<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
for the Quarterly Period Ended April 30, 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
Delaware 22-3415036
--------- ----------
(State or other jurisdiction of (I.R.S Employer
incorporation or organization) Identification No.)
294 State Street, Hackensack, New Jersey 07601
---------------------------------------- -----
(Address of principal executive office) (zip code)
(201) 928-1000
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report date)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 9 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
-- ---
Common Stock, $.01 par value -- 9,666,900 shares as of June 10, 1996
Class A Common Stock, $.01 par value--11,174,330 shares as of June 10, 1996.
(Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date)
Exhibit Index appears on page 19
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IDT CORPORATION
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements(Unaudited):
Condensed Consolidated Balance Sheets as of July 31, 1995 and April 30,
1996................................................................ 3
Condensed Consolidated Statements of Operations for the nine months
ended April 30, 1995 and 1996 and the three months ended April 30, 1995
and 1996.............................................................. 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended April 30,1995 and 1996.......................................... 5
Condensed Consolidated Statement of Stockholder's Equity for the nine
months ended April 30, 1996........................................... 6
Notes to Condensed Consolidated Financial Statements................... 7-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 9-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 16
Item 2. Changes in Securities............................................ 16
Item 3. Defaults upon senior securities.................................. 16
Item 4. Submission of Matters to a Vote of Security-Holders.............. 16
Item 5. Other Information................................................ 16
Item 6. Exhibits and Reports on Form 8-K................................. 17
Signatures................................................................ 18
Exhibit Index............................................................. 19
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IDT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, 1996 July 31, 1995
-------------- -------------
(unaudited) (note)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.................... $ 31,538,906 $ 231,592
Trade accounts receivables, net.............. 6,673,720 2,029,518
Prepaid expenses and other current assets.... 880,559 141,034
------------ -----------
Total current assets 39,093,185 2,402,144
Property and equipment, net................... 7,577,393 1,770,113
Other assets.................................. 130,813 25,000
------------ -----------
Total assets $ 46,801,391 $ 4,197,257
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable....................... $ 3,414,709 $ 798,587
Accrued expenses............................. 8,424,253 2,028,753
Deferred revenue............................. 2,423,463 266,584
Notes payable to former stockholder.......... -- 5,001
Other current liabilities.................... 508,615 187,357
Advances from affiliate...................... 360,000 --
------------ -----------
Total current liabilities................ 15,131,040 3,286,282
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; 9,666,900
and 4,491,900 shares issued and
outstanding.................................. 96,669 44,919
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................... 45,146,841 3,223,598
Accumulated deficit.......................... (13,684,902) (2,469,285)
------------ -----------
Total stockholders' equity................... 31,670,351 910,975
------------ -----------
Total liabilities and
stockholders' equity......................... $ 46,801,391 $ 4,197,257
============ ===========
</TABLE>
Note: The balance sheet at July 31, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to condensed consolidated financial statements.
