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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File No. 000-30075
COMPLETEL EUROPE N.V.
(Exact name of Registrant as specified in its charter)
The Netherlands 98-0202823
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Indentification No.)
Kruisweg 609
2132 NA Hoofddorp, The Netherlands 2132 NA
(Address of principle executive offices) (Zip Code)
Registrant's telephone number, including area code: (31) 20 666 1701
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Ordinary Shares, (euro)0.10 nominal value
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes ___ No X
----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
----
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant, as of date here of: N/A.
-----
The number of shares outstanding of the Registrant's common stock as of March
27, 2000 was 126,133,060 ordinary shares. We expect our initial public offering
of stock to close on March 30, 2000, at which time we will have an additional
27,200,000 ordinary shares outstanding, assuming that the underwriters do not
exercise their option to purchase up to an aggregate of 4,080,000 additional
ordinary shares.
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PART I
Item 1. Business
We are a rapidly-growing CLEC operating primarily in France and Germany. Our
vision is to become a leading alternative broadband provider of voice, high-
speed data and Internet protocol-based services in selected local markets across
Europe. We target business end-users, other telecommunications carriers and
Internet-related providers in large metropolitan areas with limited local access
competition. Using our state-of-the-art, fiber optic, metropolitan area networks
(MANs), we offer a wide range of voice, data and Internet-related services to
our directly connected, on-net, customers, including local and long-distance
voice services, dedicated high-capacity access and a suite of Internet-related
access and applications.
We believe that the rapid increase in demand for high-capacity data
telecommunications services and an absence of alternative local providers have
left our targeted customer segments largely underserved and provide us with
significant opportunities to grow our business. We are currently implementing
our business plan to deploy and operate our metropolitan area networks in 11
cities in France and Germany and provide Internet-related services in these
cities and the United Kingdom. As of February 25, 2000, we had commercially
launched services in nine cities, Paris, Grenoble, Lyon, Marseille and Lille in
France, and Berlin, Essen, Munich and Nuremberg in Germany. We expect to become
operational in two additional cities, Nice and Toulouse in France, during the
first half of 2000. We plan to use the proceeds from our initial public offering
to expand our metropolitan area networks in our existing cities, deploy networks
in an additional six cities, Amiens, Nantes and Rouen in France and Hamburg,
Mannheim and Stuttgart in Germany, and to accelerate the expansion of our
Internet-related services. We had deployed over 447 route kilometers as of
February 25, 2000.
In each of our target markets, we have focused on achieving an early market
position to secure a number of competitive advantages. We believe these
advantages include continuing to recruit and retain experienced personnel,
growing and developing a customer base, securing critical rights-of-way, and
promoting our name recognition.
We have assembled a strong management team that we believe has the necessary
management and telecommunications experience for us to achieve our goals. Our
senior management collectively have over 100 years of telecommunications
industry experience, which we combine with experienced regional management teams
familiar with the local communities and businesses that we serve. Our national
and local managers have broad telecommunications industry experience with
companies such as COLT, Cegetel, Alcatel, Bosch Telecom, VIAG Interkom, Siemens,
France Telecom and Deutsche Telekom. In addition, we benefit from the extensive
telecommunications industry experience of our major equity investors, which
include: funds sponsored by Madison Dearborn Partners, a Chicago-based private
equity firm, experienced with investments in other telecommunications providers,
such as Focal Communications Corporation, Nextel Communication Inc. and
Allegiance Telecom, Inc.; LPL Investment Group, an investment firm controlled by
Lawrence F. DeGeorge; and funds sponsored by Meritage Investment Partners, a
Denver-based private equity firm that invests exclusively in telecommunications
companies. Two of our directors, James C. Allen and Royce Holland, provide us
with significant additional competitive local exchange carrier experience. Mr.
Allen was a co-founder and the former chief executive officer of Brooks Fiber
Properties and currently serves as a director of several telecommunications
companies including MCI WorldCom. Mr. Holland was a co-founder of both MFS
Communications and Allegiance Telecom, Inc. and continues to serve as a director
and chief executive officer of Allegiance.
Attractive and growing markets
We have selected the French and German telecommunications markets as we
believe they offer significant opportunities. These are the two largest
telecommunications markets in continental Europe as measured by revenues,
estimated to be $24.7 billion in France and $36.2 billion in Germany, in 1998,
according to Tarifica.
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On-net customer-driven network
Overview
Our market entry strategy is to focus on providing local access to an
underserved on-net customer base. We believe there are substantial long-term
benefits of our on-net strategy as compared to an off-net reseller strategy:
. substantial increased product offerings made possible by direct connection;
. higher revenue per customer;
. lower interconnection costs and improved operating margins; and
. increased loyalty of customers and reduced churn.
Our integrated network architecture includes switches and data routers,
customer premise equipment and metropolitan area network fiber rings. Our
integrated network supports local and long-distance voice, high-speed packetized
data and services based on the Internet delivery platform. We believe our
networks offer greater capacity, higher reliability and lower operating costs
than those of the incumbent carriers in the areas we serve. The integrated
design of our networks significantly reduces our cost of providing a bundled
service offering.
To deliver high-quality, reliable telecommunications services, we employ a
state-of-the-art, uniform, high-capacity, protocol-transparent technology
platform. Our platform encompasses digital telephone and packet data switches
and synchronous digital hierarchy (SDH) transmission technology compliant with
European telecommunications standards, with a centralized network management and
monitoring centers designed to readily accommodate future technology upgrades.
Customers and route design
We have developed our network designs based on the needs and requirements of
our target customer segments using our knowledge of and experience in the
facilities-based competitive local exchange markets. We also draw on the
expertise of a broad range of independent third-party consultants.
We target high density business areas which currently experience limited
competition from other local carriers where customers purchase their
telecommunications services principally from the incumbent operators or from
resellers.
In order to identify specific target customers within identified service
areas, we complete a detailed geocoded analysis of demographic, competitive,
economic and telecommunications demand characteristics within each target city.
Ultimately, we generate a list of prioritized prospects in each target area and
a map of the target service area pinpointing the location of each potential
customer, and key demographics of those potential customers. We then plot a
route for the network, with the precise location of the route being driven to
ensure the highest possible density of customers as close as possible to each
route.
Network design principles
A key feature of our network design is its adaptability to changes in service
offerings, network standards, and new technology and protocols. Our network
design enables us to provide high-transmission to our customers while providing
substantial potential for expansion in a cost-effective manner. Our networks are
able to efficiently support a wide mix of telecommunications traffic and
protocols, including telephony, data, digital videoconferencing, virtual private
networks (VPNs), private lines, and Internet. Our network is based on the
following principles:
. Scalability. We can expand both transmission capacity and switching
capacity rapidly and cost-effectively as traffic volume and capacity
demands increase. We install duct systems typically with six ducts. Each
duct is capable of holding more than three hundred fibers. Our current
deployment uses one duct. The remaining ducts can accommodate additional
capacity for our use, or can be sold to or swapped with other
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telecommunication service providers. As we install our duct system, we also
install the access duct to the points of entry of buildings immediately
adjacent to the network route to expedite adding new customers.
. Revenue-driven deployment schedule. Using our disciplined geomarketing
design process, we design and deploy our networks to maximize potential
revenue generation while minimizing our build-out costs.
. Reliability. Our networks provide redundancy at multiple levels. The ring
structure is designed to provide dual direction routing capability that
allows the connection to be completed in the event of network failure.
Additionally, our external carrier interconnects have alternative routing
capability which should assure access to alternative carriers. We have
chosen vendors that we believe provide reliable and quality equipment, such
as Nortel, Siemens, Ciena and Cisco.
. A mix of local access technologies. We employ different technologies as we
believe it allows us to: (1) meet customers' changing communication
requirements; (2) provide investment-justified rapid expansion of the
network coverage; and (3) respond to a wide range of integration
requirements among different customer segments. The link between the
network and the customer is typically fiber, but may also be copper or
wireless transmission. We plan to employ multiple technologies including
asynchronous transfer mode (ATM), Ethernet, frame-relay, SDH, wave division
multiplexing, packet data or Internet protocol routing. On a case by case
basis, we extend the reach and efficiency of our core network rings through
alternative methods, such as leased fiber or point-to-point wireless.
. Protocol transparent and future proof. We are installing transmission
equipment that should allow us to converge circuit-switched and data
networks, and extend the value of our circuit switches into the future. As
these networks effectively merge, traffic can move more economically over
data networks, resulting in simplified network management. We are
continually reviewing our designs to ensure flexibility and rapid
evolution, as we believe that over time voice, data, video, Internet,
intranets and extranets will interconnect with our seamless network
platform.
Network infrastructure
. Metropolitan area networks. The core of our network is the fiber loops that
we build in selected areas. MANs comprise single or several fiber optic
rings that allow customers direct connection within a city or metropolitan
area to our network. We construct MANs that have route diversity and a
self-healing architecture, allowing for traffic to be re-routed in case of
a network outage, which should allow us to provide the highest levels of
reliability.
. Construction and installation. The local access networks consist of fiber
deployed in newly constructed ducts and existing ducts. The time necessary
to construct a new fiber optic network varies, depending upon factors such
as the size of the fiber ring to be installed, whether the construction is
underground or aerial, city specific rights-of-way process, whether the
conduit is in place or requires construction, and the initial number of
buildings targeted for connection to the fiber ring. We install our fiber
optic cables in conduits that we own or that we lease from third parties.
In certain isolated instances, however, to achieve maximum speed to market,
we utilize a "smart-build" strategy and lease fiber trunking capacity from
third parties. We also may lease conduit or pole space from utilities,
railroads, carriers, provincial highway authorities, local governments and
transit authorities. These arrangements are generally for multi-year terms
and have renewal options.
We use a five-step deployment process for each MAN:
- We determine the preliminary route of the MAN by completing a detailed
analysis of demographic, competitive, economic and telecommunications
demand characterization of each target city.
- Our local management and sales teams then conduct a walk-by inspection
of the proposed route.
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- We submit requests for rights-of-way and construction permission to the
appropriate municipal authorities.
- Upon approval, we select a local civil construction firm which
completes the construction.
- Nortel, acting as our turnkey network assembler, completes the
installation of SDH and data transmission equipment, and preassembles
customer premise equipment.
. Points of presence (POPs) and distribution nodes. POPs are secured
interconnection points with other carriers, typically with a minimum of two
interconnect POPs per market. We purchase or lease sites, and construct
POPs in each market at the location of other carriers, public Internet
peering locations and local telehouses. Distribution nodes are located in
leased or purchased facilities to house electronic equipment which provide
the ability to add and remove voice and data traffic from the fiber
backbone destined to a customer or an interconnection point. These nodes
are secured, environmentally-controlled, and continuously monitored stand-
alone facilities.
. Switch and Internet data centers. We construct switching centers in most of
our markets. Our switching centers are environmentally controlled, secure
sites, featuring back-up AC/DC power, emergency back-up battery and power
generator, heating, ventilation and air-conditioning systems, redundant
communication facilities, fire suppression and direct connection to our
high-speed fiber optic city MAN backbone. Our switching centers are
continuously monitored by our network operation centers. The purchased or
leased facilities are typically sized between 600 square meters and 4,000
square meters. Specific accommodations are made to provide for the
provision of co-location and hosting services. Co-location services provide
our customers with access and the space to install their own equipment in
our POPs. Our co-location centers offer customers a secure location,
controlled environment, monitoring and immediate access to high-speed
connections to the Internet and our voice switching and data networking
equipment. In addition, Internet data centers are being deployed to support
our Internet strategy, leveraging our carrier-class switch center
facilities. Our switching center assets facilitate the rapid deployment of
our Internet data centers.
. Network operation centers. We have established two network operating
centers, in Paris, France, and Munich, Germany, that allow centralized and
integrated management of all the equipment deployed in our MANs throughout
Europe. These centers continuously monitor performance of all the various
pieces of transmission and switching equipment, the operating systems, the
performance of customer transmission paths and circuits and customer
premises equipment in each of the MANs. The center in France is located at
Nanterre, which is near our French and European headquarters in La Defense
in Paris. The center in Germany is located in our southern German regional
management center in Haar/Munich.
. SDH and Internet protocol technology. We provide our data, Internet
connectivity and voice services over our MANs. Our MANs use European
standards-based synchronous digital hierarchy (SDH) transmission technology
and Internet protocol to transport information along our fiber optic
backbone. Our SDH networks are based on self-healing concentric rings, a
technology that routes traffic through an alternative path in the event
there is a point of failure. This design results in a highly reliable
network which is less susceptible to disruptions in the event of breakage
at one point. Our data services architecture is based on the Internet
protocol, which is the framework for the evolving network standard routing
protocol of choice for packet data networking.
. Interconnection and service agreements. We enter into interconnection or
service agreements with a range of other operators for transmission of
traffic outside of the reach of our local loops. We have entered into
principal national interconnection agreements with France Telecom and
Deutsche Telekom, the incumbent operators in France and Germany,
respectively. We also have entered into agreements with other significant
national and international carriers, such as MCI WorldCom, Telecom
Development, Siris and RSLCom. We are in the process of developing
additional physical interconnections with the incumbent public operators,
at both their tandem switching centers and the end office/serving wire
centers in each of our markets. Similarly, we are interconnecting our
networks with Internet backbone operators and public
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Internet peering locations with the intention to form a Tier one Internet
traffic aggregation network, connecting France, Germany, the United Kingdom
and the U.S.
. Access agreements and rights-of-way. Our MANs are primarily constructed by
digging trenches along rights-of-way by obtaining rights to use the
property from local authorities. Where necessary or economically preferable
to digging trenches, we also secure other rights-of-way agreements with
highway commissions, utilities, political subdivision, subway operators and
others. Speed to market is critical in securing rights-of-way because each
successive request by a new entrant generally has a reduced probability of
being granted.
We have established and plan to continue to establish relationships with
electric and other utility companies in our target markets to obtain
rights-of-way access. We intend to use these relationships to maximize the
penetration and speed of entry and reduce the cost of deploying our network
in our target markets. In Paris, France, we have received approval from the
city authorities to lay our fiber in the underground sewer system. This
agreement enables us to lay our fiber in a cost-effective manner because it
entails minimal excavation of city streets as the system's conduits connect
to nearly all buildings in Paris.
We must secure the rights-of-way from local authorities as we construct our
networks over property in the public domain. Certain cities, such as Lyon,
Marseille and Paris in France, and Munich, in Germany, have adopted
framework agreements that govern access to the public domain roadways and
non-roadways such as sewers, subways, tramways, and waterways. We have
signed these agreements and have secured the rights-of-way, as necessary,
to deploy our network over and under city property, and use city streets,
poles and bridges to connect our network. In certain situations, the
conduits we use to access buildings already benefit from existing rights-
of-way.
. Building entry license agreements. Before providing services to customers,
we must obtain permission from the property owner. We have adopted a
collaborative approach with property developers and owners. Generally, they
are willing to provide access to their buildings since we are providing
enhanced services to the building, which should increase its value. Our
agreements typically contain a provision for access by our network to a
specified point inside the building, with a renewable right of access
regarding inside wiring to the premises of our clients and allow us access
on a non-exclusive basis.
. Technology supplier relationships. In 1999, we entered into an agreement
with Nortel Networks to supply us equipment, including SDH, voice and data
switching, data routers and customer premise equipment, engineering
services, NOC management, inventory management, equipment installation and
first level maintenance during the initial start up phase of each market.
We selected Nortel Networks to provide the core components of our
metropolitan area networks to ensure compatibility across all of our
networks. In Germany, we also purchase voice switching equipment from
Siemens AG.
Complementary local access technologies
Although we intend to provide our services over our own fiber optic network in
each of our targeted markets, we may use point-to-point wireless technology on a
case-by-case basis to complete fiber rings or to provide services to those
customers who we may not be able to serve on-net. This complementary strategy
provides us with rapid access to buildings and allows us to gain market
penetration and take advantage of market opportunities before we have completely
constructed our network or to extend the reach of the fiber networks.
We intend to apply for licenses to provide point-to-multipoint wireless
services to supplement our fiber-based network. These licenses for high
frequency wireless facilities can be used to provide services that we will use
to serve outlying customers to whom it is not economical or technologically
feasible to provide fiber cable, to infill our existing network and to serve
other areas where customer density or other constraints make installing a fiber
network less attractive or economical than providing wireless services. In June
1999, we received from the Autorite de Regulation des Telecommunications (ART)
an experimental point-to-multipoint wireless license in Marseille, France. We
filed for a permanent point-to-multipoint license for 18 regions in France on
January 31, 2000, and, as a
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result, our experimental authorization in Marseille has been extended through
the date that a permanent license is awarded or denied. We expect a decision on
the license within approximately six months from January 31, 2000. We do not
know the extent of competition for these licenses, and their award will be based
on certain objective criteria set forth in the call for tender and, in part,
discretionary on the part of the regulatory authority. We may not receive any
licenses or licenses for all of the frequencies and locations for which we
applied. If we are unable to supplement our network with wireless facilities, we
may be unable to serve some areas and customers that will be served by those
receiving the licenses.
In certain cases where existing copper facilities within a customer's premises
or a campus business park environment can be used, we also may deploy DSL
transmission technology over leased facilities to extend the reach of our local
networks. As allowed by regulations, we intend to provide DSL services to an
expanded base of customers. DSL offers enhanced performance for small and
medium-sized businesses currently accessing the Internet with standard modems or
integrated services digital network connections that are too small to
economically connect to our fiber optic network. It provides greater speed,
reliability and flexibility than standard modem or ISDN connections over copper
lines.
High-capacity telecommunications and Internet services
We offer a wide range of products and services, individually and in bundles.
Basic voice services
Through our direct connections to customers, our basic fixed wireline voice
services cover all outbound calls, including local, national, international and
fixed-to-mobile services. We bundle resold long-distance with our local
services, and create bundled packages including Internet access. In isolated
cases, we may provide indirectly connected voice services available to off-net
customers, to allow them to access our long-distance services using a prefix
code. Our basic voice services also include calling features, such as call
forwarding, call waiting, speed dialing and call line identification. While the
growth rate basic voice services is lower than other telecommunications
segments, they currently represent the largest segment of telecommunications
services in France and Germany.
Enhanced voice service portfolio
We plan to provide:
. Virtual private network. VPN utilizes the facilities of a public network
but operates as a closed user group, to provide customers with multiple
locations the convenience of a private network with the scope and scale of
a public network.
. Unified messaging. Unified messaging allows customers to access fax-mail,
voice-mail and e-mail from any location, including the Internet.
. Personal numbering services. Personal numbering services provide customers
with flexibility in directing the location of incoming calls. Customers
will receive a number from our number series and calls to this number will
be directed by our network to a pre-programmed mobile phone, fixed line or
international number.
. Teleconferencing. Teleconferencing allows three or more parties to be
connected and hold a telephone discussion. We may also provide visual
presentation, recording and subconferencing.
Data services
Our MANs allow customers to utilize our high-capacity technology to deliver
their data traffic to end-users and carriers at substantially lower costs and
higher reliability than the incumbent operators.
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. Dedicated access leased lines. Our local dedicated access and private line
services are available for data connections over our own MANs at
transmission speeds from 64 kbps to beyond multiples of 2 gigabytes per
second on lines ranging from ISDN lines to Stm-16 circuits. We will offer
LAN to LAN services and will also consider specific requests for building
private or closed-user group networks from private and government
authorities.
. Internet protocol services. We expect to provide a variety of Internet,
intranet, and extranet services utilizing Internet protocol (IP). We also
plan to include a range of flexible high-capacity Internet protocol-based
services, which will allow customers with uneven data transmissions
capacity needs to pay for transmission on an as-used basis. In such cases,
our customers will be charged only for the excess capacity used beyond
their monthly flat-rate capacity. We plan to interconnect our IP services
with a variety of peering and transit relationships, including aggregating
Internet traffic in a Tier one level backbone between France, Germany, the
United Kingdom and the U.S.
. Asynchronous transfer mode (Atm) services. Atm is a recently commercialized
technology which allows customers with requirements to move large amounts
of data between locations quickly and reliably. We expect to introduce Atm
services for muli-site customers, LAN to LAN interconnection, and high-
speed Internet access for Internet service providers.
. DSL. We are developing plans to provide digital subscriber line services,
as regulations allow. DSL technology sends high-speed digital signals over
a customer's existing copper telephone wires through special modems
installed in the customer's premises and the telephone network. We plan to
provide DSL to new targeted market segments, generally businesses with less
than 35 employees and heavy-user residences.
Internet services
In addition to pursuing the retail and carrier markets, we are developing
Internet-related services. We have acquired two Internet service providers to
further our Internet strategy. In March 1999, our French operating company
acquired all of the outstanding stock of Acces et Solutions Internet S.A.R.L.,
an Internet service provider based in Lyon. Our operating company in the United
Kingdom acquired all of the outstanding stock of iPcenta (formerly known as Web
International Networks Limited), an Internet service provider based in London,
in June 1999. We intend to leverage our facilities and operating presence in our
markets across France and Germany to facilitate the rapid roll-out of Internet-
related services. To accelerate the launch of these services, we have
established a separate dedicated Internet division.
To implement our Internet strategy, we intend to accelerate the upgrade of
each of our switch centers in France and Germany to create Internet data
centers, including large centers in Paris and Munich (SuperPOPs), and smaller
centers in the regional switch centers (MetroPOPs) and, subject to obtaining a
waiver from our banks under our credit facility, we intend to install a center
in London. We provide space in our switch centers for other carriers and
Internet-related providers to locate their equipment. We intend to provide
carrier-class quality reliability, powering and security. We intend to
progressively provide a range of Internet services through these IDCs,
including:
. Dedicated access. We offer dedicated Internet access at a variety of
speeds.
. Co-location and complex hosting. We offer secure space for customers to
locate their Internet equipment, and plan on offering on our own computer
servers, a package of services to provide customers with turnkey Internet
solutions.
