<PAGE>
FILED PURSUANT TO
RULE 424(B)(3)
REGISTRATION NO. 333-41126
333-41126-01
PROSPECTUS SUPPLEMENT DATED DECEMBER 8, 2000
(TO PROSPECTUS DATED JULY 24, 2000)
COMPLETEL EUROPE N.V.
14% SERIES B SENIOR NOTES DUE 2010
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM ________ TO ________
</TABLE>
Commission file number 000-30075
------------------------
COMPLETEL EUROPE N.V.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
AMSTERDAM, THE NETHERLANDS 98-0202823
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
</TABLE>
KRUISWEG 609
2132 NA HOOFDDORP
THE NETHERLANDS
(Address of principal executive offices)
(31) 20 666 1701
(Registrant'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 / /
As of November 1, 2000, the Registrant had outstanding capital stock of
157,413,060 ordinary shares.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
COMPLETEL EUROPE N.V.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited)
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 Shareholders' 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................................. 10
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 EUROPE N.V. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(STATED IN THOUSANDS OF EUROS--SEE NOTE 2)
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. E 483,533 E 57,115
Short-term investments, restricted........................ 27,742 --
Customer accounts receivable, net......................... 10,820 1,709
Affiliate receivables..................................... -- 304
VAT receivables, prepaid expenses and other current
assets.................................................. 29,154 14,677
-------------- -------------
Total current assets.................................... 551,249 73,805
-------------- -------------
LONG TERM ASSETS:
Property and equipment, net (see Note 4).................. 229,029 91,946
Licenses and other intangibles, net....................... 4,600 4,557
Deferred financing costs, net............................. 20,700 5,082
Long-term investments, restricted......................... 51,983 --
Other long-term assets.................................... 2,463 818
-------------- -------------
Total long-term assets.................................. 308,775 102,403
-------------- -------------
TOTAL ASSETS................................................ E 860,024 E176,208
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Network vendor payables................................... E 59,538 E 28,593
Accrued liabilities and trade accounts payable............ 63,712 22,536
Affiliate payables........................................ 978 2,412
-------------- -------------
Total current liabilities............................... 124,228 53,541
-------------- -------------
LONG-TERM DEBT.............................................. 282,908 79,596
-------------- -------------
SHAREHOLDERS' EQUITY:
Ordinary shares, E .10 par value; 625,000,000 shares
authorized, 157,413,060 and 126,133,060 shares issued
and outstanding at September 30, 2000 and December 31,
1999, respectively...................................... 15,741 12,613
Additional paid-in capital................................ 706,534 116,463
Deferred compensation..................................... (51,804) (28,036)
Other cumulative comprehensive income (see Note 7)........ 758 728
Accumulated deficit....................................... (218,341) (58,697)
-------------- -------------
TOTAL SHAREHOLDERS' EQUITY.................................. 452,888 43,071
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. E 860,024 E176,208
============== =============
</TABLE>
The accompanying notes are an integral part of these unaudited
consolidated condensed balance sheets.
