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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: April 30, 2003
-------------------
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.)
721 Broad Street, Suite 200 Chattanooga, TN 37402
--------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 648-9700
4803 Highway 58 North, Chattanooga, TN 37416
(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 June 1, 2003
- ---------------------------- ---------------------------
Common Share, $.05 par value 17,783,092 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 for
three months ended April 30, 2003 and 2002 (unaudited) 3
Condensed Consolidated Balance Sheets
April 30, 2003 (unaudited), and
January 31, 2003 4-5
Condensed Consolidated Statements of Cash Flows
Three months ended April 30, 2003 and 2002
(unaudited) 6
Notes to Condensed Consolidated Financial
Statements (unaudited) 7-12
Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-15
Critical Accounting Policies 16-18
PART II. OTHER INFORMATION
Items 1-5 Not Applicable 19
Item 6 None
CERTIFICATIONS AND SIGNATURES 20-24
2
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Three Months Ended April 30,
2003 2002
---- ----
NET REVENUE $23,269,857 $24,548,143
----------- -----------
Costs and Expenses
Cost of revenue 13,288,202 17,673,366
Selling, general and administrative 9,116,437 8,300,497
Depreciation & Amortization 1,567,096 1,229,294
Other compensation -- 12,011
----------- -----------
Total costs and expenses 23,971,735 27,215,168
----------- -----------
OPERATING LOSS (701,878) (2,667,025)
----------- -----------
Other Income (Expense)
Interest income 4,909 1,617
Other 372 (85,675)
Interest expense (81,204) (113,562)
----------- -----------
Total other income (expense) (75,923) (197,620)
----------- -----------
Loss before income taxes (777,801) (2,864,644)
Income taxes -- --
----------- -----------
NET LOSS (777,801) (2,864,644)
BASIC LOSS PER COMMON SHARE $(0.04) $(0.23)
----------- -----------
DILUTED LOSS PER COMMON SHARE $(0.04) $(0.23)
----------- -----------
See notes to condensed consolidated financial statements.
3
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, 2003 January 31, 2003
-------------- ----------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,173,194 $ 3,444,307
Accounts receivable, net 15,045,639 15,716,015
Prepaid expenses and other current assets 831,169 626,574
----------- -----------
TOTAL CURRENT ASSETS 20,050,002 19,786,896
----------- -----------
PROPERTY AND EQUIPMENT, NET 14,221,252 15,150,416
----------- -----------
OTHER ASSETS:
Deferred line installation costs, net 564,670 473,688
Intangible assets, net 6,268,233 6,786,967
Goodwill 8,205,850 8,205,850
Other assets 486,275 646,581
----------- -----------
TOTAL OTHER ASSETS 15,525,028 16,113,086
----------- -----------
TOTAL ASSETS $49,796,282 $51,050,398
=========== ===========
See notes to condensed consolidated financial statements.
4
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, 2003 January 31, 2003
-------------- ----------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 4,374,669 $ 2,827,999
Accounts payable 12,776,025 15,073,691
Other current and accrued liabilities 11,470,908 11,024,151
Salaries and wages payable 535,119 397,430
------------- ------------
TOTAL CURRENT LIABILITIES $29,156,721 29,323,271
------------- ------------
OTHER LONG-TERM LIABILITIES 228,253 223,434
------------- ------------
LONG-TERM DEBT 1,496,175 1,810,759
------------- ------------
TOTAL LIABILITIES 30,881,149 31,357,464
------------- ------------
SHAREHOLDERS' EQUITY:
Common Stock 965,976 965,976
Additional paid-in-capital 52,834,984 52,834,984
Accumulated deficit (33,440,387) (32,662,586)
Treasury stock (1,445,440) (1,445,440)
------------- ------------
TOTAL SHAREHOLDERS' EQUITY 18,915,133 19,692,934
------------- ------------
$49,796,282 $51,050,398
============= ============
See notes to condensed consolidated financial statements.
