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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: October 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 (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 Covista (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 Covista 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 December 16, 2002
- ---------------------------- --------------------------------
Common Share, $.05 par value 12,698,752 shares
COVISTA COMMUNICATIONS, INC.
AND SUBSIDIARIES
THIRD QUARTER REPORT ON FORM 10-Q
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Condensed Consolidated Statements of Operations and
Comprehensive Loss
Nine months ended October 31, 2002 and 2001
(unaudited) and three months ended October 31,
2002 and 2001 (unaudited) 2
Condensed Consolidated Balance Sheets
October 31, 2002 (unaudited), and
January 31, 2002 3-4
Condensed Consolidated Statements of Cash Flows
Nine months ended October 31, 2002 and 2001
(unaudited) 5
Notes to Condensed Consolidated Financial
Statements (unaudited) 6-9
Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-13
PART II. OTHER INFORMATION
Items 1-5 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 23
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
ITEM 1 - FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Nine Months Ended Three Months Ended
----------------- ------------------
October 31, October 31,
----------- -----------
2002 2001 2002 2001
----------- ----------- ----------- -----------
NET SALES $77,002,274 $78,803,039 $26,773,184 $20,466,685
----------- ----------- ----------- -----------
Costs and Expenses
Cost of sales 54,341,941 64,423,267 18,185,528 15,335,763
Selling, general and administrative 30,717,399 20,990,705 9,846,672 6,921,048
----------- ----------- ----------- -----------
Total costs and expenses 85,059,340 85,413,972 28,032,199 22,256,811
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
OPERATING LOSS (8,057,066) (6,610,933) (1,259,015) (1,790,126)
----------- ----------- ----------- -----------
Other Income (Expense)
Interest income 44,576 94,392 247 18,752
Other income 26,472 305,267 33,680
Interest expense (388,457) (154,783) (133,144) (121,256)
----------- ----------- ----------- -----------
Total other income (expense) (317,409) 244,876 (132,897) (68,824)
----------- ----------- ----------- -----------
Loss before benefit from income taxes (8,374,475) (6,366,057) (1,391,912) (1,858,950)
Benefit from income taxes 511,220 - - -
----------- ----------- ----------- -----------
NET LOSS (7,863,255) (6,366,057) (1,391,912) (1,858,950)
COMPREHENSIVE LOSS $(7,863,255) $(6,366,057) $(1,391,912) $(1,858,950)
=========== =========== =========== ===========
BASIC LOSS PER COMMON SHARE $ (0.62) $ (0.64) $ (0.11) $ (0.17)
----------- ----------- ----------- -----------
DILUTED LOSS PER COMMON SHARE $ (0.62) $ (0.64) $ (0.11) $ (0.17)
----------- ----------- ----------- -----------
DIVIDENDS PER SHARE NONE NONE NONE NONE
See notes to condensed consolidated financial statements.
2
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, January 31,
2002 2002
----------- -----------
(Unaudited) (Note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,381,369 $ 1,379,038
Investments available for sale - 439,773
Notes receivable - 500,000
Accounts receivable, net 16,937,991 10,252,837
Prepaid expenses and other current assets 534,164 1,373,780
----------- -----------
TOTAL CURRENT ASSETS 20,853,524 13,945,428
----------- -----------
PROPERTY AND EQUIPMENT, NET 14,557,592 12,489,626
----------- -----------
OTHER ASSETS:
Deferred line installation costs, net 579,519 174,785
Intangible assets, net 2,441,532 -
Goodwill, net 8,307,850 -
Other assets 3,962,091 4,646,952
----------- -----------
15,290.992 4,821,737
----------- -----------
$50,702,109 $31,256,791
=========== ===========
Note: The condensed consolidated balance sheet at
January 31, 2002 has been derived from the
audited consolidated financial statements at
that date.
See notes to condensed consolidated financial statements.