1
<PAGE>
COMPLETEL EUROPE N.V. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(STATED IN THOUSANDS OF EUROS, EXCEPT SHARE AND PER AMOUNTS--SEE NOTE 2)
(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............................... E 9,537 E 1,106 E 18,003 E 1,401
OPERATING EXPENSES:
Network costs........................ 9,978 913 18,540 1,434
Selling, general and
administrative..................... 20,977 9,528 51,351 19,114
Management fees to affiliated
party.............................. 3,873 1,627 10,023 3,485
Non-cash deferred compensation....... (3,546) 514 60,683 720
Depreciation and amortization........ 6,838 1,474 14,015 1,862
----------------- ----------------- ----------------- ----------------
Total operating expenses........... 38,120 14,056 154,612 26,615
----------------- ----------------- ----------------- ----------------
OPERATING LOSS......................... (28,583) (12,950) (136,609) (25,214)
OTHER INCOME (EXPENSE):
Interest income...................... 7,394 667 16,953 2,132
Interest expense, net of capitalized
interest........................... (7,889) (1,953) (16,401) (5,849)
Foreign exchange loss and other
expense............................ (6,189) 14 (24,640) (232)
----------------- ----------------- ----------------- ----------------
Total other income (expense)....... (6,684) (1,272) (24,088) (3,949)
----------------- ----------------- ----------------- ----------------
NET LOSS BEFORE INCOME TAXES........... (35,267) (14,222) (160,697) (29,163)
INCOME TAX PROVISION................... -- -- -- --
----------------- ----------------- ----------------- ----------------
NET LOSS BEFORE EXTRAORDINARY ITEM..... (35,267) (14,222) (160,697) (29,163)
----------------- ----------------- ----------------- ----------------
EXTRAORDINARY ITEM:
Gain on early extinguishment of
debt............................... -- -- 1,053 --
----------------- ----------------- ----------------- ----------------
NET LOSS............................... E (35,267) E (14,222) E (159,644) E (29,163)
================= ================= ================= ================
BASIC AND DILUTED LOSS PER ORDINARY
SHARE:
Net loss before extraordinary item... E (0.22) E (0.13) E (1.09) E (0.30)
================= ================= ================= ================
Extraordinary item................... E -- E -- E 0.01 E --
================= ================= ================= ================
Net loss............................. E (0.22) E (0.13) E (1.08) E (0.30)
================= ================= ================= ================
WEIGHTED AVERAGE NUMBER OF ORDINARY
SHARES OUSTANDING.................... 157,413,060 105,357,145 147,252,768 95,764,079
================= ================= ================= ================
</TABLE>
The accompanying notes are an integral part of these
unaudited consolidated condensed financial statements.
2
<PAGE>
COMPLETEL EUROPE N.V. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(STATED IN THOUSANDS OF EUROS, EXCEPT SHARE AMOUNTS--SEE NOTE 2)
(UNAUDITED)
<TABLE>
<CAPTION>
ORDINARY SHARES ADDITIONAL
-------------------------------- PAID-IN DEFERRED
NUMBER AMOUNT CAPITAL COMPENSATION
----------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1999......................... 126,133,060 E12,613 E116,463 E(28,036)
Issuance of ordinary shares in connection with
initial public offering, net of underwriters'
discount and offering costs.................... 31,280,000 3,128 508,781 --
Deemed contributions by Parent related to
allocation of non-cash compensation charges.... -- -- 78,663 (67,531)
Repurchase of shares allocated from Parent....... -- -- (3,128) --
Issuance of stock options........................ -- -- 5,755 (5,755)
Amortization of deferred compensation............ -- -- -- 49,518
Cumulative translation adjustment................ -- -- -- --
Net loss......................................... -- -- -- --
----------------- ------------ ------------- -------------
BALANCE, September 30, 2000........................ 157,413,060 E15,741 E706,534 E(51,804)
================= ============ ============= =============
<CAPTION>
OTHER
CUMULATIVE
COMPREHENSIVE ACCUMULATED
INCOME DEFICIT TOTAL
-------------- -------------- --------------
<S> <C> <C> <C>
BALANCE, December 31, 1999......................... E728 E (58,697) E 43,071
Issuance of ordinary shares in connection with
initial public offering, net of underwriters'
discount and offering costs.................... -- -- 511,909
Deemed contributions by Parent related to
allocation of non-cash compensation charges.... -- -- 11,132
Repurchase of shares allocated from Parent....... -- -- (3,128)
Issuance of stock options........................ -- -- --
Amortization of deferred compensation............ -- -- 49,518
Cumulative translation adjustment................ 30 -- 30
Net loss......................................... -- (159,644) (159,644)
--------- -------------- --------------
BALANCE, September 30, 2000........................ E758 E(218,341) E 452,888
========= ============== ==============
</TABLE>
The accompanying notes are an integral part of this unaudited consolidated
condensed financial statements.
