| COGENT COMMUNICATIONS GROUP INC ITEM 1A RISK FACTORS If our operations do not produce positive cash flow to pay for our growth or meet our operating and financing obligations, and we are unable to otherwise raise additional capital to meet these needs, our ability to implement our business plan will be materially and adversely affected |
| Until we can generate positive cash flow from our operations, we will continue to rely on our cash reserves and, potentially, additional equity and debt financings to meet our cash needs |
| Our future capital requirements likely will increase if we acquire or invest in additional businesses, assets, services or technologies |
| We may also face unforeseen capital requirements for new technology required to remain competitive or to comply with new regulatory requirements, for unforeseen maintenance of our network and facilities, and for other unanticipated expenses associated with running our business |
| In addition, if we do not retain existing customer or add new customers, we may be required to raise additional funds through the issuance of debt or equity |
| We cannot assure you that we will have access to necessary capital, nor can we assure you that any such financing will be available on terms that are acceptable to our stockholders or us |
| If issuing equity securities raises additional funds, substantial dilution to existing stockholders may result |
| We need to retain existing customers and continue to add new customers in order to become profitable and cash flow positive |
| In order to become profitable and cash flow positive, we need to both retain existing customers and continue to add a large number of new customers |
| The precise number of additional customers required to become profitable and cash flow positive is dependent on a number of factors, including the turnover of existing customers and the revenue mix among customers |
| We may not succeed in adding customers if our sales and marketing plan is unsuccessful |
| In addition, many of our target customers are existing businesses that are already purchasing Internet access services from one or more providers, often under a contractual commitment, and it has been our experience that such target customers are often reluctant to switch providers due to costs associated with switching providers |
| We have historically incurred operating losses and these losses may continue for the foreseeable future |
| Since we initiated operations in 2000, we have generated operating losses and these losses may continue for the foreseeable future |
| As of December 31, 2005, we had an accumulated deficit of dlra211dtta2 million |
| Continued losses may prevent us from pursuing our strategies for growth or may require us to seek unplanned additional capital and could cause us to be unable to meet our debt service obligations, capital expenditure requirements or working capital needs |
| We are experiencing rapid growth of our business and operations and we may not be able to efficiently manage our growth |
| We have rapidly grown our company through acquisitions of companies, assets and customers as well as implementation of our own network expansion and the acquisition of new customers through our own sales efforts |
| Our expansion places significant strains on our management, operational and financial infrastructure |
| Our ability to manage our growth will be particularly dependent upon our ability to: · expand, develop and retain an effective sales force and qualified personnel; · maintain the quality of our operations and our service offerings; · maintain and enhance our system of internal controls to ensure timely and accurate compliance with our regulatory reporting requirements; and · expand our accounting and operational information systems in order to support our growth |
| 10 ______________________________________________________________________ If we fail to implement these measures successfully, our ability to manage our growth will be impaired |
| We may experience difficulties in implementing our business plan in Europe and may incur related unexpected costs |
| During the first quarter of 2004, we completed our acquisitions of Firstmark, the parent holding company of LambdaNet Communications France SAS, or LambdaNet France, and LambdaNet Communications Espana SA, or LambdaNet Spain, and have obtained the rights to certain dark fiber and other network assets that were once part of Carrier 1 International SA in Germany |
| Prior to these transactions, we had only minimal European operations |
| If we are not successful in developing our market presence in Europe, our operating results could be adversely affected |
| LambdaNet France (now Cogent France) and LambdaNet Spain (now Cogent Spain) operated a combined telecommunications network and shared operations systems with a formerly affiliated entity, LambdaNet Germany |
| We did not acquire LambdaNet Germany and we are currently involved in litigation with LambdaNet Germany regarding amounts due to and from Cogent France, Cogent Spain and several other subsidiaries |
| If we are unable to resolve such litigation or we experience other unforeseen obligations in connection with the separation, we could be subject to liability or additional expenses |
| We may experience delays and additional costs in expanding our on-net buildings |
| Currently, we plan to increase our carrier-neutral facilities and other on-net buildings from 1cmam040 at December 31, 2005 to approximately 1cmam100 at December 31, 2006 |
| We may be unsuccessful at identifying appropriate buildings or negotiating favorable terms for acquiring access to such buildings, and consequently, may experience difficulty in adding customers to our network and fully using the network’s capacity |
| We may not successfully make or integrate acquisitions or enter into strategic alliances |
| As part of our growth strategy, we intend to pursue selected acquisitions and strategic alliances |
| We compete with other companies for acquisition opportunities and we cannot assure you that we will be able to effect future acquisitions or strategic alliances on commercially reasonable terms or at all |
| Even if we enter into these transactions, we may experience: · delays in realizing or a failure to realize the benefits we anticipate; · difficulties or higher-than-anticipated costs associated with integrating any acquired companies, products or services into our existing business; · attrition of key personnel from acquired businesses; · unexpected costs or charges; or · unforeseen operating difficulties that require significant financial and managerial resources that would otherwise be available for the ongoing development or expansion of our existing operations |