3
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, January 31,
2002 2002
----------- -----------
(Unaudited) (Note)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,659,583 $ 381,405
Accounts payable 26,023,878 19,465,274
Other current and accrued liabilities 6,544,898 4,434,795
Salaries and wages payable 409,441 991,012
----------- -----------
TOTAL CURRENT LIABILITIES 34,637,801 25,272,486
----------- -----------
OTHER LONG-TERM LIABILITIES 2,578 15,466
----------- -----------
LONG-TERM NOTE PAYABLE - BANK 2,377,029 --
LONG-TERM NOTE PAYABLE - SHAREHOLDER 7,000,000 4,400,000
----------- -----------
TOTAL NOTES PAYABLE 9,377,029 4,400,000
SHAREHOLDERS' EQUITY
Common stock 711,443 619,288
Additional paid-in-capital 38,521,038 25,650,098
Accumulated deficit (31,102,339) (23,255,107)
----------- -----------
8,130,142 3,014,279
Treasury stock (1,445,440) (1,445,440)
Total Shareholders' Equity 6,684,702 1,568,839
----------- -----------
$50,702,109 $31,256,791
=========== ===========
Note: The condensed consolidated balance sheet at
January 31, 2002 has been derived from the
audited consolidated financial statements at
that date.
See notes to condensed consolidated financial statements.
4
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
October 31,
2002 2001
------------ -----------
OPERATING ACTIVITIES:
Net loss $ (7,863,255) $(6,366,057)
Adjustment for non-cash charges 6,918,842 5,691,632
Gain on sale of marketable securities - (262,234)
Changes in assets and liabilities, net of effect of
acquisitions (441,463) (2,162,645)
------------ -----------
Net cash used in operating activities (1,385,876) (3,099,304)
------------ -----------
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 (3,028,664) (4,182,146)
Proceeds from sale and leaseback transaction - 1,245,339
Additions to deferred line installation costs (464,734) (32,803)
------------ -----------
Net cash used in investing activities (1,814,466) (6,346,275)
------------ -----------
FINANCING ACTIVITIES:
Sale of common stock 315,963 6,326,666
Proceeds of loan from shareholder 2,600,000 4,000,000
Proceeds from Bank Note 3,775,000
Repayments of bank borrowings (1,488,296) (456,972)
------------ -----------
Net cash provided by financing activities 5,202,667 9,869,694
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,002,331 424,115
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,379,038 2,691,889
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,381,369 $ 3,116,004
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ 346,679 $ 46,339
Income taxes $ (511,220) $ (16,828)
Business Acquired
Fair Value of Assets excluding cash $ 21,849,458 (2,162,145)
Less Liability Assumed (10,056,503)
Less: Stock Consideration for business acquired 12,972,127
Cash Acquired 1,179,172 90,402
See notes to condensed consolidated financial statements.
5
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 nine-month
period ended October 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 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.
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 does not expect the impact of SFAS 144 to be material to its
financial position and results of operations.
6
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 sale-leaseback accounting for certain lease
modifications that have economic effects that are similar to sale-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 is not expected to have a
material effect on our results of operations or financial position.
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 per
common share:
Nine-Months Ended Three-Months Ended
October 31, October 31, October 31, October 31,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Numerator:
Loss available to $(7,863,255) $(6,366,057) $(1,391,912) $(1,858,950)
Common Shareholders used in basic
and diluted loss per Common Share
Denominator:
Weighted-average number of Common 12,612,053 9,990,562 12,697,673 10,820,365
Shares used in basic loss per
Common Share (1)
Effect of diluted securities:
Common share options - - - -
----------- ----------- ----------- -----------
Weighted-average number of Common 12,612,053 9,990,562 12,697,673 10,820,365
Shares and diluted potential Common
Shares used in diluted loss per
Common Share
Basic and diluted loss per Common Share $ (0.62) $ (0.64) $ (0.11) $ (0.17)
----------- ----------- ----------- -----------
(1) Common Shares subject to options are not included in the calculation
of diluted loss per Common Share for the nine month periods ended
October 31, 2002 and 2001, and the three-month period ended October
31, 2002, as doing so would be antidilutive due to the net loss per
Common Share.
