<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
FORM 10-Q
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED: SEPTEMBER 30, 2000
/ / TRANSITION REPORT PURSUANT SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ______ TO ______
</TABLE>
COMMISSION FILE NUMBER: 333-41126-01
---------------------
COMPLETEL LLC
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 52-2073805
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
</TABLE>
6300 S. SYRACUSE WAY
SUITE 355
ENGLEWOOD, COLORADO 80111
(Address of principal executive offices)
303-741-4788
(Issuer's telephone number)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
The Registrant currently does not have any publicly traded classes of common
stock. As of November 1, 2000, the Registrant had outstanding 123,572 units of
its common units.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
COMPLETEL LLC
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION....................................... 1
ITEM 1. Financial Statements (unaudited)............................ 1
Consolidated Condensed Balance Sheets as of September 30,
2000 and December 31, 1999 (unaudited).................... 1
Consolidated Condensed Statements of Operations for the
Three and Nine Months Ended September 30, 2000 and 1999
(unaudited)............................................... 2
Consolidated Condensed Statement of Members' Equity
(Deficit) for the Nine Months Ended September 30, 2000
(unaudited)............................................... 3
Consolidated Condensed Statements of Cash Flows for the Nine
Months Ended September 30, 2000 and 1999 (unaudited)...... 4
Notes to Interim Unaudited Consolidated Condensed Financial
Statements (unaudited).................................... 5
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 17
PART II. OTHER INFORMATION........................................... 19
ITEM 6. Exhibits and Reports on Form 8-K............................ 19
SIGNATURES.......................................................................... 20
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
COMPLETEL LLC AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(STATED IN THOUSANDS OF U.S. DOLLARS--SEE NOTE 2)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 428,235 $ 60,469
Short-term investments, restricted........................ 24,402 --
Customer accounts receivable.............................. 9,737 1,702
VAT receivables, prepaid expenses and other current
assets.................................................. 25,962 14,892
--------- --------
Total current assets.................................... 488,336 77,063
--------- --------
LONG TERM ASSETS:
Property and equipment, net (see Note 4).................. 202,005 92,872
Licenses and other intangibles, net....................... 4,046 4,938
Deferred financing costs, net............................. 19,343 6,352
Long-term investments, restricted......................... 45,724 --
Other long-term assets.................................... 2,210 872
--------- --------
Total long-term assets.................................. 273,328 105,034
--------- --------
TOTAL ASSETS................................................ $ 761,664 $182,097
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Network vendor payables..................................... $ 52,370 $ 28,711
Accrued liabilities and trade accounts payable.............. 57,368 24,076
--------- --------
Total current liabilities............................... 109,738 52,787
--------- --------
LONG-TERM DEBT.............................................. 248,849 79,922
--------- --------
MINORITY INTEREST........................................... 97,538 279
REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED UNITS:
No par value, -0- and 84,070 units authorized, issued
and outstanding, respectively......................... -- 113,469
MEMBERS' EQUITY:
Common units, no par value; 131,494 units authorized;
123,572 and 18,485 units issued and outstanding,
respectively............................................ 605,322 30,065
Deferred compensation..................................... (55,158) (28,495)
Other cumulative comprehensive loss (see Note 7).......... (45,300) (3,912)
Accumulated deficit....................................... (199,325) (62,018)
--------- --------
TOTAL MEMBERS' EQUITY....................................... 305,539 (64,360)
--------- --------
TOTAL LIABILITIES AND MEMBERS' EQUITY....................... $ 761,664 $182,097
========= ========
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated condensed balance sheets.
1
<PAGE>
COMPLETEL LLC AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES.................................. $ 8,844 $ 1,055 $ 16,980 $ 1,376
OPERATING EXPENSES:
Network costs........................... 9,258 871 17,486 1,435
Selling, general and administrative..... 23,050 10,533 57,708 22,909
Non-cash deferred compensation.......... (4,324) 486 57,400 728
Depreciation and amortization........... 6,405 1,412 13,419 1,851
-------- -------- --------- --------
Total operating expenses.............. 34,389 13,302 146,013 26,923
-------- -------- --------- --------
OPERATING LOSS............................ (25,545) (12,247) (129,033) (25,547)
OTHER INCOME (EXPENSE):
Interest income......................... 6,856 640 16,095 2,231
Interest expense, net of capitalized
interest.............................. (7,349) (2,174) (15,645) (6,391)
Foreign exchange loss and other, net.... (3,322) (11) (21,228) (277)
-------- -------- --------- --------
Total other income (expense).......... (3,816) (1,545) (20,779) (4,437)
-------- -------- --------- --------
NET LOSS BEFORE MINORITY INTEREST......... (29,361) (13,792) (149,812) (29,984)
MINORITY INTEREST IN LOSS OF CONSOLIDATED
SUBSIDARIES............................. 7,841 985 13,846 1,695
-------- -------- --------- --------
NET LOSS BEFORE INCOME TAXES.............. (21,520) (12,807) (135,966) (28,289)
INCOME TAX PROVISION...................... -- -- -- --
-------- -------- --------- --------
NET LOSS BEFORE EXTRAORDINARY ITEM........ (21,520) (12,807) (135,966) (28,289)
EXTRAORDINARY ITEM:
Gain on early extinguishment of debt.... -- -- 1,012 --
NET LOSS.................................. (21,520) (12,807) (134,954) (28,289)
-------- -------- --------- --------
ACCRETION OF REDEEMABLE CUMULATIVE
CONVERTIBLE PREFERRED UNITS............. -- (1,322) (2,353) (3,616)
-------- -------- --------- --------
NET LOSS APPLICABLE TO COMMON UNITS....... $(21,520) $(14,129) $(137,307) $(31,905)
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated condensed financial statements.
