnings per share as they are anti-dilutive. For the year ended December 31, 2000, 45,809,783 shares of preferred stock, which are convertible into 4,580,978 shares of common stock, were not included in the computation of diluted earnings per share as a result of their anti-dilutive effect. There was no preferred stock outstanding in 1999.

Liquidity and Capital Resources

        Since inception, we have primarily funded our operations and capital expenditures through private equity financing, long-term debt, and equipment financing arrangements. As of September 30, 2002, we have raised $177 million of private equity funding, obtained a credit facility for borrowings of up to $409.0 million, of which $223.6 million was outstanding at September 30, 2002, have capital lease obligations outstanding at September 30, 2002 of approximately $54.7 million, and have approximately

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$117.0 million outstanding on the Allied Riser convertible notes—due in June 2007. At September 30, 2002, our current cash and cash equivalents position and short-term investments totaled $54.1 million.

        Net Cash Used in Operating Activities.    Net cash used in operating activities was $26.8 million for the nine months ended September 30, 2002 as compared to a use of $30.3 million for the nine months ended September 30, 2001. The net loss increased to $67.9 million for the nine months ended September 30, 2002 from a net loss of $45.4 million for the nine months ended September 30, 2001. These net losses are offset by depreciation and amortization and changes in assets and liabilities of a positive $32.9 million and a positive $12.7 million, respectively, for the nine months ended September 30, 2002 and a positive $6.0 million and a positive $9.2 million, respectively, for the nine months ended September 30, 2001. Net cash used in operating activities includes an extraordinary gain of $4.5 million for the nine months ended September 30, 2002.

        Net Cash Used in Investing Activities.    Net cash from investing activities was a negative $0.3 million for the nine months ended September 30, 2002 as compared to a negative $83.9 million for the nine months ended September 30, 2001. Purchases of property and equipment were $56.9 million for the nine months ended September 30, 2002 and $72.2 million for the nine months ended September 30, 2001. Investing activities for the nine months ended September 30, 2002 included purchases of short-term investments of $0.7 million, the payment of $9.5 million related to the April 2002 acquisition of certain assets of PSINet, the purchase of additional intangible assets of approximately $0.2 million, $70.4 million of cash and cash equivalents acquired in the February 4, 2002 Allied Riser merger and approximately $3.6 million paid in April 2002 to purchase the minority interests of STOC. Investing activities for the nine months ended September 30, 2001 included a payment of $11.7 million related to the September 2001 acquisition of certain assets of NetRail Inc.

        Net Cash Provided by Financing Activities.    Financing activities provided $29.8 million for the nine months ended September 30, 2002 compared to $59.1 million for the nine months ended September 30, 2001. We received proceeds from borrowing under our credit facility of $31.9 million for the nine months ended September 30, 2002 and $69.4 million for the nine months ended September 30, 2001. The borrowings for the nine months ended September 30, 2001 included $29.0 million of a working capital loan. For the nine months ended September 30, 2002, we also entered into $10.6 million in loans to fund interest and fees related to our credit facility. The liquidation preference at September 30, 2002, of all classes of our preferred stock was $229.2 million. Principal repayments of capital lease obligations were $2.1 million and $10.3 million for the nine months ended September 30, 2002 and September 30, 2001, respectively.

        Credit Facility.    In October 2001, we entered into an agreement with Cisco Systems Capital Corporation (Cisco Capital) under which Cisco Capital agreed to enter into a $409.0 million credit facility with us. This credit facility replaced our previous $310.0 million credit facility with Cisco Capital. The credit facility is available to finance the purchases of up to $270 million of Cisco network equipment, software and related services, to fund up to $64 million of working capital, and to fund up to $75 million of interest and fees related to the credit facility. On November 6, 2002, the credit facility was amended to modify certain provisions and covenants that are described below. The amendment is a result of our lower than expected revenue growth and our greater than expected cash balance. In return for our agreement to delay drawing the full amount of working capital under the credit facility, Cisco Capital agreed to reduce our revenue covenant for the quarter ending December 31, 2002 and eliminate other requirements. While we are presently in compliance with the terms of the credit facility, we are currently in the process of further renegotiating the terms of the credit facility with Cisco Capital. Management believes that in order to have sufficient funds to fund our current or anticipated levels of operation under our current business plan it will be necessary to renegotiate the terms of the Cisco credit facility or to find alternative sources of liquidity which may not be available to us on favorable terms or at all.

