<PAGE>
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, 2000
-----------------------------
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.)
150 CLOVE ROAD, 8TH FLOOR, LITTLE FALLS, NJ 07424
----------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (973) 812-1100
Not applicable
----------------------
(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 December 14, 2000
---------------------------- ----------------------------------
Common Share, $.05 par value 7,960,571 shares
<PAGE>
COVISTA COMMUNICATIONS, INC.
AND SUBSIDIARIES
THIRD QUARTER REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I. FINANCIAL INFORMATION
Condensed Consolidated Statements of Operations and
Comprehensive Loss
Nine months ended October 31, 2000 and 1999
(unaudited) and three months ended October
31, 2000 and 1999 (unaudited) 2
Condensed Consolidated Balance Sheets
October 31, 2000 (unaudited), and
January 31, 2000 3-4
Condensed Consolidated Statements of Cash Flows Nine months ended
October 31, 2000 and 1999
(unaudited) 5
Notes to Condensed Consolidated Financial
Statements (unaudited) 6-8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
PART II. OTHER INFORMATION
Items 1-5 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
EXHIBIT 27 14-15
</TABLE>
1
<PAGE>
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
October 31, October 31,
----------------- ------------------
2000 1999 2000 1999
------------------------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
NET SALES $99,803,603 $107,135,437 $33,903,099 $36,988,483
----------------- -------------- --------------- --------------
Costs and Expenses
Cost of sales 86,788,404 85,757,454 29,729,921 30,058,098
Access charge settlement (Note G) (1,264,483) - - -
Restructuring charge - (138,349) - (138,349)
Selling, general and administrative 19,707,251 20,589,960 6,589,932 7,251,943
Other compensation (Note I) - 5,770,554 - 5,770,554
----------------- -------------- --------------- --------------
Total costs and expenses 105,231,172 111,979,619 36,319,853 42,942,246
----------------- -------------- --------------- --------------
OPERATING LOSS (5,427,569) (4,844,182) (2,416,754) (5,953,763)
----------------- -------------- --------------- --------------
Other Income (Expense)
Interest income 126,023 64,159 37,437 27,723
Other income (expense) 36,231 19,181 3,639 23,574
Interest expense (83,741) (114,450) (27,387) (36,128)
----------------- -------------- --------------- --------------
Total other income (expense) 78,513 (31,110) 13,689 15,169
----------------- -------------- --------------- --------------
(Loss) before provision for
(Benefit from) income taxes (5,349,056) (4,875,292) (2,403,065) (5,938,594)
(Benefit from) provision for income taxes (65,676) 29,086 - (399,279)
----------------- -------------- --------------- --------------
NET LOSS (5,283,380) (4,904,378) (2,403,065) (5,539,315)
Other comprehensive income, net of taxes:
Unrealized holding gain (loss) 109,603 15,595 87,575 (3,926)
----------------- -------------- --------------- --------------
COMPREHENSIVE LOSS $(5,173,777) $(4,888,783) $ (2,315,490) $ (5,543,241)
================= ============== ================ ==============
BASIC LOSS PER COMMON SHARE $ (0.72) $ (0.70) $ (0.33) $ (0.77)
----------------- -------------- --------------- --------------
DILUTED LOSS PER COMMON SHARE $ (0.72) $ (0.70) $ (0.33) $ (0.77)
----------------- -------------- --------------- --------------
DIVIDENDS PER SHARE NONE NONE NONE NONE
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE>
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
2000 2000
------------------ ---------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,575,605 $4,374,479
Investments available for sale 567,079 549,580
Accounts receivable, net 21,851,206 23,662,457
Prepaid expenses and other current assets 1,407,624 2,565,031
------------- ------------
TOTAL CURRENT ASSETS 27,401,514 31,151,547
------------- ------------
PROPERTY AND EQUIPMENT, NET 13,933,569 13,316,655
------------- ------------
OTHER ASSETS:
Deferred line installation costs, net 228,886 280,281
Other assets 679,536 435,639
------------- ------------
908,422 715,920
------------- ------------
$42,243,505 $ 45,184,122
============= ============
</TABLE>
NOTE: The balance sheet at January 31, 2000 has been taken from
the audited consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
(Continued)
3