2
<PAGE>
COMPLETEL LLC AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF MEMBERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(STATED IN THOUSANDS OF U.S. DOLLARS, EXCEPT UNIT AMOUNTS--SEE NOTE 2)
(UNAUDITED)
<TABLE>
<CAPTION>
OTHER
CUMULATIVE
COMMON UNITS COMPREHENSIVE
------------------- DEFERRED INCOME ACCUMULATED
NUMBER AMOUNT COMPENSATION (LOSS) DEFICIT TOTAL
-------- -------- ------------- -------------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1999.................... 18,485 $ 30,065 $(28,495) $ (3,912) $ (62,018)$ $(64,360)
Issuance of forfeitable common units........ 100 1,150 (1,150) -- -- --
Repurchase of forfeitable common units...... (500) -- (3,007) -- -- (3,007)
Conversion of redeemable cumulative
convertible preferred units to forfeitable
common units.............................. 105,487 115,822 -- -- -- 115,822
Gain on issuance of equity at subsidiary.... -- 375,780 -- -- -- 375,780
Deferred compensation expense related to
equity based incentive compensation
plan...................................... -- 82,505 (69,090) -- -- 13,415
Accretion of redeemable cumulative
convertible preferred units............... -- -- -- -- (2,353) (2,353)
Amortization of deferred compensation....... -- -- 46,584 -- -- 46,584
Cumulative translation adjustments.......... -- -- -- (41,388) -- (41,388)
Net loss...................................... -- -- -- -- (134,954) (134,954)
------- -------- -------- --------- --------- --------
BALANCE, September 30, 2000................... 123,572 $605,322 $(55,158) $ (45,300) $(199,325) $305,539
======= ======== ======== ========= ========= ========
</TABLE>
The accompanying notes are an integral part of this unaudited
consolidated condensed financial statements.
3
<PAGE>
COMPLETEL LLC AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(STATED IN THOUSANDS OF U.S. DOLLARS--SEE NOTE 2)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $(134,954) $(28,289)
Adjustments to reconcile net loss to cash used by
operating activities:
Depreciation and amortization............................. 13,419 1,851
Non-cash compensation expense............................. 57,400 728
Accretion of senior discount notes........................ 7,999 6,598
Amortization of deferred financing costs.................. 945 477
Gain on early extinguishment of debt...................... (1,012) --
Minority interest in net loss............................. (13,846) (1,695)
Unrealized foreign exchange loss.......................... 10,598 --
Changes in assets and liabilities
Increase in customer accounts receivables............... (8,035) (7,776)
Increase in other current assets........................ (11,070) (1,470)
Increase in other long-term assets...................... (1,338) (168)
Increase in accrued liabilities and other trade accounts
payable............................................... 33,292 23,051
--------- --------
Net cash (used by) operating activities............. (46,602) (6,693)
--------- --------
INVESTING ACTIVITIES:
Purchase of property and equipment........................ (139,703) (53,546)
Increase in network vendor payables....................... 23,659 --
Acquisition of licenses and other tangibles............... (892) (3,129)
Offering proceeds and investments earnings placed in
escrow.................................................. (74,443) (73,198)
Proceeds from escrowed offering proceeds and investment
earnings................................................ -- 73,198
--------- --------
Net cash (used by) investing activities............. (191,379) (56,675)
--------- --------
FINANCING ACTIVITIES:
Net proceeds from senior discount notes offering.......... -- 72,572
Net proceeds from initial public offering................. 486,519 --
Net proceeds from senior notes offering................... 185,448 --
Repurchase of senior discount notes....................... (14,243) --
Issuance of equity in subsidiary.......................... -- 4,478
Issuance of redeemable cumulative convertible preferred
units................................................... -- 53,637
Issuance of common units.................................. -- 2
Deferred financing costs.................................. (9,020) (5,660)
--------- --------
Net cash provided by financing activities........... 648,704 125,029
--------- --------
Effect of Exchange Rates on Cash............................ (42,957) (5,227)
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 367,766 56,434
CASH AND CASH EQUIVALENTS, beginning of period.............. 60,469 3,744
--------- --------
CASH AND CASH EQUIVALENTS, end of period.................... $ 428,235 $ 60,178
========= ========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Accretion of redeemable cumulative convertible preferred
units................................................... $ 2,353 $ 3,616
========= ========
SAB No.51 gain recorded in member's equity related to
issuance of equity in subsidiaries...................... $ 375,780 $ 698
========= ========
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated condensed financial statements.
4
<PAGE>
COMPLETEL LLC AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. GENERAL:
CompleTel LLC ("Parent", or "CompleTel LLC"), a Delaware limited liability
company, is a holding company (together with its direct wholly-owned and
indirect majority owned subsidiaries, the "Company"), which seeks to be a
leading facilities-based operator of a technologically advanced, high capacity
fiber optic communications infrastructure and provider of telecommunications and
Internet-related services to business and government end-users, carriers and
Internet service providers in targeted metropolitan areas across Western Europe,
with an initial focus on network deployment in France and Germany. Additionally,
the Company intends to establish Internet data centers (IDCs) and provide
Internet access, web hosting and Internet value added services in France,
Germany and the United Kingdom. The Company is deploying metropolitan
fiber-optic networks in 17 markets in France and Germany and business-oriented,
Internet-related services in 18 markets, including London.
The Company has been principally engaged in developing its business plans,
applying for and procuring regulatory and government authorizations, raising
capital, hiring management and other key personnel, working on the design,
development and construction of its fiber optic networks and operation support
systems, negotiating equipment and facilities agreements, and negotiating
interconnection agreements and certain right-of-way agreements. As a result of
these activities, the Company has experienced significant operating losses and
negative cash flows from operations. The Company expects to continue to generate
negative cash flows from operations in each of its markets while it emphasizes
development, construction and expansion of its business and until the Company
establishes a sufficient revenue generating customer base in its markets. The
Company also expects to experience ongoing operating losses and negative cash
flows as it expands its operations in the 17 markets in France and Germany
currently included in its business plan and builds out its IDCs and provides
Internet-related services in these markets and the United Kingdom. The Company
believes that it has fully funded its current business plan to construct
metropolitan area networks ("MANs") in these 17 markets and build out its IDCs
and provide these Internet-related services.
2. BASIS OF PRESENTATION:
The accompanying interim unaudited consolidated condensed financial
statements have been prepared in accordance with United States generally
accepted accounting principles ("U.S. GAAP") for interim financial information
and are in the form prescribed by the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by U.S. GAAP for complete financial statements. The interim consolidated
condensed unaudited financial statements should be read in conjunction with the
audited financial statements of the Parent as of and for the year ended
December 31, 1999. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three and nine month
periods ended September 30, 2000 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2000.
