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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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: July 31, 2002
------------------
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 0-2180
COVISTA COMMUNICATIONS, INC.
----------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-1656895
---------- ----------
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4803 Highway 58 North, Chattanooga, TN 37416
--------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 648-9700
150 Clove Road, 8th Floor, Little Falls, NJ 07424
(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 September 20, 2002
- ----------------------------- ---------------------------------
Common Share, $.05 par value 12,682,752 shares
COVISTA COMMUNICATIONS, INC.
AND SUBSIDIARIES
SECOND QUARTER REPORT ON FORM 10-Q
INDEX
-----
Page No.
PART I. FINANCIAL INFORMATION
Condensed Consolidated Statements of Operations and
Comprehensive (Loss) Income
Six months ended July 31, 2002 and 2001
(unaudited) and three months ended
July 31, 2002 and 2001 (unaudited) 3
Condensed Consolidated Balance Sheets
July 31, 2002 (unaudited), and
January 31, 2002 4-5
Condensed Consolidated Statements of Cash Flows
Six months ended July 31, 2002 and 2001
(unaudited) 6
Notes to Condensed Consolidated Financial
Statements (unaudited) 7-12
Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-18
Critical Accounting Policies 18-20
PART II. OTHER INFORMATION
Items 1-5 Not Applicable 21
Item 6 None 21
CERTIFICATIONS AND SIGNATURES 22-26
2
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE (LOSS) INCOME
(Unaudited)
Six Months Ended Three Months Ended
---------------- ------------------
July 31, July 31,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
NET SALES $ 50,229,089 $ 58,336,354 $ 25,680,947 $ 28,892,331
Costs and Expenses
Cost of sales 36,156,414 49,087,504 18,483,048 22,349,264
Selling, general 20,870,727 14,069,658 11,328,925 6,500,708
------------ ------------ ------------ ------------
and administrative
Total costs and expenses 57,027,141 63,157,162 29,811,973 28,849,972
OPERATING (LOSS) (6,798,052) (4,820,808) (4,131,026) 42,359
INCOME
Other Income (Expense)
Interest income 44,328 75,641 42,711 40,392
Other income 26,471 271,588 112,146 18,331
Interest expense (255,313) (33,527) (141,751) (15,522)
------------ ------------ ------------ ------------
Total other income (184,514) 313,702 13,106 43,201
NET (LOSS) INCOME (6,982,566) (4,507,106) (4,117,920) 85,560
BEFORE TAXES
Income tax benefit 511,220 -- 511,220 --
NET (LOSS) INCOME $ (6,471,346) $ (4,507,106) $ (3,606,700) $ 85,560
============ ============ ============ ============
BASIC (LOSS) EARNINGS PER COMMON SHARE
$ (0.51) $ (0.47) $ (0.28) $ 0.01
------------ ------------ ------------ ------------
DILUTED (LOSS) EARNINGS PER COMMON SHARE
$ (0.51) $ (0.47) $ (0.28) $ 0.01
------------ ------------ ------------ ------------
DIVIDENDS PER SHARE N/A N/A N/A N/A
See notes to condensed consolidated financial statements.
3
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, January 31,
2002 2002
----------- ------------
(Unaudited) (Note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,946,670 $ 1,379,038
Investments available for sale -- 439,773
Accounts receivable, net 14,416,801 10,252,837
Notes Receivable 500,000
Prepaid network capacity 400,000 --
Prepaid expenses and other
current assets 265,497 1,373,780
----------- -----------
TOTAL CURRENT ASSETS 19,028,968 13,945,428
----------- -----------
PROPERTY AND EQUIPMENT, NET 15,160,610 12,489,626
----------- -----------
OTHER ASSETS:
Deferred line installation costs, net 187,587 174,785
Intangible assets, net 2,977,260 386,142
Goodwill, net 8,346,660 --
Other assets 3,937,737 4,260,810
----------- -----------
TOTAL OTHER ASSETS 15,449,244 4,821,737
----------- -----------
TOTAL ASSETS $49,638,822 $31,256,791
=========== ===========
NOTE: The balance sheet at January 31, 2002 has been taken from the audited
consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
4
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, January 31,
2002 2002
(Unaudited) (Note)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 2,776,880 $ 381,405
Accounts payable 21,598,660 19,465,274
Other current and accrued liabilities 7,397,246 4,434,795
Salaries and wages payable 448,356 991,012
------------ ------------
TOTAL CURRENT LIABILITIES 32,221,142 25,272,486
------------ ------------
OTHER LONG-TERM LIABILITIES 2,578 15,466
------------ ------------
LONG-TERM DEBT 9,377,029 4,400,000
------------ ------------
TOTAL LIABILITIES 41,600,749 29,687,952
------------ ------------
SHAREHOLDERS' EQUITY
Common Stock 710,872 619,288
Additional paid-in-capital 38,483,074 25,650,098
Accumulated deficit (29,710,433) (23,255,107)
Treasury stock (1,445,440) (1,445,440)
TOTAL SHAREHOLDERS' EQUITY 8,038,073 1,568,839
------------ ------------
$ 49,638,822 $ 31,256,791
============ ============
NOTE: The balance sheet at January 31, 2002 has been taken from the
audited consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
5
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
July 31,
2002 2001
---- ----
OPERATING ACTIVITIES:
Net loss $ (6,471,346) $ (4,507,106)
Adjustment for non-cash charges 4,200,556 3,866,088
Gain on sale of marketable securities -- (262,234)
Changes in assets and liabilities, net of
effect of acquisition of business (2,216,064) (1,382,933)
------------ ------------
Net cash used in by operating activities (4,486,854) (2,286,185)
------------ ------------
INVESTING ACTIVITIES:
Cash acquired in purchase of business 1,179,165 90,402