<PAGE>
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
2000 2000
------------------ ---------------
(Unaudited) (Note)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 603,333 $ 568,653
Accounts payable 27,161,294 24,802,097
Accrued restructuring costs - 11,995
Other current and accrued liabilities 2,772,248 3,073,937
Salaries and wages payable 1,973,959 1,472,766
------------ -------------
TOTAL CURRENT LIABILITIES 32,510,834 29,929,448
------------ -------------
OTHER LONG-TERM LIABILITIES 223,727 250,532
------------ -------------
LONG-TERM DEBT 540,007 997,171
------------ -------------
SHAREHOLDERS' EQUITY
Common Stock 475,021 474,466
Additional paid-in-capital 29,845,682 29,710,494
Accumulated deficit (7,939,595) (2,656,215)
------------ -------------
22,381,108 27,528,745
Unearned ESOP Shares (12,225,000) (12,225,000)
Treasury stock (1,458,550) (1,458,550)
Accumulated other comprehensive income 271,379 161,776
------------ -------------
Total Shareholders' Equity 8,968,937 14,006,971
------------ -------------
$42,243,505 $ 45,184,122
============ =============
</TABLE>
NOTE: The balance sheet at January 31, 2000 has been taken from
the audited consolidated financial statements at that date.
See notes to condensed consolidated financial statements.
4
<PAGE>
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
October 31,
-----------
2000 1999
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(5,283,380) $ (4,904,378)
Adjustment for non-cash charges 3,750,012 8,763,414
(Gain) loss on disposal of property and equipment (1,975) 7,633
Changes in assets and liabilities 4,261,252 (6,092,615)
----------- ------------
Net cash provided by (used in) operating activities 2,725,909 (2,225,946)
----------- ------------
INVESTING ACTIVITIES:
Collection on notes receivable - 45,402
Issuance of notes receivable - (33,614)
Purchase of property and equipment (3,081,948) (2,189,388)
Proceeds on sale of fixed assets 1,975 3,000
Additions to deferred line installation costs (30,764) (46,830)
----------- ------------
Net cash used in investing activities (3,110,737) (2,221,430)
----------- ------------
FINANCING ACTIVITIES:
Exercise of stock options 8,438 1,672,160
Repayments of bank borrowings (422,484) (391,243)
----------- ------------
Net cash (used in) provided by financing activities (414,046) 1,280,917
----------- ------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (798,874) (3,166,459)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 4,374,479 6,051,892
----------- ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 3,575,605 $2,885,433
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ 83,741 $ 114,450
Income taxes $(1,643,227) $ 3,400
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
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 (the
"Registrant") for the fiscal year ended January 31, 2000. In the opinion of
Management, all adjustments (consisting of only normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine month period ended October 31, 2000 are not necessarily
indicative of the results that may be expected for the year ending January 31,
2001.
NOTE B -NEW ACCOUNTING PRONOUNCEMENTS
In June 2000, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities," which amends FAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 was previously amended by SFAS No. 137
"Accounting for Derivative Instruments and Hedging Activities -- Deferral of the
Effective Date of FASB Statement No. 133," which deferred the effective date of
SFAS No. 133 to fiscal years commencing after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards requiring that every derivative
instrument, including certain derivative instruments embedded in other
contracts, and for hedging activities be recorded in the balance sheet as either
an asset or liability measured at its fair value. The Registrant believes the
adoption of SFAS No. 133, as amended by SFAS No. 138 will not have a material
impact on the financial position or results of operations. The Registrant does
not currently engage or plan to engage in any derivative or hedging activities.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements", which must
be adopted no later than the quarter ending January 31,2001. At this time,
management has determined that the implementation of SAB 101 will not have a
material effect on the Registrant's financial position and results of
operations.