The preparation of financial statements in conformity with U.S. GAAP
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. Actual results could differ from those
estimates. The Parent and the Company have adopted a calendar fiscal year.
Certain prior year amounts have been reclassified to conform with the current
year presentation.
5
<PAGE>
FUNCTIONAL CURRENCY
Prior to January 1, 2000, the functional currency for the Parent and certain
Companies, including CompleTel Europe N.V., a publicly held Dutch holding
company that is majority owned by Parent ("CompleTel Europe"), CableTel
Management, Inc., CompleTel Holdings LLC, CompleTel N.A.N.V., CompleTel Europe
N.V., CompleTel Holding I B.V., CompleTel Holding II B.V. and CompleTel ECC
B.V., was the U.S. dollar and the functional currency for each of CompleTel
Europe's operating subsidiaries was the applicable local currency. Effective
January 1, 2000, CompleTel Europe N.V., CompleTel Holding I B.V., CompleTel
Holding II B.V. and CompleTel ECC B.V and each of their subsidiaries, except
those in the U.K., adopted the euro as their functional currency. Additionally,
CompleTel Europe and certain of its subsidiaries adopted the euro as their
functional currency.
3. INITIAL PUBLIC OFFERING:
On March 30, 2000, CompleTel Europe completed its initial public offering
("IPO") of ordinary shares. In the offering, CompleTel Europe issued 31,280,000
ordinary shares in exchange for gross proceeds of approximately $534.6 million
based on the U.S. dollar public offering price of $17.09 per share. A portion of
the IPO shares, 22,936,069, were offered in Europe, at a public offering price
of E17.50 per share. The effect of the shares offered in Europe results in gross
proceeds translated into U.S. dollars of approximately $524.1 million. CompleTel
Europe is using the proceeds to (i) further develop fiber optic networks in its
target markets in France and Germany, (ii) fund the build out of its IDCs and
expansion of its Internet-related services, (iii) develop complimentary local
access systems, (iv) fund net operating losses, and (v) for general corporate
purposes.
COMPENSATION CHARGES
CompleTel Europe's IPO caused certain common units of the Parent held by
employees of the Company to vest as a result of meeting specified performance
vesting criteria. As a result, CompleTel Europe recorded compensation expense of
approximately $41.0 million based on the value of those vested common units as
implied by the IPO price received. In addition, based upon the IPO value of
CompleTel Europe as indicated above, CompleTel Europe recorded additional
compensation expense and deferred compensation in the quarter ended March 31,
2000, of approximately $23.2 million and $72.4 million, respectively, for
performance vesting units that did not vest as a result of the IPO but which may
vest upon a qualified sale by a founding investor in Parent, Madison Dearborn
Partners ("MDP"), or in May 2005 based on a deemed vesting. The additional
deferred compensation is amortized to expense over the remaining vesting period
to May 18, 2005 (deemed vesting date if not prior due to a qualified sale by MDP
as defined in the executive securities agreement). The recorded amount of
compensation expense and deferred compensation for these variable awards are
adjusted at each reporting date to reflect management's estimate of the number
of such units that will ultimately vest and the fair market value of those units
as of the end of each reporting period based on the then current market value of
the ordinary shares of CompleTel Europe. Accordingly, for the three and nine
months ended September 30, 2000, CompleTel Europe reduced previously recorded
compensation expense by approximately $5.2 million and $12.4 million,
respectively, and deferred compensation by approximately $18.1 million and
$49.2 million, respectively, based on the closing price per share on
September 30, 2000.
The compensation charges (credits) described above are included in non-cash
compensation charges (credits) in the accompanying statement of operations for
the three and nine months ended September 30, 2000. Also included in non-cash
compensation charges for the three and nine months ended September 30, 2000, is
$1.8 million and $6.8 million, respectively, resulting from the recognition of
deferred compensation on fixed stock option awards granted to the Company's
employees and other common units of Parent held by employees subject only to
time vesting.
6
<PAGE>
4. PROPERTY AND EQUIPMENT:
Property and equipment includes network equipment, office furniture and
equipment, computer equipment and software, leasehold improvements and
construction in progress. These assets are stated at cost and are depreciated
when ready for their intended use. Property and equipment at September 30, 2000
and December 31, 1999, consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
Network equipment................................... $116,416 $39,955
Office furniture and equipment...................... 3,453 1,521
Computer equipment and software..................... 8,344 5,582
Leasehold improvements.............................. 5,521 1,855
Buildings........................................... 958 206
-------- -------
Property and equipment, in service.................. 134,692 49,119
Less: accumulated depreciation...................... (15,128) (4,215)
-------- -------
Property and equipment, in service, net............. 119,564 44,904
Network construction in progress.................... 82,441 47,968
-------- -------
Property and equipment, net......................... $202,005 $92,872
======== =======
</TABLE>
5. LONG-TERM DEBT:
SENIOR DISCOUNT NOTES
In February 1999, CompleTel Europe completed an offering of 147,500 units
(the "Units") consisting of $147.5 million aggregate principal amount at
maturity of 14% Senior Discount Notes due 2009 (the "Notes") issued by CompleTel
Europe and 1,475,000 non-voting Class B Membership Interests of CompleTel
Holdings. CompleTel Europe issued the Notes at a substantial discount from their
principal amount at maturity. The proceeds of the offering, net of offering fees
and costs, were approximately $72.6 million and were held in an escrow account
until CompleTel Europe received a minimum commitment of $90 million in senior
credit facilities. To comply with Netherlands laws, Parent guaranteed the Notes
on a senior unsecured basis. Parent is a holding company with no operations
other than the operations conducted by CompleTel Europe and its subsidiaries,
and it is unlikely that Parent will have sufficient funds to satisfy CompleTel
Europe's obligations on the Notes if CompleTel Europe is unable to satisfy its
own obligation on the Notes. Of the $75 million gross proceeds from the
offering, approximately $70.5 million was attributed to the Notes and
approximately $4.5 million was attributed to the 1,475,000 Class B Membership
Interests of CompleTel Holdings. During the third quarter, the Company redeemed
the Class B Membership Interests in exchange for ordinary shares of CompleTel
Europe.
