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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
for the Quarterly Period Ended October 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number 0-27898
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IDT CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware 22-3415036
--------- ----------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
294 State Street, Hackensack, New Jersey 07601
---------------------------------------- -----
(Address of principal executive office) (zip code)
(201) 928-1000
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report date)
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 periods 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
--- ---
Common Stock, $.01 par value -- 9,666,900 shares as of December 13, 1996
Class A Common Stock, $.01 par value--11,174,330 shares as of December 13,
1996
(Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date)
Exhibit Index appears on page 16
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IDT CORPORATION
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of July 31, 1996 and
October 31, 1996................................................3
Condensed Consolidated Statements of Operations for the three
months ended October 31, 1995 and 1996..........................4
Condensed Consolidated Statements of Cash Flows for the three
months ended October 31, 1995 and 1996..........................5
Notes to Condensed Consolidated Financial
Statements....................................................6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................8-12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................13
Item 2. Changes in Securities...........................................13
Item 3. Defaults upon senior securities.................................13
Item 4. Submission of Matters to a Vote of Security Holders.............13
Item 5. Other Information...............................................13
Item 6. Exhibits and Reports on Form 8-K................................14
Signatures...............................................................15
Exhibit Index............................................................16
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IDT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, 1996 July 31, 1996
----------------- --------------
(unaudited) (Note 1)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 9,191,237 $ 14,893,756
Short-term investments 957,108 --
Accounts Receivable (Net) 12,594,978 11,497,565
Other current assets 3,249,685 4,110,090
------------ ------------
Total current assets 25,993,008 30,501,411
Property and equipment, net 20,515,693 12,453,330
Other assets 2,133,258 842,630
------------ ------------
Total assets $ 48,641,959 $ 43,797,371
============ ============
LIABILITIES AND
STOCKHOLDERS'
EQUITY
Current liabilities
Trade accounts payable $ 8,202,132 $ 7,778,860
Accrued expenses 7,514,495 7,770,334
Deferred revenue 1,905,993 983,496
Notes payable & current portion
of long-term debt and capital
lease obligations 1,596,090 ---
Other current liabilities 408,333 422,005
------------ ------------
Total current liabilities 19,627,043 16,954,695
Long-term debt and capital lease
obligations 5,278,883 ---
Commitments and contingencies ---- ---
------------ ------------
Total liabilities 24,905,926 16,954,695
Stockholders' equity
Preferred stock, $.01 par value; --- ---
authorized shares-10,000,000;
no shares issued
Common stock, $.01 par value; 96,669 96,669
authorized shares-
100,000,000; 9,666,900
shares issued and outstanding
Class A stock, $.01 par value; 111,743 111,743
authorized shares-
35,000,000; 11,174,330
shares issued and outstanding
Additional paid in capital 44,746,841 44,746,841
Accumulated deficit (21,219,220) (18,112,577)
------------ ------------
Total stockholders' equity 23,736,033 26,842,676
------------ ------------
Total liabilities and
stockholders' equity $ 48,641,959 $ 43,797,371
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
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IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended October 31,
1996 1995
---- ----
<S> <C> <C>
Revenues $28,317,671 $ 6,600,818
Cost and expenses:
Direct cost of revenues 18,012,801 4,172,712
Selling, general, and
administrative 12,597,679 3,953,483
Depreciation 963,433 130,755
----------- -----------
Total costs and expenses 31,573,913 8,256,950
----------- -----------
Loss from operations (3,256,242) (1,656,132)
Interest and other, net 149,599 2,817
----------- -----------
Net loss $(3,106,643) $(1,653,315)
=========== ===========
Net loss per share ($0.15) ($0.10)
=========== ===========
Weighted average number of
shares used in calculation of
earnings per share 20,841,230 16,569,292
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
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IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three months ended October 31,
1996 1995
---- ----
<S> <C> <C>
Cash provided by (used in)
operating activities ($4,820,559) $ 240,652
Investing activities
Payment for purchase of Yovelle,
net of cash acquired 376,843 --
Purchase of short-term
investments (757,108) --
Receipt of payment on advance 1,500,000 --
Payment for the purchase of ICS
assets (2,250,000) --
Purchase of property and
equipment (4,122,656) (835,546)
------------ ---------
Net cash used in investing
activities (5,252,921) (835,546)
Financing activities
Repayment of loans (374,286) (5,001)
Repayments of capital lease
obligation (4,753) --
Proceeds from loans 4,750,000 450,000
------------ ---------
Net cash provided by financing
activities 4,370,961 444,999
------------ ---------
Net decrease in cash & cash
equivalents (5,702,519) (149,895)
Cash & cash equivalents,
beginning of period 14,893,756 231,592
------------ ---------
Cash & cash equivalents,
end of period $ 9,191,237 $ 81,697
============ =========
Supplemental disclosures of
cash flow information
Interest paid $ 48,410 --
Income taxes paid -- --
</TABLE>
See notes to condensed consolidated financial statements.