NOTE C -- EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted loss per
common share:
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
October 31, 2000 October 31, 1999 October 31, 2000 October 31, 1999
---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Numerator:
Loss available to $(5,283,380) $(4,904,378) $(2,403,065) (5,539,315)
Common Shareholders used in basic
and diluted loss per Common Share
Denominator:
Weighted-average number of Common 7,303,600 7,024,076 7,316,521 7,166,232
Shares used in basic loss per
Common Share (1)
Effect of diluted securities:
Common share options (2) - - - -
----------- ----------- ----------- ----------
Weighted-average number of Common 7,303,600 7,024,076 7,316,521 7,166,232
Shares and diluted potential Common Shares ----------- ----------- ----------- ----------
used in diluted loss per Common Share
Basic loss per Common Share $(0.72) $(0.70) $(0.33) $(0.77)
------- ------ ------ ------
Diluted loss per Common Share $(0.72) $(0.70) $(0.33) $(0.77)
------- ------ ------ ------
</TABLE>
(1) 600,000 ESOP shares have not been included in the weighted average number of
Common Shares - See Note E
(2) 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
6
<PAGE>
NOTE D -- SEGMENT REPORTING
The Registrant 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 the
Registrant's switch and operating expenses. The allocation of expense is based
upon the minutes of use flowing through the Registrant's switch network. There
are no intersegment sales. Assets are held at the consolidated level and are not
allocable to the operating segments. The Registrant evaluates performance on
operating earnings of the two business segments.
Summarized financial information concerning the Registrant's reportable
segments is shown in the following table:
<TABLE>
<CAPTION>
RETAIL WHOLESALE TOTAL
------ --------- -----
<S> <C> <C> <C>
NINE MONTHS ENDED
OCTOBER 31, 2000
Net Sales $41,950,858 $57,852,745 $99,803,603
Gross margin 10,738,278 3,541,404 14,279,682
Operating (loss) income (6,418,366) 990,797 (5,427,569)
NINE MONTHS ENDED
OCTOBER 31, 1999
Net Sales $53,009,981 $54,125,456 $107,135,437
Gross margin 16,469,347 4,908,636 21,377,983
Operating (loss) income before
other compensation (2,054,396) 2,980,768 926,372
Operating (loss) income after
other compensation (4,909,632) 65,450 (4,844,182)
</TABLE>
NOTE E - EMPLOYEE STOCK OWNERSHIP PLAN
On September 1, 1998, the Registrant established the TotalTel USA
Communications, Inc. Employee Stock Ownership Plan (the "ESOP Plan").
Concurrently with the establishment of the non-leveraged ESOP Plan, the
Registrant contributed 600,000 shares of its Common Stock to the ESOP Plan. The
Common Shares were recorded at fair value at the date contributed to the ESOP,
totaling approximately $12.3 Million, with an offset to Unearned ESOP Shares in
the Statement of Shareholders' Equity. The ESOP Plan is administered through a
Trust by a Trustee as designated by the Board of Directors. No shares have been
allocated from the ESOP Plan as of October 31, 2000.
In February 1999, the Registrant's Board of Directors authorized the termination
of the ESOP Plan. The IRS has recently given its approval to terminate the ESOP,
and the Registrant is in process of doing so. Upon termination of the ESOP Plan
the Registrant will receive the shares from the Trust and return the shares to
the authorized but unissued common stock.
NOTE F -STOCK OPTION REPRICING
On February 23, 2000, the Board of Directors passed a resolution allowing the
Registrant to re-price all outstanding options granted under its 1996 and 1999
Stock Option Plans. All outstanding options at prices ranging from $14.63 to
$21.50 per share were re-priced to $14.25 per share. All other terms and
conditions, including vesting periods remained unchanged. The Registrant has
applied FASB Interpretation No.44 "Accounting for Certain Transactions Involving
Stock Compensation" related to stock option repricing. During the nine months
ended October 31, 2000, there has been no financial statement impact based on
the market values of the Registrant's common shares.
7
<PAGE>
NOTE G -ACCESS CHARGE SETTLEMENT
In the second quarter of the current fiscal year, the Registrant received a cash
payment of $1,264,483 from certain Bell Companies in settlement of a class
action suit, to which the Registrant was a party, filed in 1992 relating to
alleged overcharges by those companies. The settlement concluded the class
action with the Bell Companies. The Registrant's portion of the settlement was
not determined until the second quarter ended July 31, 2000. The cash payment
was recorded as a separate line item as a reduction of costs and expenses in the
quarter ended July 31, 2000.