3
<PAGE>
COMPLETEL EUROPE N.V. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(STATED IN THOUSANDS OF EUROS--SEE NOTE 2)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. E(159,644) E(29,163)
Adjustment to reconcile net loss to cash used by operating
activities--
Depreciation and amortization........................... 14,015 1,862
Non-cash compensation expense........................... 60,683 720
Accretion of senior discount notes...................... 8,481 6,134
Amortization of deferred financing costs................ 1,002 154
Gain on early extinguishment of debt.................... (1,053) --
Unrealized foreign exchange loss........................ 11,237 --
Changes in assets and liabilities--
Increase in customer accounts receivable.............. (9,111) (7,364)
Increase in VAT receivables, prepaid expenses and
other current assets................................ (14,477) (1,239)
Increase in other long-term assets.................... (1,645) (145)
Increase in accrued liabilities and trade accounts
payable............................................. 41,176 22,423
Decrease in net affiliate payables/receivables........ (1,130) (6,673)
-------------- --------------
Net cash used by operating activities............... (50,466) (13,291)
-------------- --------------
INVESTING ACTIVITIES:
Expenditures for property and equipment................... (149,882) (49,710)
Increase in network vendor payables....................... 30,945 --
Acquisition of licenses and other intangibles............. (368) (2,909)
Restricted investments including funds placed in escrow... (79,725) (64,676)
Proceeds from escrowed offering and investment earnings... -- 64,676
-------------- --------------
Net cash used by investing activities............... (199,030) (52,619)
-------------- --------------
FINANCING ACTIVITIES:
Net proceeds from senior discount notes................... -- 63,063
Net proceeds from initial public offering................. 511,909 --
Net proceeds from issuance of common shares and subsequent
capital contributions................................... -- 55,720
Net proceeds from senior notes............................ 192,995 --
Repurchase of senior discount notes....................... (14,867) --
Deferred financing costs.................................. (9,612) (3,789)
-------------- --------------
Net cash provided by financing activities........... 680,425 114,994
-------------- --------------
Effect of exchange rates on cash............................ (4,511) 4,725
-------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 426,418 53,809
CASH AND CASH EQUIVALENTS, beginning of period.............. 57,115 1,472
-------------- --------------
CASH AND CASH EQUIVALENTS, end of period.................... E 483,533 E 55,281
============== ==============
</TABLE>
The accompanying notes are integral part of these unaudited
consolidated condensed financial statements.
4
<PAGE>
COMPLETEL EUROPE N.V. AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. GENERAL:
CompleTel Europe N.V., a Dutch holding company ("CompleTel Europe")
(together with its direct and indirect wholly-owned subsidiaries, the "Company")
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 is majority owned by CompleTel LLC ("Parent"), a Delaware
limited liability company.
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 it has fully funded its current business plan to construct metropolitan
area networks 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 unaudited
consolidated condensed financial statements should be read in conjunction with
the audited financial statements of the Company 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 Company has 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 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 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, the Company has
elected to adopt the euro as its financial reporting currency and the Company
has restated prior period amounts by translating prior period U.S. dollar
amounts into the euro. The Company's results of operations (accumulated deficit)
for periods prior to January 1, 1999 (introduction date for the euro) have been
restated using the January 1, 1999 exchange rate between the U.S. dollar and the
euro.
