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 January 31, 1997
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
incorporation or organization) Identification No.)
294 State Street, Hackensack, New Jersey 07601
(Address of principal executive office) (zip code)
(201) 928-1000
(Registrant's telephone number including area code)
Not Applicable
(Former name, former address, and former fiscal year, if
changed since last report date)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter periods
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
Common Stock, $.01 par value -- 9,889,600 Shares as of March 6, 1997 Class
A Common Stock, $.01 par value -- 11,174,330 shares as of March 6, 1997
(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 18
<PAGE>
IDT CORPORATION
Table Of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of July 31, 1996 and January 31,
1997........................................................................3
Condensed Consolidated Statements Of Operations for the six and three months
ended January 31, 1996 and 1997.............................................4
Condensed Consolidated Statement Of Stockholders' Equity for the six months
ended January 31, 1997......................................................5
Condensed Consolidated Statements Of Cash Flows for the six months ended
January 31, 1996 and 1997...................................................6
Notes To Condensed Consolidated Financial Statements........................7
Item 2. Management's Discussion And Analysis Of Financial Condition and
Results of Operations.......................................................9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................15
Item 2. Changes in Securities..............................................15
Item 3. Defaults upon senior securities....................................15
Item 4. Submission of Matters to a Vote of Security Holders................15
Item 5. Other Information..................................................15
Item 6. Exhibits and Reports on Form 8-k...................................16
Signatures.................................................................17
Exhibit Index..............................................................18
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IDT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 31, 1997 July 31, 1996
(unaudited) (Note 1)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 7,292,393 $14,893,756
Short-term investments 1,254,902 ---
Accounts Receivable (Net) 11,073,604 11,497,565
Other current assets 4,790,113 4,110,090
--------- ---------
Total current assets 24,411,012 30,501,411
Property and equipment, net 22,760,857 12,453,330
Other assets 3,442,697 842,630
--------- ---------
Total assets $50,614,566 $43,797,371
=========== ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 6,460,039 $ 7,778,860
Accrued expenses 9,069,558 7,770,334
Deferred revenue 1,866,333 983,496
Notes payable & current portion of long-
term debt and capital lease obligations 2,092,011 ---
Advances from officer/shareholder 1,000,000 ---
Other current liabilities 291,826 422,005
---------- -----------
Total current liabilities 20,779,767 16,954,695
Long-term debt and capital lease obligations 6,963,626 ---
------------- ------------
Total liabilities 27,743,393 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; 9,859,600 and 9,666,900
shares issued and outstanding 98,596 96,669
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 45,710,680 44,746,841
Accumulated deficit (23,049,846) (18,112,577)
------------ ------------
Total stockholders' equity 22,871,173 26,842,676
---------- ----------
Total liabilities and stockholders' equity $50,614,566 $43,797,371
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
Jan. 31, 1997 Jan. 31, 1996 Jan. 31, 1997 Jan. 31, 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $59,722,537 $16,315,068 $ 31,404,866 $ 9,714,250
Costs and expenses:
Direct cost of revenues 38,874,502 10,099,017 20,861,701 5,926,305
Selling, general,and administrative 23,842,947 12,459,263 11,245,268 8,505,780
Depreciation and amortization 2,046,655 306,186 1,083,222 175,431
---------- ---------- --------- ---------
Total costs and expenses 64,764,104 22,864,466 33,190,191 14,607,516
----------- ---------- ---------- ----------
Loss from operations (5,041,567) (6,549,398) (1,785,325) (4,893,266)
Interest and other, net 104,298 (28,675) (45,301) (31,492)
----------- ----------- ----------- -----------
Net loss $(4,937,269) $(6,578,073) $(1,830,626) $(4,924,758)
============ ============ ============ ============
Net loss per share ($0.24) ($0.40) ($0.09) ($0.30)
======= ======= ======= =======
Weighted average number of
shares used in calculation of
earnings per share 20,857,288 16,569,292 20,873,347 16,569,292
========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
- --------------------------------------------------------------------------------
IDT CORPORATION
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Additional
