<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20529
----------
FORM 10-Q
(MARK ONE)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 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 0-25961
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, 3RD FLOOR, PARAMUS, N.J. 07652
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(201) 226-4500
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
45 BROADWAY, 30TH 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.
CLASS OUTSTANDING AT OCTOBER 31, 1999
----- --------------------------------
Common Stock, $.01 par value 31,564,341
Non-voting Common Stock, $.01 par value 109,598
================================================================================
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
1999 THIRD QUARTER REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
-------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -- Three
and Nine months ended September 30, 1998 and
September 30, 1999 (unaudited).......................................... 3
Consolidated Balance Sheets -- December 31, 1998
(derived from audited financial statements) and
September 30, 1999 (unaudited).......................................... 4
Consolidated Statements of Cash Flows -- Nine
months ended September 30, 1998 and
September 30, 1999 (unaudited)......................................... 5
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................................ 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 9-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 15
Item 2. Changes in Securities........................................................ 15
Item 5. Other Information............................................................ 15
Item 6. Exhibits and Reports on Form 8-K............................................. 15
SIGNATURES............................................................................................. 17
</TABLE>
<PAGE>
PART 1. 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 September 30, Nine Months Ended September 30,
1998 1999 1998 1999
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
REVENUES $50,542 $88,225 $140,956 $226,815
COST OF SERVICES 36,047 62,678 103,088 161,415
-------------------- -------------------- -------------------- --------------------
Gross profit 14,495 25,547 37,868 65,400
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 22,364 32,557 57,121 89,083
DEPRECIATION AND AMORTIZATION 3,030 7,629 7,131 20,393
-------------------- -------------------- -------------------- --------------------
Loss from operations (10,899) (14,639) (26,384) (44,076)
INTEREST EXPENSE, net (8,105) (9,977) (20,382) (29,506)
FOREIGN CURRENCY EXCHANGE (LOSS) GAIN, net (32) (6) 80 (43)
OTHER EXPENSE, net (223) (306) (492) (1,012)
-------------------- -------------------- -------------------- --------------------
Net loss ($19,259) ($24,928) ($47,178) ($74,637)
==================== ==================== ==================== ====================
BASIC AND DILUTED LOSS PER SHARE ($0.93) ($0.80) ($2.27) ($2.81)
==================== ==================== ==================== ====================
WEIGHTED AVERAGE NUMBER OF BASIC AND DILUTED
COMMON SHARES OUTSTANDING 20,778 31,351 20,778 26,521
==================== ==================== ==================== ====================
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
3
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------------- -------------------
(see note) (unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $118,218 $85,834
Marketable securities 21,343 -
Accounts receivable, net of allowance for doubtful accounts
of $4,086 and $5,164, respectively 33,351 52,518
Prepaid expenses and other current assets 3,409 6,445
Restricted cash and securities 9,590 4,359
------------------- -------------------
Total current assets 185,911 149,156
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net of
accumulated depreciation and amortization of $12,418 and $28,546 107,249 146,325
respectively
Debt issuance costs 12,244 11,238
Intangibles 49,488 49,863
Other assets 2,439 3,123
Restricted cash and securities 30,877 16,978
------------------- -------------------
Total assets $388,208 $376,683
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $33,352 $34,870
Accrued expenses and other current liabilities 31,131 41,003
Interest accrued on Senior Notes 9,590 4,359
Current maturities of other long-term debt 16,232 9,486
Current maturities of obligations under capital lease 154 619
Current maturities of notes payable - related party 308 -
Deferred revenue 4,739 3,577
------------------- -------------------
Total current liabilities 95,506 93,914
OTHER LONG-TERM DEBT 37,379 23,689
OBLIGATIONS UNDER CAPITAL LEASE 193 968
SENIOR NOTES 343,176 359,730
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 September 30, 1999, respectively;
20,778,321 and 31,547,066 shares issued and outstanding at December 31, 1998 and
September 30, 1999, respectively 208 315
Non-voting common stock, par value $.01; 500,000 shares authorized;
135,890 and 104,388 shares issued and outstanding at December 31, 1998 and
September 30, 1999, respectively 1 1
Additional paid-in capital 6,923 82,420
Accumulated other comprehensive loss (856) (1,173)
Accumulated deficit (108,743) (183,181)
------------------- -------------------
Total stockholders' equity (deficit) (102,467) (101,618)
------------------- -------------------
Total liabilities and stockholders' equity (deficit) $388,208 $376,683
=================== ===================
</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.
