UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JULY 31, 1996 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-27898
IDT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 22-3415036
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation and organization)
294 State Street
Hackensack, New Jersey 07601
(Address of principal executive offices, including zip code)
(201) 928-1000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value (Title of class)
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing price of the Common Stock on October 25,
1996 of $12.25, as reported on the Nasdaq National Market, was approximately
$99.4 million. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded from this computation in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of October 25, 1996 the Registrant had outstanding 9,666,900 shares of
Common Stock, $.01 par value, and 11,174,330 shares of Class A Common Stock,
$.01 par value.
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INDEX
IDT CORPORATION
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Page No.
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PART I
Item 1. BUSINESS................................................. 1
RISK FACTORS............................................. 15
Item 2. PROPERTIES............................................... 27
Item 3. LEGAL PROCEEDINGS........................................ 27
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...... 27
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS...................................... 28
Item 6. SELECTED FINANCIAL DATA.................................. 29
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONAL AND RESULTS OF OPERATIONS.................... 29
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............. 36
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE................... 36
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....... 37
Item 11. EXECUTIVE COMPENSATION................................... 40
Item 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT......................... 44
Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS............................................. 46
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES, AND REPORTS ON FORM 8-K....................... 48
SIGNATURES ....................................................... F-22
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PART I
Item 1. BUSINESS
This Report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed in these forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the "Risk Factors" section of Item 1.
IDT Corporation ("IDT") is an international telecommunications company
which offers a broad range of integrated and competitively priced long-distance
telephone and Internet access services in the U.S. and abroad, and recently
began offering Internet telephony services. The Company commenced operations in
1990 as a pioneer in the international call reorigination or call-back business
and continues as an innovator in the international telecommunications industry
with its August 1996 introduction of Net2Phone -- the first commercial telephone
service to bridge live calls between personal computers and telephones via the
Internet. The Company operates a telecommunications network of switches and
leased lines with interconnections to other domestic and foreign carriers. As a
result of industry deregulation, increasing traffic volume, and an installed
base of international customers, the Company is beginning to build an
international telecommunications infrastructure of Company-owned switches and
leased lines. As of July 31, 1996, IDT provides international and domestic
long-distance telephone services to over 30,000 individuals, businesses, and
other telephone carriers in more than 120 countries. The Company also operates a
national Internet leased line network connecting over 480 points of presence
("POPs"), which include Company-owned POPs supplemented by those of its Internet
alliance partners. Through this national network, the Company provides dial-up
and dedicated Internet access and on-line services to over 142,000 individuals
and business customers. The Company has grown considerably in recent years,
generating revenues of $57.7 million for Fiscal 1996 versus revenues of $11.7
million for Fiscal 1995.
The Company operates a growing telecommunications network consisting of
Company-owned switches in the United States, dedicated leased fiber optic lines
between the United States and London, and interconnections with interexchange
carriers ("IXCs"), local exchange carriers ("LECs") and government-owned postal,
telegraph and telephone monopolies ("PTTs") around the world. Having achieved a
sufficient number of international telephone customers to cost-justify network
expansion, the Company plans to build-out its global telecommunications
switching infrastructure in order to reduce its operating costs and broaden its
potential customer base. IDT plans to install Company-owned switches in France,
Germany, Italy and the United Kingdom by early 1997 and currently is pursuing
operating agreements with several overseas carriers to enable the Company to
transmit and terminate traffic directly to these foreign carriers at
advantageous rates. IDT also operates a national Internet network comprised of
multiple leased DS3 lines creating a 45 mbps high speed backbone, together with
leased T1 lines connecting approximately 75 Company-owned POPs to the Company's
Internet backbone. Supplemented by its alliance partners, including PSINet Inc.
("PSI"), IDT now operates one of the nation's largest Internet networks. The
Company plans to add 50 more Company-owned POPs by the end of 1997. The Company
is in the process of integrating its telecommunications and Internet networks by
enabling portions of the domestic Internet backbone to be used for the
transmission of traditional telephony. If successfully implemented, this
leveraging of the available capacity over IDT's Internet network could provide
considerable economic efficiencies for transporting much of the Company's
domestic voice traffic. The Company believes that the planned expansion of its
international telecommunications network and the integration of its networks
through combined voice, data and Net2Phone services, could allow the Company to
realize certain efficiencies and position itself among those global
telecommunications companies offering full service solutions and employing
innovative and converging technologies, which will enable it to provide
competitively priced international communications 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 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. Throughout 1994, the Company focused on developing and
marketing its Internet services and offerings. In 1995, IDT began reselling to
other long-distance carriers access to the favorable international and domestic
long-distance telephone rates the Company
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obtains as a result of its significant calling volume generated by its call
reorigination customers. In early 1996, the Company brought together its focuses
on telecommunications and Internet, and began to reemphasize its bundled
telecommunications and Internet offerings and to take fuller advantage of the
relationships between the industries. In August 1996, IDT entered the Internet
telephony market with its introduction of Net2Phone.
The Company was founded in August 1990 and originally incorporated in
New York as International Discount Telecommunications Corp. The Company was
renamed IDT Corporation and incorporated in the State of Delaware in December
1995. The Company's principal offices are located at 294 State Street,
Hackensack, New Jersey 07601, its main telephone number is (201) 928-1000 and
its electronic mail address is [email protected].
Services
IDT offers its customers a wide array of domestic and international
telecommunications and Internet services.
Telecommunications Services
The Company's three primary telecommunications services are: (i)
international long-distance services for individuals and businesses via call
reorigination services and international direct-dial services; (ii)
carrier-to-carrier long-distance routing services provided to other
long-distance carriers ("carrier sales"); and (iii) marketing to individuals and
businesses of domestic long-distance services provided by WorldCom, Inc.
("WorldCom"). IDT provides international and domestic long-distance telephone
service to over 30,000 customers in 120 countries worldwide, including over
19,000 international call reorigination customers, and over 13,000 domestic
long-distance services customers.
International Long-Distance Services
Call Reorigination. The Company offers customers outside of the United
States international call reorigination services. Through this service, the
Company enables customers to access a U.S. dial tone from overseas and place
international calls reoriginated in the U.S., thereby benefiting from attractive
U.S. outbound long-distance rates, transmission quality, and enhanced services.
In a typical call reorigination scenario, an overseas customer dials a U.S.
phone number and after one ring, contact is made and the customer hangs up, with
no charge for the inbound call. The Company's switch then calls back a pre-set
number and provides a U.S. dial tone for the customer to connect and complete
the call.
The Company also provides its call reorigination customers with access
to enhanced U.S. telecommunications service options at U.S. long-distance rates.
These options include: voicemail; itemized billing; speed dial codes that allow
customers convenient access to the call reorigination service; personalized
voice prompts that allow customers to be called back at extensions where the
party being dialed must be requested by name; remote programmable service that
allows customers the flexibility of selecting the number called back instead of
receiving the call at a pre-programmed number; access to U.S. toll-free 888 and
800 numbers; and one-leg billing that combines the cost of the call back to the
customer and the cost of the customer's outbound call from the United States in
one item for convenience and orderly presentation. The Company primarily markets
its call reorigination service to fixed site businesses and individuals. As of
July 31, 1996, the Company had more than 19,000 international call reorigination
customers in 120 countries
International Direct-Dial. As an alternative service, the Company
provides international long-distance services to certain overseas customers,
currently in the United Kingdom, via standard international direct-dial network
services. Through this service, the Company offers a foreign customer the
ability to place a direct call to an international destination over the
Company's leased network at competitive rates without the need for a call
reorigination. Where the Company offers both call reorigination and
international direct-dial, and where the operating environment warrants, the
Company's strategy over time is to migrate its call reorigination customers to
international direct-dial service. The Company expects also to be offering this
service in France and Germany by July 31, 1997. However, there can be no
assurance that the Company will be able to offer this service in these
countries.
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Carrier Sales
The Company resells its competitive long-distance domestic and
international rates to third party IXCs and CAPs. In offering this service, the
Company leverages the rates that it is able to obtain through (i) its extensive
relationships in the long-distance telecommunications industry, (ii) its
inclusion in special tariffs written for a number of large call reorigination
clients, and (iii) its ability to generate a high volume of long-distance call
traffic. The Company enhances its ability to resell such rates by using its
least-cost routing ("LCR") platform to minimize the per-minute resale cost to
the third party IXC. Service is provided by routing the IXC customer's minutes
through the Company's LCR switching platform, enabling the carrier customer to
benefit from the competitive rates offered by the Company. In some instances,
rather than route a call directly between two overseas points, the Company may
"back-haul" an overseas carrier's minutes using resold switched services to the
Company's U.S.-based switch in order to terminate the traffic in a third country
while taking advantage of the Company's competitive U.S.-based international
long distance rates.
Domestic Long-Distance Services
The Company markets certain long-distance services directly to customers
in the United States. Under its agreement with WorldCom, a facilities-based U.S.
long-distance carrier, the Company markets WorldCom's domestic and international
long-distance services directly to U.S. retail customers at competitive rates.
The Company's customers save, on average, 10% - 50% off the rates for domestic
long-distance service charged by the major facilities-based carriers. The
Company markets the long-distance service as a value-added bundled service with
its dial-up Internet access, and offers customers who maintain minimum monthly
long-distance billing levels of $40, savings of approximately 20% off the rates
for dial-up Internet access charged by the major national Internet service
providers.
Internet Telephony
In August 1996, the Company began offering the first commercial
telephone service to bridge live calls between personal computers and regular
telephones via the Internet, and to charge on a per minute basis. Through the
Company's Net2Phone service, customers can place calls from sound-equipped
computers and have the calls terminate at regular telephones, with no
requirement of specialized equipment at the receiving telephone. The Company
distributes the necessary software by making it available from the Company's
Net2Phone World Wide Web ("Web") site for consumers to download free of charge.
All telephone calls made with Net2Phone are routed over the Company's switches.
The Company takes advantage of its existing LCR routing to increase the savings
realized by international callers using Net2Phone. For calls originating
overseas, the cost of placing and terminating the call with Net2Phone is up to
95% below the rates generally charged by traditional foreign carriers to place
and terminate standard international telephone calls.
The Company has announced its intention to develop, and is in the
process of developing, Net2Phone Direct, a commercial telephone service that
will allow for international phone-to-phone calling via the Internet using
packet switching. Net2Phone Direct is expected to enable phone-to-phone calling
between two parties using regular telephones while using the Internet to
transport the long-haul components of the call. Through such use of the
Internet, the Company expects to reduce significantly the cost of international
calling while extending the benefits of placing Internet telephone calls to
customers with access to a regular telephone without requiring the use of
personal computers or individual Internet access. The Company also has announced
its intention to develop a global network of switches and servers, thereby
expanding the Company's reach for providing competitively priced Internet
telephony solutions.
The Company believes that any delays in the development of Net2Phone
Direct or in the deployment of Net2Phone and Net2Phone Direct switches and
servers could delay final product introduction. There can be no assurance that
Net2Phone or Net2Phone Direct will gain market acceptance for the technology or
for the quality of the completed call, or that the Company's competitors will
not develop the ability to provide similar or better services. The Company
believes that Internet telephony applications are an important emerging niche in
the Internet industry and that other companies will enter the market to offer
additional Internet telephony products. However, because of the Company's
extensive experience in both the Internet access and telecommunications
industries, the Company believes that it is well-positioned to gain a
competitive advantage in offering personal computer-to-telephone and
telephone-to-telephone Internet telephony solutions.
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Internet and On-line Services
The Company's three primary Internet and on-line services are: (i)
dial-up Internet access for individuals and businesses; (ii) direct-connect
dedicated Internet services for corporate customers; and (iii) the Genie on-line
entertainment and information services, including the World Wide Web-based Genie
Interactive. IDT has become one of the nation's largest Internet access
providers, providing local dial-up access to 142,700 customers and providing
dedicated access to 226 corporate customers as of July 31, 1996. Through the
build-out of its own infrastructure and the recent agreement to utilize the PSI
network as well the local networks of its alliance partners, IDT now operates
one of the nation's largest networks providing local dial-up Internet access
through over 480 POPs. The Company owns approximately 75 POPs out of the over
480 POPs total.
Dial-Up Access Services
The Company markets a dial-up service that allows individuals to obtain
unrestricted Internet access with an easy-to-use point-and-click graphical user
interface for a fixed monthly fee. IDT provides its customers with access to a
full range of Internet applications, including electronic mail functions, Web
sites, USENET news groups, databases and public domain software, as well as a
full graphics package and browser software.
The Company provides its individual customer base with various pricing
options. Currently, the Company offers Basic Accounts for $19.95 per month, and
Premium Accounts for $29.95 per month. Each is a fully graphical SLIPP/PPP
account bundled with an Internet browser, unlimited dial-up Internet access, and
an e-mail account. Premium Account customers are entitled to the Reuters news
service, a second e-mail address, 8MB of personal Web space storage, and special
customer support services. The Company also offers basic Internet access
accounts for $15.95 per month for those customers who sign up for IDT's
long-distance telephone service and maintain their monthly telephone billings at
or above $40 per month. The Company offers free Basic Accounts for those
customers who sign up for IDT's long-distance telephone service and maintain
their monthly telephone billings at or above $150 per month.
Direct-Connect Dedicated Services
The Company offers a variety of Internet access options and applications
specifically designed to address the unique needs of corporations, as well as
business professionals. These direct-connect clients typically require
high-speed dedicated circuits because they desire to put up a Web site, the
nature of their business requires the transfer of large data files, or it would
be impractical for them to maintain dial-up accounts for all their employees who
require Internet access. IDT employs both frame relay technology and dedicated
connections to connect its clients' computers to the Internet through local area
networks ("LANs") and both 56Kbps and T1 lines. Currently, the Company maintains
a corporate client base comprised principally of medium-sized to large
businesses. The Company currently charges clients using 56Kbps lines
approximately $350 per month for direct-connect service and clients utilizing
full T1s approximately $1,400 per month for direct connect service. As of July
31, 1996, the Company had 226 direct connect subscribers.
Genie Services
The Company offers the recently acquired Genie on-line service, giving
subscribers access to roundtables, bulletin boards and chat areas, individual
and multi-player games, and premium news, travel, entertainment, weather and
other information services. Currently, the Company markets the Genie content as
an on-line service available only to subscribers. By the end of 1996, the
Company expects to have completed the conversion and electronic transfer of the
Genie content from the closed platform of an on-line service to the open
platform of the Web on the Internet, allowing for primarily unlimited, flat fee
access. This new offering, known as Genie Interactive, will have additional
content taking advantage of the Internet platform, including enhanced news and
information offerings and specialized interactive multi-player games currently
in development under contract with the Company. The Company believes that any
delays in the conversion and transfer to the Web platform could delay final
product introduction. There can be no assurance that Genie Interactive will gain
market acceptance, or that the Company's competitors will not develop the
ability to provide similar or better services. The Company intends to take
advantage of the unique features of each of Genie and Genie Interactive by
continuing to support both distribution mechanisms. The Company offers Internet
access to Genie on-line subscribers for an additional
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fee, and intends to offer the basic Genie Interactive service as a value-added
service for the Company's premium Internet access customers.
Network Infrastructure
The Company maintains an international telecommunications switching
infrastructure and U.S. domestic network of leased lines that enable it to
provide an array of telecommunications and Internet services to its customers.
IDT believes it enjoys competitive advantages by utilizing this network to carry
both voice and Internet traffic, resulting in the optimization of both its
network utilization and associated capital.
Telecommunications Network
Private Line Network
The Company operates a growing telephone network consisting of resold
international switched services, U.S. domestic dedicated leased fiber optic
lines, and Company-owned switch equipment in the United States which are
interconnected to major international and domestic IXCs, LECs and Competitive
Local Exchange Carriers. IDT's major switching facilities are located in
Piscattaway, NJ, Westfield, NJ and New York. These varied locations serve to
provide the network with redundancy and diversity. All of these locations are
linked with the dominant local exchange carrier as well as at least one of the
competitive LECs, allowing the Company to interconnect with all major IXCs to
switch traffic via the Company's leased private line DS3 network. Furthermore,
all of the Company's locations are interconnected via leased lines to enhance
network reliability and redundancy as each location interconnects with the
various carriers from diverse POPs.
In addition, the Company obtains switched services to connect its U.S.
facilities and London. These services are used for the origination of traffic
from IDT's customer base in the United Kingdom and to terminate existing carrier
and call reorigination traffic to the United Kingdom. The Company has recently
signed terminating agreements to the Dominican Republic and Italy and plans to
obtain leased lines to these destinations which will result in reduced costs for
termination to these countries. The Company has also targeted countries such as
France, Italy and Germany for network expansion due to the large number of
minutes the Company presently terminates to these countries and the Company's
installed base of telecommunications customers in these countries.
Switching Platforms
The Company utilizes two major switching platforms for different tasks.
The Excel LNX is a smart switch which the Company uses for its application-based
products such as callback, direct dial, call through, debit cards, calling
cards, and value added services such as voice prompts, speed dialing, voice mail
and conferencing. The other platform is the Northern Telecom DMS250-300, which
serves as an international gateway and generic carrier switch.
The Company also plans to use certain technologies, such as Northern
Telecom ERS switches, which allow for the dynamic allocation of voice and data
traffic, to enable the Company's Internet network to be used for the
transmission of traditional telephone minutes. If successfully developed, this
leveraging of IDT's Internet network could provide considerable economic
efficiencies for transporting much of the Company's domestic voice traffic.
The Company's Excel LNX switch incorporates Company-developed software
which performs efficiently all the applications the Company requires to provide
value added services as well as billing functions and traffic analysis. The
software enables the Excel to route all calls via the Company's LCR platform.
LCR is a process by which the Company optimizes the routing of calls over the
least cost route on its switch for over 230 countries. In the event that traffic
cannot be handled over the least cost route due to overflow, the LCR system is
designed to transmit the traffic over the next least cost route. The LCR system
analyzes the following variables that may effect the cost of a long distance
call: different suppliers, different time zones and multiple choices of
terminating carrier per country. The LCR system is continually reviewed in light
of rates available from different suppliers to different countries to determine
whether the Company should add new suppliers to its switch to further reduce the
cost of routing traffic to a specific country and to maintain redundancy,
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diversity and quality within the switching network. The Excel is flexible and
programmable, designed to implement network based intelligence quickly and
efficiently. All the Company's switches are modular, scaleable and equipped to
signal in such protocols as ISDN or SS7 so as to be compatible with either
domestic or foreign networks.
Internet Network
IDT operates a national Internet "network" comprised of a leased DS3 45
mbps backbone of high speed fiber optic lines connecting 8 major cities across
the United States, and leased dedicated T1 fiber optic lines connecting smaller
cities to the network. The network backbone uses state-of-the-art routing
platforms including Cisco series 7000 routers and Northern Telecom ERS Magellan
switches. The DS3 backbone drains traffic at four major Internet "meet" points
where the Company maintains switching and routing equipment and has peering
arrangements to exchange Internet traffic with over twenty other Internet
backbone providers. To minimize the potential detrimental effects of single
points of failure, the Company deploys a minimum of two dedicated leased data
lines to each backbone node and remotely positions secondary servers for all
configuration and authentication hosts. Multiple data segments are used in high
traffic areas to minimize packet loss and collision. Also, major IDT backbone
nodes employ routing switches for directing network traffic. To further enhance
network performance, the "Open Shortest Path First" protocol is employed to
optimally configure Internet routing tables and to allow data traffic to be
routed most efficiently.
The Company utilizes the local dial-up switching infrastructure of 72
alliance partners across the country to supplement the Company's owned and
operated local dial up infrastructure. The alliance partners, which are
independently owned Internet Service Providers ("ISPs"), employ routing and
modem equipment which meet the Company's standards for providing dial-up access
services. The Company offers the alliance partners a monthly fee for each
customer account funneled through their local access networks. The Company also
provides the billing, advertising, marketing and customer acquisition services,
in exchange for which the alliance partners provide local Internet access. The
agreements with alliance partners generally have one year terms and do not
prohibit the Company from constructing its own local installed POP where
warranted. Finally, the Company entered into an agreement with PSI in June 1996
to use PSI as the primary alliance partner for the Company's dial-up Internet
access customers in areas where PSI has POPs and where there are no pre-existing
alliance partners. The Company leases and operates a dedicated T3 connection to
the PSI network in order to maintain control of the Company's provisioning of
customers and to provide customers with access to electronic mail and newsfeeds.
The Company's Internet network includes over 405 POPs owned by PSI and the
alliance partners and approximately 75 Company owned POPs.
IDT's network is monitored on a 24 hours a day, 7 days a week, and 365
days a year basis by its network operations center. The entire network is
centrally managed from IDT's control center through the use of a standardized
communications protocol. In addition, two proprietary monitoring systems are
used to manage modem pools.
Research and Development
The Company has recently introduced Net2Phone and announced its
intentions to introduce Net2Phone Direct. Net2Phone is an Internet service based
on proprietary technology which allows persons using sound-equipped personal
computers to initiate telephone calls from the computer, transmit the calls over
the Internet to a gateway switch, which in turn routes the call over voice
telecommunications lines to a second party using a traditional telephone.
Net2Phone Direct will allow phone-to-phone communications over the Internet
where both parties are using regular telephones connected to the public switch
telephone networks and where the call is being transmitted over the Internet by
Company-owned switch servers in the countries in which each party is connected.
By allowing long-distance calling over the Internet, Net2Phone and Net2Phone
Direct both expand the role of the Internet as a communications medium and allow
substantial long-distance telecommunications savings.