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        As of September 30, 2002, approximately $223.6 million was outstanding under the credit facility that included $177.8 million of equipment loans, $29.0 million of working capital loans and $16.8 million of interest and fee loans. Additional borrowings are available in increments subject to our satisfaction of certain operational and financial covenants over time. Up to $40 million was available for equipment loans through September 30, 2002, of which $33.4 million was borrowed as of September 30, 2002. An additional $91.6 million of equipment loans became available on October 1, 2002. Up to $20 million was available to fund interest and fees related to the credit facility through September 30, 2002 of which $16.8 million was borrowed as of September 30, 2002. An additional $55 million for funding interest and fees became available on October 1, 2002. An additional $10 million in working capital loans became available on October 1, 2002 and was borrowed in November 2002. Assuming we are in compliance with the terms of the credit facility an additional $25 million of working capital will become available in $5.0 million monthly increments from May 2003 until September 2003. The aggregate balance of working capital loans is limited to 35 percent of outstanding equipment loans. Borrowings for the purchase of products and working capital are available until December 31, 2004. Borrowings for the funding of interest and fees are available until December 31, 2005. The credit facility matures on December 31, 2008.

        In connection with the merger with Allied Riser, the acquisition of certain assets of PSINet, and in November 2002, certain of the credit facility's covenants were renegotiated. The current covenants include the following:

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        For loans outstanding prior to entering into the October 2001 facility, the applicable interest rate is thirty-day LIBOR, or the London Interbank Offer Rate, plus 4.5% per annum. For loans issued after entering into the October 2001 facility, the applicable interest rate is thirty-day LIBOR plus a margin ranging from 6.5% currently, down to 2.0%, depending upon our EBITDA—or earnings before interest, taxes, depreciation and amortization—and leverage ratio—or its ratio or consolidated funded debt to EBITDA.

        In connection with the credit facility, we granted to Cisco Capital rights that, together with the warrants issued to Cisco Capital under the previous credit agreement, will permit Cisco Capital to acquire up to 5% of the fully diluted common stock of Cogent. These warrants for 710,216 common shares are exercisable for eight years from the grant date at exercise prices ranging from $12.47 to $30.44 per share, with the weighted-average exercise price of $18.10.

        The credit facility is secured by the pledge of all of our assets. The credit facility also includes a closing fee, facility fee and a quarterly commitment fee on the underlying commitment. Borrowings are permitted to be prepaid at any time without penalty and are subject to mandatory prepayment based upon excess cash flow or, in certain circumstances, upon the receipt of proceeds from the sale of our debt or equity securities, and other events, such as asset sales. Principal payments on the credit facility begin in March 2005 and will be completed by December 2008.

        Product and Service Agreement with Cisco Systems.    We have entered into an agreement with Cisco Systems, Inc. for the purchase of a total of $270.0 million of networking equipment for our network. Under this Cisco supply agreement, we are obligated to purchase all of our networking equipment from Cisco until September 2003 and specified amounts through December 2004 unless Cisco cannot offer a competitive product at a reasonable price and on reasonable terms. If another supplier offers such products with material functionality or features that are not available from Cisco at a comparable price, we may purchase those products from the other supplier, and such purchases will not be included in determining our compliance with Cisco minimum purchase obligations. The majority of our network equipment has been obtained from Cisco.

        The Cisco supply agreement provides for certain discounts against the list prices for Cisco equipment. The agreement also requires us to meet certain minimum purchase requirements each year during the four-year initial term of the agreement, provided that Cisco is not in default under the credit facility between Cisco and us. We have satisfied the minimum requirement through December 31, 2001. For 2002, 2003 and 2004, we must meet minimum purchase requirements of $29.5 million, $42.4 million and $45.5 million, respectively. In addition, we purchase from Cisco technical support and assistance with respect to the Cisco hardware and software purchased under the supply agreement. As of September 30, 2002, we had purchased approximately $177.8 million towards this commitment.

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        At September 30, 2002 our contractual cash obligations were as follows:

 
   Payments due by period
(in thousands)
   Total
   Less than
1 year
   1-3 years
   4-5 years
   After 5 years
Contractual Cash Obligations                              
Long term debt   $ 384,404   $ 8,774   $ 25,906   $ 267,721   $ 82,003
Capital lease obligations     100,479     7,587     13,305     10,581     69,006
Operating leases     199,976     28,181     42,502     30,320     98,973
Unconditional purchase obligations     127,158     41,030     59,481     3,381     23,266
   
 
 
 
 
Total contractual cash obligations     812,017     85,572     141,194     312,003     273,248
   
 
 
 
 