Proceeds on sale of marketable securities 439,773 1,141,302
Purchases of marketable securities -- (608,369)
Purchase of prepaid network capacity -- (4,000,000)
Purchase of property and equipment (1,345,415) (3,539,473)
Additions to deferred line installation costs (12,802) (26,420)
------------ ------------
Net cash provided by (used in) 260,721 (6,942,558)
investing activities
FINANCING ACTIVITIES:
Sale of Common Stock 277,433 6,300,000
Proceeds of loan from shareholder 6,375,000 4,000,000
Bank Borrowing 141,332 (302,014)
------------ ------------
Net cash provided by financing activities 6,793,765 9,997,986
NET INCREASE IN CASH AND
CASH EQUIVALENTS 2,567,632 769,243
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,379,038 2,691,889
------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 3,946,670 $ 3,461,132
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ 119,321 $ 33,527
Tax refund (511,220) --
Business Acquired
Fair Value of Assets $ 23,028,630
Less Liability Assumed (10,056,503)
Less: Stock Consideration for business acquired (14,151,299)
Cash acquired from business acquired (1,179,172)
See notes to condensed consolidated financial statements
6
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements 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. They do not include all information and notes required by
generally accepted accounting principles for complete financial statements.
However, except as disclosed herein, there has been no material change in the
information disclosed in the notes to the consolidated financial statements
included in the Annual Report on Form 10-K of Covista Communications, Inc.
(formerly Total-Tel USA Communications, Inc.) and Subsidiaries (Covista) for the
fiscal year ended January 31, 2002. In the Opinion of Management, all
adjustments (consisting of normal recurring accruals only) considered necessary
for a fair presentation have been included. Operating results for the six-month
period ended July 31, 2002 are not necessarily indicative of the results that
may be expected for the year ending January 31, 2003.
NOTE B -- NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations."
SFAS 141 requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method.
The adoption of SFAS 141 did not have a significant impact on the Company,
beyond the cessation of goodwill amortization on future business combinations.
As of July 31, 2002 Covista has $8,307,850 of goodwill recorded on its books in
connection with the Capsule acquisition.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective
January 1, 2002. SFAS 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes provisions for the
reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the identification of reporting units for purposes of assessing potential future
impairments of goodwill. SFAS 142 also requires Covista to complete a
transitional goodwill impairment test six months from the date of adoption.
7
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
143 ("SFAS 143"), "Accounting for Asset Retirement Obligations", which is
effective for Covista's fiscal years beginning February 1, 2003. SFAS 143
requires recording the fair value of a liability for an asset retirement
obligation in the period in which it is incurred, and a corresponding increase
in the carrying value of the related long-lived asset. Over time, the liability
is accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, it is either settled for its recorded amount or a gain or loss upon
settlement is recorded. Covista is currently assessing but has does not expect
the impact of SFAS 143 to be material to its financial position and results of
operations.
In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144 ("SFAS 144"), "Accounting for the Impairment or Disposal of Long Lived
Assets", which is effective for all fiscal years beginning after December 15,
2001. SFAS 144 replaces the Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long Lived Assets and for Long-Lived Assets to
be Disposed Of". SFAS 144 requires that long-lived assets to be measured at the
lower of the carrying amount or fair value, less cost to sell, whether included
in continuing operations or in discontinued operations. Covista is currently
assessing, but has does not expect the impact of SFAS 144 to be material to its
financial position and results of operations.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections".
This statement eliminates the automatic classification of gain or loss on
extinguishment of debt as an extraordinary item of income and requires that such
gain or loss be evaluated for extraordinary classification under the criteria of
Accounting Principles Board No. 30 "Reporting Results of Operations". This
statement also requires sales-leaseback accounting for certain lease
modifications that have economic effects that are similar to sales-leaseback
transactions and makes various other technical corrections to existing
pronouncements. This statement will be effective for Covista for the year ending
January 31, 2003. The adoption of this statement will not have a material effect
on our results of operations or financial position.
8
In July 2002, the Financial Accounting Standards Board issued SFAS
No.146,"Accounting for Costs Associated with Exit or Disposal Activities." SFAS
No.146 will supersede Emerging Issues Task Force Issue No.94-3,"Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No.146
requires that costs associated with an exit or disposal plan be recognized when
incurred rather than at the date of a commitment to an exit or disposal plan.
SFAS No.146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002.