The Company employs a technical staff that is devoted to the improvement
and enhancement of the Company's existing Internet and telecommunications
products and services, including switching technologies and the development of
new technologies and products, such as Net2Phone and Net2Phone Direct, and the
porting of the Genie entertainment and information services to the Web for Genie
Interactive. The Company believes that the ability to adjust and improve
existing technology and to develop new technologies in response to, and in
anticipation of, customers' changing demands is
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necessary to compete in the rapidly changing Internet and telecommunications
industries. There can be no assurance that the Company will be able to
successfully develop new technologies or effectively respond to technological
changes or new industry standards or developments on a timely basis, if at all.
See "Risk Factors-Rapid Technological Development; Proprietary Rights."
Sales, Marketing and Distribution
The Company's overall marketing strategy is to leverage its promotional
and advertising resources to sell the Company's full range of telecommunications
and Internet services. By marketing its telephone and Internet services as
bundled and integrated solutions, the Company believes it can gain a competitive
advantage while enhancing its international recognition as a comprehensive
provider of competitively priced communications services.
Telecommunications
The Company primarily markets its international call reorigination
services through its overseas network of independent sales representatives. The
foreign sales representatives, who are overseen by the Company's U.S.-based
sales managers, provide the Company with access to local business clientele and
residential customers and continually emerging opportunities in the local
markets they serve. The Company pays its foreign sales representatives on a
commission basis. As of July 31, 1996, the Company was represented by 110
foreign sales representatives in 70 countries. In recent months, the Company
also has commenced direct sales efforts, primarily through overseas advertising
in international print media, to penetrate particular market segments not
currently served.
The Company's internal international carrier sales staff obtains and
remarkets competitive rates to other IXCs. The staff primarily relies on, and
benefits from, (i) the Company's extensive relationships within and increasing
international exposure and recognition throughout the long-distance industry for
marketing its carrier services, and (ii) the Company's self-perpetuating
telecommunications model which should enable the Company to negotiate for lower
rates.
Internet
The Company established itself as a leading national provider of
Internet access services primarily through extensive broadcast print advertising
to the consumer market. In recent months, the Company has refocused the
marketing efforts of its Internet operations. While the Company intends to
continue various means of broadcast advertising in select markets, the Company's
sales and marketing efforts now are focused primarily on increasing its Internet
customer base through (i) OEM transactions, including hardware, software and
operating system bundling, (ii) retail channel distribution agreements and (iii)
bundling Internet access with long-distance telephone service. By applying the
above strategies, the Company believes it will increase its exposure to the
millions of computer users who are potential customers of the Company's Internet
access services, while reducing its customer acquisition costs as compared to
traditional broadcast and print advertising. The Company has entered into
third-party bundling agreements with companies such as Macromedia Inc., a
leading developer of multimedia software, which is distributing the Company's
Internet access software as part of its Showcase CD product. Also, GT
Interactive Software Corporation, a leading retail software distributor, is
marketing the Company's Internet access software in retail outlets under the
brand name "Easy Surf." The Company intends to market its Genie Interactive
service through on-line and Internet-based advertising venues and use print
media focused on interactive computer gaming and entertainment. The Company also
will continue to market the existing Genie on-line service, and cross-sell its
Internet access service to the Genie customer base. As of July 31, 1996, the
Internet sales force consisted of approximately 110 salespersons. The Company's
Internet sales staff is closely supervised and undergoes customized and ongoing
training.
Internet/Long-Distance Bundling
The Company bundles its Internet access services with its domestic
long-distance telephone services in order to maximize the Company's marketing
efforts for its Internet services while allowing for the acquisition of
telephone customers. By bundling its long-distance phone service with its $15.95
per month discounted dial-up Internet access, the Company is currently able to
compete with many major national providers of Internet access by offering rates
that are, on
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average 20% lower, and at the same time differentiate itself from its
competitors in the Internet access market who are unable to offer their
customers significant savings on their monthly long-distance bills. The Company
leverages its existing inbound Internet telesales group for the sale of its
bundled long-distance and Internet access service.
Internet Telephony
The Company is currently marketing its Net2Phone Internet telephony
solution by distributing its Net2Phone software for free via the Internet and
acquiring commercial Net2Phone customers through its pre-paid, virtual
debit-card system. IDT currently promotes its Net2Phone service through on-line
and Internet-based advertising venues, traditional print advertising in
international publications, and electronic media. The Company is currently
seeking to bundle the Net2Phone software as a value-added component with leading
OEMs and software developers. The Company is also seeking to sell its Net2Phone
Direct switch servers to third parties in strategic markets world-wide by
leveraging its existing international network of independent sales
representatives.
Customer Support and Billing
The Company provides customer support for its call reorigination
customers to deal with both technical problems and billing issues. The customer
support staff focuses on responding swiftly to customers and is generally
capable of activating call reorigination service for new customers in 24 to 48
hours from the time of subscription.
The Company believes that, in order to successfully compete in the
international call reorigination business, effective billing and collection
procedures and policies are necessary because the geographic dispersal of call
reorigination clients creates the potential for billing and collection
difficulties. Call reorigination customers have the option of either providing
the Company with a credit card or giving a security deposit or advance payment.
The Company reviews all account usage on a daily basis, regardless of the
payment mechanism. The Company charges credit card customers throughout the
month, whenever accumulated usage equals $250 dollars, and provides detailed
billing statements once a month. For cash customers, the Company generally
accepts either a two-month deposit or a prepayment. Via the daily monitoring
system, the Company attempts to prevent such customers from exceeding their
balance on hand at the Company. If a charge or credit card is declined or if the
customer has inadequate funds on deposit, the Company suspends the account to
minimize the Company's exposure to unauthorized usage. In addition, the Company
is developing a real-time billing platform for its call reorigination customers.
The Company expects this service to both provide more efficient customer service
and allow the Company to further limit its exposure to bad debt.
The Company's Internet customer support division has grown from three
persons in May 1995 to 88 at January 31, 1996 and 152 at July 31, 1996. The
Company believes that its ability to provide adequate customer support services
is a crucial component of its ability to retain customers. While the Company has
experienced difficulty in the provision of support services in the past, it
has successfully focused on improving such service through measures including
the addition of support personnel and the monitoring of customer waiting time.
The customer support staff provides 24-hour technical assistance in addition to
general service assistance. Customer support personnel communicate with
subscribers via telephone, e-mail and fax. The Company requires that each
customer support staff member field a minimum number of calls and e-mails each
day. The Company also employs liaisons between the customer support and
technical staffs to ensure maximum responsiveness to changing customer demands.
Competition
The markets in which the Company operates are extremely competitive and
can be significantly influenced by the marketing and pricing decisions of the
larger industry participants. There are no substantial barriers to entry in
either the Internet access or any of the telecommunications markets in which the
Company competes. The Company expects competition in these markets to intensify
in the future.
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Telecommunications
Currently, the Company competes with (i) IXCs engaged in the provision
of long-distance access and other long-distance resellers and providers
including large carriers such as AT&T Corp. ("AT&T"), MCI Communications Corp.
("MCI"), Sprint Corp. ("Sprint"), and WorldCom, (ii) foreign PTTs, (iii) other
marketers of international long-distance and call reorigination services such as
Viatel, Inc., Kallback, and RSL Communications, Ltd., (iv) wholesale providers
of international long distance services such as Pacific Gateway Exchange, Inc.,
(v) alliances for providing wholesale carrier services such as "Global One"
(Sprint, Deutsche Telekom AG, and France Telecom S.A.) and "Concert" (British
Telecom Plc and MCI), and Uniworld (AT&T and Unisource -- Telecom Netherlands,
Telia AB, Swiss Telecom PTT and Telefonica de Espana S.A.), (vi) new entrants to
the long distance market such as the regional telephone operations companies
("RBOCs") in the United States, who have entered or have announced plans to
enter the U.S. interstate long-distance market pursuant to recent legislation
authorizing such entry, and utilities such as RWE AG in Germany, and (vii) small
resellers and facility-based IXCs. Moreover, some of the Company's competitors
have announced business plans similar to the Company's regarding the expansion
of telecommunications networks into Europe. Many of the Company's competitors
are significantly larger and have substantially greater market presence and
financial, technical, operational, marketing and other resources and experience
than the Company.
Because of their close ties to their national regulatory authorities,
foreign PTTs and newly-privatized versions thereof can directly pressure the
Company in their home countries by influencing regulatory authorities to outlaw
the provision of call reorigination services or by blocking access to the call
reorigination services the Company markets. There can be no assurance that such
behavior will not have a material adverse effect on the Company's business,
financial condition or results of operations. With the increasing privatization
of international telecommunications in foreign countries, it is also possible
that new foreign service providers, with close ties to their national regulatory
authorities and customer bases, will enter the call reorigination services
market in competition with the Company, or that PTTs will become deregulated and
gain the pricing flexibility to compete more effectively with the Company. The
ability of a deregulated PTT to compete on the basis of greater size and
resources and long-standing relationships with customers in its own country
could have a material adverse effect on the Company's business, financial
condition or results of operations.
The large U.S. long-distance carriers have, in the past, been reluctant
to compete directly with the PTTs by entering the international call
reorigination business and attempting to capture significant market share of the
domestic customers of the incumbent foreign PTTs. However, there can be no
assurance that other large carriers will not enter the call reorigination
industry. Because of their ability to compete on the basis of superior financial
and technical resources, the entry of AT&T or any other large U.S. long-distance
carrier into the international call reorigination business could have a material
adverse effect on the Company's business, financial condition or results of
operations. Also, the FCC's approval of call reorigination services where no
foreign country proscribes it is likely to stimulate additional entry by small
carriers who might target the same customer base as the Company does, which
could have a material adverse effect on the Company's business, financial
condition or results of operations.
Competition for customers in the telecommunication markets the Company
competes in is primarily on the basis of price and, to a lesser extent, on the
basis of the type and quality of service offered. Increased competition could
force the Company to reduce its prices and profit margins if the Company's
competitors are able to procure rates or enter into service agreements
comparable to or better than those the Company obtains, or to offer other
incentives to existing and potential customers. Similarly, the Company has no
control over the prices set by its competitors in the long-distance resale
carrier-to-carrier market. The Company could also face significant pricing
pressure if it experiences a decrease in its market share of international
long-distance traffic, as the Company's ability to obtain favorable rates and
tariffs depends, in large part, on the volume of international long-distance
call traffic the Company can generate for third-party IXCs. There is no
guarantee that the Company will be able to maintain the volume of domestic and
international long-distance traffic necessary to obtain favorable rates and
tariffs. Although the Company has no reason to believe that its competitors will
pursue directly aggressive pricing policies that could adversely affect the
Company, there can be no assurance that such price competition will not occur or
that the Company will be able to compete successfully in the future. In
addition, the Company is aware that its ability to market its carrier services
depends upon the existence of spreads between the rates offered by the Company
and those offered by the IXCs with whom it competes as well as those from whom
it obtains service. A decrease in such spreads could have a material adverse
effect on the Company's business, financial condition or results of operations.
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Internet Access
The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, operational, marketing and other resources and experience than the
Company. The Company's Internet access business competes or expects to compete
directly or indirectly with the following categories of companies: (i) other
national and regional commercial Internet access providers, such as Netcom
On-Line Communications Services, Inc. ("NETCOM"), and PSI; (ii) established
on-line services companies that offer Internet access, such as American Online,
Inc. ("AOL"), CompuServe Corp. ("CompuServe") and Prodigy Services Company
("Prodigy"); (iii) software and technology companies such as Microsoft
Corporation ("Microsoft"); (iv) national long-distance telecommunications
carriers, such as AT&T, MCI, and Sprint; (v) RBOCs; (vi) cable television
operators, such as Comcast Corporation ("Comcast"), Tele-Communications, Inc.
("TCI") and Time Warner Inc. ("Time Warner"); (vii) nonprofit or educational
Internet service providers; and (viii) newly licensed providers of
spectrum-based wireless data services.
Many of the established on-line services companies and
telecommunications companies, such as AT&T and RBOCs, have begun to offer or
announced plans to offer expanded Internet access services. The Company expects
that all of the major on-line services companies will eventually compete fully
in the Internet access market. In addition, the Company believes that new
competitors, including large computer hardware and software, cable, media,
wireless, and wireline telecommunications companies such as the RBOCs, will
enter the Internet access market, resulting in even greater competition for the
Company. The ability of these competitors or others to bundle services and
products not offered by the Company with Internet access services could place
the Company at a significant competitive disadvantage. In addition, certain of
the Company's competitors that are telecommunications companies may be able to
offer customers reduced communications charges in connection with their Internet
access services or other incentives, reducing the overall cost of their Internet
access solution and increasing price pressures on the Company. This price
competition could reduce the average selling price of the Company's services. In
addition, increased competition for new subscribers could result in increased
sales and marketing expenses and related subscriber acquisition costs, which
could materially adversely affect the Company's profitability. There can be no
assurance that the Company will be able to offset the effects of any such price
reductions or incentives with an increase in the number of its customers, higher
revenue from enhanced services, cost reductions or otherwise.
Competition is also expected to increase in overseas markets, where
Internet access services are just beginning to be introduced. There can be no
assurance that the Company will be able to increase its presence in the overseas
markets it presently serves, or to enter other overseas markets. There can be no
assurance that the Company will be able to obtain the capital required to
finance such continued expansion. In addition, there can be no assurance that
the Company will be able to obtain the permits and operating licenses required
for it to operate, hire and train employees or market, sell and deliver services
in foreign countries. Further, entry into foreign markets will result in
competition from companies that may have long-standing relationships with or
possess a better understanding of their local markets, regulatory authorities,
customers and suppliers. There can be no assurance that the Company can obtain
similar levels of local knowledge, and failure to obtain that knowledge could
place the Company at a serious competitive disadvantage. To the extent the
ability to provide access to locations and services overseas becomes a
competitive advantage in the Internet access industry, failure of the Company to
penetrate overseas markets or to increase its presence in the overseas markets
it presently serves may result in the Company being at a competitive
disadvantage relative to other Internet access providers.
The Company believes that its ability to compete successfully in the
Internet access market depends upon a number of factors, including: market
presence; the adequacy of the Company's customer support services; the capacity,
reliability and security of its network infrastructure; the ease of access to
and navigation of the Internet; the pricing policies of its competitors and
suppliers; regulatory price requirements for interconnection to and use of
existing local exchange networks by Internet services; the timing of
introductions of new products and services by the Company and its competitors;
the Company's ability to support existing and emerging industry standards; and
trends within the industry as well as the general economy. There can be no
assurance that the Company will have the financial resources, technical
expertise or marketing and support capabilities to continue to compete
successfully in the Internet access market.
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Internet Telephony
Numerous companies have entered the Internet telephony market in the
past year and a half and have established their Internet telephony products in
the marketplace before the Company's August 1996 introduction of its Net2Phone
service and imminent release of Net2Phone Direct. Most of the current Internet
telephony products enable voice communications over the Internet between two
parties simultaneously connected to the Internet via multimedia-equipped
personal computers, where both parties are using identical Internet telephony
software products. These products include Internet Phone form VocalTec Ltd.
("VocalTec"), WebPhone from QuarterDeck Corporation ("QuarterDeck") and
NetMeeting from Microsoft. Recently, Intel Corporation announced a new
technology aimed at standardizing and improving the compatibility of the various
Internet telephony software products, enabling customers of different Internet
telephony software products to communicate with one another over the Internet.
Furthermore, a number of companies including Dialogic Corp. ("Dialogic") and
Northern Telecom Limited ("Northern Telecom") have developed or announced their
intentions to offer server-based products which are expected to allow
communications over the Internet between parties using a personal computer and
regular telephone and between two parties using telephones where both parties
have these specialized servers at both ends of the call. While the Company's
Net2Phone and Net2Phone Direct services differ from the above mentioned products
in that they allow PC-to-telephone and phone-to-phone communications over the
Internet, with the Internet transmission service connected to the public
switched telephone network at centralized switching platforms owned by the
Company, and where users of the service are billed on a per-minute basis, there
can be no assurance that the Company will be able to successfully compete in the
developing Internet telephony market. Although Internet telephony continues to
be an area of intense focus from various Internet software providers,
traditional telephone service companies and telephone equipment manufacturers,
there can be no assurance that Internet telephony will gain market acceptance or
prove to be a viable alternative to traditional telephone service. Many
international telephone callers, accustomed to the convenience and quality of
phone-to-phone international calling via traditional circuit switch telephone
networks, may not switch to Internet telephony services notwithstanding the
potential cost savings.
Regulation
Telecommunications
While the domestic interstate long-distance business is generally not
subject to substantial regulation, domestic intrastate service is subject to
regulation that varies by state and can be substantial. The call reorigination
business, by virtue of its international nature, is subject to the jurisdiction
of foreign governments, some of which limit or prohibit the Company's services.
The FCC has imposed certain restrictions on international call reorigination
providers such as IDT, including the requirement that licensees provide service
in a manner consistent with the laws of the countries in which they operate.
Local laws and regulations differ significantly among the foreign jurisdictions
in which the Company operates, and the interpretation and enforcement of such
laws and regulations vary and are often based on the informal views of the local
government ministries which, in some cases, are subject to influence by the
local PTTs. Accordingly, in certain of the Company's principal existing and
target markets, there are laws and regulations that either prohibit or limit, or
could be used to prohibit or limit, certain services the Company markets. The
Company provides its services to the maximum extent it believes permissible
under applicable local laws and regulations. Where such services are found to be
not in compliance with local laws and regulations, the Company seeks to comply
with such laws and regulations or ceases to market such services. There can be
no assurance that a portion of the services the Company markets and provides
will not be or will not continue to be prohibited in certain jurisdictions.
There can be no assurance that the Company has accurately predicted or
will accurately predict the interpretation of applicable laws and regulations or
regulatory and enforcement trends in state, federal and foreign jurisdictions or
will be found to be in compliance with all such laws and regulations. Failure to
predict accurately the enforcement of applicable laws and regulations in
particular jurisdictions, or incorrect interpretation of applicable laws and
regulations, could cause IDT to lose, or be unable to obtain, regulatory
approvals necessary for it to be able to provide certain of its services in such
jurisdictions or to use certain of its transmission methods and could have
monetary penalties imposed against the Company that could be significant. In
addition, IDT's license (the "Section 214 License") under Section 214 of the
Communications Act ("Section 214") requires the Company to comply with the laws
of the countries in which it operates. If the Company is found to have violated
the laws of a country in which it operates, the FCC may impose monetary fines
and penalties,
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including the rescission of the Company's Section 214 License. Although FCC
rescission of IDT's grant of authority is unlikely, such action would have a
material adverse effect on the Company's business of 1996.
The Telecommunications Act of 1996 (the "1996 Telecommunications Act")
substantially alters the regulatory framework for the telecommunications
industry for domestic and U.S. international telecommunications services. The
Company cannot predict the ultimate effects of this legislation or the outcome
of the FCC rulemakings required by the 1996 Telecommunications Act. The
legislation does not impose substantial regulatory burdens on the Company's
international call reorigination, Internet access or domestic interstate
telecommunications operations. However, depending on the outcome of FCC
rulemakings required by the 1996 Telecommunications Act, the Company could be
subjected to additional regulatory requirements, including that it contribute
some portion of its telecommunications revenues to subsidy mechanisms for
universal service. In addition, the legislation could result in increased
competition and affect interconnections and costs. If the Company cannot market
and support the services it presently provides due to the application of laws
and regulations that prohibit such services or due to failure to receive or
retain formal or informal approvals for such services or for whatever other
reason related to regulatory compliance or the lack thereof, the Company's
business could be materially adversely affected. There can be no assurance that
any number of the services or transmission methods the Company markets and
supports will not be prohibited in its current and proposed markets. Depending
upon the countries in which such prohibition occurs, there could be a material
adverse effect on the Company's business, financial condition or results of
operations.
The regulatory framework in certain geographic regions in which the
Company operates is briefly discussed below.
Europe.
In June 1990, the European Commission issued a Directive on Competition
in the Markets for Telecommunications Services (the "Directive") which required
European Union ("EU") Member States by 1991 to open their markets for all
telecommunications services with the exception of mobile, satellite, telex and
"voice telephony" services. The effect of the Directive was to permit
competitive entry into markets for the value-added services and voice services
to closed user groups that fall outside the Directive's definition of "voice
telephony." Differing interpretations of the Directive and the delayed enactment
of implementation legislation in Italy and Greece have created regulatory
uncertainty regarding entry into these markets.
In July 1993, the Council of Telecommunications Ministers of the EU (the
"Council") adopted a resolution supporting open markets for all public voice
telephony services in the EU by January 1, 1998. Extensions of up to five years
beyond that date are available for Spain, Ireland, Greece and Portugal. Spain
has since confirmed its commitment to the 1998 timetable. In December 1994, the
Council adopted a second resolution expanding the principle of general
liberalization by January 1, 1998 to cover infrastructure. These two resolutions
have no legally binding effect without country-specific legislation to
liberalize voice telephone services within the deadlines envisioned.
The European Commission issued a report on April 4, 1995 concerning the
status and implementation of the Directive and taking a narrow view of the
services which can remain closed to competition. In the report, the European
Commission states that where negotiation with a member state does not lead to
implementation of the Directive within a reasonable period, the European
Commission is obliged to resort to the use of formal procedures under the Treaty
of Rome to compel implementation. At present, the European Commission has
brought formal procedures against Italy and Greece for failing to notify details
of all necessary national legislation to implement the Directive, and Germany
and Spain for failing to correctly apply the requirements of the Directive.
United States.
The U.S. telecommunications industry is subject to regulation by the FCC
and various state regulatory agencies. Pursuant to Section 214, the FCC requires
a company to make application to, and receive authorization from, the FCC to
provide international service to U.S. points. The FCC requires a 214 licensee to
provide services "in a manner that is consistent with the laws of countries in
which [it] operates." If the FCC finds that the Company has violated the terms
of its
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Section 214 License, it could impose a variety of sanctions on the Company,
including fines or the revocation of its Section 214 License, the latter of
which is usually imposed only in the case of serious violations. Such sanctions
could have a material adverse effect on the Company's business, financial
condition or results of operations.