. Termination service. We plan on offering Internet service providers co-
locating in our facility a share of any termination revenue paid by other
carriers for incoming calls.
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. Server support. We plan on providing services to support on ongoing
maintenance and management of customer's servers.
. Operating system support and other professional services. We plan on
providing value-added services to support customers in the provision of
their operating software and other technical professional services.
. Packaged content. We intend to aggregate packages of bundled content to
enable our customers to efficiently access valuable web sites and web-based
information.
. Application services. We plan to provide a host of applications, on a
shared basis, for our customers to access certain applications, designed
for targeted segments.
We believe there is significant customer demand among Internet service
providers, Internet protocol-based carriers and corporate customers for these
services in all of our targeted cities. We intend to roll-out these services in
geographic and vertical phases. We plan to have Cisco Systemstm , Microsofttm
and UNIX accredited staff on site at these IDCs, 24 hours a day, seven days a
week. Our staff will be available to customers on a call-up basis as a function
of service level agreements.
Customer segments
We target three principal customer segments with a variety of existing and
planned services. We provide high-quality communications solutions for our
customers, based upon their internal and external communications needs, who are:
. Small-and medium-sized business, government and institutional end-users.
Businesses with an average of 35 employees up to 1,000 employees, local
governmental entities and institutions such as hospitals and educational
establishments.
. Internet-related providers. Major Internet service providers and other
Internet-related companies.
. Other telecommunications carriers. Long-distance and international carriers
and resellers.
Our products and services include:
<TABLE>
<CAPTION>
Customer Segment Products and Services
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<S> <C> <C>
Business, government and
institutional end-users Voice--local and long-distance: Inbound
Outbound
Internet access: Single vendor router
Multi vendor router*
Dedicated circuit: Intra-city
Inter-city*
Internet services: Low-end complex hosting
e-commerce portal
Domain name registration
Consulting
OS and server support*
Application support*
MAN: Case by case
LAN to LAN*
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C>
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Carriers Dedicated circuits
High-end complex hosting and co-location
Call-termination*
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Internet-related providers Inbound call termination: Basic
Improved*
Dedicated circuits
High-end complex hosting and co-location
OS and server support*
Applications support*
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</TABLE>
* Development stage
We believe that telecommunications users broadly will benefit from the suite
of services we offer, which is an alternative, high-quality and facilities-based
source for a comprehensive range of telecommunications services. We believe
there is a market demand for vendor diversity as businesses seek competitive
pricing, flexible and responsive service, greater reliability and security and,
generally, greater bargaining power.
We have chosen to focus on business end-users, Internet-related providers, and
carriers given our belief that:
. These segments represent the most profitable portion of the
telecommunications market based on their higher usage volumes, high-growth,
lack of competitive alternatives and more sophisticated requirements;
. These segments are capital-efficient to serve, given their concentration
within any particular target area; and
. These segments generally are more receptive to exploring high-quality
alternatives to the incumbent carriers.
Business end-users
Small- and medium-sized businesses are of particular focus to us, given our
belief that these companies are less likely to currently benefit, via their
existing suppliers, from the price competition and product and service
responsiveness that we offer them. We believe such competition is currently
focused in the long-distance rather than the local market and for the benefit of
multi-national companies rather than small- and medium-sized enterprises.
Additionally, we believe that, given the limited number of operators vying for
share in the local sector, margins in these sectors will be higher. Further,
small- and medium-sized businesses have a particular focus on local services, as
local calling constitutes a greater percentage of traffic than of multi-
nationals customers.
Government end-users
We have identified local government authorities as important potential
customers in view of their need to obtain advanced technology in linking up all
of their municipal offices at competitive prices. Local government authorities,
such as social security administrations and tax authorities, depend heavily on
local networks to provide their services.
Carriers
As countries in Europe have begun to liberalize their telecommunications
markets, there has been steep growth in the number of pan-European international
carriers. Generally, these carriers focus on building international and
intercity facilities, while leasing wholesale local circuits from local
providers. Historically, in the U.S., this carrier demand for local access was
the prime driver for the development of alternative local carriers. We provide
carriers with dedicated circuits and co-location services on a wholesale basis.
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In addition, we believe we will be able to terminate French and German in-
bound international calls for foreign telecommunications service providers
through our interconnections with these carriers. We are also currently in
negotiations with operators to terminate their regional and local call traffic
into Germany and France.
Internet-related providers
We believe that the dramatic increase in Internet usage will result in the
commensurate growth in Internet-related companies, in access, content provision,
e-commerce, advertising, and numerous other segments. These customers have
specific sets of needs that we believe we will be able to satisfy. We are
developing suites of services to support their requirements, primarily in high-
capacity access and value-added services.
Sales, marketing and distribution
Customer acquisition strategy
We believe that one of our competitive advantages is based on professional
direct sales and customer care programs. As a result, to address the retail
business end-user segment, our sales force is structured principally on a city-
by-city basis.
We believe that experienced, local sales personnel provide us with:
. useful knowledge of local dynamics and the target customer base;
. established contacts and relationships in the local market, enabling them
to pre-sell our products and services prior to our initiating network
operation in that market;
. insight that will allow us to tailor our product and service offerings to
specific local customer needs; and
. enhanced commitment to each market which may facilitate more rapid access
to rights-of-way for network construction and direct targeting of customer
specific needs.
Initially, we concentrate our sales and marketing effort on larger customers.
Once we secure these customers' business, we direct our sales and marketing
activities to focus on capturing smaller customers. As networks are deployed in
additional cities, we will expand our focus on national and pan-European
customers. To this end, we have already developed national sales and service
functions in both France and Germany, which operate alongside the local sales
and service functions and which currently sell to the carrier and Internet
provider customer segments.
As of January 31, 2000, we had 121 employees in sales and marketing,
representing nearly 37% of our operating employees. Our salespeople come from
two primary sources, either directly from other telecom providers or from
related industries. As of February 25, 2000, we had 315 orders for 118,549 line
equivalents of capacity, of which 137 services were installed and the remainder
were pending installation.
Marketing communications
We believe that a key to effectively implementing our business plan is to
create an "umbrella" pan-European identity under the CompleTel trade name. While
we believe that name recognition is important to our success and that our brand
awareness will become an increasingly important tool, we do not use mass-media
to develop brand awareness due to significant cost inefficiencies. Consistent
with our focused on-net strategy, we use a targeted marketing approach for on-
net prospects, within 500 meters of our network backbone, primarily driven by
telemarketing and direct mail activities. We supplement these targeted
communications with periodic press communications and event marketing.
Pricing
10
<PAGE>
Pricing is one of our ways to differentiate ourselves from the incumbent
operators and to attract customers, although it is only one of our
differentiators alongside consistent, reliable, quality, customer care and
superior product range. We plan generally to price our services to our customers
at a discount to the incumbent operator, offering combined services discounts to
incent customers to buy a portfolio of services, designed to maximize global
usage and revenue per customer. The wholesale rates charged to other carriers
and Internet-related providers are generally set at the market price or slightly
below the market price of the leading facilities-based carriers but we do not
anticipate offering a major discount compared to any alternative carrier. On a
promotional basis, we may provide discounted installation to facilitate customer
migration from the incumbent carriers.
Customer service
Our goal is to maintain an advantage over our competitors in our target
markets by providing superior customer service and care. We believe that
providing a high level of customer service is a key element to establishing
customer loyalty and attracting new customers. We have dedicated customer
service representatives who initiate contact with our customers on a routine
basis to ensure customer satisfaction.
We also believe that technology plays an important role in customer
satisfaction. Advanced technological equipment is crucial to enabling the
provision of high quality of service to our customers. We have installed
sophisticated status-monitoring and diagnostic equipment at our network
operations centers allowing us to identify and remedy network problems before
they affect customers.
Our customer care function includes:
. on-line customer care personnel available 24 hours a day, seven days a
week;
. an integrated data base management system that can immediately access all
of a customer's data and allow us to quickly respond to customer inquiries;
. an integrated billing system capable of being customized for all of our
services;
. the availability of on-line service ordering, order status viewing, billing
inquiries and other services to allow customers to manage their services;
. access to technical support to resolve problems;
. escalation processes to deal with customer concerns;
. personal relationships with customers based on local and dedicated customer
care staff; and
. a local designated sales account executive to grow and support the customer
relationship.
We offer high-quality, responsive, personalized and customizable services. To
our business end-user customers, our customer care is provided on a local basis
rather than a national basis to develop customer relationships at the city level
and develop responsibility and accountability at the local level. Our local
structure is supported by our centralized operations centers in France and
Germany, including service provisioning, network supervision and after-hours
customer care.
Management information and billing systems
All of management information systems are centralized in our European Data
Center (EDC) located in Paris, France. We believe the importance of implementing
a scalable and highly flexible platform of applications with track-records in
the European and/or U.S. competitive local exchange market is an important
criteria in selecting and integrating a comprehensive management information
system. Using consulting firms specializing in information
11
<PAGE>
technology and telecommunications, we have assembled, integrated and implemented
a system to smoothly and effectively coordinate our key business processes:
. prospecting, lead-generation and customer acquisition;
. order flow and service provisioning;
. network planning and design;
. customer care, billing and collection;
. account management;
. network management and maintenance; and
. business financial systems.
The core of our management information system is anchored in applications
supplied by Kenan, a subsidiary of Lucent Technologies, TCSI, Oracle, Nortel
Networks and Siemens. All of the applications are operated from our computing
center in the European Data Center with localized interfaces, local language and
business processes, for each market and country. We also have incorporated a
data warehouse within our European Data Center to allow our sales force to
monitor customer line usage on a daily basis and detect changes in customer
behavior and usage, which allows us to be proactive and identify better product
offerings for particular customers.
Competition
Overview
Competition for the provision of local telecommunications services in Europe
is still in the early stages of development. The markets for public, switched
telecommunications services in France, Germany and many of the other Western
European countries were closed to competition until January 1, 1998. Therefore,
legislators, regulators and courts in those countries have limited experience in
regulating a pro-competitive telecommunications sector. Historically, no entity
other than the incumbent public telecommunications operators had the right to
provide public telephone service or networks in those countries.
Currently, the European Union is actively seeking to stimulate competition
among telecommunications providers. European member states are required to end
restrictions on the entry of new telecommunications operators and adopt
standardized regulations intended to promote competition. We believe that the
ongoing liberalization of the European Union telecommunications market will
cause more local exchange carriers, including pan-European carriers, to enter
the market. Under the new regulatory structure, existing public
telecommunications operators may compete in local exchange services markets
outside of their home countries, either alone or through existing joint
ventures, subject to restrictions on market concentration and anti-competitive
mergers and acquisitions.
In today's regulatory environment, we will compete with both incumbent public
telecommunications operators, like France Telecom and Deutsche Telekom, and
other local exchange carriers in each market we enter. Based on their
historically exclusive market positions, incumbent public telecommunications
operators generally have several competitive advantages over new competitors,
including:
. expansive economic and human resources;
. close ties to local and national regulatory authorities;
. ubiquitous local and long-distance distribution facilities;
. existing rights-of-way;
. control of or access to telephone numbers; and
. control over local telecommunications connectivity.
We believe that the principal competitive factors affecting our business will
be:
. price;
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<PAGE>
. customer service;
. network quality;
. accurate billing; and
. variety of services.
Our ability to compete effectively will depend upon our ability to maintain
high-quality services at competitive prices. Because France, Germany and most of
our intended Western European markets, other than the United Kingdom, have only
recently liberalized or still are in the process of liberalizing the provision
of voice telephony, our target customers in most of these markets are not
accustomed to obtaining services from competitors to the incumbent public
telecommunications operators and may be reluctant initially to use emerging
telecommunications providers.
Incumbent carriers
We expect that our principal competitors will be the incumbent public
telecommunications operators in the markets which we serve:
. France Telecom in France, and
. Deutsche Telekom in Germany.
Each market presents a different competitive landscape. In France, France
Telecom has invested heavily in upgrading its network and enjoys relatively high
approval ratings from its customers. In Germany, we believe that attractive
opportunities exist to invest in the development of local exchange
infrastructure to provide enhanced services that have not been aggressively
pursued by Deutsche Telekom or by other new entrants.
Alternative providers
We will face competition in France from operators of fiber networks such as
MCI WorldCom, COLT and Cegetel, a consortium of Vivendi and British Telecom. We
believe that we can effectively compete in France because most current
competitors seeking to gain market share from France Telecom are focusing on
long-distance service instead of local exchange service and have concentrated
their efforts on the competitive high-volume areas in and around Paris, such as
the business district of La Defense. In Germany, we face competition from a
number of companies, including national carriers such as COLT, VIAG Telekom and
ARCOR, along with city utility carriers. Additionally, we face competition from
numerous resellers of long-distance and in isolated areas, competition from
cable television operators.
We are deploying our networks in recently liberalized Western European markets
and are operating in a fast changing and competitive industry. In the future we
expect that we will need to effectively compete against an increasing number of
telecommunications service providers who may enter our targeted markets,
including among others, a number of publicly traded, European-based providers,
such as Jazztel, Versatel and Thus. We believe that we may encounter increasing
competition from these companies. We cannot assure you that we will be able to
effectively compete with the larger, established telecommunications providers
and the other operators in our markets.
Regulation
Overview
National and local laws and regulations governing the provision of
telecommunications services differ significantly among the countries in which we
intend to operate. The interpretation and enforcement of such laws and
regulations vary and could limit our ability to provide various
telecommunications services in different markets. In addition to licenses in
France, Germany and the United Kingdom, we also have obtained a license under
Section 214 of the U.S. Communications Act that permits us to terminate calls in
the U.S. that originated on our European networks and to transport traffic
originating in the U.S. to our networks or through one of our interconnections.
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<PAGE>
Deregulation of telecommunications is a relatively new phenomenon in Europe
and there is little history to guide competitive entrants. Relationships between
European Union member governments and the European Union's central agencies are
evolving. The degree to which the European Union telecommunications market will
be subject to national or European Union control remains to be seen. Other than
the United Kingdom, there is little history in Western Europe to provide
guidance to competitive entrants concerning the independence of newly-created
regulatory bodies to demonstrate how vigorously or efficiently such bodies will
adopt and enforce regulations or rules. Regulatory, judicial, legislative or
political considerations may prevent us from offering our services to residents
of Western European countries and may adversely affect our business.
European Union
The European Union consists of the following member states: Austria, Belgium,
Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The
Netherlands, Portugal, Spain, Sweden and the United Kingdom. Other countries are
applying for membership as more of Europe adopts the trend to liberalization.
The European Union member states are required to implement Directives issued by
the European Commission and the European Council by passing national
legislation. If a European Union member state fails to effect such directives
with national or other appropriate legislation or fails to render the provisions
of such directives effective within its territory, the European Commission may
take action against the European Union member state to enforce the Directives,
including proceedings before the European Court of Justice. Private parties may
also bring actions against European Union member states for failures to
implement such legislation.
The European Commission and the European Council have issued a number of key
directives establishing basic principles for the liberalization of the European
Union telecommunications market. One of the European Union's objectives is to
create a free and open market for telecommunications. Although the European
Union set January 1, 1998 as the deadline for mandatory liberalization of the
provision of voice telephony services throughout the European Union, each
European Union Member State had to enact its own laws to implement the European
Union's mandate through its own processes. Not every European Union Member State
has enacted laws that implement the directives within the time frame set by the
European Union or in a way that complies or will comply with the intent and
spirit of the directives. Further, there can be no assurance that all European
Union Member States will enact laws which fully comply with the intent and
spirit of the directives. Greece, Portugal, Ireland, Spain and Luxembourg have
been granted additional implementation periods. Each Member State is required to
make the minimum changes necessary to comply with the European Union Directives,
but the actual method or form of implementation of European Union directives
varies from country to country. Also, the European Commission has initiated
legal action against Belgium, Denmark, Germany, Greece, Italy, Luxembourg and
Portugal for not implementing the directive on full voice telephony competition
adequately.
In 1990, the "Services Directive" required Member States to abolish all
exclusive and special rights for the provision of all telecommunication services
other than for public switched voice telephone service and public
telecommunications networks. Since that first phase of activity, further
legislative initiatives have been designed to provide full liberalization of the
telecommunications sector, including notably the adoption of:
. The revised Open Network Provision Directive, which Member States were
required to implement by June 30, 1998, aims to ensure the availability of
quality public telephone services and to define the services to which all
users should have access in the context of universal service at an
affordable price.
. The Full Competition Directive, which required Member States to abolish
exclusive and special rights for the provision of public voice telephone
services and to allow the provision of public telecommunications networks
by January 1, 1998. The Full Competition Directive also abolished special
and exclusive rights regarding the self-provision of infrastructure, the
use of infrastructure operated by third parties and the use of shared
infrastructure for the provision of services other than public voice
telephony.
. The Licensing Directive, which established a common framework for general
authorizations and individual licenses in the field of telecommunication
services. The Licensing Directive is intended to allow
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<PAGE>
telecommunications operators to benefit from an European Union-wide market
for telecommunications and establish a common framework for national
authorization regimes and seeks to facilitate cross-border networks and
services.
. The Interconnection Directive, which mandates that each Member State ensure
that the historical public telecommunications operators and operators with
significant market power:
. provide interconnection to other operators under terms and conditions that
are cost-oriented, non-discriminatory, objective and transparent;
. publish by July 1, 1997, their "unbundled" interconnection terms and
conditions;
. negotiate access agreements and specific terms of interconnection, subject
to the intervention of the member state's regulatory authority in case of a
breakdown in the negotiations; and
. adopt transparent accounting methods for each cost component.
Member States are also required to adopt a quick, cheap and effective
procedure to solve interconnection disputes in order to prevent the historical
operator from maintaining its dominant position through litigation and other
delaying tactics. The Interconnection Directive is expected to be amended to
provide for carrier pre-selection in the fixed market, enabling subscribers to
choose an alternative carrier to convey their long-distance calls, with the
possibility of overriding their choice on a call-by-call basis. In addition, the
Interconnection Directive requires number portability in the fixed and mobile
markets, enabling subscribers, while remaining at a specific location, to retain
their telephone number despite switching network operators. Number portability
for all subscribers on public fixed networks was required by January 1, 2000.
Carrier pre-selection was required for public fixed networks by January 1, 2000,
by operators with significant market power. Member States may also decide to
apply this requirement to other operators, as has been the case in the United
Kingdom.
France
In July 1996, France enacted legislation amending the French Code des Postes
et Telecommunications, abolishing France Telecom's legal monopoly and providing
for the immediate liberalization of all telecommunications activities in France,
but maintaining a partial exception for the provision of voice telephony to the
public on fixed wireline. Such voice telephony was fully liberalized "including
carrier pre-selection" on January 1, 1998. French law allows market participants
to build and operate public voice telecommunications networks or offer services
following receipt of the required license. Interconnection is available as a
matter of right to all licensed operators.
Licenses are granted by the Secretaire d'Etat a l'Industrie, the
"Telecommunications Ministry", in charge of telecommunications upon
recommendation of ART, an independent regulatory authority. ART has broad rule-
making and adjudicatory powers and is administratively independent from the
Telecommunications Ministry. Among other things, ART has the power to approve
interconnection rates of operators deemed dominant in the market place,
arbitrate interconnection disputes and to exercise oversight powers and punish
regulatory infractions through suspensions or revocations of licenses or through
fines based on a percentage of the violator's revenues.
On December 13, 1998, the Minister of Telecommunications, pursuant to ART's
recommendation, awarded our French operating subsidiary a fixed wireline license
and a service license for network deployment in four regions and six cities and
the provision of services in four regions and six departments in France that we
intend to serve. The term of these licenses is 15 years from December 13, 1998.
Under French law, these licenses entitle us, among other things, to obtain
rights-of-way to establish network infrastructure along public roads, to obtain
easements on private property and to obtain certain rights on public domain
property other than roads. We have not yet obtained a license for our planned
development in Amiens.
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<PAGE>
We also received a point-to-multipoint wireless authorization for our planned
local loop in Marseille in June 1999. Point-to-multipoint authorizations are
currently available in France only on a limited and experimental basis. We filed
for a permanent point-to-multipoint license on January 31, 2000 and, as a
result, our experimental authorization has been extended until a decision is
made to award or deny our application for permanent license. We expect that the
decision to grant the license will be made within six months of January 31,
2000.
On December 18, 1998, we entered into an interconnection agreement with France
Telecom. France is one of the European Union Member states that differentiates
between interconnection for public telecommunications network operators and for
voice telephony service providers. The published interconnection tariffs of
France Telecom, which are approved annually by ART, provide substantially more
favorable interconnection terms for public telecommunications network operators
than for voice telephony service providers that use third-party operators'
transmission facilities.
As a public network operator and service provider in France and pursuant to
our license, we must provide, among other things, non-discriminatory treatment
of customers and we must accept reasonable requests for interconnection from
other operators of networks open to the public and from voice telephony and
mobile telephony providers. In addition, we are required to notify ART of
interconnection agreements and to make contributions to finance universal
service by paying supplementary charges for interconnection to France Telecom,
as well as making payments to a universal service fund based on our volume of
activity. The amounts of universal service contributions are set annually by the
French Telecommunications Ministry as proposed by ART. In addition, we are
required to spend 5% of our net capital investments and property equipment
expenditures in the preceding fiscal year to support research and development in
France.
In France, unbundling of the local loop is an issue which has still to be
settled. In April 1999, ART started a public consultation on the issue of
unbundling the local loop and requested comment on five possible options: access
to the copper wires; access to a permanent virtual circuit; access to capacity;
resale of local traffic; and resale of subscriptions. The results of the comment
period were published in October 1999. Although the issue has not been settled
as of the date of this prospectus, ART could request that unbundling solutions
be rapidly implemented concerning access to France Telecom's ADSL lines.