NOTE C -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted (loss)
earnings per common share:
Six Months Three Months
Ended Ended
July 31,2002 July 31,2001 July 31, 2002 July 31, 2001
------------ ------------ ------------- -------------
Numerator:
(Loss) Earnings available to $ (6,471,346) $ (4,507,106) $ (3,606,700) $ 85,560
Common Shareholders used
in basic and diluted (loss)
earnings per Common Share
Denominator:
Weighted-average number of 12,568,524 9,568,783 12,670,805 10,819,405
Common Shares used in basic
(loss) earnings per Common
Share
Effect of diluted securities:
Common share options(1) -- -- -- 286,103
------------ ------------ ------------ ------------
Weighted-average number 12,568,524 9,568,783 12,670,805 11,105,508
Of Shares and diluted potential
Common Shares used in diluted
(loss) earnings per Common Share
Basic (loss) earnings $ (0.51) $ (0.47) $ (0.28) $ 0.01
------------ ------------ ------------ ------------
Per Common Share
Diluted (loss) earnings
per Common Share $ (0.51) $ (0.47) $ (0.28) $ 0.01
------------ ------------ ------------ ------------
(1) Common Shares subject to options are not included in the calculation of
diluted loss per Common Share for the six month periods ended July 31, 2002 and
2001, and the three-month period ended July 31, 2002, as doing so would be
antidilutive due to the net loss per common share.
9
NOTE D -- SEGMENT REPORTING
Covista sells telecommunications services to three distinct segments: a
retail segment consisting primarily of small to medium sized businesses
principally within the United States, a wholesale segment with sales to other
telecommunications carriers throughout the world, and a segment that generates
sales through direct mailing campaigns (KISSLD) which started in the beginning
of fiscal year 2003 for residential customers in network supported areas on the
East Coast.
In addition to direct costs, each segment is allocated a portion of the
Covista's switch and operating expenses. The allocation of expense is based upon
the minutes of use flowing through the Covista's switch network. There are no
intersegment sales. Assets are held at the consolidated level and are not
allocable to the operating segments. Covista evaluates performance on operating
earnings of the three business segments.
Summarized financial information concerning Covista's reportable segments
is shown in the following table:
Retail Wholesale KISS LD Total
------ --------- ------- -----
Six Months Ended July 31, 2002
Net Sales $ 38,351,030 $ 8,290,447 $ 3,587,612 $ 50,229,089
Gross margin 14,613,102 (765,346) 224,919 14,072,675
Operating loss (465,571) (1,556,080) (4,766,401) (6,798,052)
Six Months Ended July 31, 2001
Net Sales $ 24,721,154 $ 33,615,200 N/A $ 58,336,354
Gross margin 7,809,725 1,439,125 N/A 9,248,850
Operating loss (3,722,735) (1,098,073) N/A (4,820,808)
NOTE E -- INCOME TAXES
For the fiscal year ended January 31, 2002, Covista established a valuation
allowance against its net deferred tax asset due to the uncertainty of realizing
certain tax credits and loss carryforwards. In the quarter ended July 31, 2002,
Covista continued this accounting treatment and recorded a full valuation
allowance against the net tax benefit arising from the quarter's net operating
loss. The result is that the net deferred tax asset of approximately $14,278,000
is fully offset by the valuation allowance and, as such, does not appear on the
balance sheet. It will be reflected at net recoverable value when the net
deferred tax asset can be utilized in future periods.
During the second quarter of the fiscal year 2003, Covista received a tax refund
of $511,220; which reflected a change in IRS regulations regarding net operating
loss carrybacks.
10
NOTE F -- ACQUISITION OF CAPSULE COMMUNICATIONS
On February 8, 2002, Covista completed the merger (the "Merger") of its wholly
owned subsidiary CCI Acquisitions, Inc. ("CCI") with and into Capsule
Communications, Inc. ("Capsule"), pursuant to the Agreement and Plan of
Reorganization dated as of July 17, 2001 among Covista, CCI and Capsule (the
"Merger Agreement"). As a result of the Merger, Capsule became a wholly owned
subsidiary of Covista. Covista has accounted for the combination with Capsule as
a purchase business combination under SFAS 141 ("Business Combination"). Capsule
is a switch-based interexchange carrier providing long distance telephone
communications services primarily to small and medium-size business customers as
well as residential accounts.
The results of Capsule's operations have been included in Covista's statement of
operations since the Merger Date. The total purchase price was approximately
$12.7 million and consisted of approximately 1.7 million shares of Covista's
Common Stock, valued at approximately $11.6 million determined based on the
average closing market price of Covista's Common Stock at the time of
acquisition, options assumed from Capsule for the purchase of 286,975 shares of
Common Stock valued at approximately $1.1 million using the Black-Scholes
Valuation Model, using an exercise price of $3.49 to $20.10, expected lives of
0.5 to 2 years, 156% volatility, 2.69% discount rate, and Covistas' stock price
of $6.71. In addition, Covista incurred approximately $0.3 million in
acquisition expenses.
The following table summarizes the estimate of fair value of the assets acquired
and liabilities assumed at the Merger Date.