Common Stock Class A Stock paid in Accumulated
Shares Amount Shares Amount capital Deficit
---------------------------------------------------------------------------------
Balance at July 31,1996......... 9,666,900 $ 96,669 11,174,330 $111,743 $44,746,841 $(18,112,577)
Issuance of Stock options....... 41,212
Exercise of Stock options....... 192,700 1,927 922,627
Net Loss for the six months
ended January 31, 1997...... (4,937,269)
_________ _________ __________ ________ ____________ ____________
Balance at January 31, 1997..... 9,859,600 $ 98,596 11,174,330 $111,743 $45,710,680 $(23,049,846)
========= ========= ========== ======== ============ =============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
- --------------------------------------------------------------------------------
IDT CORPORATION
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six months ended January 31,
1997 1996
---- ----
<S> <C> <C>
Cash provided by (used in)
operating activities ($7,181,770) $ 144,451
INVESTING ACTIVITIES
Payment for purchase of Yovelle,
net of cash acquired 376,843 --
Purchase of short-term investments (1,254,902) --
Receipt of payments on advance 1,832,458 --
Payment for the purchase of ICS assets (2,250,000) --
Purchase of property and equipment (7,317,406) (2,800,346)
----------- -----------
Net cash used in investing activities (8,613,007) (2,800,346)
FINANCING ACTIVITIES
Repayment of loans (394,893) (5,001)
Repayments of stockholder loans -- (117,000)
Repayments of capital lease obligations (86,247) --
Advances from stockholders 1,000,000 2,572,000
Proceeds from exercise of stock options 924,554 --
Advances from affiliates -- 185,000
Proceeds from loans 6,750,000 --
----------- -----------
Net cash provided by financing activities 8,193,414 2,634,999
----------- -----------
Net decrease in cash & cash equivalents (7,601,363) (20,896)
Cash & cash equivalents, beginning
of period 14,893,756 231,592
----------- -----------
Cash & cash equivalents, end of period $ 7,292,393 $ 210,696
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Interest paid $231,160 $14,278
Income taxes paid -- --
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE>
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of IDT Corporation and Subsidiaries (collectively "the Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six and three months ended January 31,
1997 are not necessarily indicative of the results that may be expected for the
year ending July 31, 1997. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K for the year ended July 31, 1996 as filed with the
Securities and Exchange Commission.
Note 2 - Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
January 31, 1997 July 31, 1996
---------------- -------------
<S> <C> <C>
Equipment $20,850,468 $10,661,941
Computer software 3,182,933 1,971,018
Leasehold improvements 1,024,593 296,718
Furniture and fixtures 1,372,773 1,176,867
------------ ------------
26,430,767 14,106,544
Less: Accumulated depreciation
and amortization (3,669,910) (1,653,214)
------------ ------------
$22,760,857 $12,453,330
============ ============
</TABLE>
Note 3 - Acquisitions
During the six months ended January 31, 1997, the Company purchased the
equipment and networks of two of its alliance partners for approximately $4.4
million of which the Company issued two promissory notes totaling $1,440,000. In
addition, to pay a portion of the purchase price the Company borrowed $2,250,000
in a four year note with interest only payments for the first six months at 11%
per annum and 42 equal monthly payments of principal and interest at 14% per
annum and convertible into Common Stock at the lower of $14 or the market price
at the date of conversion per share at the option of the holder after nine
months of issuance.
In August 1996, the Company purchased all of the issued and outstanding
stock of Yovelle Renaissance Corporation, who owns the GENIE online service, for
$200,000. The purchase price included the assumption of a note payable of
$750,000 to GE Information Services, due and paid by December 15, 1996 and
resulted in the recording of Goodwill of $1,372,289 which is included in other
assets.
<PAGE>
Note 4 - Loans payable and capital lease obligations
During the six months ended January 31, 1997, the Company borrowed
$8,190,000 consisting of five interest bearing notes collateralized by certain
equipment owned by the Company and with terms ranging from twenty-four months to
forty-eight months. One note of $2,250,000 can be converted into Common Stock at
the option of the holder.
The Company also entered into various capital lease arrangements during
the six months ended January 31, 1997 to acquire computer and communications
related equipment totaling approximately $1.2 million with terms ranging from
twenty-four months to thirty-six months and collateralized by the equipment.
The company received an advance from Howard Jonas, its Chairman of the
Board and Chief Executive Officer of $1,000,000 during the quarter ended January
31,1997.