7
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
------ --------- ------- -----
Nine Months Ended
October 31, 2002
Net Sales $60,327,000 $11,389,000 $5,286,000 $77,002,000
Gross margin 19,512,000 1,139,000 2,009,000 22,660,000
Operating loss (6,365,000) (1,128,000) (564,000) (8,057,000)
Nine-Months Ended
October 31, 2001
Net Sales $36,717,000 $42,086,000 N/A $78,803,000
Gross margin 13,062,000 1,318,000 N/A 14,380,000
Operating loss (4,457,000) (2,153,000) N/A (6,611,000)
Retail Wholesale KISS LD Total
------ --------- ------- -----
Three Months Ended
October 31, 2002
Net Sales $20,788,000 $3,099,000 $2,886,000 $26,773,000
Gross margin 7,181,000 310,000 1,097,000 8,588,000
Operating loss (1,053,000) (45,000) (161,000) (1,259,000)
Three Months Ended
October 31, 2001
Net Sales $11,996,000 $8,471,000 N/A $20,467,000
Gross margin 4,284,000 847,000 N/A 5,131,000
Operating loss (1,495,000) (295,000) N/A (1,790,000)
8
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 October 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.
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.
9
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.
Nine Months Three Months
Ended Ended
October 31, 2002 October 31, 2001 October 31, 2002 October 31, 2001
---------------- ---------------- ---------------- ----------------
Total Revenue $77,815,223 $107,019,236 $26,773,184 $29,413,441
Loss attributable to (7,770,611) (7,388,496) (1,391,912) (2,476,381)
Common stockholders
Basic net loss per (0.62) (0.74) (0.11) (0.23)
common share
NOTE G - SHAREHOLDER LOAN
As of October 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 December 19, 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, 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 October 31, 2002, Covista's outstanding balance on its
credit facility was $548,076 leaving approximately $1,451,924 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 Agreement; however, Covista received verbal
waivers related to such non-compliance relevant to the fiscal period ended
October 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.
10
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
ITEM 2
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 can generally 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 on such forward-looking
statements. The forward-looking statements included herein are only made 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 $77,002,000 for the first nine months of the
current fiscal year, a decrease of approximately $1,801,000 or 2.2% as compared
to the approximately $78,803,000 recorded in the first nine months of the prior
fiscal year. Net sales for the third quarter of the current fiscal year were
approximately $26,773,000, an increase of approximately $6,306,000 or 30.8% as
compared to the approximately $20,467,000 recorded in the third quarter of the
prior fiscal year.
Wholesale revenue for the nine-month period was approximately $11,389,000, a
decrease of approximately $30,696,620 or 73% from the nine month period ended
October 31, 2001. For the quarter ended October 31, 2002, wholesale revenue was
approximately $3,099,000, a decrease of approximately $5,372,000 or 63.4% over
the comparative quarter in the last fiscal year. Wholesale minutes sold in the
nine-month period ended October 31, 2002 were approximately 148,615,000 minutes,
a decrease of approximately 234,143,000 minutes or 61.1% from the nine-month
period ended October 31, 2001. Wholesale minutes sold in the quarter ended
October 31, 2002 were approximately 32,578,000 minutes, a decrease of
approximately 49,309,000 minutes or 60.2% from the third quarter of the prior
fiscal year. For the nine-month period, the decline in revenue also reflected
the competitive wholesale market place and the business failure of several
wholesale customers, both trends that Covista believes will continue.
Competitive pressures on sales price have resulted in a 34.7% decline in the
average selling rate. Covista also has attempted to limit its exposure to the
business failures experienced within the industry by tightening up credit limits
on all wholesale accounts. Covista has strategically reduced the Wholesale
segment of its business.
11
Retail revenues for the nine-month period were approximately $61,205,000, an
increase of approximately $24,488,000 or 66.7% from the nine-month period ended
October 31, 2001. For the quarter ended October 31, 2002, retail revenues were
approximately $20,788,000, an approximately $8,792,000 or 73.2% increase over
the comparative quarter in the last fiscal year. Retail minutes sold in the
nine-month period ended October 31, 2002 were approximately 824,279,000 minutes,
an increase of approximately 353,487,000 minutes or 75% over the nine-month
period ended October 31, 2001. Retail minutes sold in the quarter ended October
31, 2002 were approximately 276,585,000 minutes, an increase of approximately
109,487,000 minutes, or 65.5% over the third quarter of the prior fiscal year.