Germany
The German Telecommunications Act of July 25, 1996, ended the legal monopoly
of Deutsche Telekom AG for the provision of voice telephony and public
telecommunications networks, and immediately liberalized all telecommunications
activities in Germany, but postponed effective liberalization of voice telephony
until January 1, 1998. Since January 1, 1998 the German telecommunications
market has been completely open to competition and a new regulatory authority,
the Regulierungsbehorde fur Telekommunikation und Post (RegTP), has been
installed.
Under the German regulatory scheme, RegTP grants licenses in four license
classes. A license is required for operation of transmission lines that extend
beyond the limits of a property and that are used to provide telecommunications
services for the general public. This infrastructure license is divided into 3
classes: mobile radio license (class 1); satellite license (class 2); and
general infrastructure license, covering all telecommunications services for the
public which are not covered by the mobile radio license or satellite license
(class 3). In addition to the infrastructure licenses, a license is required for
operation of voice telephony services based on self-operated telecommunications
networks (class 4). A class 4 license does not include the right to operate
transmission lines and a class 3 license does not include the right to provide
voice telephony services. Licensees under class 1, 2 and 3 have the right to
install transmission lines on, in and above public trafficways such as public
roads, squares, bridges and public waterways without payment; however, when
installing transmission lines permission must be obtained from the relevant
authorities. In general, this permission cannot be refused.
In March of 1999, our German operating subsidiary, CompleTel GmbH was granted,
class 3 and class 4 licenses for three markets in Germany, including our initial
target market, which were subsequently amended as of July 1999 and as of January
2000, to include among others, our additional markets. The licenses are of
unlimited duration. We have not yet obtained licenses for our planned
development in Hamburg, Mannheim and Stuttgart.
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<PAGE>
We entered into an interconnect agreement with Deutsche Telekom in May 1999,
which was amended in December 1999 and in January 2000. A company that operates
a public telecommunications network has the right to receive favorable
interconnection rates from Deutsche Telekom, the former incumbent public
telecommunications operator. Deutsche Telekom filed a request with RegTP to
offer more favorable interconnection rates to competitors that maintain a higher
number of interconnection points with Deutsche Telekom's network and less
favorable interconnection rates to competitors that maintain a smaller number of
interconnection points which would have effected the operation of smaller
networks in terms of interconnection pricing. For the time being, RegTP has
rejected the request. A telecommunications provider that does not agree with the
offered rates or is refused interconnection by Deutsche Telekom can take the
case to RegTP who may order interconnection at specific rates. To date,
interconnection has been the source of major dispute between Deutsche Telekom
and its competitors. Several complaints currently pending before RegTP and
German courts concern the content of the standard interconnection offer of
Deutsche Telekom. Although RegTP has established standard interconnection rates,
Deutsche Telekom and some of its major competitors have been unable to reach
agreement on other aspects of interconnection such as rates for unbundled local
loops. Rates for unbundled access to the customer line have been considered and
rates have been set by RegTP which Deutsche Telekom's competitors generally
regard as too high and anti-competitive. Other pending disputes concern the
costs of billing services provided by Deutsche Telekom to other carriers and
rates for direct access to the end-user lines of Deutsche Telekom.
United Kingdom
The Telecommunications Act of 1984 provides a licensing and regulatory
framework for the telecommunications activities in the United Kingdom. The
Secretary of State for Trade and Industry at the Department of Trade and
Industry (DTI), is responsible for granting licenses and for overseeing
telecommunications policy, while the Director General of Telecommunications, the
"Director General", is responsible for enforcing the terms of such licenses.
Individual licenses are granted for the construction and operation of public
networks, and class (or general) licenses are granted for systems comprising
equipment at a single site, self-provided non-public networks, or limited public
networks. On January 11, 1999, the DTI granted our operating subsidiary in the
United Kingdom, CompleTel UK Limited, an individual license to operate fixed
public telecommunications systems of any kind in the United Kingdom (a PTO
license). The PTO license will also license the operation of international
facilities. We currently do not plan to operate under the PTO license but we
have been advised that this does not constitute ground, which by itself, would
result in a right to revoke the PTO license. To provide international services
in the United Kingdom, we have also obtained an International Simple Voice
Resale License. To provide international facilities, we do not need a separate
license as under the terms of a bill presently before Parliament the PTO license
also will license the operation of international facilities. However, we also
plan to provide some services under the Telecommunications Services License, a
class license that allows us to provide a number of services other than those
requiring individual licenses.
These licenses impose certain requirements on us, including but not limited to
the requirements that we provide end-users and other network operators with
reasonable and non-discriminatory access to our system. Licenses may also limit
the type of services that may be operated over the license system and the way in
which these can be provided in order to facilitate the open competitive
environment.
The focus of deregulation in the United Kingdom has been to encourage new
entrants to build competitive networks. Until recently, only network providers
had the right to require interconnection with British Telecommunications plc
("BT") above the level of the network termination point and to obtain favorable
wholesale interconnection rates. A recent interconnection regulation allows
several other categories of operators and service providers to obtain
interconnection on favorable terms from BT and other operators designated as
having market power in a defined market. CompleTel UK Limited has provisionally
been granted favorable interconnection terms, but this right will lapse and a
further application for favorable terms will be required if it does not commence
operations under its PTO license in the first half of 2000. All interconnecting
operators within the designated categories are required to offer interconnection
to similarly situated operators and providers. At present, competitors
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<PAGE>
to BT generally cannot obtain unbundled access to the local loops, but this is
subject to review and consultation which is likely to result in mandatory
unbundling by BT. In this way, network providers have historically been favored
over services providers.
The regulatory authorities in the United Kingdom are in the process of
revising the regulatory framework to meet the detailed requirements of the
various European Union telecommunications directives. Initially, we expect these
changes to enhance the competitive position of resellers and other service
providers by lowering their costs of access to the BT network. The
telecommunications regulator, Oftel, oversees competition in the
telecommunications market. Number portability must be provided by public
telecommunications operators at the request of other operators. From January 1,
2000, operators will be required to offer number portability at the customer's
request for a nominal charge. Also, carrier preselection over BT's network will
be required for national or international calls by late 2000, and for all local,
national and international calls as of 2001.
Employees
As of January 31, 2000, we had 410 employees. We believe that our future
success will depend on our ability to attract and retain highly skilled,
qualified and experienced employees. Our employees are not covered by any
collective bargaining agreement. We believe that we enjoy good relationships
with our employees.
Item 2. Properties
Our European headquarters are located in Paris, France. We also have sales
offices in each of our markets. Our sales offices, switch and IDC sites, as well
as our operations and service centers, are located in leased facilities. We are
in the process of purchasing our facilities in Toulouse, France.
Our material properties currently under lease include our switch sites, as
follows:
<TABLE>
<CAPTION>
Location Size (sq. meters) Lease Expiration Date
- --------------------------------- ----------------- ---------------------
<S> <C> <C>
France:
Grenoble 637 July 2011
Marseille 1,789 February 2011
Nanterre/Paris 2,638 November 2010
Lille 684 May 2011
Lyon 734 October 2010
Nice 625 November 2011
Toulouse 640 Own facilities
Germany:
Essen 3,028 September 2004
Berlin 2,795 November 2009
Munich 3,958 July 2004
Nuremberg 1,800 December 2004
</TABLE>
We believe that our leased facilities are adequate to meet our current needs
and that additional facilities are currently available to meet our development
and expansion needs in existing and projected target markets.
Item 3. Legal Proceedings
We are not party to any pending legal proceedings that we believe would,
individually or in the aggregate, have a material adverse effect on our
financial condition or results of operations.
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<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of security holders during
the quarter ended December 31, 1999:
By written consent, effective December 10, 1999, the sole shareholder
authorized the adoption of the CompleTel Europe N.V. 2000 Stock Option Plan
reserving a maximum of 2,634,175 (which amount gives effect to the five-for-one
split effected subsequent to December 31, 1999) shares.
By written consent, effective December 10, 1999, the sole shareholder
authorized the issuance of 1,241,190 ordinary shares (which number gives effect
to the five-for-one split) for cash contribution from the Shareholder of
approximately $2.1 million.
By written consent, effective December 23, 1999, the sole shareholder
authorized (i) the entering into by CompleTel Europe N.V. of a (Euro)265 million
credit agreement with Goldman Sachs International and Paribas as Co-arrangers
and (ii) the execution of all other documents envisaged by the credit agreement.
By written consent, effect December 30, 1999, the sole shareholder
authorized the method of determining the exercise price of options granted under
the Completel Europe N.V. 2000 Stock Option Plan.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
We have applied to list the ordinary shares approved for quotation on the
Nasdaq National Market under the symbol "CLTL" and we have applied to have the
ordinary shares approved for listing on the Premier Marche of the ParisBourse
under the symbol "CTL." We expect that trading will begin on March 28, 2000, at
the time of our initial public offering.
Item 6. Selected Financial Data
The following selected consolidated financial data have been derived from the
audited consolidated financial statements included elsewhere in this report
which have been prepared in accordance with accounting principles generally
accepted in the U.S. The selected consolidated financial data set forth below
are qualified by reference to, and should be read in conjunction with, the
audited consolidated financial statements and notes thereto and also with Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Commencement
of Operations
(January 8, 1998)
Year Ended to
December 31, 1999 December 31, 1998
-------------------- ---------------------
(In thousands, except per share amounts)
Statement of operations data:
<S> <C> <C>
Revenues............................................................ $ 2,985 $ --
Network costs....................................................... 2,407 --
Selling, general and administrative expenses........................ 32,282 4,552
Management fees to affiliate........................................ 6,464 2,963
Depreciation and amortization....................................... 4,489 46
----------- -----------
Operating loss...................................................... (42,657) (7,561)
Other expense, net.................................................. (9,299) --
----------- -----------
Net loss............................................................ $ (51,956) $ (7,561)
=========== ===========
Basic and diluted loss per share.................................... $(.52) $(.31)
=========== ===========
Weighted average number of ordinary shares outstanding.............. 99,056,060 24,444,820
=========== ===========
As of As of
December 31, 1999 December 31, 1998
------------------- --------------------
(in thousands)
Balance sheet data:
Cash and cash equivalents........................................... $ 57,349 $ 1,718
Property and equipment, net......................................... $ 92,374 $ 3,371
Total assets........................................................ $ 177,339 $ 7,870
Long term debt...................................................... $ 79,922 $ --
Total shareholder's equity (deficit)................................ $ 43,614 $ (6,012)
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion and analysis in conjunction with the
"Selected Consolidated Financial Data" and our audited consolidated financial
statements and the related notes thereto which are included elsewhere in this
prospectus. Such "Selected Consolidated Financial Data" and the audited
consolidated financial
19
<PAGE>
statements have been prepared using accounting principles generally accepted in
the U.S. We review the financial position of CompleTel Europe N.V. and its
subsidiaries as if they had been formed and were a consolidated entity since
January 1998.
The following discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. These forward-
looking statements may include statements concerning our plans, objectives and
future economic prospects, expectations, beliefs, anticipated events or trends
and similar expressions about matters that are not historical facts. These
forward-looking statements involve both known and unanticipated risks,
uncertainties and other factors that may cause our actual results, performance
or achievements, or industry results, to be materially different from what we
say or imply with the forward-looking statements. These factors include our
ability to continually adapt to technological change, our ability to obtain
necessary equipment, the successful deployment of our networks and our ability
to develop wireless transmission systems. They also include our ability to
manage the rapid expansion of our business. These forward-looking statements
apply only as of the time of this report and we have no obligation or plans to
provide updates or revisions to these forward-looking statements or any other
changes in events or circumstances on which these forward-looking statements are
based.
Introduction
We are a rapidly growing CLEC operating in France and Germany. 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 division to offer a full range of
Internet-related services through Internet data centers we are establishing in
France, Germany and the United Kingdom.
CompleTel Europe was incorporated in December 1998, and through a series of
transactions in January 1999, became the holding company for our European
telecommunications businesses which commenced in January 1998, when CompleTel
LLC was formed. We accounted for these transactions as a reorganization of
entities under common control, similar to a pooling of interests. Accordingly,
our historical results of operations are presented as if we had been legally
formed on January 8, 1998 and had performed all CLEC related development
activities in Western Europe since CompleTel LLC's inception.
We currently report all of our historical financial results in U.S. dollars as
our functional currency. We have adopted the euro as our functional currency
effective January 1, 2000, as the principal economic environment in which we
earn revenue and incur expenses has become significantly tied to euro currency
environments, such as France and Germany.
Significant milestones
. Between May 1998 and January 1999, Madison Dearborn Partners, Inc. and LPL
Investment Group Inc., our founders, other directors and other individual
investors, contributed a total of $65.8 million to CompleTel LLC for our
initial financing.
. In December 1998, we were awarded licenses to operate telecommunications
facilities and provide services in selected regions in France.
. In February 1999, we closed a units offering in which we issued senior
discount notes and CompleTel Holdings LLC issued class B interests
representing a 7% ownership interest in our then outstanding share capital.
Net proceeds to us totaled $72.6 million.
. In March 1999, we were awarded licenses to operate telecommunications
facilities and provide services in selected regions in Germany.
. In March 1999, we acquired all of the outstanding capital stock of Acces et
Solutions Internet S.A.R.L., a Lyon-based Internet service provider for
$2.1 million in cash.
20
<PAGE>
. In April 1999, we received a $90 million credit facility commitment from
Paribas and Nortel Networks.
. In June 1999, we launched commercial services in France and obtained an
experimental authorization for point-to-multipoint in Marseille.
. In June 1999, we acquired all of the outstanding capital stock of Web
International Networks Limited (now iPcenta), a London-based Internet
service provider for approximately $365,000 in cash plus approximately
$240,000 in contingent earnout payments.
. In July 1999, we received an extension of the markets for our German
licenses.
. In October 1999, we received a commitment from Goldman Sachs International
and Paribas, as co-arrangers for syndicated bank financing in the form of a
(Euro) 265 million senior secured credit facility. The commitment
terminated, superseded and replaced, without penalty, our commitment from
Paribas and Nortel Networks.
. In November 1999, we launched commercial operations in Germany.
. In the fourth quarter of 1999, CompleTel LLC received additional equity
contributions from its initial private equity investors, directors and
management, and from a new private equity investor, Meritage Investment
Partners, totaling $42.1 million, which CompleTel LLC immediately
contributed to us and our operating subsidiaries.
. In January 2000, we executed the (Euro)265 million senior secured credit
facility. To date, we have made no draws under this facility.
Results of operations
We have generated operating losses and negative cash flow from our operating
activities to date. 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
We generated our first revenues in the quarter ended June 30, 1999. For the
year ended December 31, 1999, revenues totaled $3.0 million. Since January 1998,
we have developed and refined our business plans, procured regulatory and
governmental authorizations for our initial 11 markets, raised capital, hired
management and other key personnel, designed, developed and begun installing our
fiber optic metropolitan area networks and operation support systems, obtained
senior financing commitments and negotiated equipment and facilities agreements.
Operating expenses
Our primary operating expenses through December 1999 consisted 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 year ended December 31, 1999 totaled $2.4 million. We
did not incur network costs in the similar 1998 period. 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
21
<PAGE>
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.
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 year ended December 31, 1999, selling,
general and administrative expenses totaled $32.3 million compared to $4.6
million for the comparable period in 1998. This increase was primarily due to
the rapid growth of personnel costs since commencement of operations.
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. We are supplementing our direct sales
force with commissioned indirect sales agents. To attract and retain a highly
qualified sales force, we offer our sales and customer-care personnel a highly
competitive compensation package. The number of employees increased from 36 as
of December 31, 1998 to 374 as of December 31, 1999. On December 31, 1999, we
had a sales force of 108 (including managers and administrators), compared to
one on December 31, 1998. We expect the number of sales and marketing personnel
to continue to grow and our selling, general and administrative costs to
increase as we develop and expand our operations.
We anticipate incurring amortization of stock-based compensation expense of
approximately $1.4 million under our stock option plan for the three months
ended March 31, 2000. This amount is based on deferred compensation expense
recorded as of December 31, 1999 totaling approximately $26.5 million.
We also anticipate incurring additional stock-based compensation expense of
approximately $38.2 million upon completion of our initial public offering
("IPO") due to the resulting anticipated vesting of certain CompleTel LLC
performance vesting units held by certain of our employees in connection with
what is anticipated to be a qualified public offering. This compensation expense
is based on an assumed IPO price of (Euro)16.50 ($15.91)per share. For each $1
increase in the anticipated IPO price per share, additional compensation expense
of approximately $7.2 million will be recorded. In addition, based upon our
value as indicated in the IPO, we will record compensation expense and deferred
compensation of approximately $18.5 million and $57.9 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 will be 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
awards will be 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 ordinary shares assuming the successful completion of our
anticipated IPO.
Management fees to affiliate
CompleTel LLC, 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. During 1998,
CompleTel LLC, and its wholly-owned subsidiary, CableTel Management, Inc., a
Colorado corporation, entered into an agreement for CableTel Management, Inc. to
provide management services for CompleTel LLC and all the other companies in the
group. The companies 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. incurs in
rendering services to each of the companies. For the year ended December 31,
1999, and the period from commencement of operations to December 31, 1998, we
recorded $6.5 million and $3.0 million, respectively, of related-party
management fees.
Depreciation and amortization
22
<PAGE>
For the year ended December 31, 1999, we recorded depreciation and
amortization expense of $4.5 million, compared to $46,000 for the similar period
in 1998. This increase is due to increases in network and non-network related
property and equipment. We started recording network depreciation during the
quarter ended June 30, 1999 when we initiated network services.
Other income and expense
We incurred interest expense, net of $1.4 million of capitalized interest, of
$8.2 million during the year ended December 31, 1999. The interest expense
recorded reflects the accretion of the notes and the amortization of deferred
financing costs. We capitalize a portion of our interest costs as part of the
construction cost of our networks, in accordance with Statement of Financial
Accounting Standards No. 34 "Capitalization of Interest Costs" ("SFAS 34" ).
Interest income for the same period was $2.6 million, which resulted from the
investment of the proceeds from the high-yield notes and the investment of the
available cash from the equity contributions. We did not recognize any
significant amounts of interest expense or interest income during 1998.
In addition to the above expenses, some of our employees have purchased common
units of CompleTel LLC for which CompleTel LLC incurs non-cash compensation
charges. For accounting purposes, we record such non-cash compensation charges
as a deemed capital contribution with an offsetting entry to deferred
compensation. Deferred compensation is amortized to expense over the vesting
period of the common units.
Foreign exchange rates
We are exposed to changes in currency exchange rates because our revenues,
costs, assets and liabilities are, for the most part, denominated in local
currencies. As a result, our financial condition and results of operations, as
reported in dollars as our functional currency through December 31, 1999, may be
affected by changes in the value of the local currencies in which we transact
business. The notes which we issued in February 1999 also 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. 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 currency effective January 1, 2000.
Net loss
Our consolidated net loss during the year ended December 31, 1999 and the
period from commencement of operations (January 8, 1998) to December 31, 1998
was $52.0 million and $7.6 million, respectively. The increase was primarily the
result of substantial start-up costs of the operating subsidiaries, primarily
our French subsidiary.
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 of U.S. Dollars).
23
<PAGE>
<TABLE>
<CAPTION>
Commencement
of Operations
(January 8, 1998)
Year Ended to
December 31, 1999 December 31, 1998
-------------------- ---------------------
<S> <C> <C>
Net Loss............................................................ $(51,956) $(7,561)
Interest expense (net of interest income)........................... 5,683 --
Income taxes........................................................ -- --
Depreciation and amoritization...................................... 4,489 46
Non-cash compensation expense....................................... 675 191
Other expense....................................................... 3,553 --
-------- -------
Adjusted EBITDA..................................................... $(37,556) $(7,324)
======== =======
</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.
You also should be aware that Adjusted EBITDA 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 $57.3 million as of December 31, 1999, an
increase of $55.6 million from $1.7 million as of December 31, 1998. Details of
the change in cash and cash equivalents are set forth in the table below.
<TABLE>
<CAPTION>
Commencement
of Operations
(January 8, 1998)
Year Ended to
December 31, 1999 December 31, 1998
-------------------- -------------------
<S> <C> <C>
Cash flows from operating activities.................................. $(41,313) $ 5,596
Cash flows from investing activities.................................. (72,659) (4,368)
Cash flows from financing activities.................................. 170,721 649
Effect of exchange rates on cash...................................... (1,118) (159)
-------- -------
Net increase in cash and cash equivalents............................. 55,631 1,718
Cash and cash equivalents at beginning of period...................... 1,718 --
-------- -------
Cash and cash equivalents at end of period............................ $ 57,349 $ 1,718
======== =======
</TABLE>
24
<PAGE>
Cash flows from operating activities
During the year ended December 31, 1999, we used $41.3 million in operating
activities, a $46.9 million decrease from the $5.6 million generated from
operating activities for the similar period in 1998. This decrease was primarily
related to the substantial organization and start-up costs incurred during the
development of our networks. Our development efforts increased significantly in
the fourth quarter of 1998 and during 1999 upon our receipt of services licenses
in France and Germany.
Cash flows from investing activities
We used approximately $72.7 million of cash in investing activities during the
year ended December 31, 1999, compared to a use of $4.4 million for the similar
period in 1998. The increase was due to increased capital expenditures primarily
related to our network development and office facilities and equipment.
Additionally, during the year ended December 31, 1999, we used $2.1 million and
$0.4 million in cash to acquire all of the outstanding capital stock of Acces et
Solutions Internet S.A.R.L. and Web International Networks Limited, now iPcenta,
respectively.