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 E547.4 million,
based on the euro public offering price of E17.50 per share. A portion of the
IPO shares, 8,343,931, were offered in the U.S., at a public offering price of
$17.09 per share. After giving effect to the translation of U.S. dollars
received for shares offered in the U.S., gross proceeds translated into euros
totaled approximately E551.4 million. The Company is using the proceeds to
(i) further develop fiber optic networks in its target 17 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 initial public offering (IPO) in March 2000, caused
certain common units of Parent held by employees of the Company to vest as a
result of meeting specified performance vesting criteria. As a result, the
Company recorded compensation expense of approximately E42.4 million based on
the value of those vested common units as implied by the IPO price received. In
addition, based upon the IPO value indicated above, the Company recorded
additional compensation expense and deferred compensation in the quarter ended
March 31, 2000, of approximately E24.0 million and E74.9 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 date. 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 agreements). The
recorded amount of compensation expense and deferred compensation for these
variable awards are adjusted at each quarterly 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 E5.4 million and E12.9 million, respectively, and deferred
compensation by approximately E18.7 million and E50.9 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
E1.9 million and E7.2 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................................... E132,353 E42,343
Office furniture and equipment...................... 3,926 1,384
Computer equipment and software..................... 9,486 5,095
Leasehold improvements.............................. 6,277 1,847
Buildings........................................... 205 205
------------- ------------
Property and equipment, in service.................. 152,247 50,874
Less: accumulated depreciation...................... (16,944) (4,144)
------------- ------------
Property and equipment, in service, net............. 135,303 46,730
Network construction in progress.................... 93,726 45,216
------------- ------------
Property and equipment, net......................... E229,029 E91,946
============= ============
</TABLE>
5. LONG-TERM DEBT:
SENIOR DISCOUNT NOTES
In February 1999, the Company 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 (E64.9 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 the Company and it is
unlikely that Parent would 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 (E67.1 million) gross proceeds from
the offering, approximately $70.5 million (E63.1 million) was attributed to the
Notes and approximately $4.5 million (E4.0 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, the Company 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, the funds were to be available to the Company's
subsidiaries, initially to include CompleTel ECC B.V., CompleTel Services
S.A.S., CompleTel S.A.S., and CompleTel GmbH, in two
7
<PAGE>
tranches including a euro term facility available until December 31, 2000, in
the aggregate amount of E105 million, and a euro 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
Company will not borrow funds under the credit facility until the credit
facility is amended. In turn, during this period, the lenders have suspended 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, the Company 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. The Company lent approximately E78.0 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 are 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 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....................... E 82,908 E79,596
E265 million senior secured credit facility......... -- --
14% Senior Notes, face amount E200 million, due
2010.............................................. 200,000 --
------------- ------------
Total............................................. E282,908 E79,596
============= ============
</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
8
<PAGE>
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.
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................................ E 6,969 E 878 E 1,690 E -- E 9,537
Adjusted EBITDA......................... (13,590) (7,348) (897) (3,456) (25,291)
Total assets............................ 153,974 110,149 8,657 587,244 860,024
Expenditures for long-lived assets...... 23,308 28,466 1,348 4,853 57,975
</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................................ E 816 E -- E 290 E -- E 1,106
Adjusted EBITDA......................... (7,983) (1,557) (529) (893) (10,962)
Total assets............................ 76,436 12,955 2,048 39,637 131,076
Expenditures for-long-lived assets...... 17,315 7,164 749 299 25,527
</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................................ E 12,342 E 1,608 E 4,053 E -- E 18,003
Adjusted EBITDA......................... (35,485) (21,099) (1,754) (3,573) (61,911)
Total assets............................ 153,974 110,149 8,657 587,244 860,024
Expenditures for-long-lived assets...... 69,055 71,737 1,773 7,685 150,250
</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................................ E 1,074 E -- E 327 E -- E 1,401
Adjusted EBITDA......................... (17,200) (2,204) (1,161) (2,067) (22,632)
Total assets............................ 76,436 12,955 2,048 39,637 131,076
Expenditures for-long-lived assets...... 40,943 7,404 785 3,437 52,619
</TABLE>
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.................................. E(35,267) E(14,222) E(159,644) E(29,163)
Foreign currency translation
adjustments............................. (14,719) 3,422 30 (463)
------------- ------------- -------------- -------------
Comprehensive loss........................ E(49,986) E(10,800) E(159,614) E(29,626)
============= ============= ============== =============
</TABLE>
9
<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 shuqtdowns; (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 share numbers reflect the five-for-one stock
split we 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 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 Holding I B.V., CompleTel Holding II B.V.
10
<PAGE>
and CompleTel ECC B.V and each of their subsidiaries, except those in the United
Kingdom, adopted the euro as their functional currency. Additionally, we adopted
the euro as our financial reporting currency. As a result, we have restated
prior period amounts by translating prior period U.S. dollar amounts into the
euro. Our results of operations (accumulated deficit) for periods prior to
January 1, 1999 (introduction date for the euro) have been restated using the
January 1, 1999 exchange rate between the U.S. dollar and the euro.