5
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IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
IDT Corporation and Subsidiaries (collectively "the Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended October 31, 1996
are not necessarily indicative of the results that may be expected for the year
ending July 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended July 31, 1996 as filed with the
Securities and Exchange Commission.
Note 2 - Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
October 31, 1996 July 31, 1996
---------------- -------------
<S> <C> <C>
Equipment $18,827,522 $10,661,941
Computer software 2,527,282 1,971,018
Leasehold improvements 439,515 296,718
Furniture and fixtures 1,209,457 1,176,867
Automobile 21,650 --
Property and improvements 106,914 --
----------- -----------
23,132,340 14,106,544
Less: Accumulated depreciation
and amortization (2,616,647) (1,653,214)
----------- -----------
$20,515,693 $12,453,330
=========== ===========
</TABLE>
Note 3 - Acquisitions
During the quarter ended October 31, 1996, the Company purchased the
equipment and networks of two of its alliance partners for approximately $4.4
million of which the Company issued two promissory notes totaling $1,440,000.
In addition, to pay a portion of the purchase price the Company borrowed
$2,250,000 in a four year note with interest only payments for the first six
months at 11% per annum and 42 equal monthly payments of principal and interest
at 14% per annum and convertible into Common Stock at the lower of $14 or the
market price at the date of conversion per share at the option of the holder
after nine months of issuance.
In August 1996, the Company purchased all of the issued and outstanding
stock of Yovelle Renaissance Corporation, who owns the GENIE online service, for
cash of $200,000 which is due and payable in December 1996. The purchase price
included assumption of a note payable of $750,000 to GE Information Services,
due by December 15, 1996 and resulted in the recording of Goodwill of $1,372,289
which is included in other assets and is being amortized over forty years.
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Note 4 - Loans payable and capital lease obligations
During the quarter ended October 31, 1996, the Company borrowed $6,190,000
consisting of four interest bearing notes collateralized by certain equipment
owned by the Company and with terms ranging from twenty-four months to forty-
eight months.
One note of $2,250,000 can be converted into Common Stock at the option of
the holder.
The Company also entered into three capital lease arrangement to acquire
computer and communications related equipment totaling approximately $314,000 in
aggregate with terms ranging from twenty-four months to thirty-six months and
collateralized by the equipment.
Note 5 - Legal Proceedings and Contingencies
IDT has received an inquiry from a state Attorney General's office, in
which several states are participating, concerning IDT's advertising and
marketing practices. IDT is cooperating with the Attorneys General in this
investigation and has met with representatives of the offices involved. The
parties are currently working toward a resolution of this matter and IDT
believes that the outcome will not have a material effect on the ongoing
business of the Company.
On December 29, 1995, DRTV, Inc. a/k/a Surfers Unlimited, L.L.C.
("Surfers") filed a breach of contract action in the New Jersey Superior Court,
Bergen County. The suit names the Company as defendant and seeks restitutional
and consequential damages in an unspecified amount for licensing the sale of a
product in the retail market to a third party allegedly in violation of the
agreement between the Company and Surfers. The Company has filed a
counterclaim. The Company and Surfers have had settlement discussion; however,
the Company does not believe that a settlement of this matter is imminent.
