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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, 2002
------------------
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to
Commission File Number 0-2180
COVISTA COMMUNICATIONS, INC.
----------------------------
(Exact name of registrant as specified in its charter)
New Jersey 22-1656895
- ------------------------------- ------------------
(State or other Jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4803 Highway 58 North, Chattanooga, TN 37416
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 648-9700
150 Clove Road, 8th Floor, Little Falls, NJ 07424
(Former address of principal executive offices) (Zip Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at June 18, 2002
- ---------------------------- -----------------------------
Common Share, $.05 par value 12,679,986 shares
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COVISTA COMMUNICATIONS, INC.
AND SUBSIDIARIES
FIRST QUARTER REPORT ON FORM 10-Q
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Condensed Consolidated Statements of Operations and
Comprehensive Loss
Three months ended April 30, 2002 and 2001
(unaudited) 2
Condensed Consolidated Balance Sheets
April 30, 2002 (unaudited), and
January 31, 2002 3-4
Condensed Consolidated Statements of Cash Flows
Three months ended April 30, 2002 and 2001
(unaudited) 5
Notes to Condensed Consolidated Financial
Statements (unaudited) 6-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12-17
PART II. OTHER INFORMATION
Items 1,3,5 Not Applicable 18
Item 2 Change in Securities and Use of Proceeds 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 6 Exhibits and Reports on Form 8-K 19
SIGNATURES 21
1
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COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
Three Months Ended
April 30,
2002 2001
------------ ------------
Net Sales $ 24,548,143 $ 29,444,021
------------ ------------
Costs and Expenses
Cost of sales 17,673,366 26,738,240
Selling, general and administrative 9,529,791 7,499,702
Other compensation 12,011 69,245
------------ ------------
Total costs and expenses 27,215,168 34,307,187
------------ ------------
Operating Loss (2,667,025) (4,863,166)
------------ ------------
Other Income (Expense)
Interest income 1,617 35,249
Other (expense) income (85,675) 253,256
Interest expense (113,562) (18,005)
------------ ------------
Total other income (expense) (197,620) 270,500
------------ ------------
Loss before income taxes (2,864,644) (4,592,666)
Income taxes -- --
------------ ------------
Net Loss (2,864,644) (4,592,666)
Other comprehensive income, net of taxes:
Unrealized holding gain (loss) -- 289
------------ ------------
Comprehensive loss $ (2,864,644) $ (4,592,377)
============ ============
BASIC LOSS PER COMMON SHARE $ (0.23) $ (0.56)
------------ ------------
DILUTED LOSS PER COMMON SHARE $ (0.23) $ (0.56)
------------ ------------
DIVIDENDS PER SHARE NONE NONE
See notes to condensed consolidated financial statements
2
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COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, January 31,
2002 2002
----------- ----------
(Unaudited) (Note)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,272,085 $ 1,379,038
Investments available for sale -- 439,773
Accounts receivable, net 17,326,882 10,252,837
Note receivable -- 500,000
Prepaid expenses and other current assets 1,301,522 1,373,780
----------- -----------
TOTAL CURRENT ASSETS 21,900,489 13,945,428
----------- -----------
PROPERTY AND EQUIPMENT, NET 15,360,747 12,489,626
----------- -----------
OTHER ASSETS:
Deferred line installation costs, net 171,743 174,785
Intangible assets, net 5,193,299 386,142
Goodwill, net 8,205,850 --
Other assets, net 2,920,873 4,260,810
----------- -----------
$53,753,001 $31,256,791
=========== ===========
Note: The balance sheet at January 31, 2001 has been taken from
the audited consolidated financial statements at that date.