5
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended April 30,
2003 2002
---- ----
OPERATING ACTIVITIES:
Net loss $ (777,801) $(2,864,644)
Adjustment for non-cash charges 2,191,494 2,031,156
Changes in assets and liabilities, net of effect of acquisition of business (1,706,712) (1,264,737)
------------ -----------
Net cash used in by operating activities (293,019) (2,098,225)
------------ -----------
INVESTING ACTIVITIES:
Cash acquired in purchase of business 1,179,172
Proceeds on sale of marketable securities -- 439,773
Purchase of property and equipment (83,620) (425,071)
Additions to deferred line installation cost (126,560) (19,248)
------------ -----------
Net cash provided used in investing activities (210,180) 1,174,626
------------ -----------
FINANCING ACTIVITIES:
Sale of Common Stock -- 174,140
Bank Borrowing - net of repayment 1,232,086 42,506
Note payable to related party -- 2,600,000
------------ -----------
Net cash provided by financing activities 1,232,086 2,816,646
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 728,887 1,893,047
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,444,307 1,379,038
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $4,173,194 $3,272,085
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $64,001 $6,295
Business Acquired
Fair Value of Assets -- $21,524,458
Less Liability Assumed -- (10,056,503)
Less Stock Consideration for business acquired -- (12,647,127)
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. and Subsidiaries (Covista) for the fiscal year ended January 31, 2003. 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 three-month period ended April 30, 2003 are not
necessarily indicative of the results that may be expected for the year ending
January 31, 2004. Certain reclassifications have been made to conform prior
years' balances to the current year presentation.
Revenue Recognition
The Company'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
The Company defers charges from other common carriers related to the
cost of installing telephone transmission facilities (lines). Amortization of
these costs is provided using the straight-line method over the related contract
life of the lines ranging from three to five years.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
7
Concentrations of Credit Risk
The Company sells its telecommunications services and products
primarily to small to medium size businesses, residential and wholesale
customers. The Company performs ongoing credit evaluations of both its retail
and wholesale customers. The Company generally does not require collateral,
however when circumstances warrant, deposits are required. Recent conditions in
the telecommunications industry have given rise to an increase in potential
doubtful accounts. Allowances are maintained for such potential credit losses.
The Company has entered into offset arrangements with certain of its customers,
who are also vendors, allowing for the ability to offset receivables against the
Company's payable balance.
NOTE B - NEW ACCOUNTING PRONOUNCEMENTS
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN
45"), "Guarantees," an interpretation of FASB Statement No. 5, "Accounting for
Contingencies." This interpretation elaborates on the disclosures to be made by
a guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. Covista has adopted FIN 45 and
there has not been a material impact on its financial position or results of
operations.
In January 2003, FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities ("FIN 46"). FIN 46 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns or
both. FIN 46 also requires disclosures about variable interest entities that a
company is not required to consolidate but in which it has a significant
variable interest. Covista has adopted FIN 46 and there has not been a material
impact on its financial position or results of operations.
NOTE C - STOCK BASED COMPENSATION
The following disclosure complies with the adoption of SFAS No. 123,
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure - an amendment of FASB Statement No. 123", and includes pro forma
net loss as if the fair value based method of accounting had been applied:
Three Months Ended April 30,
2003 2002
---- ----
Net Loss as reported (000's) $(778) $(2,865)
Stock-based compensation expense included in reported net loss -- --
Total stock-based compensation expense determined under fair
value based method for all options (000's) (58) (87)
----- -------
Pro forma net loss (000's) $(836) $(2,952)
===== =======
Three Months Ended April 30,
2003 2002
---- ----
Basic Earnings Per Share:
As reported $(.04) $(0.23)
Pro forma $(.05) $(0.24)
Diluted Earnings Per Share:
As reported $(.04) $(0.23)
Pro forma $(.05) $(0.24)
For purposes of pro forma disclosures under SFAS 123, the estimated
fair value of the options is assumed to be amortized to expense over the
options' vesting period. The fair value of the options granted has been
estimated at the various dates of the grants using the Black-Scholes
option-pricing model with the following assumptions:
o Fair market value based on the Company's closing common stock
price on the date the option is granted;
o Risk-free interest rate based on the weighted averaged U.S.
treasury note rates;
o Volatility based on the historical stock price over the expected
term;
o No expected dividend yield based on future dividend payment
plans.
8
NOTE D - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss
earnings per common share:
Three Months Ended April 30,
2003 2002
---- ----
Numerator:
Loss available to Common Shareholders
used in basic and diluted loss per Common Share $(777,801) $ (2,864,644)
Denominator:
Weighted-average number of Common Shares used in
basic loss earnings per Common Share 17,783,092 12,462,885
Effect of diluted securities:
Common share options (1) -- --
----------- ------------
Weighted-average number of Common Shares and diluted potential
Common Shares used in diluted loss per Common Share 17,783,092 12,462,885
----------- ------------
Basic loss Per Common Share $(0.04) $(0.23)
----------- ------------
Diluted loss per Common Share $(0.04) $(0.23)
----------- ------------
(1) Common Shares subject to options are not included in the calculation of
diluted loss per Common Share for the three-month period ended April 30, as
doing so would be antidilutive due to the net loss per common share.