On June 19, 1996, the Business Software Alliance ("BSA") in correspondence
with the Company alleged that the Company has made unlicensed internal use of
certain third party software. The Company has agreed to conduct an internal
software audit and is in negotiations with BSA to settle this matter. Although
there can be no assurance, the Company believes that the outcome will not have a
material adverse effect on the ongoing business of the Company.
The Company recently has been served with a third party complaint in a
pending action between The New York Times Company and Independent Media
Services, Inc. ("IMS"). In the third party complaint, IMS alleges non-payment
of media services fees and print advertisement fees. The claim against the
Company is for approximately $300,000. An answer has not yet been filed and an
assessment of potential liability is not possible at this time.
The Company received correspondence from a stockholder of 575,000 shares of
Common Stock with the right to require the Company to register his shares for
sale in a public offering. The Company asserted its right to delay or suspend
such registration for a limited time under specified circumstances. The
stockholder has stated his belief that the Company has no such right and that
the Company and Howard Jonas, its Chairman and Chief Executive Officer, will be
held responsible for any loss suffered by such stockholder from a decline in the
market price of the stock or other losses resulting from the delay in
registering his shares. Although the Company believes it has valid defenses to
the stockholder's claims, there can be no assurance as to the outcome of this
matter.
The Company is subject to other legal proceedings and claims which have
arisen in the ordinary course of its business and have not been finally
adjudicated. Although there can be no assurance, the opinion of management is
that settlement of these actions, when ultimately concluded, will not have a
material adverse effect on results of operations, cash flows or the financial
condition of the Company.
7
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
accompanying condensed consolidated financial statements and the associated
notes thereto of this Quarterly Report, and the audited consolidated financial
statements and the notes there to and Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company contained in the
Company's Annual Report on Form 10-K for the year ended July 31, 1996, as filed
with the Securities and Exchange Commission.
Overview
IDT is an international telecommunications company offering a broad range
of competitively priced long-distance telephone, and Internet access services in
the U.S. and abroad and recently began offering Internet telephony services.
The Company entered the international call reorigination business in 1990
to capitalize on the opportunity created by the spread between U.S. and foreign-
originated international long-distance telephone rates. IDT leveraged the
expertise derived from, and calling volume generated by, its call reorigination
business to enter the domestic long-distance business in late 1993, by reselling
long-distance telecommunications services of other carriers to IDT's domestic
customers. As a value-added service for its domestic long-distance customers,
the Company began offering Internet access in early 1994, eventually offering
dial-up and dedicated Internet access to individuals and businesses as stand-
alone services. In 1995, IDT began reselling to other long-distance carriers
access to the favorable telephone rates and special tariffs the Company receives
because of the calling volume generated by its call reorigination customers. In
August 1996, IDT entered the Internet telephony market with its introduction of
Net2Phone.
Revenues from the Company's telecommunications operations are derived
primarily from the following activities: (i) international long-distance call
reorigination services; (ii) international direct-dial services for individuals
and businesses; (iii) resale of long-distance minutes to other long-distance
carriers; and (iv) marketing to individuals and businesses of domestic long-
distance services provided by WorldCom. Revenues from the Company's Internet
operations are derived from providing Internet access services to individuals
and businesses.
The Company's Internet access service revenues depend primarily on the
number of subscribers to the Company's services and the types of accounts
subscribed for. Revenues from monthly subscribers have substantially increased
over the last year as a result of significant increases in the Company's
subscriber base. The Company believes this growth has resulted from greater
public awareness and acceptance of the Internet in general, an increase in the
number of POPs servicing the Company's clients, increased marketing and
advertising and an attractive Internet access package offered by the Company.
The Company's Alliance Program has facilitated its rapid POP expansion, which
allows the Company to offer local access in more geographic areas, thereby
enhancing its ability to expand its subscriber base.