IDT's ability to provide international switched service to points in the
U.S. is limited by the terms of the Section 214 License granted to the company
by the FCC. The Company's current authorization is limited to (i) the provision
of international switched service via the resale of other carriers'
international switched service; (ii) the provision of international private line
service via the resale of other carriers' international private line services;
and (iii) the provision of international switched service via the resale of
international private line services, but only to countries which the FCC finds
offer "equivalent" resale opportunities to U.S. carriers. Currently the FCC has
approved only the United Kingdom, Canada and Sweden as "equivalent." The Company
cannot use any of its international leased lines to provide call reorigination
or any other switched international services to countries other than the UK,
Canada and Sweden until the FCC finds other countries "equivalent." There can be
no assurance that the FCC will find equivalence in other countries or when such
determinations will be made.
The Company's services between U.S. points are regulated by the FCC and
state commissions. If the FCC or state regulators find that the Company was
engaging in activities that required authorizations which the Company currently
does not hold or violated the regulatory requirements established by the
relevant commissions, the FCC or state regulators could impose financial
penalties and order the Company to comply with the applicable regulations or
cease doing business. Such penalties or action could have a material adverse
effect on the Company's business, financial condition or results of operations.
Moreover, the Company uses LEC networks to connect its Internet
customers to its POPs. Under current federal and state regulations, the Company
and its Internet customers pay no charges for this use of the LECs' networks
other than the flat-rate, monthly service charges that apply to basic telephone
service. The LECs have asked the FCC to change its rules and require Internet
access providers to pay additional, per minute charges for their use of local
networks. Per minute access charges could significantly increase the Company's
costs of doing business and could, therefore, have a material adverse effect on
the Company's business, financial condition or results of operations. The FCC is
considering whether to propose such rule changes in a formal rulemaking
proceeding scheduled to begin November 26, 1996.
Other Overseas Markets.
The Company is subject to the regulatory regimes in each of the
countries in which it conducts business. Local regulations range from permissive
to restrictive, depending upon the country. In the past, the Company has
experienced problems in certain countries and has, in certain instances,
modified or terminated its services to comply with local regulatory
requirements.
Internet
Data network access providers are generally not regulated under the laws
and regulations governing the telecommunications industry. Accordingly, except
for regulations governing the ability of the Company to disclose the contents of
communications by its customers, no state or federal regulations currently
exists pertaining to the pricing, service characteristics or capabilities,
geographic distribution or quality control features of Internet access services.
The Company cannot predict the impact that future regulation or regulatory
changes, if any, may have on its Internet access business.
The 1996 Telecommunications Act imposes criminal liability on persons
sending or displaying in a manner available to minors indecent material on an
interactive computer service such as the Internet. The 1996 Telecommunications
Act also imposes criminal liability on an entity knowingly permitting facilities
under its control to be used for such activities. Entities solely providing
access to facilities not under their control are exempted from liability, as are
service providers that take good faith, reasonable, effective and appropriate
actions to restrict access by minors to the prohibited communications. The
constitutionality of these provisions has been successfully challenged in
federal appellate court, and the interpretation and enforcement of them is
uncertain. The Act may decrease demand for Internet access, chill
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the development of Internet content, or have other adverse effects on Internet
access providers such as the Company. In addition, in light of the uncertainty
attached to interpretation and application of this law, there can be no
assurances that the Company would not have to modify its operations to comply
with the statute, including prohibiting users from maintaining home pages on the
WWW, and increasing its control over the Genie Interactive content.
Internet Telephony
The Company knows of no U.S. or foreign laws or regulations specifically
regulating voice communications over the Internet. However, an association of
domestic phone carriers (ACTA) filed a petition on March 4, 1996 with the FCC
asking the FCC to regulate voice communications over the Internet. The FCC has
not yet taken any action in response. However, the State Commissions and the FCC
could conclude that Internet telephony providers are subject to the same
regulatory requirements as telephony providers who use more traditional network
services. If the FCC or a state commission decides to regulate Internet
telephony, there can be no assurance that any such regulation will not
materially adversely affect the Company's business, financial condition or
results of operations.
Intellectual Property
The Company's success and ability to compete is dependent in part upon
its technology, although the Company believes that its success is more dependent
upon its technical expertise than its proprietary rights. The Company relies on
a combination of patent, copyright, trademark and trade secret laws and
contractual restrictions to establish and protect its technology. The Company
does not have any issued patents or registered copyrights, although it has
registered trademarks in connection with the Genie services and other pending
applications for a patent and certain trademarks. The Company requires employees
and consultants to execute confidentiality agreements upon the commencement of
their relationships with the Company. These agreements provide that confidential
information developed or made known during the course of a relationship with the
Company is to be kept confidential and not disclosed to third parties except in
specific circumstances. There can be no assurance that the steps taken by the
Company will be adequate to prevent misappropriation of its technology or other
proprietary rights or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology. In addition, there can be no assurance that licenses for
any intellectual property that might be required by the Company for it to
provide its services or products would be available on reasonable terms, if at
all.
The Company owns a trademark registrations for the mark GENIE. In
addition, the Company has applications pending with respect to the registration
of the service marks IDT, IDT together with the Company's logo, INTERNET NEWS
NETWORK, PHONE BACK, NET2PHONE, N2P, KIDZWEB, BIZWEB and SUPERWEB. In addition,
the Company has applied for a patent in connection with its development of the
systems and methodology comprising the technologies underlying Net2Phone. There
can be no assurance that Net2Phone will gain market acceptance or that the
Company's competitors will not develop the ability to provide similar or better
services. In addition, there can be no assurance that the Company's patent
application relating to the systems and methodology comprising the technologies
underlying Net2Phone will result in any patent being issued or that, if issued,
any patent will provide protection against competitive technology or will be
held valid and enforceable if challenged, or that the Company's competitors
would not be able to design around such patent; nor can there be any assurance
that others will not obtain patents that the Company would need to license or
circumvent to practice its patent. See "Risk Factors-Dependence on Technological
Development."
Employees
As of July 31, 1996, the Company had 485 full-time employees, including
approximately 130 in technical support and customer service, 117 in sales and
marketing, 58 on the technical staff, 126 in general operations and 54 in
management and finance. The Company believes that its relations with its
employees are good. None of the Company's employees is represented by a labor
union or covered by a collective bargaining agreement and the Company has never
experienced a work stoppage.
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RISK FACTORS
Forward-looking Statements. This Report on Form 10-K contains
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. Such
forward-looking statements include, among other things, the Company's plans to
implement its growth strategy, improve its financial performance, expand its
infrastructure, develop new products and services, expand its sales force,
expand its customer base and enter international markets. Such forward-looking
statements also include the Company's expectations concerning factors affecting
the markets for its products, such as demand for long-distance
telecommunications, Internet access and on-line and Internet telephony services.
Actual results could differ from those projected in any forward-looking
statements for the reasons detailed in the "Risk Factors" below as well as in
other sections of this Report on Form 10-K. The forward-looking statements are
made as of the date of this Report on Form 10-K, and the Company assumes no
obligation to update the forward-looking statements, or to update the reasons
why actual results could differ from those projected in the forward-looking
statements. You should consult the risk factors listed from time to time in the
Company's Reports on Form 10-Q, 8-K, 10-K and Annual Report to Stockholders.
Limited Operating History; Operating Losses; Fluctuations in Operating Results
The Company commenced operations in August 1990 as one of the first
providers of international call reorigination, or call-back services and entered
the Internet access business in February 1994. Accordingly, the Company has only
a limited operating history upon which an evaluation of it and its prospects can
be based. Although the Company has experienced substantial revenue growth since
its incorporation, it has incurred losses of approximately $300,000, $2.1
million and $15.6 million in the fiscal year ended July 31, 1994 ("Fiscal
1994"), Fiscal 1995 and Fiscal 1996, respectively. As of July 31, 1996, the
Company had an accumulated deficit of approximately $18.1 million. The Company's
current focus is on expanding its network infrastructure to achieve economies of
scale, improve network performance, and enable the Company to expand its
geographic reach for potential telecommunications and Internet subscribers.
Consequently, the Company continues to make capital expenditures and incur
additional operating costs to hire additional personnel and increase its
expenses related to product development, marketing, network infrastructure,
technical resources and customer support. The pursuit of such objectives can be
expected to have an adverse impact on the Company's profit margins for at least
the near-term and until the Company can increase its customer bases sufficiently
to recover the costs of such expansions. In addition, an acceleration in the
growth of the Company's subscriber bases or changes in usage patterns among
subscribers may also increase costs as a percentage of revenues. As a result,
the Company expects that it will continue to incur net losses at least through
the fiscal year July 31, 1997 ("Fiscal 1997"). There can be no assurance that
revenue growth will continue or that the Company will be profitable in Fiscal
1998 or will at any time in the future achieve or sustain profitability.
The Company's quarterly operating results have fluctuated in the past as
the Company's business has evolved and may fluctuate significantly in the future
as a result of a variety of factors, some of which are outside of the Company's
control. These factors include general economic conditions, acceptance and use
of the Internet, user demand for long-distance telecommunications services,
capital expenditures and other costs relating to the expansion of operations,
the timing and costs of any acquisitions of technologies or businesses,
government regulation, the timing of new product announcements by the Company or
its competitors, changes in pricing strategies by the Company or its
competitors, changes in the mix of services sold by the Company market
availability and acceptance of new and enhanced versions of the Company's or its
competitors' products and services and the rates of new subscriber acquisition
and retention. These factors could also have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Quarterly Results of Operations."
Risks of Expansion and Implementation of Growth Strategy
The Company's rapid growth and expansion into new businesses have
placed, and may continue to place, a strain on the Company's management,
administrative, operational, financial and technical resources and increased
demands on its systems and controls. Demands on the Company's network resources
and technical staff and resources have grown rapidly
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with the Company's expanding customer bases, and the Company has in the past
experienced difficulties satisfying the demand for its services. The Company has
experienced delays in shipping the Company's software, resulting in billing
subscribers in advance of software receipt, and from time to time, subscribers
have experienced significant delays both in accessing the Internet through the
Company's modems and in contacting, and in receiving responses from, the
Company's customer and technical support personnel. In certain situations, these
events have created customer relations issues for the Company and resulted in
cancellations of subscriptions. There can be no assurance that the Company's
improved technical staff and resources will be adequate to facilitate the
Company's growth. A failure to effectively provide customer and technical
support services will affect adversely the Company's ability to attract and
maintain its customer base. The Company expects to experience continued strain
on its operational systems as it develops, operates and maintains its network.
Expected increases in the Company's telecommunications customer and Internet
subscriber bases will produce increased demands on its sales, marketing and
administrative resources, its engineering and technical resources, and its
customer and technical support resources, as well as on its switching and
routing capabilities and network infrastructure. As of July 31, 1995 and July
31, 1996, the Company had 96 and 462 employees, respectively. The Company
believes that it will need, both in the short-term and the long-term, to hire
additional sales and marketing and technical personnel as well as qualified
administrative and management personnel in the accounting and finance areas to
manage its financial control systems. Although the Company has hired additional
personnel and upgraded certain of its systems, there can be no assurance that
the Company's administrative, operating and financial control systems,
infrastructure, personnel and facilities will be adequate to support the
Company's future operations or maintain and effectively adapt to future growth.
There can be no assurance that the Company will be able to install
additional POPs, or expand its telecommunications infrastructure, add services,
expand its customer bases and geographical markets or implement the other
features of its business strategy at the rate or to the extent presently
planned. There can be no assurance that IDT's business strategy will be
successful. The Company's ability to continue to grow may be affected by various
factors, many of which are not within the Company's control, including U.S. and
foreign regulation of the telecommunications and Internet industries,
competition and technological developments. Part of the Company's growth
strategy is dependent upon the continued deregulation of foreign
telecommunications markets. There can be no assurance that such deregulation
will occur when or to the extent anticipated. The effect of foreign deregulation
on the Company is also uncertain. While the Company expects that deregulation
will give rise to new opportunities, the increase in competition expected to
result from deregulation could cause the Company's call reorigination business
to suffer and could have other material adverse effects on the business,
financial condition or results of operations of the Company. The inability to
continue to upgrade the networking systems or the operating and financial
control systems, the inability to recruit and hire necessary personnel or the
emergence of unexpected expansion difficulties could have a material adverse
effect on the Company's business, financial condition or results of operations.
Increasing Competition
The markets in which the Company operates are extremely competitive and
can be significantly influenced by the marketing and pricing decisions of the
larger industry participants. There are no substantial barriers to entry in
either the Internet access or any of the telecommunications markets in which the
Company competes. The Company expects competition in these markets to intensify
in the future.
Telecommunications
Currently, the Company competes with (i) IXCs engaged in the provision
of long-distance access and other long-distance resellers and providers
including large carriers such as AT&T, MCI, Sprint, and WorldCom, (ii) foreign
PTTs, (iii) other marketers of international long-distance and call
reorigination services such as Viatel, Kallback, and RSL Communications, (iv)
wholesale providers of international long distance services such as Pacific
Gateway, (v) alliances for providing wholesale carrier services such as "Global
One" (Sprint, Deutsche Telekom, and France Telecom), "Concert" (British Telecom
and MCI) and Uniworld (AT&T and Unisource -- Telecom Netherlands, Telia AB,
Swiss Telecom PTT and Telefonica de Espana S.A.), (vi) new entrants to the long
distance market such as the RBOCs in the United States, who have entered or have
announced plans to enter the U.S. interstate long-distance market pursuant to
recent legislation authorizing such entry, and utilities such as RWE in Germany,
and (vii) small resellers and facility-based IXCs. Moreover,
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some of the Company's competitors have announced business plans similar to the
Company's regarding the expansion of telecommunications networks into Europe.
Many of the Company's competitors are significantly larger and have
substantially greater market presence and financial, technical, operational,
marketing and other resources and experience than the Company.
Because of their close ties to their national regulatory authorities,
foreign government-owned PTTs can directly pressure the Company in their home
countries by influencing regulatory authorities to outlaw the provision of call
reorigination services or by blocking access to the call reorigination services
the Company markets. Similar pressure can be applied by newly-privatized former
PTTs and other home country competitors in nations that have eliminated
government ownership of the PTT. Although the Company has not suffered a
material adverse effect due to anti-competitive behavior on the part of the PTTs
(or former PTTs) to date, there can be no assurance that such behavior will not
in the future cause a material adverse effect on the Company's business,
financial condition or results of operations. With the increasing privatization
of international telecommunications in foreign countries, PTTs may increasingly
become deregulated and free to compete more effectively with the Company at
competitive rates. Deregulation in foreign countries also could result in
competition from other service providers with large, established customer bases
and close ties to governmental authorities in their home countries. Deregulation
and increased competition in foreign markets could cause prices for direct-dial
international calls to decrease so much that customers are no longer willing to
use the Company's international call reorigination services. The ability of a
deregulated PTT or another home country service provider to compete on the basis
of greater size and resources, pricing flexibility and long-standing
relationships with customers in its own country could have a material adverse
effect on the Company's business, financial condition or results of operations.
The large U.S. long-distance carriers have, in the past, been reluctant
to compete directly with the PTTs by entering the international call
reorigination business and attempting to capture significant market share of the
domestic customers of the incumbent overseas PTTs. However, there can be no
assurance that other large carriers will not enter the call reorigination
industry. Because of their ability to compete on the basis of superior financial
and technical resources, the entry of AT&T or any other large U.S. long-distance
carrier into the international call reorigination business could have a material
adverse effect on the Company's business, financial condition or results of
operations. Also, the FCC's approval of call reorigination services where no
foreign country proscribes it is likely to stimulate additional entry by small
carriers who might target the same customer base as the Company does, which
could have a material adverse effect on the Company's business, financial
condition or results of operations.
Competition for customers in the telecommunication markets the Company
competes in is primarily on the basis of price and, to a lesser extent, on the
basis of the type and quality of service offered. Increased competition could
force the Company to reduce its prices and profit margins if the Company's
competitors are able to procure rates or enter into service agreements
comparable to or better than those the Company obtains or markets or are able to
offer other incentives to existing and potential customers. Similarly, the
Company has no control over the prices set by its competitors in the
long-distance resale market. The Company could also face significant pricing
pressure if it experiences a decrease in its market share of international
long-distance traffic because the Company's ability to obtain favorable rates
and tariffs from its carrier suppliers depends, in large part, on the Company's
total volume of long-distance traffic. There is no guarantee that the Company
will be able to maintain the volume of domestic and international long-distance
traffic necessary to obtain favorable rates and tariffs. The Company is aware
that its ability to market its long-distance resale services depends upon the
existence of spreads between the rates offered by the Company and those offered
by the IXCs with whom it competes as well as those from whom it obtains service.
A decrease in such spreads or price competition in the Company's markets could
have a material adverse effect on the Company's business, financial condition or
results of operations. See "Risk Factors - Dependence on Others" and
"Business-Competition."
Internet Access
The Company's current and prospective competitors include many large
companies that have substantially greater market presence and financial,
technical, operational, marketing and other resources and experience than the
Company. The Company's Internet access business competes or expects to compete
directly or indirectly with the following categories of companies: (i) other
national and regional commercial Internet access providers, such as NETCOM and
PSI; (ii) established on-line services companies that currently offer or are
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expected to offer Internet access, such as AOL, CompuServe, and Prodigy; (iii)
computer hardware and software and other technology companies, such as
Microsoft; (iv) national long-distance telecommunications carriers, such as
AT&T, MCI, and Sprint; (v) RBOCs; (vi) cable television system operators, such
as Comcast, TCI, and Time Warner; (vii) nonprofit or educational ISPs; and
(viii) newly-licensed providers of spectrum-based wireless data services. See
"Business-Competition."
Many of the established on-line services companies and
telecommunications companies, such as AT&T and the RBOCs, have begun to offer or
announced plans to offer expanded Internet access services. The Company expects
that all of the major on-line services companies will eventually compete fully
in the Internet access market. In addition, the Company believes that new
competitors, including large computer hardware and software, cable, media,
wireless, and wireline telecommunications companies, will enter the Internet
access market, resulting in even greater competition for the Company. The
ability of these competitors or others to bundle with Internet access services
other services and products not offered by the Company could place the Company
at a significant competitive disadvantage. In addition, certain of the Company's
competitors that are telecommunications companies may be able to provide
customers with reduced communications costs in connection with their Internet
access services or other incentives, reducing the overall cost of their Internet
access solution and significantly increasing price pressures on the Company.
This price competition could result in significant reductions in the average
selling price of the Company's services. In addition, increased competition for
new subscribers could result in increased sales and marketing expenses and
related subscriber acquisition costs, which could materially adversely affect
the Company's profitability. There can be no assurance that the Company will be
able to offset the effects of any such price reductions or incentives with an
increase in the number of its customers, higher revenue from enhanced services,
cost reductions or otherwise.
Moreover, the Company uses LEC networks to connect its Internet
customers to its POPs. Under current federal and state regulations, the Company
and its Internet customers pay no charges for this use of the LECs' networks
other than the flat-rated, monthly service charges that apply to basic telephone
service. LECs have asked the FCC to change its rules and require Internet access
providers to pay additional, per minute charges for their use of local networks.
Per minute access charges could significantly increase the Company's costs of
doing business and could, therefore, have a material adverse effect on the
Company's competitive position and on its business, financial condition or
results of operations. The FCC is currently considering whether to propose such
rule changes.
Competition is also expected to focus increasingly on overseas markets,
where Internet access services are just beginning to be introduced. The Company
does not currently plan to increase its Internet access services outside the
United States. To the extent the ability to provide access to locations and
services overseas becomes a competitive advantage in the Internet access
industry, failure of the Company to penetrate overseas markets or to increase
its presence in the few overseas markets it presently serves may result in the
Company being at a competitive disadvantage relative to other Internet access
providers.
The Company believes that its ability to compete successfully in the
Internet access market depends upon a number of factors, including: market
presence; the adequacy of the Company's customer support services; the capacity,
reliability and security of its network infrastructure; the ease of access to
and navigation of the Internet; the pricing policies of its competitors and
suppliers; regulatory price requirements for interconnection to and use of
existing local exchange networks by Internet services; the timing of
introductions of new products and services by the Company and its competitors;
the Company's ability to support existing and emerging industry standards; and
trends within the industry as well as the general economy. There can be no
assurance that the Company will have the financial resources, technical
expertise or marketing and support capabilities to continue to compete
successfully in the Internet access market.
Internet Telephony
In August 1996, the Company began offering the first commercial
telephone service to bridge line calls between personal computers and regular
telephones via the Internet, and to charge on a per minute basis. Through the
Company's Net2Phone service, customers can place calls from sound-equipped
computers and have the calls terminate at regular telephones, with no
requirement of specialized equipment at the receiving telephone.
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Numerous companies have entered the Internet telephony market in the
past year and a half and had established their Internet telephony products in
the marketplace before the Company's introduction of its Net2Phone service. Most
of the current Internet telephony products enable voice communications over the
Internet between two parties simultaneously connected to the Internet via
multimedia-equipped personal computers, where both parties are using identical
Internet telephony software products. These products include Internet Phone from
VocalTec, WebPhone from QuarterDeck and NetMeeting from Microsoft. Recently,
Intel Corporation announced a new technology aimed at standardizing and
improving the compatibility of the various Internet telephony software products,
enabling customers of different Internet telephony software products to
communicate with one another over the Internet. Furthermore, a number of
companies including Northern Telecom and Dialogic have announced server-based
products and switches which are expected to allow communications over the
Internet between parties using a personal computer and regular telephone and
between two parties using telephones where both parties have these specialized
servers at both ends of the call. There can be no assurance that other large
companies will not enter the market as suppliers of Internet telephony services
or equipment or that the Company's competitors in this market will not introduce
Internet telephony products that permit termination of the call at a standard
telephone as does Net2Phone. There can be no assurances that the Company will be
able to successfully compete in the developing Internet telephony market.