4
<PAGE>
DESTIA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
1998 1999
------------------ ------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (47,178) $ (74,637)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 7,131 20,393
Provision for doubtful accounts 4,663 1,078
Accreted interest expense 12,574 16,554
Changes in assets and liabilities:
Increase in accounts receivable (24,343) (19,446)
Increase in prepaid expenses and
other current assets (1,823) (2,485)
Decrease (increase) in other assets 262 (1,377)
Increase in accounts payable, accrued
expenses and other current liabilities 18,460 4,244
Increase (decrease) in deferred revenue 1,436 (1,162)
------------------ ------------------
Net cash used in operating activities (28,818) (56,838)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (56,363) (53,274)
Net cash paid in acquisitions (22,327) (2,292)
(Purchase) sale of marketable securities - net (58,097) 21,343
------------------ ------------------
Net cash used in investing activities (136,787) (34,223)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock 43 59,000
Net proceeds from exercise of stock options -- 1,716
Proceeds from long-term debt 6,773 --
Repayments of long-term debt (986) (20,436)
Repayments of capital leases (110) (425)
Repayments of notes payable - related party (7) (308)
Proceeds from senior notes 175,785 --
Payment of debt issuance costs (7,144) --
------------------ ------------------
Net cash provided by financing activities 174,354 39,547
------------------ ------------------
Increase (decrease) in cash and cash equivalents,
(including restricted cash) 8,749 (51,514)
Cash and cash equivalents, beginning of period
(including restricted cash) 126,630 158,685
------------------ ------------------
Cash and cash equivalents, end of period
(including restricted cash) $ 135,379 $ 107,171
================== ==================
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 22,540 $ 12,308
SUPPLEMENTAL DISCLOSURE OF NONCASH
ACTIVITIES:
Accretion of preferred stock $ 68 --
Capital leases executed 8,000 1,665
Acquisition in exchange for common stock -- 675
Note issued for purchase of minority interest - Telco 14,035 --
Conversion of preferred stock into common stock -- 14,421
DETAILS OF ACQUISITIONS:
Fair value of assets acquired $ (1,936) $ (1,615)
Goodwill (21,092) (2,592)
Liabilities assumed 701 1,915
------------------ ------------------
Net cash paid for acquisitions ($22,327) ($2,292)
================== ==================
</TABLE>
The accompanying notes to the financial statements are an integral part of these
statements.
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. 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 the 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. Certain reclassifications
have been made to 1998 information to conform to the presentation used in 1999.
Operating results for the three-month and nine-month periods ended September 30,
1999 are not necessarily indicative of the results that may be expected for any
other interim period or 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 September 30, 1998 and
1999 includes the following components:
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1998 1999
-------- --------
Net Loss ........................................ $(19,259) $(24,928)
Other Comprehensive Income, net of tax:
Foreign Currency Translation Adjustments ....... 47 (170)
-------- --------
Comprehensive Loss .............................. $(19,212) $(25,098)
======== ========
Accumulated other comprehensive loss (all of which relates to foreign
currency translation adjustments) as of December 31, 1998 and September 30, 1999
is as follows:
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ ------------
Balance at beginning of period $ (104) $ (856)
Translation Adjustments.......................... (752) (317)
------ --------
Balance at end of period......................... $ (856) $ (1,173)
====== =========
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 third 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. 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
6
<PAGE>
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"),
at $10.00 per share. The net proceeds to the Company (after deducting
underwriter discounts and expenses) were approximately $59.0 million.