The Company also has a direct connect Internet access service that is
marketed to businesses that typically require high-speed dedicated circuits from
customer premises to a Company or alliance partner POP. The Company charges
subscribers using 56Kbps lines approximately $350 per month and subscribers
utilizing full T1 lines approximately $1,400 per month for direct connect
service. As of October 31, 1996, the Company had 267 direct connect subscribers.
The Company began offering premium services to its subscribers in April
1996, and has experienced a trend towards an increase in the percentage of new
customers subscribing for Premium Accounts. However, there can be no assurance
that this trend will continue. As the Company has expanded and continues to
expand its nationwide network of POPs and leased lines, it expects to maintain
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an increasingly greater percentage of its customer base on Company-owned POPs,
while reducing its dependence on alliance partners. However, there can be no
assurance that this trend will continue.
The Company's ability to achieve revenue growth and profitability is
dependent upon its ability to acquire and retain customers. To continue to
realize subscriber growth, the Company must continue to attract additional
subscribers and replace terminating subscribers. The sales and marketing
expenses and subscriber acquisition costs associated with attracting new
subscribers, however, are substantial. Accordingly, the Company's ability to
improve operating margins will depend in part on its ability to retain its
subscribers and there can be no assurances that the Company's investments in
telecommunications infrastructure, customer support capabilities and software
releases will improve subscriber retention. The Company has expanded both the
personnel and operating hours of technical support and customer service staffs,
hired experienced managers and has made additional expenditures to enhance
customer and technical support systems. These strategies and commitments have
required substantial up-front expenditures for additional personnel, marketing,
facilities, infrastructure, product development and capital equipment and have
and may continue to adversely affect short-term operating results. There can be
no assurance that revenue growth will continue or that the Company will in the
future achieve or sustain profitability or positive cash flow from operations on
either a quarterly or annual basis.
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company has adopted Statement
121 in the first quarter of fiscal 1997 and, based on current circumstances,
does not believe the effect of adoption will be material.
The Company grants stock options for a fixed number of shares to employees
with an exercise price equal to or less than the fair value of the shares at the
date of grant. In October 1995, the FASB issued Statement No. 123, Accounting
for Stock Based Compensation, which is effective for fiscal years beginning
after December 15, 1995. In accordance with the provisions of Statement 123,
the Company has elected to continue to account for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and, accordingly, recognizes compensation expense for stock options grants only
when the exercise price is less than the fair value of the shares at the date of
grant.
Three Months Ended October 31, 1996 Compared to Three Months Ended October 31,
1995
Results of Operations
Revenues. Revenues increased 329% from approximately $6.6 million for the
three months ended October 31, 1995 to approximately $28.3 million for the three
months ended October 31, 1996. Revenues from the Company's telecommunications
operations increased 277% from approximately $4.8 million for the three months
ended October 31, 1995 to approximately $18.1 million for the three months ended
October 31, 1996. Revenues from the Company's Internet operations increased
461% from approximately $1.8 million for the three months ended October 31, 1995
to approximately $10.1 million for the three months ended October 31, 1996. The
increase in telecommunications revenues was due primarily to a 400% increase in
rebilled long-distance minutes from 6.7 million minutes to approximately 33.5
million minutes. The increase in rebilled long-distance minutes was due to a
substantial increase in international call reorigination customers, and the
addition of wholesale carrier clients. The number of international call
reorigination customers increased from approximately 4,500 at October 31, 1995
to 26,500 customers at October 31, 1996. The addition of wholesale carrier
clients resulted in an increase in long-distance arbitrage revenues of 592% from
approximately $1.4 million for the three months ended October 31, 1995 to
approximately $9.7 million for the three months ended October 31, 1996. As a
percentage of telecommunications revenues and overall revenues, long-distance
arbitrage revenues increased from approximately 29.7% to 53.6% and 21.6% to
34.3%, respectively. As a percentage of total revenues,
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Internet revenues increased from approximately 27.3% for the three months ended
October 31, 1995 to approximately 35.8% for the three months ended October 31,
1996. The increase in Internet revenues both in dollar terms and as a percentage
of revenues was due primarily to an increase in dial-up subscribers from
approximately 33,600 as of October 31, 1995 to approximately 153,100 as of
October 31, 1996. Internet revenues also included approximately $1.3 million of
online service revenues million for the three months ended October 31,1996 and
$0 for the three months ended October 31, 1995. Net2Phone revenues for the three
months ended October 31, 1996 were approximately $79,000, compared to $0 for the
three months ended October 31, 1995.