Cash flows from financing activities
We had approximately $170.7 million of cash flows from financing activities
during the year ended December 31, 1999, compared to $0.6 million for the
similar period in 1998. The increase resulted in part from increased cash
contributions from our ultimate parent, CompleTel LLC, which totaled
approximately $104.7 million for the year ended December 31, 1999, compared to
$1.5 million for the similar period in 1998. Additionally, in April 1999, we
received from escrow the net proceeds from our units offering totaling
approximately $73.2 million.
Liquidity and capital resources
The telecommunications business is capital intensive. Since January 1998, and
for the foreseeable future, we have needed and will continue to need large
amounts of capital to fund capital expenditures, working capital, debt service,
and to fund operating losses. As of December 31, 1999, we had $57.3 million of
cash and short-term investments and net working capital of $20.3 million.
Since January 1998, CompleTel LLC has received $107.9 million in private
equity contributions of which $59.5 million was contributed to our French
operating subsidiary, $40.0 million was contributed to our German operating
subsidiary, $2.1 million was contributed to CompleTel Europe and the remainder
was retained by CompleTel LLC for start up expenditures on behalf of CompleTel
Europe and its subsidiaries. In February 1999, CompleTel Europe and CompleTel
Holdings LLC completed a units offering consisting of senior discount notes and
class B interests in CompleTel Holdings LLC resulting in gross proceeds in
respect of the units of approximately $75.0 million, of which $70.5 million was
allocated to the notes, which represents a substantial discount from the $147.5
million aggregate stated principal amount at maturity of the notes. The
remaining $4.5 million was allocated to the class B interests of CompleTel
Holdings LLC. Cash interest will not accrue on the notes prior to February 15,
2004. At that date, the principal amount of the notes will have increased to the
$147.5 million stated principal amount at an effective annual interest rate of
15.1%. The $77 million increase in principal amount plus amortization of
deferred financing costs will be charged to interest expense. Commencing
February 15, 2004, cash 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 on February 16, 2009. The notes indenture contains restrictive covenants,
including among others, limitations on our ability and the ability of our
restricted subsidiaries to: borrow additional money, pay dividends and make
other distributions, make investments, sell assets and engage in mergers and
consolidations.
In January 2000, we executed an agreement for a (Euro)265 million senior
secured credit facility with Goldman Sachs International and Paribas as co-
arrangers of the facility. The funds will be available to our subsidiaries,
initially to include CompleTel ECC, 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 (Euro)105 million and a
euro revolving loan facility available until December 31, 2002, in the aggregate
amount of (Euro)160 million. The (Euro)160 million tranche will become available
after May 31, 2000, if the euro term facility is fully drawn and other
25
<PAGE>
specified conditions are satisfied. Following December 31, 2002, up to
(Euro)141 million of the outstanding advances under the euro revolving loan
facility will be converted into a term loan, and any other outstanding advances
will become part of a (Euro)19 million working capital facility. As of the date
of this prospectus, we had no borrowings outstanding under the facility.
The funds available under the facility are to be used substantially to deploy
our networks in France and Germany. Advances under the facility cannot exceed
certain limits that increase with time, and are subject to other conditions,
including that our subsidiaries must be operational in designated cities in
France and Germany, and satisfy a debt to capital test. In addition, the
facility includes various financial and other covenants and restrictions that
limit our ability to pay dividends, dispose of assets, and effect merger and
consolidation transactions. The facility also limits the use of proceeds of an
initial public offering, other equity investments, or a high yield issue as it
provides that any such proceeds be held as cash equivalent investments or used
to develop our telecommunications business in France and Germany.
The rate of interest will be variable based on EURIBOR, plus a margin of up to
3.75% per annum for the term loan facility or 3.00% per annum for the revolving
loan facility that will be determined based on a senior debt leverage ratio
test, and costs. Upon an event of default, all advances will accelerate and
become immediately due and payable and the undrawn portion of the facilities
will be cancelled and the commitments of the banks reduced to zero.
The facility is secured by our assets and the assets of our subsidiaries and
the stock in certain of our subsidiaries. We also have guaranteed the payments
under the facility and have agreed to indemnify the banks against certain
losses.
Based on our current plan, we will satisfy our aggregate capital requirements
to fund the deployment of our business plan through December 31, 2001, with the
remaining funds we have already raised, funds available to us under our
(Euro)265 million senior secured credit facility, the proceeds from our initial
public offering ((Euro)450.6 million) and additional funds that we intend to
raise in the future through other sources of debt and/or equity financing.
Concurrently with our initial public offering, we are offering (Euro)300 million
principal amount of senior notes due 2010. The closing of the notes offering is
conditioned on the closing of our initial public offering. We cannot be certain
that we will be successful in obtaining additional financing.
26
<PAGE>
Capital expenditures
During the year ended December 31, 1999 and the period from commencement of
operations (January 8, 1998) through December 31, 1998, we made capital
expenditures (excluding capitalized interest) of $101.4 million and $4.4
million, respectively, for property and equipment necessary to deploy networks
in our initial markets. We also used capital during these periods to fund our
operating losses.
Based on our current plans, we expect that we will make aggregate capital
expenditures of approximately $575 million through December 31, 2003, including
approximately $375 million between January 1, 2000 and December 31, 2001, and
$200 million between January 1, 2002 and December 31, 2003, to deploy our
planned 17 city network in France, Germany and the United Kingdom, including our
existing eleven markets and six additional cities, Amiens, Nantes and Rouen in
France, and Hamburg, Mannheim and Stuttgart in Germany. We intend to fund our
capital expenditures and operating losses during this period with cash on hand,
the proceeds from our initial public offering, funds available to us under our
credit facility and/or other funds to be raised
27
<PAGE>
from various sources of financing, which we currently expect will largely
consist of debt financing, as market conditions may permit.
Impact of the year 2000
The "year 2000" problem generally describes the various problems that may
result from the improper processing of dates and date-sensitive calculations by
computers and other equipment as a result of computer hardware and software
using only the last two digits of the year to identify the year in a date field.
If a computer program or other piece of equipment fails to properly process
dates including and after the year 2000, the computer's calculations may be
inaccurate and equipment may malfunction. The failure to process dates could
result in system failures or miscalculations causing disruptions in operations
including, among other things, a temporary inability to process transactions,
send invoices or engage in other routine business activities.
We have completed our initial internal year 2000 conversion and have not
experienced any significant problems. However, until well into the year 2000, we
cannot assure you that all systems will function adequately. Also, we sell our
telecommunications services to companies that may rely upon computerized systems
to make payments for our services, and we interconnect certain portions of our
network and systems with other companies' networks and systems. These
transactions and interactions potentially expose us to year 2000 problems
arising in these other companies' systems. Based on our experience to date, we
do not currently anticipate significant problems related to the year 2000
conversion in the future and do not expect to incur additional costs associated
with year 2000 issues. However, because we cannot predict with any degree of
certainty the effect of the year 2000 conversion on our customers and vendors,
we cannot guarantee that we will not encounter problems related to the year 2000
conversion in the future which may have a material adverse effect on our
business, financial condition and results of operations.
Euro conversion
Effective January 1, 1999, the euro became the single legal currency of the
eleven participating European Union member states, including The Netherlands,
France and Germany and the conversion rates of the currencies of the
participating member states were irrevocably fixed against the euro as of that
date. Effective January 1, 1999, the French franc, the German mark and the
Netherlands guilder ceased to be the legal currency. From January 1, 1999 until
December 21, 2001, the French franc, the German mark and the Netherlands guilder
will be denominations of the euro and, as such, will be legal tender. The status
of the French franc, the German mark and the Netherlands guilder as
denominations of the euro will continue until, at the latest, June 30, 2002. On
that date (or, if these countries so determine, on some earlier date after
January 1, 2002), French francs, German marks and Netherlands guilders will be
withdrawn from circulation and will cease to be legal tender. Euro notes and
coins are not expected to be issued before January 1, 2002. Prior to that date,
cash payments will continue to be made in the local currencies. From January 1,
2002 until the local currencies are withdrawn and cease to be legal tender, cash
payments may be made by means of euro notes and coins or by way of French
francs, German marks and Netherlands guilders as appropriate.
We are not burdened with systems that must be redesigned to accommodate the
introduction of the euro as we have purchased and specified our business support
systems, including our billing systems, to accommodate euro transactions and
dual currency operations during the transition period. In addition, we intend to
require all vendors supplying third party software to us to warrant to us that
their programs support dual currency operations.
We will be dependent on banks, customers and other providers to complete
business transactions and we will be exposed to problems inherent in these
third-party systems. During the transition period, to the extent we are
supplying local and national service, we may continue billings and collections
in the legacy currency to avoid euro conversion problems. However, to the extent
we have international transactions, we will be exposed to euro-related risks.
The establishment of the European Monetary Union may have a significant effect
on the economies of the participant countries. While we believe that the
introduction of the euro will eliminate exchange rate risks in respect
28
<PAGE>
of the currencies of those member states that have adopted the euro, which
includes Germany and France, there can be no assurance as to the relative
strength of the euro against other currencies, including the U.S. dollar. Since
a substantial portion of our net sales will be denominated in euro or legacy
currencies of participant countries, we will be exposed to that risk.
Regulation and Licensing Matters
France, Germany and the United Kingdom, and any new markets across Europe in
which we intend to operate, subject the telecommunications industry to a
significant degree of regulation. We need telecommunications licenses and other
equivalent authorizations to operate in each of these countries. Our ability to
deploy metropolitan area networks and provide Internet-related services in the
additional six cities included in our business plan depends on our ability to
obtain additional licenses and other authorizations or permissions. There can be
no assurance that we will be able to obtain the required licenses and, if we are
unsuccessful, we will need to revise our network deployment strategy.
We must keep our licenses in our existing markets in force or we may be in
default under our senior notes indenture and our credit facility, and we risk
sanctions from the government authorities that grant our licenses. In most
cases, these licenses and other authorizations are of fixed duration, and we
must comply with regulations and technical requirements in order to maintain
them. For example, in France, we must comply with French and European Union
regulations and technical standards regarding interconnection, secrecy,
neutrality, non-discrimination, security, environmental protection, limitations
on ownership, and public service.
We cannot assure you that we will be successful in obtaining, maintaining, or
renewing licenses and other authorizations required for the services we provide
or plan to provide. In addition, we cannot assure you that the required licenses
and other authorizations will be issued or renewed on commercially viable terms.
New Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") establishes
accounting and reporting standards for derivative instruments, including certain
instruments embedded in other contracts, and for hedging activities. SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. It also specifies the
accounting for changes in the fair value of a derivative instrument depending on
the intended use of the instrument and whether (and how) it is designated as a
hedge. SFAS 133 was effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. During 1999, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
SFAS 133" (SFAS 137) which delayed the effective date of SFAS 133 until all
fiscal quarters of fiscal years beginning after June 15, 2000. Through December
31, 1999, the Company had not entered into any transactions involving derivative
financial instruments and, therefore, cannot predict the financial statement
impact of adopting SFAS 133 with respect to transactions which have not yet been
entered into.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101") "Views on Selected Revenue
Recognition Issues" which provides the staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. The
Company has evaluated SAB 101 and it believes that there is no effect on the
revenue recognition policies currently in place.
29
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Investment portfolio and interest rate sensitivity
Our investment policy is limited by the indenture for the senior discount
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). The indenture requires investments that meet high credit quality
standards, such as obligations of the U.S. government securities 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 our credit facility, we are required to enter
into an interest rate hedging program with respect to 50% of every tranche of
(Euro) 50 million borrowed to mitigate foreign currency exchange rate risk.
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.
We do not think we are exposed to significant changes in fair value of our
investment portfolio because of our conservative investment strategy.
Impact of foreign currency rate changes
We are exposed to changes in currency exchange rates because our revenues,
costs, assets and liabilities are, for the most part, denominated in local
currencies. As a result, our financial condition and results of operations, as
reported in dollars as our functional currency through December 31, 1999, may be
affected by changes in the value of the local currencies in which we transact
business. The senior discount notes which we issued in February 1999 also 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 local currencies,
including the euro. 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.
December 31, 1998 .......................... $1.181(1)
December 31, 1999 .......................... $1.007
--------------
(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 will
continue to evaluate whether to adopt hedging strategies to manage our exposure
to foreign currency exchange rate risk.
30
<PAGE>
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Company are filed under this
Item as follows:
<TABLE>
<CAPTION>
<S> <C>
I. COMPLETEL EUROPE N.V.
Report of Independent Public Accountants............................................... 32
Consolidated Balance Sheets as of December 31, 1999 and 1998.......................... 33
Consolidated Statements of Operations for the year ended December 31, 1999
and for the Period from Commencement of Operations (January 8, 1998) to
December 31, 1998..................................................................... 34
Consolidated Statements of Shareholder's Equity (Deficit) for the year ended
December 31, 1999 and for the Period from Commencement of Operations
(January 8, 1998) to December 31, 1998................................................ 35
Consolidated Statements of Cash Flows for the year ended December 31, 1999
and for the Period from Commencement of Operations (January 8, 1998) to
December 31, 1998..................................................................... 36
Notes to Consolidated Financial Statements............................................. 37
</TABLE>
31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CompleTel Europe N.V.:
We have audited the accompanying consolidated balance sheets of COMPLETEL
EUROPE N.V. (an N.V. registered in the Netherlands) and subsidiaries (the
"Company") as of December 31, 1999 and 1998 and the related consolidated
statements of operations, shareholder's equity (deficit) and cash flows for the
year ended December 31, 1999, and for the period from commencement of operations
(January 8, 1998) to December 31, 1998 (after corporate reorganization--see Note
1). These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CompleTel Europe N.V. and
subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for the year ended December 31, 1999, and for
the period from the commencement of operations (January 8, 1998) to December 31,
1998, in conformity with United States generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
March 2, 2000.
32
<PAGE>
COMPLETEL EUROPE N.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Stated in thousands of U.S. Dollars, except share and per share amounts)
(After Corporate Reorganization--See Note 1)
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------------ ------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents......................................................... $ 57,349 $ 1,718
Receivables....................................................................... 14,886 527
Affiliate receivables............................................................. 306 --
Prepaid expenses and other current assets......................................... 1,564 179
-------- --------
Total current assets.............................................................. 74,105 2,424
-------- --------
LONG-TERM ASSETS:
Property and equipment, net....................................................... 92,374 3,371
Licenses and other intangibles, net............................................... 4,938 950
Deferred financing costs, net..................................................... 5,103 869
Other long-term assets............................................................ 819 256
-------- --------
Total long-term assets............................................................ 103,234 5,446
-------- --------
TOTAL ASSETS $177,339 $ 7,870
======== ========
LIABILITIES AND SHAREHOLDERS'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Construction payables............................................................. $ 28,711 $ --
Trade accounts payable............................................................ 9,891 1,959
Accrued liabilities............................................................... 12,656 1,453
Affiliate payables................................................................ 2,545 10,470
-------- --------
Total current liabilities......................................................... 53,803 13,882
-------- --------
LONG-TERM DEBT 79,922 --
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 5)
SHAREHOLDER'S EQUITY (DEFICIT):
Ordinary shares, nominal value (translated from Euro.10 per share),
625,000,000 shares authorized; 126,133,060 and 24,444,820 shares
issued and outstanding at December 31, 1999 and 1998, respectively............. 14,171 2,853
Additional paid-in capital........................................................ 124,166 2,195
Deferred compensation............................................................. (28,495) (540)
Other cumulative comprehensive loss............................................... (3,912) (160)
Accumulated deficit............................................................... (62,316) (10,360)
-------- --------
TOTAL SHAREHOLDER'S EQUITY (DEFICIT)................................................. 43,614 (6,012)
-------- --------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY (DEFICIT)................................. $177,339 $ 7,870
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
33
<PAGE>
COMPLETEL EUROPE N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in thousands of U.S. Dollars, except share and per share amounts)
(After Corporate Reorganization--See Note 1)
<TABLE>
<CAPTION>
Commencement
of Operations
Year (January 8,
Ended 1998) to
December 31, December 31,
1999 1998
------------------ -------------------
<S> <C> <C>
REVENUES.................................................... $ 2,985 $ --
OPERATING EXPENSES:
Network costs............................................. 2,407 --
Selling, general and administrative....................... 32,282 4,552
Management fees to affiliate.............................. 6,464 2,963
Depreciation and amortization............................. 4,489 46
----------- -----------
Total operating expenses............................... 45,642 7,561
----------- -----------
OPERATING LOSS.............................................. (42,657) (7,561)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income........................................... 2,553 --
Interest expense, net of capitalized interest............. (8,236) --
Foreign exchange loss and other expense................... (3,616) --
----------- -----------
Total other income (expense)........................... (9,299) --
----------- -----------
NET LOSS BEFORE INCOME TAXES................................ (51,956) (7,561)
INCOME TAX PROVISION........................................ -- --
----------- -----------
NET LOSS .................................................. $ (51,956) $ (7,561)
----------- -----------
BASIC AND DILUTED LOSS PER ORDINARY SHARE................... $(.52) $(.31)
=========== ===========
WEIGHTED AVERAGE NUMBER OF ORDINARY
SHARES OUTSTANDING...................................... 99,056,060 24,444,820
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
COMPLETEL EUROPE N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(Stated in thousands of U.S. Dollars, except share and per share amounts)
(After Corporate Reorganization--See Note 1)
<TABLE>
<CAPTION>
Total
Other
Ordinary Shares Additional Cumulative
--------------------- Paid-in Deferred Comprehensive Accumulated Comprehensive
Number Amount Capital Compensation Loss Deficit Loss Total
----------- -------- --------- ------------- -------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 8, 1998 - $ - $ - $ - $ - $ - $ - $ -
Deemed issuance of ordinary
shares, net of $54
subscription receivable on
January 8, 1998............... 24,444,820 2,799 - - - (2,799) - -
Cash contributions by Par-
ent........................... - - 1,464 - - - - 1,464
Payment on subscription
receivable on December
14, 1998..................... - 54 - - - - - 54
Deemed contributions by
Parent related to allocation
of non-cash compensation
charges...................... - - 731 (604) - - - 127
Amortization of allocated
deferred compensation
charges...................... - - - 64 - - - 64
Cumulative translation
adjustment................... - - - - (160) - (160) (160)
Net loss...................... - - - - - (7,561) (7,561) (7,561)
----------- ------- -------- -------- ------- -------- -------- --------
BALANCE, December 31,
1998.......................... 24,444,820 $ 2,853 $ 2,195 $ (540) $ (160) $(10,360) $ (7,721) $ (6,012)
========
Issuance of ordinary shares
in connection with
corporate reorganization..... 73,537,325 8,392 49,653 - - - - 58,045
Issuance of ordinary shares
in connection with the
Units Offering............... 7,375,000 825 3,653 - - - - 4,478
Issuance of ordinary shares
in connection with
capital contributions........ 20,775,915 2,101 40,035 - - - - 42,136
Deemed contributions by
Parent related to allocation
of non-cash compensation
charges...................... - - 2,130 (2,130) - - - -
Issuance of stock options in
December 1999................ - - 26,500 (26,500) - - - -
Amortization of allocated
deferred compensation
charges...................... - - - 675 - - - 675
Cumulative translation
adjustment................... - - - - (3,752) - (3,752) (3,752)
Net loss...................... - - - - - (51,956) (51,956) (51,956)
----------- ------- -------- -------- ------- -------- -------- --------
BALANCE, December 31,
1999.......................... 126,133,060 $14,171 $124,166 $(28,495) $(3,912) $(62,316) $(55,708) $ 43,614
=========== ======= ======== ======== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
COMPLETEL EUROPE N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in thousands of U.S. Dollars)
(After Corporate Reorganization--See Note 1)
<TABLE>
<CAPTION>
Commencement of
Operations
(January 8,
Year 1998) to
Ended December 31,
December 31, 1998
1999 ---------------
-------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss.......................................................................................... $(51,956) $(7,561)
Adjustments to reconcile net loss to cash flows from operating activities-
Depreciation and amortization.................................................................. 4,489 46
Non-cash compensation expense.................................................................. 675 191
Accretion of senior notes...................................................................... 7,948 --
Amortization of deferred financing costs....................................................... 236 --
Changes in assets and liabilities-
Increase in receivables..................................................................... (15,181) (527)
Increase in prepaid expenses and other current assets....................................... (1,470) (179)
Increase in other long-term assets.......................................................... (607) (256)
Increase in trade accounts payable.......................................................... 10,164 1,959
Increase in accrued liabilities............................................................. 11,950 1,453
Increase (decrease) in net affiliate payables/receivables................................... (7,561) 10,470
-------- -------
Net cash flows from operating activities................................................. (41,313) 5,596
-------- -------
INVESTING ACTIVITIES:
Expenditures for property and equipment........................................................... (97,055) (3,418)
Increase in construction payables................................................................. 28,711 --
Purchase of licenses and other intangibles........................................................ (4,315) (950)
Offering proceeds and investment earnings placed in escrow........................................ (73,198) --
Proceeds from escrowed offering and investment earnings........................................... 73,198 --
-------- -------
Net cash flows from investing activities................................................. (72,659) (4,368)
-------- -------
FINANCING ACTIVITIES:
Gross proceeds from senior notes offering......................................................... 70,532 --
Proceeds from issuance of ordinary shares and subsequent capital contributions.................... 104,659 1,518
Deferred financing costs.......................................................................... (4,470) (869)
-------- -------
Net cash flows from financing activities................................................. 170,721 649
-------- -------
Effect of exchange rates on cash.................................................................. (1,118) (159)
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................................................... 55,631 1,718
CASH AND CASH EQUIVALENTS, beginning of period...................................................... 1,718 --
-------- -------
CASH AND CASH EQUIVALENTS, end of period............................................................ $ 57,349 $ 1,718
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
COMPLETEL EUROPE N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(After Corporate Reorganization--See Note 1)
(1) ORGANIZATION AND NATURE OF OPERATIONS
CompleTel Europe N.V. ("CompleTel Europe") (together with its wholly-owned
subsidiaries, the "Company") is a Dutch holding company incorporated on December
14, 1998 for the purpose of completing a Rule 144A offering (the "Offering")
(see Note 4) to finance its planned operations.