Note 5 - Legal Proceedings and Contingencies
IDT received an inquiry from a state Attorney General's office, in
which several states participated, concerning IDT's advertising and marketing
practices. Subsequent to January 31, 1997, the Company negotiated a settlement
with all the participating Attorneys General requiring, among other matters, the
payment of a $250,000 fine and an agreement to give certain qualifying customers
refunds.
All such costs have been accrued as of January 31, 1997.
On June 19, 1996, the Business Software Alliance ("BSA") in
correspondence with the Company alleged that the Company made unlicensed
internal use of certain third party software. The Company conducted an internal
software audit and negotiated a settlement of $100,000 during the quarter ended
January 31, 1997.
The Company has received a complaint from five former employees
alleging religious discrimination under Title 7 of the Civil Rights Act. The
Company and its counsel believe that these allegations are unfounded, and
intends to defend this matter vigorously.
The Company is subject to other legal proceedings and claims which have
arisen in the ordinary course of its business and have not been finally
adjudicated. Although there can be no assurance, the opinion of management is
that settlement of these actions, when ultimately concluded, will not have a
material adverse effect on results of operations, cash flows or the financial
condition of the Company.
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
accompanying condensed consolidated financial statements and the associated
notes thereto of this Quarterly Report, and the audited consolidated financial
statements and the notes there to and Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company contained in the
Company's Annual Report on Form 10-K for the year ended July 31, 1996, as filed
with the Securities and Exchange Commission.
Overview
IDT is an international telecommunications company offering a broad
range of competitively priced long-distance telephone, and Internet access
services in the U.S. and abroad and recently began offering Internet telephony
services.
The Company entered the international call reorigination business in
1990 to capitalize on the opportunity created by the spread between U.S. and
foreign-originated international long-distance telephone rates. IDT leveraged
the expertise derived from, and calling volume generated by, its call
reorigination business to enter the domestic long-distance business in late
1993, by reselling long-distance telecommunications services of other carriers
to IDT's domestic customers. As a value-added service for its domestic
long-distance customers, the Company began offering Internet access in early
1994, eventually offering dial-up and dedicated Internet access to individuals
and businesses as stand-alone services. In 1995, IDT began reselling to other
long-distance carriers access to the favorable telephone rates and special
tariffs the Company receives because of the calling volume generated by its call
reorigination customers. In August 1996, IDT entered the Internet telephony
market with its introduction of Net2Phone.
Revenues from the Company's telecommunications operations are derived
primarily from the following activities: (i) international long-distance call
reorigination services; (ii) resale of long-distance minutes to other
long-distance carriers; and (iii) marketing to individuals and businesses of
domestic long-distance services provided by WorldCom. Revenues from the
Company's Internet operations are primarily 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, however, revenues from monthly subscribers have decreased from
the quarter ended January 31,1997 compared to the prior quarter ended October
31, 1996 as a result of a decrease in the Company's subscriber base.
In February 1997, the Company announced its decision to shift its focus
from the dial-up Internet access operation to its telecommunications division.
This shift resulted in the termination of 120 employees, mostly from outbound
sales and marketing positions in the dial-up Internet access division.
The Company's ability to achieve revenue growth and profitability is
dependent upon its ability to acquire and retain customers. The Company's
ability to improve operating margins will also depend in part on its ability to
retain its customers and there can be no assurances that the Company's
investments in telecommunications infrastructure, customer support capabilities
and software releases will improve customer retention. The Company's 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.