NOTE H -INCOME TAXES
For the fiscal year ended January 31, 2000, the Registrant 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, 2000, the Registrant 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
$6,172,587 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.
NOTE I -- OTHER COMPENSATION
On September 21, 1999 the Registrant entered into an agreement with Warren
Feldman, Chairman of the Board of Directors and a shareholder of the Registrant.
As part of this agreement, a lump sum in the amount of $900,000 was paid to Mr.
Feldman in settlement of his employment agreement. The Registrant paid $650,000
and Mr. Walter Anderson, a major shareholder, paid $250,000. Mr. Feldman's
Employment Agreement was to have been in effect until December 31, 2001. The
Registrant expensed the $900,000 in the quarter ended October 31, 1999 with the
$250,000 being accounted for as a capital contribution.
Simultaneously Revision LLC and Mr. Walt Anderson ("Revision/Anderson") and the
Registrant entered into put option agreements with Warren Feldman, Sol Feldman
("the Feldmans") and Leon Genet, ("Genet") a director of the Registrant. These
Put Option agreements allow the Feldmans and Genet the right to sell their
shares of the Registrant to Revision/Anderson at a price of $16.00 per share and
obligate Revision/Anderson to purchase the shares during an exercise period
beginning on December 11, 1999 and ending at 5:00 PM on February 10, 2000.
Revision/Anderson purchased the shares under the put option agreements prior to
the deadline, with the exception of 100,778 shares still held by the Feldman's.
The Registrant has no obligation to purchase any shares from the Feldmans or
Genet. The closing market price of the Registrant's shares on September 21,
1999, the date of the agreements, was $12.25, and the total number of shares
covered by the agreements was 1,208,137. Using a binomial valuation model with
an interest rate of 5% and a volatility rate of 50%, the fair value of the Put
agreements was determined to be $4.03 per share or $4,870,554. In accordance
with the Securities and Exchange Commission Staff Accounting Bulletin No. 83,
the Registrant accounted for this non-cash transaction as a charge to expense
and a credit to paid-in capital during the quarter ended October 31,1999.
THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK
8
<PAGE>
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 can generally be identified as such because the
context of the statement will include words such as the Registrant "believes",
"anticipates", "expects", or words of similar import. Similarly, statements
which describe the Registrant'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 the Registrant undertakes no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
Overview
The Registrant is a regional facilities-based telecommunications
provider servicing both the retail and wholesale marketplace. The Registrant
began offering interexchange telecommunications services in January, 1983.
The Registrant currently owns and operates two long-distance switches,
located in New York City and Newark, New Jersey. The Registrant also has a
Network Operating Center ("NOC") that monitors and controls its network. The
Registrant sells its services through three sales groups: a field retail sales
force, independent agents and a wholesale sales team.
The Registrant's principal expenses consist of cost of sales and
selling, general and administrative (S,G&A) expenses. Cost of sales consist of
access fees, line installation expenses, switch expenses, NOC expenses,
depreciation, transport expenses, and local and long-distance expenses. S, G & A
expenses are comprised of selling and marketing costs, and general and
administrative costs.
Results of Operations
Net sales were approximately $99,804,000 for the first nine months of
the current fiscal year, a decrease of approximately $7,331,000 or 6.8% as
compared to the approximately $107,135,000 recorded in the first nine months of
the prior fiscal year. Net sales for the third quarter of the current fiscal
year were approximately $33,903,000, a decrease of approximately $3,085,000 or
8.3% as compared to the approximately $36,988,000 recorded in the third quarter
of the prior fiscal year.