3
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IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended Three months ended
April 30, 1996 April 30, 1995 April 30, 1996 April 30,1995
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Revenues................................................. $34,541,156 $ 6,964,225 $18,226,089 $ 3,255,269
Cost and expenses:
Cost of sales................................................. 22,387,928 4,005,501 12,288,911 2,135,708
Selling, general, and administrative 22,594,533 4,093,653 10,135,271 1,407,057
Depreciation.................................................. 570,826 184,591 264,640 78,049
------------ ----------- ----------- -----------
TOTAL COSTS AND EXPENSES..................................... 45,553,287 8,283,745 22,688,822 3,620,814
Loss from operations............................... (11,012,131) (1,319,520) (4,462,733) (365,545)
Interest income(expense), net.................................. 30,014 27,369 58,689 17,847
------------ ----------- ----------- -----------
Net loss before extraordinary
item........................................................ (10,982,117) (1,292,151) (4,404,044) (347,698)
Extraordinary item............................................. (233,500) -- (233,500) --
------------ ----------- ----------- -----------
NET LOSS.................................................... $(11,215,617) $(1,292,151) $(4,637,544) $ (347,698)
============ =========== =========== ===========
Net loss per share ($0.65) ($0.08) ($0.25) ($0.02)
============ =========== =========== ===========
Weighted average number of shares
used in calculation of earnings
per share................................................... 17,281,282 16,569,292 18,705,261 16,569,292
============ =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
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IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
April 30, 1996 April 30, 1995
--------------- ------------------
<S> <C> <C>
Net cash provided by (used in) operating activities $(4,574,910) $ 272,004
INVESTING ACTIVITIES
Purchase of equipment (6,377,768) (639,496)
Proceeds from sale of short-term investments -- 56,250
----------- ---------
Net cash (used in) investing activities (6,377,768) (583,246)
FINANCING ACTIVITIES
Payments on notes due to former shareholders (5,001) (15,001)
Payments of stockholder, investor and employee loans (3,360,000) --
Net proceeds from sale of common stock 41,904,993 --
Proceeds from stockholder, investor and employee loans 3,360,000 --
Advances from affiliates 360,000 --
----------- ---------
Net cash used by financing activities 42,259,992 (15,001)
----------- ---------
Net increase (decrease) in cash and cash
equivalents 31,307,314 (326,243)
Cash and cash equivalents at beginning of
period 231,592 754,430
----------- ---------
Cash and cash equivalents at end of period $31,538,906 $ 428,187
=========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid $ 110,322 $ 0
Income taxes paid $ 0 $ 42,000
</TABLE>
See notes to condensed consolidated financial statements.
5
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IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Common Stock Class A Stock Additional Retained
Shares Amount Shares Amount paid in Earnings
capital (Accumulated
Deficit)
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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 41,858,993
Exercise of warrants..................... 575,000 5,750 (5,750)
Net loss for the nine
months ended April 30, 1996............. (11,215,617)
--------- --------- ---------- -------- ----------- -------------
Balance at April 30, 1996 9,666,900 $96,669 11,174,330 $111,743 $45,146,841 $(13,684,902)
========= ========= ========== ======== =========== =============
</TABLE>
Gives retroactive effect to the Reincorporation, see Note 1.
See notes to condensed consolidated financial statements
6
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IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
These condensed consolidated financial statements for the nine months
and three months ended April 30, 1995 and 1996 and the related footnote
information are unaudited and have been prepared on a basis substantially
consistent with the audited consolidated financial statements of IDT Corporation
and subsidiaries (collectively, "the Company") as of July 31, 1995 included in
the Company's registration statement on Form S-1 (No. 333-00204) and final
Prospectus, as filed with the Securities and Exchange Commission (the
"Registration Statement"). These financial statements should be read in
conjunction with the audited consolidated financial statements and the related
notes included in the Company's Registration Statement. In the opinion of
management, the accompanying unaudited financial statements contain all
adjustments (consisting primarily of normal recurring adjustments) which
management considers necessary to present fairly the consolidated financial
position of the Company at April 30, 1996 and the results of operations and cash
flows for the nine and three month periods ended April 30, 1995 and 1996. The
results of operations for the nine and three month period ended April 30, 1996
are not necessarily indicative of the results expected for any succeeding
quarter or for the year ending July 31, 1996.
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. On March 14, 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.
Note 2 - Net Income (Loss) Per Share
Except as noted below, net 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. The net loss
per share amounts in the statements of operations have been 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 to an initial public offering of common stock to be treated
as common stock equivalents outstanding for all periods prior to the offering.
Note 3 - 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 $41.9 million from this offering. A portion of
the proceeds from this offering was used to repay $3,360,000 of short term notes
previously issued during fiscal 1996. In connection with the repayment of some
of such notes the Company incurred a prepayment penalty of $233,500. Such
prepayment penalty has been classified as an extraordinary loss on the early
extinguishment of debt in the accompanying statement of operations.