Although Internet telephony continues to be an area of intense focus of various
Internet software providers, traditional telephone service companies and
telephone equipment manufacturers, there can be no assurance that Internet
telephony will gain market acceptance or prove to be a viable alternative to
traditional telephone service. Many international telephone callers, accustomed
to the convenience and quality of phone-to-phone international calling, may not
switch to Internet telephony services notwithstanding the potential cost
savings.
Dependence on Others
The Company is dependent on third-party suppliers of network
transmission services for many of its services and generally does not have
long-term contracts with its suppliers. Certain of these suppliers are or may
become competitors of the Company, and such suppliers generally are not subject
to restrictions upon their ability to compete with the Company. To the extent
that any of these suppliers raise their rates or change their pricing structure,
the Company may be adversely affected. Also, the Company faces the risk that
there will be a disruption in the service provided by these suppliers, and can
give no assurance that there will not be a significant disruption in such
service in the future, causing a disruption in the services provided by the
Company to its customers. The Company is dependent upon WorldCom and MFS
Communications Company, Inc. ("MFS") which are the primary providers to the
Company of leased-line network capacity and data communications facilities, and
lease to the Company physical space for switches, modems and other equipment. If
these suppliers are unable to expand their networks or unwilling to provide or
expand their current level of service to the Company in the future, the
Company's operations could be adversely affected. The Company is also dependent
upon the LECs and MFS to provide telecommunications services to the Company's
customers. Although certain leased data communications services are currently
available from several alternative suppliers, including, for example, AT&T, MCI,
and Sprint, there can be no assurance that the Company could obtain substitute
services from other suppliers at reasonable or comparable terms and prices or in
a timely fashion.
The Company's ability to compete in the long-distance telecommunications
market depends, in part, on its ability to procure advantageous rates from other
IXCs, and on the ability of such IXCs to carry the calls the Company routes to
their networks. If the Company, as a result of a termination of its relationship
with an IXC or an IXC's inability to carry traffic routed to it, routed the
traffic to another IXC providing service at a less advantageous rate, or with
lesser quality, there could be an adverse effect on the Company's profit margins
and network service quality. Such harm to the Company's profit margins and
service quality could in turn have an adverse effect on the Company's results of
operations and its ability to prevent subscription cancellation. Similarly, if
the facility-based providers whose services the Company resells were unable to
sell such services to the Company, there could be a material adverse effect on
the Company's business, financial condition, or results of operations.
IDT also depends on other companies to provide Internet access in areas
not serviced by the Company's POPs. The Company depends upon the continued
viability and financial stability of PSI, other alliance partners and other
suppliers as well as on the performance of their networks. If a material number
of such networks were to suffer operational problems or failure, or were unable
to expand to satisfy customer demand, there could be a material adverse effect
on the Company.
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The Company has from time to time experienced delays in the timely connection of
customer accounts to the Internet by suppliers other than PSI. If a material
number of suppliers other than PSI fail to serve accounts on a timely basis or
are unable to serve accounts generated by the Company's growth, there could be a
loss of customers which may have a material adverse effect on the Company's
business, financial condition or results of operations.
The Company currently is dependent on software licensed from Netscape
Communications Corp. ("Netscape") for the front end software for its Internet
access services. Under its non-exclusive agreement with Netscape (the "Netscape
Agreement"), the Company can use and reproduce certain Netscape products, and
distribute such products to distributors and end users in conjunction with IDT
configuration software. The Company has experienced difficulty in integrating
third party software into the Company's Internet software. The occurrence of
operating difficulties in connection with Netscape software could deter
customers from using the Company's Internet services. If another software
challenges Netscape's market position and the Company is unable to provide such
software to its customers or the Company continues to experience difficulty
integrating Netscape software into the Company's Internet services, there could
be a material adverse effect on the Company's business, financial condition or
results of operations.
The Company is dependent on certain third-party suppliers of equipment
and hardware components, including, for example, Northern Telecom, Excel
Communications, Inc., and Ascend Communications, Inc. A failure by a supplier to
deliver quality services or products on a timely basis, or the inability to
develop alternative sources if and as required, could result in delays which
could have a material adverse effect on the Company.
In addition, the Company is dependent on its independent sales
representatives, particularly in key foreign markets. Most of the Company's
independent sales representatives also sell services or products of other
companies. There can be no assurance that the Company's sales representatives
will devote sufficient efforts to promoting and selling the Company's services.
Dependence on Key Personnel
The Company is highly dependent on the technical and management skills
of its key employees, including technical, sales, marketing, financial and
executive personnel, and on its ability to identify, hire and retain qualified
personnel. Competition for such personnel is intense and there can be no
assurance that the Company will be able to retain existing personnel or identify
or hire additional personnel. In particular, the Company is highly dependent on
the services of Howard S. Jonas, its Chief Executive Officer, Chairman of the
Board and founder, and Howard S. Balter, its Chief Operating Officer and Vice
Chairman of the Board. The loss of either Mr. Jonas's or Mr. Balter's services
could have a material adverse effect on the Company's business, financial
condition or results of operations.
Rapid Technological Development; Proprietary Rights
The markets the Company services are characterized by rapidly changing
technology, evolving industry standards, emerging competition and the frequent
introduction of new services, software and other products. The Company's success
is dependent in part upon its ability to enhance existing products, software and
services and to develop new products, software and services that meet changing
customer requirements on a timely and cost-effective basis. There can be no
assurance that the Company can successfully identify new opportunities and
develop and bring new products, software and services to market in a timely and
cost-effective manner, or that products, software, services or technologies
developed by others will not render the Company's products, software, services
or technologies noncompetitive or obsolete. In addition, there can be no
assurance that products, software or service developments or enhancements
introduced by the Company will achieve or sustain market acceptance or be able
to effectively address the compatibility and inoperability issues raised by
technological changes or new industry standards.
There can be no assurance that the Company's patent application relating
to the systems and methodology comprising the technologies underlying Net2Phone
will result in any patent being issued or that, if issued, any patent will
provide adequate protection against competitive technology or will be held valid
and enforceable if challenged, or that the
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Company's competitors would not be able to design around any such patent; nor
can there be any assurance that others will not obtain patents that the Company
would need to license or circumvent in order to exploit the Company's patent.
The Company is also at risk to fundamental changes in the technologies
for delivering telephone, Internet telephony and Internet access and content
provision services. For example, although Internet services currently are
accessed primarily by computers through telephone lines, several companies have
recently introduced, on an experimental basis, delivery of Internet access
services through cable television lines. If the Internet becomes accessible by
other methods or if there are advancements in the delivery of telephone
services, the Company will need to develop new technology or modify its existing
technology to accommodate these developments. The Company's pursuit of these
technological advances may require substantial time and expense, and there can
be no assurance that the Company will succeed in adapting its businesses to
alternate access devices, conduits or other technological developments.
The Company relies on a combination of patent, copyright, trademark and
trade secret laws and contractual restrictions to establish and protect its
technology. The Company does not currently have any issued patents or registered
copyrights, although it has registered trademarks in connection with the Genie
services and other pending applications for certain trademarks. The Company has
a policy to require employees and consultants to execute confidentiality and
technology ownership agreements upon the commencement of their relationships
with the Company. There can be no assurance that the steps taken by the Company
will be adequate to prevent misappropriation of its technology or other
proprietary rights, or that the Company's competitors will not independently
develop technologies that are substantially equivalent or superior to the
Company's technology. There can be no assurance that the Company's trademark
applications will result in any trademark registrations, or that, if registered,
any registered trademark will be held valid and enforceable if challenged. In
addition, there can be no assurance that licenses for any intellectual property
that might be required for the Company's services or products would be available
on reasonable terms if at all. See "Business-Intellectual Property."
Although the Company does not believe that its products infringe the
proprietary rights of any third parties, and no third parties have asserted
patent infringement or other such claims against the Company, there can be no
assurance that third parties will not assert such claims against the Company in
the future or that any such claims will not be successful. The Company is aware
that patents have been granted recently to others on fundamental technologies in
the communications, multimedia and Internet telephony areas, and patents may
issue which relate to fundamental technologies incorporated in the Company's
services and products. Since patent applications in the United States are not
publicly disclosed until the patent issues, applications may have been filed
which, if issued as patents, could relate to the Company's services. The Company
could incur substantial costs and diversion of management resources in defending
or pursuing any claims relating to proprietary rights, which could have a
material adverse effect on the Company's business, financial condition or
results of operations. Furthermore, parties making such claims could secure a
judgment awarding substantial damages, as well as injunctive or other equitable
relief which could effectively block the Company's ability to provide services
in the United States or abroad. Such a judgment could have a material adverse
effect on the Company's business, financial condition or results of operations.
Risks of Network Failure
The success of the Company is largely dependent on its ability to
deliver high quality, uninterrupted access to the Internet and low-cost,
uninterrupted domestic and international long-distance telephone services. Any
system or network failure that causes interruptions in the Company's operations
could have a material adverse effect on the business, financial condition or
results of operations of the Company. The Company has experienced failures
relating to individual POPs and the Company's subscribers have experienced
difficulties in accessing, and maintaining connection to, the Internet. The
Company at times has experienced failures of its call reorigination switching
equipment, which temporarily prevented customers from using IDT's call
reorigination services. The Company's operations are dependent on its ability
successfully to expand its network and integrate new and emerging technologies
and equipment into its network, which are likely to increase the risk of system
failure and cause unforeseen strain upon the network. The Company's operations
also are dependent on the Company's protection of its hardware and other
equipment from damage from natural disasters such as fires, floods, hurricanes,
and earthquakes, or other sources of power loss, telecommunications failures or
similar occurrences. The Company maintains a substantial portion of its Internet
accounts, electronic mail services, and other
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systems essential to the Company's service offerings at its primary operational
facilities in Hackensack, New Jersey. Significant or prolonged system failures,
such as were experienced in 1996 by AOL and NETCOM, or difficulties for
subscribers in accessing, and maintaining connection with the Internet could
damage the reputation of the Company and result in the loss of subscribers.
Similarly, significant or prolonged telephone network failures, or difficulties
for customers in completing long-distance telephone calls could damage the
reputation of the Company and result in the loss of customers. Such damage or
losses could have a material adverse effect on the Company's ability to obtain
new subscribers and customers, and on the Company's business, financial
condition or results of operation.
Risks Associated with International Operations
In Fiscal 1994, 1995 and 1996, international customers accounted for
approximately 59%, 56%, and 23%, respectively, of the Company's total revenues.
The Company anticipates that revenues from international customers will continue
to account for a significant percentage of its total revenues. In addition, part
of the Company's growth strategy is to develop a network switching
infrastructure in foreign countries. Therefore, a significant portion of the
Company's total revenues as well as a portion of its equipment and other
property will be subject to risks associated with international operations,
including unexpected changes in legal and regulatory requirements, changes in
tariffs, exchange rates and other barriers, political and economic instability,
difficulties in accounts receivable collection, longer payment cycles,
difficulties in establishing, maintaining and managing independent foreign sales
organizations, difficulties in staffing and managing international operations,
difficulties in maintaining and repairing equipment abroad, difficulties in
protecting the Company's intellectual property overseas, possible confiscation
of property and equipment, potentially adverse tax consequences and the
regulation of Internet access providers and telecommunications companies by
foreign jurisdictions. Although the Company's sales to date have generally been
denominated in U.S. dollars, the value of the U.S. dollar in relation to foreign
currencies may also adversely affect the Company's sales to international
customers as well as the cost of procuring, installing and maintaining equipment
abroad. To the extent the Company expands its international operations or
changes its pricing practices to denominate prices in foreign currencies, the
Company will be exposed to increased risks of currency fluctuation as the
Company does not, and has no plans to, engage in hedging activities designed to
manage currency fluctuations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business-Sales and
Marketing."
New and Uncertain Markets
Many of the overseas markets in which the Company currently markets
long-distance telephone services are undergoing dramatic changes as a result of
privatization and deregulation. The European Union has mandated competitive
markets for the European telecommunications industry by January 1998 and the
various European countries are at different stages of opening their
telecommunications markets. As a result of privatization and deregulation, a new
competitive environment is emerging in which major European telephone companies,
media companies and utilities are entering the telecommunications market and
forming new alliances which are radically changing the landscape for domestic
and international telephone services. Open markets for telecommunications
services are expected to evolve in other parts of the world as well. While the
Company is focused on exploiting the imbalances brought about by the often
fragmented nature of deregulation, the Company is entering new and often unknown
markets and, therefore, is unable to predict how such deregulating markets will
evolve and there can be no assurance that changes in the marketplace and new
strategic alliances among companies with greater resources than the Company will
not adversely affect the Company's ability to continue to offer and sell call
reorigination services, its efforts to increase its overseas telecommunications
customer base or its ability to recover the cost of building out its
international telecommunications switching infrastructure.
The markets for Internet connectivity, telephony and content services
and related software products are relatively new and current and future
competitors are likely to introduce competing Internet connectivity and/or
on-line services and products. Therefore, it is difficult to predict the rate at
which the markets will grow or at which new or increased competition will result
in market saturation. If demand for Internet services fails to grow, grows more
slowly than anticipated, or becomes saturated with competitors, the Company's
business, operating results and financial condition could be adversely affected.
Although the Company intends to support emerging standards in the market for
Internet connectivity, there can be no assurance that industry standards will
emerge or if they become established, that the Company
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will be able to conform to these new standards in a timely fashion and maintain
a competitive position in the market. See "Business-Research and Development."
Security Risks
Despite the implementation of network security measures by the Company,
such as limiting physical and network access to its routers, its Internet access
systems and Genie entertainment and information services are vulnerable to
computer viruses, break-ins and similar disruptive problems caused by its
customers or other Internet users. Such problems caused by third parties could
lead to interruption, delays or cessation in service to the Company's Internet
customers. Furthermore, such inappropriate use of the Internet by third parties
could also potentially jeopardize the security of confidential information
stored in the computer systems of the Company's customers and other parties
connected to the Internet, which may deter potential subscribers. Persistent
security problems continue to plague public and private data networks. Recent
break-ins reported in the press and otherwise have reached computers connected
to the Internet at major corporations and Internet access providers and have
involved the theft of information, including incidents in which hackers bypassed
firewalls by posing as trusted computers. Alleviating problems caused by
computer viruses, break-ins or other problems caused by third parties may
require significant expenditures of capital and resources by the Company, which
could have a material adverse effect on the Company. Until more comprehensive
security technologies are developed, the security and privacy concerns of
existing and potential customers may inhibit the growth of the Internet service
industry in general and the Company's customer base and revenues in particular.
Moreover, if the Company experiences a breach of network security or privacy,
there can be no assurance that the Company's customers will not assert or
threaten claims against the Company based on or arising out of such breach, or
that any such claims will not be upheld, which could have a material adverse
effect on the Company's business, financial condition or results of operations.
Potential Liability for Information Disseminated through Network
Internet access and content providers face potential liability of
uncertain scope for the actions of subscribers and others using their systems,
including liability for infringement of intellectual property rights, rights of
publicity, defamation, libel and criminal activity under the laws of the U.S.
and foreign jurisdictions. For example, an action against Prodigy alleging libel
and negligence in connection with an electronic message posted by a Prodigy
subscriber through Prodigy's Internet access system attempted to impose
liability upon Internet service providers for information, messages and other
materials disseminated across and through their systems. Prodigy lost a summary
judgment motion related to the scope of its potential liability exposure. While
the parties subsequently settled their dispute, the court refused to vacate its
opinion on the summary judgment motion, which still stands as precedent. Another
action is currently pending against NETCOM relating to NETCOM's potential
liability for vicarious copyright infringement arising out of electronic
messages posted by a subscriber. NETCOM lost a summary judgment motion related
to the scope of its potential vicarious copyright liability exposure, but this
case has yet to come to trial. Recently, a Hong Kong court permitted a local
company to sue a California Internet provider for copyright violation based on
content included by a subscriber on a Web site.
The Company carries errors and omissions insurance. However, such
insurance may not be adequate to compensate the Company for all liability that
may be imposed. Any imposition of liability in excess of the Company's coverage
could have a material adverse effect on the Company. In addition, recent
legislative enactments and pending legislative proposals aimed at limiting the
use of the Internet to transmit indecent or pornographic materials could,
depending upon their interpretation and application, result in significant
potential liability to Internet access and service providers including the
Company, as well as additional costs and technological challenges in complying
with any statutory or regulatory requirements imposed by such legislation. For
example, the Communications Decency Act of 1996 (amending 47 U.S.C. 223), which
is part of the 1996 Telecommunications Act, became effective on February 8,
1996. The 1996 Telecommunications Act would impose criminal liability on persons
sending or displaying in a manner available to minors indecent material on an
interactive computer service such as the Internet, and on an entity knowingly
permitting facilities under its control to be used for such activities. While
the constitutionality of these provisions has been successfully challenged in
federal appellate court, there can be no assurance as to the final result
regarding the constitutionality of the 1996 Telecommunications Act, or as to the
scope and content of any substitute legislation or other legislation in the U.S.
or foreign jurisdictions restricting the type of content being provided over the
Internet. In addition, CompuServe faced action
23
<PAGE>
by German authorities in response to which CompuServe temporarily restricted the
scope of the Internet access it provides to all subscribers, both in the U.S.
and internationally; and a number of countries are considering content
restrictions based on such factors as political or religious views expressed,
and pornography or indecency. The recent acquisition of the Genie on-line
service and the launch of Genie Interactive service has increased the Company's
exposure to such legislation, and to libel and defamation suits, primarily
because of the increased level of content being provided by or through the
Company.
Need for Additional Capital to Finance Growth and Capital Requirements
The Company believes that it must continue to enhance and expand its
network and build out its telecommunications network infrastructure in order to
maintain its competitive position and continue to meet the increasing demands
for service quality, availability and competitive pricing. The Company's ability
to grow depends, in part, on its ability to expand its operations through the
establishment of new installed POPs, each of which requires significant advance
capital equipment expenditures, as well as advance expenditures and commitments
for owned and leased telephone company facilities and circuits and advertising.
The Company believes that, based upon its present business plan, the net
proceeds from the sale of the Common Stock offered hereby, together with 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 through at least Fiscal 1997. If the Company's growth
exceeds current expectations or if the Company's cash flow from operations after
Fiscal 1997 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
anticipated expansion, which could have a material adverse effect on the
Company's business, financial condition or results of operations and its ability
to compete. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources."
Government Regulatory Policy Risks
Telecommunications
United States domestic interstate long-distance telecommunications
services are subject to limited regulation by the FCC. Intrastate long-distance
services are regulated by state commissions, which have varying requirements.
International call reorigination services are subject to regulation by both U.S.
and foreign regulators. The FCC requires international call reorigination
providers such as the Company to provide service in a manner not in violation of
the laws of the countries in which they operate. Local laws and regulations
differ among the jurisdictions in which the Company operates, and the
interpretation and enforcement of such laws and regulations vary and are often
based on the informal views of the local government ministries which, in some
cases, are subject to influence by the local PTTs. Accordingly, in certain of
the Company's principal existing and target markets, there are laws and
regulations that either prohibit or limit, or could be used to prohibit or
limit, certain of the Company's services. There can be no assurance that the
Company has accurately predicted or will accurately predict the interpretation
of foreign laws and regulations or regulatory and enforcement trends or will be
found to be in compliance with all such laws and regulations. Failure to
accurately predict the enforcement of applicable laws and regulations in
particular jurisdictions, or incorrect interpretation of applicable laws and
regulations, could cause the Company to lose, or be unable to obtain, regulatory
approvals necessary for it to provide services in such jurisdictions and could
result in monetary penalties imposed against the Company that could be
significant. If the FCC finds that the Company has not provided services "in a
manner that is consistent with the laws of the countries in which [it]
operates," the FCC could impose a variety of sanctions, including fines or the
revocation of the Company's Section 214 License to provide international service
to U.S. points. There can be no assurance that the Company's international
services will continue to be permitted in its current and proposed markets.
Depending upon the countries involved, there could be a material adverse effect
on the Company's business, financial condition or results of operations if the
Company's services are prohibited. Furthermore, if the FCC or state regulators
found that the Company was engaging in activities that required certain licenses
which the Company currently does not hold, or that required compliance with
tariffing or other regulatory requirements which the Company has not satisfied,
the FCC or state regulators could impose financial penalties or prohibit
service, which could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Business-Regulation."
24
<PAGE>
The 1996 Telecommunications Act substantially altered the regulatory
framework for the telecommunications industry for domestic and U.S.
international telecommunications services. The 1996 Telecommunications Act
directs the FCC to conduct a variety of rulemakings to implement the Act's
requirements. The Company cannot predict the ultimate effects of this
legislation or the outcome of the FCC rulemakings required by this Act. The
legislation does not impose substantial regulatory burdens on the Company's
international call reorigination, Internet access or domestic telecommunications
operations. However, the rulemakings required by the 1996 Telecommunications Act
could produce additional regulatory requirements, including a requirement that
the Company contribute some portion of its revenues to subsidy mechanisms for
universal service. In addition, the legislation could increase competition and
affect interconnections and costs. If the Company cannot provide the services it
is presently providing or intends to provide, due to regulations that affect
such services, or due to its inability to receive or retain formal or informal
approvals for such services, or for whatever other reason related to regulatory
compliance or the lack thereof, the Company's business could be materially
adversely affected.
Internet
Data network access providers are generally not regulated under the laws
and regulations governing common carrier providers of telecommunications.
Accordingly, except for regulations governing the ability of the Company to
disclose the contents of communications by its customers, no state or federal
regulations exist currently pertaining to the pricing, service characteristics
or capabilities, geographic distribution or quality control features of Internet
access services. The Company cannot predict the impact that future regulation or
regulatory changes, if any, may have on its Internet access business.