The Company has used and continues 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.
NOTE H -- VIATEL MERGER AGREEMENT
On August 27, 1999, the Company announced that it had entered into a merger
agreement with Viatel, Inc. in a stock-for-stock transaction that is expected to
close by year-end, subject to the satisfaction of numerous conditions,
underlying regulatory consents and stockholder approvals. Under the terms of the
proposed transaction, Viatel will exchange 0.445 of a share of its common stock
for each share of Common Stock of Destia. The special meeting of Destia
stockholders to approve the merger agreement has been scheduled for November 19,
1999.
7
<PAGE>
NOTE I -- 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
nine-month periods ended September 30, 1998 and September 30, 1999.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1999 % CHANGE
------ ------ --------
(IN THOUSANDS)
REVENUE
North America........................ $ 33,307 $ 55,247 66%
United Kingdom....................... 11,665 18,341 57%
Continental Europe................... 5,570 14,637 163%
-------- -------- ----
Total................................ $ 50,542 $ 88,225 75%
======== ======== ====
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1999 % CHANGE
------ ------ --------
(IN THOUSANDS)
REVENUE
North America......................... $ 80,354 $ 141,924 77%
United Kingdom........................ 45,555 50,101 10%
Continental Europe.................... 15,047 34,790 131%
-------- --------- ---
Total................................. $140,956 $ 226,815 61%
======== ========= ===
8
<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) failures or delays in
completing the merger with Viatel; (xii) changes in international settlement
rates; and (xiii) 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 to: (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"),
at $10.00 per share. The net proceeds to the Company (after deducting
underwriter discounts and offering related expenses) were approximately $59.0
million.
On August 27, 1999, the Company announced that it had entered into a merger
agreement with Viatel, Inc in a stock-for-stock transaction that is expected to
close by year-end, subject to the satisfaction of numerous conditions,
underlying regulatory consents and stockholder approvals. Under the terms of the
proposed transaction, Viatel will exchange 0.445 of a share of its common stock
for each share of Common Stock of Destia. The special meeting of Destia
stockholders to approve the merger agreement has been scheduled for November 19,
1999.
9
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1999 % CHANGE
------ ------ ---------
(IN THOUSANDS)
REVENUE
North America............................ $ 33,307 $ 55,247 66%
United Kingdom........................... 11,665 18,341 57%
Continental Europe....................... 5,570 14,637 163%
-------- -------- ---
Total.................................... $ 50,542 $ 88,225 75%
======== ======== ===
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1998 1999 % CHANGE
------ ------ ---------
(IN THOUSANDS)
BILLABLE MINUTES OF USE
North America.............................. 154,355 408,289 165%
United Kingdom............................. 70,913 159,418 125%
Continental Europe......................... 11,876 87,668 638%
------- ------- ---
Total...................................... 237,144 655,376 176%
======= ======= ===
REVENUES. Revenues for the three months ended September 30, 1999 increased
75% to $88.2 million from $50.5 million for the three months ended September 30,
1998. Billable minutes of use increased 176% to 655.4 million in the current
quarter from 237.1 million in the comparable quarter of the prior year. The
number of customer accounts serviced by the Company increased 94% to
approximately 540,000 at September 30, 1999 from approximately 277,000 at
September 30, 1998. The revenue increase was primarily attributable to strong
retail customer growth in all of our geographic markets, which was partially
offset by declining prices. Retail and wholesale revenues in the third quarter
of 1999 increased 68% and 119%, respectively, over the comparable period of
1998. The increase in European revenues occurred despite a significant decline
in exchange rates for European currencies against the U.S. dollar since the
third quarter of 1998, which negatively impacted revenues for the third quarter
of 1999. 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. In addition, as the Company implements additional
interconnections with national carriers in Continental Europe, its minutes of
national traffic, which carries lower revenue per minute than international
traffic, increases.