7
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Note 4 - Legal Proceedings
On August 2, 1995, in a suit entitled Fisher, Herbst & Kimle, 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. 227(b)(1)(C) ("TCPA"). In
general, the TCPA prohibits certain kinds, but not all of, unauthorized
advertising by way of facsimile. Plaintiffs contend 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. Although Plaintiffs purport to represent their own interests, as
well as those similarly situated and hence will apparently seek class
certification, the number of possible claimants and range of potential damages
is uncertain.
The Company is evaluating the merits of the claims that have been
raised and believes that there are viable defenses to these claims. The Company
intends to vigorously contest this matter. Management believes that the
eventual outcome of this matter will not have a material adverse effect on the
Company's results of operations, cash flows or financial condition. However,
there can be no assurance that this litigation will be resolved in the Company's
favor. An adverse result or prolonged litigation could have material adverse
effect on the Company's financial condition or results of operations.
IDT has received an inquiry from a state Attorney General's office, in
which several states are participating, concerning IDT's advertising and
marketing practices. IDT is cooperating with the Attorneys General in this
investigation and has met with representatives of the offices involved. The
parties are currently working toward a resolution of this matter and IDT
believes that the outcome will not have a material effect on the ongoing
business of the Company.
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 actions when
ultimately concluded will not have a material adverse effect on results of
operations, cash flows or the financial condition of the Company.
8
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
accompanying consolidated financial statements and the associated notes thereto
of this Quarterly Report, and the audited consolidated financial statements, the
notes there to and Management's Discussion and Analysis of Financial Condition
and Results of Operations of the Company as of July 31, 1995 included in the
Company's registration statement on Form S-1 and final Prospectus, as filed with
the Securities and Exchange Commission.
Overview
IDT is a leading provider of Internet access services to individuals
and businesses and a leading marketer of international call reorigination
services. The Company also markets certain other long-distance
telecommunications services.
The Company commenced operations in August 1990 with its entry into
the international call reorigination business. In late 1993, the Company began
marketing long-distance telecommunications services of other long-distance
carriers to domestic customers on a retail basis. In early 1994, the Company
began its Internet operations by first offering access as a free value added
service to its existing domestic long-distance customers. Soon afterwards, the
Company began offering Internet access to the general public via a rebilled 800
telephone number service. In early 1995, the Company began marketing fixed fee
Internet connectivity with local dial-up access in response to the significant
demand it received for unmetered local Internet access.
Revenues from the Company's telecommunications operations are derived
primarily from three activities: (i) international call reorigination services,
(ii) long-distance arbitrage in which international and domestic long-distance
telecommunications services are marketed on a wholesale basis to other
telecommunications carriers and (iii) marketing of other carriers' long-distance
services to commercial customers on a retail basis. Revenues from the Company's
Internet operations are derived from providing Internet access services to
individuals and businesses.
Initially, the Company derived substantially all its revenues from
line fees paid by end users and commissions paid by third party carriers that
billed end users. Under these arrangements, the Company did not bill its
customers for completion of their international call reorigination traffic.
Under such arrangements, third-party carriers billed customers and also bore the
cost of providing services. In early 1994, the Company began utilizing its
least cost routing ("LCR") platform to migrate existing customers, and enroll
new customers, onto its own billing system. For customers on the Company's own
billing system, the Company recognizes all revenues and direct costs associated
with their calls. The migration of existing customers, which was substantially
completed by March 1995, resulted in significant increases in IDT's revenues and
direct costs. During the migration of customers to the Company's own billing
system, the Company's focus shifted from larger business and commercial
customers that were willing to pay line fees to businesses and individuals that
were charged on the basis of minutes of service. In January 1995, the Company
began marketing its LCR platform for the provision of telecommunications
services on a wholesale basis to telecommunications carriers. The Company
expects that its revenues and earnings from these telecommunications operations
will depend primarily upon the number of subscribers using these services and
the number of minutes of service they use. The following table illustrates the
growth in the number of call reorigination customers and total number of minutes
routed through the Company's LCR platform:
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Nine Months Ended April 30,
----------------------------
1995 1996
---- ----
Number of call reorigination customers
(at period end)................ 4,800 14,600
Minutes used.......................... 6,500,000 33,500,000
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.