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 that market. 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, build out
our IDCs and provide Internet-related services in these markets and the United
Kingdom. We believe we have fully funded our current business plan to construct
metropolitan area networks in these 17 markets, build out the IDCs and provide
these Internet-related services. As a result of our operating history,
prospective investors have limited operating and financial data about us upon
which to base an evaluation of our performance.
REVENUES
For the quarter ended September 30, 2000, revenues totaled E9.5 million
compared to E1.1 million for the comparable period in 1999. For the nine months
ended September 30, 2000, revenues totaled E18.0 million, compared to
E1.4 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, management fees to
affiliate, and depreciation and amortization expenses.
NETWORK COSTS
Network costs for the three and nine month periods ended September 30, 2000
totaled E10.0 million and E18.5 million, respectively, compared to E0.9 million
and E1.4 million for the comparable periods in 1999. We expect these costs will
increase as we expand our networks and services. Our 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 lease 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 E4.0 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 E2.7 million in
the third quarter, compared to E500 thousand in the second quarter, and resulted
in a direct margin loss of 15%. We expect this margin to improve during the
11
<PAGE>
fourth quarter 2000. For the three and nine month periods ended September 30,
2000, our 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
Our 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, selling, general and administrative expenses totaled
E21.0 million and E51.4 million, respectively, compared to E9.5 million and
E19.1 million for the comparable periods in 1999. These increases are primarily
due to the rapid growth in the number of personnel and the expenses related to
wages and salaries.
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, the number of employees increased by 348 employees, to 722
as of September 30, 2000, including 156 employees in the sales and marketing
area, compared to 374 employees as of December 31 1999. 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 E1.7 million and E5.1 million under our fixed stock option plan
for the three and nine month periods ended September 30, 2000. These amounts are
based on deferred compensation at the date of grant totaling approximately
E31.9 million.
We incurred additional stock-based compensation expense of approximately
E42.4 million upon completion of our initial public offering in March 2000 due
to the resulting vesting of certain CompleTel LLC performance vesting common
units held by certain of our employees in connection with a qualified public
offering. This compensation expense is based on an IPO price of E17.50 per
share. In addition, based upon our value as indicated in the IPO, we recorded
compensation expense and deferred compensation in the quarter ended March 31,
2000, of approximately E24.0 million and E74.9 million, respectively, for
performance vesting units that will not vest as a result of the IPO but which
may vest upon a qualified sale by Madison Dearborn Partners or in May 2005 based
on a deemed vesting date. 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 months ended September 30, 2000, we reduced
previously recorded compensation expense by approximately E5.4 million and E12.9
million, respectively, and deferred compensation by approximately E18.7 million
and E50.9 million, respectively, based on the closing price per share on
September 30, 2000.
MANAGEMENT FEES TO AFFILIATE
CompleTel LLC and its wholly-owned subsidiary, CableTel Management, Inc.,
CompleTel Europe, and each of the entities between CompleTel Europe and our
operating subsidiaries, incur overhead costs and expenses associated with their
holding company operations. Our operating subsidiaries bear their proportionate
share of these costs and expenses. The operating subsidiaries pay CableTel
Management, Inc. a management fee of 105% (103% for periods prior to the end of
January 1999) of all allocated costs, expenses, charges and disbursements that
CableTel Management, Inc. and
12
<PAGE>
CompleTel Europe incur in rendering services to each of the companies. These
services rendered are ordinary and necessary general and administrative expenses
of CompleTel Europe that were paid on its behalf by CableTel Management, Inc.
For the three and nine month periods ended September 30, 2000, we recorded
E3.9 million and E10.0 million, respectively, of related-party management fees
compared to E1.6 million and E3.5 million for the same periods of 1999.
Beginning October 1, 2000, the overhead costs, charges and disbursements
described above will be accounted for within CompleTel Europe Headquarters
S.A.S., a wholly owned subsidiary of CompleTel Europe. Accordingly, management
fees to affiliate will no longer be classified as such on a consolidated basis,
as the costs incurred by CompleTel Europe Headquarters S.A.S will be classified
as part of selling, general and administrative costs.