Wholesale revenue for the nine-month period increased to approximately
$57,853,000 an increase of approximately $3,727,000 or 6.9%. For the quarter
ended October 31, 2000, wholesale revenue was approximately $21,227,000, an
approximately $1,405,000 or 7.1% increase over the comparative quarter in the
last fiscal year. Wholesale minutes sold in the nine-month period ended October
31, 2000 were approximately 466,439,000 minutes, an increase of approximately
47,778,000 minutes or 11.4%. Wholesale minutes sold in the quarter ended October
31, 2000 were approximately 172,149,000 minutes, an increase of approximately
15,344,000 minutes or 9.8%. The rate of revenue growth does not parallel the
rate of volume growth due to the reduction of prices in the competitive
wholesale market place.
Retail revenues for the nine-month period were approximately
$41,951,000, a decrease of approximately $11,059,000 or 20.9%. For the quarter
ended October 31, 2000, retail revenues were approximately $12,677,000, an
approximately $4,491,000 or 26.2% decrease over the comparative quarter in the
last fiscal year. Retail minutes sold in the nine month period ended October 31,
2000 were approximately 459,670,000 minutes, a decrease of approximately
58,590,000 minutes or 11.3%. Retail minutes sold in the quarter ended October
31, 2000 were approximately 144,735,000 minutes, a decrease of approximately
27,238,000 minutes, or 15.8%. Decreases in both the retail selling price and
volume is attributed to the intense price competition within the industry, and a
decrease in the utilization of the the registrant's facilities The Registrant
has experienced a reduction of approximately 1.1 cents per minute or 10.8% to an
average billing rate per minute of 9.1 cents during the current fiscal year.
This rate decrease equates to an approximately $5,066,000 reduction in retail
sales. The volume
9
<PAGE>
decrease equates to an approximately $5,993,000 reduction in retail revenues.
These two factors combined make up the approximately $11,059,000 shortfall over
the prior year's nine month revenue. Given the competitive climate in the long
distance telephone industry, there can be no assurance that the trend will abate
during the remainder of the fiscal year.
Cost of sales, excluding the access charge settlement, for the current
nine-month period was approximately $86,788,000, an increase of approximately
$1,031,000 or 1.2%. For the quarter ended October 31, 2000, cost of sales was
approximately $29,730,000, a decrease of approximately $328,000 or 1.1% over the
comparative quarter in the last fiscal year. These changes were unfavorable in
relation to the 6.8% decrease in sales for the nine-month period and the 8.3%
decrease in the third quarter. Included in cost of sales is approximately
$2,073,000 of disputed charges on vendor invoices for the nine-month period
ended October 31, 2000. During the current fiscal year the registrant filed
approximately $4,320,000 of disputes with its vendors, of which approximately
$1,991,000 has been settled in the registrant's favor, and approximately
$256,000 denied. For the quarter ended October 31, 2000 the registrant filed
approximately $1,868,000 of disputes with its vendors, of which approximately
$1,268,000 has been settled in the registrant's favor, and approximately $60,000
denied. These disputes along with the increased volume of wholesale minutes
sold, offset by the reduced retail volumes and reduced buy rates are the primary
reason for the increase in cost of sales. The gross margin, excluding the line
access settlement for the current nine-month period decreased to approximately
13.0% as compared to approximately 20.0% for the first nine months of the prior
fiscal year, and decreased to 12.3% from 18.7% for the third quarter of the
current fiscal year as compared to the third quarter of the prior fiscal year.
These decreases in the gross margins are reflective of the disputed charges
described above and the higher mix of lower margin wholesale product compared to
the higher margin retail product, and the continued decrease in the retail
selling prices. The retail to wholesale mix for the nine months ended October
31, 2000, was 42% to 58%. In the comparative prior fiscal period, the retail to
wholesale mix was 49% to 51%.
In the second quarter of the current fiscal year the Registrant
received a cash payment of $1,264,483 from certain Bell Companies in settlement
of a class action suit filed in 1992 relating to overcharges by those companies.
The settlement concluded the class action with the Bell Companies. The cash
payment was recorded as a reduction of line costs in the quarter.