GROSS PROFIT. Gross margins improved to 29.0% in the third quarter of 1999
from 28.7% in the third quarter of 1998 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 third quarter of 1999 were $32.6
million, representing 36.9% of revenue, compared to $22.4 million, or 44.2% of
revenue, in the third quarter of 1998. 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. In absolute terms, SG&A expenses for the third quarter increased by
two-thirds of the amount that total revenue increased, with a 46% SG&A increase
over the third quarter of 1998, while total revenues increased by 75% during the
same period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased to $7.6 million for the three months ended September 30, 1999 from
$3.0 million for the three months ended September 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 $11.6
million in the third quarter of 1999 from $10.9 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
10
<PAGE>
to additional borrowings to finance the cost to acquire switches and other
telecommunications equipment and IRUs. Interest income decreased to $1.6 million
in the third quarter of 1999 from $2.8 million in the third quarter of 1998,
primarily due to lower levels of cash and marketable securities.
NET LOSS. The Company reported a net loss of $24.9 million for the third
quarter of 1999 compared to a net loss of $19.3 million in the same period a
year ago. The increase in net loss primarily reflects the additional
depreciation expense associated with the continuing build-out of the Destia
network in the United States, the United Kingdom and continental Europe.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1998 1999 % CHANGE
(IN THOUSANDS)
REVENUE
North America ................................ $ 80,354 $ 141,924 77%
United Kingdom ............................... 45,555 50,101 10%
Continental Europe ........................... 15,047 34,790 131%
-------- --------- ---
Total ........................................ $140,956 $ 226,815 61%
======== ========= ===
NINE MONTHS ENDED SEPTEMBER 30,
1998 1999 % CHANGE
(IN THOUSANDS)
BILLABLE MINUTES OF USE
North America ................................ 366,655 932,851 154%
United Kingdom ............................... 211,478 367,542 74%
Continental Europe ........................... 29,181 188,195 545%
-------- --------- ---
Total ........................................ 607,314 1,488,588 145%
======== ========= ===
REVENUES. Revenues for the nine months ended September 30, 1999 increased
61% to $226.8 million from $141.0 million for the nine months ended September
30, 1998. Billable minutes of use increased 145% to 1.49 billion in the current
nine-month period from 607.3 million in the comparable nine-month period of the
prior year. The revenue increase was primarily attributable to strong retail
customer growth in all of our geographic markets, which was partially offset by
declining prices. Retail revenues in the first nine months of 1999 increased 83%
over the prior year nine-month period. Wholesale revenues in the first nine
months of 1999, as compared to the first nine months of 1998, declined and
represented approximately 12% of consolidated revenues in the first nine months
of 1999, compared to 23% in the first nine months of 1998. The reduction of
wholesale revenues was the result of the Company's intentional shift away from
certain low margin U.K. 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. The gross profit margin of 28.8% reported for the nine months
ended September 30, 1999 increased 1.9 percentage points from the 26.9% achieved
in the nine months ended September 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 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 56%
from $57.1 million for the first nine months of 1998 to $89.1 million for the
first nine months of 1999. However, SG&A expenses as a percentage of revenues
decreased to 39.3% in the 1999 nine-month period from 40.5% in the comparable
period of the prior year. The SG&A increase in absolute terms 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 and to create
brand awareness.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased to $20.4 million for the nine months ended September 30, 1999 from
$7.1 million for the nine months ended September 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.
11
<PAGE>
INTEREST EXPENSE AND INTEREST INCOME. Interest expense increased to $35.0
million for the first nine months of 1999 from $29.4 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, and, to a lesser extent, the interest expense incurred from borrowings
to finance the acquisition of switches and other telecommunications equipment
and IRUs. Interest income decreased to $5.5 million in the first nine months of
1999 from $9.0 million in the first nine months of 1998, primarily due to lower
levels of cash and marketable securities.