SIX MONTHS ENDED JANUARY 31, 1997 COMPARED TO
SIX MONTHS ENDED JANUARY 31, 1996
Results of Operations
Revenues. Revenues increased 266% from approximately $16.3 million for
the six months ended January 31, 1996 to approximately $59.7 million for the six
months ended January 31, 1997. Revenues from the Company's telecommunications
operations increased 276% from approximately $10.7 million for the six months
ended January 31, 1996 to approximately $40.0 million for the six months ended
January 31, 1997. Revenues from the Company's Internet operations increased 240%
from approximately $5.7 million for the six months ended January 31, 1996 to
approximately $19.2 million for the six months ended January 31, 1997. The
increase in telecommunications revenues was due primarily to an increase in
rebilled long-distance minutes from 18.2 million minutes to approximately 80.4
million minutes. The increase in rebilling long-distance minutes was due to the
addition of wholesale carrier clients and a substantial increase in
international call reorigination customers. The number of international call
reorigination customers increased from approximately 11,100 at January 31, 1996
to 33,500 customers at January 31, 1997. The addition of wholesale carrier
clients resulted in an increase in long-distance arbitrage revenues of 469% from
approximately $4.0 million for the six months ended January 31, 1996 to
approximately $22.7 million for the six months ended January 31, 1997. As a
percentage of telecommunications revenues and overall revenues, long-distance
arbitrage revenues increased from approximately 37.4% to 56.7% and 24.4% to
38.0%, respectively. As a percentage of total revenues, Internet revenues
decreased as a percentage of total revenues from approximately 34.7% for the six
months ended January 31, 1996 to approximately 32.2% for the six months ended
January 31, 1997. The increase in Internet revenues in dollar terms was due
primarily to an increase in dial-up subscribers from approximately 64,800 as of
January 31, 1996 to approximately 130,000 as of January 31, 1997. The decrease
in Internet revenues as a percentage was due to the increase of
telecommunications revenue as compared to Internet revenue. Internet revenues
also included approximately $2.2 million of online service revenues million for
the six months ended January 31,1997 and $0 for the six months ended January 31,
1996. Net2Phone revenues for the six months ended January 31, 1997 were
approximately $472,000, compared to $0 for the six months ended January 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, network
connectivity costs, switch maintenance costs, and online network processing
costs. The Company's direct cost of revenues increased by 285% from
approximately $10.1 million in the six months ended January 31, 1996 to
approximately $38.9 million in the six months ended January 31, 1997. As a
percentage of revenues, these costs increased from 61.9% to 65.1% in the six
months ended January 31, 1996 and 1997, respectively. The increase in absolute
dollars is primarily due to increases in underlying carrier costs as the
Company's telecommunications minutes of use and associated revenue grew
substantially. To a lesser extent, the increase is due to the increase in fees
paid to alliance partners, the costs of leased circuits and networks and of
access lines and network connectivity to support subscriber growth in both
Internet access and international call reorigination and the online network
processing costs. The Company expects that direct cost of revenues will continue
to increase in absolute dollar terms and as a percentage of total revenues as
the Company expands its telecommunications base.
Selling, General and Administrative. Selling, general and
administrative costs increased 91% from approximately $12.5 million in the six
months ended January 31, 1996 to approximately $23.8 million in the six months
ended January 31, 1997. As a percentage of revenues, these costs decreased from
76.4% to 39.9% in the six months ended January 31, 1996 and 1997, respectively.
The increase in these costs in dollar terms was due primarily to the addition of
sales, marketing and technical and customer support personnel hired to support
the growth of the Company's Internet access business, the increased advertising
to attract Internet dial-up subscribers and costs incurred in developing and
marketing Net2Phone. The decrease in selling , general and administrative costs
as a percentage of total revenue was primarily due to the increase of
telecommunications revenue as compared to Internet revenue. The Company
anticipates selling, general and administrative costs in dollar terms will
continue to increase as the Company implements its growth strategy, but will
decrease as a percentage of total revenues as a result of the shift of focus to
the telecommunications division and away from dial-up Internet access.
Depreciation and Amortization. Depreciation and amortization costs
increased 568% from approximately $306,000 in the six months ended January 31,
1996 to approximately $2.0 million in the six months ended January 31, 1997. As
a percentage of revenues, these costs increased from 2.0% to 3.4% in the six
months ended January 31, 1996 and 1997, respectively. These costs increased in
absolute terms primarily as a result of the Company's higher fixed asset base
during the six months ended January 31, 1997 as compared with the six months
ended January 31,1996 due to the Company's efforts to install additional
Company-owned POPs, enhance its network infrastructure and expand its
facilities. The Company anticipates depreciation and amortization costs will
continue to increase as the Company continues to implement its growth strategy.
