<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 MARCH 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 NUMBER 333-33117
------------------------
DESTIA COMMUNICATIONS, INC.
(formerly Econophone, Inc.)
(Exact name of registrant as specified in its charter)
DELAWARE 11-3132722
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
95 ROUTE 17 SOUTH, 3(RD) FLOOR, PARAMUS, N.J. 07652
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 226-4500
45 BROADWAY, 30(TH) FLOOR, NEW YORK, N.Y. 10006
(Former address of principal executive offices) (Zip Code)
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 APRIL 30, 1999
- ----------------------------------------------- ---------------------------------
<S> <C>
Common Stock, $.01 par value 20,830,267
Non-Voting Common Stock, $.01 par value 191,640
</TABLE>
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<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
1999 FIRST QUARTER REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
----------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements....................................................................... 3
Condensed Consolidated Statements of Operations--Three months ended March 31, 1998 and
March 31, 1999 (unaudited)............................................................... 3
Consolidated Balance Sheets--December 31, 1998 (derived from audited financial statements)
and March 31, 1999 (unaudited)........................................................... 4
Consolidated Statements of Cash Flows--Three months ended March 31, 1998 and March 31, 1999
(unaudited).............................................................................. 5
Notes to Condensed Consolidated Financial Statements (unaudited)........................... 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 8-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................... 13
Item 2. Changes in Securities...................................................................... 13
Item 3. Defaults Upon Senior Securities............................................................ 13
Item 4. Submission of Matters to a Vote of Security Holders........................................ 13
Item 5. Other Information.......................................................................... 14
Item 6. Exhibits and Reports on Form 8-K........................................................... 14
SIGNATURES........................................................................................... 15
</TABLE>
2
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY ECONOPHONE, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
<S> <C> <C>
1998 1999
---------- ----------
REVENUES.................................................................................. $ 41,660 $ 62,619
COST OF SERVICES.......................................................................... 31,456 44,370
---------- ----------
Gross profit............................................................................ 10,204 18,249
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.............................................. 15,484 26,615
DEPRECIATION AND AMORTIZATION............................................................. 1,678 5,849
---------- ----------
Loss from operations.................................................................... (6,958) (14,215)
INTEREST EXPENSE, net..................................................................... (5,679) (9,889)
FOREIGN CURRENCY EXCHANGE GAIN (LOSS), net................................................ 116 (44)
OTHER EXPENSE............................................................................. (73) (351)
---------- ----------
Net loss................................................................................ $ (12,594) $ (24,499)
---------- ----------
---------- ----------
BASIC AND DILUTED LOSS PER SHARE.......................................................... $ (0.61) $ (1.17)
---------- ----------
---------- ----------
WEIGHTED AVERAGE NUMBER OF BASIC AND DILUTED COMMON SHARES OUTSTANDING.................... 20,778 20,937
---------- ----------
---------- ----------
</TABLE>
3
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY ECONOPHONE, INC.)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(SEE NOTE) (UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................................................. $ 118,218 $ 77,524
Marketable securities................................................................. 21,343 25,351
Accounts receivable, net of allowance for doubtful accounts of $4,086 and $5,276 as of
December 31, 1998 and March 31, 1999, respectively.................................. 33,351 37,764
Prepaid expenses and other current assets............................................. 3,409 4,370
Restricted cash and securities........................................................ 9,590 4,359
------------ -----------
Total current assets................................................................ 185,911 149,368
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net of accumulated depreciation and
amortization of $12,418 and $16,624 as of December 31, 1998 and March 31, 1999,
respectively.......................................................................... 107,249 120,271
Debt issuance costs..................................................................... 12,244 11,913
Intangibles............................................................................. 49,488 49,285
Other assets............................................................................ 2,439 4,066
Restricted cash and securities.......................................................... 30,877 26,094
------------ -----------
Total assets........................................................................ $ 388,208 $ 360,997
------------ -----------
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable...................................................................... $ 33,352 $ 23,384
Accrued expenses and other current liabilities........................................ 31,131 40,480
Interest accrued on Senior Notes...................................................... 9,590 4,359
Current maturities of other long-term debt............................................ 16,232 16,646
Current maturities of obligations under capital lease................................. 154 149
Current maturities of notes payable--related party.................................... 308 308
Deferred revenue...................................................................... 4,739 4,036
------------ -----------
Total current liabilities........................................................... 95,506 89,362
OTHER LONG-TERM DEBT.................................................................... 37,379 34,666
OBLIGATIONS UNDER CAPITAL LEASE......................................................... 193 153
SENIOR NOTES............................................................................ 343,176 348,551
SERIES A REDEEMABLE CONVERTIBLE PREFERRED STOCK......................................... 14,421 14,442
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIENCY)
Common stock-voting, par value $.01; authorized 29,250,000 shares; 20,830,267 shares
issued and outstanding in 1998 and 1999............................................. 208 208
Non-Voting common stock, par value $.01; authorized 500,000 shares; 135,890 and
151,473 shares issued and outstanding at December 31, 1998 and March 31, 1999
respectively........................................................................ 1 2
Additional paid-in capital............................................................ 6,923 7,597
Accumulated other comprehensive loss.................................................. (856) (721)
Accumulated deficit................................................................... (108,743) (133,263)
------------ -----------
Total stockholders' equity (deficiency)............................................. (102,467) (126,177)
------------ -----------
Total liabilities and stockholders' equity (deficiency)............................. $ 388,208 $ 360,997
------------ -----------
------------ -----------
</TABLE>
Note: The December 31, 1998 Balance Sheet is derived from audited financial
statements.