Cash $ 1,179,172
Current assets 5,717,428
Property and equipment 3,544,981
Other assets 89,199
Intangible assets 4,190,000
Goodwill 8,307,850
Total assets acquired 23,028,630
------------
Current liabilities (10,056,503)
------------
Total purchase price $(12,972,127)
------------
The intangible assets acquired from Capsule were identified as its business
customer relationships valued at $1,288,000, its residential customer
relationships valued at $376,000, and its agent relationships valued at
$2,526,000. These intangibles are being amortized over periods of 10 months to
four years. The customer and agent relationships are amortized using
double-declining method.
11
The unaudited pro forma information below represents the consolidated results of
operations as if the merger with Capsule had occurred as of February 1, 2001 and
2002. The unaudited pro forma information has been included for comparative
purposes and is not indicative of the results of operations of the consolidated
Company had the merger occurred as of February 1, 2001, nor is it necessarily
indicative of future results.
Six Months Three Months
Ended Ended
July 31,2002 July 31,2001 July 31, 2002 July 31, 2001
------------ ------------ ------------- -------------
Total Revenue $ 50,229,089 $ 77,658,853 $ 25,680,946 $ 38,467,264
Loss attributable to (6,471,346) (5,017,533) (3,606,700) (79,733)
Common stockholders
Basic net loss per (0.51) (0.40) (0.28) (0.01)
common share
NOTE G -- SHAREHOLDER LOAN
As of July 31, 2002, Covista received loans from Henry G. Luken III, its
Chairman of the Board and principal shareholder, in the amount of $7,000,000.
These loans will be converted to equity upon shareholder approval which approval
is expected to be sought at Covista's Annual Shareholder meeting planned to be
held prior to the end of calendar year 2002. Covista currently has the necessary
votes to approve the conversion.
NOTE H -- NOTES PAYABLE
Covista has a revolving $2,000,000 credit facility with Wells Fargo Business
Credit Corporation, which was renegotiated and amended on May 11, 2002, which
expires on May 11, 2004. Interest on the revolving credit facility is currently
calculated at the prime lending rate plus 2 3/4%, on a minimum loan balance of
$750,000. The loan is collateralized by accounts receivable and fixed and
intangible assets of Covista. As of July 31, 2002, Covista's outstanding balance
on its credit facility was $1,378,352 leaving approximately $621,648 available
based on collateral for future borrowing under the credit facility.
The loan agreement contains covenants and restrictions, which, among other
things, require maintenance of certain subjective financial performance criteria
and restrict encumbrance of assets, creation of indebtedness and places
limitations on annual capital expenditures. Covista was not in compliance with
several of its covenants in the Loan and Security Agreement, however, Covista
received verbally advised waivers related to such conditions of non-compliance
relevant to the filed period ended July 31, 2002.
On June 17, 2002, Covista entered into a term loan agreement with a major
Tennessee bank. Covista has received $3,775,000 payable monthly in 36
installments at a fixed interest rate of 4.595% for the first year and
converting to 2% over LIBOR on June 17, 2003 and each year thereafter. This term
loan is secured by certain of the company's switching equipment and Certificates
of Deposit provided by Covista's chairman of the board.
12
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULT OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS:
Certain matters discussed in this Quarterly Report on Form 10-Q are
"forward-looking statements" intended to qualify for the safe harbor from
liability provided by the Private Securities Litigation Reform Act of 1995.
These forward-looking statements generally can be identified as such because the
context of the statement will include words such as Covista "believes",
"anticipates", "expects", or words of similar import. Similarly, statements
which describe Covista's future plans, objectives or goals are also
forward-looking statements. Such forward-looking statements are subject to
certain risks and uncertainties which are described in close proximity to such
statements and which could cause actual results to differ materially from those
anticipated as of the date of this Report. Shareholders, potential investors and
other readers are urged to consider these factors in evaluating the forward-
looking statements and are cautioned not to place undue reliance upon such
forward-looking statements. The forward-looking statements included herein are
made only as of the date of this Report and Covista undertakes no obligation to
publicly update such forward-looking statements to reflect subsequent events or
circumstances, except as required under applicable laws.
Results of Operations
Net sales were approximately $50,229,000 for the first six months of the current
fiscal year, a decrease of approximately $8,107,000 or 13.9% as compared to the
approximately $58,336,000 recorded in the first six months of the prior fiscal
year. Net sales for the second quarter of the current fiscal year were
approximately $25,681,000, a decrease of approximately $3,211,000 or 11.1% as
compared to the approximately $28,892,000 recorded in the second quarter of the
prior fiscal year.