3
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COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30. January 31,
2002 2002
(Unaudited) (Note)
----------- ------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 1,441,002 $ --
Current portion of long-term debt 219,930 381,405
Accounts payable 25,973,620 19,465,274
Other current and accrued liabilities 6,974,189 4,434,795
Salaries and wages payable 611,065 991,012
TOTAL CURRENT LIABILITIES 35,219,806 25,272,486
------------ -----------
OTHER LONG-TERM LIABILITIES 7,733 15,466
------------ -----------
LONG-TERM DEBT 7,000,000 4,400,000
------------ -----------
SHAREHOLDERS' EQUITY
Common Stock 708,669 619,288
Additional paid-in-capital 38,381,984 25,650,098
Accumulated deficit (26,119,751) (23,255,107)
------------ -----------
Treasury stock (1,445,440) (1,445,440)
------------ -----------
Total Shareholders' Equity 11,525,462 1,568,839
------------ -----------
$ 53,753,001 $ 31,256,791
============ ============
Note: The balance sheet at January 31, 2002 has been taken from
the audited consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
4
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COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
April 30,
2002 2001
----------- -----------
OPERATING ACTIVITIES:
Net loss $ (2,864,644) $ (4,592,666)
Adjustment for non-cash charges 2,031,156 2,215,742
Gain on sale of marketable securities -- (263,101)
Changes in assets and liabilities, net of effect of
acquisition of business (1,264,737) 790,104
------------ ------------
Net cash used in operating activities (2,098,225) (1,849,921)
------------ ------------
INVESTING ACTIVITIES:
Cash acquired in purchase of business 1,179,172 90,402
Proceeds on sale of marketable securities 439,773 529,302
Purchases of marketable securities -- (603,869)
Purchase of property and equipment (425,071) (3,061,155)
Additions to deferred line installation costs 19,248 (11,514)
------------ ------------
Net cash provided by (used in) investing activities 1,174,626 (3,056,834)
------------ ------------
FINANCING ACTIVITIES:
Sale of Common Stock 174,140 6,300,000
Bank borrowing 203,982 --
Note payable to related party 2,600,000 --
Repayments of bank borrowings (161,476) (149,766)
------------ ------------
Net cash provided by financing activities 2,816,646 6,150,234
------------ ------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 1,893,047 1,243,479
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,379,038 2,691,889
------------ ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 3,272,085 $ 3,935,368
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest $ 6,295 $ 18,005
Income taxes $ -- $ --
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
5
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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 in the United States of
America 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 (the "Registrant") 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 three-month period ended April 30, 2002 are not
necessarily indicative of the results that may be expected for the year ending
January 31, 2002.
Certain reclassifications have been made to conform prior years' balances to the
current year presentation
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. SFAS 142 also requires Covista to complete a
transitional goodwill impairment test six months from the date of adoption.
Covista is currently assessing but has not yet determined the impact of SFAS 142
on its financial position and results of operations. As of February 1, 2002
Covista had no goodwill recorded on its books, therefore, management does not
believe the adoption of SFAS 142 has a significant impact on its financial
position and results of operations. As of April 30, 2002 Covista has
$8,205,850 of goodwill recorded on its books in connection with the Capsule
acquisition described in Note F.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
143 ("SFAS 143"), "Accounting for Asset Retirement Obligations", which is
effective for our fiscal year 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 not yet determined the impact of SFAS 143
on its financial position and results of operations.
6
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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 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 adopted SFAS 144
on February 1, 2002 and the adoption did not have a significant impact on
Covista's financial position or results of operations.
Note C--Earnings Per Share
The following table sets forth the computation of basic and diluted loss per
common share:
Three Months Ended
April 30, 2002 April 30, 2001
-------------- --------------
Numerator:
Loss available to
Common Shareholders used in basic
and diluted loss per Common Share $ (2,864,644) $ (4,592,666)
Denominator:
Weighted-average number of Common
Shares used in basic loss per
Common Share 12,462,885 8,247,989
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 12,462,885 8,247,989
------------ ------------
Basic loss per Common Share $ (0.23) $ (0.56)
------------ ------------
Diluted loss per Common Share $ (0.23) $ (0.56)
------------ ------------
(1) Common Share options are not included in the calculation of diluted loss per
Common Share as doing so would be antidilutive due to the net loss.
7
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Note D--Segment Reporting
Covista sells telecommunication services to two distinct segments: a
retail segment, consisting primarily of small to medium size businesses
principally within the Northeastern United States, and a wholesale segment with
sales to other telecommunications carriers throughout the world.
In addition to direct costs, each segment is allocated a portion of
Covista's switch and operating expenses. The allocation of expense is based upon
the minutes of use flowing through 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 two business segments.
Summarized financial information concerning Covista's reportable segments
is shown in the following table:
Retail Wholesale Total
------ --------- -----
Three Months Ended
April 30, 2002
Net Sales $19,914,018 $ 4,634,125 $24,548,143
Gross margin 7,266,755 (391,978) 6,874,777
Operating loss (2,143,121) (523,904) (2,667,025)
Three Months Ended
April 30, 2001
Net Sales $11,810,321 $17,633,700 $29,444,021
Gross margin 1,364,733 1,341,048 2,705,781
Operating loss (3,699,123) (1,164,043) (4,863,166)
8
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NOTE E--Income Taxes
For the fiscal year ended January 31, 2001, 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, 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 $15,569,000
is fully offset by the valuation allowance, and as such does not appear as an
asset on the balance sheet. It will be reflected at full value when the net
deferred tax asset can be utilized in future periods or when managements'
assessment is substantially changed.