DEPRECIATION AND AMORTIZATION
For the three and nine month periods ended September 30, 2000, we recorded
depreciation and amortization expense of E6.8 million and E14.0 million,
respectively, compared to E1.5 million and E1.9 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 E1.9 million of capitalized interest,
of E7.9 million during the quarter ended September 30, 2000. Interest expense
for the quarter ended September 30, 1999 totaled E1.9 million. For the nine
month periods ended September 30, 2000 and 1999, interest expense totaled
E16.4 million, net of E5.8 million of capitalized interest, and E5.8 million,
respectively. The interest expense recorded reflects interest on our senior
notes, the accretion of our senior discount notes and the amortization of
deferred financing costs.
Interest income totaled E7.4 million and E17.0 million for the three and
nine month periods ended September 30, 2000, respectively, compared to
E0.6 million and E2.1 million for the comparable periods in 1999. We applied for
an exemption from regulations required by the Investment Company Act of 1940. We
received the exemption in August 2000. Through the time that we received the
exemption, we had invested approximately E538 million of the proceeds from our
initial public offering (IPO) and our senior notes due 2010 in short-term
maturities of U.S. treasury bills. Interest income from these U.S. treasury
bills totaled E13.0 million for the nine month period ended September 30, 2000.
Upon receiving the exemption and the final maturities of the U.S. treasury
bills, we invested the proceeds in euro-denominated investments.
FOREIGN EXCHANGE LOSS AND OTHER EXPENSES
Our revenues, costs, assets and liabilities are, for the most part,
denominated in euros, which is our 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 notes which we issued in
February 1999 expose us to exchange rate fluctuations as the payment of
principal and interest on the 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. In addition, because of
the issues surrounding our desire to not be considered an investment company
under the Investment Company Act of 1940, we invested a substantial portion of
our available cash in U.S. government treasury bills with various short-term
maturities. We executed certain forward currency contracts in order to hedge our
risk against foreign currency fluctuations between the U.S. dollar and the euro.
As a result of our investments in the U.S. government treasury bills, we
incurred foreign exchange losses of approximately E9.4 million. In August 2000,
we received an exemption from the Investment
13
<PAGE>
Company Act of 1940 and all excess cash is currently invested in
euro-denominated accounts. 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.
We adopted the euro as our functional and reporting currency effective
January 1, 2000.
NET LOSS
Our net loss during the three and nine month periods ended September 30,
2000 was E35.3 million and E159.6 million, respectively, compared to losses
during the similar periods in 1999 of E14.2 million and E29.2 million,
respectively. The increases were primarily the result of non-cash compensation
charges and substantial start-up costs of the operating subsidiaries.
ADJUSTED EBITDA
Since the commencement of our 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 our Adjusted EBITDA calculation for the
periods indicated (amounts in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
-------------- -------------
<S> <C> <C>
Net loss.................................................... E(159,644) E(29,163)
Interest, net............................................... (552) 3,717
Incomes taxes............................................... -- --
Depreciation and amortization............................... 14,015 1,862
Non-cash compensation expense............................... 60,683 720
Foreign exchange loss and other expense..................... 24,640 232
Gain on early extinguishment of debt........................ (1,053) --
-------------- -------------
Negative Adjusted EBITDA.................................... E (61,911) E(22,632)
============== =============
</TABLE>
In view of our 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.
14
<PAGE>
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, our reported
Adjusted EBITDA may not be comparable to similarly titled measures used by other
companies.
STATEMENTS OF CASH FLOWS
We had cash and cash equivalents of E483.5 million as of September 30, 2000,
an increase of E426.4 million from E57.1 million as of December 31, 1999.