Cash interest will not accrue on the Notes prior to February 15, 2004, with
the Notes accreting to their stated principal amount at maturity at an effective
interest rate of 15.1%. The accretion will be charged to interest expense.
Commencing February 15, 2004, interest on the Notes will accrue at 14% per annum
and will be payable in cash on August 15 and February 15 of each year. The Notes
mature February 16, 2009.
CREDIT AGREEMENT
In January 2000, CompleTel Europe executed an agreement for a E265 million
senior secured credit facility with Goldman Sachs International and BNP Paribas
as co-arrangers of the facility. The facility currently is suspended under the
terms of an agreement between the Company and the lenders.
Under the facility, funds were to be available to several subsidiaries,
initially to include CompleTel ECC B.V., CompleTel Services S.A.S., CompleTel
S.A.S. and CompleTel GmbH, in two tranches including a euro term facility
available until December 31, 2000, in the aggregate amount of E105 million and a
euro
7
<PAGE>
revolving loan facility available until December 31, 2002, in the aggregate
amount of E160 million. The E160 million tranche was to become available after
May 31, 2000, if the euro term facility was fully drawn, and other conditions
were satisfied. Following December 31, 2002, up to E141 million of the
outstanding advances under the euro revolving loan facility were first to be
converted into a term loan, and any other outstanding advances were to become
part of a E19 million working capital facility. The facility matures on
December 31, 2006.
In April 2000, the Company entered into an agreement (the "Suspension
Agreement") with the lenders under the credit facility which provides that the
of the Company will not borrow funds under the credit facility until the credit
facility is amended. In turn, during this period, the lenders will suspend the
application of various provisions, including substantially all of the
representations, covenants and events of default in the credit facility. During
this period, certain other provisions of the credit facility remain in effect
including, without limitation, the obligation to maintain the security interests
of the lenders and to pay, among other things, commitment fees to the lenders.
The Suspension Agreement will be in effect until the earlier of
(a) January 11, 2001, (b) the date the Company cancels the credit facility or
(c) the date an amendment to the credit facility is in effect. The Company plans
to negotiate an amended credit facility prior to the expiration of the
Suspension Agreement which, among other things, will include modifications to
the covenants and permit the Company to borrow under such amended credit
facility. The Company currently is in discussions with the lenders regarding the
extension of the current termination date of the Suspension Agreement.
SENIOR NOTES
In April 2000, CompleTel Europe completed an offering of an aggregate
E200 million 14% senior notes due 2010 (the "Senior Notes"). A portion of the
proceeds were used to repurchase $27.0 million (E27.6 million) principal amount
at maturity of the Notes. CompleTel Europe lent approximately $74.4 million of
the net proceeds of the Senior Notes offering to a wholly-owned subsidiary which
used the funds to invest in a portfolio of securities which is pledged as
security for the Senior Notes. The proceeds of these pledged securities will be
used to make the first six interest payments on the Senior Notes. The Company is
using the remaining proceeds from the Senior Notes to (i) fund the further
deployment of the Company's networks in existing markets and additional markets
in France and Germany, (ii) fund the build out of the IDCs and the expansion of
the Company's Internet-related services, (iii) develop complementary local
access systems, (iv) fund net operating losses, and (v) for general and
corporate purposes.
Long-term debt at September 30, 2000 and December 31, 1999 consisted of the
following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
<S> <C> <C>
14% Senior Discount Notes, face amount
$147.5 million, due 2009, effective interest rate
of 15.1%, at accreted value....................... $ 76,609 $79,922
E265 million senior secured credit facility......... -- --
14% Senior Notes, face amount E200 million due
2010.............................................. 172,240 --
-------- -------
Total............................................. $248,849 $79,922
======== =======
</TABLE>
6. SEGMENT REPORTING:
SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. Operating segments
are components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision maker in
deciding how to allocate resources and in assessing performance.
8
<PAGE>
Currently, management evaluates the Company's development efforts according
to the geographic location of its markets. Certain financial information
reflecting the Company's development efforts is presented below.
As of and for the three months ended September 30, 2000 (in thousands):
<TABLE>
<CAPTION>
COMPLETEL
COMPLETEL COMPLETEL COMPLETEL EUROPE AND
SAS GMBH UK LTD. OTHER CONSOLIDATED
--------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................................ $ 6,477 $ 816 $1,551 $ -- $ 8,844
Adjusted EBITDA......................... (12,304) (6,653) (812) (3,695) (23,464)
Total assets............................ 135,436 96,887 7,615 521,726 761,664
Expenditures for long-lived assets...... 20,502 24,582 1,156 1,743 47,983
</TABLE>
As of and for the three months ended September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
COMPLETEL
COMPLETEL COMPLETEL COMPLETEL EUROPE AND
SAS GMBH UK LTD. OTHER CONSOLIDATED
--------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................................ $ 676 $ -- $ 290 $ 379 $ 1,055
Adjusted EBITDA......................... (8,366) (1,632) (554) 203 (10,349)
Total assets............................ 81,404 13,587 2,048 54,023 135,427
Expenditures for long-lived assets...... 18,159 7,513 786 689 27,147
</TABLE>
As of and for the nine months ended September 30, 2000 (in thousands):
<TABLE>
<CAPTION>
COMPLETEL
COMPLETEL COMPLETEL COMPLETEL EUROPE AND
SAS GMBH UK LTD. OTHER CONSOLIDATED
--------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................................ $11,640 $ 1,518 $3,822 $ -- $ 16,980
Adjusted EBITDA......................... (33,383) (19,849) (1,650) (3,332) (58,214)
Total assets............................ 135,436 96,887 7,615 521,726 761,664
Expenditures for long-lived assets...... 64,798 66,164 1,563 8,070 140,595
</TABLE>
As of and for the nine months ended September 30, 1999 (in thousands):
<TABLE>
<CAPTION>
COMPLETEL
COMPLETEL COMPLETEL COMPLETEL EUROPE AND
SAS GMBH UK LTD. OTHER CONSOLIDATED
--------- --------- --------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues................................ $ 957 $ -- $ 348 $ 419 $ 1,376
Adjusted EBITDA......................... (18,477) (2,368) (1,247) (876) (22,968)
Total assets............................ 81,404 13,797 2,181 54,023 135,427
Expenditures for long-lived assets...... 48,474 7,885 836 4,350 56,675
</TABLE>
9
<PAGE>
7. COMPREHENSIVE INCOME (LOSS):
The Company has calculated comprehensive income (loss) as follows for the
periods presented:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss.................................. $(21,520) $(12,807) $(134,954) $(28,289)
Foreign currency translation
adjustments............................. (48,238) 2,492 (53,999) (2,125)
-------- -------- --------- --------
Comprehensive loss........................ $(69,758) $(10,315) $(188,953) $(30,414)
======== ======== ========= ========
</TABLE>
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD-LOOKING STATEMENTS
The following discussion contains, in addition to historical information,
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. We often use these types of statements when discussing our plans,
strategies, expected revenues, expenses and expenditures, adjusted EBITDA, and
results of operations, the markets for our products and services, the
development of new products and services, our expansion into new markets,
expected sources and uses of funds, and our information management and
operations support systems. You generally can identify these statements by our
use of forward-looking words, such as "plans", "estimates", "anticipates",
"expects", "intends", "will", "should", and "may", and other variations of such
terms, and by discussion of a future strategy. These types of statements involve
risks and uncertainties and other factors that may cause our actual results,
performance, or industry results, to be materially different from what we say or
imply with these forward-looking statements. As a result, we caution you not to
place undue reliance on these types of statements which speak only as the date
of this report.