| In the past, our acquisitions have often included assets, service offerings and financial obligations that are not compatible with our core business strategy |
| We have expended management attention and other resources to the divestiture of assets, modification of products and systems as well as restructuring financial obligations of acquired operations |
| In most acquisitions, we have been successful in renegotiating long-term agreements that we have acquired relating to long distance and local transport of data and IP traffic |
| If we are unable to satisfactorily renegotiate such agreements in the future or with respect to future acquisitions, we may be exposed to large claims for payment for services and facilities we do not need |
| Consummating these transactions could also result in the incurrence of additional debt and related interest expense, as well as unforeseen contingent liabilities, all of which could have a material adverse effect on our business, financial condition and results of operations |
| Because we have purchased financially 11 ______________________________________________________________________ distressed companies or their assets, and may continue to do so in the future, we have not had, and may not have, the opportunity to perform extensive due diligence or obtain contractual protections and indemnifications that are customarily provided in corporate acquisitions |
| As a result, we may face unexpected contingent liabilities arising from these acquisitions |
| We may also issue additional equity in connection with these transactions, which would dilute our existing shareholders |
| Revenues generated by the customer contracts that we have acquired have accounted for a substantial portion of our historical growth in net service revenue |
| However, following an acquisition, we have experienced a decline in revenue attributable to acquired customers as these customers’ contracts have expired and they have entered into standard Cogent customer contracts at generally lower rates or have chosen not to renew service with us |
| We anticipate that we will experience similar declines with respect to customers we have acquired or will acquire |
| We depend upon our key employees and may be unable to attract or retain sufficient qualified personnel |
| Our future performance depends upon the continued contribution of our executive management team and other key employees, in particular, our Chairman and Chief Executive Officer, Dave Schaeffer |
| Schaeffer’s knowledge of our business combined with his engineering background and industry experience makes him particularly well suited to lead our company |
| Our connections to the Internet require us to establish and maintain relationships with other providers, which we may not be able to maintain |
| The Internet is composed of various public and private network providers who operate their own networks and interconnect them at public and private interconnection points |
| Our network is one such network |
| In order to obtain Internet connectivity for our network, we must establish and maintain relationships with other providers and incur the necessary capital costs to locate our equipment and connect our network at these various interconnection points |
| By entering into what are known as settlement-free peering arrangements, providers agree to exchange traffic between their respective networks without charging each other |
| Our ability to avoid the higher costs of acquiring dedicated network capacity and to maintain high network performance is dependent upon our ability to establish and maintain peering relationships |
| The terms and conditions of our peering relationships may also be subject to adverse changes, which we may not be able to control |
| For example, several network operators with large numbers of individual users are arguing that they should be able to charge or charge more to network operators and businesses that send traffic to those users |
| If we are not able to maintain or increase our peering relationships in all of our markets on favorable terms, we may not be able to provide our customers with high performance or affordable services, which could have a material adverse effect on our business |
| We have in the past encountered some disputes with certain of our providers regarding our peering arrangements, but we have generally been able to route our traffic through alternative peering arrangements, resolve such disputes, or terminate such peering arrangements with a minimal adverse impact on our business |
| In the past year we had two such disputes that resulted in a temporary disruption of the exchange of traffic between our network and the network of the other carrier |
| We cannot assure you that we will be able to continue to establish and maintain relationships with providers or favorably resolve disputes with providers |
| We make some of these connections pursuant to agreements that make data transmission capacity available to us at negotiated rates |
| In some instances these agreements have minimum and maximum volume commitments |
| If we fail to meet the minimum, or exceed the maximum, volume commitments, our rates and costs may rise |
| 12 ______________________________________________________________________ Our European and Canadian operations expose us to economic, regulatory and other risks |
| The nature of our European and Canadian business involves a number of risks, including: · fluctuations in currency exchange rates; · exposure to additional regulatory requirements, including import restrictions and controls, exchange controls, tariffs and other trade barriers; · difficulties in staffing and managing our foreign operations; · changes in political and economic conditions; and · exposure to additional and potentially adverse tax regimes |
| As we continue to expand our European and Canadian business, our success will depend, in part, on our ability to anticipate and effectively manage these and other risks |
| Our failure to manage these risks and grow our European and Canadian operations may have a material adverse effect on our business and results of operations |
| Fluctuations in foreign exchange rates may adversely affect our financial position and results of operations |
| Our European and Canadian operations expose us to currency fluctuations and exchange rate risk |
| For example, while we record revenues and financial results from our European operations in euros, these results are reflected in our consolidated financial statements in US dollars |
| Therefore, our reported results are exposed to fluctuations in the exchange rates between the US dollar and the euro |
| In particular, we fund the euro-based operating expenses and associated cash flow requirements of our European operations, including IRU obligations, in US dollars |