Direct Cost of Revenues. Direct cost of revenues consists primarily of the
costs paid to carriers for the transmission and termination of switched minutes
through IDT's facilities, and to a lesser extent, fees paid to alliance
partners, leased circuits and network costs, local access costs, Internet
connectivity costs, switch maintenance costs, and Online network processing
costs. The Company's direct cost of revenues increased by 327% from
approximately $4.2 million in the three months ended October 31, 1995 to
approximately $18.0 million in the three months ended October 31, 1996. As a
percentage of revenues, these costs increased from 63.2% to 63.6% in the three
months ended October 31, 1995 and 1996, respectively. The increase in absolute
dollars is primarily due to increases in underlying carrier costs as the
Company's telecommunications minutes of use, and associated revenue, grew
substantially. To a lesser extent, the increase is due to the increase in fees
paid to alliance partners, the costs of leased circuits and networks and of
access lines and network connectivity to support subscriber growth in both
Internet access and international call reorigination and the Online network
processing costs. The Company expects that direct cost of revenues will continue
to increase in absolute dollar terms as the Company expands its
telecommunications and Internet subscriber bases.
Selling, General and Administrative. Selling, general and administrative
costs increased 223% from approximately $3.9 million in the three months ended
October 31, 1995 to approximately $12.6 million in the three months ended
October 31, 1996. As a percentage of revenues, these costs decreased from 59.8%
to 44.5% in Fiscal 1995 and 1996, respectively. The increase in these costs in
dollar terms was due primarily to the addition of sales, marketing and technical
and customer support personnel hired to support the growth of the Company's
Internet access business, the increased advertising to attract Internet dial-up
subscribers and costs incurred in developing and marketing Net2Phone. The
Company anticipates selling, general and administrative costs in dollar terms
will continue to increase as the Company implements its growth strategy.
Depreciation and Amortization. Depreciation and amortization costs
increased 635% from approximately $131,000 in the three months ended October 31,
1995 to approximately $963,000 in the three months ended October 31, 1996. As a
percentage of revenues, these costs increased from 2.0% to 3.4% in the three
months ended October 31, 1995 and 1996, respectively. These costs increased in
absolute terms primarily as a result of the Company's higher fixed asset base
during Fiscal 1996 as compared with Fiscal 1995 due to the Company's efforts to
install additional Company-owned POPs, enhance its network infrastructure and
expand its facilities. The Company anticipates depreciation and amortization
costs will continue to increase as the Company continues to implement its growth
strategy.
Income (loss) from Operations. Income from operations for the
telecommunications segment decreased to approximately $621,000 in the three
months ended October 31, 1996 from $849,000 in the three months ended October
31, 1995 and as a percentage of telecommunication revenues to 3.4% from 17.8%.
The decrease in dollars resulted principally from increased selling, general and
administrative expenses generated by the expansion of operations. The decrease
as a percentage of telecommunication revenues resulted from increased selling
general and administrative expenses as well as the increased percentage of long-
distance arbitrage revenues which typically carry lower margins. Loss from
operations for the Internet access segment increased to $3.2 million in the
three months ended October 31, 1996 from approximately $2.5 million in the three
months ended October 31, 1995. The loss from operations from the Internet
access segment was principally due to the initial costs of acquiring customers,
increased personnel and facilities costs to sustain growth and substantial
marketing expenses to create customer
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awareness. The increased loss of the Internet access segment is largely due to
the growth in Internet customer base as the initial costs of acquiring customers
exceeds the initial revenue received from such customers. The loss generated
from the development and marketing of Net2Phone was approximately $632,000 for
the three months ended October 31, 1996.
Income Taxes. The Company records income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). The Company did not record an income tax benefit in the three months
ended October 31, 1995 or 1996, as the realization of available tax losses was
not probable.