9
NOTE E - SEGMENT REPORTING
The Company sells telecommunication services to three distinct
segments: a retail segment, consisting primarily of small to medium size
businesses, a wholesale segment, with sales to other telecommunications carriers
and KISSLD which targets residential users.
In addition to direct costs, each segment is allocated a proportion
of the Company's operating expenses, including utilization of its switch and
facilities. The allocation of expenses is based upon the minutes of use flowing
through the Company's switching network. There are no intersegment sales. When
specifically identified, assets are allocated to each segment. All intangible
assets and goodwill have been allocated to the retail segment. Capital
expenditures and other assets are allocated based on total revenue. Management
evaluates performance on operating results of the three business segments.
Summarized financial information (000's) concerning Covista's
reportable segments is shown in the following table:
Retail Wholesale KISSLD Total
------ --------- ------ -----
Three Months Ended April 30, 2003
Net Sales $17,367 $1,631 $4,272 $23,270
Operating profit (loss) $ (364) $ (388) $ 50 $ (702)
Assets $39,773 $4,547 $5,476 $49,796
Capital expenditures $ 63 $ 6 $ 15 $ 84
Three Months Ended April 30, 2002
Net Sales $18,854 $4,634 $1,060 $24,548
Operating profit (loss) $(2,048) $ (504) $ (115) $(2,667)
Assets $44,393 $7,618 $1,742 $53,753
Capital expenditures $ 327 $ 80 $ 18 $ 425
NOTE F - INCOME TAXES
For the fiscal year ended January 31, 2003, 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 April
30, 2003, 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
$3,579,000 is fully offset by the valuation allowance and as such, does not
appear as an asset on the balance sheet. It will be reflected in the Company's
balance sheet when the net deferred tax asset can be utilized in future periods
or when managements' assessment is substantially changed.
10
NOTE G - ACQUISITION OF CAPSULE COMMUNICATIONS
On February 8, 2002, Covista completed the acquisition of Capsule
Communications, Inc., through the issuance of 1,742,320 shares of Common Stock
and the assumption of certain liabilities and stock options. As a result,
Capsule became a wholly owned subsidiary of Covista. The Company has accounted
for the combination with Capsule as a purchase business combination under SFAS
141("Business Combination").
The results of Capsule's operations have been included in the Company's
Consolidated Statement of Loss and Comprehensive Loss since the date of merger.
The total purchase price, including certain direct costs, was approximately
$12,972,000 plus assumed liabilities of approximately $10,057,000. Included in
the purchase, the Company assumed options 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 a
Company stock price of $6.71. In addition, the Company incurred approximately
$0.3 million in acquisition expenses.
The identifiable intangible assets acquired from Capsule were
classified 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 using
the straight-line method over a weighted average period of 40 months. Goodwill
and intangible assets acquired are not deductible for tax purposes.
NOTE H - LONG TERM DEBT
The Company had a revolving $2,000,000 credit facility with Wells Fargo
Business Credit Corporation. Interest on the revolving credit facility was
calculated at the prime lending rate plus 2 3/4%, on a minimum loan balance of
$750,000. The loan was collateralized by accounts receivable and fixed and
intangible assets of the Company. This facility was terminated and paid in full
with proceeds from a new credit facility, effective April 16, 2003
Effective April 16, 2003, Covista executed a revolving credit and
security agreement with Capital Source Finance, LLC. This credit facility
provides the Company with an $8 million loan of which approximately $4,439,000
was available at April 30, 2003 based on eligible accounts receivable. An
additional $1 million becomes available upon Covista maintaining twelve
consecutive months of positive cash flow as defined in the agreement. This
thirty-six month facility allows the Company to borrow funds based on a portion
of eligible customer accounts receivable and bears interest at the Prime Rate
plus 2.00% with a floor of 6.25%. Interest, unused line and collateral
management fees are payable monthly in arrears. Covista is required to maintain
certain covenants that include cash velocity and fixed charge coverage ratios as
defined in the agreement. The loan is secured by all of the Company's assets.
Initial loan proceeds were used to payoff the Wells Fargo facility in full. The
loan balance at April 30, 2003 was $3,351,080 and is included in current portion
of long-term debt.
11
On June 17, 2002, Covista entered into a term loan agreement with a
major bank. The initial principal amount of this note was $3,775,000, payable in
36 monthly installments at a fixed interest rate of 4.495% for the first year
and converting to 2% over LIBOR on June 17, 2003 and thereafter. This note is
secured by certain of the Company's switching equipment and certificates of
deposit provided by Covista's Chairman of the Board. The balance on this
facility was $2,765,003 at April 30, 2003 of which $1,268,828 is classified as
current.