These risks and uncertainties include, among other things, our ability
to: (1) construct network infrastructure in a timely and efficient manner;
(2) successfully market our network services to current and new customers;
(3) manage rapid and significant changes in technology and the markets for
telecommunications services; (4) obtain and maintain necessary licenses,
permits, rights of way and other required authorizations and consents;
(5) successfully adapt to changes in the regulatory environment affecting our
business; (6) manage increased competition and pricing pressure in our current
and planned markets; (7) obtain additional capital to expand our business or
fulfill additional capital requirements if we experience significant cost
overruns, or delays, or experience demand and usage rates for our services that
vary from our expectations; (8) successfully develop and manage strategic
relationships with partners, suppliers and joint ventures; (9) successfully
control our cost and expense structure; (10) successfully build out our IDCs and
expand our Internet-related services; (11) maintain and upgrade critical
information and operating support systems, such as our billing, provisioning and
network management systems; (12) effectively manage unanticipated system
failures or shutdowns; (13) interconnect with the incumbent carriers in a timely
and cost-efficient manner; and (14) continue to attract and retain skilled
personnel. These forward-looking statements represent management's view only as
of the date of this report and we do not undertake any obligation to update the
forward-looking statements, or changes in events and circumstances on which they
are based, after the date of this report.
Unless otherwise indicated, all references to the number of shares of
CompleTel Europe reflect the five-for-one stock split that it effected on
February 25, 2000.
INTRODUCTION
We are a rapidly growing, facilities-based CLEC provider of switched local
access telecommunications and Internet-related services to business end-users,
government end-users, carriers and Internet service providers in targeted
markets in Western Europe. We offer traditional fixed wireline retail business
telecommunications services to our directly connected on-net customers and sell
wholesale services to other carriers. We also have established an Internet group
that offers a full range of Internet-related services through Internet data
centers (IDCs) we are establishing in France, Germany and the United Kingdom.
Prior to January 1, 2000, the functional currency for CompleTel LLC,
CableTel Management, Inc., CompleTel Holdings LLC, CompleTel N.A.N.V., CompleTel
Europe N.V., a publicly held Dutch holding company that is majority owned by
Parent ("CompleTel Europe"), CompleTel Holding I B.V., CompleTel Holding II B.V.
and CompleTel ECC B.V. was the U.S. dollar, and the functional currency for each
of CompleTel Europe's operating subsidiaries was the applicable local currency.
Effective January 1, 2000, CompleTel Europe, CompleTel
11
<PAGE>
Holding I B.V., CompleTel Holding II B.V. and CompleTel ECC B.V and each of
their subsidiaries, except those in the United Kingdom, adopted the euro as
their functional currency.
RESULTS OF OPERATIONS--THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED
TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
We have generated operating losses and negative cash flow from our operating
activities to date. We expect to continue to generate negative cash flows from
operations in each of our markets while we emphasize development, construction
and expansion of our business and until we establish a sufficient revenue
generating customer base in our markets. We also expect to experience ongoing
operating losses and negative cash flows as we expand our operations in the 17
markets in France and Germany currently included in our business plan and build
out our IDCs and provide Internet-related services in these markets and the
United Kingdom. As a result of our operating history, we have limited operating
and financial data upon which to base an evaluation of our performance.
REVENUES
For the quarter ended September 30, 2000, revenues totaled $8.8 million
compared to $1.1 million for the comparable period in 1999. For the nine months
ended September 30, 2000, revenues totaled $17.0 million, compared to
$1.4 million in the comparable period in 1999.
OPERATING EXPENSES
Our primary operating expenses consist of network costs, selling, general
and administrative expenses, including start-up costs, and depreciation and
amortization expenses.
NETWORK COSTS
Network costs for the three and nine month periods ended September 30, 2000
totaled $9.3 million and $17.5 million, respectively, compared to $0.9 million
and $1.4 million for the comparable periods in 1999. We expect these costs will
increase as we expand our networks and services. Network costs include costs
such as interconnection costs, the cost of leasing high capacity digital lines
that interconnect our network with the networks of other providers, the cost of
leasing local loop lines that connect our customers to our network, and switch
site rent, operating and maintenance costs. We also leases dark fiber and
conduit to establish and augment our networks in certain markets.
