<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20529
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 NUMBER 333-33117
DESTIA COMMUNICATIONS, INC.
(FORMERLY ECONOPHONE, INC.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 11-3132722
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
95 ROUTE 17 SOUTH, 3RD FLOOR, PARAMUS, N.J. 07652
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(201) 226-4500
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
<TABLE>
<S> <C>
45 BROADWAY, 30TH FLOOR, NEW YORK, N.Y.
(FORMER ADDRESS OF PRINCIPAL EXECUTIVE 10006
OFFICES) (ZIP CODE)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
CLASS OUTSTANDING AT JULY 31, 1999
----- ----------------------------
<S> <C>
Common Stock, $.01 par value 31,177,012
Non-voting Common Stock, $.01 par value 103,642
</TABLE>
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<PAGE> 2
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
1999 SECOND QUARTER REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -- Three and
Six months ended June 30, 1998 and June 30, 1999
(unaudited)............................................... 2
Consolidated Balance Sheets -- December 31, 1998 (derived
from audited financial statements) and June 30, 1999
(unaudited)............................................... 3
Consolidated Statements of Cash Flows -- Six months ended
June 30, 1998 and June 30, 1999 (unaudited)............... 4
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... 5-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 8-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 14
Item 2. Changes in Securities....................................... 14
Item 3. Defaults Upon Senior Securities............................. 14
Item 4. Submission of Matters to a Vote of Security Holders......... 14
Item 5. Other Information........................................... 15
Item 6. Exhibits and Reports on Form 8-K............................ 15
SIGNATURES..................................................................... 16
</TABLE>
1
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ---------------------
1998 1999 1998 1999
--------- --------- --------- --------
<S> <C> <C> <C> <C>
REVENUES..................................... $ 48,754 $ 75,971 $ 90,414 $138,590
COST OF SERVICES............................. 35,585 54,367 67,041 98,737
--------- --------- --------- --------
Gross profit............................ 13,169 21,604 23,373 39,853
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 19,272 29,911 34,756 56,526
DEPRECIATION AND AMORTIZATION................ 2,424 6,915 4,102 12,764
--------- --------- --------- --------
Loss from operations.................... (8,527) (15,222) (15,485) (29,437)
INTEREST EXPENSE, net........................ (6,597) (9,640) (12,276) (19,529)
FOREIGN CURRENCY EXCHANGE (LOSS) GAIN, net... (2) 7 114 (37)
OTHER EXPENSE, net........................... (196) (356) (269) (706)
--------- --------- --------- --------
Net loss................................ $ (15,322) $ (25,211) $ (27,916) $(49,709)
========= ========= ========= ========
BASIC AND DILUTED LOSS PER SHARE............. $ (0.74) $ (0.93) $ (1.34) $ (2.07)
========= ========= ========= ========
WEIGHTED AVERAGE NUMBER OF BASIC AND DILUTED
COMMON SHARES OUTSTANDING.................. 20,778 27,239 20,778 24,028
========= ========= ========= ========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
2
<PAGE> 4
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(SEE NOTE) (UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 118,218 $ 118,844
Marketable securities..................................... 21,343 --
Accounts receivable, net of allowance for doubtful
accounts of $4,086 and $5,523, respectively............ 33,351 46,447
Prepaid expenses and other current assets................. 3,409 6,045
Restricted cash and securities............................ 9,590 9,591
--------- ---------
Total current assets................................... 185,911 180,927
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net of
accumulated depreciation and amortization of $12,418 and
$21,878 at December 31, 1998 and June 30, 1999,
respectively.............................................. 107,249 132,375
Debt issuance costs......................................... 12,244 11,576
Intangibles................................................. 49,488 50,809
Other assets................................................ 2,439 4,263
Restricted cash and securities.............................. 30,877 21,458
--------- ---------
Total assets........................................... $ 388,208 $ 401,408
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 33,352 $ 34,543
Accrued expenses and other current liabilities............ 31,131 39,224
Interest accrued on Senior Notes.......................... 9,590 9,591
Current maturities of other long-term debt................ 16,232 9,487
Current maturities of obligations under capital lease..... 154 590
Current maturities of notes payable -- related party...... 308 --
Deferred revenue.......................................... 4,739 4,834
--------- ---------
Total current liabilities.............................. 95,506 98,269
OTHER LONG-TERM DEBT........................................ 37,379 25,725
OBLIGATIONS UNDER CAPITAL LEASE............................. 193 946
SENIOR NOTES................................................ 343,176 354,066
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK............. 14,421 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Voting common stock, par value $.01; 29,250,000 and
72,000,000 shares authorized at December 31, 1998 and
June 30, 1999, respectively; 20,778,321 and 31,119,397
shares issued and outstanding at December 31, 1998 and
June 30, 1999, respectively............................ 208 311
Non-voting common stock, par value $.01; 500,000 shares
authorized; 135,890 and 95,331 shares issued and
outstanding at December 31, 1998 and June 30, 1999,
respectively........................................... 1 1
Additional paid-in capital................................ 6,923 81,346
Accumulated other comprehensive loss...................... (856) (1,003)
Accumulated deficit....................................... (108,743) (158,253)
--------- ---------
Total stockholders' equity (deficit)................... (102,467) (77,598)
--------- ---------
Total liabilities and stockholders' equity (deficit)... $ 388,208 $ 401,408
========= =========
</TABLE>
NOTE: The December 31, 1998 Balance Sheet is derived from audited financial
statements.