Substantially all of the Company's Internet revenues are derived from
fixed fee access charges. The Company currently offers unlimited and
unrestricted dial-up Internet access for (i) $19.95 per month for a basic
SLIP/PPP graphical account and (ii) $29.95 per month for premium graphical
SLIP/PPP account. Both accounts come with the Company's interface software
bundled with Netscape's browser. Premium customers are entitled to the Reuters
news service, free upgrades of the Netscape software for up to one year, a
second e-mail address and special customer support services. In addition, the
Company offers both its basic and premium customers a $4.00 discount off their
monthly subscription fee when they sign up for IDT's domestic long-distance
telephone service.
The following table illustrates the increase in the number of the
Company's Internet subscribers and the POPs servicing its customers:
<TABLE>
<CAPTION>
April 30,1995 April 30,1996
------------- -------------
<S> <C> <C>
NUMBER OF DIAL-UP SUBSCRIBERS:
Through Company POPs........... 2,587 39,628
Through Alliance Partner POPs -- 54,997
----- ------
Total.......................... 2,587 94,625
===== ======
NUMBER OF POPS:
Company........................ 9 26
Alliance Partners.............. -- 230
----- ------
Total.......................... 9 256
===== ======
</TABLE>
The Company also has a direct connect Internet access service that is
marketed to businesses that typically require high-speed dedicated circuits.
The Company charges subscribers using 56 Kbps lines approximately $300 per month
and subscribers utilizing T1 lines approximately $1,000 per month for direct
connect service. As of April 30, 1996, the Company had 201 direct connect
subscribers.
The Company provides local access to its dial-up Internet access
subscribers through a network of its own installed POPs and Alliance Partners'
POPs. With its installed POPs, IDT acquires and installs the equipment and
access lines and is responsible for all costs associated with operating the POP.
Under the Alliance Program, the Alliance Partner is responsible for installing,
operating and maintaining the POP, while the Company pays the Alliance Partner a
monthly fee of approximately $10.00 per subscriber for service. As a result,
the Company's installed POPs require greater up-front costs and capital
expenditures and continuing network maintenance costs than are incurred in
connection with the Alliance Partner POPs.
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
10
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attract additional subscribers and replace terminating subscribers. The sales
and marketing expenses and subscriber acquisition costs associated with
attracting new subscribers, however, are substantial. Accordingly, the Company's
ability to improve operating margins will depend in part on its ability to
retain its subscribers and there can be no assurances that the Company's
investments in telecommunications infrastructure, customer support capabilities
and software releases will improve subscriber retention. The Company has
expanded both the personnel and operating hours of technical support and
customer service staffs, hired experienced managers and is making additional
expenditures to enhance customer and technical support systems. These strategies
and commitments require substantial up-front expenditures for additional
personnel, marketing, facilities, infrastructure, product development and
capital equipment and may adversely affect short term operating results. As a
result, the Company expects that it will continue to incur net losses at least
through Fiscal 1997. 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.
RECENT DEVELOPMENTS
On June 7, 1996 IDT announced that it is negotiating to acquire
Econophone, Inc., an FCC licensed facilities-based carrier in the United States
and a provider of long distance telephone service in the United Kingdom. The
two companies are in the process of negotiating the final terms of the
transaction. By acquiring the closely-held Econophone, IDT hopes to
significantly benefit from the infrastructure, expertise and cost efficiencies
as it implements its strategy to bundle telephone service with Internet access
and expand its overseas Telecom and Internet operations.