MARGINS
For the three months ended September 30, 2000, our direct operating margin,
which includes network costs directly associated with our revenues such as
interconnect costs, totaled $3.6 million, or 41 percent. For the prior quarter,
direct operating margin was 50 percent. The direct operating margin decrease is
primarily the result of the rapid growth in our Internet dial-up and voice
termination revenue, as we were unable to optimize our interconnection
agreements to accommodate the growth rate. This revenue grew to $2.5 million in
the third quarter, compared to $458 thousand in the second quarter, and resulted
in a direct margin loss of 15%. We expect this margin to improve during the
fourth quarter 2000. For the three and nine month periods ended September 30,
2000, gross margin, which includes all network costs, was approximately
break-even. Certain fixed network costs are incurred in advance of the delivery
of the revenue and will be absorbed over time.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The selling, general and administrative expenses include selling and
marketing costs, customer care, billing, corporate administration, salaries and
other personnel costs and legal fees. For the three and nine month periods ended
September 30, 2000, our selling, general and administrative expenses totaled
12
<PAGE>
$23.1 million and $57.7 million, respectively, compared to $10.5 million and
$22.9 million for the comparable periods in 1999. These increases are primarily
due to the rapid growth in the number of personnel and associated wages,
salaries and related costs.
We are assembling a large, locally based, direct sales force in our local
and regional markets and a national account team to service multiple location
customers and key account executives. During the nine months ended
September 30, 2000, our employees increased by 348 employees to 722 as of
September 30, 2000, including 156 sales and marketing employees. We expect the
number of sales and marketing personnel to continue to grow and our selling,
general and administrative costs to increase as we expand our operations.
We incurred amortization of stock-based compensation expense of
approximately $1.5 million and $4.8 million under a fixed stock option plan for
the three and nine month ended September 30, 2000. This amount is based on
deferred compensation at the date of grant totaling approximately
$32.0 million.
We incurred additional stock-based compensation expense of approximately
$41.0 million upon completion of the initial public offering (IPO) of the
ordinary shares of CompleTel Europe due to the resulting vesting of certain
CompleTel LLC performance vesting units held by certain of employees of the
Company in connection with a qualified public offering. This compensation
expense is based on an assumed IPO price of E17.50 per share. In addition, based
upon its value as indicated in the IPO, the Company recorded compensation
expense and deferred compensation in the quarter ended March 31, 2000, of
approximately $23.2 million and $72.4 million, respectively, for performance
vesting units that will not vest as a result of the IPO but which may vest
either upon a qualified sale by Madison Dearborn Partners, or based on a deemed
vesting date in May 2005. The additional deferred compensation is being
amortized to expense over the remaining vesting period to May 18, 2005 (deemed
vesting date if not prior due to a qualified sale by Madison Dearborn Partners).
The recorded amount of compensation expense and deferred compensation for these
variable awards are adjusted at each reporting date to reflect management's
estimate of the number of such units that will ultimately vest and the fair
market value of those units as of the end of the reporting period based on the
then current market value of the ordinary shares of CompleTel Europe.
Accordingly, for the three and nine month periods ended September 30, 2000, we
reduced previously recorded compensation expense by approximately $5.2 million
and $12.4 million, respectively, and deferred compensation by approximately
$18.1 million and $49.2 million, respectively, based on the closing price per
share on September 30, 2000.
DEPRECIATION AND AMORTIZATION
For the three and nine-month periods ended September 30, 2000, we recorded
depreciation and amortization expense of $6.4 million and $13.4 million,
respectively, compared to $1.4 million and $1.9 million for the comparable
periods in 1999. These increases are due to increases in network and non-network
related property and equipment. We started recording network depreciation during
the quarter ended September 30, 1999 when we initiated network services.
OTHER INCOME AND EXPENSE
We incurred interest expense, net of $1.6 million of capitalized interest,
of $7.3 million during the quarter ended September 30, 2000. Interest expense
for the quarter ended September 30, 1999 totaled $2.2 million. For the
nine-month periods ended September 30, 2000 and 1999, interest expense totaled
$15.6 million, net of $3.8 million of capitalized interest and $6.4 million,
respectively. The interest expense recorded reflects interest on the senior
notes due 2010, the accretion of the senior discount notes due 2009 and the
amortization of deferred financing costs.
Interest income totaled $6.9 million and $16.1 million for the three and
nine months ended September 30, 2000, respectively, compared to $0.6 million and
$2.2 million for the comparable periods in 1999. CompleTel Europe applied for an
exemption from the regulations required by the Investment Company Act of 1940.
CompleTel Europe received the exemption in August 2000. Through the time that it
received
13
<PAGE>
the exemption, it had invested approximately $514.0 million of the proceeds from
the IPO and senior notes due 2010 in short-term maturities of U.S. treasury
bills. Interest income from these U.S. treasury bills totaled $12.1 million for
the nine month period ended September 30, 2000. Upon receiving the exemption and
the final maturities of the U.S. treasury bills, the Company invested the
proceeds in euro denominated instruments.
FOREIGN EXCHANGE LOSS AND OTHER EXPENSES
The revenues, costs, assets and liabilities of CompleTel Europe and its
operating subsidiaries are, for the most part, denominated in euros, which is
their functional currency, effective January 1, 2000. Therefore, we are exposed
to changes in currency exchange rates due to our U.S. dollar denominated debt
and investments. The senior discount notes which CompleTel Europe issued in
February 1999 expose us to exchange rate fluctuations as the payment of
principal and interest on these notes will be made in U.S. dollars, and a
substantial portion of our future cash flow used to service these payments will
be denominated in local currencies, including the euro. We intend to take steps
to minimize exchange rate risks, however we cannot assure you that we will not
be materially adversely affected by variations in currency exchange rates.
NET LOSS
Net loss during the three and nine month periods ended September 30, 2000
was $21.5 million and $135.0 million, respectively, compared to net losses
during the similar periods in 1999 of $12.8 million and $28.3 million,
respectively. The increases were primarily the result of non-cash compensation
charges and substantial start-up costs of our operating subsidiaries.
ADJUSTED EBITDA
Since the commencement of operations, we have experienced significant
operating losses and negative Adjusted EBITDA, as set forth below. We expect to
continue to generate significant operating losses and negative Adjusted EBITDA
in each of our markets as we develop, construct and expand our business, until
we have established a sufficient revenue-generating customer base in each
market.