Income (loss) from Operations. Income from operations for the
telecommunications segment increased to approximately $2.1 million in the six
months ended January 31, 1997 from $1.4 million in the six months ended January
31, 1996 and as a percentage of telecommunication revenues decreased to 5.2%
from 13.5%. The increase in dollars resulted principally from increased revenue
generated by the expansion of operations. The decrease as a percentage of
telecommunication revenues resulted from increased selling general and
administrative expenses as well as the increased percentage of long-distance
arbitrage revenues which typically carry lower margins. Loss from operations for
the Internet access segment decreased to approximately $6.1 million in the six
months ended January 31, 1997 from approximately $7.7 million in the six months
ended January 31, 1996. 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 loss generated from the development and marketing of
Net2Phone was approximately $1.0 million, and $0 for the six months ended
January 31, 1997 and 1996 respectively.
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 six
months ended January 31, 1996 or 1997, as the realization of available tax
losses was not probable.
THREE MONTHS ENDED JANUARY 31, 1997 COMPARED TO
THREE MONTHS ENDED JANUARY 31, 1996
Results of Operations
Revenues. Revenues increased 223% from approximately $9.7 million for
the three months ended January 31, 1996 to approximately $31.4 million for the
three months ended January 31, 1997. Revenues from the Company's
telecommunications operations increased 275% from approximately $5.8 million for
the three months ended January 31, 1996 to approximately $21.9 million for the
three months ended January 31, 1997. Revenues from the Company's Internet
operations increased 135% from approximately $3.9 million for the three months
ended January 31, 1996 to approximately $9.1 million for the three months ended
January 31, 1997. The increase in telecommunications revenues was due primarily
to an increase in rebilled long-distance minutes from 11.5 million minutes to
approximately 46.9 million minutes. The increase in rebilling long-distance
minutes was due to the addition of wholesale carrier clients and a substantial
increase in international call reorigination customers. The number of
international call reorigination customers increased from approximately 11,100
at January 31, 1996 to 33,500 customers at January 31, 1997. The addition of
wholesale carrier clients resulted in an increase in long-distance arbitrage
revenues of 406% from approximately $2.6 million for the three months ended
January 31, 1996 to approximately $13.0 million for the three months ended
January 31, 1997. As a percentage of telecommunications revenues and overall
revenues, long-distance arbitrage revenues increased from approximately 43.8% to
59.1% and 26.4% to 41.3%, respectively. As a percentage of total revenues,
Internet revenues decreased as a percentage of total revenues from approximately
39.8% for the three months ended January 31, 1996 to approximately 28.9% for the
three months ended January 31, 1997. The increase in Internet revenues in dollar
terms was due primarily to an increase in dial-up subscribers from approximately
64,800 as of January 31, 1996 to approximately 130,000 as of January 31, 1997.
The decrease in Internet revenues as a percentage of total revenues was due to
the increase of telecommunications revenue as compared to Internet revenue.
Internet revenues also included approximately $900,000 of online service
revenues for the three months ended January 31,1997 and $0 for the three months
ended January 31, 1996. Net2Phone revenues for the three months ended January
31, 1997 were approximately $393,000, compared to $0 for the three months ended
January 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, network
connectivity costs, switch maintenance costs, and online network processing
costs. The Company's direct cost of revenues increased by 252% from
approximately $5.9 million in the three months ended January 31, 1996 to
approximately $20.9 million in the three months ended January 31, 1997. As a
percentage of revenues, these costs increased from 61.0% to 66.4% in the three
months ended January 31, 1996 and 1997, respectively. The increase in absolute
dollars is primarily due to increases in underlying carrier costs as the
Company's telecommunications minutes of use and associated revenue grew
substantially. To a lesser extent, the increase is due to the increase in fees
paid to alliance partners, the costs of leased circuits and networks and of
access lines and network connectivity to support subscriber growth in both
Internet access and international call reorigination and the online network
processing costs. The Company expects that direct cost of revenues will continue
to increase in absolute dollar terms as the Company expands its
telecommunications base.
Selling, General and Administrative. Selling, general and
administrative costs increased 32% from approximately $8.5 million in the three
months ended January 31, 1996 to approximately $11.2 million in the three months
ended January 31, 1997. As a percentage of revenues, these costs decreased from
87.6% to 35.8% in the three months ended January 31, 1996 and 1997,
respectively. The increase in these costs in dollar terms was due primarily to
the addition of sales, marketing and technical and customer support personnel
hired to support the growth of the Company's Internet access business, the
increased advertising to attract Internet dial-up subscribers and costs incurred
in developing and marketing Net2Phone. The decrease in selling, general and
administrative costs as a percentage of total revenues was primarily due to the
increase of telecommunications revenue as compared to Internet revenue. The
Company anticipates selling, general and administrative costs in dollar terms
will continue to increase as the Company implements its growth strategy, but
will decrease as a percentage of total revenues as a result of the shift of
focus to the telecommunications division and away from dial-up Internet access.