| Accordingly, in the event that the euro strengthens versus the dollar to a greater extent than we anticipate, the expenses and cash flow requirements associated with our European operations may be significantly higher in US-dollar terms than planned |
| Our business could suffer delays and problems due to the actions of network providers on whom we are partially dependent |
| Our off-net customers are connected to our network by means of communications lines that are provided as services by local telephone companies and others |
| We may experience problems with the installation, maintenance and pricing of these lines and other communications links, which could adversely affect our results of operations and our plans to add additional customers to our network using such services |
| We have historically experienced installation and maintenance delays when the network provider is devoting resources to other services, such as traditional telephony |
| We have also experienced pricing problems when a lack of alternatives allows a provider to charge high prices for services in an area |
| We attempt to reduce this problem by using many different providers so that we have alternatives for linking a customer to our network |
| Competition among the providers tends to improve installation, maintenance and pricing |
| If the information systems that we depend on to support our customers, network operations, sales and billing do not perform as expected, our operations and our financial results may be adversely affected |
| We rely on complex information systems to operate our network and support our other business functions |
| Our ability to track sales leads, close sales opportunities, provision services and bill our customers for those services depends upon the effective integration of our various information systems |
| If our systems, individually or collectively, fail or do not perform as expected, our ability to process and provision orders, to make timely payments to vendors and to ensure that we collect revenue owed to us would be adversely affected |
| Such failures or delays could result in increased capital expenditures, 13 ______________________________________________________________________ customer and vendor dissatisfaction, loss of business or the inability to add new customers or additional services, all of which would adversely affect our business and results of operations |
| Our business could suffer from an interruption of service from our fiber providers |
| The carriers from whom it has been obtained maintain our inter-city and intra-city dark fiber |
| If these carriers fail to maintain the fiber or disrupt our fiber connections for other reasons, such as business disputes with us and governmental takings, or us our ability to provide service in the affected markets or parts of markets would be impaired |
| While we have successfully mitigated the effects of prior service interruptions in the past, we may incur significant delays and costs in restoring service to our customers in connection with future service interruptions, and we may lose customers if delays are substantial |
| Our business depends on license agreements with building owners and managers, which we could fail to obtain or maintain |
| Our business depends upon our in-building networks |
| Our in-building networks depend on access agreements with building owners or managers allowing us to install our in-building networks and provide our services in the buildings |
| These agreements typically have terms of five to ten years, with one or more renewal options |
| Any deterioration in our existing relationships with building owners or managers could harm our marketing efforts and could substantially reduce our potential customer base |
| We expect to enter into additional access agreements as part of our growth plan |
| Current federal and state regulations do not require building owners to make space available to us or to do so on terms that are reasonable or nondiscriminatory |
| While the FCC has adopted regulations that prohibit common carriers under its jurisdiction from entering into exclusive arrangements with owners of multi-tenant commercial office buildings, these regulations do not require building owners to offer us access to their buildings |
| Building owners or managers may decide not to permit us to install our networks in their buildings or may elect not to renew or amend our access agreements |
| The initial term of most of our access agreements will conclude in the next several years |
| Most of these agreements have one or more automatic renewal periods and others may be renewed at the option of the landlord |
| While we have historically been successful in renewing these agreements and no single building access agreement is material to our success, the failure to obtain or maintain a number of these agreements would reduce our revenue, and we might not recover our costs of procuring building access and installing our in-building networks |
| We may not be able to obtain or construct additional building laterals to connect new buildings to our network |
| In order to connect a new building to our network we need to obtain or construct a lateral from our metropolitan network to the building |
| We may not be able to obtain fiber in an existing lateral at an attractive price from a provider and may not be able to construct our own lateral due to the cost of construction or municipal regulatory restrictions |
| Failure to obtain fiber in an existing lateral or to construct a new lateral could keep us from adding new buildings to our network and from increasing our revenues |
| Impairment of our intellectual property rights and our alleged infringement on other companies’ intellectual property rights could harm our business |
| We are aware of several other companies in our and other industries that use the word “Cogent” in their corporate names |
| One company has informed us that it believes our use of the name “Cogent” infringes on their intellectual property rights in that name |
| If such a challenge is successful, we could be required to change our name and lose the goodwill associated with the Cogent name in our markets |
| The sector in which we operate is highly competitive, and we may not be able to compete effectively |
| We face significant competition from incumbent carriers, Internet service providers and facilities-based network operators |
| Relative to us, many of these providers have significantly greater financial 14 ______________________________________________________________________ resources, more well-established brand names, larger customer bases, and more diverse strategic plans and service offerings |