We expect to experience increasing consolidated operating losses and
negative cash flows from operations as we expand our operations and enter new
markets, even if and after we have achieved positive cash flow from operations
in our initial markets. The following table summarizes the Adjusted EBITDA
calculation for the periods indicated (amounts in thousands of U.S. dollars).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Net loss........................................... $(134,954) $(28,289)
Interest expense (net of interest income and
capitalized interest)............................ 15,645 6,391
Interest income.................................... (16,095) (2,231)
Incomes taxes...................................... -- --
Depreciation and amortization...................... 13,419 1,851
Non-cash compensation expense...................... 57,400 728
Foreign exchange loss and other expense............ 21,228 277
Gain on early extinguishment of debt............... (1,012) --
Accretion of redeemable cumulative convertible
preferred units.................................. 2,353 3,616
--------- --------
Negative Adjusted EBITDA........................... $ (42,016) $(17,657)
========= ========
</TABLE>
14
<PAGE>
In view of the Company's highly leveraged capital structure, we consider
Adjusted EBITDA to be an important performance measure. Adjusted EBITDA consists
of net earnings (loss) before interest expense, interest income, income taxes,
non-cash compensation expense, depreciation and amortization and other non-cash
charges, including foreign currency exchange rate gains and losses.
Conceptually, Adjusted EBITDA measures the amount of income generated each
period that could be used to service debt, because it is independent of the
actual leverage employed by the business; but Adjusted EBITDA ignores funds
needed for capital expenditures, income taxes and expansion. Some investment
analysts track the relationship of Adjusted EBITDA to total debt as one measure
of financial strength. However, Adjusted EBITDA does not represent cash provided
or used by operating activities and you should not consider Adjusted EBITDA in
isolation or as a substitute for measures of performance prepared in accordance
with U.S. generally accepted accounting principles.
Adjusted EBITDA also may differ significantly from cash flows from operating
activities as reflected in a statement of cash flows prepared in accordance with
U.S. generally accepted accounting principles. Cash from operating activities is
net of interest and taxes paid and is a more comprehensive determination of
periodic income on a cash, rather than accrual, basis and is exclusive of
non-cash items of income and expenses such as depreciation and amortization. In
contrast, Adjusted EBITDA is derived from accrual basis income and is not
adjusted for changes in working capital. Consequently, Adjusted EBITDA is not
affected by the timing of receivable collections or when accrued expenses are
paid. We are not aware of any uniform standards for determining Adjusted EBITDA.
Presentations of Adjusted EBITDA may not be calculated consistently by different
companies in the same or similar businesses. As a result, the reported Adjusted
EBITDA for the Company may not be comparable to similarly titled measures used
by other companies.
STATEMENTS OF CASH FLOWS
We had cash and cash equivalents of $428.2 million as of September 30, 2000,
an increase of $367.7 million from $60.5 million as of December 31, 1999.
Additionally, we had $70.1 million of restricted investments placed in escrow
for debt service. Details of the change in cash and cash equivalents are set
forth in the table below (in thousands).
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities............... $ (46,602) $ (6,693)
Cash flows from investing activities............... (191,379) (56,675)
Cash flows from financing activities............... 648,704 125,029
Effect of exchange rates on cash................... (42,957) (5,227)
--------- --------
Net increase in cash and cash equivalents.......... 367,766 56,434
Cash and cash equivalents at beginning of period... 60,469 3,744
--------- --------
Cash and cash equivalents at end of period......... $ 428,235 $ 60,178
========= ========
</TABLE>
CASH FLOWS FROM OPERATING ACTIVITIES
During the nine months ended September 30, 2000, we used $46.6 million in
operating activities, a $39.9 million increase from the $6.7 million used in
operating activities for the similar period in 1999. This increase was primarily
related to the substantial organization and start-up costs incurred during the
development of the networks. Our development efforts increased significantly
since the first nine months of 1999.
15
<PAGE>
CASH FLOWS FROM INVESTING ACTIVITIES
We used approximately $191.4 million of cash in investing activities during
the nine months ended September 30, 2000, compared to a use of $56.7 million for
the similar period in 1999. The increase was primarily due to investment of the
proceeds from the CompleTel Europe IPO during the first quarter of 2000 and the
purchase of approximately $70.1 million of securities that are currently pledged
as security for the senior notes due 2010 (see Liquidity and Capital Resources
below).
CASH FLOWS FROM FINANCING ACTIVITIES
We had approximately $648.7 million of cash flows from financing activities
during the nine months ended September 30, 2000, compared to $125.0 million for
the similar period in 1999. The increase was due to the proceeds from the
CompleTel Europe IPO and the senior notes due 2010, less approximately
$14.2 million used to repurchase a portion of the outstanding senior discount
notes due 2009. Cash flows from financing activities during the first quarter of
1999 resulted from proceeds from the senior discount note offering and equity
contributions from CompleTel LLC.
LIQUIDITY AND CAPITAL RESOURCES
The telecommunications business is capital intensive. We have needed and
will continue to need large amounts of capital to fund capital expenditures,
working capital, debt service, and operating losses. As of September 30, 2000,
we had $452.6 million of cash and restricted short-term investments and
$45.7 million of restricted long-term investments in escrow for debt service.
In January 2000, CompleTel Europe and certain subsidiaries executed a
E265 million senior secured credit facility agreement with Goldman Sachs
International and BNP Paribas as co-arrangers of the facility. In April 2000,
the Company entered into a suspension agreement with the lenders whereby it
agreed not to borrow funds under the credit facility in exchange for their
agreement to suspend the application of substantially all of the
representations, covenants and events of default. The Company currently is in
discussions with the lenders regarding the extension of the termination date of
the suspension agreement. There can be no assurances that it will be successful
in negotiating an extension of the termination date of the suspension agreement
or an amended credit facility on acceptable terms. See Note 5 of the Notes to
Unaudited Consolidated Condensed Financial Statements included elsewhere in this
report for a discussion of this facility and the suspension agreement. As of
September 30, 2000, the Company had no borrowings outstanding under the
facility.