Wholesale revenue for the six-month period decreased to approximately $8,290,000
a decrease of approximately $25,325,000 or 75.3%. This decrease is largely
attributable to the loss of facilities due to the September 11, 2001 terrorist
attacks on New York City, after which Covista decided to exit such market. For
the quarter ended July 31, 2002, wholesale revenue was approximately $3,656,000,
a decrease of approximately $12,326,000 or 77.1% over the comparative quarter in
the last fiscal year. Wholesale minutes sold in the six-month period ended July
31, 2002 were approximately 116,037,000 minutes, a decrease of approximately
184,834,000 minutes or 61.4%. Wholesale minutes sold in the quarter ended July
31, 2002 were approximately 49,887,000 minutes, a decrease of approximately
97,868,000 minutes or 66.2%. For the six-month period the decline in revenue
does not parallel the increased usage due to an approximate 37.1% reduction of
price, because of the competitive wholesale market place, a trend that Covista
believes is likely to continue. Covista has also attempted to limit its exposure
by tightening up credit limits on all wholesale accounts. A rate decrease of
approximately 34.0% was experienced in the three-month period ended July 31,
2002.
Retail revenues for the six-month period were approximately $41,939,000, an
increase of approximately $17,218,000 or 69.6%. For the quarter ended July 31,
2002, retail revenues were approximately $22,025,000, an approximately
$9,114,000 or 70.6% increase over the comparative quarter in the last fiscal
year. Retail minutes sold in the
13
six-month period ended July 31, 2002 were approximately 582,433,000 minutes, an
increase of approximately 268,790,000 minutes or 85.7%. Retail minutes sold in
the quarter ended July 31, 2002 were approximately 312,200,000 minutes, an
increase of approximately 151,206,000 minutes, or 94.0%.
KissLD revenues (a section within the retail revenue segement) for the six
month period were approximately $3,588,000. KissLD is a new product offering
for the current fiscal year, and therefore, does not have prior year
comparatives. The total minutes sold for KissLD for the six month period was
approximately 45,961,000. For the three month period ended July 31, 2002,
sales were approximately $1,800,000 for KissLD. KissLD minutes sold for the
three month period ended July 31, 2002 were approximately 34,739,000.
For the six-month period ended July 31, 2002, Covista has experienced a
reduction of approximately 0.68 cents per minute or 10.3% to an average billing
rate per minute of 5.97 cents during the current fiscal year.
For the three-month period ended July 31, 2002, the volume increase of
approximately 151,206,000 minutes was attributed to the acquisition of Capsule
Communications of 143,311,000 minutes and the addition of a new residential
product of 34,739,000 minutes and a concerted sales effort to acquire new
customers. Covista experienced a reduction of approximately 0.54 cents per
minute or 8.3% to an average billing rate of 5.94 cents per minute in the
three-month period ended July 31, 2002. This rate decrease amounts to
approximately $1,685,850 for the quarter which was offset by the approximately
151,206,000 minute volume increase, resulting in the approximately $9,114,000
increase in retail revenue for the three-month period ended July 31, 2002.
Cost of sales for the current six-month period was approximately $36,156,000, a
decrease of approximately $12,932,000 or 26.3%. These changes were favorable in
relation to the 13.9% decrease in sales for the six-month period. The decrease
in cost of sales was primarily due to a decrease in carrier volume of
approximately $25,325,000.
Cost of sales for the three-month period ended July 31, 2002 was approximately
$18,483,000, a decrease of approximately $3,866,000 or 17.3%. These changes were
favorable in relation to the 11.1% decrease in revenues in the second quarter.
The decrease in cost of sales was primarily due to the reduced volume of carrier
traffic of approximately $12,326,000. These savings were offset by the cost of
additional retail volume of approximately $9,114,000.
14
Selling, general and administrative expense for the six-month period increased
to approximately $20,870,000, an increase of approximately $6,800,000 or 48.3%.
For the quarter ended July 31, 2002, selling, general and administrative expense
was approximately $11,329,000, an approximate $4,828,000, or a 74.3% increase
over the comparative quarter in the last fiscal year. The increase of
approximately $6,800,000 for the six-month period was primarily due to an
increase in sales, general and administrative costs acquired in the Capsule
merger of $6,878,000; additional amortization of intangible assets related to
the Capsule merger of $1,600,000; an increase in rent expenses related to the
addition of the Tennessee Call Center and the addition of the Chattanooga and
Dallas Switch sites of $390,000. These increases were partially offset by
reductions in provision for doubtful accounts of $911,000 due to a reduction in
high risk wholesale business, a reduction in salary expense of $1,309,000 due to
reductions in force and miscellaneous cost savings of $140,000. For the three
month period ended July 31, 2002, the increase of approximately $4,828,000 was
comprised primarily of increased sales, general and administrative costs
acquired from the Capsule merger of $3,980,000 and additional amortization of
intangibles related to the same merger of $736,000; partially offset by a
miscellaneous cost savings of $112,000.
For the reasons described above, the operating loss for the six-month period
ended July 31, 2002 was approximately $6,789,000, an increase of approximately
$1,968,000 from the six-month period ended July 31, 2001. The operating loss for
the three-month period ended July 31, 2002 was approximately $4,131,000, an
increase of approximately $4,173,000 over the prior year's three-month period
ended July 31, 2001.
Total other loss, net, for the current six-month period was approximately
$185,000 as compared to approximately $314,000 of total other income, net,
recorded in the prior year six-month period. Total other income for the current
fiscal quarter was approximately $13,000 as compared to approximately $43,000 of
total other income recorded in the comparable period during the prior fiscal
year.