The Company has a strategic objective of becoming 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. A
facilities-based operator uses mainly its own telecommunications facilities to
provide service, in contrast with non-facilities-based resellers who purchase
the services of other providers and then retail the services to customers.
Initially, the Company is focusing on building high-capacity fiber optic
networks in France and Germany. Additionally, the Company intends to provide
Internet access services in France, Germany and the United Kingdom ("UK").
CompleTel Europe is an indirect majority owned subsidiary of CompleTel LLC
("Parent"), a Delaware limited liability company. An indirect 7% interest in
CompleTel Europe was acquired by purchasers of units in the Offering (see Note
4). CompleTel LLC was known as CableTel Delaware LLC ("CableTel Delaware") from
its formation on January 8, 1998 through May 18, 1998, when it was reorganized
and renamed as CableTel Europe LLC in connection with the admission of a new
member. Effective August 20, 1998, CableTel Europe LLC changed its name to
CompleTel LLC.
As of December 31, 1998, Parent's other direct and indirect wholly-owned
subsidiaries consisted of CableTel Management Inc. ("Management Co."), CompleTel
Holding I B.V. ("BVI"), CompleTel Holding II B.V. ("BVII"), its French operating
subsidiary, CompleTel SAS ("CompleTel France") (formerly known as CompleTel
S.A.R.L.), its UK operating subsidiary, CompleTel UK Limited ("CompleTel UK"),
and its German operating subsidiary, CompleTel GmbH ("CompleTel Germany"). As of
December 31, 1998, Parent's operating companies were held indirectly through BVI
and BVII. CompleTel Europe had no material assets or operations as of December
31, 1998.
In January 1999, Parent formed CompleTel Services SAS, CompleTel Holdings LLC
("CompleTel Holdings"), CompleTel ECC B.V. ("CompleTel ECC"), CompleTel (N.A.)
N.V. ("NANV") and CompleTel SPC ("CompleTel SPC"). CompleTel Holdings was formed
to issue the equity component of the Offering (see Note 4). CompleTel ECC was
formed to be the group's European corporate center and to hold the proceeds of
the Offering, through an escrow account, until the Company received aggregate
financing commitments of at least $90 million (see Note 4). Through a series of
transactions in the restructuring, CompleTel LLC contributed approximately $58
million of equity, consisting of cash of approximately $52 million and accounts
receivable of approximately $6 million, to CompleTel France through CompleTel
SPC. Also, through a series of restructuring transactions, CompleTel SPC became
a wholly-owned subsidiary of BVI. BVI was contributed to CompleTel Europe in
exchange for the issuance of 73,537,325 additional ordinary shares and CompleTel
Europe became a wholly-owned subsidiary of NANV. Furthermore, CompleTel LLC
contributed its 100% interest in NANV to CompleTel Holdings in exchange for all
19,596,429 Class A Membership Interests in CompleTel Holdings. The Non-Voting
Class B Membership Interests (aggregating 1,475,000) in CompleTel Holdings were
issued substantially to unrelated parties in connection with the Offering (see
Note 4). In connection with this issuance by CompleTel Holdings of its Non-
Voting Class B Membership Interests, CompleTel Europe issued 7,375,000
additional ordinary shares to NANV and NANV issued additional ordinary shares to
CompleTel Holdings in consideration of a cash contribution to CompleTel Europe
totaling approximately $4.5 million. This corporate reorganization has been
accounted for as a reorganization of entities under common control, similar to a
pooling of interests. Accordingly, the accompanying financial statements
retroactively reflect the new corporate organizational structure of CompleTel
Europe as if CompleTel Europe had been incorporated as of January 8, 1998. The
incorporation is reflected through a deemed issuance, on January 8, 1998, of
24,444,820 shares of CompleTel Europe in exchange for a subscription receivable
from Parent of
37
<PAGE>
approximately $54,000, which was paid on December 14, 1998. Furthermore, the
accompanying consolidated financial statements have been prepared as though
CompleTel Europe had performed all competitive local exchange carrier ("CLEC")
related development activities in Western Europe since the inception of Parent.
The accompanying consolidated financial statements of CompleTel Europe include
its direct and indirect wholly-owned subsidiaries consisting of BVI, BVII,
CompleTel France, CompleTel Germany, CompleTel UK, CompleTel ECC and CompleTel
SPC.
In November and December 1999, Parent received additional cash contributions
totaling approximately $42.1 million from new and existing investors. As of
December 31, 1999, Parent had contributed, through a series of planned
transactions, $40 million to CompleTel GmbH through intermediate subsidiaries in
exchange for one share of CompleTel GmbH, and contributed approximately $2.1
million to CompleTel Europe through intermediate subsidiaries in exchange for
ordinary shares of CompleTel Europe. Through this series of planned
transactions, an intermediate subsidiary of Parent received one share of
CompleTel GmbH, which was contributed to BVI in February 2000 in exchange for
one BVI class B share. Also, in February 2000 the BVI share was contributed to
CompleTel Europe in exchange for ordinary shares in CompleTel Europe. These
transactions have been accounted for as a reorganization of entities under
common control. Accordingly, the accompanying consolidated financial statements
retroactively reflect the deemed capital contribution by Parent through certain
intermediate subsidiaries to BVI and CompleTel Europe of the one share interest
in CompleTel GmbH and the associated 20,775,915 ordinary shares issued by
CompleTel Europe as if such transaction had occurred in December 1999.
CompleTel Europe 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 the Company's fiber optic networks and
operation support systems ("OSS"), negotiating equipment and facilities
agreements, and negotiating interconnection agreements and certain right-of-way
agreements. As a result of its development stage activities, the Company has
experienced significant operating losses and negative cash flows from
operations. The Company exited the development stage during the fourth quarter
of 1999. The Company expects to continue to generate negative cash flows from
operations in each market while it continues development, construction, and
expansion of its business and until the Company establishes a sufficient revenue
generating customer base in that market. The Company also expects to experience
increasing operating losses and negative cash flows from operations as it
expands its operations and enters new markets, even if and after it achieves
positive cash flow from operations in its initial markets.
The Company's ultimate success will be affected by the problems, expenses and
delays encountered in connection with the formation of any new business and by
the competitive environment in which the Company intends to operate. The Company
currently offers its services in two markets in France and one market in Germany
and plans to deploy networks in six additional markets in France and three
additional markets in Germany. The Company is also developing an Internet-
related services business in these markets and the U.K. The Company's
performance will further be affected by its ability to obtain licenses, properly
assess potential markets, secure financing or raise additional capital, design
networks, acquire right-of-way and building access rights, implement
interconnection with incumbent public telecommunications operators ("PTOs"),
lease adequate trunking capacity from PTOs, purchase and install switches in
additional markets, implement efficient OSS and other back office systems,
develop a sufficient customer base, and attract, retain and motivate qualified
personnel. Delays or failure in receiving required regulatory approvals or the
enactment of new adverse regulations or regulatory requirements may have a
material adverse effect upon the Company. Although management believes that the
Company will be able to successfully mitigate these risks, there is no assurance
that the Company will be able to do so or that the Company will ever operate
profitably.
The actual amount and timing of the Company's future capital requirements may
differ materially from the Company's current estimates, and additional financing
may be required in the event of departures from the Company's current business
plans and projections, including those caused by unforeseen delays, cost
overruns, engineering design changes, demand for the Company's services that
varies from that expected by the Company, and adverse regulatory, technological
or competitive developments. The Company may also require additional capital (or
require financing sooner than anticipated) if it alters the schedule or targets
of its roll-out plan in response to regulatory, technological or competitive
developments (including additional market developments and new
38
<PAGE>
opportunities in and outside of its target markets). The Company intends to
evaluate potential joint ventures, strategic alliances, and acquisition
opportunities on an ongoing basis as they arise, and the Company may require
additional financing if it elects to pursue any such opportunities. The Company
also will be required to seek additional financing if it elects to 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.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements of the Company have been
prepared in accordance with United States generally accepted accounting
principles ("U.S. GAAP" ). 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 the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. The Company has adopted a calendar fiscal
year.
Stock-Splits
In April 1999, the Company executed a stock-split through which its 431
ordinary shares then outstanding were converted into 21,071,429 shares of the
Company's ordinary shares. Additionally, the Company increased its authorized
shares of ordinary shares to 105,330,800. Subsequent to December 31, 1999, the
Company completed a 5-for-1 stock split through which its then outstanding
ordinary shares totaling 25,226,612 were converted into 126,133,060 ordinary
shares. Additionally, the Company increased its authorized ordinary shares to
625,000,000 and changed the nominal value of its ordinary shares to Euro .10 per
ordinary share. Accordingly, the accompanying consolidated financial statements
have been retroactively restated to give effect to these recapitalizations.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
CompleTel Europe and its wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all marketable
securities and commercial paper with maturities of ninety days or less at
acquisition as cash equivalents.
Receivables
Receivables consist primarily of amounts due to the Company's European
subsidiaries for value added taxes ("VAT") paid on purchased goods and services.
VAT receivables are recoverable through a netting of VAT payable on sales
revenue or by a request for reimbursement to the applicable taxing authority.
Prepaid Expenses and Other Current Assets
Prepaid expenses consist of prepaid rent and prepaid insurance. Prepayments
are amortized on a straight-line basis over the life of the underlying
agreements. Other current assets consist primarily of deposits on office and
switch location premises.
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 being
39
<PAGE>
depreciated when ready for their intended use on a straight line basis over the
estimated useful lives of the related assets as follows:
Estimated
Useful Life
-----------
Network equipment 3 to 8 years
Office furniture and equipment 5 years
Computer equipment and software 3 to 5 years
Leasehold improvements 9 to12 years
Buildings 20 years
Property and equipment consisted of the following (in thousands):
December 31, December 31,
1999 1998
------------- -------------
Network equipment........................ $39,955 $ --
Office furniture and equipment........... 1,445 129
Computer equipment and software.......... 5,116 608
Leasehold improvements................... 1,855 24
Buildings................................ 206 --
------- ------
Property and equipment, in service....... 48,577 761
Less: accumulated depreciation.......... (4,171) (46)
------- ------
Property and equipment, in service, net.. 44,406 715
Construction in progress 47,968 2,656
------- ------
Property and equipment, net.............. $92,374 $3,371
======= ======
The Company capitalized approximately $1.4 million and $0 of interest for the
year ended December 31, 1999 and for the period from commencement of operations
(January 8, 1998) to December 31, 1998, respectively.
Computer Software Costs
The American Institute of Certified Public Accountants ("AICPA") recently
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. SOP 98-1 identifies the characteristics of internal-use
software and provides examples to assist in determining when computer software
costs should be capitalized and amortized versus expensed. This statement was
adopted at commencement of operations.
Start-Up Costs
The Company expenses all start-up and organization costs as incurred, in
accordance with the provisions of AICPA Statement of Position 98-5, "Reporting
on the Costs of Start-up Activities."
Deferred Financing Costs
Costs to obtain debt financing are capitalized and amortized over the life of
the related debt facility using the effective interest method.
License Costs
40
<PAGE>
The Company capitalizes all third-party direct costs associated with obtaining
licenses. Capitalized license costs are amortized at commencement of operations
over the lives of the related licenses, ranging from 15 to 25 years.
Recoverability of Long-Lived Assets
The Company evaluates the carrying value of its long-lived assets whenever
events or circumstances indicate the carrying value of assets may exceed their
recoverable amounts. An impairment loss is recognized when the estimated future
cash flows (undiscounted and without interest) expected to result from the use
of an asset are less than the carrying amount of the asset. If an asset which is
expected to be held and used is determined to be impaired, then the asset would
be written down to its fair market value based on the present value of the
discounted cash flows related to such asset. Measurement of an impairment loss
for an asset held for sale would be based on its fair market value less the
estimated costs to sell.
Revenue Recognition
The Company recognizes revenue for its services in the period earned.
Stock-Based Compensation
The Company's Parent and the Company account for stock-based compensation to
employees using the intrinsic value method prescribed in Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Certain non-cash compensation amounts are pushed down from Parent to the Company
and recorded as a deemed capital contribution, with an offsetting entry to
deferred compensation. Deferred compensation is amortized to expense over the
vesting period of the related stock-based awards. The Company adopted an
employee stock option plan in December 1999 (Note 8).
Income Taxes
The Company accounts for income taxes under the asset and liability method
which requires recognition of deferred tax assets and liabilities for the
expected future income tax consequences of transactions which have been included
in the financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the differences between the
financial statement and income tax basis of assets, liabilities and
carryforwards using enacted tax rates in effect for the year in which the
differences are expected to reverse or the carryforwards are expected to be
utilized. Net deferred tax assets are then reduced by a valuation allowance if
management believes it is more likely than not they will not be realized.
Comprehensive Loss
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), requires that an enterprise (i) classify items of other
comprehensive income (loss) by their nature in the financial statements and (ii)
display the accumulated balance of other comprehensive income (loss) separately
from retained earnings (deficit) and additional paid-in capital in the equity
section of a balance sheet. The Company's other comprehensive loss, as set forth
in the accompanying consolidated statements of shareholder's equity (deficit),
includes cumulative translation adjustments.
Basic and Diluted Loss Per Ordinary Share
The Company computes earnings (loss) per ordinary share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
128"). Under SFAS 128, "basic earnings (loss) per share" is determined by
dividing net income (loss) by the weighted average number of ordinary shares
outstanding during each period. "Diluted earnings (loss) per share" includes the
effects of potentially issuable ordinary shares, but only if dilutive. Because
the Company had no potentially issuable shares until the award of certain stock
options in December 1999, and because any such shares would be antidilutive,
there are no differences between basic and diluted loss per ordinary share for
the Company through December 31, 1999. The weighted average ordinary shares
41
<PAGE>
outstanding for the period assumes the initial capitalization of the Company
(24,444,820 ordinary shares) occurred as of January 8, 1998.
Foreign Operations and Foreign Exchange Rate Risk
The functional currency for the Company's foreign operations is the applicable
local currency for the affiliate company. Assets and liabilities of foreign
subsidiaries for which the functional currency is the local currency are
translated at exchange rates in effect at period-end, and the consolidated
statements of operations are translated at the average exchange rates during the
period. Exchange rate fluctuations on translating foreign currency financial
statements into U.S. dollars that result in unrealized gains or losses are
referred to as translation adjustments. Cumulative translation adjustments are
recorded as a separate component of shareholder's equity (deficit).
Transactions denominated in currencies other than the local functional
currency of the Company's operating subsidiaries, including U.S. dollar
denominated intercompany accounts and notes payable to Parent and Management
Co., are recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transaction gains and losses
which are reflected in income as unrealized (based on period-end translations)
or realized upon settlement of the transactions.
The Company's foreign subsidiaries can have payables that are denominated in a
currency other than their own functional currency. The Company has not
historically hedged foreign currency denominated transactions for receivables or
payables related to current operations. If the Company enters into hedging
transactions, there can be no assurance that any such hedging transactions would
be successful and that the exchange rate fluctuations would not have a material
adverse effect on the Company. Accordingly, the Company may experience economic
loss and a negative impact on earnings and equity with respect to its holdings
solely as a result of foreign currency exchange rate fluctuations, which include
foreign currency devaluation against the dollar.
The Company adopted the euro as its functional currency effective January 1,
2000.
New Accounting Standards
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), establishes
accounting and reporting standards for derivative instruments, including certain
instruments embedded in other contracts, and for hedging activities. SFAS 133
requires that an entity recognize all derivatives as either assets or
liabilities and measure those instruments at fair value. It also specifies the
accounting for changes in the fair value of a derivative instrument depending on
the intended use of the instrument and whether (and how) it is designated as a
hedge. SFAS 133 was effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. During 1999, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
SFAS 133" ("SFAS 137") which delayed the effective date of SFAS 133 until all
fiscal quarters of fiscal years beginning after June 15, 2000. Through December
31, 1999, the Company had not entered into any transactions involving derivative
financial instruments and, therefore, cannot predict the financial statement
impact of adopting SFAS 133 with respect to transactions which have not yet been
entered into.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101") "Views on Selected Revenue
Recognition Issues" which provides the staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. SAB 101
is effective March 31, 2000. The Company has evaluated SAB 101 and it believes
that there is no effect on the revenue recognition policies currently in place.
(3) RELATED PARTY TRANSACTIONS
Rights of Parent's Unitholders
42
<PAGE>
If a qualified public offering or sale of Parent has not occurred by May 18,
2005, each holder of Parent's preferred units or common units issued or issuable
upon conversion of the preferred units ("Purchaser Securities") will have the
right to require Parent to take all actions necessary to purchase the Purchaser
Securities held by such holder for fair market value (or, in the case of
preferred units to be repurchased, the greater of fair market value or the
liquidation value (together with all accrued but unpaid preferred yield) of such
preferred units). Fair market value is defined as the amount agreed to by the
holders of the preferred units to be repurchased and the holders of Parent's
common units, excluding unvested performance units. If mutual agreement can not
be reached within twenty days of the issuance of the repurchase notice, the fair
market value for (a) publicly traded securities generally means the average of
the closing prices of such securities for the 21 day period preceding the filing
of the repurchase notice and (b) non-publicly traded securities a valuation
determined by an appraisal mechanism. In the event the repurchase options are
exercised, Parent is obligated to do everything within its power to satisfy its
repurchase obligations, which may involve the sale of some or all of its
subsidiaries, or a portion or all of its assets. The Indenture related to the
Offering (Note 4) limits the ability of the Company to pay dividends or take
certain other actions that may be necessary to effectuate the repurchase of any
such securities.
Management Agreement
During 1999, Parent and Management Co., executed management services
agreements (as amended, the "Management Agreements"), pursuant to which
Management Co. performs certain services for Parent and Parent's direct and
indirect subsidiaries. The Management Agreements provide for reimbursement in an
amount of 105% (103% prior to January 31, 1999) of all costs, expenses, charges
and disbursements incurred by Management Co. in the performance of the
Management Agreements. These items incurred by Management Co. consist primarily
of executive management salaries and benefits, occupancy costs and professional
fees and are allocated to certain of the Parent's direct and indirect
subsidiaries (the "Operating Subsidiaries") based upon an estimate of the
percentage of such items that are attributable to the operations of the
Operating Subsidiaries. Management believes that the allocation method is
reasonable and that such costs are representative of the costs which would have
been incurred by the Operating Subsidiaries on a stand-alone basis without any
support from the Parent. For the year ended December 31, 1999 and for the period
from commencement of operations (January 8, 1998) to December 31, 1998, the
Company recorded approximately $6.5 million and $3 million, respectively for
billings under the Management Agreements.
(4) INDEBTEDNESS
Senior Discount Notes
In February 1999, the Company and CompleTel Holdings completed an Offering of
147,500 units (the "Units") consisting of $147.5 million aggregate principal
amount 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 on February 16, 2009. A principal investor in
Parent acquired 400 Units in the Offering. 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, which was received in April 1999. To comply
with Netherlands laws, the Notes are guaranteed by Parent on a senior unsecured
basis. As Parent is a holding company with no operations other than the
operations to be conducted by CompleTel Europe and its subsidiaries, 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 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. The $4.5 million allocated to the Class B Membership
Interests represents additional discount on the Notes.
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 approximately 15.1%. The accretion will be charged to interest
expense. Commencing February 15, 2004, cash 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 15, 2009.
43
<PAGE>
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, December 31,
1999 1998
-------------- --------------
14% Senior Discount Notes, face amount $147.5
million, due 2009, effective interest
rate of 15.1% .................................... $ $ 79,922 $ --
============== ==============
</TABLE>
44
<PAGE>
(5) COMMITMENTS AND CONTINGENCIES
Operating Leases, Including Rights-of-Way Agreements
The Company has entered into various operating lease agreements for network
switch locations, office space, employee residences and vehicles. In addition,
during 1999, the Company entered into various rights-of-way agreements. Future
minimum lease obligations related to the Company's operating leases are as
follows for the years subsequent to December 31, 1999 and 1998, respectively (in
thousands):
December 31, December 31,
1999 1998
------------ ------------
December 31, 2000.................. $ 6,161 $ 855
December 31, 2001.................. 6,113 966
December 31, 2002.................. 5,998 974
December 31, 2003.................. 5,766 955
December 31, 2004.................. 5,679 948
Thereafter......................... 16,726 4,975
------- ------
Total........................ $46,443 $9,673
======= ======
Total rent expense for the period from commencement of operations (January 8,
1998) through December 31, 1998 was approximately $120,000 and for the year
ended December 31, 1999 was approximately $1.5 million.
Management Employment Agreements
Certain employees of Management Co. that have been seconded to CompleTel
Europe's subsidiaries are parties to employment agreements. The agreements
generally provide for a specified base salary, as well as a bonus set as a
specified percentage of the base salary. The bonus is based on attainment of
certain identified performance measures. The employment agreements generally
provide for cost of living differentials, relocation and moving expenses,
automobile allowances and income tax equalization payments, if necessary, to
keep the employee's tax liability the same as it would be in the United States.
Service Licenses
France
On December 13, 1998 the Secretaire d'Etat a l'Industrie, based on the
recommendation of the Autorite de Regulation des Telecommunications ("ART"),
awarded the Company's French operating subsidiary a fixed wireline license and
service license for network deployment in four regions and six cities and the
provision of services in four regions and six departments in France that the
Company intends to serve. The term of these licenses is 15 years from December
13, 1998. Under French law, these licenses entitle the Company, among other
things, to obtain rights-of-way to establish network infrastructure along public
roads, to obtain easements on private property and to obtain certain rights on
public domain property other than roads.