The accompanying notes to the financial statements are an integral part of these
statements.
3
<PAGE> 5
DESTIA COMMUNICATIONS, INC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1999
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (27,916) $(49,709)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 4,102 12,764
Provision for doubtful accounts........................ 3,244 1,437
Accreted interest expense.............................. 7,645 10,890
Changes in assets and liabilities:
Increase in accounts receivable........................ (15,739) (13,734)
Increase in prepaid expenses and other current
assets................................................ (2,769) (2,085)
Decrease (increase) in other assets.................... 501 (2,601)
Increase in accounts payable, accrued expenses and
other current liabilities............................. 20,646 7,370
Increase in deferred revenue........................... 1,515 95
--------- --------
Net cash used in operating activities................ (8,771) (35,573)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (35,645) (32,983)
Net cash paid in acquisitions............................. (20,980) (2,255)
(Purchase) sale of marketable securities -- net........... (134,956) 21,343
--------- --------
Net cash used in investing activities................ (191,581) (13,895)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock................ -- 59,000
Net proceeds from exercise of stock options............... -- 532
Proceeds from long-term debt.............................. 922 --
Repayments of long-term debt.............................. (984) (18,399)
Repayments of capital leases.............................. (92) (149)
Repayments of notes payable -- related party.............. (7) (308)
Proceeds from senior notes................................ 175,785 --
Payment of debt issuance costs............................ (7,159) --
--------- --------
Net cash provided by financing activities............ 168,465 40,676
--------- --------
Decrease in cash and cash equivalents, (including restricted
cash)..................................................... (31,887) (8,792)
Cash and cash equivalents, beginning of period (including
restricted cash).......................................... 126,629 158,685
--------- --------
Cash and cash equivalents, end of period (including
restricted cash).......................................... $ 94,742 $149,893
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................... $ 11,710 $ 11,854
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Accretion of preferred stock.............................. $ 46 $ --
Capital leases executed................................... -- 1,338
Acquisition in exchange for common stock.................. -- 675
Conversion of preferred stock into common stock........... -- 14,421
DETAILS OF ACQUISITIONS:
Fair value of assets acquired............................. (1,068) (1,615)
Goodwill.................................................. (20,613) (2,555)
Liabilities assumed....................................... 701 1,915
--------- --------
Net cash paid for acquisitions....................... $ (20,980) $ (2,255)
========= ========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
4
<PAGE> 6
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Destia Communications, Inc. (formerly Econophone, Inc.) ("Destia" or the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Rule 10-01 of Regulation S-X. Certain information and footnote
disclosures normally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted, although management believes that the disclosures herein are adequate
to make the information presented not misleading. All significant intercompany
balances and transactions have been eliminated in consolidation. The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, as well as the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates. In the opinion of management, all adjustments
(consisting of only normal recurring adjustments) considered necessary for a
fair presentation have been included. Operating results for the three-month or
six-month period ended June 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. It is
suggested that these financial statements be read in conjunction with Destia's
audited annual consolidated financial statements.
NOTE B -- CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with a maturity of
less than three months when purchased.