During the second quarter of the fiscal year 2003, Covista received a tax refund
of $511,220; which reflected a change in IRS regulations regarding net operating
loss carrybacks.
Basic and diluted loss per Common Share was $0.51 per share for the current
six-month period ended July 31, 2002 as compared to $0.47 loss per share for the
six-months ended July 31, 2001. Basic and diluted loss per Common Share was
$0.28 per share for the current three-month period ended July 31, 2002 as
compared to earnings of $0.01 per Common Share for the three-months ended July
31, 2001.
15
Liquidity and Capital Resources
At July 31, 2002, Covista had a working capital deficit of approximately
$13,192,000, an increase of approximately $1,865,000 as compared to January 31,
2002. The ratio of current assets to current liabilities at July 31, 2002 was
0.55:1, as compared to the ratio of 0.8:1 at January 31, 2002. The decrease in
working capital and increase in working capital deficit at July 31, 2002 was
primarily attributable to a decrease in investments available for sale of
approximately $440,000; a decrease in notes receivable of $500,000; a decrease
in prepaid expenses of approximately $1,108,000; an increase in current portion
of long term debt of approximately $2,395,000; in increase of accounts payable
of approximately $2,133,000; and an increase in other current liabilities of
$2,962,000. These reductions in working capital were partially offset by an
increase in cash of approximately $2,568,000; an increase in accounts receivable
of approximately $4,164,000; an increase in prepaid network capacity of
$400,000; and a decrease in accrued salaries payable of approximately $543,000.
On February 21, 2002, Covista announced that on February 20, 2002, its Board of
Directors had approved the private sale of additional Common Stock of up to
$12,500,000. The investment includes a cash infusion of $7,000,000 already
received , contribution of $3,300,000 of fixed assets and $2,200,000 cash to be
received upon shareholder approval. The total debt or Common Stock and the
conversion of all existing long-term debt for debt or Common Stock to Common
Stock at the rate of $5.00 per share, which was the closing price for the Common
Stock on the date authorized by the Board. The commitment for funding for the
investment and the conversion of the indebtedness is anticipated to come
primarily from the current Chairman of Covista's Board or his designee's and is
subject to shareholder's approval at the next Annual Meeting, or a special
meeting of Shareholders to be convened for such purpose. Finally, the company is
planning to obtain a line of credit from a bank. If such line of credit is not
obtained, the Chairman of the Board has committed to loaning $2 million to the
Company through at least the second quarter of fiscal 2004.
The increase in cash of approximately $2,568,000 was the result primarily of
proceeds from the sale of Common Stock of $277,000; proceeds from a long term
loan received from a major shareholder of approximately $6,375,000; the proceeds
from the sale of marketable securities of approximately $440,000; cash acquired
in the acquisition of Capsule Communications of approximately $1,179,000 and net
proceeds from bank borrowings of approximately $141,000. These increases were
offset by cash used in operations of approximately $4,487,000; and purchases of
property and equipment of approximately $1,345,000.
Capital Expenditures
Capital expenditures for the six-month period ended July 31, 2002 were
approximately $1,345,000. The major expenditures were approximately $1,163,000
for new switches installed as part of Covista's network expansion; approximately
$57,000 for equipment and fixtures for Covista's Tennessee call center; and
approximately $125,000 for software and hardware upgrades to the local area
network (LAN).
16
Capital expenditures for the remainder of Fiscal 2003 are estimated at
approximately $125,000 and are expected to be financed from funds provided from
operations.
Prepaid Network Capacity
On July 2, 2001, Covista received a loan from Henry G. Luken III, its Chairman
of the Board and principal shareholder, in the amount of $4,000,000. This loan
will be converted to equity upon shareholder approval which approval is expected
to be sought at Covista's Annual Shareholder meeting planned to be held prior to
the end of calendar year 2002. Covista currently has the necessary votes to
approve the conversion.
The proceeds of the loan were used to purchase a 10-year commitment for
approximately 2.8 billion DS-0 channel miles of telecommunications network
capacity from an unaffiliated party. The unaffiliated party has filed for
Chapter 11 reorganization; however, as of the date of this report, is continuing
to perform under the agreement, and therefore, management does not believe that
this asset is impaired. However, management was unable to determine if this
carriers' bankruptcy filing will impact the carrier's ability to fulfill its
obligation to Covista under the prepaid network capacity agreement.
As of the date hereof, Covista has used 30 million DS-0 channel miles of
telecommunications network capacity against the 2.8 billion DS-0 total prepaid
network capacity, of which $400,000 has been classified as a current asset and
based on anticipated usage in the next 12 months the remainder of the prepaid
capacity amount of approximately $3,200,000 is included in other assets.
Subsequent Event
Covista completed its move to Chattanooga and took a charge in the period of
approximately $273,000 for severance costs for terminated employees, which this
charge has been fully expensed in the current period.
Accounts Receivable and Credit Risk
Accounts receivable subjects Covista to the potential for credit risk with
customers in the retail and wholesale segments. To reduce credit risk, Covista
performs ongoing evaluations of its customers' financial condition and, except
in situations where the risk warrants it, Covista does not require a deposit or
other collateral. Accounts receivable of approximately $14,417,000, net of the
reserve for uncollectible accounts totaling approximately $6,586,000, represents
approximately 30.0% of the total assets of Covista.