NOTE F--Acquisition of Capsule Communications
On February 8, 2002, Covista Communications, Inc. ("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. The Company 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. As a result of
the acquisition, the Company has strengthened its offerings to its customers.
It also expects to reduce costs through economies of scale and lead the combined
companies to profitability.
The results of Capsule's operations have been included in the Company'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
the Company'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 a Company stock price
of $6.71. In addition, the Company incurred approximately $0.3 million in
acquisition expenses.
9
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The Company is in the process of finalizing an independent valuation of the
assets and liabilities acquired as well as identifying the intangible assets it
has acquired in order to finalize its allocation of the purchase price of the
transaction. The Company will finalize its valuation as soon as practicable or
within one year of the acquisition date. The Company's preliminary allocation of
the purchase price is subject to adjustment based on the final determination of
fair value. The following table summarizes management's preliminary estimated
fair values 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 191,199
Intangible assets 4,190,000
Goodwill 8,205,850
------------
Total assets acquired 23,028,630
------------
Current liabilities (10,056,503)
------------
Total purchase price $(12,972,127)
------------
The intangible assets acquired from Capsule were preliminarily 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 a period of 10 months
to four years. The customer and agent relationships are amortized using
double-declining method.
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.
Three months ended April 30,
2002 2001
---- ----
Total Revenue ................................... $25,249,509 $38,581,792
Loss attributable to Common stockholders ........ (2,845,822) (6,006,064)
Basic net loss per common share ................. (0.23) (0.60)
10
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NOTE G--Shareholder Loan
As of April 30, 2002, Covista has received loans from Henry G. Luken III, its
Chairman of the Board and principal shareholder, in the amount of $7,000,000
consisting of an additional $2.6 million in the first quarter of fiscal year
2003. These loans will be converted to equity upon shareholder approval which
approval is expected at the Company's Annual Shareholder meeting planned to be
held in August, 2002. The Company currently has the necessary votes to approve
the conversion.
NOTE H--Note Payable
The Company has a revolving $2,000,000 credit facility with Wells Fargo Business
Credit Corporation, which was renegotiated and amended on May 11, 2002 which
expires on May 11, 2004. Interest on the revolving credit facility is currently
calculated at the prime lending rate plus 2 3/4%, on a minimum loan balance of
$750,000. The loan is collateralized by accounts receivable and fixed and
intangible assets of the Company. As of April 30, 2002, the Company's
outstanding balance on its credit facility was $1,441,002 leaving approximately
$559,998 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. The Company was not in compliance
with several of its covenants in the Loan and Security Agreement, however, the
Company received waivers related to such conditions of non-compliance at
April 30, 2002.
NOTE--I Commitments and Contingencies
On February 26, 2001 the Company has extended, per Amendment No. 31, a long term
contract for the purchase of 1+.800 and Private line services with its primary
underlying carrier Worldcom. The contract provides for a minimum monthly
commitment of $150,000 and an aggregate commitment of $3,600,000 over the
24-month contract life. The contract converts to a month-to-month agreement at
the point-in-time the Company achieves the total minimum revenue commitment of
$3,600,000. The Company estimates that it will achieve its minimum revenue
commitment sometime during the second quarter of 2002.
NOTE--J Subsequent Event
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 the Company's Switching equipment and
Certificates of Deposit, which were provided by Covista's Chairman of the
Board.
11
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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 $24,548,000 for the first three months of the
current fiscal year, a decrease of approximately $4,896,000 or 16.6% as compared
to the approximately $29,444,000 recorded in the first three months of the prior
fiscal year.
Wholesale revenue for the three-month period was approximately $4,634,000,
a decrease of approximately $13,000,000 or 73.7% from the three month period
ended April 30, 2001. Wholesale minutes sold in the three-month period ended
April 30, 2002 were approximately 66,150,000 minutes, a decrease of
approximately 86,967,000 minutes or 56.8% from the three-month period ended
April 30, 2001. The reduction in wholesale revenues is primarily the result of
wholesale business lost as a result of interruption of service in the Company's
New York switching facility during the September 11 World Trade Center attack.