Selling, general and administrative expense for the nine-month period
decreased to approximately $19,707,000 a decrease of approximately $883,000, or
4.3%. For the quarter ended October 31, 2000, selling, general and
administrative expense was approximately $6,590,000, an approximately $662,000,
or a 9.1% decrease over the comparative quarter in the last fiscal year. The
decrease of approximately $883,000 for the nine month period was primarily
comprised of savings in commission expense of approximately $1,274,000 due to
the reduced sales volumes; a decrease in salaries, wages and fringe benefits of
approximately $324,000 due to headcount reductions; and reduced advertising,
promotion and selling expenses of approximately $776,000. This was offset by an
increase in the provision for doubtful accounts of approximately $968,000 for
certain wholesale business; an increase in depreciation expense of approximately
$267,000; and an increase in office rent expense for new sales offices of
approximately $140,000. The decrease of approximately $662,000 during the
quarter ended October 31, 2000 as compared to the quarter ended October 31, 1999
was comprised primarily of savings in commission expense of approximately
$610,000 due to reduced sales volume; reduced spending on advertising, promotion
and selling expense of approximately $427,000; and a decrease of salaries, wages
and fringes of approximately $140,000 due to reduced headcount. These cost
savings were offset by increases of approximately $45,000 in depreciation
expense; and a increase in the provision for doubtful accounts for certain
wholesale accounts of approximately $478,000.
Other compensation expense for the nine month and three month period
ended October 31, 1999 of approximately $5,771,000 consisted of a non-cash
charge of approximately $4,871,000 for the Put Option agreement as described in
Note I to the condensed financial statements, and $900,000 for the separation
agreement as described in Note I to the condensed financial statements.
For the reasons described above, the operating loss for the nine-month
period ended October 31, 2000 was approximately $5,428,000, an increase in the
operating loss of approximately $583,000 from the nine-month period ended
October 31, 1999. The operating loss for the three-month period ended October
31, 2000 was approximately $2,416,000, an improvement in results of
approximately $3,537,000 from the three-month period ended October 31, 1999.
Total other income, net, for the current nine-month period was
approximately $79,000 as compared to approximately $31,000 of total other
expense, net, recorded in the prior year nine-month period. Total other income,
net, for the current fiscal quarter was approximately $14,000 as compared to
approximately $15,000 of total other income, net, recorded in the comparable
period during the prior fiscal year. The approximately $110,000 change for the
nine month period is due to reduced interest expense and increased interest
income.
Diluted loss per Common share was $.72 per share for the current
nine-month period ended October 31, 2000 as compared to $.70 loss per share for
the nine-months ended October 31, 1999. Diluted loss per Common share was $.33
per share for the current three-month period ended October 31, 2000 as compared
to $.77 loss per share for the three-months ended October 31, 1999.
10
<PAGE>
Liquidity and Capital Resources
At October 31, 2000, the Registrant had negative working capital of
approximately $5,109,000, a decrease of approximately $6,331,000 as compared to
January 31, 2000. The ratio of current assets to current liabilities at October
31, 2000 decreased to 0.84:1, from the ratio of 1.04:1 at January 31, 2000. The
decrease in working capital at October 31, 2000 was primarily attributable to a
decrease in net accounts receivable of approximately $1,811,000; a decrease in
current income taxes receivable of approximately $1,577,000; an increase in
accounts payable of approximately $2,359,000; a decrease in cash and cash
equivalents of approximately $799,000; an increase in accrued liabilities and
salary and wages payable of approximately $187,000 and an increase in the
current portion of long term debt of approximately $35,000. This was offset by
an increase in the value of investments available for sale of $17,000 and an
increase in prepaid expenses of approximately $420,000.
The decrease in cash of approximately $799,000 was the result primarily
of the net loss of approximately $5,283,000; purchases of fixed assets of
approximately $3,082,000; the repayment of bank borrowings of approximately
$422,000; and additions to deferred line installation costs of approximately
$31,000. This was offset by non-cash charges for depreciation and amortization
of approximately $2,547,000; doubtful accounts of approximately $1,100,000;
non-cash compensation of approximately $103,000; the exercise of stock options
for approximately $8,000; and the net change in assets and liabilities of
approximately $4,261,000.