Liquidity and Capital Resources
Historically, the Company has satisfied its cash requirements principally
through a combination of cash flow from operations, sales of equity securities
and borrowings from third parties (including its stockholders). In Fiscal 1996,
the Company raised $3,477,000 through the issuance of notes. The proceeds from
the issuance of the notes were used for general corporate purposes, including
working capital. In March 1996, the Company completed an initial public
offering of 4,600,000 shares of Common Stock for $10 per share. The Company
realized approximately $41.5 million from this offering. A portion of the
proceeds were used to repay $3,477,000, the principal amount of short-term notes
previously issued during Fiscal 1996. In connection with the repayment of such
notes, the Company incurred prepayment penalty of $233,500. Such prepayment
penalty was classified as an extraordinary loss for the early retirement of debt
in the Company's consolidated statement of operations for the year ended July
31, 1996. The Company used the remaining net proceeds from the offering for
general corporate purposes, capital expenditures and working capital, including
to (i) expand and improve the Company's Internet network infrastructure, (ii)
increase the Company's sales and marketing efforts, (iii) expand and improve the
Company's customer support and fulfillment capabilities, (iv) intensify the
Company's research and development activities, (v) develop new Internet
applications and content, and (vi) expand the Company's telecommunications
operations. At October 31, 1996, the Company had cash, and cash equivalents of
$9.2 million and working capital of approximately $6.4 million.
The Company generated negative cash flow from operating activities of
approximately $4.8 million during the three months ended October 31, 1996,
compared to a positive cash flow from operating activities of approximately
$240,000 during the three months ended October 31, 1995. The changes in
operating cash flows from the three months ended October 31, 1996 to the three
months ended October 31, 1995 were primarily due to increases in accounts
receivable and prepaid and other assets in relation to accounts payable and
other current liabilities. Cash flow from operations varied significantly from
quarter to quarter, depending upon the timing of operating cash receipts and
payments, especially accounts receivable and accounts payable. Accounts and
commissions receivable (net of allowances) were approximately $12.6 million and
$2.2 million at October 31, 1995 and 1996, respectively. Accounts receivable,
accounts payable and accrued expenses have increased period to period as the
Company's businesses have grown. Because of the nature of the Company's Internet
access business and the rapid increase in the number of subscribers, allowance
for doubtful accounts has also grown from period to period.
Purchases of fixed assets increased from approximately $835,000 in three
months ended October 31, 1995 to approximately $9.0 million in three months
ended October 31, 1996, primarily as a result of purchases of equipment to
support expansion of the Company's network infrastructure, and expansion of the
Company's facilities. The Company is upgrading and expanding its existing
network infrastructure by building a new, higher capacity, frame-relay based
network backbone and by adding Company-owned POPs.
The Company experiences intense competition in both its telecommunications
and Internet access businesses. If additional competition were to lead to
significant price reductions, especially in the price of
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the Company's expanding Internet services, cash flows from operations would be
materially adversely affected.
The Company intends to, where appropriate, make strategic acquisitions to
increase its telecommunications customer base. The Company may also make
strategic acquisitions related to its Internet business. From time to time, the
Company evaluates potential acquisitions of companies, technologies, products
and customer accounts that complement the Company's businesses. In the three
months ended October 31, 1996, the Company purchased the equipment and networks
of two of its alliance partners for approximately $4.4 million. The purchase
price includes cash of $2,250,000, which was financed by a four year note,
assumption of trade liabilities of approximately $280,000 excluding $429,000 due
to the Company) and the issuance of promissory notes totaling approximately
$1,440,000 of which $690,000 is a two year note at 8.25% interest per annum, and
$750,000 is a four year note at 10% per annum. No additional acquisitions are
currently contemplated.