NINE MONTHS ENDED APRIL 30, 1996 COMPARED TO NINE MONTHS ENDED APRIL 30, 1995
RESULTS OF OPERATIONS
Revenues. Revenues increased 396.0% from approximately $7.0 million
for the nine months ended April 30, 1995 to $34.5 million for the nine months
ended April 30, 1996. Revenues from the Company's telecommunications operations
increased 231.8% from approximately $6.6 million for the nine months ended April
30, 1995 to approximately $21.9 million for the nine months ended April 30,
1996. Revenues from the Company's Internet operations increased from $374,000
for the nine months ended April 30, 1995 to $12.6 million for the nine months
ended April 30, 1996. The increase in telecommunications revenues was due
primarily to a 450.0% increase in rebilled long-distance minutes from 6.5
million minutes to approximately 33.5 million minutes. The increase in rebilled
long-distance minutes was due to a substantial increase in international call
reorigination customers, migration of existing customers to the Company's
billing system and the addition of wholesale carrier clients. During this
period, the number of international call reorigination customers increased from
approximately 4,800 at April 30, 1995 to 14,600 customers at April 30, 1996.
The addition of wholesale carrier clients resulted in an increase in long-
distance arbitrage revenues from approximately $450,000 for the nine months
ended April 30, 1995 to approximately $11.2 million for the nine months ended
April 30, 1996. As a percentage of telecommunications revenues and overall
revenues, long-distance arbitrage revenues increased from approximately 6.8% to
51.1% and 6.4% to 32.5%, respectively. As a percentage of total revenues,
Internet revenues increased from approximately 5.3% for the nine months ended
April 30, 1995 to approximately 36.5% for the nine months ended April 30, 1996.
The increase in Internet revenues both in dollar terms and as a percentage of
revenues was due primarily to an increase in dial-up subscribers from
approximately 2,600 as of April 30, 1995 to approximately 95,000 as of April 30,
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, local access costs,
leased network costs, Internet connectivity costs, switch maintenance and fees
paid to Alliance Partners. The Company's direct cost of revenues increased by
460.0% from approximately $4.0 million in the nine months ended April 30, 1995
to approximately $22.4 million in the nine months ended April 30, 1996. As a
percentage of revenues, these costs increased from 57.5% to 64.8% for the nine
11
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months ended April 30, 1995 and 1996, respectively. The increases in both
dollar amounts and costs as a percentage of revenues were primarily due to
increases in underlying carrier costs as the Company's revenue mix shifted from
line fees and commissions to the direct billing of its call reorigination
customers, and to a lesser extent, the increase in fees paid to Alliance
Partners, leased circuits, access lines and network connectivity to support
subscriber growth in both Internet access and international call reorigination.
Selling, General and Administrative. Selling, general and
administrative costs increased 452.4% from approximately $4.1 million for the
nine months ended April 30, 1995 to approximately $22.6 million for the nine
months ended April 30, 1996. As a percentage of revenues, these costs increased
from 58.7% to 65.4% for the nine months ended April 30, 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, increased advertising to attract Internet
dial-up subscribers and increased license fees paid to Netscape under the
Netscape Agreement. During the nine months ended April 30, 1995, the Company
recorded a non-cash compensation expense of approximately $969,000 as compared
to $70,000 for the nine months ended April 30, 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 209.2% from approximately $185,000 in the nine months ended April 30,
1995 to approximately $571,000 in the nine months ended April 30, 1996. These
costs increased primarily as a result of the Company's higher fixed asset base
during the nine months ended April 30, 1996 as compared with the nine months
ended April 30, 1995. The Company anticipates depreciation and amortization
costs will continue to increase as the Company implements its growth strategy.