NET LOSS. The Company reported a net loss of $74.6 million for the first
nine months of 1999 compared to a net loss of $47.2 million for the first nine
months of 1998. The increase in net loss primarily reflects increased
depreciation and amortization expenses and a higher level of net interest
expense. In addition, 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 added to the higher level of net loss.
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 provided primarily by NTFC
Capital Corporation and an equity investment in preferred stock of the Company
by Princes Gate Investors.
At September 30, 1999, Destia had approximately $85.8 million in
unrestricted cash, cash equivalents and marketable securities, compared to
$139.6 million at December 31, 1998. In addition, Destia had $21.3 million of
restricted cash and securities (which will be used to pay interest expense on
the 1997 Notes through July 15, 2000) as of September 30, 1999. Destia's net
cash used in operating activities was $56.8 million for the nine months ended
September 30, 1999, and was primarily attributable to a net loss of $74.6
million and an increase in accounts receivable of $19.4 million, partially
offset by depreciation and amortization expense of $20.4 million and accreted
interest expense of $16.6 million. Net cash used in investing activities of
$34.2 million for the nine months ended September 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 $39.5 million was primarily related to the
net proceeds from the sale of Common Stock in the IPO of approximately $59.0
million, which was partially offset by repayments of long-term debt of $20.4
million.
Destia currently expects capital expenditures during 1999 to be below $75
million, of which $55.2 million was expended during the first nine months of
1999. These investments are 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 systems
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.
On May 11, 1999, the Company completed its IPO of 6,500,000 shares of Common
Stock 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.
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's acquisition
activity, however, is currently restricted by the terms of the Company's merger
agreement with Viatel. The success of the Company's acquisition activities, if
any, 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.
12
<PAGE>
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 nine months
of 1998 and 1999, approximately 43% 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
September 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 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 migrated its billing platform that was not Year 2000 compliant to a billing
platform that is Year 2000 compliant in the United States and United Kingdom.
The Company is still in the process of implementing the migration in continental
Europe. 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 or discontinue the
use of some of its other existing software, including its billing software. The
Company estimates that it will have updated all of its significant internal
systems, including its billing software, to make them Year 2000 compliant by the
end of November, and it began testing these systems 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
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's external review of the Company and related third parties was
substantially completed by October 31, 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
13
<PAGE>
carriers will be available or, if available, that the Company can purchase
transmission capacity at a reasonable cost. In addition, in many 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 $1.6 million has been
spent through September 30, 1999, with the majority of the expenditures incurred
in the first two quarters of 1999 related to upgrades of its Northern Telecom
switches. 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.
14
<PAGE>
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 a special meeting of the Board of Directors on August 27, 1999, an
agreement to enter into a merger with Viatel, Inc. was approved. The merger is a
stock for stock exchange in which Destia shareholders would receive 0.445 shares
of Viatel common stock for each share of Destia Common Stock upon the
consummation of the merger. The special stockholders' meeting to approve the
merger agreement has been scheduled for November 19, 1999.
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.
On August 27, 1999, the Company announced that it had entered into a merger
agreement with Viatel, Inc. in a stock for stock transaction that is expected to
close by year-end, subject to the satisfaction of numerous conditions,
underlying regulatory consents and stockholder approvals. Under the terms of the
proposed transaction, Viatel will exchange 0.445 share of its common stock for
each share of Destia's common stock. The Company filed a definitive proxy
statement on October 19, 1999 with the Securities and Exchange Commission
pursuant to Section 14a of the Securities Exchange Act of 1934. The proxy
statement describes the proposed merger and solicits the Company's stockholders'
approval of the merger and certain other related transactions. The special
stockholders' meeting to approve the merger agreement has been scheduled for
November 19, 1999.