United Kingdom
On January 11, 1999, the Secretary of State for Trade and Industry at the
Department of Trade and Industry granted CompleTel UK an individual license to
operate fixed public telecommunications systems of any kind in the United
Kingdom. To provide international services in the United Kingdom, the Company
has also obtained an international simple voice resale license.
Germany
On March 8, 1999, the Regulierungsbehorde fur Telekommunikation und Post
granted CompleTel Germany class 3 (general infrastructure license) and class 4
(license required for operation of voice telephony services based on self-
operated telecommunications networks) licenses for three markets in Germany,
including the Company's
45
<PAGE>
initial target market, which were subsequently amended in July 1999 and January
2000, to include among others, CompleTel Germany's additional markets. These
licenses are of unlimited duration.
(6) INCOME TAXES
Netherlands
In general, a Dutch holding company may benefit from the so-called
"participation exemption." The participation exemption is a facility in Dutch
corporate tax law which allows a Dutch company to exempt, from Dutch income tax,
any dividend income and capital gains in relation to its participation in
subsidiaries which are legal entities residing in The Netherlands or in a
foreign country. Capital losses are also exempted, apart from liquidation losses
(under stringent conditions). Any costs in relation to participations, to the
extent these participations do not realize Dutch taxable profit, are not
deductible. These costs include costs to finance such participation.
For Dutch corporate income tax purposes, net operating loss ("NOL")
carryforwards may be carried forward indefinitely.
Germany
As of December 31,1999, CompleTel Germany had generated NOL carryforwards for
income tax purposes totaling approximately $8.2 million. For German income tax
purposes, NOL carryforwards may be carried forward indefinitely. The current
statutory tax rate for Germany is 52.38%.
France
As of December 31, 1999, CompleTel France had generated NOL carryforwards for
income tax purposes totaling approximately $31.5 million. For French income tax
purposes NOL carryforwards may generally be carried forward for a period of up
to five years. Start-up costs will be capitalized for French tax purposes. The
Company considers the majority of these costs as eligible for the deferred
depreciation regime for French tax purposes, resulting in an indefinite
carryforward life of the corresponding amortization expense.
The Company has recorded a valuation allowance equal to the total net deferred
tax assets as of December 31, 1999 and 1998, due to the uncertainty of
realization through future operations. The valuation allowance will be reduced
at such time as management believes it is more likely than not that the net
deferred tax assets will be realized. Any reductions in the valuation allowance
will reduce future provisions for income tax expense.
The difference between income tax expense provided in the consolidated
financial statements and the expected income tax benefit at statutory rates
related to the Company's corporate and foreign subsidiary operations for the
year ended December 31, 1999 and for the period from commencement of operations
(January 8, 1998) to December 31, 1998, is reconciled as follows (in thousands):
Commencement
of Operations
Year Ended (January 8, 1998)
December 31, to December 31,
1999 1998
------------- -----------------
Expected income tax benefit
at the weighted average
statutory rate
of 39.56%................... $ 20,556 $ 2,520
Stock-based compensation (267) (64)
Other......................... 80 --
Valuation allowance........... (20,369) (2,456)
-------- -------
Total income tax benefit.... $ -- $ --
============ ========
46
<PAGE>
Deferred tax assets are as
follows:
December 31, to December 31,
1999 1998
------------ ---------------
Deferred tax assets--
Operating loss carryforwards $ 19,625 $ 1,205
Capitalized start-up costs.. 932 1,214
Net unrealized foreign......
exchange loss.............. 611 20
Depreciation and amortization 1,648 16
Other....................... 9 1
------------ ----------------
Total deferred tax assets... 22,825 2,456
Less valuation allowance.... (22,825) (2,456)
------------ ----------------
Net deferred taxes.......... $ -- $ --
============ ================
(7) SEGMENT REPORTING
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"), 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.
Through December 31, 1999, a significant portion of the Company's expenditures
were associated with its network deployment in France and Germany. A significant
portion of the Company's revenues through December 31, 1999 have been generated
by an indirect subsidiary of the Company's UK subsidiary.
Management currently 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 December 31, 1998 and for the period from inception (January 8, 1998) to
December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
CompleTel CompleTel CompleTel Corporate
SAS GmbH UK Ltd. and Other Consolidated
---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Revenues .................................. $ -- $ -- $ -- $ -- $ --
Depreciation .............................. 46 -- -- -- 46
Management Fee Expense .................... (2,661) -- -- (302) (2,963)
Net Loss .................................. (5,949) (300) (400) (912) (7,561)
Total Assets .............................. 6,180 19 21 1,650 7,870
Expenditures for Long-Lived Assets ........ 3,647 19 21 681 4,368
</TABLE>
As of December 31, 1999 and for the year ended December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
CompleTel CompleTel CompleTel Corporate
SAS GmbH UK Ltd. and Other Consolidated
---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Revenues .................................. $ 1,986 $ -- $ 999 $ -- $ 2,985
Depreciation .............................. 3,445 671 72 301 4,489
Management Fee Expense .................... 5,297 557 208 402 6,464
Net Loss .................................. (34,684) (8,181) (1,548) (7,543) (51,956)
Total Assets .............................. 81,250 68,000 1,732 26,357 177,339
Expenditures for Long-Lived Assets ........ 71,850 28,628 892 -- 101,370
</TABLE>
47
<PAGE>
(8) EMPLOYEE INCENTIVE PLANS
Parent Common Units
Certain employees of the Company have purchased common units of Parent for $1
per unit under their executive securities agreements. The common units issued
consist of non-performance time vesting units and performance vesting units. The
non-performance time vesting units generally vest over a four year period.
Vesting for non-performance time vesting units is accelerated upon a qualified
public offering or a qualified sale of Parent (or any of its subsidiaries) by
Madison Dearborn Partners (''MDP''), as defined in the executive securities
agreements. The intrinsic value of the non-performance time vesting units was
accounted for at issuance and pushed down to the Company as additional paid-in
capital, with an offsetting entry to deferred compensation. The intrinsic value
of the non-performance time vesting units issued through December 31, 1999 and
December 31, 1998, totaled approximately $2.7 million and $604,000,
respectively. This deferred compensation is being amortized over the four year
vesting period. Amortization of deferred compensation expense totaled
approximately $675,000 and $64,000 for the years ended December 31, 1999 and for
the period ended December 31, 1998, respectively.
The performance vesting units are, in addition to time vesting, subject to
performance vesting according to certain multiple-of-invested-capital tests
calculated based upon the valuation of Parent's equity implied by a qualified
public offering and/or by actual sales of Parent's securities by MDP. If any
performance vesting units remain unvested on May 18, 2005, there shall be deemed
to have occurred a sale of the Parent's securities by MDP at fair market value.
Any performance vesting units that do not vest upon such a deemed sale will be
forfeited.
For financial reporting periods ending prior to final determination of the
number of Performance Vesting Units that will vest, compensation cost will be
recorded by Parent, and allocated to the Company, based upon management's
estimate of the number of such units that would vest and the fair market value
of those units as of the end of the reporting period. As of December 31, 1999
and 1998, no compensation cost has been recorded related to the performance
vesting units as the number of units that may ultimately vest is not yet
reasonably determinable.
Assuming an IPO price per ordinary share of $15.91 (euro 16.50), the Company
will record compensation expense of approximately $38.2 million due to the
anticipated vesting of certain performance vesting units held by certain of our
employees in connection with what is anticipated to be a qualified public
offering as defined in CompleTel LLC's executive securities agreements. For each
$1 increase in the anticipated IPO price per ordinary share, additional
compensation expense and deferred compensation of approximately $7.2 million
will be recorded. In addition, based upon the IPO value of the Company as
indicated above, the Company will record additional compensation expense and
deferred compensation of approximately $18.5 million and $57.9 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 MDP or in May 2005 based on
a deemed vesting date as defined. The additional deferred compensation will be
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 awards will be 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 Company's
ordinary shares, assuming the successful completion of the Company's anticipated
IPO.
Stock Option Plan
In December 1999, the Company adopted the CompleTel Europe N.V. 2000 Stock
Option Plan (the ''Option Plan''). The Option Plan provides for the grant of
options to purchase ordinary shares of CompleTel Europe to employees of the
Company.
Options granted are subject to vesting as follows. Options granted to
employees resident in France vest in an increment of 60% of the ordinary shares
subject to the option on the third anniversary of the date of the grant and in
two increments of 20% on the fourth and fifth anniversaries of the date of the
grant. Options granted to employees
48
<PAGE>
resident in the United Kingdom, Germany and the U.S. vest in annual increments
of 25% of the ordinary shares subject to the option, commencing on the first
anniversary date of the grant.
The number of options to acquire shares under the Option Plan totals
18,919,960, or 15.0% of the Company's ordinary shares issued and outstanding as
of December 31, 1999. The first grant, which took place in December 1999,
included 2,035,230 options granted, or approximately 1.6% of the share capital
of the Company. These options have an exercise price of $2.60 per ordinary
share. Deferred compensation was recorded in December 1999 totaling
approximately $26.5 million which represents the estimated intrinsic value of
such options at that date. The deferred compensation will be amortized to
expense over the applicable vesting period related to the individual awards.
Pro Forma Fair Value Disclosures
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, ''Accounting for Stock-Based Compensation''
(''SFAS 123''), which defines a fair value based method of accounting for
employee stock options and similar equity instruments. However, as allowed by
SFAS 123, the Company has elected to account for its stock-based compensation
plans using the intrinsic value based method of APB 25 and provide pro forma
disclosures of net income (loss) and earnings (loss) per share as if the fair
value based method had been applied.
For pro forma disclosure purposes, the Company has computed the fair value of
each option as of the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions.
<TABLE>
<CAPTION>
Year Ended
December 31,
1999
-----------------------------
<S> <C>
Risk-free interest rate......................................................... 6.4%
Expected dividend yield......................................................... 0%
Expected lives outstanding...................................................... 5.5 years
Expected volatility............................................................. 17.1%
</TABLE>
The estimated fair value of options granted is amortized to expense over the
option vesting period. Cumulative compensation costs recognized in pro forma net
income or loss with respect to options that are forfeited prior to vesting are
adjusted as a reduction of pro forma compensation expense in the period of
forfeiture.
Had compensation cost for the Option Plan been determined based upon the fair
value of options on their date of grant, the Company's net loss for the year
ended December 31, 1999 and for the period from inception (January 8, 1998) to
December 31, 1998, would have been increased by $54,000 and $0, respectively.
(9) ASI ACQUISITION
On March 24, 1999, CompleTel SAS acquired all of the outstanding stock of
Acces et Solutions Internet (''ASI''), an Internet service provider based in
Lyon, for approximately $2.1 million in cash. The transaction was recorded under
the purchase method of accounting as of March 31, 1999. The purchase price was
first allocated to the fair value of the net tangible assets acquired of
$73,000, which is classified as property and equipment in the accompanying
consolidated balance sheet. The resulting excess cost over the fair value of
tangible net assets acquired, or goodwill, was recorded in the amount of
approximately $2.0 million and is being amortized under the straight-line method
over a ten year period. The goodwill is classified as other intangibles in the
accompanying consolidated balance sheet.
The following unaudited pro forma condensed consolidated operating results for
the year ended December 31, 1999 and for the period from commencement of
operations (January 8, 1998) to December 31, 1998, reflect the pro forma effects
of the ASI acquisition as if the acquisition occurred on January 8, 1998. For
purposes of the
pro forma
49
<PAGE>
condensed consolidated operating results, the acquisition is assumed to have
been financed through an equity contribution from Parent.
The unaudited pro forma condensed consolidated operating results are based on
the historical consolidated financial statements of the Company and ASI, giving
effect to certain assumptions and adjustments that management believes are
reasonable based upon currently available information. This pro forma condensed
consolidated financial data is presented for illustrative purposes and does not
purport to represent what the Company's results of operations would actually
have been if the acquisition had been consummated as of January 8, 1998.
<TABLE>
<CAPTION>
For the period from
Commencement of Operations
For the Year Ended (January 8, 1998) to
December 31, 1999 December 31, 1998
------------------------------------ --------------------------------------
Historical Pro Forma Historical Pro Forma
----------------- ----------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Revenues . $ 2,985 $ 3,242 $ - $ 1,020
----------- ----------- ----------- -----------
Net Loss . $ (51,956) $ (52,053) $ (7,561) $ (7,699)
=========== =========== =========== ===========
Basic and diluted loss per ordinary share . $ (.52) $ (.53) $ (.31) $ (.31)
=========== =========== =========== ===========
Weighted average number of ordinary shares
outstanding.................................. 99,056,060 99,056,060 24,444,820 24,444,820
=========== =========== =========== ===========
</TABLE>
(10) SUBSEQUENT EVENTS
Credit Agreement
In January 2000, we executed an agreement for a (Euro)265 million senior
secured credit facility with Goldman Sachs International and Paribas as co-
arrangers of the facility. The funds will be available to our subsidiaries,
initially to include CompleTel ECC, CompleTel Services S.A.S., CompleTel France,
and CompleTel Germany, in two tranches, including a euro term facility available
until December 31, 2000, in the aggregate amount of (Euro)105 million and a euro
revolving loan facility available until December 31, 2002, in the aggregate
amount of (Euro)160 million. The (Euro)160 million tranche will become available
after May 31, 2000, if the euro term facility is fully drawn, and other
conditions are satisfied. Following December 31, 2002, up to (Euro)141 million
of the outstanding advances under the euro revolving loan facility will first be
converted into a term loan, and any other outstanding advances will become part
of a (Euro)19 million working capital facility. The facility matures on December
31, 2006.
This agreement terminates, supersedes and replaces, without penalty, the
original commitment from Paribas for $90 million in senior credit (see Note 4).
Additionally, the commitment with Nortel Networks for $20 million in vendor
financing has been terminated. No termination fees are payable to Nortel or
Paribas.
The notes are structurally subordinated to any debt incurred under the senior
secured credit facility. Additionally, the terms of the agreement require that
the senior secured credit facility be guaranteed to the extent allowed by law by
CompleTel Europe and each of its subsidiaries. The terms of the agreement
further require that the senior secured credit facility be secured by a
perfected security interest in all of the Company's present and future material
assets and revenue and those of its subsidiaries and by a pledge of the stock of
each of the borrowers.
The funds are to be used substantially to deploy our networks in France and
Germany. Advances under the facility cannot exceed certain limits that increase
with time, and are subject to other conditions, including that the subsidiaries
must be operational in designated cities in France and Germany, and satisfy a
debt to capital test. In addition, the facility includes various financial and
other covenants and restrictions that limit our ability to pay dividends,
dispose of assets, and effect merger and consolidation transactions. The
facility also limits the use of proceeds of an initial public offering, other
equity investments, or a high yield debt issue as it provides that any such
50
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proceeds be held as cash equivalent investments or used to develop our
telecommunications businesses in France and Germany.
The rate of interest will be variable based on EURIBOR, plus a margin of up to
3.75% per annum for the term loan facility or 3.00% per annum for the revolving
loan facility that will be determined based on a senior debt leverage ratio
test, and costs. Upon an event of default, advances may accelerate and become
immediately due and payable and the undrawn portion of the facilities will be
cancelled and the commitments of the banks reduced to zero. The facility is
secured by our assets and the assets of our subsidiaries and the stock in
certain of our subsidiaries, and we and several of our subsidiaries have agreed
to guarantee the payments under the facility and to indemnify the banks against
certain losses.
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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
CompleTel Europe was incorporated as a European holding company in December
1998 and appointed ING Trust (Netherlands) B.V. (ING Trust) as the sole managing
director. CompleTel Europe and CompleTel LLC are parties to the management
agreement with ING Trust, under which ING Trust has acted as our sole manager
and has managed in the manner directed by the board of directors of CompleTel
LLC since our inception. On January 14, 2000, James E. Dovey, Paul J. Finnegan
and Lawrence F. DeGeorge were appointed as additional members to our Board of
Management. Upon the closing of our initial public offering, we will terminate
the management agreement with ING Trust and Messrs. Dovey, Finnegan and DeGeorge
will resign as members of our Board of Management and will be appointed as
members of our Supervisory Board. We will also appoint additional members to our
Supervisory Board and three new members to the Board of Management.
Supervisory Board and Board of Management
Our general affairs and business and the Board of Management will be
supervised by a Supervisory Board. The Supervisory Board will provide advice to
the Board of Management. The Supervisory Board may decide that certain
resolutions of the Board of Management will be subject to its approval. In
fulfilling their duties, all members of the Supervisory Board must serve our
best interests.
Our articles of association will provide for at least three supervisory
directors to serve on the Supervisory Board. Under Dutch law, members of the
Supervisory Board cannot serve as members of our Board of Management, nor may a
person serve as a member of the Supervisory Board after the annual general
meeting of shareholders during the fiscal year of such person's 72nd birthday.
The members of the Supervisory Board are appointed by the general meeting of
shareholders from a non-binding nomination, drawn up by the Supervisory Board.
After our initial public offering, CompleTel LLC will continue to control a
majority of our outstanding shares and will be able to control the appointment
of the Supervisory Board.
Decisions of the Supervisory Board generally will require the approval of a
majority of the votes cast. Members of the Supervisory Board may be suspended or
dismissed by the general meeting of shareholders at any time. A resolution of
the general meeting of shareholders to suspend or dismiss members of the
Supervisory Board not pursuant to a proposal thereto by the Supervisory Board
requires a majority of two-thirds of the votes cast, representing more than half
of the issued capital. A resolution of the general meeting of shareholders to
suspend or dismiss members of the Supervisory Board pursuant to a proposal
thereto by the Supervisory Board requires an absolute majority of the votes
cast. A suspension may not last longer than three months in total, even after
having been extended one or more times. In case no decision on a termination of
the suspension or dismissal has been made following such time, the suspension
will end.
Management and policy making for us and our subsidiaries will be entrusted to
the Board of Management under the supervision of the Supervisory Board. The
Board of Management will have no more than three members and the Supervisory
Board may designate one member as our Chief Executive Officer and one member as
our President, although one person could have both designations. The members of
the Board of Management shall be appointed by the general meeting of
shareholders from a binding nomination, drawn up by the Supervisory Board, of at
least two nominees for each vacancy to be filled. If the Supervisory Board fails
to make use of its right to draw up a binding nomination or fails to do so in a
timely manner, the general meeting of shareholders shall be free to make the
appointment. The general meeting of shareholders may at all times override the
binding nature of the Supervisory Board's nomination by adopting a resolution to
this effect with two-thirds of the votes cast representing more than half of the
issued capital.
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The general legal authority to represent the Company will be vested in the
Board of Management and in the chief executive officer acting together with one
other member of the Board of Management. Certain resolutions by the Board of
Management determined from time to time by the Supervisory Board will require
the approval of the Supervisory Board.
The general meeting of shareholders may suspend and dismiss the members of the
Board of Management. The Supervisory Board may also suspend the members of the
Board of Management. Other than upon a proposal thereto by the Supervisory
Board, the general meeting of shareholders may only resolve upon a suspension or
dismissal of members of the Board of Management with a majority of two-thirds of
the votes cast representing more than half of the issued capital. Upon a
proposal thereto by the Supervisory Board, the general meeting of shareholders
may resolve upon a suspension or dismissal of members of the Board of Management
with an absolute majority of the votes cast. Even after having been extended, a
suspension shall not last for more than three months. If no decision has been
reached after that time on the lifting of the suspension or the removal from
office, the suspension shall cease to exist. The remuneration and other
conditions of employment of each member of the Board of Management will be
determined by the Supervisory Board.
The following tables identify the members of the Supervisory Board and Board
of Management. For purposes of this prospectus, (i) "directors" includes the
individuals who will become members of our Supervisory Board, and (ii)
"executive officers" includes individuals who will become officers and the
members of the Board of Management, and (iii) "employees" includes employees of
CableTel Management, Inc. ("Management Company"), a wholly owned subsidiary of
CompleTel LLC, who are seconded to CompleTel Europe and its operating
subsidiaries pursuant to certain agreements with the Management Company.
The following tables show the composition of and position held by each member
of our Supervisory Board and Board of Management as of the closing of our
initial public offering:
Supervisory Board of CompleTel Europe
Our Supervisory Board will consist of seven members. The following persons
have consented to serve on the Supervisory Board:
Name Age Position(s)
- --------------------------- --- ---------------------------------
James E. Dovey 56 Supervisory Director and Chairman
James C. Allen 53 Supervisory Director
Lawrence F. DeGeorge 53 Supervisory Director
Paul J. Finnegan 47 Supervisory Director
Royce J. Holland 49 Supervisory Director
James H. Kirby 32 Supervisory Director
James N. Perry, Jr. 39 Supervisory Director
Board of Management
Our Board of Management will consist of three members. The following persons
have consented to serve as Managing Directors:
Name Age Position(s)
- ------------------------- --- ----------------------------------------------
William H. Pearson 44 Manager, President and Chief Executive Officer
Hansjorg Rieder 57 Managing Director of CompleTel GmbH
Martin Rushe 31 President of CompleTel UK Limited
Other Significant Employees
The following list includes officers and employees of our subsidiaries and
affiliates who are involved in our business affairs and operations.
Name Age Position(s)
---- --- ------------------------------------------
Richard N. Clevenger 53 Chief Technology Officer
David E. Lacey 53 Chief Financial Officer
John M. Hugo 39 Corporate Controller and Chief Accounting
Officer
Anna Lascar 51 Vice President Legal Affairs and General Counsel
John T. Puhl 50 Chief Information Officer
Jerome de Vitry 38 President of CompleTel S.A.S.
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James E. Dovey was elected a Managing Director of CompleTel Europe in January
2000 and will resign that position and be elected to the Supervisory Board as
its chairman upon the consummation of our initial public offering. Mr. Dovey,
one of the co-founders of CompleTel LLC, has over 30 years' experience in the
telecommunications industry. He has served as the Chief Executive Officer from
inception through December 1999 and as Chief Executive Officer of CompleTel LLC
from January 1998 through December 1999 and as chairman of its board since
January 2000. In 1987, Mr. Dovey founded United Cable International, a joint
venture between United Cable and United Artists, where he served as CEO until
1990 when that company (by then renamed TCI International) merged with the
United Kingdom assets of U S WEST Inc. to form TeleWest Communications, plc. Mr.