NOTE C -- COMPREHENSIVE LOSS
The comprehensive loss for the three months ended June 30, 1998 and 1999
includes the following components:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------
1998 1999
-------- --------
<S> <C> <C>
Net Loss.................................................... $(15,322) $(25,211)
Other Comprehensive Income, net of tax:
Foreign Currency Translation Adjustments.................... (313) (282)
-------- --------
Comprehensive Loss.......................................... $(15,635) $(25,493)
======== ========
</TABLE>
Accumulated other comprehensive loss, (all of which relates to foreign
currency translation adjustments) as of December 31, 1998 and June 30, 1999 is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
<S> <C> <C>
Balance at beginning of period.............................. $(104) $ (856)
Translation Adjustments..................................... (752) (147)
----- -------
Balance at end of period.................................... $(856) $(1,003)
===== =======
</TABLE>
5
<PAGE> 7
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE D -- LOSS PER SHARE
Loss per share is based on the standards of Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings per Share", which requires the
presentation of basic EPS and diluted EPS. Basic EPS is calculated by dividing
income available to common stockholders by the weighted average number of shares
of common stock outstanding during the period. Weighted average shares
outstanding has been calculated to reflect additional issuances of shares of
common stock during the second quarter (including shares of common stock issued
as a result of the exercise of warrants or options or the conversion of shares
of restricted non-voting common stock or preferred stock). A total of 6,500,000
shares of common stock were issued in connection with Destia's initial public
offering in May ("IPO") and, upon consummation of the IPO, shares of preferred
stock automatically converted into 3,553,821 shares of common stock. If these
shares had been included for the entire second quarter, the weighted average
shares outstanding as of June 30, 1999 would have been 31,214,728 shares of
common stock. Loss available to common stockholders is calculated as net loss
reduced by accretion on preferred stock. Upon the conversion of preferred stock
at the IPO, accretion of preferred stock ceased, and the accumulated accretion
to date was converted to additional paid-in capital (see Note E). Diluted EPS
has not been presented separately since the inclusion of outstanding options and
warrants would be antidilutive.
NOTE E -- ACCUMULATED DEFICIT
The change in the accumulated deficit reflects net loss for the period,
which is offset by the reclassification, as a result of the IPO, of the
preferred stock accretion, in the amount of approximately $199,000, from the
accumulated deficit to additional paid-in capital. At the IPO, the preferred
stock automatically converted to common stock. Prior to May, 1999 accretion of
preferred stock was recorded within the accumulated deficit.
NOTE F -- INITIAL PUBLIC OFFERING
On May 11, 1999, the Company completed an initial public offering of
6,500,000 shares of its common stock, par value $.01 per share ("Common Stock"),
which was priced at $10.00 per share. The net proceeds to the Company (after
deducting underwriter discounts and expenses) were approximately $59.0 million.
The Company intends to use the net proceeds from the offering to expand its
sales and marketing activities and to make capital expenditures, particularly in
Europe, as well as to fund working capital and general corporate purposes,
including to fund losses. Upon consummation of the IPO, all outstanding shares
of Preferred Stock were converted into Common Stock and the following material
changes to the Company's certificate of incorporation were effected: (i) the
number of authorized shares of Common Stock was increased from 29,250,000 to
72,000,000; (ii) the number of authorized shares of preferred stock was
increased from 250,000 to 2,500,000; and (iii) a stock split of 1.04 shares of
Common Stock for every 1.0 shares was completed.
NOTE G -- ACQUISITION OF MINORITY INTEREST IN SUBSIDIARY
On March 30, 1999, the Company acquired the 28% minority interest in
Econophone Services GmbH (Switzerland). The entire purchase price is classified
as goodwill, which is being amortized over 20 years.
6
<PAGE> 8
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
NOTE H -- GEOGRAPHIC INFORMATION
In accordance with quarterly reporting requirements of SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information", the
following revenue by segment information is shown for the three-month and
six-month periods ended June 30, 1998 and June 30, 1999.
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------
1998 1999 % CHANGE
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue
North America......................................... $26,007 $46,174 78%
United Kingdom........................................ 17,849 18,524 4%
Continental Europe.................................... 4,898 11,273 130%
------- ------- ---
Total................................................. $48,754 $75,971 56%
======= ======= ===
</TABLE>
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------
1998 1999 % CHANGE
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue
North America........................................ $47,045 $ 86,677 84%
United Kingdom....................................... 33,887 31,759 (6)%
Continental Europe................................... 9,482 20,154 113%
------- -------- ---
Total................................................ $90,414 $138,590 53%
======= ======== ===
</TABLE>
7
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with Destia's
financial statements and the notes thereto included in the annual report on Form
10-K for the year ended December 31, 1998 filed by Destia pursuant to the
requirements of the Securities Exchange Act of 1934. Certain of the matters
discussed in this item may constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements are statements other
than historical information or statements of current condition. Some
forward-looking statements may be identified by use of terms such as "believes",
"anticipates", "intends" or "expects". These forward-looking statements relate
to the plans, objectives and expectations of Destia for future operations and
its business and the telecommunications industry generally. In light of the
risks and uncertainties inherent in all future projections, the inclusion of
forward-looking statements in this report should not be regarded as a
representation by the Company or any other person that the objectives or plans
of the Company will be achieved. The Company's revenues and results of
operations are difficult to forecast and could differ materially from those
projected in the forward-looking statements as a result of numerous factors
affecting one or more of the Company's markets, including the following: (i)
inaccuracies in the Company's forecasts of telecommunications traffic or
customers; (ii) the rate of expansion of Destia's network and/or customer base;
(iii) changes in or developments under laws, regulations, licensing requirements
or telecommunications standards; (iv) changes in the availability of
transmission facilities; (v) loss of a customer or distributor that provides
Destia with significant revenues; (vi) concentration of credit risk; (vii)
highly competitive market conditions; (viii) currency fluctuations; (ix) changes
in retail or wholesale telecommunications rates; (x) loss of the services of key
officers, such as Alfred West, the Chairman and Chief Executive Officer, or Alan
L. Levy, the President and Chief Operating Officer; (xi) changes in
international settlement rates; (xii) general economic conditions. The foregoing
review of important factors should not be construed as exhaustive. The Company
undertakes no obligation to release publicly the results of any future revisions
it may make to any forward-looking statement to reflect events or circumstances
after the date hereof, including the occurrence of unanticipated events.