No one customer accounts for greater than eight percent of the total revenues.
In the wholesale segment, which contains Covista's largest customers, Covista
has been able to reduce credit risk by using reciprocal arrangements with
certain customers, which are also Covista's suppliers, to offset outstanding
receivables. Covista has historically maintained a better than three percent
ratio of bad debts to revenues. For the three-month period ended July 31, 2002,
this ratio was less than 2.4%. Covista also measures accounts receivable
turnover (as measured in days sales outstanding). For the periods ended July 31,
2002 and 2001 days sales outstanding were 89.6 days and 117.9 days,
respectively.
17
The Company is in the process of integrating the Covista and Capsule customer
service databases, and is currently processing the Capsule billing on the
Covista billing platform.
Related Party Transactions
Jay J. Miller, a Director of Covista, has provided various legal services for
Covista in Fiscal 2003. In the second quarter, Fiscal 2003, Covista accrued
$16,000 to Mr. Miller for services rendered and accrued for in Fiscal 2003. As
of July 31, 2002, Covista owed Mr. Miller $16,000. Covista believes that Mr.
Miller's fees were reasonable for the services performed and were no less
favorable to Covista than could have been obtained from an unrelated third
party.
Leon Genet, a Director of Covista, has provided agent services for Covista
through his wholly-owned Registrant, LPJ, Inc. During the second quarter, Fiscal
2003, LPJ, Inc. was paid commissions of $15,024. The commissions paid to LPJ,
Inc. were computed on the same basis as other independent agents retained by
Covista.
Covista has entered into a lease agreement for approximately 28,000 square feet
of office space in Chattanooga, Tennessee, with Henry G. Luken III Chairman of
the Board and a principal shareholder of Covista. The term of the lease is for
five years beginning September 1, 2001. The lease provides for annual rent of
$86,400 from September 1, 2001 to August 30, 2002; $115,200 from September 1,
2002 to August 30, 2003; $144,000 from September 1, 2003 to August 30, 2004,
with the last two years to be $144,000 annually adjusted for the Consumer Price
Index. Covista believes that such premises are leased on terms not less
favorable than an arm's length transaction. For the second quarter FY 2003
Covista has paid Henry G. Luken III $21,600 for rent of office space.
As of July 31, 2002, Covista received loans from Henry G. Luken III, its
Chairman of the Board and principal shareholder, in the amount of $7,000,000.
These loans will be converted to equity upon shareholder approval which approval
is expected to be sought at Covista's Annual Shareholder meeting planned to be
held prior to the end of calendar year 2002. Covista currently has the necessary
votes to approve the conversion.
CRITICAL ACCOUNTING POLICIES
----------------------------
Revenue Recognition
- -------------------
Covista's revenues, net of sales discounts, are recognized in the period in
which the service is provided, based on the number of minutes of
telecommunications traffic carried, and a rate per minute. Access and other
service fees charged to customers, typically monthly, are recognized in the
period in which service is provided.
18
Deferred Line Installation Costs
- --------------------------------
Deferred line installation costs are costs incurred by Covista for new
facilities and costs incurred for connections from within the Covista's network
to the network of other telecommunication suppliers (such as Verizon, MFS and
other carriers). Amortization of such line installation costs is provided using
the straight-line method over the contract life of the lines ranging from three
to five years.
Long-Lived Assets
- -----------------
Covista accounts for the impairment of long-lived assets and for long-lived
assets to be disposed of by evaluating the carrying value of its long-lived
assets in relation to the operating performance and future undiscounted cash
flows of the underlying businesses annually and when indications of impairment
are present. Long-lived assets to be disposed of, if any, are evaluated in
relation to the net realizable value. If impairment is indicated, the amount of
the impairment is typically calculated using discounted expected future cash
flows. The discount rate applied to these cash flows is based on Covista's
weighted average cost of capital. If the carrying value of the asset exceeds the
fair value of the asset, the difference will be charged to the results of
operations in the period in which the impairment occurred. Based on Covista's
analysis of future undiscounted cash flow, which are in excess of the carrying
value of its long-lived assets, there does not appear to be an impairment as of
July 31, 2002.
On July 2, 2001, Covista received a loan from Henry G. Luken III, its Chairman
of the Board and principal shareholder, in the amount of $4,000,000. This loan
will be converted to equity upon shareholder approval which approval is expected
to be sought at Covista's Annual Shareholder meeting planned to be held prior to
the end of calendar year 2002. Covista currently has the necessary votes to
approve the conversion.
The proceeds of the loan were used to purchase a 10-year commitment for
approximately 2.8 billion DS-0 channel miles of telecommunications network
capacity from an unaffiliated party. The unaffiliated party has filed for
Chapter 11 reorganization; however, as of the date of this report, is continuing
to perform under the agreement, and therefore, management does not believe that
this asset is impaired. However, management was unable to determine if this
carriers' bankruptcy filing will impact the carrier's ability to fulfill its
obligation to Covista under the prepaid network capacity agreement.