The increase in volume results primarily from the acquisition of Capsule
Communications. However, the decrease in revenue per minute results from the
extreme pricing pressures existing within the industry. Covista has experienced
a rate decrease of 7.3% for the nine-month period ended October 31, 2002 and
3.1% for the three-month period ended October 31, 2002. The extreme pricing
pressures experienced in the industry is a trend that the Company believes may
continue.
KissLD revenues (a product sold to retail consumers) for the nine month
period were approximately $5,286,000. 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 nine month period was approximately
103,472,000. For the three month period ended October 31, 2002, sales were
approximately $2,886,000 for KissLD. KissLD minutes sold for the three month
period ended July 31, 2002 were approximately 57,511,000.
Cost for the current nine-month period was approximately $54,342,000, a
decrease of approximately $10,081,000 or 15.6% from the nine- month period ended
October 31, 2001. These changes were favorable in relation to the 2.2% decrease
in sales for the nine-month period. The decrease in cost of sales was due
primarily to a decrease of approximately 234,143,000 wholesale minutes equating
to approximately $27,627,000. This savings was offset with the cost of the
increase in retail volume of approximately $17,595,000.
Cost of sales for the three-month period ended October 31, 2002 was
approximately $18,186,000, an increase of approximately $2,850,000 or 18.6%
from the third quarter of the prior fiscal year. These changes were favorable
in relation to the 30.8% increase in revenues in the third quarter. The
increase in cost of sales was due primarily to the Capsule acquisition.
In the normal course of business, Covista files disputes with its service
providers. Covista's 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 nine-month period and the three-month period
ended October 31, 2002 are approximately $3,116,000 and $3,007,000,
respectively.
Selling, general and administrative expense for the nine-month period increased
to approximately $30,717,000, an increase of approximately $9,727,000, or 46.3%
over the nine-month period ended October 31, 2001. For the quarter ended October
31, 2002, selling, general and administrative expense was approximately
$9,847,000; an approximate $2,926,000 or 42.2% increase over the comparative
quarter in the last fiscal year.
The increase in selling, general and administrative expenses of approximately
$9,727,000 for the nine-month period was primarily due to an increase in
commission expense of approximately $4,045,000 related to the added agent
commissions of the Capsule agent program, an increase in salaries of
approximately $2,906,000 related to the addition of Capsule salaries and
expansion of the Tennessee call center staff; an increase in marketing expense
of approximately $2,731,000 related to the KissLD marketing program, an increase
in office expense of approximately $1,265,000 due to the addition of the
Tennessee call center, the addition of Capsule general and administrative costs
G&A, and the one time relocation costs of the corporate headquarters; and other
miscellaneous selling, general and administrative expenses of $130,000. This was
partially offset by a reduction in bad debt expense of approximately $1,349,000
for the same period.
12
For the three-month period ended October 31, 2002, the net increase in selling,
general and administrative expenses of approximately $2,926,000 was comprised
primarily of increase in commission expense of approximately $1,459,000 from the
acquisition of the Capsule agent program, an increase in office expense of
approximately $626,000 due to the one time relocation costs of the corporate
headquarters to downtown Chattanooga, TN, and the addition of Capsule general
and administrative costs, an increase in salaries of approximately $436,000 from
the addition of Capsule salaries, an increase in benefits of approximately
$231,000, an increase in equipment rental of approximately $195,000, an increase
in franchise taxes of approximately $127,000, an increase in postage of
approximately $88,000, increase in marketing expense of approximately $84,000,
and other miscellaneous expenses of $8,000. This was partially offset by a
reduction in bad debt expense of approximately $172,000 and a reduction in legal
expense of $156,000.
For the reasons described above, the operating loss for the nine-month period
ended October 31, 2002 was approximately $8,057,000, an increase of
approximately $1,448,000 from the nine-month period ended October 31, 2001 The
operating loss for the three-month period ended October 31, 2002 was
approximately $1,259,000, an improvement of approximately $531,000 over the
prior year's three-month period ended October 31, 2001.