Covista has not pursued replacing this lower margin segment of the business. For
the three-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 an 39.9% 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,
which has had an impact in attracting new customers.
Retail revenues for the three-month period were approximately $19,914,000,
a increase of approximately $8,104,000 or 69% from the three-month period ended
April 30, 2001. Retail minutes sold in the three-month period ended April 30,
2002 were approximately 268,565,000 minutes, an increase of approximately
125,865,000 minutes or 88.2% over the three- month period ended April 30, 2001.
The increase in volume results primarily from the acquisition of Capsule
Communications which provided additional retail revenue of $8,406,000. Covista
has experienced a rate decrease of 19.1% for the three-month period ended April
30, 2002. The extreme pricing pressures experienced in the industry is a trend
that the Company believes will continue.
12
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Cost of sales for the current three-month period was approximately
$17,673,000, a decrease of approximately $9,065,000 or 33.9% from the three-
month period ended April 30, 2001. These changes were favorable in relation to
the 16.6% decrease in sales for the three-month period. The decrease in cost of
sales was due primarily to an improvement in buy rates over the prior year,
(partially due to new contracted rates with Covista's suppliers), of
approximately $2,496,000; the recovery of disputes relating to prior years of
approximately $527,000; and a decrease of approximately 86,967,000 wholesale
minutes equating to approximately $7,392,000. This saving was offset with the
cost of the increase in retail volume of approximately $2,202,000 and a decrease
in switch and network operations costs of approximately $ 32,000.
Selling, general and administrative expense for the three-month period
increased to approximately $9,530,000, an increase of approximately $2,030,000,
or 27% over the three-month period ended April 30, 2001. The increase in
selling, general and administrative expenses of approximately $2,030,000 for the
three-month period was primarily due to additional selling, general and
administrative expense from the acquisition of Capsule Communications of
$2,898,000; additional amortization of intangible assets of $865,000 related to
the Capsule merger and additional postage expense of $930,000 related to mail
marketing of the Company's new KISSLD residential program. These increases were
partially offset by a decrease in the salaries and payroll taxes of personnel
due to a reduction in staff of $958,000; a reduction in provision for bad debt
due to the reduction of higher risk wholesale business of $1,035,000.
For the reasons described above, the operating loss for the three-month
period ended April 30, 2002 was approximately $2,667,000, a decrease of
approximately $2,196,000 from the three-month period ended April 30, 2001.
Total other expense, net, for the current three-month period was
approximately $198,000 as compared to approximately $271,000 of total other
income, net, recorded in the prior year three-month period. The approximately
$469,000 change for the three-month period is primarily due to receipt of an
insurance claim received in the same period prior year of approximately $253,000
and an increase in interest expense related to new financing of $ 95,000 and
reduction in interest income of approximately $34,000 and an increase in
miscellaneous expense of approximately $85,000.
Basic and diluted loss per Common Share was $0.23 per share for the current
three-month period ended April 30, 2002 as compared to $0.56 loss per share for
the three-months ended April 30, 2001.
13
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Liquidity and Capital Resources
At April 30, 2002, Covista had a working capital deficit of approximately
$13,319,000, an increase of approximately $1,992,000 as compared to January 31,
2002. The ratio of current assets to current liabilities at April 30, 2002 was
...62:1, as compared to the ratio of .55:1 at January 31, 2002. The decrease in
working capital at April 30, 2002 was primarily attributable to an increase in
notes payable of approximately $1,441,000, an increase in current payables of
approximately $6,508,000, an increase in accrued liabilities of approximately
$2,159,000, and decreases in investment available for sale approximately
$439,000 and notes receivable approximately $500,000. This was offset by the
increases in cash of approximately $1,893,000 and trade accounts receivable of
approximately $7,074,000.
On February 21, 2002, Covista announced that on February 20, 2002, its
Board of Directors had approved the private sale of additional Common Stock of
up to $12,500,000. The investment includes a cash infusion of $7,000,000,
contribution of $3,300,000 of fixed assets and $2,200,000 cash to be received.
The total debt or Common Stock and the conversion of all existing long-term debt
for debt or Common Stock to Common Stock at the rate of $5.00 per share, which
was the closing price for the Common Stock on the date authorized by the Board.