As of the date hereof, Covista has used 30 million DS-0 channel miles of
telecommunications network capacity against the 2.8 billion total prepaid
network capacity, of which $400,000 has been classified as a current asset and
based on anticipated usage in the next 12 months the remainder of the prepaid
capacity amount of approximately $3,200,000 is included in other assets.
19
Goodwill
- --------
Goodwill consists of the excess purchase price over the fair value of
identifiable net assets of acquired businesses. Goodwill added subsequent to
January 1, 2002 is not being amortized in accordance to SF142. The carrying
value of goodwill is evaluated for impairment on an annual basis. Management
also reviews goodwill for impairment whenever events or changes in circumstances
indicate that the carrying amount of goodwill may be impaired. If it is
determined that an impairment in value has occurred, goodwill will be written
down to the present value of the expected future operating cash flows to be
generated by the respective reporting unit.
Vendor Disputes
- ---------------
In the normal course of business Covista will file disputes with its service
suppliers. Covista accounting policy is to record the invoiced amount to cost of
sales, which may include disputed amounts. When the dispute is resolved and the
credit is received, the amount is credited to cost of sales. Open disputes
included in cost of sales for the six-month period and the three-month period
ended July 31, 2002 are approximately $109,000 and $55,000, respectively.
Intangible Assets
- -----------------
Intangible assets are carried at cost, less accumulated amortization, and are
amortized on a double-declining or straight-line basis over their expected lives
based upon managements' expectation regarding the timing of future realization.
Covista does not currently have any indefinite-lived intangible assets, which
are not subject to amortization.
Market Risk
- -----------
Market risk represents the risk of changes in value of a financial instrument,
derivative or non-derivative, caused by fluctuations in interest rates, foreign
exchange rates and equity prices. As Covista holds no marketable securities at
July 31, 2002, the exposure to interest rate risk relating to marketable
securities no longer exists. Covista does not hold any derivatives related to
its interest rate exposure. Covista also maintains long-term debt at fixed
rates. Due to the nature and amounts of Covista's note payable, an immediate 10%
change in interest rates would not have a material effect in Covista's results
of operations over the next fiscal year. Covista's exposure to adverse changes
in foreign exchange rates is also immaterial to the consolidated statements as a
whole.
20
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEMS 1 - 6 Not applicable
21
I, A. John Leach, Jr., certify that;
1) I have reviewed this quarterly report on Form 10-Q of Covista;
2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in quarterly annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Covista as of, and for, the periods presented in this
annual report;
4) Covista's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for Covista are have;
a) designed such disclosure controls and procedures to ensure
that material information relating to Covista, including
its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness Covista's disclosure controls
and procedures as of a date with 90 days prior to the
filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5) Covista's other certifying officers and I have disclosed, based on our
most recent evaluation, to Covista's auditors and the audit committee
of Covista's board of directors (or persons performing the equivalent
functions);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect Covista's
ability to record, process, summarize, and report financial
data, and I have identified for Covista's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in Covista's internal controls; and
6) Covista's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date:______________ ________________________
[Signature]
[Title]
22
I, Thomas P. Gunning., certify that;
1) I have reviewed this quarterly report on Form 10-Q of Covista;
2) Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in quarterly annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Covista as of, and for, the periods presented in this
annual report;
4) Covista's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for Covista are have;
a) designed such disclosure controls and procedures to ensure
that material information relating to Covista, including
its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness Covista's disclosure controls
and procedures as of a date with 90 days prior to the
filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5) Covista's other certifying officers and I have disclosed, based on our
most recent evaluation, to Covista's auditors and the audit committee
of Covista's board of directors (or persons performing the equivalent
functions);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect Covista's
ability to record, process, summarize, and report financial
data, and I have identified for Covista's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in Covista's internal controls; and
6) Covista's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date:______________ ________________________
[Signature]
[Title]
23
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Covista Communications, Inc. on Form
10-Q for the period ending July 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, A. John Leach, Jr.,
President and CEO of Covista Communications, Inc., certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that;
1) The report fully complies with the requirements of section 13 (a) or
15 (d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all.
material respects, the financial condition and result of operations of
Covista Communications, Inc.
Date:
------------------ ------------------------
[Signature]
[Title]
24
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Covista Communications, Inc. on Form
10-Q for the period ending July 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Thomas P. Gunning, CFO
of Covista Communications, Inc., certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that;
3) The report fully complies with the requirements of section 13 (a) or
15 (d) of the Securities Exchange Act of 1934; and
4) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of
Covista Communications, Inc.
Date:
------------------ ------------------------
[Signature]
[Title]
25
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.
COVISTA COMMUNICATIONS, INC.
(Registrant)
Date: September 20, 2002 By: /s/ A. John Leach, Jr.
-----------------------
A. John Leach, Jr.
President and Chief
Executive Officer
Date: September 20, 2002 By: /s/ Thomas P. Gunning
-----------------------
Thomas P. Gunning,
Vice President, Chief Financial
Officer and Principal Accounting
Officer
26