4
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
(FORMERLY ECONOPHONE, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
<S> <C> <C>
1998 1999
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................................... $ (12,594) $ (24,499)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................................ 1,678 5,849
Provision for doubtful accounts...................................................... 1,326 1,190
Accreted interest expense............................................................ 2,672 5,375
Changes in assets and liabilities:
Increase in accounts receivable...................................................... (9,649) (5,603)
Increase in prepaid expenses and other current assets................................ (862) (961)
Decrease (increase) in other assets and intangibles.................................. 582 (1,926)
Increase (decrease) in accounts payable, accrued expenses and other current
liabilities........................................................................ 6,315 (5,850)
Increase (decrease) in deferred revenue.............................................. 343 (703)
----------- ----------
Net cash used in operating activities.............................................. (10,189) (27,128)
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment..................................................... (9,109) (17,228)
Net cash paid in acquisitions.......................................................... (20,980) --
Purchase of marketable securities--net................................................. (170,213) (4,008)
----------- ----------
Net cash used in investing activities.............................................. (200,302) (21,236)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt........................................................... (362) (2,299)
Repayments of capital leases........................................................... (45) (45)
Repayments of notes payable--related party............................................. (4) --
Proceeds from senior notes............................................................. 175,785 --
Payment of debt issuance costs......................................................... (7,159) --
----------- ----------
Net cash provided by (used in) financing activities................................ 168,215 (2,344)
----------- ----------
Decrease in cash and cash equivalents, (including restricted cash)....................... (42,276) (50,708)
Cash and cash equivalents, beginning of period (including restricted cash)............... 126,630 158,685
----------- ----------
Cash and cash equivalents, end of period (including restricted cash)..................... $ 84,354 $ 107,977
----------- ----------
----------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest............................................................................. $ 11,488 $ 10,875
SUPPLEMENTAL DISCLOSURE OF NONCASH ACTIVITIES:
Accretion of preferred stock........................................................... $ 23 $ 21
Acquisition in exchange for common stock............................................... -- $ 675
DETAILS OF ACQUISITIONS:
Fair value of assets acquired.......................................................... $ (1,280) --
Goodwill............................................................................... (20,401) --
Liabilities assumed.................................................................... 701 --
----------- ----------
Net cash paid for acquisitions..................................................... $ (20,980) $ 0
----------- ----------
----------- ----------
</TABLE>
5
<PAGE>
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. It is suggested that these
financial statements be read in conjunction with Destia's audited annual
consolidated financial statements. 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
period ended March 31, 1999 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999.
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 March 31, 1998 and 1999
includes the following components.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
<S> <C> <C>
1998 1999
---------- ----------
Net Loss.............................................................. $ (12,594) $ (24,499)
Other Comprehensive Income, net of tax:
Foreign Currency Translation Adjustments.............................. 57 135
---------- ----------
Comprehensive Loss.................................................... $ (12,537) $ (24,364)
---------- ----------
---------- ----------
</TABLE>
Accumulated other comprehensive loss, (all of which relates to foreign
currency translation adjustments) as of December 31, 1998 and March 31, 1999 is
as follows:
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
1998 1999
------------- -----------
<S> <C> <C>
Balance at beginning of period....................................... $ (104) $ (856)
Translation Adjustments.............................................. (752) 135
----- -----
Balance at end of period............................................. $ (856) $ (721)
----- -----
----- -----
</TABLE>
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. Income available to common
stockholders is calculated as
6
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
net income less dividends and accretion on preferred stock. There were no
dividends on preferred stock in 1998 or 1999. Diluted EPS has not been presented
since the inclusion of outstanding options would be antidilutive.