Total other expense, net, for the current nine-month period was approximately
$317,000 as compared to approximately $245,000 of total other income, net,
recorded in the prior year nine-month period. The approximately $562,000 change
for the nine-month period is primarily due to the reduction in sale of
marketable securities of approximately $262,000, offset by an increase in
interest expense of approximately $234,000 and a reduction in interest income of
approximately $50,000. Total other expense, net, for the current fiscal quarter
was approximately $133,000 as compared to approximately $69,000 of total other
expense, net, recorded in the comparable period during the prior fiscal year.
This change was due to an increase in interest expense.
Basic and diluted loss per Common Share was $0.62 per share for the current
nine-month period ended October 31, 2002 as compared to $0.64 loss per share for
the nine-months ended October 31, 2001. Basic and diluted loss per Common Share
was $0.11 per share for the current three-month period ended October 31, 2002 as
compared to $0.17 loss per Common Share for the three-months ended October 31,
2001.
Liquidity and Capital Resources
At October 31, 2002, Covista had a working capital deficit of approximately
$13,784,000, an increase of deficit of approximately $2,457,000 as compared to
January 31, 2002. The ratio of current assets to current liabilities at October
31, 2002 was 0.60:1, as compared to the ratio of 0.55:1 at January 31, 2002. The
increase in the working capital deficit at October 31, 2002 was primarily
attributable to an increase in accounts payable of approximately $6,559,000; a
decrease in prepaid expenses and other current assets of approximately $840,000
and an increase in the current portion of long term debt of approximately
$1,278,000. This was offset by an increase in accounts receivable of
approximately $6,685,000; an increase in cash and cash equivalents of
approximately $2,002,000; a decrease in investments available for sale of
approximately $440,000; and a increase in accrued liabilities of approximately
$2,110,000.
The increase in cash of approximately $2,002,000 was the result primarily of
proceeds from the sale of Common Stock of $315,963; proceeds from a long-term
loan received from a major shareholder of $2,600,000; the proceeds from the sale
of marketable securities of approximately $439,773; the proceeds of a note
payable of approximately $3,775,000 and cash acquired in the purchase of
businesses of approximately $1,179,165. These increases were offset by cash
used in operations of approximately $1,386,000; and payment of line
installation casts of approximately $405,000, purchases of Property, Plant,
and Equipment of approximately $3,029,000 and repayment of bank borrowings
of approximately $1,488,000.
13
On February 20, 2002, Covista's Board of Directors approved the private sale of
additional Common Stock of up to $12,500,000. The investment includes a
conversion into common stock, of $6,800,000 of debt, contribution of $3,500,000
of fixed assets and $2,200,000 of cash to be received at the rate of $2.867 per
share, which was the closing price for the Common Stock for 30 trading days
prior to November 1, 2002, as authorized by the Board. The commitment for
funding for the investment and the conversion of the indebtedness is from the
current Chairman of Covista's Board or his designee's and is subject to
shareholder's approval at the next Annual Meeting, to be held on December 19,
2002. Additionally, Covista has received a commitment from W. Thorpe McKenzie, a
nominee for election as a director, to purchase an additional 500,000 shares at
$2.867 per share for a total of approximately $1,434,000. Finally, the company
is seeking a line of credit from a bank. If such line of credit were 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.
Capital Expenditures
Capital expenditures for the nine-month period ended October 31, 2002 were
approximately $3,196,207. These expenditures were financed principally from the
proceeds of a long term loan received from a major shareholder. Planned spending
for the balance of the fiscal year ending January 31, 2003, includes
approximately $100,000 for additional switches and equipment to be installed as
part of Covista's network expansion. These expenditures are planned to be
financed primarily through vendor financing, sale and leaseback transactions,
and additional lines of credit, which Covista intends to negotiate with its
current lender or other sources. In addition, Covista may seek to sell
privately, additional equity or debt securities. However, there can be no
assurance that Covista shall be able to obtain such financing or, if available,
the terms thereof shall be favorable.