The commitment for funding for the investment and the conversion of the
indebtedness is anticipated to come primarily from the current Chairman of
Covista's Board or his designee's and is subject to shareholder's approval at
the next Annual Meeting, or a special meeting of Shareholders to be convened for
such purpose. Finally, the company is planning to obtain a line of credit from a
bank. If such line of credit is not obtained, the Chairman of the Board has
committed to loaning $2 million to the Company through at least the second
quarter of fiscal 2004.
The increase in cash of approximately $1,893,000 was the result primarily
of proceeds from the sale of Common Stock of $174,000; 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 $440,000; and cash acquired in the
purchase of Capsule Communications of approximately $1,179,000. These increases
were offset by cash used in operations of approximately $2,118,000; purchases of
property and equipment of approximately $425,000; repayment of bank borrowings
of approximately $161,000; and additional bank borrowing of approximately
$204,000.
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 the Company's Switching equipment and Certificates of
Deposit, which were provided by Covista's Chairman of the Board.
Capital Expenditures
Capital expenditures for the three-month period ended April 30, 2002 were
approximately $425,000. The major expenditures were approximately $290,000 for
switch installations as part of Covista's network expansion; approximately
$19,000 for equipment and fixtures for Covista's Tennessee location;
approximately $74,000 for software and hardware upgrades to Covista's local area
network; and approximately $19,000 for furniture and fixtures and leasehold
improvements. The remaining expenditures $42,000 were for Capsule Communications
purchase of equipment.
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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 $17,327,000, net of the
reserve for uncollectible accounts totaling approximately $6,565,000, represents
approximately 33.2% 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, 2002, this ratio was less
than 1%. Covista also measures accounts receivable turnover (as measured in days
sales outstanding). For the periods ended April 30, 2002 and 2001 days sales
outstanding were 58.5 days and 62.5 days, respectively.
The Company is in the process of integrating the Covista and Capsule customer
service databases, and is currently processing the Capsule billing on Covista's
billing platform.
Related Party Transactions
Jay J. Miller, a Director of Covista, has provided various legal services for
Covista in Fiscal 2003. In the first quarter, Fiscal 2003, Covista accrued
$16,395 to Mr., Miller for services rendered and accrued for in Fiscal 2003. As
of April 30, 2002, Covista owed Mr. Miller $195,712. Covista believes that Mr.
Miller's fees were reasonable for the services performed and were no less
favorable to Covista than could have been obtained from an unrelated third
party.
Leon Genet, a Director of Covista, has provided agent services for Covista
through his wholly-owned Registrant, LPJ, Inc. During the first quarter, Fiscal
2003, LPJ, Inc. was paid commissions of $20,665. The commissions paid to LPJ,
Inc. were computed on the same basis as other independent agents retained by
Covista.
Covista has entered into a lease agreement for approximately 28,000 square feet
of office space in Chattanooga, Tennessee, with Henry G. Luken III Chairman of
the Board and a principal shareholder of Covista. The term of the lease is for
five years beginning September 1, 2001. The lease provides for annual rent of
$86,400 from September 1, 2001 to August 30, 2002; $115,200 from September 1,
2002 to August 30, 2003; $144,000 from September 1, 2003 to August 30, 2004,
with the last two years to be $144,000 annually adjusted for the Consumer Price
Index. Covista believes that such premises are leased on terms not less
favorable than an arm's length transaction. For the first quarter FY 2003
Covista has paid Henry G. Luken III $21,600 for rent of office space.
As of April 30, 2002, Covista has received loans from Henry G. Luken III, its
Chairman of the Board and principal shareholder, in the amount of $7,000,000
consisting of an additional $2.6 million in the first quarter of fiscal year
2003. These loans will be converted to equity upon shareholder approval which
approval is expected at the Company's Annual Shareholder meeting planned to be
held in August, 2002. The Company currently has the necessary votes to approve
the conversion.
CRITICAL ACCOUNTING POLICIES
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.
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Deferred Line Installation Costs
Deferred line installation costs are costs incurred by the 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 these 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
The Company 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 the Company'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 that the impairment occurred. Based
on the Company'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 April 30, 2002.
The Company purchased 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 recently filed for Chapter 11
reorganization; however at the time of this filing is continuing to perform
under the agreement.
Goodwill
Goodwill consists of the excess purchase price over the fair value of
identifiable net assets of acquired businesses. Goodwill is not being amortized.
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.