NOTE E--ACCUMULATED DEFICIT
The change in the accumulated deficit reflects net loss for the period, as
well as the accretion of preferred stock, which was approximately $23,000 and
$21,000 for the quarters ended March 31, 1998 and March 31, 1999, respectively.
NOTE F--INITIAL PUBLIC OFFERING
On February 1, 1999, the Company announced that it had filed a registration
statement with the Securities and Exchange Commission (the "Commission") for an
initial public offering of its common stock, par value $.01 per share ("Common
Stock"), which was declared effective on May 5, 1999. On that date, the Company
priced its initial public offering at $10.00 per share. 6,500,000 shares were
subsequently sold, and the Company's initial public offering was consummated on
May 11, 1999.
NOTE G--STOCK SPLIT
The financial statements retroactively reflect the approximately 1.04 to 1
stock split that occurred immediately prior to the completion of the initial
public offering referred to in Note F above.
NOTE H--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.
NOTE I--CHANGE IN AUTHORIZED SHARES
At the stockholders' annual meeting held on May 3, 1999, the stockholders
approved an increase in the number of authorized shares of Common Stock from
29,250,000 to 72,000,000 and an increase in the number of authorized shares of
preferred stock from 250,000 to 2,500,000 shares.
In addition, the Company's Board of Directors and stockholders authorized
and ratified an increase in the number of authorized shares reserved for
issuance under the 1996 Flexible Incentive Plan from 4,600,000 to 5,500,000
shares. In connection with its initial public offering, the Company's Board of
Directors and stockholders also authorized 6,000,000 shares to be reserved for
the issuance of stock options under the Company's 1999 Flexible Incentive Plan
and 500,000 shares to be reserved for issuance under the Company's Employee
Stock Purchase Plan.
7
<PAGE>
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 long
distance telecommunications services in North America and Europe. Destia's
customer base consists primarily of residential customers, commercial customers,
ethnic groups and telecommunications carriers. Destia currently offers a broad
portfolio of telecommunications services including international and domestic
long distance, prepaid and post-paid calling cards, and wholesale transmission
services.
Destia's objective is to become a leading facilities-based provider of
telecommunications services in the largest metropolitan markets in Europe and
North America. The key elements of the Company's growth strategy are to: (i)
focus on high margin retail business; (ii) leverage its existing network and
customer support infrastructure; (iii) enhance the Destia Network and
opportunistically enter new markets; (iv) expand its IP telephony capabilities;
and (v) pursue strategic acquisitions and alliances.
8
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-----------------------------------
<S> <C> <C> <C>
REVENUE 1998 1999 % CHANGE
- -------------------------------------------------------------------------------- --------- --------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
United States................................................................... $ 21,038 $ 40,502 93%
United Kingdom.................................................................. 16,038 13,235 (17)%
Continental Europe.............................................................. 4,584 8,882 94%
--------- --------- --
Total........................................................................... $ 41,660 $ 62,619 50%
--------- --------- --
--------- --------- --
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
-------------------------------------
<S> <C> <C> <C>
BILLABLE MINUTES OF USE 1998 1999 % CHANGE
- ------------------------------------------------------------------------------ ---------- ---------- -------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
United States................................................................. 90,647 228,826 152%
United Kingdom................................................................ 60,242 94,475 57%
Continental Europe............................................................ 7,837 37,870 383%
---------- ---------- ---
Total......................................................................... 158,726 361,171 128%
---------- ---------- ---
---------- ---------- ---
</TABLE>
REVENUES. Revenues for the three months ended March 31, 1999 increased 50%
to $62.6 million from $41.7 million for the three months ended March 31, 1998.