The 1996 Telecommunications Act would impose criminal liability on
persons sending or displaying in a manner available to minors indecent material
on an interactive computer service such as the Internet, and on an entity
knowingly permitting facilities under its control to be used for such
activities. Entities solely providing access to facilities not under their
control are exempted from liability, as are service providers that take good
faith, reasonable, effective and appropriate actions to restrict access by
minors to the prohibited communications. However, the Genie on-line service and
Genie Interactive are not likely to fall within such exception. The
constitutionality of these provisions has been successfully challenged in
federal appellate court, and the interpretation and enforcement of them are
uncertain. This legislation, as well as lawsuits against Internet service
providers, may decrease demand for Internet access, chill the development of
Internet content, or have other adverse effects on Internet access and content
providers such as the Company. In addition, in light of the uncertainty attached
to interpretation and application of this law, there can be no assurance that
the Company would not have to modify its operations to comply with the statute,
including prohibiting users from maintaining home pages on the Web, and
increasing its control over the Genie Interactive content. See "Risk Factors --
Potential Liability for Information Disseminated Through Network."
Internet Telephony
The FCC and State regulatory commissions have not made any formal
determinations regarding the regulatory status of voice telephony services
provided through use of the Internet. However, an association of domestic phone
carriers (ACTA) filed a petition on March 4, 1996 with the FCC asking the FCC to
regulate voice communications over the Internet. The FCC has not yet taken any
action in response. The Act authorizes the FCC to forebear from regulating any
provider of telecommunications services and the FCC has proposed doing so, but
has not taken final action. If the FCC or one or more state commissions decide
to regulate Internet telephony, there can be no assurance that any such
regulation will not adversely affect the Company's business, financial condition
or results of operations.
Control by Principal Stockholder
Howard S. Jonas, the Company's Chief Executive Officer, Chairman of the
Board and founder, owns beneficially all of the Company's outstanding shares of
Class A Stock and thereby holds more than 50% of the combined voting power of
the Company's outstanding capital stock. As a result, Mr. Jonas is able to
control matters requiring approval by the stockholders of the Company, including
the election of all of the directors and the approval of significant corporate
matters,
25
<PAGE>
including any merger, consolidation or sale of all or substantially all of the
Company's assets. See "Security Ownership of Certain Beneficial Owners and
Management."
Volatility of Stock Price
Since the initial public offering of the Company's Common Stock in March
1996, the market price of the Company's Common Stock has fluctuated
significantly, and it is likely that the price of the Company's Common Stock
will fluctuate in the future. Factors such as variations in the Company's
revenue, earnings and cash flow from quarter-to-quarter and announcements of new
service offerings, technological innovations or price reductions by the Company,
its competitors or providers of alternative services could cause the market
price of the Common Stock to fluctuate substantially. In addition, the stock
markets recently have experienced significant price and volume fluctuations that
particularly have affected companies in the technology sector and resulted in
changes in the market price of the stocks of many companies, which have not been
directly related to the operating performance of those companies. Such broad
market fluctuations may adversely affect the market price of the Common Stock in
the future.
Antitakeover Provisions
The Company's restated certificate of incorporation (the "Certificate of
Incorporation") contains certain provisions that may discourage bids for the
Company, including disparate voting rights and a provision providing for
classification of the Company's Board of Directors. This could limit the price
that certain investors might be willing to pay in the future for shares of
Common Stock. See "Description of Capital Stock."
Shares Eligible for Future Sale
Sales of a substantial number of shares of Common Stock eligible for
sale into the public market could adversely affect the market price for the
Common Stock.
26
<PAGE>
Item 2. PROPERTIES
The Company's principal facilities total approximately 35,300 square
feet and are located in three buildings in Hackensack, New Jersey. The Company
also leases space (typically less than 500 square feet) in various geographic
locations to house the telecommunications equipment for each of its POPs. The
Company occupies one building under a lease which expires on June 30, 1997, with
a renewal option for the Company. The Company leases this facility from an
entity in which Howard S. Jonas, the Company's Chairman and Chief Executive
Officer, is the sole stockholder. See "Certain Relationships and Related
Transactions." The Company occupies facilities in a second building pursuant to
a lease which expires on September 30, 1998 and facilities in a third building
pursuant to two leases, both of which expire on September 30, 1996, but which
allow the Company to renew such leases for two six month terms.
Item 3. LEGAL PROCEEDINGS.
In October 1995, an investigation was instituted by the Attorneys
General of Iowa, New Jersey, New York, Tennessee and Texas (collectively, the
"A.G.") into certain business practices of the Company as a result of complaints
by residents of those states. Michigan thereafter entered the investigation in
September 1996. The focus of the A.G.'s investigation concerns advertising
practices that the Company voluntarily terminated prior to the notice of
investigation from the A.G. The majority of the advertising in question concerns
the sale of a service that the Company now sells only in limited circumstances.
The A.G. has indicated its desire to settle the matter with a consent order, the
content of which is being presently negotiated with the Company. Although there
can be no assurance, the Company 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 discussions; 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 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 recently 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 has 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
27
<PAGE>
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock has traded publicly on the Nasdaq National Market under
the symbol "IDTC" since March 15, 1996, the date of the Company's initial public
offering. The table below sets forth the high and low sales prices for the
Common Stock as reported by the Nasdaq National Market for the fiscal periods
indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
High Low
---- ---
Fiscal Year ended July 31, 1996
Third Quarter (from March 15, 1996).................. $11.75 $ 6.75
Fourth Quarter....................................... 16.00 8.50
Fiscal Year ending July 31, 1997
First Quarter (through October 25, 1996)............. 17.50 10.75
</TABLE>
On October 25, 1996, the last sale price reported on the Nasdaq National
Market for the Common Stock was $12.25 per share. On the same date, there were
approximately 77 holders of record of the Common Stock. The aggregate market
value of the voting stock held by non-affiliates of the Registrant, based on the
closing price of the Common Stock on October 25, 1996, was approximately $99.4
million. Shares of Common Stock held by each officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded
from this computation in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The Company has never declared or paid any dividends on its Common Stock
and does not expect to pay dividends for the foreseeable future. The Company's
current policy is to retain all of its earnings to finance future growth. Any
future declaration of dividends will be subject to the discretion of the Board
of Directors of the Company. The availability of funds for the payment of
dividends by the Company is dependent on dividends the Company may receive from
its subsidiaries, which is subject to certain limitations under state laws.
28
<PAGE>
Item 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated financial data presented below for each of the
four years in the period ended July 31, 1996 has been derived from the Company's
consolidated financial statements, which have been audited by Ernst & Young LLP,
independent auditors. The selected consolidated financial data presented below
for the year ended July 31, 1992 has been derived from the Company's unaudited
consolidated financial statements. The selected consolidated financial data
should be read in conjunction with the Consolidated Financial Statements and the
Notes thereto and other financial information appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
Year Ended July 31,
--------------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues .............................................. $ 270 $ 1,675 $ 3,169 $ 11,664 $ 57,694
Costs and expenses:
Direct cost of revenues ............................. 254 272 990 7,544 36,438
Selling, general and administrative ................. 277 1,019 2,402 5,992 35,799
Depreciation and amortization ....................... 62 79 106 303 1,212
-------- -------- -------- -------- --------
Total costs and expenses ........................... 593 1,370 3,498 13,839 73,449
-------- -------- -------- -------- --------
Income (loss) from operations ......................... (323) 305 (329) (2,175) (15,755)
--------
Other, net(1) ......................................... 16 (3) 31 30 112
-------- -------- -------- -------- --------
Net income (loss) ................................... $ (339) $ 302 $ (298) $ (2,145) $(15,643)
======== ======== ======== ======== ========
Net income (loss) per share ............................. $ (.02) $ (.02) $ (.02) $ (.13) $ (.86)
======== ======== ======== ======== ========
Weighted average number of shares used in
calculation of net income (loss) per share ............ 16,569 16,569 16,569 16,569 18,180
======== ======== ======== ======== ========
(1) For the year ended July 31, 1996, includes an extraordinary loss on
retirement of debt of $233.
July 31,
---------------------------------------------------------------------
1992 1993 1994 1995 1996
------- -------- -------- -------- --------
Balance Sheet Data
Cash and cash equivalents ............................. $ 331 $ 302 $ 754 $ 232 $ 14,894
Working capital (deficit) ............................. (151) 826 1,289 (884) 13,547
Total assets .......................................... 671 1,302 2,795 4,197 43,797
Total stockholders' equity ............................ 109 1,045 2,062 911 26,843
</TABLE>
- - ----------
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Report contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed in these forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
in the "Risk Factors" section of Item 1.
Overview
IDT is an international telecommunications company offering a broad
range of integrated and competitively priced long-distance telephone, Internet
access and Internet telephony services in the U.S. and abroad.
29
<PAGE>
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 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 significant calling volume generated by its call
reorigination customers. In August 1996, IDT entered the Internet telephony
market with its introduction of Net2Phone.
Initially, the Company derived substantially all its revenues from line
fees paid by customers and commissions paid to the Company by third party
carriers. Under these arrangements, the Company relied on the third party
carriers to route the Company's customers' international call reorigination
traffic, bear the cost of providing services, and bill the customers directly.
In early 1994, the Company began to migrate existing customers to, as well as
provision new customers on, its own facilities-based least cost routing ("LCR")
platform which consisted of Company-owned switches and leased lines. The Company
also began to provide the underlying transmission and switching services to its
customers and to direct bill its customers for minutes of use. For customers
billed by the Company on a minutes of use basis, the Company recognizes all
revenues and direct costs associated with their calls. This fundamental change
in the operating structure of the Company has resulted in significant increases
in IDT's revenues as well as direct costs in the years ended July 31, 1995 and
1996 ("Fiscal 1995" and "Fiscal 1996," respectively). In January 1995, the
Company began utilizing its LCR platform for the provision of telecommunications
services on a wholesale basis to telecommunications carriers.
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) carrier-to-carrier long-distance routing services provided
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 July 31, 1996, the Company had 226 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
an increasingly greater percentage of its customer base on Company-owned POPs,
while reducing its dependence on alliance partners. The Company makes no
warranties that this trend will rise consistently month to month, though it is
one of its strategic goals.
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
30
<PAGE>
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 will adopt 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 Statment
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.
Results of Operations
The following table sets forth the percentage of revenues represented by
certain items in the Company's statement of operations:
<TABLE>
<CAPTION>
Year Ended July 31,
-------------------------------------
1994 1995 1996
------------ ------------ --------
<S> <C> <C> <C>
Revenues............................................. 100.0% 100.0% 100.0%
Costs and expenses:
Direct cost of revenues............................ 31.2 64.7 63.2
Selling, general and administrative................ 75.8 51.4 62.0
Depreciation and amortization 3.4 2.5 2.1
--- --- ---
-------------------------------------
Total costs and expenses....................... 110.4 118.6 127.3
----- ----- -----
Income (loss) from operations (10.4) (18.6) (27.3)
----- ----- -----
Interest (net)...................................... 1.0 0.2 0.6
----- ----- -----
Income before taxes and extraordinary item..... (9.4)% (18.4)% (26.7)%
Income taxes ........................................ 0.0 0.0 0.0
----- ----- -----
Income (loss) before extraordinary item (9.4) (18.4) (26.7)
Extraordinary loss on retirement of debt ............ 0.0 0.0 (0.4)
----- ----- -----
Net income (loss) ................................... (9.4)% (18.4)% (27.1)%
----- ----- -----
</TABLE>
Fiscal 1996 Compared to Fiscal 1995
Revenues. Revenues increased 390% from approximately $11.7 million in
Fiscal 1995 to approximately $57.7 million in Fiscal 1996. Revenues from the
Company's telecommunications operations increased 230% from approximately $10.8
million in Fiscal 1995 to approximately $35.7 million in Fiscal 1996. Revenues
from Internet operations increased from $875,000 in Fiscal 1995 to approximately
$22 million in Fiscal 1996, a 24-fold increase. The increase in
telecommunications revenues was due primarily to an 8 fold increase in rebilled
long-distance minutes of use from approximately 11 million minutes of use to
nearly 88 million minutes of use. The increase in rebilled long-distance minutes
31
<PAGE>
of use was due to a substantial increase in international call reorigination
customers, migration of existing customers to the Company's least cost routing
switch platform and the addition of carrier-to-carrier services clients. During
this period, the number of international call reorigination customers increased
208% from approximately 6,358 at July 31, 1995 to 19,582 customers at July 31,
1996. As a percentage of telecommunications revenues and overall revenues in
fiscal 1995 and 1996, callback revenues decreased from approximately 55.8% to
36.5% and 51.6% to 22.2%, respectively. The addition of wholesale carrier
clients resulted in an increase in carrier-to-carrier services revenues from
approximately $1.1 million in Fiscal 1995 to approximately $18.6 million in
Fiscal 1996. As a percentage of telecommunications revenues and overall
revenues, carrier-to-carrier services revenues increased from approximately
10.3% to 52.1% and 12.1% to 31.8%, respectively. As a percentage of total
revenues, Internet revenues increased from approximately 7.5% in Fiscal 1995 to
approximately 38.1% in Fiscal 1996. The increase in Internet revenues both in
dollar terms and as a percentage of revenues was due primarily to a 12 fold
increase in dial-up subscribers from 10,839 as of July 31, 1995 to approximately
142,700 as of July 31, 1996.
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, and switch maintenance costs. The Company's direct cost of
revenues increased by 383% from approximately $7.5 million in Fiscal 1995 to
approximately $36.4 million in Fiscal 1996. As a percentage of revenues, these
costs decreased from 64.7% to 63.2% in Fiscal 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 and 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. 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 497% from approximately $6.0 million in Fiscal 1995 to
approximately $35.8 million in Fiscal 1996. As a percentage of revenues, these
costs increased from 51.4% to 62.0% in Fiscal 1995 and 1996, respectively. The
increase in these costs both in dollar terms and as a percentage of revenues 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, the
increased license fees paid to Netscape under the Netscape Agreement, and costs
incurred in developing and marketing Net2Phone. During Fiscal 1995, the Company
recorded a non-cash compensation expense of approximately $1.0 million as
compared to $70,000 in Fiscal 1996 due to the grant of options to employees and
consultants. The Company anticipates selling, general and administrative costs
will continue to increase as the Company implements its growth strategy.
Depreciation and Amortization. Depreciation and amortization costs
increased 299% from approximately $304,000 in Fiscal 1995 to approximately $1.2
million in Fiscal 1996. As a percentage of revenues, these costs decreased from
2.5% to 2.1% in Fiscal 1995 and Fiscal 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 aggressive
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 increased to approximately $2.8 million in Fiscal
1996 from $830,000 in Fiscal 1995 and as a percentage of telecommunications
revenues to 7.72% from 7.69%. The increase resulted principally from increased
volume. Loss from operations for the Internet access segment increased to $17.9
million in Fiscal 1996 from approximately $3 million in Fiscal 1995 and as a
percentage of Internet revenues to 81.2% from 343%. 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 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 customer base increased 12-fold from
10,839 to 142,700 customers during Fiscal 1996. The loss
32
<PAGE>
generated from the development and marketing of Net2Phone was approximately
$660,000 for the year ended July 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
periods ended July 31, 1995 or 1996, as the realization of available tax losses
was not assured. As of July 31, 1996, the Company had Federal net operating loss
carryforwards of approximately $18.1 million. The amount of these carryforwards
that can be used in any given year may be limited in the event of certain
changes in the ownership of the Company. The Company believes that neither the
prior ownership changes nor the change in ownership of the Company that may
result from the offering will significantly limit the Company's ability to use
its net operating loss carryforwards.
Fiscal 1995 Compared to Fiscal 1994
Revenues. Revenues increased 268.1% from $3.2 million in Fiscal 1994 to
$11.7 million in Fiscal 1995. This increase was primarily due to an increase in
the number of international call reorigination customers and the minutes of
service used and the migration of these customers onto the Company's own billing
system. In addition, the Company began marketing long-distance
telecommunications services on a wholesale basis in Fiscal 1995, which resulted
in $1.4 million of additional revenues. The number of international call
reorigination customers increased 347.7% from 1,420 customers to 6,358 customers
from July 31, 1994 to July 31, 1995. Minutes of use on the Company's switching
platform increased from approximately 308,000 minutes in Fiscal 1994 to
approximately 11 million minutes in Fiscal 1995. In addition, revenues from
carrier customers increased from approximately $22,000 to approximately $2.4
million from Fiscal 1994 to Fiscal 1995. Revenues from Internet access services
increased from approximately $57,000 in Fiscal 1994 to approximately $875,000 in
Fiscal 1995 primarily as the result of an increase in the Company's Internet
subscriber base from approximately 600 subscribers at the end of Fiscal 1994 to
approximately 10,800 subscribers at the end of Fiscal 1995.
Direct Cost of Revenues. Direct cost of revenues increased 662.1% from
$1.0 million in Fiscal 1994 to $7.5 million in Fiscal 1995 and as a percentage
of revenues from 31.2% to 64.7%. These increases resulted primarily from the
migration of clients onto IDT's own LCR platform and the resultant shift from
line fees and commissions, which involve little or no direct costs, to rebilled
minutes of use. In addition, the Company invested in leased backbone circuits,
local access loops and additional connectivity to accommodate growth in customer
demand for its services.
Selling, General and Administrative. Selling, general and administrative
costs increased 149.4%, from $2.4 million in Fiscal 1994 to $6.0 million in
Fiscal 1995. This increase was due primarily to an increase in advertising to
attract individual Internet subscribers and the hiring of additional sales,
customer support, technical support and administrative personnel to support the
Company's expanding Internet customer base. During Fiscal 1995, the Company
recorded a non-cash compensation expense of approximately $1.0 million due to
the grant of fully vested options to employees and consultants. As a percentage
of revenues, selling, general and administrative costs decreased from 75.8% to
51.4% from Fiscal 1994 to Fiscal 1995, primarily due to revenues increasing
without commensurate increases in these costs.
Depreciation and Amortization. Depreciation and amortization expenses
increased 186.8% from approximately $106,000 in Fiscal 1994 to approximately
$304,000 in Fiscal 1995. These expenses increased primarily as a result of the
Company's higher fixed asset base in Fiscal 1995 which was due principally to
Company-owned POP expansion, investments in telecommunications switches and
infrastructure and facility expansion.
Income (loss) from Operations. Loss from operations increased to $2.2
million in Fiscal 1995 from $329,000 in Fiscal 1994. In Fiscal 1994, the Company
operated principally in one segment, telecommunications, and in Fiscal 1995, the
Company operated in both the telecommunications and Internet access businesses.
In Fiscal 1995, the telecommunications segment had income from operations of
approximately $830,000 while the Internet access segment had a loss from
operations of $3.0 million. The increase in the income from telecommunications
operations resulted principally from increased volume. 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
33
<PAGE>
customer awareness. General corporate expenses of $1.6 million for the year
ended July 31, 1995 was allocated to the two segments in the above analysis.
Income Taxes. The Company records income taxes in accordance with SFAS
109. The Company did not record an income tax benefit in either Fiscal 1994 or
1995, as the realization of available tax losses was not assured.
Quarterly Results of Operations
The following tables set forth certain quarterly financial data for the
eight quarters ended July 31, 1996. This quarterly information is unaudited, has
been prepared on the same basis as the annual financial statements and, in the
opinion of the Company's management, reflects all adjustments (consisting only
of normal recurring adjustments) necessary for a fair presentation of the
information for periods presented. Operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------------------
October 31, January 31, April 30, July 31, October 31, January 31, April 30, July 31,
1994 1995 1995 1995 1995 1996 1996 1996
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues...................... $ 1,648 $ 2,061 $ 3,255 $ 4,700 $ 6,601 $ 9,714 $ 18,226 $ 23,153
Costs and expenses:
Direct cost of revenues .......... 703 1,167 2,136 3,538 4,173 5,926 12,289 14,050
Selling, general and
administrative................... 1,757 930 1,407 1,898 3,953 8,506 10,135 13,205
Depreciation and amortization..... 49 57 78 119 131 175 264 642
-------- -------- -------- -------- -------- -------- -------- --------
Total costs and
expenses ....................... 2,509 2,154 3,621 5,555 8,257 14,607 22,688 27,897
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) from operations..... (861) (93) (366) (855) (1,658) (4,893) (4,462) (4,744)
Other (net) ...................... 5 4 18 3 3 (32) 59 316
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss)
before taxes................... (856) (89) (348) (852) (1,656) (4,925) (4,403) (4,428)
======== ======== ======== ======== ======== ======== ======== ========
Income taxes ..................... 0 0 0 0 0 0 0 0
======== ======== ======== ======== ======== ======== ======== ========
Income (loss) before x'item....... (856) (89) (348) (852) (1,653) (4,925) (4,403) (4,428)
======== ======== ======== ======== ======== ======== ======== ========
Extraordinary loss on retirement
of debt ........................ 0 0 0 0 0 0 (234) 0
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) ................ (856) (89) (348) (852) (1,653) (4,925) (4,637) (4,428)
======== ======== ======== ======== ======== ======== ======== ========
Net income (loss) per share....... $ (.05) $ (0.01) $ (0.02) $ (0.5) $ (0.10) $ (0.30) $ (0.25) $ (0.21)
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Percentage of Total Revenues for Three Months Ended
--------------------------------------------------------------------------------------------
October 31, January 31, April 30, July 31, October 31, January 31, April 30, July 31,
1994 1995 1995 1995 1995 1996 1996 1996
-------- -------- -------- -------- -------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ........................... 100% 100% 100% 100% 100% 100% 100% 100%
Costs and expenses:
Direct cost of revenues .......... 42.7 56.6 65.6 75.3 63.2 61.0 67.4 60.7
Selling, general and
administrative .................. 106.6 45.1 43.2 40.4 59.9 87.6 55.6 57.0
Depreciation and
amortization .................... 3.0 2.8 2.4 2.5 2.0 1.8 1.5 2.8
----- ----- ----- ----- ----- ----- ----- -----
Total costs and
expenses ...................... 152.3 104.5 111.2 118.2 125.1 150.4 124.5 120.5
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from
operations .................... (52.3) (4.5) (11.2) (18.2) (25.1) (50.4) (24.5) (20.5)
Other, net (1) ................... 0.4 0.2 0.5 0.1 0.1 (0.3) 1.0 1.4
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) .............. (51.9)% (4.3)% (10.7)% (18.1)% (25.0)% (50.7)% (25.5)% (19.1)%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
(1) For the three months ended April 30, 1996, includes an extraordinary loss
on retirement of debt of (1.3%).