Income (loss) from Operations. Income from operations for the
telecommunications segment increased to $2.1 million for the nine months ended
April 30, 1996 from $797,000 for the nine months ended April 30, 1995 and as a
percentage of telecommunications revenues decreased to 9.7% from 12.1%. The
increase resulted principally from increased volume. Loss from operations for
the Internet access segment increased to $13.1 million for the nine months ended
April 30, 1996 from $2.1 million for the nine months ended April 30, 1995 and as
a percentage of Internet revenues to 159.9% from 132.1%. 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 by
approximately 84,000 customers during the nine months ended April 30, 1996.
General corporate expenses of $1.3 million and $2.1 million for the nine months
ended April 30, 1995 and 1996, respectively, have been allocated to the two
segments in the above analysis.
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 April 30, 1995 or 1996, as the realization of available tax losses
was not assured.
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THREE MONTHS ENDED APRIL 30, 1996 COMPARED TO THREE MONTHS ENDED APRIL 30, 1995
RESULTS OF OPERATIONS
Revenues. Revenues increased 459.9% from approximately $3.2 million
for the three months ended April 30, 1995 to approximately $18.2 million for the
three months ended April 30, 1996. Revenues from the Company's
telecommunications operations increased 276.7% from approximately $3.0 million
for the three months ended April 30, 1995 to approximately $11.3 million for the
three months ended April 30, 1996. Revenues from the Company's Internet
operations increased from approximately $252,000 for the three months ended
April 30, 1995 to approximately $6.9 million for the three months ended April
30, 1996. The increase in telecommunications revenues was due primarily to a
294.7% increase in rebilled long-distance minutes from 3.9 million minutes to
approximately 15.3 million minutes. The increase in rebilled long-distance
minutes was due to a substantial increase in international call reorigination
customers, migration of existing customers to the Company's billing system and
the addition of wholesale carrier clients. During this period, the number of
international call reorigination customers increased from approximately 4,800 at
April 30, 1995 to 14,600 customers at April 30, 1996. The addition of wholesale
carrier clients resulted in an increase in long-distance arbitrage revenues from
approximately $393,000 for the three months ended April 30, 1995 to
approximately $7.2 million for the three months ended April 30, 1996. As a
percentage of telecommunications revenues and overall revenues, long-distance
arbitrage revenues increased from approximately 13.1% to 63.5% and 12.1% to
39.5%, respectively. As a percentage of total revenues, Internet revenues
increased from approximately 7.7% for the three months ended April 30, 1995 to
approximately 37.8% for the three months ended April 30, 1996. The increase in
Internet revenues both in dollar terms and as a percentage of revenues was due
primarily to an increase in dial-up subscribers from approximately 2,500 as of
April 30, 1995 to approximately 95,000 as of April 30, 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, local access costs,
leased network costs, Internet connectivity costs, switch maintenance and fees
paid to Alliance Partners. The Company's direct cost of revenues increased by
485.7% from approximately $2.1 million in the three months ended April 30, 1995
to approximately $12.3 million in the three months ended April 30, 1996. As a
percentage of revenues, these costs increased from 65.6% to 67.4% for the three
months ended April 30, 1995 and 1996, respectively. The increases in both
dollar amounts and costs as a percentage of revenues were primarily due to
increases in underlying carrier costs as the Company's revenue mix shifted from
line fees and commissions to the direct billing of its call reorigination
customers, and to a lesser extent, the increase in fees paid to Alliance
Partner, leased circuits, 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 increase in dollar
amounts, but not as a percentage of revenues as the Company expands its Internet
subscriber base.
Selling, General and Administrative. Selling, general and
administrative costs increased 620.3% from approximately $1.4 million for the
three months ended April 30, 1995 to approximately $10.1 million for the three
months ended April 30, 1996. As a percentage of revenues, these costs increased
from 43.2% to 55.6% for the three months ended April 30, 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, increased advertising to attract Internet
dial-up subscribers and increased license fees paid to Netscape under the
Netscape Agreement. During the three months ended April 30, 1995, the Company
recorded a non-cash compensation expense of approximately $228,000 as compared
to $0 for the three months ended April 30, 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.