OVERVIEW
Destia is a facilities-based provider of domestic and international
telecommunications services in North America and nine countries in Europe.
Destia provides its end users with a variety of retail telecommunications
services, including international and domestic long distance, calling card and
prepaid card services, carrier wholesale transmission services and Internet
access.
Destia's objective is to become a leading facilities-based provider of
integrated telecommunications services to end users in the largest metropolitan
markets in Europe and North America. The key elements of the Company's growth
strategy are: (i) focus on high margin end user business; (ii) leverage its
existing network and customer support infrastructure; (iii) enhance its network
and opportunistically enter new markets; (iv) expand its service offerings; and
(v) pursue strategic acquisitions and alliances.
On May 11, 1999, the Company completed an initial public offering of
6,500,000 shares of its common stock, par value $.01 per share ("Common Stock"),
which was priced at $10.00 per share. The net proceeds to the Company (after
deducting underwriter discounts and offering related expenses) were
approximately $59.0 million.
8
<PAGE> 10
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30, 1999
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------
1998 1999 % CHANGE
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue
North America......................................... $26,007 $46,174 78%
United Kingdom........................................ 17,849 18,524 4%
Continental Europe.................................... 4,898 11,273 130%
------- ------- ----
Total................................................. $48,754 $75,971 56%
======= ======= ====
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------
1998 1999 % CHANGE
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Billable minutes of use
North America......................................... 121,653 295,735 143%
United Kingdom........................................ 80,324 113,649 41%
Continental Europe.................................... 9,468 62,657 562%
------- ------- ---
Total................................................. 211,445 472,041 123%
======= ======= ===
</TABLE>
Revenues. Revenues for the three months ended June 30, 1999 increased 56%
to $76.0 million from $48.8 million for the three months ended June 30, 1998.
Billable minutes of use increased 123% to 472.0 million in the current quarter
from 211.4 million in the comparable quarter of the prior year. The number of
customers serviced by the Company increased 110% to approximately 490,000 at
June 30, 1999 from approximately 234,000 at June 30, 1998. The year-to-year
revenue increase was primarily attributable to strong retail customer growth in
all of our geographic markets. Retail revenues in the second quarter of 1999
increased 91% over the comparable period of 1998. Wholesale revenues in the
second quarter of 1999 as compared to the second quarter of 1998 declined
significantly and represented approximately 12% of consolidated revenues in the
second quarter of 1999, compared to 28% in the second quarter of 1998. The 4%
revenue growth rate reported for the U.K. from the second quarter of 1998 to the
comparable period of 1999 was negatively impacted by an $11.0 million reduction
in wholesale revenues. The reduction of wholesale revenue was the result of the
Company's intentional shift away from certain low margin wholesale customers.
The increase in billable minutes as a percentage of overall revenue reflects
changes in the Company's product mix, the impact of deregulation in the
Company's continental European markets and increased competition in all of the
Company's markets.
Gross profit. Gross margins improved from 27.0% in the second quarter of
1998 to 28.4% in the second quarter of 1999 primarily as a result of the growth
in retail revenues supported by the continued expansion of Destia's network,
increased utilization of owned and leased transmission capacity and improved
global routing, all of which contributed to lower per-minute costs. The margin
improvement was also partially due to an increase in revenues derived from
retail products, which have higher gross margins than wholesale services.
Selling, general and administrative expenses. Selling, general and
administrative ("SG&A") expenses for the second quarter of 1999 were $29.9
million, representing 39.4% of revenue, compared to $19.3 million in the second
quarter of 1998, or 39.5% of revenue. The increase in overall SG&A expense
levels was primarily attributable to the increased scale of the Company's
operations resulting from the expansion of its business, which contributed to
increased staffing-related costs and marketing and promotional expenses. The
increase in marketing and promotional expenses was primarily the result of
Destia's spending in developing marketing and sales channels in Europe, as well
as increased marketing expenditures to grow the retail customer base in North
America. SG&A as a percentage of revenue remained virtually the same despite the
significant increase in retail revenues which have higher associated selling,
marketing and administrative expenses than wholesale revenues.