        Future Capital Requirements.    Our future capital requirements will depend on a number of factors, including our success in increasing the number of customers using our services and the number of buildings we serve, the expenses associated with the build-out of our network, regulatory changes, competition, technological developments, potential merger and acquisition activity and the economy's ability to recover from the recent downturn. We believe our available liquidity resources, assuming the availability of our Cisco credit facility, will be sufficient to fund our operating needs under our expected activities through fiscal 2003. We have based this estimate on assumptions that may prove to be wrong. For example, future capital requirements will change from current estimates to the extent to which we acquire or invest in businesses, assets, products and technologies. Our forecast of the period of time through which our financial resources will be adequate to support our operations and capital expenditures is a forward-looking statement that involves risks and uncertainties, and actual results could vary. Until we can generate sufficient levels of cash from our operations, which we do not expect to achieve this year, we will continue to rely on equity financing and our credit facility to satisfy our cash needs. We cannot assure you that this financing will be available on terms favorable to us or our stockholders, or at all. Insufficient funds may require us to delay or scale back the build-out of our network or to restructure our business. If additional funds are raised by issuing equity securities, substantial dilution to existing stockholders may result.

        Allied Riser's notes may become immediately due if the merger is deemed to be a "change in control," as defined by the related indenture. On March 25, 2002, certain of the holders of the notes asserted to us that the merger constituted a change of control, and that as a result an event of default had occurred under the indenture. On March 27, 2002, the Trustee under the indenture notified us that an event of default had occurred based on such noteholder's assertions and that the principal amount of the notes and accrued interest was immediately due and payable. We do not believe that the merger would qualify as a change in control as defined in the indenture and are vigorously disputing the noteholders' assertion. The Delaware Chancery Court has agreed with our interpretation of the change in control provision, but this decision could be overturned. However, in the event that the merger is deemed to be a change in control, we could be deemed to be in default under the indenture and obligated to pay the principal amount of the notes and accrued interest or to repurchase the notes at their full face value. We cannot assure you that we will have the ability to do this if we are required to do so. If we are unable to repurchase the notes and pay the accrued interest, we will be in default of the indenture and our obligations under our credit facility could become due and payable. This issue is currently in litigation between us and certain noteholders. This litigation and its proposed settlement is discussed in greater detail in the "Proposal No. 1" Section of the Information accompanying Statement.

        In connection with the proposed settlement and exchange described in the "Proposal No. 1" Section of the accompanying Information Statement, it is anticipated that Allied Riser will pay an aggregate of $9,877,981 in cash, and that we will issue shares of our Preferred Stock, to certain of the holders of the Allied Riser notes in exchanged for such noteholder's surrendering to Allied Riser an aggregate of $104,389,000 in face value of Allied Riser Notes. Allied Riser anticipates that it will fund

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this cash payment from available cash on hand. While the settlement and exchange will significantly reduce our obligations associated with the notes in the long term by eliminating $106,789,000 of principal payment associated with the notes that would otherwise be due in 2007 and by eliminating the interest payments of approximately $4.0 million that would otherwise be due each December and June until 2007, the payment associated with the exchange and settlement will result an immediate reduction in our liquidity and as a result will increase the risk in the short term that we will be unable to fund our capital requirements. We may elect to purchase or otherwise retire additional 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.

        As described in the "Financial Information Regarding the Company" Section of the accompanying Information Statement, in December 2002 the Company reached an agreement with one of its vendors to settle certain litigation brought by the vendor against Allied Riser. Under this settlement, Allied Riser will make a cash payment of $1.6 million and the vendor will dismiss the litigation and accept that cash payment as payment in full of amounts due under the contracts that are the subject of the litigation. Allied Riser anticipates that it will fund this cash payment from available cash on hand.

        We are subject to claims and lawsuits arising in the ordinary course of business. Management believes that the outcome of any such proceedings to which we are a party will not have a material adverse effect on us.

Recent Accounting Pronouncements

        In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which is effective for fiscal years beginning after June 15, 2002. The statement provides accounting and reporting standards for recognizing obligations related to asset retirement costs associated with the retirement of tangible long-lived assets. Under this statement, legal obligations associated with the retirement of long-lived assets are to be recognized at their fair value in the period in which they are incurred if a reasonable estimate of fair value can be made. The fair value of the asset retirement costs is capitalized as part of the carrying amount of the long-lived asset and expensed using a systematic and rational method over the assets' useful life. Any subsequent changes to the fair value of the liability will be expensed. Adoption of this standard is not expected to have a material impact on impact on our operations or financial position.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes FASB No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," but retains that statement's fundamental provisions for recognition and measurement of impairment of long-lived assets to be held and used and measurement of long-lived assets to be disposed of by sale. SFAS No. 144 also supersedes the accounting/reporting provisions of APB Opinion No. 30 for segments of a business to be disposed of, but retains APB 30's requirement to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. The adoption of this statement on January 1, 2002 did not have a material impact on our operations or financial position.