| Intense competition from these traditional and new communications companies has led to declining prices and margins for many communications services, and we expect this trend to continue as competition intensifies in the future |
| Decreasing prices for high-speed Internet services have somewhat diminished the competitive advantage that we have enjoyed as a result of our service pricing |
| Our competitors may also introduce new technology or services that make our services less attractive to potential customers |
| For example, some providers are introducing a new version of the Internet protocol (Ipv6) that we do not plan to introduce at this time |
| If this becomes important to Internet users our ability to compete may be lessened |
| We issue projected results and estimates for future periods from time to time, and such projections and estimates are subject to inherent uncertainties and may prove to be inaccurate |
| Financial information, results of operations and other projections that we may issue from time to time are based upon our assumptions and estimates |
| While we believe these assumptions and estimates to be reasonable, they are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control |
| You should understand that certain unpredictable factors could cause our actual results to differ from our expectations and those differences may be material |
| No independent expert participates in the preparation of these estimates |
| These estimates should not be regarded as a representation by us as to our results of operations during such periods as there can be no assurance that any of these estimates will be realized |
| In light of the foregoing, we caution you not to place undue reliance on these estimates |
| Network failure or delays and errors in transmissions expose us to potential liability |
| Our network uses a collection of communications equipment, software, operating protocols and proprietary applications for the high-speed transportation of large quantities of data among multiple locations |
| Given the complexity of our network, it is possible that data will be lost or distorted |
| Delays in data delivery may cause significant losses to one or more customers using our network |
| Our network may also contain undetected design faults and software bugs that, despite our testing, may not be discovered in time to prevent harm to our network or to the data transmitted over it |
| The failure of any equipment or facility on the network could result in the interruption of customer service until we effect necessary repairs or install replacement equipment |
| Network failures, delays and errors could also result from natural disasters, power losses, security breaches, computer viruses, denial of service attacks and other natural or man-made events |
| Our off-net services are dependent on the network of other providers or on local telephone companies |
| Network failures, faults or errors could cause delays or service interruptions, expose us to customer liability or require expensive modifications that could have a material adverse effect on our business |
| As an Internet access provider, we may incur liability for information disseminated through our network |
| The law relating to the liability of Internet access providers and on-line services companies for information carried on or disseminated through their networks is unsettled |
| As the law in this area develops and as we expand our international operations, the potential imposition of liability upon us for information carried on and disseminated through our network could require us to implement measures to reduce our exposure to such liability, which may require the expenditure of substantial resources or the discontinuation of certain products or service offerings |
| Any costs that are incurred as a result of such measures or the imposition of liability could harm our business |
| 15 ______________________________________________________________________ Legislation and government regulation could adversely affect us |
| As an enhanced service provider, we are not subject to substantial regulation by the FCC or the state public utilities commissions in the United States |
| Internet service is also subject to minimal regulation in Europe and in Canada |
| If we decide to offer traditional voice services or otherwise expand our service offerings to include services that would cause us to be deemed a common carrier, we will become subject to additional regulation |
| Additionally, if we offer voice service using IP (voice over IP) or offer certain other types of data services using IP we may become subject to additional regulation |
| This regulation could impact our business because of the costs and time required to obtain necessary authorizations, the additional taxes than we may become subject to or may have to collect from our customers, and the additional administrative costs of providing voice services, and other costs |
| Even if we do not decide to offer additional services, governmental authorities may decide to impose additional regulation and taxes upon providers of Internet service |
| Much of the law related to the liability of Internet service providers remains unsettled |
| For example, many jurisdictions have adopted laws related to unsolicited commercial email or “spam” in the last several years |
| Other legal issues, such as the sharing of copyrighted information, transborder data flow, universal service, and liability for software viruses could become subjects of additional legislation and legal development |
| Regulatory changes could have a material adverse effect on our business, financial condition or results of operations |
| Terrorist activity throughout the world and military action to counter terrorism could adversely impact our business |
| The September 11, 2001 terrorist attacks in the United States and the continued threat of terrorist activity and other acts of war or hostility have had, and may continue to have, an adverse effect on business, financial and general economic conditions internationally |
| Effects from these events and any future terrorist activity, including cyber terrorism, may, in turn, increase our costs due to the need to provide enhanced security, which would adversely affect our business and results of operations |
| These circumstances may also damage or destroy the Internet infrastructure and may adversely affect our ability to attract and retain customers, our ability to raise capital and the operation and maintenance of our network access points |
| We are particularly vulnerable to acts of terrorism because our largest customer concentration is located in New York, our headquarters is in Washington, DC, and we have significant operations in Paris and Madrid, cities that have historically been targets for terrorist attacks |