On November 5, 1999, the Company amended its credit facility with NTFC
Capital Corporation ("NTFC") to increase the amount of NTFC's aggregate
commitment by $25.0 million from approximately $24.0 million to approximately
$49.0 million and to effect other amendments, including a waiver by NTFC of its
right to consent to the merger between Destia and Viatel. This waiver will
remain in effect until 90 days after the merger closes. If NTFC has not
consented to the merger before the waiver expires, then Destia, which will be a
subsidiary of Viatel at such time, will be obligated to prepay the outstanding
amount borrowed, which as of November 5, 1999 was approximately $28.9 million,
in addition to prepayment penalties of approximately $150,000.
The indentures governing Destia's 13 1/2% senior notes due 2007 ("13 1/2%
Notes") and Destia's 11% senior discount notes due 2008 ("11% Notes") require
Destia to offer to repurchase promptly after the acquisition by Viatel (as it is
currently structured) all of the outstanding notes at a purchase price equal to
101% of the outstanding principal amount of the 13 1/2% Notes and 101% of the
accreted value of the 11% Notes. As of September 30, 1999, the outstanding
principal amount of the 13 1/2% Notes was approximately $150.7 million and the
accreted value of the 11% Notes was approximately $209.1 million. Based on the
current and historical trading prices of the 13 1/2% Notes, Destia does not
expect holders of these notes to tender them for repurchase. Based on the
current and historical trading prices of the 11% Notes, Destia considers it
likely that holders of these notes would tender them for repurchase.
Accordingly, Viatel recently launched an exchange offer and consent
solicitation for the 11% Notes in which Viatel offered cash consideration and
Viatel's 11 1/2% senior notes due 2009 to holders who tender their Destia 11%
Notes, and Viatel has offered cash consideration to holders who consent to the
elimination of substantially all of the restrictive covenants contained in the
indenture governing the 11% Notes. This offer is conditioned, among other
things, on the closing of the merger. To the extent the exchange offer is not
accepted and the merger is consummated, Destia will be required to offer to
purchase the 13 1/2% Notes and the 11% Notes at a purchase price equal to 101%
of their outstanding principal amount and accreted value, respectively. If
Viatel and Destia conclude prior to completion of the merger that it is likely
that the repurchase of Destia notes that will be tendered in the repurchase
offer will adversely affect the cash available to fund the combined company's
business plan, Viatel and Destia may restructure the merger in order to avoid
the obligation to make a repurchase offer.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -- Exhibit 27.1 Financial Data Schedule.
(b) The Company filed a Current Report on Form 8-K on August 31, 1999
(Item 5 - other information).
16
<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.
DESTIA COMMUNICATIONS, INC.
(registrant)
Date: November 15, 1999 By /s/ ALAN L. LEVY
--------------------------------------
Name: Alan L. Levy
Title: President, Chief Operating Officer and Chief
Financial Officer
Date: November 15, 1999 By /s/ RICHARD L. SHORTEN, JR.
--------------------------------------
Name: Richard L. Shorten, Jr.
Title: Senior Vice President and General Counsel
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION (in thousands) EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 90,193
<SECURITIES> 0
<RECEIVABLES> 52,518
<ALLOWANCES> 5,164
<INVENTORY> 0
<CURRENT-ASSETS> 149,156
<PP&E> 146,325
<DEPRECIATION> 28,546
<TOTAL-ASSETS> 376,683
<CURRENT-LIABILITIES> 93,914
<BONDS> 383,419
0
0
<COMMON> 316
<OTHER-SE> (101,934)
<TOTAL-LIABILITY-AND-EQUITY> 376,683
<SALES> 226,815
<TOTAL-REVENUES> 226,815
<CGS> 161,415
<TOTAL-COSTS> 161,415
<OTHER-EXPENSES> 88,005
<LOSS-PROVISION> 1,078
<INTEREST-EXPENSE> 29,506
<INCOME-PRETAX> (74,637)
<INCOME-TAX> 0
<INCOME-CONTINUING> (74,637)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (74,637)
<EPS-BASIC> (2.81)
<EPS-DILUTED> (2.81)
</TABLE>