9
<PAGE> 11
Depreciation and amortization. Depreciation and amortization expenses
increased to $6.9 million for the three months ended June 30, 1999 from $2.4
million for the three months ended June 30, 1998. This increase was
substantially due to the continuing build-out of the Company's network in North
America, the United Kingdom and Continental Europe.
Interest expense and interest income. Interest expense increased to $11.5
million in the second quarter of 1999 from $10.4 million in the comparable
quarter of the prior year. This increase was primarily attributable to higher
interest expense incurred on the 11% Notes issued in February 1998 (the "1998
Notes"), due to the accretion of the principal balance, as well as interest
expense incurred related to additional borrowings to finance the cost to acquire
switches and other telecommunications equipment and IRUs. Interest income
decreased to $1.9 million in the second quarter of 1999 from $3.8 million in the
second quarter of 1998, primarily due to lower levels of cash and marketable
securities.
Net loss. The Company reported a net loss of $25.2 million for the second
quarter of 1999 compared to a net loss of $15.3 million for the second quarter
of 1998. The increase in net loss reflects the increased SG&A expenses
associated with the development of the Company's sales and marketing channels
and the build out of its customer and network support infrastructure, as well as
increased depreciation and amortization expenses.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------
1998 1999 % CHANGE
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenue
North America........................................ $47,045 $ 86,677 84%
United Kingdom....................................... 33,887 31,759 (6)%
Continental Europe................................... 9,482 20,154 113%
------- -------- ----
Total................................................ $90,414 $138,590 53%
======= ======== ====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1998 1999 % CHANGE
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Billable minutes of use
North America......................................... 212,300 524,561 147%
United Kingdom........................................ 140,566 208,124 48%
Continental Europe.................................... 17,305 100,527 481%
------- ------- ---
Total................................................. 370,171 833,212 125%
======= ======= ===
</TABLE>
Revenues. Revenues for the six months ended June 30, 1999 increased 53% to
$138.6 million from $90.4 million for the six months ended June 30, 1998.
Billable minutes of use increased 125% to 833.2 million in the current six-month
period from 370.2 million in the comparable six-month period of the prior year.
The year-to-year revenue increase was primarily attributable to strong retail
customer growth in all of our geographic markets. Retail revenues in the first
six months of 1999 increased 93% over the prior year six-month period. Wholesale
revenues in the first six months of 1999 as compared to the first six months of
1998 declined significantly over this period and represented approximately 10%
of consolidated revenues in the first half of 1999 compared to 29% in the first
half of 1998. The increase in billable minutes as a percentage of overall
revenue reflects changes in the Company's product mix, the impact of
deregulation in the Company's continental European markets and increased
competition in all of the Company's markets.
Gross profit. The gross profit margin of 28.8% reported for the six months
ended June 30, 1999 increased 2.9% from the 25.9% achieved in the six months
ended June 30, 1998 as a result of the growth in retail revenues supported by
the continued expansion of Destia's network, increased utilization of owned and
10
<PAGE> 12
leased transmission capacity and improved global routing, all of which
contributed to lower per-minute costs. The margin improvement was also partially
due to an increase in revenues derived from retail products, which have higher
gross margins than wholesale services.
Selling, general and administrative expenses. SG&A expenses increased 63%
from $34.8 million for the first six months of 1998 to $56.5 million for the
first six months of 1999. SG&A expenses as a percentage of revenues increased to
40.8% in the 1999 six-month period from 38.4% in the comparable period of the
prior year. This increase was primarily attributable both to an increase in
retail revenues (which have higher associated selling, marketing and
administrative expenses) as a percentage of overall revenues and to the
increased scale of the Company's operations resulting from the expansion of its
business, which contributed to increased staffing-related costs and marketing
and promotional expenses. The increase in marketing and promotional expenses was
primarily the result of Destia's spending in developing marketing and sales
channels in Europe, as well as increased marketing expenditures to grow the
retail customer base in North America.
Depreciation and amortization. Depreciation and amortization expenses
increased to $12.8 million for the six months ended June 30, 1999 from $4.1
million for the six months ended June 30, 1998. This increase was substantially
due to the continuing build-out of the Company's network in North America, the
United Kingdom and continental Europe.