Intangible Assets
Intangible assets are carried at cost less accumulated amortization. Intangible
assets are amortized on a double-declining or straight-line basis over their
expected lives. The Company does not currently have any indefinite lived
intangible assets that were not subject to amortization.
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Item 3 - 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 marketable
securities at April 30, 2002, the exposure to interest rate risk relating to
marketable securities no longer exists. Covista does not hold any derivatives
related to its interest rate exposure. Covista also maintains long-term debt at
fixed rates. Due to the nature and amounts of Covista's note payable, an
immediate 10% change in interest rates would not have a material effect in
Covista's results of operations over the next fiscal year. Covista's exposure to
adverse changes in foreign exchange rates is also immaterial to the consolidated
statements as a whole.
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COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1 Not applicable
ITEM 2 Not applicable
ITEM 3 Not applicable
ITEM 4 Submission of Matter to a Vote of Security Holders On February 8th, 2002,
Covista held a shareholders meeting to consider and vote on the following
matters:
1. The proposal to issue shares of Covista Common Stock to the
stockholders of Capsule Communications pursuant to the proposed
merger set forth in the Agreement and Plan of Reorganization dated
as of July 17, 2001, by and among Covista, CCI Acquisitions Corp.,
a wholly owned subsidiary of Covista, and Capsule Communications,
Inc;
No. of shares votes for: 8,950,411 No of shares votes
against: 1,734
2. The proposal to elect eight directors of Covista for a term of one
year and until their successors are duly elected and qualified;
No. of shares votes for: 10,200,030 No of shares votes
against: 2,760
3. The proposal to adopt the Covista Communications, Inc. 2001 Equity
Incentive Plan;
No. of shares votes for: 8,375,948 No of shares votes
against: 575,292
4. The proposal to ratify the selection of Deloitte & Touche LLP as
independent auditors of Covista for the fiscal year ending January
31, 2002; and
No. of shares votes for: 10,192,635 No of shares votes
against: 2,314
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ITEM 5 Not applicable
ITEM 6 Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1
Agreement and Plan of Reorganization dated as of July 17,
2001 by and among Covista Communications, Inc., CCI
Acquisitions Corp. and Capsule Communications, Inc. Filed
as Exhibit 2.1 to the Registrant's Form 8-K Report dated
July 17, 2001 (the "July 17, 2001 8-K") and incorporated
herein by reference.
Exhibit 99.1 Press Release dated February 8, 2002. Filed with Form
8-K dated February 20 and incorporated by reference.
Exhibit 2.1 - Agreement and Plan of Reorganization dated as of July 17, 2001 by
and among Covista Communications, Inc., CCI Acquisitions Corp.
and Capsule Communications, Inc. Filed as Exhibit 2.1 to the
Registrant's Form 8-K Report dated July 17, 2001 (the "July 17,
2001 8-K") and incorporated herein by reference.
Exhibit 99.1 - Press Release dated February 8, 2002. Filed as Exhibit 99.1 to
the Registrant's Form 8-K filed with the SEC on February 8, 2002
and incorporated herein by reference.
Exhibit 99.2 - Unaudited Condensed Consolidated Financial Statements of Capsule
Communications, Inc. for the nine months ended September 30,
2001, incorporated by reference from Capsule's Quarterly Report
on Form 10-Q for the quarter ended September 30, 2001 and
incorporated herein by reference.
Exhibit 99.3 - Audited Consolidated Financial Statements of Capsule
Communications, Inc. for the year ended December 31, 2000,
incorporated by Reference from Capsule's Annual Report on Form
10-K for the year ended December 31, 2000 and incorporated herein
by reference.
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Exhibit 99.4 - Covista and Capsule unaudited pro forma combined condensed
financial information for the nine months ended October 31, 2001
and the year ended January 31, 2001, incorporated by reference
from Pre-Effective Amendment No. 3 to Covista's Registration
Statement on Form S-4 (Registration No. 333-69644), as filed with
the Securities and Exchange Commission on January 8, 2002 and
incorporated herein by reference.
(b) Reports on Form 8-K
2/8/2002 8-K Acquisition of Capsule Communications, Inc.
4/22/2002 8-K/A Amendment to form 8-K filed 2/8/2002
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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 18, 2002 By /s/ A. John Leach
------------- -----------------
A. John Leach
President and Chief Executive Officer
Date June 18, 2002 By /s/ Thomas P. Gunning
------------- ----------------------
Thomas P. Gunning,
Vice President, Chief Financial Officer and
Principal Accounting Officer
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