Additionally, we had E79.7 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........................ E (50,466) E(13,497)
Cash flows from investing activities........................ (199,030) (52,619)
Cash flows from financing activities........................ 680,425 114,994
Effect of exchange rates on cash............................ (4,511) 4,932
-------------- -------------
Net increase in cash and cash equivalents................... 426,418 53,809
Cash and cash equivalents at beginning of period............ 57,115 1,472
-------------- -------------
Cash and cash equivalents at end of period.................. E 483,533 E 55,281
============== =============
</TABLE>
CASH FLOWS FROM OPERATING ACTIVITIES
During the nine months ended September 30, 2000, we used E50.5 million in
operating activities, a E37.0 million increase from the E13.5 million used in
operating activities for the comparable period in 1999. This increase was
primarily related to the substantial organization and start-up costs incurred
during the development of our networks. Our development efforts increased
significantly since the first nine months of 1999.
CASH FLOWS FROM INVESTING ACTIVITIES
We used approximately E199.0 million of cash in investing activities during
the nine months ended September 30, 2000, compared to a use of E52.6 million for
the similar period in 1999. The increase was primarily due to investment of the
proceeds from our IPO during the first quarter of 2000 in property and equipment
and the purchase of approximately E78 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 E680.4 million of cash flows from financing activities
during the nine months ended September 30, 2000, compared to E115.0 million for
the similar period in 1999. The increase was due to the net proceeds from our
IPO and our senior notes due 2010 less approximately
15
<PAGE>
E14.9 million used to repurchase a portion of our outstanding senior discount
notes due 2009. Cash flows from financing activities during the first quarter of
1999 resulted from proceeds from our senior discount note offering and equity
contributions from our parent.
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 E511.3 million of cash and restricted short-term investments, and
E52.0 million of restricted long-term investments in escrow for debt service
(see below).
In January 2000, we executed a E265 million senior secured credit facility
with Goldman Sachs International and BNP Paribas as co-arrangers of the
facility. In April 2000, we entered into a suspension agreement with the lenders
whereby we 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. We currently are in
discussions with the lenders regarding the extension of the termination date of
the suspension agreement. There can be no assurances that we 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 Financial Statements included elsewhere in this report
for a discussion of this facility and the suspension agreement. As of
September 30, 2000, we had no borrowings outstanding under the facility.
In April 2000, we 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 our
existing senior discount notes. We lent approximately E78.0 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. We
are using the proceeds of these pledged securities to make the first six
interest payments on the Senior Notes. We are using the remaining proceeds from
the Senior Notes offering to (i) fund the further deployment of our networks in
our existing markets and additional markets in France and Germany, (ii) fund the
build out of the IDCs and expansion of our 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 E58.0 million and E25.5 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 E150.3 million and E52.6 million, respectively. We also
used capital during these periods to fund our operating losses.
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 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 in 18 markets.
The actual amount and timing of our future capital requirements may differ
materially from our 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, difficulties, 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
16
<PAGE>
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 its 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 DISCLOSURES ABOUT MARKET RISK.
INVESTMENT PORTFOLIO AND INTEREST RATE SENSITIVITY
Our investment policy is limited by the indentures for our outstanding notes
and our 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 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 our senior secured credit
facility, we would be required to enter into an interest rate hedging program
with respect to 50% of every tranche of E50 million borrowed to mitigate foreign
currency exchange rate risk. We have entered into a suspension agreement
concerning this 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.
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<PAGE>
IMPACT OF FOREIGN CURRENCY RATE CHANGES
Our revenues, costs, assets and liabilities are, for the most part,
denominated in euros, which is our 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 we
issued in February 1999 expose us to exchange rate fluctuations as the payment
of principal and interest on the notes will be made in dollars, and a
substantial portion of our 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.
Our 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........................................... $1.065
December 31,1999............................................ $1.007
September 30, 2000.......................................... $0.879
</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 our exposure to foreign currency exchange
rate risk.
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<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
----------- ------------------------------------------------------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
CompleTel Europe filed a Current Report on Form 8-K on July 27, 2000,
pursuant to Item 5, disclosing that it announced its financial results for the
second quarter ended June 30, 2000. The report included as an exhibit the press
release dated July 27, 2000.
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<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>
<CAPTION>
<S> <C>
COMPLETEL EUROPE N.V.
(Registrant)
Date: November 14, 2000 /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)
</TABLE>
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