NOTE I - COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal and administrative actions
arising in the normal course of business. While the resolution of any such
actions may have an impact on the financial results for the period in which it
is resolved, management believes that the ultimate disposition of these matters
will not have a material adverse effect upon its consolidated results of
operations, cash flows or financial position.
12
ITEM 2
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 $23,270,000 for the first three months of
the current fiscal year, a decrease of approximately $1,278,000 or 5.2% as
compared to the approximately $24,548,000 recorded in the first three months of
the prior fiscal year.
For the quarter ended April 30, 2003, retail revenues were
approximately $17,367,000, a decrease of approximately $1,487,000 or 7.9%
versus the comparative quarter in the last fiscal year. Retail minutes sold in
the three-month period ended April 30, 2003 were approximately 252,093,000
minutes, a decrease of approximately 6,615,000 minutes or 2.5%. The overall
blended retail rate per minute decreased to $.069 versus $.073 from the first
quarter of the previous year. Management expects to experience continued rate
per minute erosion due to competition in the retail segment.
For the quarter ended April 30, 2003, KISSLD revenues were
approximately $4,272,000, an increase of approximately $3,212,000 or 303% versus
the first quarter from the prior fiscal year. KISSLD minutes sold for the
three-month period ended April 30, 2003 were approximately 75,155,000, an
increase of approximately 57,367,000 or 323%. The overall blended rate per
minute was $.057 versus $.059 from the first quarter of the previous year.
13
The Company has continued to successfully reduce reliance on lower
margin wholesale revenue. For the quarter ended April 30, 2003, wholesale
revenue was approximately $1,631,000, a decrease of approximately $3,003,000
or 64.8% versus the comparative quarter in the last fiscal year. Wholesale
minutes sold in the three-month period ended April 30, 2003 were approximately
16,212,000 minutes, a decrease of approximately 49,938,000 minutes or 75.5%.
Cost of revenue for the current three-month period was approximately
$13,288,000, a decrease of approximately $4,385,000 or 24.8%. These changes were
favorable in relation to the 5.2% decrease in revenue for the three-month
period. The decrease in cost of revenue was primarily due to an overall decrease
in lower margin wholesale minute volume of approximately $2,702,000 in addition
to the realization of credits from vendors for previously disputed charges and
network cost savings iniatives of approximately $1,682,000.
For the quarter ended April 30, 2003, selling, general and
administrative expense, excluding depreciation and amortization was
approximately $9,116,000, an increase of approximately $816,000 or 9.8% over
the comparative quarter in the last fiscal year. The increase was primarily due
to an increase in agent commission expense of approximately $447,000 as a
result of higher residual payout rates, an increase in bad debt expense of
approximately $494,000 and an increase in bank credit card charges of
approximately $323,000 as a result of greater KISSLD volume whereby the majority
of customers pay via credit card. These increases were partially offset by
reductions in payroll, building rent and other miscellaneous decreases of
approximately $448,000 as a result of more efficient use of human and building
resources.
For the reasons described above, the operating loss for the three-month
period ended April 30, 2003 was approximately $702,000, a decrease of
approximately $1,965,000 from the three-month period ended April 30, 2002.
Basic and diluted loss per Common Share was $(.04) per share for the
current three-month period ended April 30, 2003 as compared to $(.23) loss per
share for the three-months ended April 30, 2002.
Liquidity and Capital Resources
At April 30, 2003, Covista had a working capital deficit of
approximately $9,107,000, an improvement of approximately $429,000 as compared
to January 31, 2003. The ratio of current assets to current liabilities at April
30, 2003 was .69:1, as compared to the ratio of .67:1 at January 31, 2003. The
improvement in the working capital deficit at April 30, 2003 was primarily
attributable to a net increase in current assets of approximately $263,000. This
increase was supplemented by a decrease in current liabilities of approximately
$166,000.
The increase in cash of approximately $729,000 was the result primarily
of net proceeds from bank borrowings of approximately $1,232,000. This increase
was offset by cash used in operations of approximately $293,000 and cash used in
investing activities of approximately $210,000.
Capital Expenditures
Capital expenditures for the three-month period ended April 30, 2003
were approximately $84,000. Capital expenditures for the remainder of Fiscal
2003 are estimated at approximately $1,500,000 and are expected to be funded
from operations.
14
Prepaid Network Capacity
In July 2002, Covista purchased 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 would impact the carrier's ability
to fulfill it's obligation to Covista under the prepaid network capacity
agreement.