<PAGE>
The Company's quarterly operating results have fluctuated in the past
and may fluctuate significantly in the future as a result of a variety of
factors, some of which are outside of the Company's control. These factors
include general economic conditions, user demand for long-distance
telecommunications services, acceptance and use of the Internet, capital
expenditures and other costs relating to the expansion of operations, the timing
of new product introductions by the Company or its competitors, changes in
pricing strategies by the Company or its competitors, market availability and
acceptance of new and enhanced versions of the Company's or its competitors'
products and services, and the rates of new subscriber acquisition and
retention.
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).
During Fiscal 1994, the Company issued capital stock for an aggregate of $1.3
million. During the first three quarters of 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
a prepayment penalty of $233,500. Such prepayment penalty has been classified as
an extraordinary loss for the early retirement of debt in the accompanying
statement of operations. 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 July 31, 1996, the Company had cash and cash
equivalents of $14.9 million and working capital of approximately $13.5 million.
The Company generated negative cash flow from operating activities of
approximately $15 million during Fiscal 1996, compared to a positive cash flow
from operating activities of approximately $521,000 during Fiscal 1995, compared
to negative cash flow from operating activities of approximately $235,000 during
Fiscal 1994. The changes in operating cash flows from Fiscal 1995 to Fiscal 1996
and from Fiscal 1994 to Fiscal 1995 were primarily due to increases in accounts
payable and deferred revenues in relation to accounts receivable. 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 $925,000, $2.0 million and $11.5 million at July 31, 1994,
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 $717,000 in
Fiscal 1994 to approximately $1.3 million in Fiscal 1995 and approximately $11.9
million in Fiscal 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 the
Company's rapidly expanding Internet services, cash flows from operations would
be materially adversely affected.
35
<PAGE>
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 August and
September, the Company purchased the equipment and networks of two of its
alliance partners for approximately $4.2 million in aggregate. Such acquisitions
were paid through cash down payments of approximately $260,000, assumption of
trade liabilities of approximately $95,000 excluding $162,300 due to the company
and the issuance of promissory notes totaling approximately $3,690,000 of which
$690,000 is a two year note at 8.25% interest per annum, $750,000 is a four year
note at 10% per annum and $2.25 million is 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. Such note can be converted
into Common Stock at the option of the holder. No such other significant
acquisitions are currently contemplated.
The Company believes that the cash on hand together with cash flow from
operating activities, will be sufficient to fund the Company's existing
operations through fiscal 1997. The Company is in discussions with underwriters
to raise additional equity capital and has announced that it proposes to file a
registration statement for a public offering of Common Stock. The proceeds from
the proposed financing are anticipated to be used to expand the Company's
operations, fund the Company's growth and enable the Company to undertake
additional strategic initiatives. There can be no assurance that the Company
will be able to complete the proposed public offering or raise additional
capital on acceptable terms or at all. If the Company is unable to obtain such
additional capital, the Company may have to curtail its expansion of operations,
growth and other strategic initiatives, which could adversely affect the
company's business, financial condition and results of operations and its
ability to compete.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and supplementary data of the
Company and the report of independent auditors thereon set forth on pages F-1
through F-20 herein are incorporated herein by reference.
Quarterly financial information set forth at page 34 herein is
incorporated herein by reference.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
36
<PAGE>
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors and Executive Officers
The directors and executive officers of the Company are as follows:
Name Age Position
- - ---- --- --------
Howard S. Jonas.............. 40 Chief Executive Officer, Chairman of the
Board and Treasurer
Howard S. Balter............. 35 Chief Operating Officer and Vice
Chairman of the Board
James Courter................ 55 President and Director
Stephen R. Brown............. 40 Chief Financial Officer
Eric L. Raab................. 35 Chief Technical Officer
Kenneth Scharf............... 45 Chief Information Officer
Joyce J. Mason............... 36 Secretary and Director
Marc E. Knoller.............. 35 Vice President and Director
Meyer A. Berman.............. 62 Director
J. Warren Blaker............. 62 Director
David S. Steiner............. 67 Director
Bert W. Wasserman............ 63 Director
Howard S. Jonas founded IDT in August 1990 and has served as Chairman of
the Board and Treasurer since its inception and as Chief Executive Officer since
December 1991. He served as President of the Company from December 1991 through
September 1996. Mr. Jonas is also the founder and has been President of Jonas
Publishing Corp. ("Jonas Publishing"), a publisher of trade directories, since
its inception in 1979. Mr. Jonas received a B.A. in Economics from Harvard
University.
Howard S. Balter has served as Chief Operating Officer of the Company
since 1993 and served as the Company's Chief Financial Officer from 1993 to May
1995. Mr. Balter has been a director of the Company since December 1995 and
became Vice Chairman of the Board in October 1996. From 1985 to 1993, Mr. Balter
operated his own real estate development firm. Mr. Balter holds a B.A. in
Mathematics and Computers from Yeshiva University and attended New York
University School of Business.
James Courter joined the Company as President in October 1996 and has
been a director of the Company since March 1996. Mr. Courter has been a senior
partner in the New Jersey law firm of Courter, Kobert, Laufer & Cohen since
1972. He was also a partner in the Washington, D.C. law firm of Verner,
Liipfert, Bernhard, McPherson & Hand from January 1994 to September 1996. Mr.
Courter was a member of the U.S. House of Representatives for 12 years, retiring
in January 1991. From 1991 to 1994, Mr. Courter was Chairman of the President's
Defense Base Closure and Realignment Commission. Mr. Courter also serves on the
Board of Directors of Envirogen, Inc. He received a B.A. from Colgate University
and a J.D. from Duke University Law School.
Stephen R. Brown joined the Company as its Chief Financial Officer in
May 1995. From 1985 to May 1995, Mr. Brown operated his own public accounting
practice servicing medium-sized corporations as well as high net worth
individuals. Mr. Brown received a B.A. in Economics from Yeshiva University and
a B.B.A. in Business and Accounting from Baruch College.
37
<PAGE>
Eric L. Raab joined the Company as its Chief Technical Officer in April
1995. From March 1988 to March 1995, Mr. Raab worked for AT&T Bell Labs in their
semiconductor research division, most recently as a member of the technical
staff developing new technologies for integrated circuit production. Mr. Raab
received a Ph.D. in Physics from the Massachusetts Institute of Technology and
an A.B. in Physics and Mathematics from Columbia College.
Kenneth Scharf joined the Company as its Chief Information Officer in
December 1995. From February 1995 to August 1995, Mr. Scharf served as a senior
manager in Ernst & Young LLP's consulting practice. From 1983 to 1994, Mr.
Scharf was the Senior Vice President of Information Systems for Nine West Group,
Inc. Mr. Scharf received a B.B.A. from Pace University and an M.B.A. from
Fordham University.
Joyce J. Mason has been a director of the Company since March 1996. Ms.
Mason has served as Secretary of the Company since its inception and as a
director of the Company's predecessor since its inception to March 1996. Ms.
Mason has been in private legal practice since August 1990. Ms. Mason received a
B.A. from the City University of New York and a J.D. from New York Law School.
Ms. Mason is Mr. Jonas's sister.
Marc E. Knoller has been a director of the Company since March 1996. Mr.
Knoller joined the Company as its Vice President in March 1991 and also served
as a director of its predecessor since such time. From 1988 until March 1991,
Mr. Knoller was director of national sales for Jonas Publishing. Mr. Knoller
received a B.B.A. from Baruch College.
Meyer A. Berman has been a director of the Company since March 1996. Mr.
Berman founded M.A. Berman Co. in 1981, a broker-dealer that services high net
worth individuals and institutions, and has served as its President from its
inception. Prior to such time Mr. Berman held various positions in the stock
brokerage business.
J. Warren Blaker has been a director of the Company since March 1996.
Dr. Blaker has been Professor of Physics and Director of the Center for
Lightwave Science and Technology at Fairleigh Dickinson University since 1987.
Prior to such time he worked in various capacities in the optics industry,
including serving as Chief Executive Officer of University Optical Products,
Inc., a wholly-owned subsidiary of University Patents, Inc., from 1982 to 1985.
Dr. Blaker received a B.S. from Wilkes University and a Ph.D. from the
Massachusetts Institute of Technology.
David S. Steiner has been a director of the Company since March 1996.
Mr. Steiner served as a director of the Company's predecessor since 1992. Mr.
Steiner has also been Chairman and Manager at the Steiner Equities Group,
developers of industrial and office parks and commercial facilities, since May
1996. Prior to such time, Mr. Steiner served as President and Chief Executive
Officer of The Sudler Companies since 1955. Mr. Steiner received a B.S. from the
Carnegie Institute of Technology.
Bert W. Wasserman has been a director of the Company since March 1996.
Mr. Wasserman was Executive Vice President and Chief Financial Officer of Time
Warner Inc. from January 1990 to December 1994 and was also a director of Time
Warner from January 1990 to March 1993. Mr. Wasserman was a member of the Office
of the President and was also a director of Warner Communications, Inc. ("Warner
Communications") from 1981 to 1990, when that company merged to form Time
Warner, and had served Warner Communications in various capacities beginning in
1966. Mr. Wasserman serves as a member of various boards, including: several
investment companies in the Dreyfus Family of Funds; Lillian Vernon Corp., a
catalog seller of home products; Winstar Communications, Inc., a wireless
communications company; Mountasia Entertainment International, Inc., an operator
of family recreation centers; and The New German Fund, a New York Stock Exchange
listed mutual fund operated by Deutsche Bank AG. Mr. Wasserman is a graduate of
Baruch College and Brooklyn Law School.
Each director holds office until that director's successor has been duly
elected and qualified. The Company's Board of Directors is divided into three
classes with Messrs. Blaker, Courter and Knoller constituting Class I, Messrs.
Balter, Berman and Wasserman constituting Class II and Messrs. Jonas and Steiner
and Ms. Mason constituting Class III. Upon the expiration of the term of each
class of directors, directors comprising such class of directors will be elected
for a three-year term at the next succeeding annual meeting of stockholders.
Executive officers of the Company are elected by the Board of Directors on an
annual basis and serve until their successors are duly elected and qualified.
38
<PAGE>
Committees of the Board of Directors
The Board of Directors has established a Compensation Committee
consisting of Messrs. Berman, Blaker and Steiner and an Audit Committee
consisting of Messrs. Berman, Blaker and Wasserman. The Compensation Committee
will make recommendations concerning the salaries and incentive compensation of
employees of and consultants to the Company and will administer the Company's
Plan (as defined below). The Audit Committee will be responsible for reviewing
the results and scope of audits and other services provided by the Company's
independent auditors.
39
<PAGE>
Item 11. EXECUTIVE COMPENSATION.
Compensation of Directors
Options to purchase 25,000 shares of Common Stock for $10.00 per share
were granted to Bert W. Wasserman in March 1996. Such options were immediately
exercisable and have a term of ten years. In addition, each non-employee
director (including Mr. Wasserman) received as of March 15, 1996 grants
exercisable for 10,000 shares of Common Stock at an exercise price of $10.00 per
share, and will annually receive grants of options exercisable for 10,000 shares
of Common Stock on the date of the Annual Meeting of Stockholders under the
Company's Plan.
Executive Compensation
The following table sets forth certain information for the Company's
last completed fiscal year concerning the compensation of the Company's Chief
Executive Officer and the Company's most highly compensated executive officers
(whose salary and bonus exceeded $100,000), other than the Chief Executive
Officer, who were serving as executive officers as of July 31, 1996 (the "Named
Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Long-term
Compensation
Annual Compensation Awards(2)
------------------- ------------
Other Securities
Name and Principal Annual Underlying All Other
Position Year(1) Salary($) Bonus($) Compensation($) Options(#) Compensation($)
- - ------------------ ------- --------- -------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Howard S. Jonas....... 1996 65,000 0 0 0 0
Chairman of The
Board
Chief Executive
Officer
President
Treasurer
Howard S. Balter...... 1996 175,000 64,000 0 0 0
Chief Operating
Officer and
Vice Chairman
</TABLE>
- - ----------
(1) Information with respect to prior fiscal years is not presented because the
Company was not a reporting Company pursuant to the Securities Exchange Act
of 1934, as amended, prior to Fiscal 1996.
(2) The Company does not have executive long-term compensation plans.
40
<PAGE>
Stock Options Granted in Last Fiscal Year
There were no grants of options to purchase shares of Common Stock made
during Fiscal 1996 to the Named Executive Officers.
Option Exercises in Last Fiscal Year and Fiscal Year-End Values
The following table provides certain information concerning the number
of shares of Common Stock underlying unexercised stock options held by each of
the Named Executive Officers and the value of such officers' unexercised stock
options at July 31, 1996. No stock options were exercised by the Named Executive
Officers during Fiscal 1996.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Shares Fiscal Year-End(#) Fiscal Year-End($)(1)
Acquired ------------------ ---------------------
on Value
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
- - ---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Howard S. Jonas.............. 0 0 0 0 0 0
Howard S. Balter............. 0 0 552,920 0 6,115,786 0
</TABLE>
- - ----------
(1) The closing price of the Common Stock on July 31, 1996, as reported by the
Nasdaq National Market, was $11.50 per share.
Employment Agreements
The Company has entered into employment agreements with Messrs. Jonas,
Balter, Scharf, Raab and Courter. Mr. Jonas's employment agreement, dated as of
January 1, 1996, provides for a base salary of a minimum of $200,000 which may
be increased, but not decreased, during the term of the agreement. The Company
may terminate Mr. Jonas's employment only for cause (as defined in the
agreement). If the agreement is terminated without cause, the Company is
obligated to pay to Mr. Jonas an amount equal to twice his base salary as then
in effect. The agreement has a three year term but is automatically extendable
for one year periods unless the Board of Directors or Mr. Jonas notifies the
other, within ninety days of the anniversary of such period, that the agreement
will not be extended. Pursuant to the agreement, Mr. Jonas has agreed to not
compete with the Company for a period of one year following termination of the
agreement.
Mr. Balter's employment agreement, dated as of January 1, 1996, provides
for a base salary of a minimum of $175,000 which may be increased, but not
decreased, during the term of the agreement. The Company may terminate Mr.
Balter's employment only for cause (as defined in the agreement). If the
agreement is terminated without cause, the Company is obligated to pay to Mr.
Balter an amount equal to twice his base salary as then in effect. The agreement
has a three year term but is automatically extendable for one year periods
unless the Board of Directors or Mr. Balter notifies the other, within 90 days
of the anniversary of such period, that the agreement will not be extended.
Pursuant to the agreement, Mr. Balter has agreed to not compete with the Company
for a period of one year following termination of the agreement.
The Company entered into an employment agreement with Kenneth Scharf,
its Chief Information Officer, dated as of September 1, 1996. The agreement
provides for an annual base salary of $200,000. In the event of termination, Mr.
Scharf will receive six months severance in the amount of $100,000 from the
Company.
The Company entered into an employment agreement with Eric L. Raab, its
Chief Technology Officer, dated as of April 3, 1995, which agreement was amended
on December 28, 1995. Mr. Raab's employment agreement has a term of three years
from the date of his original agreement and automatically extends for terms of
one year thereafter, unless Mr. Raab provides written notice of his decision to
not renew the agreement. The agreement also provides for termination for cause
(as defined in the agreement) upon six months' written notice. The agreement
provides for a base salary of $75,000 for the first year of the agreement and
for increases in such amount for each additional year the agreement is in
effect.
41
<PAGE>
Pursuant to the agreement, Mr. Raab may continue his involvement with certain
business opportunities he had become involved with prior to joining the Company.
Mr. Courter's employment agreement, dated as of September 4, 1996,
provides for a base salary of a minimum of $200,000 which may be increased, but
not decreased, during the term of the agreement. The Company may terminate Mr.
Courter's employment only for cause (as defined in the agreement). If the
agreement is terminated without cause, the Company is obligated to pay to Mr.
Courter an amount equal to twice his base salary as then in effect. The
agreement has a three year term but is automatically extendable for one year
periods unless the Board of Directors or Mr. Courter notifies the other, within
ninety days of the anniversary of such period, that the agreement will not be
extended. Pursuant to the agreement, Mr. Courter has agreed to not compete with
the Company for a period of one year following termination of the agreement.
Employee Stock Option Program
The Company had an informal stock option program whereby selected key
employees were granted options to purchase shares of Common Stock. The primary
purpose of this program was to provide long-term incentives to the Company's key
employees and to further align their interests with those of the Company.
Options granted under such program have a term of ten years and are subject to
all other reasonable terms and conditions as the Company deems necessary and
appropriate. The selection of the participants and the determination of the
number of options to be granted to each participant were made by the Company's
Board of Directors. Under such program, options to purchase an aggregate of
2,158,770 shares of Common Stock have been granted. See "Certain Relationships
and Related Transactions." The Company does not anticipate that any additional
options will be granted under this program.
1996 Stock Option and Incentive Plan
The Company has adopted the IDT Corporation 1996 Stock Option and
Incentive Plan (the "Plan"). The description in this Registration Statement of
the principal terms of the Plan is a summary, does not purport to be complete,
and is qualified in its entirety by the full text of the Plan which is
incorporated by reference as an exhibit to the Registration Statement of which
this Prospectus forms a part.
Pursuant to the Plan, key employees, directors and consultants of the
Company are eligible to receive awards of stock options, stock appreciation
rights, limited stock appreciation rights and restricted stock. Options granted
under the Plan may be "incentive stock options" ("ISOs"), within the meaning of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
nonqualified stock options ("NQSOs"). Stock appreciation rights ("SARs") and
limited stock appreciation rights ("LSARs") may be granted simultaneously with
the grant of an option or (in the case of NQSOs), at any time during the term of
the Plan. Restricted stock may be granted in addition to or in lieu of any other
award granted under the Plan. The Company has authorized 2,300,000 shares of
Common Stock for issuance of awards under the Plan (subject to antidilution and
similar adjustments).
The Plan is administered by the Compensation Committee (the "Committee")
appointed by the Board of Directors of the Company (the "Board"). Subject to the
provisions of the Plan, the Committee will determine the type of award, when and
to whom awards will be granted, the number of shares covered by each award and
the terms, provisions and kind of consideration payable (if any), with respect
to awards. The Committee may interpret the Plan and may at any time adopt such
rules and regulations for the Plan as it deems advisable.
In determining the persons to whom awards shall be granted and the
number of shares covered by each award, the Committee shall take into account
the duties of the respective persons, their present and potential contribution
to the success of the Company and such other factors as the Committee shall deem
relevant.
An option may be granted on such terms and conditions as the Committee
may approve, and generally may be exercised for a period of up to 10 years from
the date of grant. Generally, ISOs will be granted with an exercise price equal
to the "Fair Market Value" (as defined in the Plan) on the date of grant. In the
case of ISOs, certain limitations will apply
42
<PAGE>
with respect to the aggregate value of option shares which can become
exercisable for the first time during any one calendar year, and certain
additional limitations will apply to ISOs granted to "Ten Percent Stockholders"
(as defined in the Plan) of the Company. The Committee may provide for the
payment of the option price in cash, by delivery of Common Stock or Class A
Stock having a Fair Market Value equal to such option price, by a combination
thereof or by any other method. Options granted under the Plan will become
exercisable at such times and under such conditions as the Committee shall
determine, subject to acceleration of the exercisability of options in the event
of, among other things, a "Change in Control" (as defined in the Plan).
The Plan provides for automatic formula option grants to eligible
non-employee directors of the Company. Options to purchase 10,000 shares of
Common Stock were granted to each non-employee director upon the consummation of
the Company's initial public offering in March 1996 and options to purchase
10,000 shares of Common Stock will be granted to each new non-employee director
upon such director's initial election and qualification for the Board. In
addition, options to purchase 10,000 shares of Common Stock will be granted
annually to each non-employee director on the day of each annual stockholder
meeting. Each option will have an exercise price equal to the Fair Market Value
of a share of Common Stock on the date of grant. All such options granted to
non-employee directors will be immediately exercisable. All options held by
non-employee directors, to the extent not exercised, expire on the earliest of
(i) the tenth anniversary of the date of grant, (ii) one year following the
optionee's termination of his directorship on account of death or disability or
(iii) three months following the optionee's termination of his directorship with
the Company for any other reason.
The Plan also permits the Committee to grant SARs and/or LSARs with
respect to all or any portion of the shares of Common Stock covered by options.
Generally, SARs may be exercised only at such time as the related option is
exercisable and LSARs may be exercised only during the 90 days immediately
following an "Acceleration Date" (as defined in the Plan) except that, in the
case of an "Insider" (as defined in the Plan), (i) an SAR and an LSAR must be
held for at least six months before it becomes exercisable and (ii) an LSAR must
automatically be paid out in cash. LSARs will be exercisable only if, and to the
extent, that the option to which the LSARs relate is then exercisable, and if
such option is an ISO, only to the extent the Fair Market Value per share of
Common Stock exceeds the option price.
Upon exercise of an SAR, a grantee will receive for each share for which
an SAR is exercised, an amount in cash or Common Stock, as determined by the
Committee, equal to the excess, if any, of (i) the Fair Market Value of a share
of Common Stock on the date the SAR is exercised over (ii) the exercise price
per share of the option to which the SAR relates.