13
<PAGE>
Depreciation and Amortization. Depreciation and amortization costs
increased 239.7% from approximately $78,000 in the three months ended April 30,
1995 to approximately $265,000 in the three months ended April 30, 1996. These
costs increased primarily as a result of the Company's higher fixed asset base
during the three months ended April 30, 1996 as compared with the three months
ended April 30, 1995. The Company anticipates depreciation and amortization
costs will continue to increase as the Company implements its growth strategy.
Income (loss) from Operations. Income from operations for the
telecommunications segment increased to $787,000 for the three months ended
April 30, 1996 from $379,000 for the three months ended April 30, 1995 and as a
percentage of telecommunications revenues decreased from 12.6% to 6.9%. The
increase resulted principally from increased volume. Loss from operations for
the Internet access segment increased to $5.2 million for the nine months ended
April 30, 1996 from $745,000 for the three months ended April 30, 1996 and as a
percentage and as a percentage of Internet revenues to 146.3% from 124.8%. 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 initial revenue received from such customers. The customer base
increased by approximately 30,000 customers during the three months ended April
30, 1996. General corporate expenses of approximately $400,000 and $900,000 for
the three months ended April 30, 1995 and 1996, respectively, have been
allocated to the two segments.
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 April 30, 1995 or 1996, as the realization of available tax losses
was not assured.
LIQUIDITY AND CAPITAL RESOURCES
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 $41.9 million from this offering. A portion of
the proceeds from this offer were used to repay $3,360,000, the principal amount
of short term notes previously issued during fiscal 1996. In connection with
the repayment of some such notes the Company incurred a prepayment penalty of
$233,500. Such prepayment penalty has been classified as an extraordinary loss
on the early extinguishment of debt in the accompanying statement of operations.
At April 30, 1995, and 1996 the Company had cash and cash equivalents of
approximately $428,000 and $31.5 million respectively and working capital of
approximately $535,000 and 24.0 million, respectively.
The Company generated negative cash flow from operating activities of
approximately $4.6 million during the nine months ended April 30, 1996, compared
to positive cash flow from operating activities of approximately $272,000 during
the nine months ended April 30, 1995. The changes in operating cash flow from
the first nine months of Fiscal 1995 to the first nine months of 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 will vary significantly from quarter to quarter, depending upon
the timing of operating cash receipts and payments, especially accounts
receivable and accounts payable. Accounts receivable, accounts payable and
accrued expenses have increased from 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, bad debt
allowances and expenses have also grown from period to period.
Purchases of fixed assets increased from approximately $639,000 for
the nine months ended April 30, 1995 to approximately $6,378,000 for the first
nine months of Fiscal 1996, primarily as a result of purchases of equipment to
support expansion of the Company's network infrastructure, and expansion of
14
<PAGE>
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
was 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.
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. No such
material acquisitions are currently contemplated beyond Econophone, Inc. as
discussed above.
The Company believes that the net proceeds from the initial public
offering, together with its existing cash resources and cash flow from operating
activities, will be sufficient to meet its currently anticipated working capital
and capital expenditure requirements for at least the next twelve months. If
the Company's growth exceeds current expectations or if the Company's cash flow
from operations after the next twelve months 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 will be
required to reduce the scope of its anticipated expansion, which could adversely
affect the Company's business and its ability to compete.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
IDT has received an inquiry form a state Attorney General's office, in
which several states are participating, concerning IDT's advertising and
marketing practices. IDT is cooperating with the Attorneys General in this
investigation and has met with representatives of the offices involved. The
parties are currently working toward a resolution of this mater and IDT believes
that the outcome will not have a material adverse effect on the ongoing business
of the company.