Billable minutes of use increased 128% to 361.2 million in the current quarter
from 158.7 million in the comparable prior year's quarter. The year-to-year
revenue increase was primarily attributable to strong customer growth, primarily
in the United States market. Revenues from our direct dial, calling card and
prepaid card products, collectively, increased 96% over the prior year's first
quarter level, which more than offset the significant decline in wholesale
revenues. The decline in wholesale revenues was attributable to the Company's
intentional shift away from certain low margin wholesale customers in the U.K.
Wholesale revenues may, however, increase in future periods. The increase in
revenues resulting from the growth in billable minutes was partially offset by
per-minute price reductions caused by increased competition in all of our
markets.
GROSS PROFIT. The gross profit margin of 29.1% reported for the quarter
ended March 31, 1999 increased 4.6% from the 24.5% achieved in the quarter ended
March 31, 1998. This improvement was primarily attributable to improved line
cost management, the continued expansion of Destia's network and increased
utilization of owned and leased transmission capacity, 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 margins
than wholesale services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses for the first quarter of 1999 were $26.6
million, representing 42.5% of revenue, compared to $15.5 million in the first
quarter of 1998, or 37.2% of revenue. The increase in SG&A expenses as a
percentage of revenues during the first quarter of 1999 was primarily
attributable to a lower proportion of wholesale revenues to overall revenues and
an increase in staffing-related costs and marketing and promotional expenses.
The increase in retail revenues as a percentage of total revenues contributed to
an increase in SG&A expenses because retail revenues have higher associated
selling expenses than wholesale revenues. 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 $5.8 million for the three months ended March 31, 1999 from $1.7
million for the three months ended March 31, 1998.
9
<PAGE>
This increase was substantially due to the continuing build-out of the Company's
network in the United States, the United Kingdom and Continental Europe, the
amortization of goodwill from the purchase of the VoiceNet Corporation, the
minority interest in Telco Global Communications and other smaller acquisitions
and the amortization of costs associated with the Company's issuance of its 11%
Notes ("1998 Notes").
INTEREST EXPENSE AND INTEREST INCOME. Interest expense increased to $11.8
million in the first quarter of 1999 from $8.1 million in the prior year's
comparable quarter. This increase was primarily attributable to the current
period having a full quarter's expense for the 1998 Notes, which were issued in
February 1998. Interest income decreased to $1.9 million in the first quarter of
1999 from $2.4 million in the first quarter of 1998. This decrease was primarily
due to a lower level of cash and marketable securities.
NET LOSS. The Company reported a net loss of $24.5 million for the first
quarter of 1999 compared to a net loss of $12.6 million for the first quarter of
1998. The increase is primarily due to the higher level of selling, general and
administrative expenses and higher debt service costs.
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 sale of the Company's 13 1/2% Notes issued in 1997
("1997 Notes") and the 1998 Notes and, to a lesser extent, equipment-based
financing and a $14.0 million equity investment (less fees and expenses) by
Princes Gate Investors.
At March 31, 1999, Destia had approximately $77.5 million in cash and cash
equivalents and $25.4 million in marketable securities, compared to $118.2
million in cash and cash equivalents and $21.3 million in marketable securities
at December 31, 1998. In addition, Destia had $30.5 million of restricted cash
and securities (which will be used to pay interest expense on the 1997 Notes
through July 15, 2000) as of March 31, 1999. Destia's net cash used in operating
activities was $27.1 million for the three months ended March 31, 1999, and was
primarily attributable to a net loss of $24.5 million, an increase in accounts
receivable of $5.6 million and a decrease in accounts payable, accrued expenses
and other current liabilities of $5.8 million, partially offset by accreted
interest expense of $5.4 million and depreciation and amortization of $5.8
million. Net cash used in investing activities of $21.2 million for the three
months ended March 31, 1999 was attributable to investments made primarily in
switching and other telecommunications equipment and to a lesser extent, the
purchase of marketable securities. Net cash used in financing activities of $2.3
million was primarily related to repayments of long-term debt.
Destia currently expects capital expenditures during 1999 to be below $100
million, of which $17.2 million was expended during the first three 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 transatlantic capacity on a long term basis, 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.
10
<PAGE>
The Company continually evaluates business opportunities, including
potential acquisitions, and engages in discussions with potential acquisition
candidates. 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. While the
Company has, from time to time, had discussions with other telecommunications
companies, it has no agreements in place other than those previously disclosed.