Upon exercise of an LSAR, a grantee will receive for each share for
which an LSAR is exercised, an amount in cash equal to the excess, if any, of
(i) the greater of (x) the highest Fair Market Value of a share of Common Stock
during the 90-day period ending on the date the LSAR is exercised, and (y)
whichever of the following is applicable: (1) the highest per share price paid
in any tender or exchange offer which is in effect at any time during the 90
days ending on the date of exercise of the LSAR; (2) the fixed or formula price
for the acquisition of shares of Common Stock in a merger in which the Company
will not continue as the surviving corporation, or upon a consolidation, or a
sale, exchange or disposition of all or substantially all of the Company's
assets, approved by the Company's stockholders (if such price is determinable on
the date of exercise); and (3) the highest price per share of Common Stock shown
on Schedule 13D, or any amendment thereto, filed by the holder of the specified
percentage of Common Stock, the acquisition of which gives rise to the
exercisability of the LSAR over (ii) the exercise price per share of the option
to which the LSAR relates. In no event, however, may the holder of an LSAR
granted in connection with an ISO receive an amount in excess of the maximum
amount which will enable the option to continue to qualify as an ISO.
When an SAR or LSAR is exercised, the option to which it relates will
cease to be exercisable to the extent of the number of shares with respect to
which the SAR or LSAR is exercised, but will be deemed to have been exercised
for purposes of determining the number of shares available for the future grant
of awards under the Plan.
The Plan further provides for the granting of restricted stock awards,
which are awards of Common Stock which may not be disposed of, except by will or
the laws of descent and distribution, for such period as the Committee
determines (the "restricted period"). The Committee may also impose such other
conditions and restrictions, if any, on the shares as it
43
<PAGE>
deems appropriate, including the satisfaction of performance criteria. All
restrictions affecting the awarded shares lapse in the event of a Change in
Control.
During the restricted period, the grantee will be entitled to receive
dividends with respect to, and to vote the shares awarded to him. If, during the
restricted period, the grantee's service with the Company terminates for any
reason, any shares remaining subject to restrictions will be forfeited. The
Committee has the authority to cancel any or all outstanding restrictions prior
to the end of the restricted period, including cancellation of restrictions in
connection with certain types of termination of service.
The Board may at any time and from time to time suspend, amend, modify
or terminate the Plan; provided however, that, to the extent required by Rule
16b-3 ("Rule 16b-3") promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or any other law, regulation or stock exchange
rule, no such change shall be effective without the requisite approval of the
Company's stockholders. In addition, no such change may adversely affect any
award previously granted, except with the written consent of the grantee.
No awards may be granted under the Plan after ten years after its
adoption.
401(k) Plan
The Company has established a plan, effective September 1, 1996,
pursuant to Section 401(k) of the Internal Revenue Code of 1986, as amended (the
"401(k) Plan"), for non-union employees. The non-union employees of the Company
and its subsidiaries are eligible to participate in the 401(k) Plan after
completion of one year of employment with the Company. Under the 401(k) Plan,
eligible employees may elect to defer a portion of their salary each year
(subject to limits imposed by the Internal Revenue Service). The portion
deferred will be paid by the Company to the trustee under the 401(k) Plan. The
Company makes a matching contribution to the 401(k) Plan each month on behalf of
each participant in an amount equal to 20% of such participant's salary deferral
contribution. Matching contributions become vested under the 401(k) Plan at a
rate of 20% for each full year of employment. Matching contributions do not
begin vesting until the second year of employment.
Compensation Committee Interlocks and Insider Participation
During Fiscal 1996, the Compensation committee was comprised of Messrs.
Berman, Blaker and Courter and the Audit committee was comprised of Messrs.
Berman, Blaker and Wasserman. Each of the members of the Compensation Committee
and the Audit Committee were not employees of the Company during such period.
During Fiscal 1995, the Company did not have a Compensation Committee or an
Audit Committee. Messrs. Jonas and Balter each participated in the determination
of officers' compensation during Fiscal 1995.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of Common Stock (and Class A Stock, assuming conversion of
all shares of Class A Stock into Common Stock) as of September 30, 1996 by (i)
each person known by the Company to be the beneficial owner of more than 5% of
the outstanding shares of Common Stock (and Class A Stock, on an as-converted
basis), (ii) each of the Company's directors and the Named Executive Officers
and, (iii) all directors and officers of the Company as a group. Unless
otherwise noted in the footnotes to the table, the persons named in the table
have sole voting and investing power with respect to all shares (or Class A
Stock) of Common Stock indicated as being beneficially owned by them.
44
<PAGE>
<TABLE>
<CAPTION>
Beneficial Ownership
--------------------
Name and Address of Number of Percentage
Beneficial Owner* Shares of Ownership
----------------- ------ ------------
<S> <C> <C>
Five Percent Stockholders
Howard S. Jonas(1) .............................. 11,174,330 53.6%
294 State Street
Hackensack, NJ 97068
David S. Steiner(2) ............................. 1,252,000 6.0
c/o The Sudler Companies
75 Eisenhower Pkwy
Roseland, NJ 07068
Named Executive Officers and Directors
Howard S. Balter(3) ............................. 552,920 2.7
Joyce J. Mason(3) ............................... 46,000 *
James Courter(4) ................................ 247,000 2.6
Meyer A. Berman(4) .............................. 113,500 *
J. Warren Blaker(3) ............................. 10,000 *
Bert W. Wasserman(3) ............................ 35,000 *
All directors and officers as a group
(12 persons) .................................. 13,885,110 66.4
</TABLE>
- - ----------
* Less than 1%.
(1) Shares of Class A Stock which are convertible on a share-for-share basis
into Common Stock at the option of the holder.
(2) Served as a director of the Company's predecessor between 1992 and 1996 and
is a director of the Company. Includes 621,000 shares of Common Stock
transferred by Mr. Steiner to irrevocable trusts over which Mr. Steiner
shares voting power with one individual and 10,000 shares of Common Stock
issuable upon exercise of stock options exercisable within 60 days.
(3) Common Stock beneficially owned pursuant to stock options exercisable
within 60 days.
(4) Includes 10,000 shares beneficially owned pursuant to stock options
exercisable within 60 days.
45
<PAGE>
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Simon L. Lermer, who served as a director of the Company from December
1992 to December 1995, is the sole stockholder of Lermer Overseas
Telecommunications, Inc. ("Lermer"). Mr. Lermer and Marc Knoller, a director of
the Company, are the two directors of Lermer. Under an agreement between Lermer
and the Company in effect from April 1994 until May 1996, Lermer provided
long-distance telecommunications services to the Company's customers and the
Company marketed Lermer's long-distance services and also provided Lermer with
marketing, technical support, billing and collection and rate procurement
services. Payments made to Lermer by the Company in Fiscal 1994 (from the
inception of Lermer in April 1994 until July 31, 1994), Fiscal 1995 and Fiscal
1996 were $181,160, $2,416,534 and $2,142,718, respectively.
The Company currently leases one of its three headquarters facilities in
Hackensack, New Jersey from a corporation which is wholly-owned by Howard Jonas,
the Company's Chief Executive Officer and Chairman of the Board of Directors.
Aggregate lease payments under such lease were $24,000 for each of Fiscal 1994,
1995 and 1996.
In September 1995, the Company borrowed $75,000 at 12% per annum from
Meyer A. Berman, a stockholder and, as of March 1996, a director, of the
Company. The principal amount of, and accrued interest on, this loan was payable
in September 1996. In October 1995, the Company issued promissory notes in the
principal amount of $100,000 to each of David S. Steiner, a stockholder and, as
of March 1996, a director of the Company, and Peter D. Sudler, a stockholder and
former director of the Company. These notes bore interest, due in monthly
installments, at the rate of 12% per annum and matured one year from issuance.
The Company issued promissory notes in the principal amount of $250,000 in
January 1996 and in February 1996 to Mr. Steiner. Such notes also bore interest,
due in monthly installments, at the rate of 12% per annum and matured one year
from issuance. In November 1995, the Company issued a promissory note in the
principal amount $100,000 to Mr. Lermer, which note bore interest at the rate of
12% per annum and was due in November 1996. This note required the Company to
redeem the note for an amount equal to its principal amount plus accrued
interest and a redemption premium in the amount of 10% of the principal amount
of the note upon completion of an initial public offering by the Company. All
such loans and notes were repaid in full in March 1996 with proceeds from the
Company's initial public offering. In the first three quarters of Fiscal 1996,
the Company also borrowed an aggregate of $760,000 from Jonas Publishing Corp.,
a corporation which is wholly-owned by Mr. Jonas. Such borrowings did not bear
interest. Of such borrowings, $400,000 was repaid before the initial public
offering and $360,000 was repaid with the proceeds of the initial public
offering.
In August 1994, the Company granted options to purchase 552,920 shares
of Common Stock to Howard S. Balter, the Chief Operating Officer and a director
of the Company, at a weighted average exercise price of approximately $0.44 per
share, options to purchase 46,000 shares of Common Stock to Joyce J. Mason, its
Secretary and, as of March 1996, a director of the Company, at an exercise price
of approximately $0.21 per share and options to purchase 230,000 shares of
Common Stock to Marc E. Knoller, the Vice President and, as of March 1996, a
director of the Company, at an exercise price of approximately $0.21 per share.
In April 1995, the Company granted options to purchase 69,920 shares of Common
Stock to Stephen R. Brown, the Chief Financial Officer of the Company, at an
exercise price of $0.372 per share and options to purchase 124,440 shares of
Common Stock to Eric L. Raab, the Chief Technical Officer of the Company, at a
weighted average exercise price of $1.09 per share. Such options have terms of
ten years, are subject to all other reasonable terms and conditions and became
exercisable as of July 31, 1995. In addition, the Company granted as of March
15, 1996 options to purchase 184,000 shares of Common Stock at an exercise price
of $10.00 per share to Mr. Raab pursuant to the Plan. In March 1996, the Company
granted options to purchase 25,000 shares of Common Stock to Bert W. Wasserman,
a director of the Company, at an exercise price of $10.00 per share and have a
term of ten years. The Company also granted options to purchase 10,000 shares of
Common Stock at an exercise price of $10.00 per share to each of the
non-employee directors as of March 15, 1996. See "Executive
Compensation-Compensation of Directors."
In January 1996, Howard S. Jonas, the Company's Chief Executive Officer
and Chairman of the Board of Directors, loaned $500,000 to Yovelle, the owner of
the Genie on-line service. In consideration for such loan, Yovelle issued a
promissory note in the principal amount of $500,000 to Mr. Jonas. Such note bore
interest at a rate of 12% per annum and was due in June 1996. The Company
acquired all of the stock of Yovelle in August 1996. Prior to such acquisition,
Mr. Jonas's loan was repaid in full by Yovelle.
46
<PAGE>
The Company has not and will not extend or guarantee loans to officers
or directors of the Company, unless such loans are approved by a majority of the
directors and a majority of the independent, disinterested, outside directors of
the Company, are for bona fide business purposes and may be reasonably expected
to benefit the Company.
James Courter, the President and a Director of the Company, was a
partner of the law firm of Verner, Liipfert, Bernhard, McPherson & Hand until
September 1996. The firm has served as counsel to the Company since January
1996. Mr. Courter is a partner of the law firm Courtner, Kobert, Laufer & Cohen
which has served as counsel to the Company since July 1996. Fees paid to each of
the firms by the Company were less than 5% of the firms' gross revenues for each
fiscal year in which they represented the Company.
47
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Report:
1. Financial Statements.
2. Financial Statement Schedules.
Schedule No. Description
------------ -----------
II Valuation and Qualifying Accounts
3. Exhibits.
Exhibit
No. Description
--- -----------
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 the 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 Registrant.
10.08### Form of Registration Rights Agreement between the Company's
stockholders and the Company
10.09## Lease of 294 State Street.
10.11o Form of Registration Rights Agreement between Howard S.
Jonas and the Registrant.
10.14| | Access Agreement between PSINet Inc. and the Registrant.
21.01* Subsidiaries of the Registrant.
27.01* Financial Data Schedule.
- - ----------
* filed herewith
| | to be filed by amendment
+ confidential treatment requested
** incorporated by reference to Form S-1 filed January 9, 1996, file No.
333-00204
# incorporated by reference to Form S-1 filed January 22, 1996, file No.
333-00204
## incorporated by reference to Form S-1 filed February 21, 1996, file No.
333-00204
### incorporated by reference to Form S-1 filed March 8, 1996, file No.
333-00204
o incorporated by reference to Form S-1 filed March 14, 1996, file No.
333-00204
48
<PAGE>
(b) Reports on Form 8-K. The Registrant did not file any reports on Form 8-K
during the fiscal year ended July 31, 1996.
49
<PAGE>
IDT Corporation
Index to Consolidated Financial Statements
Report of Independent Auditors............................................F-2
Consolidated Balance Sheets as of July 31, 1995 and 1996..................F-3
Consolidated Statements of Operations for the years ended
July 31, 1994, 1995 and 1996............................................F-4
Consolidated Statements of Stockholders' Equity for the years ended
July 31, 1994, 1995 and 1996............................................F-5
Consolidated Statements of Cash Flows for the years ended
July 31, 1994, 1995 and 1996............................................F-6
Notes to Consolidated Financial Statements................................F-7
Financial Statement Schedule - Valuation and Qualifying Accounts..........F-20
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
IDT Corporation
We have audited the accompanying consolidated balance sheets of IDT Corporation
as of July 31, 1995 and 1996, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended July 31, 1996. Our audits also included the financial statement
schedule listed in the Index at Item 14(a). These consolidated financial
statements and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company at July 31, 1995 and 1996 and the results of its operations and its cash
flows for each of the three years in the period ended July 31, 1996, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
New York, New York
September 30, 1996,
except for Note 14, as to which the date is
October 14, 1996
F-2
<PAGE>
IDT Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
July 31
1995 1996
-------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 231,592 $14,893,756
Trade accounts and commissions receivable, net of allowance
for doubtful accounts of $250,000 at July 31, 1995 2,029,518 11,497,565
and $2,100,000 at July 31, 1996
Advances receivable -- 925,000
Due from Yovelle -- 1,200,000
Other current assets 141,034 1,985,090
-------------------------
Total current assets 2,402,144 30,501,411
Property and equipment, at cost, net 1,770,113 12,453,330
Advances receivable -- 325,000
Other assets 25,000 517,630
-------------------------
Total assets $ 4,197,257 $43,797,371
=========================
Liabilities and stockholders' equity Current liabilities:
Trade accounts payable $ 798,587 $ 7,778,860
Accrued expenses 2,028,753 7,770,334
Deferred revenue 266,584 983,496
Notes payable to former stockholder 5,001 --
Other current liabilities 187,357 422,005
-------------------------
Total current liabilities 3,286,282 16,954,695
-------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; authorized shares--
10,000,000; -- --
no shares issued
Common stock, $.01 par value; authorized shares--
100,000,000; 4,491,900 and 9,666,900 shares issued and 44,919 96,669
outstanding in 1995 and 1996, respectively
Class A stock, $.01 par value; authorized shares--
35,000,000; 11,174,330 shares issued and outstanding 111,743 111,743
Additional paid-in capital 3,223,598 44,746,841
Accumulated deficit (2,469,285) (18,112,577)
-------------------------
Total stockholders' equity 910,975 26,842,676
-------------------------
Total liabilities and stockholders' equity $ 4,197,257 $43,797,371
=========================
</TABLE>
F-3
<PAGE>
See accompanying notes.
F-4
<PAGE>
IDT Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended July 31
1994 1995 1996
--------------------------------------------
<S> <C> <C> <C>
Revenues $ 3,169,013 $ 11,664,434 $ 57,693,880
Costs and expenses:
Direct cost of revenues 989,886 7,543,923 36,437,583
Selling, general and administrative 2,402,556 5,991,520 35,799,158
Depreciation and amortization 105,853 303,619 1,212,235
--------------------------------------------
Total costs and expenses 3,498,295 13,839,062 73,448,976
--------------------------------------------
Loss from operations (329,282) (2,174,628) (15,755,096)
Interest expense (3,167) -- (113,160)
Interest income 26,376 15,129 458,464
Other 7,684 14,950 --
--------------------------------------------
Loss before income taxes and extraordinary item (298,389) (2,144,549) (15,409,792)
Income taxes -- -- --
--------------------------------------------
Loss before extraordinary item (298,389) (2,144,549) (15,409,792)
Extraordinary loss on retirement of debt -- -- (233,500)
--------------------------------------------
Net loss $ (298,389) $ (2,144,549) $(15,643,292)
============================================
Loss per share:
Loss before extraordinary item $ (0.02) $ (0.13) $ (0.85)
Extraordinary loss on retirement of debt -- -- (0.01)
--------------------------------------------
Net loss $ (0.02) $ (0.13) $ (0.86)
============================================
Weighted average number of shares used in
calculation of loss per share 16,569,292 16,569,292 18,180,023
============================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
IDT Corporation
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Class A Stock Additional Stock
--------------------- --------------------- Paid-In Subscription (Accumulated
Shares Amount Shares Amount Capital Receivable Deficit)
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1993 4,491,900 $ 44,919 11,174,330 $ 111,743 $ 939,938 $ (25,000) $ (26,347)
Contribution and sale of common stock -- -- -- -- 1,315,000 -- --
Net loss for the year ended July 31, 1994 -- -- -- -- -- -- (298,389)
-----------------------------------------------------------------------------------------
Balance at July 31, 1994 4,491,900 44,919 11,174,330 111,743 2,254,938 (25,000) (324,736)
Stock options -- -- -- -- 968,660 -- --
Services rendered in exchange for
subscription receivable -- -- -- -- -- 25,000 --
Net loss for the year ended July 31, 1995 -- -- -- -- -- -- (2,144,549)
-----------------------------------------------------------------------------------------
Balance at July 31, 1995 4,491,900 44,919 11,174,330 111,743 3,223,598 -- (2,469,285)
Stock options -- -- -- -- 70,000 -- --
Sale of common stock 4,600,000 46,000 -- -- 41,458,993 -- --
Exercise of warrants 575,000 5,750 -- -- (5,750 -- --
Net loss for the year ended July 31, 1996 -- -- -- -- -- -- (15,643,292)
-----------------------------------------------------------------------------------------
Balance at July 31, 1996 9,666,900 $ 96,669 11,174,330 $ 111,743 $ 44,746,841 $ -- $(18,112,577)
=========================================================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
IDT Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended July 31
1994 1995 1996
-----------------------------------------------------------
Operating activities
<S> <C> <C> <C>
Net loss $ (298,389) $ (2,144,549) $(15,643,292)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Stock option expense -- 968,660 70,000
Depreciation and amortization 105,853 303,619 1,212,235
Write-off of abandoned equipment 82,000 -- --
Services rendered in exchange for subscription
receivable -- 25,000 --
Gain on sale of short-term investments (7,284) -- --
Changes in assets and liabilities:
Accounts receivable (648,928) (1,104,087) (9,468,047)
Due from Yovelle -- -- (1,200,000)
Other current assets (9,896) (97,357) (1,844,056)
Other assets (25,000) -- (492,630)
Advances receivable -- -- (1,250,000)
Trade accounts payable 321,873 417,662 6,980,273
Accrued expenses 260,557 1,731,696 5,741,581
Deferred revenue -- 242,921 716,912
Other current liabilities (15,488) 177,810 234,648
-----------------------------------------------------------
Net cash provided by (used in) operating activities (234,702) 521,375 (14,942,376)
Investing activities
Purchase of equipment (716,623) (1,325,518) (11,895,452)
Purchase of short-term investments (1,490,413) -- --
Proceeds from the sale of short-term investments 1,669,355 297,974 --
-----------------------------------------------------------
Net cash used in investing activities (537,681) (1,027,544) (11,895,452)
Financing activities
Payments on notes due to former shareholder (13,334) (16,669) (5,001)
Proceeds from notes payable from shareholders,
affiliates and outside investors -- -- 4,237,000
Repayments of notes payable from shareholders,
affiliates and outside investors -- -- (4,237,000)
Payments of stockholder loans (77,500) -- --
Proceeds from sale of common stock 1,315,000 -- 41,504,993
-----------------------------------------------------------
Net cash provided by (used in) financing activities 1,224,166 (16,669) 41,499,992
-----------------------------------------------------------
Net increase (decrease) in cash 451,783 (522,838) 14,662,164
Cash and cash equivalents at beginning of period 302,647 754,430 231,592
----------------------------------------------------------
Cash and cash equivalents at end of period $ 754,430 $ 231,592 $ 14,893,756
==========================================================
</TABLE>
See accompanying notes.
F-7
<PAGE>
IDT Corporation
Notes to Consolidated Financial Statements
July 31, 1996
1. Summary of Significant Accounting Policies
Organization
IDT Corporation (the "Company") was incorporated in Delaware in December 1995 as
a wholly-owned subsidiary of International Discount Telecommunications, Corp.
("IDT New York"). IDT New York was incorporated under the laws of the state of
New York in August 1990. In March 1996, in order to effect IDT New York's
Reincorporation in Delaware, IDT New York was merged into the Company ("the
Reincorporation"). As part of the Reincorporation, the stockholders of IDT New
York exchanged their shares of common stock of IDT New York for an aggregate of
4,491,900 shares of Common Stock and 11,174,330 shares of Class A Stock of the
Company. The accompanying financial statements give retroactive effect to the
Reincorporation.
The Company provides Internet connectivity and certain telecommunication
services to subscribers in the United States and abroad. In August 1996, the
Company also began providing Internet telephony services with the introduction
of Net2Phone.
Principles of Consolidation
The accompanying consolidated financial statements include accounts of the
Company and its majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results inevitably will differ from those estimates.
Revenue Recognition
Monthly subscription service revenue is recognized over the period services are
provided. Telecommunication revenues are recognized as they are incurred.