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
On June 7, 1996, IDT announced that it is negotiating to acquire
Econophone, Inc., an FCC licensed facilities-based carrier in the United States
and a provider of long distance telephone service in the United Kingdom. The
two companies are in the process of negotiating the final terms of the
transaction.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number
- - ------
2.01 Merger Agreement relating to the reincorporation of the Registrant
in Delaware. *
3.01 Restated Certificate of Incorporation of the Registrant. *
3.02 By-laws of the Registrant. *
4.01 Specimen Certificates for shares of the Registrant's Common Stock
and Class A Stock. *
4.02 Description of Capital Stock (contained in the Certificate of
Incorporation of the Registrant, filedas 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+ OEM Reseller License 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 the Company's stockholders and
the Company. *
10.09 Lease of 294 State Street. *
10.10 Management, Consulting and Internet Services Agreement between
Yovelle Renaissance Corporation and the Registrant. *
10.11 Form of Registration Rights Agreement between Howard S. Jonas and
the Registrant. *
21.01 Subsidiaries of the Registrant. *
27.00 Financial Data Schedule.
+ Confidential treatment requested
* Incorporated by reference to Registrant's registration statement on
Form S-1 (No. 333-00204) and final prospectus as filed with the
Securities and Exchange Commission.
(b) The registrant did not file any reports on Form 8-K during the
quarter ended April 30, 1996.
17
<PAGE>
IDT CORPORATION
FORM 10-Q
APRIL 30, 1996
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IDT CORPORATION
June 14, 1996 By /s/ Howard S. Jonas
- - ------------- -------------------
Date Howard S. Jonas
Chairman of the Board,
President and Chief Executive Officer
(Principle Executive Officer)
June 14, 1996 By /s/ Howard Balter
- - ------------- -------------------
Date Howard Balter
Chief Operating Officer and
Director
(Principle Financial Officer)
June 14, 1996 By /s/ Stephen R. Brown
- - ------------- ---------------------
Date Stephen R. Brown
Chief Financial Officer
(Principle Accounting Officer)
18
<PAGE>
EXHIBIT INDEX
Exhibit
Number
- - ------
2.01 Merger Agreement relating to the reincorporation of the Registrant
in Delaware. *
3.01 Restated Certificate of Incorporation of the Registrant. *
3.02 By-laws of the Registrant. *
4.01 Specimen Certificates for shares of the Registrant's Common Stock
and Class A Stock. *
4.02 Description of Capital Stock (contained in the Certificate of
Incorporation of the Registrant, filedas 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+ OEM Reseller License 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 the Company's stockholders and
the Company. *
10.09 Lease of 294 State Street. *
10.10 Management, Consulting and Internet Services Agreement between
Yovelle Renaissance Corporation and the Registrant. *
10.11 Form of Registration Rights Agreement between Howard S. Jonas and
the Registrant. *
21.01 Subsidiaries of the Registrant. *
27.00 Financial Data Schedule.
+ Confidential treatment requested
* Incorporated by reference to Registrant's registration statement on
Form S-1 (No. 333-00204) and final prospectus as filed with the
Securities and Exchange Commission.
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> APR-30-1996 APR-30-1996
<PERIOD-START> AUG-01-1995 FEB-01-1996
<PERIOD-END> APR-30-1996 APR-30-1996
<CASH> 31,538,906 31,538,906
<SECURITIES> 0 0
<RECEIVABLES> 6,673,720 6,673,720
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 39,093,185 39,093,185
<PP&E> 7,577,393 7,577,393
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 46,801,391 46,801,391
<CURRENT-LIABILITIES> 15,131,040 15,131,040
<BONDS> 0 0
0 0
0 0
<COMMON> 96,669 96,669
<OTHER-SE> 31,573,682 31,573,682
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<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 30,014 58,689
<INCOME-PRETAX> (10,982,117) (4,404,044)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (10,982,117) (4,404,044)
<DISCONTINUED> 0 0
<EXTRAORDINARY> (233,500) (233,500)
<CHANGES> 0 0
<NET-INCOME> (11,215,617) (4,637,544)
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