Dovey continued to serve as CEO of TeleWest until his return to the U.S. in late
1992. From 1992 to 1994, Mr. Dovey acted as a private consultant on a variety of
U.S. and international telecommunications and cable television projects for TCI,
U S WEST Inc., and other clients. From 1992 to 1995, Mr. Dovey served as Deputy
Chairman for the United Kingdom communications company, IVS Cable International,
which developed switched voice and data services in areas such as Oxford,
Salisbury, and Andover until the business was sold in 1995. In 1994, Mr. Dovey
co-founded SPD CableTel Management, Inc., where he actively explored various
entrepreneurial opportunities in the U.S. for providing converged cable and
telephony services prior to co-founding CompleTel LLC in January 1998.
James C. Allen will be elected to the Supervisory Board upon the consummation
of our initial public offering. He also has served as a Director of CompleTel
LLC since December 1998. From March 1993 to January 1998, Mr. Allen was the CEO
and Vice-Chairman of Brooks Fiber Properties, Inc. Since June 1998, Mr. Allen
has acted as an investment director and member of Meritage Investment Partners
LLC, a Denver-based private equity firm that invests exclusively in
telecommunication companies. Mr. Allen also presently serves on the boards of
directors of MCI WorldCom Inc., a publicly traded U.S. and international
telecommunications company, Verio Inc., a publicly traded Internet and Web
hosting company, and Open Access Broadband Networks, Inc., a privately held
company. Mr. Allen also serves on the board of directors of David Lipscomb
University in Nashville, Tennessee.
Lawrence F. DeGeorge was elected as a Managing Director in January 2000 and
will resign that position and be elected to the Supervisory Board upon the
consummation of our initial public offering. He also has served as a Director of
CompleTel LLC since January 1998. Mr. DeGeorge is a private investor who has
managed and participated in a number of principal equity investments in
technology and communications companies, including, since December 1995, as
President and Chief Executive Officer of LPL Investment Group, Inc., LPL
Management Group, Inc., and DeGeorge Holdings Ltd. From June 1987 to January
1991, Mr. DeGeorge held various positions with Amphenol Corporation, including
serving as President from May 1989 to January 1991, as Executive Vice President
and Chief Financial Officer from June 1987 to May 1989, and as a director from
June 1987 until January 1991. Mr. DeGeorge also presently serves as a director
of Advanced Display Technologies which is publicly traded.
Paul J. Finnegan was elected as a Managing Director in January 2000 and will
resign that position and be elected to the Supervisory Board upon the
consummation of our initial public offering. He also has served as a Director of
CompleTel LLC since May 1998. Mr. Finnegan is a Managing Director of Madison
Dearborn Partners, Inc., a Chicago-based private investment firm where he
specializes in investing in companies in the communications industry. Prior to
co-founding Madison Dearborn Partners in 1993, Mr. Finnegan was an investment
officer at First Chicago Venture Capital for 11 years. He presently serves on
the boards of directors of Allegiance Telecom, Inc. and Focal Communications
Corporation, each of which is publicly traded, and of several private companies,
@link Networks Inc., Enews.com, Madison River Telephone Company, LLC, Reiman
Holding Company, LLC and Wireless One Network, L.P. He is a member of the board
of trustees of The Skyline Fund, a small-cap mutual fund.
Royce J. Holland will be elected to the Supervisory Board upon consummation of
our initial public offering. He also has served as a Director of CompleTel LLC
since August 1998. Mr. Holland is a co-founder and the Chairman and CEO of
Allegiance Telecom, Inc. Prior to founding Allegiance Telecom, Inc., Mr. Holland
was one of several co-founders of MFS Communications Company, Inc., where he
served as President and Chief Operating Officer from April 1990 until September
1996 and as Vice Chairman from September 1996 to February 1997. In January 1993,
Mr. Holland was appointed by President George Bush to the National Security
Telecommunications Advisory Committee. Mr. Holland also presently serves on the
boards of directors
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of Allegiance Telecom, Inc., and CSG Systems, which are publicly traded, and
Choice One Communications, a private company.
James H. Kirby will be elected to the Supervisory Board upon the consummation
of our initial public offering. He also has served as a Director of CompleTel
LLC since May 1998. Mr. Kirby is a Director of Madison Dearborn Partners, Inc.,
a Chicago-based private investment firm where he specializes in investing in
companies in the communications industry. Prior to joining Madison Dearborn
Partners in 1996, Mr. Kirby worked in investment banking and private equity
investing at Lazard Freres & Co. LLC and The Beacon Group LLC. He presently
serves on the boards of directors of several private companies including
Wireless One Network, L.P., Orblynx, Inc. and Reiman Holding Company, LLC.
James N. Perry, Jr. will be elected to the Supervisory Board upon the
consummation of our initial public offering. He also has served as a Director of
CompleTel LLC since May 1998. Mr. Perry is a Managing Director of Madison
Dearborn Partners, Inc., a Chicago-based private investment firm where he
specializes in investing in companies in the communications industry. Prior to
co-founding Madison Dearborn Partners in 1993, Mr. Perry was an investment
officer at First Chicago Venture Capital for eight years. He presently serves on
the boards of directors of Allegiance Telecom, Inc., Focal Communications
Corporation, VoiceStream Wireless Corporation and Clearnet Communications, each
of which is publicly traded.
William H. Pearson will be appointed as a Managing Director, and the President
and Chief Executive Officer of CompleTel Europe upon the consummation of our
initial public offering. Mr. Pearson, one of the co-founders of CompleTel LLC,
has served as President of European Operations of CompleTel LLC since its
inception and as its Chief Executive Officer since January 2000. In 1994, Mr.
Pearson co-founded SPD CableTel Management, Inc. with Mr. Dovey. Between 1980
and 1994, Mr. Pearson held a variety of senior management positions with U S
WEST Inc. From 1983 to 1989, Mr. Pearson worked in U S WEST's cellular division,
including starting up its marketing department in 1983, becoming head of
strategic planning in 1986, and managing the Rocky Mountain region from 1987 to
1988. In 1989, Mr. Pearson relocated to the United Kingdom, and he served as
Senior Vice President of Marketing and Planning for TeleWest from 1990 to 1992,
where he worked to develop U S WEST's cable telephony strategy, and as Executive
Director of Business Development for U S WEST International from 1993 to 1994,
where he evaluated numerous local loop opportunities in Western Europe and Latin
America. In 1992, Mr. Pearson was an adjunct professor of graduate-level
marketing at the University of Wisconsin-Madison School of Business.
Hansjorg Rieder will be appointed as a Managing Director upon the
consummation of our initial public offering. He has been with us since January
1999 and was appointed Managing Director of CompleTel GmbH in April 1999. Prior
to joining CompleTel GmbH, Mr. Rieder was a Managing Director of COLT Telecom
GmbH from March 1997 until March 1999. Mr. Rieder was the Chief Executive
Officer and a Managing Director of GLOBEX GmbH and the Chief Executive Officer
of Jo rg Rieder Consulting from January 1993 until March 1997. From April 1972
until December 1992, Mr. Rieder was a Vice President and Managing Director
Germany for Digital Equipment.
Martin Rushe will be appointed as a Managing Director upon the consummation of
our initial public offering. He has been with us since June 1999 and was
appointed President of CompleTel UK Limited, in January 2000. Prior to joining
CompleTel UK Limited, Mr. Rushe was Managing Director of Web International
Networks Limited from April 1995 until its acquisition by CompleTel and is
currently the President. Prior to that, Mr. Rushe was a scientist with European
Space Agency.
Richard N. Clevenger will be appointed Senior Vice President and Chief
Technology Officer of CompleTel Europe upon the consummation of our initial
public offering. Mr. Clevenger, one of the co-founders of CompleTel LLC, has
served as Senior Vice President and Chief Technology Officer of CompleTel LLC
since its inception in January 1998, and as its Acting Chief Operating Officer
since August 1999. Mr. Clevenger has served in various market development and
technology management positions in domestic and international telecommunications
for over 30 years. Prior to co-founding CompleTel in 1998, Mr. Clevenger worked
from 1996 to 1997 as an independent management consultant on several business
strategy, technology, and implementation matters relating to cable television,
wireless cable, business and residential telephony, and business video,
including for SPD CableTel Management, Inc., which he joined full time in 1997.
Mr. Clevenger served as Senior Vice President and Chief Technology Officer for
KBLCOM, Inc. from 1987 to 1995, during which time his duties included (i)
serving as President and Chief Operating Officer of KBLCOM's business services
subsidiary, Paragon Business Systems; (ii) working as Vice President of Market
Development for KBLCOM's cable television subsidiary, KBL Ventures; and (iii)
founding and serving as President and
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Chief Operating Officer of the KBLCOM subsidiary, FIBRCOM, a successful
competitive access provider. From 1982 to 1987, Mr. Clevenger was Vice President
of Engineering and Technology for Cox Cable Communications, Inc. From 1973 to
1982, Mr. Clevenger served as Vice President of Engineering for United Cable
Television of Colorado. From 1968 to 1973, Mr. Clevenger held a variety of
positions at Cablecom General, Inc., including Division Engineer, General
Manager, and Vice President of Engineering.
David E. Lacey will be appointed as our Chief Financial Officer upon the
consummation of our initial public offering. He joined CompleTel LLC in December
1998 and was appointed Chief Financial Officer and Treasurer of CompleTel LLC at
that time. Prior to joining CompleTel LLC, Mr. Lacey served in a variety of
positions for Storage Technology Corporation including, from June 1996 to
December 1998, as Executive Vice President and Chief Financial Officer, from
February 1995 to May 1996 as Interim Chief Financial Officer and Corporate Vice
President, and from October 1989 to February 1995, as Corporate Controller.
Anna Lascar will be appointed as our Vice President of Legal Affairs and
General Counsel prior to the consummation of our initial public offering and has
served as Directeur Juridique (legal counsel) for CompleTel SAS since July 1998.
Prior to joining us, Ms. Lascar was Special Counsel in the Paris office of the
law firm of Willkie Farr & Gallagher from 1994 to 1998. From 1984 through 1993,
Ms. Lascar was a partner in the law firm of Salans Hertzfeld & Heilbronn in
Paris.
John M. Hugo will be appointed Corporate Controller and Chief Accounting
Officer upon to the consummation of our initial public offering. Mr. Hugo joined
CompleTel LLC as its Corporate Controller in April 1999. Prior to joining
CompleTel LLC, Mr. Hugo was the Assistant Corporate Controller for Jones
Intercable, Inc. from 1994 to 1999. From 1988 to 1993, Mr. Hugo was employed
with Arthur Andersen LLP's audit and business advisory services division. Mr.
Hugo is a certified public accountant in the state of Colorado.
John T. Puhl has been CompleTel LLC's Chief Information Officer since
September 1998 and will be appointed to the same position with us upon the
consummation of our initial public offering. Prior to joining CompleTel LLC, Mr.
Puhl worked from December 1996 to September 1998 as Managing Director and Vice
President of Tanning Technology Europe, a telephony consultant. From May 1995 to
November 1996, Mr. Puhl was Managing Director and Vice President of SageComm
International, a telephony consultant. From February 1992 to March 1995, Mr.
Puhl was Vice President of AT&T Europe.
Jerome de Vitry joined us in February 1999 and has been the President of
CompleTel S.A.S. since March 1999. Prior to joining CompleTel S.A.S., Mr. de
Vitry was Vice President of Radio Communications France for Alcatel Access
System Division from January 1995 until December 1999. From January 1993 until
December 1995, Mr. de Vitry was Vice President Marketing, and Research and
Development for Alcatel Radio Transmissions Systems.
Committees of the Supervisory Board
We intend to establish three Supervisory Board committees upon the
consummation of our initial public offering, including:
. an audit committee;
. a compensation committee; and
. an executive committee.
The audit committee. The members of the audit committee will be Messrs. Allen,
DeGeorge and Holland. The audit committee will be responsible for making
recommendations to the Board of Management regarding the selection of
independent auditors, reviewing the results and scope of the audit and other
services provided by our independent accountants and reviewing and evaluating
our audit and control functions.
The compensation committee. The members of the compensation committee will be
Messrs. Allen, DeGeorge, Finnegan and Holland. The compensation committee will
be responsible for reviewing, and as it deems appropriate, recommending to the
Supervisory Board with respect to members of the Board of Management, and to the
Board of Management with respect to other managerial employees, policies,
practices and procedures relating to compensation and the establishment and
administration of employee benefit plans. The compensation committee will be
responsible for making recommendations to the Board of Management in relation to
any employee stock option, stock purchase or other rights plans, and advises and
consults with our officers as may be requested regarding managerial personnel
policies.
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The executive committee. The members of the executive committee will be
Messrs. Dovey, Finnegan and DeGeorge. The executive committee will be authorized
to take certain actions on behalf of the Supervisory Board, but such actions
must be approved unanimously by the members of the executive committee or they
will be referred to the full Supervisory Board.
Item 11. Executive Compensation
The following table sets forth in summary form all compensation paid during
the years ended December 31, 1999 and December 31, 1998, to the Chief Executive
Officer and each Executive Officer of CompleTel LLC whose annual salary and
bonus exceeded $100,000 during such year:
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------------------------
Name and principal position Fiscal Year Salary ($) Bonus ($) Compensation ($)(1)
- -------------------------------------------------------
<S> <C> <C> <C> <C>
James E. Dovey......................................... 1999 $183,750 $183,750 $ --
Chairman of the Board and Chief Executive Officer(2) 1998 175,000 95,000 --
William H. Pearson..................................... 1999 $183,750 $183,750 $78,576
President of European Operations(3) 1998 175,000 96,250 45,407
Richard N. Clevenger................................... 1999 $157,500 $157,500 $33,768
Senior Vice President and Chief Technology Officer(4) 1998 150,000 82,500 32,987
David E. Lacey......................................... 1999 $170,000 $ 85,000 $ --
Senior Vice President and Chief Financial Officer(5) 1998 7,083 -- --
</TABLE>
_____________
(1) Includes perquisites and other benefits paid in excess of 10% of the total
annual salary and bonus received by such officer during the last fiscal
year. These amounts consist of housing allowances, moving expenses and
travel expenses associated with the relocation of these executives to Paris
and their ongoing foreign service.
(2) Mr. Dovey resigned as Chief Executive Officer effective December 31, 1999.
He currently holds the positions of Chairman of the Board of CompleTel LLC
and Managing Director of CompleTel Europe. Upon consummation of our initial
public offering, he will resign as Managing Director and be elected as a
member of the Supervisory Board of CompleTel Europe.
(3) Mr. Pearson currently holds this position with, and is the Chief Executive
Officer of, CompleTel LLC. Upon the consummation of our initial public
offering, he will be appointed Managing Director, President and Chief
Executive Officer of CompleTel Europe.
(4) Mr. Clevenger currently holds these positions with CompleTel LLC. Upon the
consummation of our initial public offering, he will be appointed to these
same positions with CompleTel Europe.
(5) Mr. Lacey joined us in December 1998. He currently holds these positions
with CompleTel LLC. Upon the consummation of our initial public offering, he
will be appointed to these same positions with CompleTel Europe.
Employment agreements
In May 1998, CompleTel LLC's wholly owned subsidiary, CableTel Management,
Inc., entered into employment agreements with each of Messrs. Pearson and
Clevenger, subsequently amended in February 2000, which include the following
terms:
Salary. During the course of their employment, Mr. Pearson is to receive an
annual base salary of $175,000, and Mr. Clevenger is to receive an annual base
salary of $150,000. These salaries may be adjusted upward by the board. In 1999,
they were increased to $183,750 and $157,500, respectively.
Bonus. At the end of each calendar year, each of Messrs. Pearson and
Clevenger will be entitled to receive an incentive bonus of up to 55% of his
annual salary if we achieve certain performance benchmarks set by the board
during the year. For 1999, CableTel Management, Inc.'s board augmented the bonus
awards for each of these individuals.
Tax equalization. As expatriates, Messrs. Pearson and Clevenger are
subject to additional taxes and different taxes than if they lived and worked in
the U.S. Consequently, their employment agreements contain tax equalization
provisions designed to ensure that they will be placed in substantially the same
economic position as if they were employed in the U.S.
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Severance. Messrs. Pearson and Clevenger will receive severance benefits if
their employment is terminated due to death, disability, or nonperformance in an
amount equal to their base salary and benefits for nine months. Each is entitled
to receive severance benefits equal to his base salary and benefits for 24
months after the date of termination if he is terminated without cause or if he
is terminated or constructively terminated within six months after a change in
control. If the employee resigns or is terminated for cause, he will not be
entitled to severance benefits.
In December 1998, CableTel Management, Inc. entered into an employment
agreement with Mr. Lacey, Senior Vice President and Chief Financial Officer,
including, the following terms, among others:
Salary. During the course of his employment, Mr. Lacey is to receive an
annual base salary of $170,000, which salary may be adjusted upward by the
board.
Bonus. At the end of each calendar year, beginning in 1999, Mr. Lacey will be
entitled to receive an incentive bonus of up to 50% of his annual salary if he
achieves during the year certain performance benchmarks set by the board.
Severance. Mr. Lacey will receive severance benefits in an amount equal to
his base salary and benefits for three months in the event his employment is
terminated due to his death or disability, for nonperformance, by us, without
cause, or within six months after a change of control. If his employment is
terminated for cause or he resigns, he will not be entitled to severance
benefits.
Compensation of members of the Supervisory Board
We will reimburse the members of the Supervisory Board for their reasonable
out-of-pocket expenses incurred in connection with attending board or committee
meetings for CompleTel Europe or any of its subsidiaries. Additionally, we have
agreed to maintain existing levels of directors' and officers' indemnity
insurance coverage. Except Mr. Dovey, who is compensated as an employee of
CableTel Management, Inc., the members receive no other compensation for
services provided as a member of the Supervisory Board, as a member of the board
of any of our subsidiaries, or as a member of any board committee.
Compensation committee interlocks and insider participation
The members of the Compensation Committee for CompleTel Europe will include
Messrs. Allen DeGeorge, Finnegan and Holland. All of these individually serve on
the Board of CompleTel LLC. Mr. Dovey, who will be Chairman of the Supervisory
Board, and Mr. Pearson, who will be our President and Chief Executive Officer,
are both currently members of CompleTel LLC's board.
Stock option plan
We adopted the CompleTel Europe N.V. 2000 Stock Option Plan (option plan) on
December 10, 1999, subsequently amended as of February 18, 2000. The option plan
provides for the grant of options to purchase shares to our employees and
employees of our affiliated companies. Affiliated companies are those companies
(1) in which we directly or indirectly own a majority of its stock or other
capital interest, (2) a company that, directly or indirectly, owns a majority of
our stock or other capital interest, or (3) a company in which CompleTel LLC,
directly or indirectly, owns 100% of the stock or other capital interest.
A maximum of 18,919,960 options are authorized under the option plan. The
number of shares is subject to adjustment on account of stock splits, repayment
of capital on the shares, the issue of shares in our capital out of the retained
earnings or the capital surplus account, or recapitalization, spinoff or other
dilutive change in our capital structure. Options granted to employees who
reside in France will be adjusted in accordance with the requirements of French
law. Shares that are issued or issuable upon exercise of options reduce the
maximum number of shares available for grant under the option plan. Shares that
were subject to expired or terminated and unexercised options are available for
grants under the option plan.
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Participation
Options may be granted to our employees and employees of our affiliated
companies who have an employment agreement with us or an affiliated company. In
December 1999, we had granted options covering 2,035,230 shares with an option
price of $2.60 per share to 348 employees of affiliated companies. In February
2000, we granted additional options to purchase 383,740 shares at an option
price of $2.60 per share to 70 employees. In addition, on March 27, 2000, we
granted additional options to purchase 175,000 shares at the (Euro)17.50 public
offering price to 17 employees.
Administration
The option plan is administered by our Board of Management. The Board of
Management is designated by the general meeting of shareholders as the corporate
body authorized to grant options and to issue shares in accordance with the
option plan.
The Board of Management has the discretion to determine the employees to whom
options may be granted under the option plan and the manner in which such
options will vest. Options may be granted by the Board of Management to
employees in such numbers and at such times during the term of the option plan
as the Board of Management shall determine. The Board of Management has the
discretion to grant options with terms and conditions that are different from
the terms and conditions specified in the option plan and the appendices to the
option plan as the Board of Management determines to be necessary or appropriate
to comply with the laws of the country in which the grantee resides or is
employed, or for any other reason.
Option price
The option price must be at least equal to the fair market value of the shares
on the date the option is granted. If the shares are not listed on a stock
exchange, the Board of Management will determine fair market value according to
the procedures that it determines or, if applicable, according to the procedure
required by the law of the country in which the grantees work or reside. It is
expected that the Board of Management will determine the manner in which a
professional advisor may be engaged to verify the valuation and the manner in
which any dispute concerning fair market value will be resolved. It is expected
that fair market value will be determined no less frequently than every six
months. The option price was determined by the Board of Management by taking
into account the recent sale of a minority interest in CompleTel Europe and
other factors in accordance with the method prescribed by our shareholder.
Vesting
At the time an option is granted, the Board of Management may determine the
vesting or other restrictions on exercise. The options granted to date are
subject to vesting as follows:
. options granted to employees resident in France vest in an increment of 60%
of the shares subject to the option on the third anniversary of the date of
grant and in two increments of 20% on the fourth and fifth anniversaries of
the date of grant; and
. options granted to employees resident in the United Kingdom, Germany, and
the U.S. vest in annual increments of 25% of the shares subject to the
option, commencing on the first anniversary of the date of grant.