Interest expense and interest income. Interest expense increased to $23.4
million for the first half of 1999 from $18.5 million in the prior year
comparable period. This increase was primarily attributable to higher interest
expense incurred on the 1998 Notes due to the accretion of the principal
balance, as well as interest expense incurred related to borrowings to finance
the cost to acquire switches and other telecommunications equipment and IRUs.
Interest income decreased to $3.9 million in the first half of 1999 from $6.2
million in the first half of 1998, primarily due to lower levels of cash and
marketable securities.
Net loss. The Company reported a net loss of $49.7 million for the first
half of 1999 compared to a net loss of $27.9 million for the first half of 1998.
The increase in net loss reflects the increased SG&A expenses associated with
the development of the Company's sales and marketing channels and the build out
of its customer and network support infrastructure, as well as increased
depreciation and amortization expenses and a higher level of net interest
expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred significant operating and net losses and made
substantial capital expenditures, due in large part to the start-up and
development of the Company's operations and its network. The Company will
continue to incur additional losses and have substantial additional capital
expenditures. The Company has utilized cash provided from financing activities
to fund losses and capital expenditures. The sources of this cash have primarily
been the proceeds from the Company's IPO in May of 1999, the issuance in 1997 of
the Company's 13 1/2% Notes (the "1997 Notes"), the issuance of the 1998 Notes
and, to a lesser extent, equipment-based financing and an equity investment in
preferred stock of the Company by Princes Gate Investors.
At June 30, 1999, Destia had approximately $118.8 million in unrestricted
cash, cash equivalents and marketable securities, compared to $139.6 million in
cash, cash equivalents and marketable securities at December 31, 1998. In
addition, Destia had $31.0 million of restricted cash and securities (which will
be used to pay interest expense on the 1997 Notes through July 15, 2000) as of
June 30, 1999. Destia's net cash used in operating activities was $35.6 million
for the six months ended June 30, 1999, and was primarily attributable to a net
loss of $49.7 million, an increase in accounts receivable of $13.7 million and a
decrease in accounts payable, accrued expenses and other current liabilities of
$7.4 million, partially offset by accreted interest expense of $10.9 million and
depreciation and amortization expense of $12.8 million. Net cash used in
investing activities of $13.9 million for the six months ended June 30, 1999 was
attributable to investments made primarily in switches and other
telecommunications equipment, partially offset by the sale of marketable
securities of $21.3 million. Net cash provided by financing activities of $40.7
million was primarily related to the net proceeds from the sale of Common Stock
of approximately $59.0 million partially offset by repayments of long-term debt
of $18.4 million.
11
<PAGE> 13
Destia currently expects capital expenditures during 1999 to be below $100
million, of which $33.0 million was expended during the first six months of
1999. These investments will be made principally to support the continued growth
of Destia's network, including the purchase of telecommunications equipment and
the purchase of additional network capacity, as well as the continued
development of Destia's back office capabilities, including its management
information and network management systems.
The Company anticipates financing these expenditures primarily through term
notes, capital leases with various lending institutions or its own cash
resources. The Company's operations, continued development of its network and
continued geographic expansion will continue to require substantial capital
investment. Management believes it has the ability to continue to secure
long-term equipment financing and to obtain funds from the high yield bond and
equity markets. Management believes these abilities combined with available
borrowing capacity under existing lines of credit and its own cash resources
will be sufficient to fund capital expenditures, working capital needs and debt
repayment requirements for the foreseeable future.
The Company continually evaluates business opportunities, including
potential acquisitions, and engages in discussions with potential acquisition
candidates. In June 1999, the Company purchased Wavetech Ltd., a reseller of
wireless telecommunications in the United Kingdom. The Company will seek to
acquire or align itself with complementary companies that (1) offer attractive
opportunities in new geographic markets (with an emphasis on continental
Europe), (2) have an established customer base or (3) have innovative
telecommunications services or technologies (such as data transmission and
wireless or Internet services). One or more of such acquisitions could result in
a substantial change in the Company's operations and financial condition. The
success of the Company's acquisition activities will depend, among other things,
on the availability of acquisition candidates, the availability of funds to
finance acquisitions and the availability of management resources to oversee the
operation of acquired businesses.
On May 11, 1999, the Company completed an initial public offering of
6,500,000 shares of its common stock, par value $.01 per share ("Common Stock"),
which was priced at $10.00 per share. The net proceeds to the Company (after
deducting underwriter discounts and other expenses related to the offering) were
approximately $59.0 million.