Equipment sales are recognized when installation is completed. Deferred revenue
consists primarily of semi-annual and annual Internet services billed in
advance.
F-8
<PAGE>
IDT Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Direct Cost of Revenues
Direct cost of revenues consists primarily of telecommunication costs,
connectivity costs, and the cost of equipment sold to customers.
Property and Equipment
Equipment, software, and furniture and fixtures are depreciation using the
straight-line method over the estimated useful lives of the assets, which range
from five to seven years. Leasehold improvements are depreciated using the
straight-line method over the term of the lease or estimated useful life of the
assets, whichever is shorter.
Subscriber Acquisition Costs and Advertising
Subscriber acquisition costs including sales commissions, license fees and
production and shipment of starter packages are expensed as incurred.
The Company expenses the costs of advertising as incurred. For the years ended
July 31, 1994, 1995 and 1996, advertising expense totaled $10,000, $581,000 and
$8,520,000, respectively.
Software Development Costs
Costs for the internal development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time any additional
costs would be capitalized. To date, the Company has essentially completed its
software development concurrently with the establishment of technological
feasibility and, accordingly, no such costs have been capitalized to date.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Cash and cash equivalents
are carried at cost which approximates market value.
F-9
<PAGE>
IDT Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Income Taxes
The Company accounts for income taxes on the liability method as required by
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of assets and
liabilities.
Net Income (Loss) Per Share
Except as noted below, net income (loss) per common share is computed using the
weighted average number of common and Class A shares outstanding and dilutive
common stock equivalent shares from stock options. Stock options and warrants
are included as share equivalents using the treasury stock method. For all
periods prior to the Company's initial public offering the net income (loss) per
share amounts were computed in accordance with rules and practices of the
Securities and Exchange Commission that require common stock, common stock
options and common stock warrants issued at a price substantially below the
proposed public offering price and within a twelve-month period prior to an
initial public offering of common stock to be treated as common stock
equivalents outstanding for all periods prior to the initial public offering.
Current Vulnerability Due to Certain Concentrations
The Company is dependent upon certain suppliers for the provision of
telecommunication and Internet services to its customers. The Company has not
experienced and does not expect any disruption of such services. Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash, cash equivalents and trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the large number of customers comprising the Company's customer base.
However, international customers account for a significant amount of the
Company's total revenues. Therefore, the Company is subject to risks associated
with international operations, including changes in exchange rates, difficulty
in accounts receivable collection and longer payment cycles.
Management regularly monitors the creditworthiness of its domestic and
international customers and believes that it has adequately provided for any
exposure to potential credit losses.
F-10
<PAGE>
IDT Corporation
Notes to Consolidated Financial Statements (continued)
1. Summary of Significant Accounting Policies (continued)
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board ("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 will adopt Statement 121 in the first quarter of fiscal 1997 and, based
on current circumstances, does not believe the effect of adoption will be
material.
Stock Based Compensation
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 of 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 option grants only when
the exercise price is less than the fair value of the shares at the date of
grant. However, Statement 123 requires additional pro forma disclosures
regardless of whether a company elects to continue to apply APB 25 for its stock
option grants. The Company will include such disclosures in its fiscal 1997
annual financial statements.
2. Advances Receivable
Prior to July 31, 1996, the Company advanced $1,250,000 to one of its carriers.
The Company also had trade receivables of approximately $1,600,000 due from the
carrier at July 31, 1996. Subsequent to July 31, 1996, the Company converted the
advance and trade receivables, plus accrued interest thereon, into a promissory
note bearing interest at a rate of 13% per annum and payable in 12 monthly
installments commencing on November 15, 1996. The promissory note is secured by
the carrier's equipment.
F-11
<PAGE>
IDT Corporation
Notes to Consolidated Financial Statements (continued)
3. Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
July 31
1995 1996
----------------------------
<S> <C> <C>
Equipment $ 1,906,622 $ 10,661,941
Computer software 140,319 1,971,018
Leasehold improvements 48,249 296,718
Furniture and fixtures 115,902 1,176,867
----------------------------
2,211,092 14,106,544
Less accumulated depreciation and
amortization (440,979) (1,653,214)
============================
Net property and equipment $ 1,770,113 $ 12,453,330
============================
</TABLE>
4. Note Payable to Former Stockholder
In May 1991, the Company repurchased 1,035,000 shares of its Common for $80,000
payable $20,000 on execution of the agreement and 36 monthly principal payments
of $1,667 beginning May 1, 1992. The note bore interest at 2% above the prime
rate as defined. In connection with the aforementioned stock repurchase, the
former stockholder received a warrant permitting him, in the event of certain
sales of the Company's Common stock, as defined, to purchase shares of the
Company's stock at a discount to the sale price. On January 1, 1996, in full
satisfaction of the previous agreement, the former stockholder was granted a
warrant to purchase 575,000 shares of the Company's Common stock for an
aggregate purchase price of $1.00. This warrant was exercised in March 1996.
5. Related Party Transactions
The Company currently leases office space from a corporation which is
wholly-owned by an officer stockholder. Aggregate lease payments under such
lease, which expires on June 30, 1997, were $24,000 for each of the years ended
July 31, 1994, 1995 and 1996. The Company provided a portion of such space to
corporations owned by an officer/stockholder without compensation.
The Company has been provided professional services by directors and/or
relatives of officers/directors. The Company incurred approximately $9,000,
$37,000 and $197,000 for such services for the years ended July 31, 1994, 1995
and 1996, respectively.
F-12
<PAGE>
IDT Corporation
Notes to Consolidated Financial Statements (continued)
5. Related Party Transactions (continued)
During 1996, the Company received $760,000 in non-interest bearing advances from
a company which is wholly-owned by an officer/shareholder of the Company. Such
advances were repaid during 1996.
The Company supplied telecommunications services to its customers under an
agreement wherein Lermer Overseas Telecommunications, Inc. ("Lermer") was the
carrier. Simon L. Lermer, who served as a director of the Company from December
1992 to December 1995, is the sole shareholder of Lermer. Mr. Lermer and Marc
Knoller, a director of the Company, are the two directors of Lermer. Under an
agreement between Lermer and the Company, the Company provides Lermer with
marketing, technical support, billing and collection and rate procurement
services. Payments made to Lermer in Fiscal 1994 (from the inception of Lermer
in April 1994 until July 31, 1994), 1995 and 1996 equal $181,160, $2,416,534 and
$2,142,718, respectively. The Company's revenues for such services amounted to
approximately $298,000, $6,016,000 and $13,024,259 for the years ended July 31,
1994, 1995 and 1996, respectively.
During fiscal 1996, the Company obtained a license to supply telecommunications
services directly to its customers and the agreement with Mr. Lermer was
terminated.
6. Income Taxes
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
July 31
1995 1996
----------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 570,000 $ 7,257,000
Bad debt reserve -- 844,000
Employee benefits 330,000 418,000
----------------------------
Deferred tax assets 900,000 8,519,000
Deferred tax liability - depreciation 60,000 759,000
----------------------------
Net deferred tax assets 840,000 7,760,000
Valuation allowance (840,000) (7,760,000)
----------------------------
Total deferred tax assets $ -- $ --
===========================
</TABLE>
F-13
<PAGE>
IDT Corporation
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
The Company has provided a full valuation allowance on net deferred tax assets
since realization of these benefit cannot be reasonably assured. The valuation
allowance increased by $6,920,000 during 1996.
At July 31, 1996, based upon tax returns filed and to be filed, the Company had
net operating loss carryforwards for federal income tax purposes of
approximately $18,100,000 expiring in the years 2009 through 2011. These net
operating loss carryforwards may be limited in their use in the event of
significant changes in the Company's ownership. In addition, their use is
limited to future taxable earnings of the Company.
7. Stockholders' Equity
Common Stock and Class A Stock
The rights of holders of Common stock and holders of Class A stock are identical
except for voting and conversion rights and restrictions on transferability. The
holders of Class A stock are entitled to three votes per share and the holders
of Common stock are entitled to one vote per share. Class A stock is subject to
certain limitations on transferability that do not apply to the Common stock.
Each share of Class A stock may be converted into one share of Common stock, at
any time at the option of the holder.
Stock Options
In August 1994, the Company granted options to purchase 1,783,530 shares of
common stock at exercise prices ranging from $0.21 to $0.83 per share. In April
1995, the Company granted options to purchase 356,840 shares of common stock at
exercise prices ranging from $0.41 to $1.66 per share. In November 1995, the
Company granted options to purchase 18,400 shares of common stock at exercise
prices ranging from $2.54 to $10.16 per share. The options granted include
various vesting provisions and expire ten years from the date of grant. In
connection with the granting of these options, the Company recorded compensation
expense of approximately $969,000 and $70,000 during the years ended July 31,
1995 and 1996, respectively.
At July 31, 1996, options to purchase 3,503,520 shares of the Company's Common
Stock were outstanding of which 2,446,512 were then exercisable.
F-14
<PAGE>
IDT Corporation
Notes to Consolidated Financial Statements (continued)
7. Stockholders' Equity (continued)
Initial Public Offering
On March 15, 1996, the Company completed an initial public offering of 4,600,000
shares of its common stock for $10 per share. The Company realized net proceeds
of approximately $41.5 million from this offering. A portion of the proceeds
from this offering was used to repay $3,477,000 of short-term notes previously
issued during fiscal 1996.
8. Commitments and Contingencies
Legal Proceedings
On August 2, 1995, in a suit entitled Fisher, Herbst & Kimble, P.C. et al v.
International Discount Telecommunications Corporation, pending in the U.S.
District Court of Dallas County, Texas, two plaintiffs alleged violation of the
Telephone Consumer Protection Act of 1991, 47 U.S.C. (beta)227(b)(1)(C) ("TCPA).
In general, the TCPA prohibits certain kinds of, but not all, unauthorized
advertising by way of facsimile. The named Plaintiffs filed suit individually
and as a class action certification contending that the Company transmitted
advertisements proscribed by the TCPA and should be liable for damages permitted
by law. The statute provides a private right of action (if otherwise permitted
by the laws or rules of a court of a state) and allows recovery of up to $500 or
actual damages, if greater, for each individual violation. The Company has
entered into a settlement agreement with such plaintiffs which has received
final court approval.
In October 1995, an investigation was instituted by the Attorneys General of
Iowa, New Jersey, New York, Tennessee and Texas (collectively, the "A.G.") into
certain business practices of the Company as a result of complaints by residents
of those states. Michigan, thereafter entered the investigation on or about
September 1996. The focus of the A.G.'s investigation concerns advertising
practices that the Company voluntarily terminated prior to the notice of
investigation from the A.G. The majority of the advertising in question concerns
the sale of a product that the Company now sells only in limited circumstances.
The A.G. has indicated its desire to settle the matter with a consent order, the
content of which is being presently negotiated with the Company. The Company
believes that the outcome will not have a material effect on the Company's
results of operations or financial condition.
F-15
<PAGE>
IDT Corporation
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
On December 29, 1995, DRTV, Inc. a/k/a Surfers ("Surfers") filed a breach of
contract action in court. The suit names the Company as defendant and seeks
damages 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 reached a
settlement agreement and are in the process of finalizing it.
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. In
the opinion of management, settlement of these and the aforementioned actions
when ultimately concluded will not have a material adverse effect on results of
operations, cash flows or the financial condition of the Company.
Employment Agreements
The Company has entered into employment agreements with four senior executives
and two other employees of the Company which extend through December 1999. The
employment agreements provide, among other things, minimum annual compensation
aggregating $835,000 and for the issuance of stock options and common stock.
Operating Leases
The Company has operating leases for its premises and certain equipment. Rental
expense under such leases was approximately $25,000, $30,000 and $178,000 for
the years ended July 31, 1994, 1995 and 1996, respectively. Future minimum lease
payments under such leases for the years ending July 31 are as follows:
<TABLE>
<CAPTION>
<C> <C>
1997 $ 392,000
1998 351,000
1999 203,000
2000 4,000
============
Total minimum lease payments $ 950,000
============
</TABLE>
F-16
<PAGE>
IDT Corporation
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
License Fees
In connection with the provision of Internet access, the Company provides
certain customers with Internet software licensed from a third party. In the
prior year, the Company agreed to pay royalties based upon end users. In May
1996, such agreement was amended, except for monies due under the original
agreement. Under the terms of the amended agreement, which expires in May 1998,
the Company has agreed to pay minimum royalties based upon end users and annual
service fees of approximately $1,850,000 and $300,000, respectively. For the
years ended July 31, 1994, 1995 and 1996, total licensing fees amounted to $0,
$30,000 and $1,098,000, respectively.
Communications Services
The Company has an agreement with a supplier of telecommunications services
("Vendor") which began in August 1994 and continues monthly unless terminated by
one of the parties. Under such agreement, the Vendor bills and collects, on
behalf of the Company, for long distance telephone services provided to the
Company's customers. The Company is responsible for all uncollected receivables.
For the year ended July 31, 1995 and 1996, the Company purchased approximately
$1,723,000 and $3,900,000 respectively, of services from the Vendor.
The Company has entered into agreements with certain carriers to buy and sell
communications services. As of July 31, 1996, the Company has approximately
$1,475,000 in minimum purchase commitments related to such agreements.
Distribution Agreements
The Company has entered into distribution agreements under which it has agreed
to pay its agents commissions for obtaining new Internet and discount
telecommunications customers. The agreements require commissions upon activation
of the customers.
9. Customer, Geographical Area and Segment Information
During the year ended July 31, 1996, one customer accounted for approximately
19% of revenues. No customer accounted for more than 10% of revenues during the
years ended July 31, 1994 and 1995.
F-17
<PAGE>
IDT Corporation
Notes to Consolidated Financial Statements (continued)
9. Customer, Geographical Area and Segment Information (continued)
Revenues from customers outside the United States represented approximately 59%,
56% and 23% of total revenues during the years ended July 31, 1994, 1995 and
1996, respectively. No single geographic area accounted for more than 10% of
total revenues.
Operating results and other financial data are presented for the principal
business segments of the Company for the years ended July 31, 1995 and 1996.
Prior to August 1, 1994, the Company operated principally in one segment
telecommunications.
<TABLE>
<CAPTION>
Internet Tele-
Access communications Net2Phone Total
-------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C>
Year ended July 31, 1995
Revenues $ 875 $ 10,789 $ - $ 11,664
Income (loss) from operations (3,005) 830 - (2,175)
Depreciation and amortization 187 117 - 304
Total assets 869 3,328 - 4,197
Capital expenditures 893 433 - 1,326
Year ended July 31, 1996
Revenues 21,986 35,708 - 57,694
Income (loss) from operations (17,851) 2,756 (660) (15,755)
Depreciation and amortization 930 258 24 1,212
Total assets 20,570 22,907 320 43,797
Capital expenditures 10,335 1,358 202 11,895
</TABLE>
10. Notes and Advances Payable
During fiscal 1996, the Company borrowed an aggregate of $3,477,000 from
shareholders, affiliates and outside investors. The notes bore interest at 12%
per annum. The notes were repaid with the proceeds of the Company's initial
public offering. In connection with the repayment of such notes, the Company
incurred a prepayment penalty of $233,500. Such prepayment penalty has been
classified as an extraordinary loss on retirement of debt in the accompanying
statement of operations.
F-18
<PAGE>
IDT Corporation
Notes to Consolidated Financial Statements (continued)
11. Additional Financial Information
Additional financial information with respect to cash flows is as follows:
<TABLE>
<CAPTION>
Year ended July 31,
----------------------------------
1994 1995 1996
----------------------------------
<S> <C> <C> <C>
Cash payments made for interest $ 4,574 $ - $ 113,000
Cash payments made for income taxes -- 56,000 --
</TABLE>
Other current assets include advances from carriers of $1,498,502 at July 31,
1996. Accrued expenses includes $1,791,587 and $5,839,706 due to
telecommunication carriers at July 31, 1995 and 1996, respectively.
12. Consulting and Licensing Agreement
The Company possesses the exclusive right to make the services of Genie,
including its multi-player games and information services, accessible over the
Internet and the World Wide Web, pursuant to its agreement with Yovelle
Renaissance Corporation ("Yovelle," and such agreement, the "Yovelle
Agreement"). Yovelle, a recently formed entity, purchased the Genie service from
GE Information Services, Inc. in January 1996. Pursuant to the Yovelle
Agreement, the Company provided certain management consulting and other services
to Yovelle and paid Yovelle certain online content product costs and licensing
fees, in exchange for the right to make Genie's online offerings available over
the Internet (including the World Wide Web) exclusively through the Company. The
Yovelle Agreement was to expire in February 1998, and was renewable thereafter.
The Company's Chief Executive Officer and Chairman of the Board of Directors,
loaned $500,000 to Yovelle and received a promissory note in consideration
therefor which bore interest at a rate of 12% per annum and was due in June
1996.
During the year ended July 31, 1996, revenue under the Yovelle Agreement
amounted to $1,200,000.
In August 1996, the Company purchased all of the issued and outstanding stock of
Yovelle for $200,000. The purchase price is comprised of $100,000 in cash and a
non-interest bearing promissory note for $100,000, payable on or before December
31, 1996.
F-19
<PAGE>
IDT Corporation
Notes to Consolidated Financial Statements (continued)
13. Joint Venture
In May 1996, the Company entered into an agreement with Internet Consulting
Group Limited to make the Company's Internet services available throughout
Europe by providing marketing and customer support services. Under the terms of
the agreement, the Company has agreed to an initial capital investment of
$1,400,000 for 70% of the shares of the new joint venture, of which the Company
has invested $90,000 as of July 31, 1996. Operations of the joint venture are
expected to commence in 1997.
14. Subsequent Events
Acquisition of PCIX, Inc.
On August 16, 1996, the Company completed the acquisition of the assets of PCIX,
Inc. ("PCIX"), a former alliance partner of the Company. The acquisition price
included a $690,000 promissory note, cash payments totaling $260,000,
forgiveness of $162,300 owed to the Company from PCIX, and the assumption of
$95,400 of other PCIX liabilities. The acquisition price is subject to
adjustment based on PCIX's operating activity during the period from May 1, 1996
to August 16, 1996. The promissory note bears interest at 8.25% per annum and
matures on August 16, 1998.
Capital Lease
In August 1996, the Company entered into a $1,000,000 capital lease arrangement
to acquire computer and communications related equipment. The lease which
expires in July 1999, requires monthly payments of $31,270, including interest
at 8.4% and is collateralized by the equipment.
Note Payable
On August 8, 1996, the Company borrowed $2,500,000 from a financing company
under an interest bearing note. Such note will be repaid in 34 installments of
$77,330 per month commencing in October 1996 and includes a balloon payment of
$312,500 in September 1999. The note is collateralized by certain equipment
owned by the Company.
F-20
<PAGE>
<TABLE>
<CAPTION>
Additions
Balance at Charged to Balance
Beginning Costs and at End
Description of Period Expenses Deductions(1) of Period
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts $ -- $ 5,000 $ -- $ 5,000
1995:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts 5,000 439,891 (194,891) 250,000
1996:
Reserves deducted from accounts receivable:
Allowance for doubtful accounts 250,000 4,042,070 (2,192,070) 2,100,000
</TABLE>
- - ----------
(1) Uncollectible accounts written off, net of recoveries.
F-21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
October 29, 1996 By: /s/ Howard S. Jonas
- - ---------------- -------------------------------
Date Howard S. Jonas
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Howard S. Jonas Chairman and Chief October 29, 1996
- - ------------------- Executive Officer
Howard S. Jonas (Principal Executive
Officer)
/s/ Howard S. Balter Chief Operating Officer October 29, 1996
- - -------------------- and Vice Chairman
Howard S. Balter
(Principal Financial
Officer)
/s/ Stephen R. Brown Chief Financial Officer October 29, 1996
- - -------------------- (Principal Accounting
Stephen R. Brown Officer)
/s/ James Courter President and Director October 29, 1996
- - -----------------
James Courter
/s/ Marc E. Knoller Vice President and October 29, 1996
- - ------------------- Director
Marc E. Knoller
/s/ Joyce J. Mason Secretary and Director October 29, 1996
- - ------------------
Joyce J. Mason
- - ------------------ Director October __, 1996
Meyer A. Berman
/s/ J. Warren Blaker Director October 29, 1996
- - --------------------
J. Warren Blaker
/s/ David S. Steiner Director October 29, 1996
- - --------------------
David S. Steiner
- - -------------------- Director October __, 1996
Bert W. Wasserman
Exhibit 21.01
Subsidiaries of Registrant
IDT America, Corp.
IDT International Corp.
IDT Internet Services, Inc.
Internet Online Services, Inc.
Media Response, Inc.
New World Telecommunications, Corp.
Shmuelco Equipment Corp.
Phone Depot, Inc.
1
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 14,893,756
<SECURITIES> 0
<RECEIVABLES> 13,597,565
<ALLOWANCES> 2,100,000
<INVENTORY> 0
<CURRENT-ASSETS> 30,501,411
<PP&E> 14,106,544
<DEPRECIATION> 1,653,214
<TOTAL-ASSETS> 43,797,371
<CURRENT-LIABILITIES> 16,954,695
<BONDS> 0
0
0
<COMMON> 96,669
<OTHER-SE> 26,746,007
<TOTAL-LIABILITY-AND-EQUITY> 43,797,371
<SALES> 0
<TOTAL-REVENUES> 57,693,880
<CGS> 0
<TOTAL-COSTS> 36,437,583
<OTHER-EXPENSES> 37,011,393
<LOSS-PROVISION> 4,041,573
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (15,409,792)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,409,792)
<DISCONTINUED> 0
<EXTRAORDINARY> (233,500)
<CHANGES> 0
<NET-INCOME> (15,643,292)
<EPS-PRIMARY> (0.86)
<EPS-DILUTED> (0.86)
</TABLE>