Exercise and transferability of options
An option may be exercised only by the employee to whom it was granted, or if
the employee has died or become permanently disabled, the option may be
exercised by the administrator of the employee's estate or the employee's heirs.
The option may not be assigned or pledged in any manner. An employee may
exercise the option in full or in part by giving us written notice stating the
number of shares to be purchased.
The option plan provides that, within seven days after the exercise of an
option, we will transfer the shares purchased to the employee, provided that the
employee has made arrangements satisfactory to us for the satisfaction of all
withholding requirements.
Options are not transferable other than by will or the laws of descent and
distribution.
59
<PAGE>
Sale of shares
Shares acquired through exercise of an option may not be sold or otherwise
disposed of for six months. However, shares acquired pursuant to the exercise of
options granted to employees resident in France may not be sold for a period of
five years after granted. Shares acquired pursuant to the exercise of options
granted to employees resident in Germany may not be sold for a period of twelve
months after the date the shares are acquired.
Term of options; termination of employment
The period during which the option may be exercised, the option term, which
may not be longer than ten years, is determined when the option is granted.
Options granted to date have a ten year option term.
If the employee terminates employment on account of retirement, early
retirement, permanent disability or death, unexercised options held by that
employee will expire one year after the date of termination or, if earlier, at
the end of the option term. However, in the case of death, the option held by
that employee will expire no earlier than six months after the date of death.
The options held by that employee may be exercised only to the extent vested,
exercisable and unconditional on the date of termination or the date of death.
If the employee is dismissed for cause, outstanding options held by that
employee expire immediately. If an employee terminates employment for any other
reason, options held by that employee expire 30 days after termination. Options
are exercisable only to the extent vested, exercisable and unconditional on the
date of employment termination. Our Board of Management has the discretion to
provide for different termination provisions at the time an option is granted.
Merger
If there is a change in ownership of 50 percent or more of the shares or if we
are merged in a transaction in which our shares are surrendered in exchange for
another company's shares, we may make provision for such disposition or
adjustment of the options as our Board of Management determines, in its sole
discretion, to be fair and equitable. If there is a merger in which we are not
the survivor, our Board of Management may require that the options be exchanged
for options under the surviving company's option plan, provided that the new
options are equivalent in value to the surrendered options, or our Board of
Management may provide for such other adjustment to the options that the board,
in its sole discretion, deems equitable. If there is a merger or a change in
control, our Board of Management has the discretion to provide that the options
become fully vested at the time or times determined by our Board of Management.
If an option holder's employment terminates after a change in control other than
for cause, the option will expire one year after the date of employment
termination or, if earlier, at the end of the option term.
Amendment and termination
Our Board of Management may amend or terminate the option plan in any respect
at any time, but no amendment can impair any option previously granted without
the consent of the affected employee.
Other equity incentives
Executive management and selected key employees, including about 13% of our
current employees, were given the opportunity to purchase common ownership
interests in our indirect parent, CompleTel LLC, at fair market value. These
interests are not transferable and are subject to both time vesting tied to the
executive's continued employment with CompleTel LLC or its subsidiaries and
performance vesting tied to the private equity investors' return on investment
restrictions. Holders of these interests will be entitled to receive a pro rata
number of CompleTel Europe shares when and if CompleTel LLC is liquidated.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Prior to our initial public offering, all of CompleTel Europe's issued and
paid-up shares were owned by CompleTel Holdings LLC (indirectly through its
wholly owned subsidiary, CompleTel (N.A.) N.V.). CompleTel LLC owns all of the
class A interests of CompleTel Holdings LLC which represent 94.15% of CompleTel
Holdings' total equity. The remaining 5.85% is represented by the non-voting
class B interests included in the units purchased by the holders of the notes.
CompleTel LLC's power to vote and dispose of its
60
<PAGE>
equity interests in CompleTel Holdings LLC is exercised by CompleTel LLC's board
of managers, which is elected by the holders of CompleTel LLC's preferred
interests and common interests. CompleTel Holdings' power to vote and dispose of
our outstanding capital stock is exercised by CompleTel Holdings LLC's board of
managers, which is elected by CompleTel LLC as the owner of all of the voting
interests in CompleTel Holdings LLC. CompleTel LLC's board of managers and
CompleTel Holdings' board of managers have the same composition. Thus, the
holders of preferred and common interests in CompleTel LLC could be deemed to be
beneficial owners of the equity interests of CompleTel Holdings LLC owned by
CompleTel LLC and the capital stock of CompleTel Europe indirectly owned by
CompleTel Holdings LLC. None of the holders of the class B interests of
CompleTel Holdings hold interests representing more than 5% of the outstanding
common equity interests of CompleTel Holdings.
The following table sets forth information regarding the beneficial ownership
of our equity securities as of March 27, 2000 by:
. each of the directors and the named executive officers;
. all directors and executive officers as a group; and
. each owner of more than 5% of our equity securities ("5% Owners" ).
Information with respect to ownership of CompleTel Europe shares is based on
ownership of CompleTel LLC interests and is presented on a fully diluted basis
giving effect to the mandatory conversion of all outstanding preferred interests
upon consummation of our initial public offering.
<TABLE>
<CAPTION>
CompleTel Europe N.V.
-------------------------------------
Percentage of shares
----------------------
Prior to After
Name of beneficial owner Shares Owned Offering Offering
- ----------------------- ------------ ---------- ----------
<S> <C> <C> <C>
Directors and Named Executive Officers:
James E. Dovey(1) 6,276,099 5.0% 4.1%
William H. Pearson(2) 6,299,879 5.0 4.1
Richard N. Clevenger(3) 5,383,881 4.3 3.5
David E. Lacey(4) 1,080,319 0.9 0.7
James C. Allen(5) 794,011 0.6 0.5
Royce J. Holland(6) 794,011 0.6 0.5
Lawrence F. DeGeorge(7)(9) 25,194,939 20.0 17.0
Paul J. Finnegan * *
James H. Kirby * *
James N. Perry, Jr. * *
All directors and executive officers as a group (15 persons) 46,933,583 37.2 31.1
5% Owners:
Madison Dearborn Partners(8) 60,948,733 48.3 40.5
DeGeorge Telecom Holdings Limited Partnership(9) 25,194,939 20.0 17.0
</TABLE>
_______
* Less than 1%
(1) These shares are held indirectly by Mr. Dovey, Dovey Company LLC and Dovey
Family Partners LLP through their ownership interests in CompleTel LLC. Mr.
Dovey has sole voting power for each of these entities. Mr. Dovey's address
is 6300 S. Syracuse Way, Suite 355, Englewood, Colorado 80111.
(2) These shares are held indirectly by Mr. Pearson, Haj LLC and Haj Pearson
LLC, through their ownership interests in CompleTel LLC. Mr. Pearson has
sole voting power for each of these entities. Mr. Pearson's address is
Immeuble Artois, 44 rue Washington, 75008 Paris.
(3) These shares are held indirectly by Mr. Clevenger, Clevenger Family LLLP
and Clevenger Company LLC, through their ownership interests in CompleTel
LLC. Mr. Clevenger has sole voting power for each of these entities. Mr.
Clevenger's address is Immeuble Artois, 44 rue Washington, 75008 Paris.
(4) Mr. Lacey's address is 6300 S. Syracuse Way, Suite 355, Englewood, Colorado
80111.
(5) These shares are held indirectly by Mr. Allen through his ownership
interests in CompleTel LLC.
(6) These shares are held indirectly by Mr. Holland through his ownership
interests in CompleTel LLC.
(7) Mr. DeGeorge is the Chairman and Chief Executive Officer of LPL Investment
Group, Inc., which controls DeGeorge Telecom Holdings Limited Partnership,
(8) These shares are held indirectly by Madison Dearborn Capital Partners II,
L.P. through its ownership interests in CompleTel LLC. Madison Dearborn
Partners has agreed to purchase shares in our initial public offering at
the public offering price for an aggregate amount of $20 million. Messrs.
Finnegan and Perry are managing directors of Madison Dearborn Partners,
Inc., the general partner of the general partner of Madison
61
<PAGE>
Dearborn Capital Partners II, L.P. The address of Madison Dearborn Partners
is Three First National Plaza, Chicago, Illinois 60602.
(9) These shares are held by DeGeorge Telecom Holdings Limited Partnership
through its ownership interests in CompleTel LLC and CompleTel Holdings
LLC. LPL Telecom Europe, L.P., an affiliate of DeGeorge Telecom Holdings
Limited Partnership, has agreed to purchase shares in our initial public
offering at the public offering price for an aggregate amount of $14
million. Mr. DeGeorge has sole voting and investment power over the units
owned by DeGeorge Telecom Holdings Limited Partnership. The address of
DeGeorge Telecom Holdings Limited Partnership is 639 Isbell Road, Suite
390, Reno, Nevada 89509.
Item 13. Certain Relationships and Related Transactions
January 1999 Equity contribution
In January 1999, in connection with a corporate restructuring, CompleTel LLC
contributed approximately $58 million of equity, in cash and receivables, and in
exchange, CompleTel Europe issued 73,537,325 shares. Of the $58.0 million
contributed by CompleTel LLC, approximately $6.2 million was a receivable, and
$51.8 million was cash. In connection with that transaction, Madison Dearborn
Partners and DeGeorge Holdings, each a beneficial owner of more than 5% of
outstanding shares of CompleTel Europe, purchased additional CompleTel LLC
preferred interest for $2.51 million and $1.06 million, respectively,
representing 2,847,053 and 1,202,341 CompleTel Europe shares; and Mr. Dovey, who
will become a Supervisory Director of Completel Europe, and Messrs. Pearson,
Clevenger and Lacey, purchased additional CompleTel LLC preferred interests for
an aggregate of $57,000, representing 64,654 shares of CompleTel Europe.
February 1999 units offering
In February 1999, CompleTel Europe and CompleTel Holdings LLC issued 147,500
units, each unit consisting of $1,000 principal amount at maturity of 14% senior
discount notes of CompleTel Europe due 2009 and 10 non-voting class B interests
of CompleTel Holdings, in an offering under Rule 144A of the Securities Act. Mr.
DeGeorge, one of the Managing Directors, purchased 4,000 units in the offering
on the same terms as the other purchasers.
In connection with the issuance of the class B interests of CompleTel Holdings
LLC, CompleTel Europe, CompleTel Holdings LLC and CompleTel (N.A.) N.V. entered
into a subscription agreement pursuant to which CompleTel (N.A.) N.V. purchased
shares representing 7.0% of the issued share capital of CompleTel Europe on a
fully diluted basis and issued a corresponding percentage of its equity
interests to CompleTel Holdings LLC for the capital accounts of the holders of
class B interests of CompleTel Holdings LLC.
Pursuant to the subscription agreement, the Company has agreed that all future
transactions between the Company and its officers, directors, principal
shareholders or their respective affiliates, will be on terms no less favorable
to the Company than can be obtained from unrelated third parties.
November 1999 equity contribution
In November 1999, CompleTel Holdings issued additional class A interests to
CompleTel LLC, the holder of all of the outstanding CompleTel Holdings LLC class
A interests, in exchange for an additional equity contribution by CompleTel LLC
of approximately $42.14 million. As a result of this transaction, the
corresponding percentage of class B interests was reduced from 7.0% to 5.85%.
Madison Dearborn Partners and DeGeorge Holdings, each a beneficial owner of more
than 5% of our outstanding shares, purchased CompleTel LLC preferred interests
for $20.21 million and $8.34 million, respectively, representing 9,882,914 and
4,111,779 shares of CompleTel Europe respectively. Additionally, Messrs. Dovey,
Allen and Holland, each of whom will become a Supervisory Director of CompleTel
Europe, purchased CompleTel LLC preferred interests for $0.48 million, $0.23
million and $0.23 million, respectively, representing 238,200, 111,160 and
111,160 shares, respectively, of CompleTel Europe; and Messrs. Pearson,
Clevenger and Lacey, each of whom will be an executive officer of CompleTel
Europe, purchased CompleTel LLC preferred interests for $0.20 million, $0.17
million and $0.20 million respectively, representing 98,683, 83,937 and 98,683
shares, respectively, of CompleTel Europe.
62
<PAGE>
Employee loans
In January 2000, iPecenta Limited, a wholly owned indirect subsidiary of
CompleTel Europe, loaned Martin Rushe, who will be appointed a Managing Director
of CompleTel Europe upon the consummation of this offering and serves as the
President of CompleTel UK Limited, the principal amount of $206,500 to purchase
100 common units of CompleTel LLC. The principal amount, together with
accumulated interest at the rate of 7% compounded semi-annually, is due and
payable on the earlier of January 15, 2003, or 30 days after a termination for
cause, or 90 days after any other termination of employment. The common units
are subject to time and performance vesting and forfeiture provisions and will,
if vested, entitle Mr. Rushe to receive a pro rata number of CompleTel Europe
shares when and if CompleTel LLC is liquidated. iPecenta has agreed to forgive
a pro rata portion of the principal and interest on the note as the common units
vest or upon any forfeiture.
A limited number of our employees obtained interest bearing loans in an
aggregate principal amount of (Euro)2,000,000 from a commercial bank to purchase
our shares. These include loans to Hansjorg Rieder and Martin
Rushe, who will be appointed as Managing Directors of CompleTel Europe, in the
principal amounts of (Euro)567,000 and (Euro)309,000, respectively. The loans
are for a term of 18 months and will be secured by a pledge of the shares
purchased by such individuals. In addition, CompleTel Europe has agreed to
guarantee the employee and officer loans in the approximate total amount of
(Euro)2,000,000 and has agreed to assume the interest cost payments on the
loans.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports of Form 8-K.
(a) Index to Financial Statements
(b) Reports on Form 8-K
None.
(c) Exhibits
Exhibit No. Description
- ----------- -------------------------------------------------------------------
3.1(2) Articles of Association of CompleTel Europe N.V.
3.2(7) Form of Amended Articles of Association of CompleTel Europe N.V.
4.1(1) Specimen stock certificate for shares of CompleTel Europe N.V.
10.1(4) (Euro)265 Million Senior Secured Credit Facility dated January 6,
2000, among Goldman Sachs International and Paribas Corporation, as
co-arrangers, and other banks
10.2(4) Purchase Agreement dated August 4, 1999, between CompleTel GmbH
and Siemens AG.
10.3(1) Supply Agreement dated January 8, 1999, between CompleTel SAS and
Matra Nortel Communications
10.4(1) Arrete dated November 17, 1988 authorizing CompleTel SARL to set up
and operate a telecommunications network open to the public and to
supply the public with the telephone service, as published December
13, 1998
10.5(1) License dated January 11, 1999 granted by the Secretary of State
for Trade and Industry to CompleTel UK Limited under Section 7 of
the Telecommunications Act 1984
10.6(2) German License Certificate Class 3 for the Operation and
Performance of Public Telecommunications German license certificate
Class 3 for the Operation and Performance of Public
Telecommunications Services by the Licensee or Others dated March
8, 1999
10.7(2) German License Certificate Class 4 for the Operations of Voice
Telephone Service on the Basis of a Self-Operated
Telecommunications Network dated March 8, 1999
10.8(3) Extension of Class 3 German License
10.9(3) Extension of Class 4 German License
10.10(4) CompleTel Europe N.V. 2000 Stock Option Plan
10.11(1) Employment Agreement by and between CableTel Management, Inc. and
William H. Pearson, dated as of May 18, 1998
10.12(1) Employment Agreement by and between CableTel Management, Inc. and
Richard N. Clevenger, dated as of May 18, 1998
63
<PAGE>
10.13(1) Employment Agreement by and between CableTel Management, Inc. and
David Lacey dated as of December 16, 1998
10.14(1) Employment Agreement by and between CableTel Management, Inc. and
James E. Dovey dated as of May 18, 1999
10.15(1) Amended and Restated CompleTel LLC Guaranty Agreement, dated as of
July 14, 1999 by CompleTel LLC in favor of the noteholders
10.16(1) Equity Registration Rights Agreement dated as of February 16, 1999
among CompleTel (N.A.) N.V., CompleTel Europe N.V., the
Shareholders named therein, the initial purchasers and U.S. Bank
Trust National Association, as Transfer Agent
10.17(7) First Amendment to CompleTel Europe N.V. 2000 Stock Option Plan
10.18(6) Second Amended and Restated Registration Agreement dated as of
November 23, 1999 by and among CompleTel LLC and the Holders named
therein
10.19(7) Form of First Supplement to Second Amended and Restated
Registration Agreement dated as of November 23, 1999 by and among
CompleTel LLC and the Holders named therein
12.1 Computation of Ratio of Earnings to Fixed Charges
21.1(5) Subsidiaries of CompleTel Europe N.V.
27.1 Financial Data Schedule
___________
(1) Previously filed as an exhibit to the Registrant's Registration Statement
on Form S-4, file number 333-82305, filed with the Securities and Exchange
Commission on July 2, 1999 and incorporated herein by reference.
(2) Previously filed as an exhibit to Amendment No. 1 to the Registrant's
Registration Statement on Form S-4, file number 333-82305, filed with the
Securities and Exchange Commission on August 27, 1999 and incorporated
herein by reference.
(3) Previously filed as an exhibit to Amendment No. 2 to the Registrant's
Registration Statement on Form S-4, file number 333-82305 filed with the
Securities and Exchange Commission on September 14, 1999 and incorporated
herein by reference.
(4) Previously filed as an exhibit to the Post-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form S-4, file number 333-82305,
filed with the Securities and Exchange Commission on January 31, 2000 and
incorporated herein by reference.
(5) Previously filed as an exhibit to the Registrant's Registration Statement
on Form F-1, file number 333-30834, filed with the Securities and Exchange
Commission on February 22, 2000.
(6) Previously filed as an exhibit to Amendment No. 1 to the Registrant's
Registration Statement on Form F-1, file number 333-30834, filed with the
Securities and Exchange Commission on March 6, 2000.
(7) Previously filed as an exhibit to Amendment No. 2 to the Registrant's
Registration Statement on Form F-1, file number 333-30834, filed with the
Securities and Exchange Commission on March 22, 2000.
(b) Financial Statement Schedules:
Schedules have been omitted because the information required to be shown in
the schedules is not applicable or is included elsewhere in our financial
statements or the notes thereto.
64
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized as of the 29th day of
March 2000.
COMPLETEL EUROPE N.V.
By: /s/ James E. Dovey
-------------------------------
James E. Dovey
Managing Director
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- -----
<S> <C> <C>
/s/ James E. Dovey
- --------------------------------- Managing Director March 29, 2000
James E. Dovey (Principal Executive Officer)
/s/ Lawrence F. DeGeorge
- --------------------------------- Managing Director March 29, 2000
Lawrence F. DeGeorge (Principal Executive Officer)
/s/ Paul J. Finnegan
- --------------------------------- Managing Director March 29, 2000
Paul J. Finnegan (Principal Executive Officer)
/s/ P.C.E. van Witteveen
/s/ P. Maletic
- --------------------------------- Managing Director March 29, 2000
ING Trust (Netherlands) B.V. (Principal Executive Officer)
By: P.C.E. van Witteveen
General Proxy Holder
and
P. Maletic
Special Proxy Holder
/s/ David E. Lacey
- --------------------------------- Principal Financial Officer March 29, 2000
David E. Lacey
/s/ John M. Hugo
- --------------------------------- Principal Accounting Officer March 29, 2000
John M. Hugo
</TABLE>
65
<PAGE>
EXHIBIT 12.1
COMPLETEL EUROPE N.V.
COMPUTATION OF RATIO EARNINGS TO FIXED CHARGES
(Stated in thousands of U.S. Dollars)
<TABLE>
<CAPTION>
Period from
commencement
of operations
Year (January 8, 1998)
Ended December 31, Through
1999 December 31,
1998
------------------ -----------------
<S> <C> <C>
Earnings available for fixed charges:
Net loss before income taxes (51,956) $(7,561)
Add: Fixed charges 8,685 10
------------------ -----------------
Adjusted Earnings (43,271) (7,551)
Fixed charges:
Interest on indebtness (8,236) ---
Interest capitalized (1,442) ---
Amortization of debt issuance
costs (236) ---
Interest portion of rental and lease
expenses (1) (213) (10)
------------------ -----------------
(10,127) (10)
------------------ -----------------
Deficiency of earnings available to
cover fixed charges $ (53,398) $ (7,561)
------------------ -----------------
------------------ -----------------
</TABLE>
(1) The interest component of rental and lease expenses has been estimated by
taking the difference between the gross rent and lease expense and net present
value of rent and lease expense using the Company's cost of capital of 14%,
representing the coupon rate on the Company's outstanding senior discount notes.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-08-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 DEC-31-1999
<CASH> 1,718,000 57,349,000
<SECURITIES> 0 0
<RECEIVABLES> 527,000 15,192,000
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,424,000 74,105,000
<PP&E> 3,417,000 96,545,000
<DEPRECIATION> (46,000) (4,171,000)
<TOTAL-ASSETS> 7,870,000 177,339,000
<CURRENT-LIABILITIES> 13,882,000 53,803,000
<BONDS> 0 79,922,000
0 0
0 0
<COMMON> 2,853,000 14,171,000
<OTHER-SE> (8,865,000) 29,443,000
<TOTAL-LIABILITY-AND-EQUITY> 7,870,000 177,339,000
<SALES> 0 2,985,000
<TOTAL-REVENUES> 0 2,985,000
<CGS> 0 2,407,000
<TOTAL-COSTS> 7,561,000 45,642,000
<OTHER-EXPENSES> 0 3,616,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 8,236,000
<INCOME-PRETAX> (7,561,000) (51,956,000)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (7,561,000) (51,956,000)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (7,561,000) (51,956,000)
<EPS-BASIC> (0.31) (0.52)
<EPS-DILUTED> (0.31) (0.52)
</TABLE>