In April 2000, CompleTel Europe completed an offering of an aggregate
E200 million 14% senior notes due 2010 (the "Senior Notes"). A portion of the
proceeds from the Senior Notes offering were used to repurchase $27.0 million
(E27.6 million) principal amount at maturity of our existing senior discount
notes. CompleTel Europe lent approximately $74.4 million of the net proceeds to
a wholly-owned subsidiary which used the funds to invest in a portfolio of
securities which is pledged as security for the Senior Notes. The proceeds of
these pledged securities will be used to make the first six interest payments on
the Senior Notes. The remaining proceeds from the Senior Notes offering are
being used to (i) fund the further deployment of the Company's networks in its
existing markets and additional markets in France and Germany, (ii) fund the
build out of the IDCs and expansion of the Internet-related services,
(iii) develop complementary local access systems, (iv) fund net operating
losses, and (v) for general and corporate purposes.
CAPITAL EXPENDITURES
During the quarters ended September 30, 2000 and 1999, we made capital
expenditures of $48.0 million and $27.1 million, respectively, for property and
equipment necessary to deploy networks in our initial markets. For the nine
month periods ended September 30, 2000 and 1999, we made capital expenditures
totaling $140.6 million and $56.7 million respectively. We also used capital
during these periods to fund operating losses.
16
<PAGE>
We are currently implementing our business plan to deploy and operate
metropolitan area networks ("MANs") in 17 markets in France and Germany and
provide Internet-related services in these cities and the United Kingdom. We
believe that we have fully funded our current business plan to construct MANs in
these 17 markets and build out the IDCs and provide these Internet-related
services.
The actual amount and timing of our future capital requirements may differ
materially from current estimates, and additional financing may be required in
the event of departures from our business plans and projections, including those
caused by unforeseen delays, cost overruns, engineering design changes, demand
for our services that varies from our expectations, adverse regulatory,
technological or competitive developments, or delays in obtaining necessary
rights-of-way. We may also require additional capital, or require financing
sooner than anticipated, if we alter the schedule or target markets of our
roll-out plan in response to regulatory, technological or competitive
developments (including additional market developments and new opportunities
within and outside of our target markets). We intend to evaluate potential joint
ventures, strategic alliances, and acquisition opportunities on an ongoing basis
as they arise, and we may require additional financing if we elect to pursue any
such opportunities. We also may be required to seek additional financing if we
elect to provide complementary telecommunications services or deploy networks in
other Western European markets beyond our target markets. Sources of additional
financing may include commercial bank borrowings, vendor financing and/or the
private or public sale of equity or debt securities.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
("SAB 101"), which is required to be adopted in the fourth quarter of 2000 and
applied retroactively for the year. SAB 101 provides the staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues. We are currently evaluating the potential impact, if any,
the adoption of SAB 101 will have on our financial position and results of
operations.
Emerging Issues Task Force Issue 99-19, "Reporting Revenue Gross as a
Principal versus Net as an Agent" ("EITF 99-19") provides indicators that should
be considered in determining whether revenue should be recognized based on the
gross amount billed or the net amount retained. Implementation of the consensus
guidance in EITF 99-19 is required no later than the required implementation
date for SAB 101. We are currently evaluating the potential impact, if any, the
adoption of EITF 99-19 will have on our statements of operations.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
noncompensatory plan; the accounting consequence of various modifications to the
terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The
application of FIN 44 has not had a material impact on our financial position or
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
INVESTMENT PORTFOLIO AND INTEREST RATE SENSITIVITY
Our investment policy is limited by the indentures for the outstanding notes
and the senior secured credit facility. We are restricted to investing in
financial instruments with a maturity of one year or less (with certain limited
exceptions). We are required to utilize investments that meet high credit
quality
17
<PAGE>
standards, such as obligations of the U.S. government or any European Economic
Community member government or any agency thereof guaranteed by the country,
certificates of deposits, money market deposits, and commercial paper with a
rating of A-1 or P-1. Under the terms of the senior secured credit facility, the
Company would be required to enter into an interest rate hedging program with
respect to 50% of every tranche of $50 million borrowed to mitigate foreign
currency exchange rate risk. The Company has entered into a suspension agreement
concerning the facility, which is described in Item 2 and Note 5 of the Notes to
Unaudited Consolidated Financial Statements included in this report.
Interest income earned on our investment portfolio is affected by changes in
short-term interest rates. We are thus exposed to market risk related to changes
in market interest rates. To date, we have managed these risks by monitoring
market rates and the duration of our investments.
IMPACT OF FOREIGN CURRENCY RATE CHANGES
The Company's operations are not significantly exposed to changes in
currency exchange rates because its revenues, costs, assets and liabilities are,
for the most part, denominated in euros. However, the senior discount notes
which were issued in February 1999 expose the Company to exchange rate
fluctuations as the payment of principal and interest on the notes will be made
in dollars, and a substantial portion of its future cash flows used to service
these payments will be denominated in euros. While we intend to take steps to
minimize exchange rate risks, we cannot assure you that we will not be
materially adversely affected by variations in currency exchange rates.
The operating subsidiaries' monetary assets and liabilities are subject to
foreign currency exchange risk if purchases of network equipment and services
are denominated in currencies other than the subsidiary's own functional
currency. However, the majority of such purchases to date have been based on
each subsidiary's functional currency.
The spot rates for the euro are shown below expressed in dollar per one
euro.
<TABLE>
<S> <C>
December 31, 1998........................................... $ 1.181(1)
September 30, 1999.......................................... $ 1.033
December 31, 1999........................................... $ 1.007
September 30, 2000.......................................... $0.8796
</TABLE>
------------------------
(1) Based on the exchange rate as of January 4, 1999, the date on which the Euro
Noon Buying Rate was first quoted.
We intend to manage exchange rate risk by incurring financing liabilities
denominated in the currency of the country of operations. In addition, we intend
to adopt hedging strategies to manage exposure to foreign currency exchange rate
risk.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
The exhibits listed below are filed as part of this Quarterly Report on
Form 10-Q or are incorporated by reference into this Quarterly Report on
Form 10-Q.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
--------------------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
------------------------
(b) Reports on Form 8-K
None
19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
COMPLETEL LLC
(Registrant)
/s/ WILLIAM H. PEARSON
-----------------------------------------
William H. Pearson
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)
Date: November 14, 2000
/s/ DAVID E. LACEY
-----------------------------------------
David E. Lacey
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
Date: November 14, 2000
</TABLE>
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