Foreign Currency Exposure
Destia is exposed to fluctuations in foreign currencies relative to the
U.S. dollar because Destia bills its end users in their local currency, while
major portions of its transmission costs are incurred in U.S. dollars, and
interest expense on the 1997 and 1998 Notes is in U.S. dollars. For the first
six months of 1998 and 1999, approximately 46% and 37%, respectively, of
Destia's revenues were billed in currencies other than the U.S. dollar,
consisting primarily of British pounds, Belgian francs, German marks and Swiss
francs. As Destia expands its operations, a higher percentage of revenues is
expected to be billed in currencies other than the U.S. dollar. Destia, from
time to time, uses foreign exchange contracts relating to its trade accounts
receivables to hedge foreign currency exposure and to control risks relating to
currency fluctuations. Destia does not use derivative financial instruments for
speculative purposes. At June 30, 1998 and 1999, Destia had no open foreign
currency hedging positions.
New Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use." SOP 98-1 provides
guidance on accounting for the costs of computer software developed or obtained
for internal use software, dividing the development into three stages: (1) the
preliminary project stage, during which conceptual formulation and evaluation of
alternatives takes place, (2) the application development stage, during which
design, coding, installation and testing takes place and (3) the operations
stage during which training and maintenance takes place. Costs incurred during
the application development stage are capitalized; all other costs are expensed
as incurred. SOP 98-1 is effective for financial statements for
12
<PAGE> 14
fiscal years beginning after December 15, 1998. The Company has adopted the
provisions of SOP 98-1, and it has not had a material effect on the Company's
results of operations.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities." SOP 98-5 requires that all non-governmental entities
expense the costs of start-up activities, including organization costs, as those
costs are incurred. SOP 98-5 is effective for financial statements for fiscal
years beginning after December 15, 1998. The Company has adopted the provisions
of SOP 98-5 and it has not had a material effect on its results of operations.
Year 2000 Compliance
The Company is engaged in an ongoing process of assessing its exposure to
the Year 2000 issue -- the potential problems arising from computer systems that
were designed to use two digits, rather than four, to specify the year. The
Company has formed a project team (consisting of representatives from its
information technology, finance, business development, product development,
sales, marketing and legal departments) to address internal and external Year
2000 issues. By December 31, 1998, the Company had completed its internal review
of its financial and other computer systems (which include switching, billing
and other platforms) to assess Year 2000 issues. Based on this review, the
Company believes that the amount of work and expense required to address Year
2000 issues relating to its internal systems will not be material. The Company
has upgraded certain of its Northern Telecom switches to make them and their
related software Year 2000 compliant. The Company had completed this upgrade as
of June 30, 1999 at a cost of approximately $1.3 million. In addition, the
Company may be required to modify some of its other existing software. The
Company estimates that it will have updated all of its significant internal
systems to make them Year 2000 compliant and will have begun testing during the
third quarter of 1999.
In addition to assessing its own systems, the Company has retained a
consulting firm to assist it in conducting an external review of its significant
customers, suppliers and other third parties with which it does business,
including significant equipment and system providers and telecommunications
service providers, to determine their vulnerability to Year 2000 problems and
any potential impact that a lack or preparedness on such parties' behalf may
have on the Company. In particular, the Company may experience problems to the
extent that other telecommunications carriers are not Year 2000 compliant. The
Company anticipates that this external review of the Company and related third
parties will be substantially completed by September 30, 1999. The Company's
ability to determine the status of these third parties' ability to address
issues relating to Year 2000 issues is limited and there is no assurance that
these third parties will achieve full Year 2000 compliance before the end of
1999.
The Company believes that its reasonably possible worst case Year 2000
scenario is disruption of its ability to route traffic over portions of its own
network or an inability to terminate calls to certain destinations, which would
require the Company to utilize other transmission capacity at greater cost. To
the extent that a limited number of carriers experience disruption in service
due to the Year 2000 issue, the Company's contingency plan is to obtain service
from alternate carriers. However, there is no assurance that alternate carriers
will be available or, if available, that the Company can purchase transmission
capacity at a reasonable cost. In addition, in many continental European
countries there are no alternative carriers to use. Significant Year 2000
failures in the systems of the Company, alternate carriers and other third
parties (or third parties on whom they depend) would have a material adverse
effect on the Company's business.
The Company estimates the total cost for resolving its Year 2000 issues to
be approximately $2.0 million, of which approximately $1.4 million has been
spent through June 30, 1999, with the majority of the expenditures incurred in
the first two quarters of 1999 related to upgrades of its Northern Telecom
switches. In addition, the Company spent approximately $100,000 for consultant
costs through June 30, 1999. The Company's overall estimate of Year 2000-related
expenses includes the accelerated cost of replacing systems that are not Year
2000 compliant. Actual costs may, however, differ materially.
13
<PAGE> 15
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is, from time to time, a party to litigation that arises in the
normal course of business. The Company is not presently a party to any
litigation that it believes would reasonably be expected to have a material
adverse effect on its business or results of operations.