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 to be held December 19,
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 has been unable to determine if this
carrier's bankruptcy will adversely affect the carrier's ability to fulfill its'
obligation to Covista under the prepaid network capacity agreement.
As of October 31, 2002, Covista has used 63 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.
14
Accounts Receivable and Credit Risk
Accounts receivable subject 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 customer's financial condition and except in
situations where the risk warrants it, Covista does not require collateral.
Accounts receivable of approximately $16,938,000, net of the reserve for
uncollectible accounts totaling approximately $6,833,000, represents
approximately 33% of the total assets of Covista. No one customer accounts for
greater than eight percent of the total revenues and receivables. In the
wholesale segment, which contains Covista's largest customers, Covista has been
able to ameliorate credit risk by using reciprocal arrangements with the
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 nine-month period ended October 31,
2002, this ratio was 4%. Covista also measures net accounts receivable turnover
(as measured in days sales outstanding). For the periods ended October 31, 2002
and 2001 days sales outstanding were 59.3 days and 58.5 days respectively.
Related Party Transactions
Jay J. Miller, a Director of Covista, has provided various legal services for
Covista in Fiscal 2003. In the third quarter, Fiscal 2003, Covista accrued
$13,960 to Mr. Miller for services rendered and accrued for in Fiscal 2003. As
of October 31, 2002, Covista owed Mr. Miller $26,100.
Leon Genet, a Director of Covista, has provided agent services for Covista
through his wholly-owned Registrant, LPJ, Inc. During the third quarter, Fiscal
2003, LPJ, Inc. was paid commissions of $24,155. The commissions paid to LPJ,
Inc. were computed on the same basis as other independent agents retained by
Covista.
Covista has entered into three lease agreements for office and switch space in
Chattanooga, Tennessee, with Henry G. Luken III, Chairman of the Board and a
principal shareholder of Covista. Each lease carries a term of five years. The
leases provide for annual rent of $154,986 for fiscal year 2003; $258,290 for
fiscal year 2004; $293,336 for fiscal year 2005 and for both fiscal years of
2006 and 2007 the annual rent will be $300,000 and annually adjusted for the
Consumer Price Index. For the third quarter FY 2003 Covista has paid Henry G.
Luken III $21,600 for rent of office space.
As of October 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 provided at Covista's Annual Shareholder meeting scheduled to
be held December 19, 2002.
15
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.
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
October 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 provided at Covista's Annual Shareholder meeting planned to be held
December 19, 2002.
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 has been unable to determine if this
carrier's bankruptcy will impact the carrier's ability to fulfill its'
obligation to Covista under the prepaid network capacity agreement.
As of October 31, 2002, Covista has used 63 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 in included in other assets.
16
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 with SFAS142. 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 files disputes with its service
providers. Covista's 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 nine-month period and the three-month period
ended October 31, 2002 are approximately $3,116,000 and $3,007,000,
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.
Quantitative and Qualitative Disclosures about 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 significant marketable
securities at October 31, 2001, 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.
17
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEMS 1 - 5 Not applicable
ITEM 6 Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed in the period
18
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: December 16, 2002 By: /s/ A. John Leach, Jr.
-----------------------
A. John Leach, Jr.
President and Chief
Executive Officer
19
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: December 16, 2002 By: /s/ Thomas P. Gunning
-----------------------
Thomas P. Gunning,
Vice President, Chief Financial
Officer and Principal Accounting
Officer
20
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 October 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: December 16, 2002 By: /s/ A. John Leach, Jr.
-----------------------
A. John Leach, Jr.
President and Chief
Executive Officer
21
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 October 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: December 16, 2002 By: /s/ Thomas P. Gunning
-----------------------
Thomas P. Gunning,
Vice President, Chief Financial
Officer and Principal Accounting
Officer
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Covista has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
COVISTA COMMUNICATIONS, INC.
(Registrant)
Date: December 16, 2002 By: /s/ A. John Leach
-------------------- ---------------------
A. John Leach
President and Chief Executive Officer
Date: December 16, 2002 By: /s/ Thomas P. Gunning
------------------ ------------------------
Thomas P. Gunning,
Vice President, Chief Financial Officer
and Principal Accounting Officer
23