The Company believes that, based upon its present business plan, its
existing cash resources and expected cash flow from operating activities will be
sufficient to meet its currently anticipated working capital and capital
expenditure requirements for at least the next twelve months. If the Company's
growth exceeds current expectations or the Company expedites or expands its
network expansion or if the Company's cash flow from operations is insufficient
to meet its working capital and capital expenditure requirements, the Company
will need to raise additional capital from equity or debt sources. There can be
no assurance that the Company will be able to raise such capital on favorable
terms or at all. If the Company is unable to obtain such additional capital, the
Company may be required to reduce the scope of its presently anticipated
expansion, which could adversely affect the Company's business and results of
operations and its ability to compete.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
- - ---------------------------------------------------------
The statements contained in this Report on Form 10-Q that are not purely
historical are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions, beliefs or strategies regarding the future. Forward looking
statements include the Company's liquidity, anticipated cash needs and
availability, and anticipated expense levels under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations." All
forward looking statements included in this document are based on information
available to the Company on the date of this Report, and the Company assumes no
obligation to update any such forward looking statement. It is important to
note that the Company's actual results could differ materially from those
expressed or implied in such forward looking statements. Among the factors that
could cause actual results to differ materially are the Company's recent entry
into new telecommunications markets and new service offerings, the intense
competition in the markets in which the Company operates and the domination of
many markets by large industry participants, the Company's dependence on others
to support or provide many of the services offered by the Company, technological
change and uncertainty, regulatory developments and the Company's ability to
manage its anticipated growth. You should also consult the risk factors listed
in the Company's Annual Report on Form 10-K from the year ended July 31, 1996 as
well as those factors listed from time to time in the Company's other reports
filed with the Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934 and the Securities Act of 1933.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Incorporated by reference from Part I, Item 1, Financial Statements,
Note 5 captioned "Legal Proceedings and Contingencies."
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
13
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number
- - ------
2.01## Merger Agreement relating to the reincorporation of the Registrant in
Delaware.
3.01## Restated Certificate of Incorporation of the Registrant.
3.02## By-laws of the Registrant.
4.01### Specimen Certificates for shares of the Registrant's Common Stock and
Class A Stock.
4.02## Description of Capital Stock (contained in the Certificate of
Incorporation of the Registrant, filed as Exhibit 3.01).
10.01** Form of Employment Agreement between the Registrant and
Howard S. Jonas.
10.02** Form of Employment Agreement between the Registrant and
Howard S. Balter.
10.03** Form of Employment Agreement between the Registrant and Eric L. Raab.
10.04## Form of 1996 Stock Option and Incentive Plan.
10.05.. Network Service Provider Agreement between Netscape Communications
Corporation and Registrant
10.06** Marketing Services and Independent Contractor Services Agreement
between Lermer Overseas Telecommunications, Inc. and the Registrant.
10.07# Rebiller Service Agreement between WorldCom, Inc. (formerly LDDS
Communications, Inc.) and the Company.
10.08### Form of Registration Rights Agreement between the Company's
stockholders and the Company
10.09## Lease of 294 State Street.
10.11! Form of Registration Rights Agreement between Howard S. Jonas and the
Registrant.
10.14.. Access Agreement between PSINet Inc. And the Registrant.
10.15.. Rested Sales Agreement between International Computer Systems, Inc.
and the Registrant.
21.01+ Subsidiaries of the Registrant.
27.00* Financial Data Schedule.
* filed herewith
.. incorporated by reference to Form 10-K/A filed November 21, 1996
(confidential treatment request pending)
** incorporated by reference to Form S-1 filed January 9, 1996, file
No. 33300204
# incorporated by reference to Form S-1 filed January 22 ,1996, file
No. 33300204
## incorporated by reference to Form S-1 filed February 21 ,1996, file
No. 33300204
### incorporated by reference to Form S-1 filed March 8 ,1996, file
No. 33300204
! incorporated by reference to Form S-1 filed March 14 ,1996, file
No. 33300204
+ incorporated by reference to Form S-1 filed October 29, 1996, file
No.33300204
(b) Reports on Form 8-K. The registrant did not file any reports on Form 8-K
during the quarter ended October 31, 1996.
14
<PAGE>
IDT CORPORATION
FORM 10-Q
October 31, 1996
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.