Capital Expenditures
Capital expenditures for the nine-month period ended October 31, 2000
were approximately $3,082,000. These expenditures were financed from funds
provided by operations and working capital. The major expenditures were for
expansion and upgrades of the New York switch site of approximately $1,179,000;
the purchase of an Oracle software license of approximately $402,000; the
purchase of a generator for the Newark, NJ switch site of approximately
$170,000; ISP iniatiatives and an E-commerce platform for approximately
$238,000; approximately $556,000 for new P.C.'s, and hardware and software
upgrades to the LAN; purchase of furniture and fixtures for new sales offices of
approximately $111,000 and other purchases for switch and NOC enhancements of
$426,000. Planned spending for fiscal 2000 totals approximately $3,800,000. The
remaining expenditures are slated for data warehousing, customer equipment, 800
redundancy and additional upgrades to the switches and LAN/WAN network. These
expenditures are planned to be financed through working capital, vendor
financing and additional lines of credit which the Registrant intends to
negotiate with its current lender or other sources.
The Registrant has a loan commitment from Gold and Appel Transfer SA, a
principal shareholder of the Registrant, for $15,000,000 at an interest rate of
11 1/2%. The Registrant is also currently negotiating with a major New Jersey
bank for a new line of credit. The Registrant has drawn down $1,143,340 of a
prior loan commitment at an interest rate of 7.71% payable over five years.
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. The Registrant's cash and
investments exceed long-term debt; therefore, the exposure to interest rate risk
relates primarily to the marketable securities held by the Registrant. The
Registrant only invests in instruments with high credit quality for which a
secondary market exists. The Registrant does not hold any derivatives related to
its interest rate exposure. The Registrant also maintains long-term debt at
fixed rates. Due to the nature and amounts of the Registrant's note payable, an
immediate 10% change in interest rates would not have a material effect in the
Registrant's results of operations over the next fiscal year. The Registrant's
exposure to adverse changes in foreign exchange rates is also immaterial to the
consolidated statements as a whole.
THE REST OF THIS PAGE INTENTIONALLY LEFT BLANK
11
<PAGE>
COVISTA COMMUNICATIONS, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEMS 1 - 3,5 Not applicable
ITEM 4 Submission of matters to a vote of security holders
The following matters were submitted to, and voted upon by,
the Stockholders of the Registrant in conjunction with the
2000 Annual Meeting of Shareholders held on September 12, 2000
in Little Falls, New Jersey:
(1) To elect five directors
(2) To approve an amendment of the Registrant's Certificate of
Incorporation to change the name to Covista
Communications, Inc.
The five nominees consisted of Mr. Walt Anderson, the
Registrant's Chairman of the Board; Mr. Leon Genet, a
director; Mr. Henry Luken, a director; Mr. Jay J. Miller, a
director and Mr. A. John Leach, a director. The stockholders
approved the election of the five nominees to the Board by
affirmative vote of a majority of the shares of Common Stock
in person or by proxy, and entitled to vote at the annual
meeting. Each of the following nominees received the following
votes:
<TABLE>
<CAPTION>
Name For Withheld
------------- --------- ---------
<S> <C> <C>
Walt Anderson 7,230,730 11,476
Leon Genet 7,230,730 11,476
Henry Luken 7,232,730 9,476
Jay J. Miller 7,230,730 11,476
A. John Leach 7,232,730 9,476
</TABLE>
The stockholders approved the amendment to the registrant's
Certificate of Incorporation to change the name to Covista
Communications, Inc. The proposal received 7,218,820 for the
proposal and 17,030 against the proposal.
ITEM 6 Exhibits and reports on Form 8-K
(a) Exhibit - 27 - Financial Data Schedule
(b) Report on Form 8-K filed during the three months ended
October 31, 2000 on October 3, 2000
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COVISTA COMMUNICATIONS, INC.
(Registrant)
<TABLE>
<S> <C>
Date December 14, 2000 By /S/ A. John Leach
--------------------------- ------------------------------
A. John Leach
President and Chief Executive Officer
Date December 14, 2000 By /S/ Thomas P. Gunning
--------------------------- -----------------------------
Thomas P. Gunning,
Vice President, Chief Financial Officer and
Principal Accounting Officer
</TABLE>
13