        In May 2002, the FASB issued SFAS No. 145. SFAS No. 145 rescinded three previously issued statements and amended SFAS No. 13, "Accounting for Leases." The statement provides reporting standards for debt extinguishments and provides accounting standards for certain lease modifications that have economic effects similar to sale-leaseback transactions. The statement is effective for certain lease transactions occurring after May 15, 2002 and all other provisions of the statement shall be effective for financial statements issued on or after May 15, 2002. Adoption of this standard did not have any impact on our financial position or the presentation of any transactions.

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        On July 29, 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operation, plant closing, or other exit or disposal activity. Previous accounting guidance was provided by EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)."    SFAS 146 replaces Issue 94-3. SFAS 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

Critical Accounting Policies and Significant Estimates

        The preparation of consolidated financial statements requires management to make judgments based upon estimates and assumptions that are inherently uncertain. Such judgments affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Management continuously evaluates its estimates and assumptions, including those related to allowances for doubtful accounts, revenue allowances, long-lived assets, contingencies and litigation, and the carrying values of assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

        The following is a summary of our most critical accounting policies used in the preparation of our consolidated financial statements.

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1015 31st Street N.W. Washington, D.C. 20007 (202) 295-4200
INFORMATION STATEMENT
PROPOSAL NO. 1 AMENDMENT AND RESTATEMENT OF THE COMPANY'S CERTIFICATE OF INCORPORATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
FINANCIAL INFORMATION REGARDING THE COMPANY
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Cogent Communications Group, Inc. and Subsidiaries Unaudited Pro Forma Consolidated Balance Sheet As of September 30, 2002 (in thousands, except share amounts)
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2002
Cogent Communications Group, Inc. and Subsidiaries Unaudited Pro forma consolidated Statement of Operations For the Year Ended December 31, 2001 (in thousands, except share and per share amounts)
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2001
Cogent Communications Group, Inc. and Subsidiaries Unaudited Pro forma consolidated Statement of Operations For the Nine Months Ended September 30, 2002 (in thousands, except share and per share amounts)
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
Appendix A
ARTICLE 1. NAME .
ARTICLE 2. REGISTERED OFFICE AND AGENT .
ARTICLE 3. PURPOSE .
ARTICLE 4. CAPITAL STOCK .
ARTICLE 5. COMPROMISE OR ARRANGEMENT WITH CREDITORS .
ARTICLE 6. DIRECTORS LIABILITY; INDEMNIFICATION .
Appendix B
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2001 AND SEPTEMBER 30, 2002 (IN THOUSANDS, EXCEPT SHARE DATA)
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002 (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002 (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2002 (IN THOUSANDS)
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 2001, AND 2002 (Unaudited)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2000 AND 2001 (IN THOUSANDS, EXCEPT SHARE DATA)
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE PERIOD FROM INCEPTION (AUGUST 9, 1999) TO DECEMBER 31, 1999, AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001 (IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD FROM INCEPTION (AUGUST 9, 1999) TO DECEMBER 31, 1999 AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM INCEPTION (AUGUST 9, 1999) TO DECEMBER 31, 1999, AND FOR THE YEARS ENDED DECEMBER 31, 2000 AND 2001 (IN THOUSANDS)
COGENT COMMUNICATIONS GROUP, INC., AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 2000, and 2001
REPORT OF INDEPENDENT ACCOUNTANTS
PSINET INC. PROJECT PHOENIX STATEMENT OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
PSINET INC. PROJECT PHOENIX STATEMENTS OF REVENUES AND DIRECT EXPENSES
PSINET INC. PROJECT PHOENIX NOTES TO STATEMENTS
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS—DECEMBER 31, 2001 AND 2000 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
NETRAIL, INC. BALANCE SHEET DECEMBER 31, 1999
NETRAIL, INC. BALANCE SHEET DECEMBER 31, 1999
NETRAIL, INC. STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1999
NETRAIL, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIT) YEAR ENDED DECEMBER 31, 1999
NETRAIL, INC. STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1999
NETRAIL, INC. NOTES TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
NETRAIL, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
NETRAIL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
NETRAIL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2000 (In thousands, except share amounts)
NETRAIL, INC. AND SUBSIDIARIES STATEMENT OF CASH FLOWS
NETRAIL, INC. AND SUBSIDIARIES CONSOLIDATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2000
Appendix C