IDT CORPORATION
December 16, 1996 By /s/ Howard S. Jonas
- - ----------------- -----------------------------------
Date Howard S. Jonas
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
December 16, 1996 By /s/ Howard Balter
- - ----------------- -----------------------------------
Date Howard Balter
Chief Operating Officer and
Director
(Principal Financial Officer)
December 16, 1996 By /s/ Stephen R. Brown
- - ----------------- -----------------------------------
Date Stephen R. Brown
Chief Financial Officer
(Principal Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
Exhibit
Number
- - ------
2.01## Merger Agreement relating to the reincorporation of the Registrant in
Delaware.
3.01## Restated Certificate of Incorporation of the Registrant.
3.02## By-laws of the Registrant.
4.01### Specimen Certificates for shares of the Registrant's
Common Stock and Class A Stock.
4.02## Description of Capital Stock (contained in the Certificate of
Incorporation of the Registrant, filed as Exhibit 3.01).
10.01** Form of Employment Agreement between the Registrant and Howard S.
Jonas.
10.02** Form of Employment Agreement between the Registrant and Howard S.
Balter.
10.03** Form of Employment Agreement between the Registrant and Eric L. Raab.
10.04## Form of 1996 Stock Option and Incentive Plan.
10.05.. Network Service Provider Agreement between Netscape Communications
Corporation and Registrant
10.06** Marketing Services and Independent Contractor Services Agreement
between Lermer Overseas Telecommunications, Inc. and the Registrant.
10.07# Rebiller Service Agreement between WorldCom, Inc. (formerly LDDS
Communications, Inc.) and the Company.
10.08### Form of Registration Rights Agreement between the Company's
stockholders and the
Company
10.09## Lease of 294 State Street.
10.11! Form of Registration Rights Agreement between Howard S. Jonas and the
Registrant.
10.14.. Access Agreement between PSINet Inc. And the Registrant.
10.15.. Rested Sales Agreement between International Computer Systems, Inc.
and the Registrant
21.01+ Subsidiaries of the Registrant.
27.00* Financial Data Schedule.
* filed herewith
.. incorporated by reference to Form 10-K/A filed November 21, 1996
(confidential treatment request pending)
** incorporated by reference to Form S-1 filed January 9, 1996, file
No. 33300204
# incorporated by reference to Form S-1 filed January 22,1996, file
No. 33300204
## incorporated by reference to Form S-1 filed February 21,1996, file
No. 33300204
### incorporated by reference to Form S-1 filed March 8,1996, file
No. 33300204
! incorporated by reference to Form S-1 filed March 14,1996, file
No. 33300204
+ incorporated by reference to Form S-1 filed October 29, 1996, file
No. 33300204
16
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<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> OCT-31-1996 JUL-31-1996
<PERIOD-START> AUG-01-1996 AUG-01-1995
<PERIOD-END> OCT-31-1996 OCT-31-1995
<CASH> 9,191,237 14,893,756
<SECURITIES> 957,108 0
<RECEIVABLES> 12,594,978 11,497,565
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 25,993,008 30,501,411
<PP&E> 23,132,340 14,106,544
<DEPRECIATION> 2,616,647 1,653,214
<TOTAL-ASSETS> 48,641,959 43,797,371
<CURRENT-LIABILITIES> 19,627,043 16,954,695
<BONDS> 0 0
0 0
0 0
<COMMON> 96,669 96,669
<OTHER-SE> 23,639,364 26,746,007
<TOTAL-LIABILITY-AND-EQUITY> 48,641,959 43,792,371
<SALES> 0 0
<TOTAL-REVENUES> 28,317,671 6,600,818
<CGS> 0 0
<TOTAL-COSTS> 18,012,801 4,172,712
<OTHER-EXPENSES> 13,561,112 4,084,238
<LOSS-PROVISION> 1,452,286 2,600,000
<INTEREST-EXPENSE> 48,410 0
<INCOME-PRETAX> (3,126,641) (1,653,315)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,106,643) (1,653,315)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,106,643) (1,653,315)
<EPS-PRIMARY> (0.15) (0.10)
<EPS-DILUTED> (0.15) (0.10)
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