Depreciation and Amortization. Depreciation and amortization costs
increased 518% from approximately $175,000 in the three months ended January 31,
1996 to approximately $1.1 million in the three months ended January 31, 1997.
As a percentage of revenues, these costs increased from 1.8% to 3.4% in the
three months ended January 31, 1996 and 1997, respectively. These costs
increased in absolute terms primarily as a result of the Company's higher fixed
asset base during the three months ended January 31, 1997 as compared with the
three months ended January 31,1996 due to the Company's efforts to install
additional Company-owned POPs, enhance its network infrastructure and expand its
facilities. The Company anticipates depreciation and amortization costs will
continue to increase as the Company continues to implement its growth strategy.
Income (loss) from Operations. Income from operations for the
telecommunications segment increased to approximately $1.5 million in the three
months ended January 31, 1997 from $539,000 in the three months ended January
31, 1996 and as a percentage of telecommunication revenues decreased to 6.7%
from 9.2%. The increase in dollars resulted principally from increased revenue
generated by the expansion of operations. The decrease as a percentage of
telecommunication revenues resulted from increased selling general and
administrative expenses as well as the increased percentage of long-distance
arbitrage revenues which typically carry lower margins. Loss from operations for
the Internet access segment decreased to approximately $2.8 million in the three
months ended January 31, 1997 from approximately $5.4 million in the three
months ended January 31, 1996. 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 loss generated from the development and marketing of
Net2Phone was approximately $400,000 for the three months ended January 31,
1997.
Liquidity and Capital Resources
Historically, the Company has satisfied its cash requirements
principally through a combination of cash flow from operations, sales of equity
securities and borrowings from third parties (including its stockholders). In
Fiscal 1996, the Company raised $3,477,000 through the issuance of notes. The
proceeds from the issuance of the notes were used for general corporate
purposes, including working capital. In March 1996, the Company completed an
initial public offering of 4,600,000 shares of Common Stock for $10 per share.
The Company realized approximately $41.5 million from this offering. A portion
of the proceeds were used to repay $3,477,000, the principal amount of
short-term notes previously issued during Fiscal 1996. In connection with the
repayment of such notes, the Company incurred prepayment penalty of $233,500.
Such prepayment penalty was classified as an extraordinary loss for the early
retirement of debt in the Company's consolidated statement of operations for the
year ended July 31, 1996. The Company used the remaining net proceeds from the
offering for general corporate purposes, capital expenditures and working
capital, including to (i) expand and improve the Company's Internet network
infrastructure, (ii) increase the Company's sales and marketing efforts, (iii)
expand and improve the Company's customer support and fulfillment capabilities,
(iv) intensify the Company's research and development activities, (v) develop
new Internet applications and content, and (vi) expand the Company's
telecommunications operations. At January 31, 1997, the Company had cash, and
cash equivalents of $7.3 million and working capital of approximately $3.6
million.
The Company generated negative cash flow from operating activities of
approximately $7.2 million during the six months ended January 31, 1997,
compared to a positive cash flow from operating activities of approximately
$144,000 during the six months ended January 31, 1996. The changes in operating
cash flows from the six months ended January 31, 1997 to the six months ended
January 31, 1996 were primarily due to increases in accounts receivable and
prepaid and other assets in relation to accounts payable and other current
liabilities. Cash flow from operations varied significantly from quarter to
quarter, depending upon the timing of operating cash receipts and payments,
especially accounts receivable and accounts payable. Accounts and commissions
receivable (net of allowances) were approximately $11.1 million and $3.2 million
at January 31, 1997 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 initial rapid increase in the number of subscribers, allowance
for doubtful accounts has also grown from period to period.
Payments on purchases of fixed assets increased from approximately $2.8
million in six months ended January 31, 1996 to approximately $7.3 million in
six months ended January 31, 1997, 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 through international network expansion.