As of the date hereof, Covista has used approximately 152 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 $2,867,000 is included in
intangible assets.
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 $16,909,000,
net of the reserve for uncollectible accounts totaling approximately $1,864,000,
represents approximately 30.2% 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 April
30, 2003, this ratio was approximately 2.7%. Covista also measures accounts
receivable turnover (as measured in days sales outstanding). For the periods
ended April 30, 2003 and 2002, days sales outstanding were 52.5 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 2004. In the first quarter, Covista accrued
$8,700 to Mr. Miller for services rendered. As of April 30, 2003, Covista owed
Mr. Miller $49,785.
Leon Genet, a Director of Covista, has provided agent services for
Covista through his wholly owned Registrant, LPJ, Inc. During the first quarter,
Fiscal 2004, LPJ, Inc. was paid commissions of $18,271. The commissions paid to
LPJ, Inc. were computed on the same basis as other independent agents retained
by Covista.
15
CRITICAL ACCOUNTING POLICIES
Nature of Operations
Covista Communications, Inc. ("Covista"), and its wholly-owned subsidiaries
(collectively, the "Company") operates as a switch based resale common carrier
providing domestic and international long distance telecommunications service to
customers throughout the United States. Prior to the Capsule acquisition, the
Company's principal customers were primarily businesses and other common
carriers. On September 15, 2000, the Company changed its name from Total-Tel USA
Communications, Inc. to Covista Communications, Inc. On February 8, 2002,
Covista completed the acquisition of Capsule Communications, Inc. As a result,
Capsule became a wholly owned subsidiary of Covista. 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 the
Company's statement of operations since the acquisition date.
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.
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization is being provided by use of the straight-line method over the
estimated useful lives of the related assets. Leasehold improvements are
amortized over the shorter of the term of the lease or the useful lives of the
asset.
The estimated useful lives of the principal classes of assets are as follows:
Classification Years
-------------- -----
Machinery and equipment 5-10
Office furniture, fixtures and equipment 5-10
Vehicles 3-5
Leasehold improvements 2-10
Computer equipment and software 5-7
16
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.
Intangible Assets
Intangible assets consist of prepaid network capacity and purchased
customer and agent relationships being amortized over a straight-line basis over
periods varying between 10 and 120 months.
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 SFAS 142. 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.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
Vendor Disputes
In the normal course of business Covista will file disputes with its
service suppliers. The Covista accounting policy is to record the invoiced
amount to cost of revenue which may include disputed amounts. When the dispute
is resolved and the credit is received, the amount is credited to cost of
revenue. Open disputes included in accounts payable and accrued liabilities at
April 30, 2003 are approximately $5.3 million.
Concentrations of Credit Risk
The Company sells its telecommunications services and products
primarily to small to medium size businesses, residential and wholesale
customers. The Company performs ongoing credit evaluations of both its retail
and wholesale customers. The Company generally does not require collateral,
however when circumstances warrant, deposits are required. Recent conditions in
the telecommunications industry have given rise to an increase in potential
doubtful accounts. Allowances are maintained for such potential credit losses.
The Company has entered into offset
17
arrangements with certain of its customers, who are also vendors, allowing for
the ability to offset receivables against the Company's payables balance.
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 April 30, 2003, 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents. Cash and
cash equivalents consist of cash on hand, demand deposits and money market
accounts.
18
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEMS 1 - 5 Not applicable
ITEMS 6 None
19
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: June 13, 2003 By: /s/ A. John Leach, Jr.
------------- -----------------------
A. John Leach, Jr.
President and Chief
Executive Officer
20
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: June 13, 2003 By: /s/ Thomas P. Gunning
------------- -----------------------
Thomas P. Gunning,
Vice President, Chief Financial Officer
and Principal Accounting 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 April 30, 2003 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: June 13, 2003 By: /s/ A. John Leach, Jr.
------------- -----------------------
A. John Leach, Jr.
President and Chief Executive Officer
22
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 April 30, 2003 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;
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: June 13, 2003 By: /s/ Thomas P. Gunning
------------- -----------------------
Thomas P. Gunning,
Vice President, Chief Financial
Officer and Principal Accounting Officer
23
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: June 13, 2003 By: /s/ A. John Leach, Jr.
------------- -----------------------
A. John Leach, Jr.
President and Chief Executive Officer
Date: June 13, 2003 By: /s/ Thomas P. Gunning
------------- -----------------------
Vice President, Chief Financial
Officer and Principal Accounting Officer
24