ITEM 2. CHANGES IN SECURITIES
At the annual stockholders' meeting held on May 3, 1999, the stockholders
approved an amended and restated certificate of incorporation of the Company and
amended and restated bylaws. These modifications affect the holders of the
Common Stock.
Pursuant to the stockholders' approval, the following material changes to
the Company's certificate of incorporation and other changes were effected: (i)
the number of authorized shares of Common Stock was increased from 29,250,000 to
72,000,000; (ii) the number of authorized shares of preferred stock was
increased from 250,000 to 2,500,000; (iii) a stock split of 1.038916026 shares
of Common Stock for every 1.0 shares was authorized to be completed upon
consummation of the Company's IPO; (iv) at least 80% of the Company's
stockholders must approve a material modification to the Company's bylaws; (v)
action by written consent may not be taken at a stockholders' meeting unless
approved by 66 2/3% of the Company's stockholders.
The following material changes to the Company's bylaws were effected: (i)
special meetings may be called only by the Board of Directors, the Chairman or
the President of the Company; (ii) notice of stockholder meetings must be mailed
between 10 and 60 days prior to such meeting; (iii) the size of the Board of
Directors was increased to six directors; (iv) directors may be removed only for
cause; (v) vacancies on the Board of Directors may be filled only by vote of a
majority of Directors; (vi) stockholder proposals for an annual stockholders'
meeting must be received by the Company at least 120 days prior to such annual
meeting; and (vii) at least 80% of the Company's stockholders must approve a
material modification to the Company's bylaws.
This summary description does not purport to be complete and is qualified
in its entirety by reference to the Certificate of Incorporation and Bylaws of
the Company previously filed with the Securities and Exchange Commission by the
Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 3, 1999, the Company held its annual stockholders meeting during
which all actions were taken by written consent.
The stockholders took the following action as well as certain other
actions: (i) adoption of the Company's 1999 Flexible Incentive Plan; (ii)
adoption of the Company's Employee Stock Purchase Plan; (iii) approval of an
increase in the number of authorized shares of Common Stock reserved for the
issuance of stock options under the 1996 Flexible Incentive Plan from 4,600,000
to 5,500,000 shares; (iv) approval of the Company's amended and restated
certificate of incorporation and bylaws as described in Item 2 above; (v)
ratification of the transfer of certain operating assets from the Company to a
wholly owned operating subsidiary as of January 1, 1999; (vi) appointment of the
Company's independent certified public accountants until the next annual
meeting; and (vii) re-election of the Company's existing Board of Directors of
the Company to serve until the next annual meeting.
14
<PAGE> 16
ITEM 5. OTHER INFORMATION
On August 3, 1999, the Company filed two registration statements on Form
S-8 with the Securities and Exchange Commission in order to register shares of
its Common Stock in connection with employee-related stock plans. The Company
registered 6,000,000 shares of Common Stock reserved for issuance of stock
options under its 1999 Flexible Incentive Plan and 500,000 shares of Common
Stock reserved for issuance under its Employee Stock Purchase Plan.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -- Exhibit 27.1 Financial Data Schedule.
(b) The Company filed a report on Form 8-K on April 20, 1999.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DESTIA COMMUNICATIONS, INC.
(registrant)
Date: August 13, 1999 By /s/ ALAN L. LEVY
------------------------------------
Name: Alan L. Levy
Title: President and Chief Operating
Officer
Date: August 13, 1999 By /s/ PHILLIP J. STORIN
------------------------------------
Name: Phillip J. Storin
Title: Senior Vice President and
Chief Financial Officer
16
<TABLE> <S> <C>
<ARTICLE> 5 <LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION (in thousands) EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 128,435
<SECURITIES> 0
<RECEIVABLES> 46,447
<ALLOWANCES> 5,523
<INVENTORY> 0
<CURRENT-ASSETS> 180,927
<PP&E> 132,375
<DEPRECIATION> 21,878
<TOTAL-ASSETS> 401,408
<CURRENT-LIABILITIES> 98,269
<BONDS> 379,791
0
0
<COMMON> 312
<OTHER-SE> (77,910)
<TOTAL-LIABILITY-AND-EQUITY> 401,408
<SALES> 138,590
<TOTAL-REVENUES> 138,590
<CGS> 98,737
<TOTAL-COSTS> 98,737
<OTHER-EXPENSES> 55,089
<LOSS-PROVISION> 1,437
<INTEREST-EXPENSE> 19,529
<INCOME-PRETAX> (49,709)
<INCOME-TAX> 0
<INCOME-CONTINUING> (49,709)
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<EXTRAORDINARY> 0
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<NET-INCOME> (49,709)
<EPS-BASIC> (2.07)
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