On January 29, 1999, the Company filed a preliminary Registration Statement
on Form S-1 ("Registration Statement") with the Commission to register its
Common Stock in connection with an initial public offering, which was declared
effective on May 5, 1999. On that date, the Company priced its initial public
offering at $10.00 per share. 6,500,000 shares were subsequently sold, and the
initial public offering was consummated on May 11, 1999.
FOREIGN CURRENCY EXPOSURE
Destia is exposed to fluctuations in foreign currencies relative to the U.S.
dollar because Destia bills in local currency, while transmission costs are
largely incurred in U.S. dollars and interest expense on the 1997 Notes and 1998
Notes is in U.S. dollars. For the first three months of 1998 and 1999,
approximately 49% and 34%, respectively, of Destia's revenues were billed in
currencies other than the U.S. dollar, consisting primarily of British pounds,
Deutsche marks, Swiss francs and Belgian francs. The effect of these
fluctuations on Destia's revenues for the three months ended March 31, 1998 and
1999 was immaterial. 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 March 31, 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 fiscal years
beginning after December 15, 1998. The Company has reviewed the provisions of
SOP 98-1 and does not believe adoption of this standard will have a material
effect on its 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 reviewed the provisions
of SOP 98-5 and does not believe adoption of this standard will have a material
effect on its results of operations.
11
<PAGE>
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
is upgrading certain of its Northern Telecom switches to make them and their
related software Year 2000 compliant. The Company expects this upgrade to be
completed by 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 be able to begin testing by
June 30, 1999.
In addition to assessing its own systems, the Company recently 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 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 and related third party review will be substantially completed by
September 30, 1999. The Company's ability to determine the status of these third
parties and to address issues relating to the Year 2000 issues is limited. 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 $1.0 million has been
spent through March 31, 1999, with the majority of expenditures expected to be
incurred in the first two quarters of 1999 in connection with upgrades of its
Northern Telecom switches. This estimate includes the accelerated cost of
replacing systems that are not Year 2000 compliant. Actual costs may, however,
differ materially.
12
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In February 1999 the Company's interconnection agreement in Germany with
Deutsche Telekom expired. Deutsche Telekom, as a market-dominating operator, is
nevertheless obligated to grant the Company access to Deutsche Telekom's
network. Certain aspects of this required access may be determined by the German
regulatory authority ("RegTP"). On February 25, 1999, the Company initiated
legal action through its German subsidiary requesting the RegTP to issue a
preliminary and final order to ensure continued interconnection between Destia
and Deutsche Telekom on commercially reasonable terms. On May 6, 1999, the RegTP
issued a ruling favorable to the Company.
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 initial public offering; (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 as exhibits to Amendment No.3 to the Company's
Registration Statement.
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
13
<PAGE>
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.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits--Exhibit 27.1 Financial Data Schedule.
(b) The Company filed reports on Form 8-K on February 2, 1999, February 18,
1999 and April 20, 1999.
14
<PAGE>
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.
<TABLE>
<S> <C> <C>
DESTIA COMMUNICATIONS, INC.
(registrant)
Date: May 17, 1999 By: /s/ ALAN L. LEVY
--------------------------------------
Name: Alan L. Levy
Title: President and Chief Operating Officer
Date: May 17, 1999 By: /s/ PHILLIP J. STORIN
--------------------------------------
Name: Phillip J. Storin
Title: Senior Vice President and Chief Financial
Officer
</TABLE>
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION (in thousands) EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 77,524
<SECURITIES> 25,351
<RECEIVABLES> 5,276
<ALLOWANCES> 5,276
<INVENTORY> 0
<CURRENT-ASSETS> 149,368
<PP&E> 136,895
<DEPRECIATION> 16,624
<TOTAL-ASSETS> 360,997
<CURRENT-LIABILITIES> 89,362
<BONDS> 383,370
0
14,442
<COMMON> 208
<OTHER-SE> (126,384)
<TOTAL-LIABILITY-AND-EQUITY> 360,997
<SALES> 62,619
<TOTAL-REVENUES> 62,619
<CGS> 44,370
<TOTAL-COSTS> 44,370
<OTHER-EXPENSES> 25,425
<LOSS-PROVISION> 1,190
<INTEREST-EXPENSE> 9,889
<INCOME-PRETAX> (24,499)
<INCOME-TAX> 0
<INCOME-CONTINUING> (24,499)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-PRIMARY> (1.17)
<EPS-DILUTED> (1.17)
</TABLE>