The Company experiences intense competition in both its
telecommunications and Internet access businesses. If additional competition
were to lead to significant price reductions cash flows from operations would be
materially adversely affected.
The Company intends to, where appropriate, make strategic acquisitions
to increase its telecommunications customer base. The Company may also make
strategic acquisitions related to its Internet business. From time to time, the
Company evaluates potential acquisitions of companies, technologies, products
and customer accounts that complement the Company's businesses. In the six
months ended January 31, 1997, the Company purchased the equipment and networks
of two of its alliance partners for approximately $4.4 million. The purchase
price includes cash of $2,250,000, which was financed by a four year note,
assumption of trade liabilities of approximately $280,000, excluding $429,000
due to the Company) and the issuance of promissory notes totaling approximately
$1,440,000 of which $690,000 is a two year note at 8.25% interest per annum, and
$750,000 is a four year note at 10% per annum. No additional acquisitions are
currently contemplated.
The Company believes that, based upon its present business plan, its
existing cash resources and expected cash flow from operating activities and
equipment financing will be sufficient to meet its currently anticipated working
capital and capital expenditure requirements for at least the next twelve
months. If the Company's growth exceeds current expectations or the Company
expedites its network expansion or if the Company cannot finance its new
equipment or if the Company's cash flow from operations is insufficient to meet
its working capital and capital expenditure requirements, the Company will need
to raise additional capital from equity or debt sources. There can be no
assurance that the Company will be able to raise such capital on favorable terms
or at all. If the Company is unable to obtain such additional capital, the
Company may be required to reduce the scope of its presently anticipated
expansion, which could adversely affect the Company's business and results of
operations and its ability to compete.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The statements contained in this Report on Form 10-Q that are not
purely historical are forward looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including statements regarding the Company's expectations, hopes,
intentions, beliefs or strategies regarding the future. Forward looking
statements include the Company's liquidity, anticipated cash needs and
availability, and anticipated expense levels under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations." All
forward looking statements included in this document are based on information
available to the Company on the date of this Report, and the Company assumes no
obligation to update any such forward looking statement. It is important to note
that the Company's actual results could differ materially from those expressed
or implied in such forward looking statements. Among the factors that could
cause actual results to differ materially are the Company's recent entry into
new telecommunications markets and new service offerings, the intense
competition in the markets in which the Company operates and the domination of
many markets by large industry participants, the Company's dependence on others
to support or provide many of the services offered by the Company, technological
change and uncertainty, regulatory developments and the Company's ability to
manage its anticipated growth. You should also consult the "Risk Factors"
section in the Company's Annual Report on Form 10-K from the year ended July 31,
1996 as well as those factors listed from time to time in the Company's other
reports filed with the Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934 and the Securities Act of 1933.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
IDT received an inquiry from a state Attorney General's office, in
which several states participated, concerning IDT's advertising and marketing
practices. Subsequent to January 31, 1997, the Company negotiated a settlement
with all the participating Attorneys General requiring, among other matters, the
payment of $250,000 fine and an agreement to give certain qualifying customers
refunds.
All such costs have been accrued as of January 31, 1997.
On June 19, 1996, the Business Software Alliance ("BSA") in
correspondence with the Company alleged that the Company made unlicensed
internal use of certain third party software. The Company conducted an internal
software audit and negotiated a settlement of $100,000 during the quarter ended
January 31, 1997.
The Company has received a complaint from five former employees
alleging religious discrimination under Title 7 of the Civil Rights Act. The
Company and its counsel believe that these allegations are unfounded and intends
to defend this matter vigorously.
The Company is subject to other legal proceedings and claims which have
arisen in the ordinary course of its business and have not been finally
adjudicated. Although there can be no assurance, the opinion of management is
that settlement of these actions, when ultimately concluded, will not have a
material adverse effect on results of operations, cash flows or the financial
condition of the Company.
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit Number
2.01## Merger Agreement relating to the reincorporation of the Registrant in
Delaware.
3.01## Restated Certificate of Incorporation of the Registrant.
3.02## By-laws of the Registrant.
4.01### Specimen Certificates for shares of the Registrant's Common Stock and
Class A Stock.
4.02## Description of Capital Stock (contained in the Certificate of
Incorporation of the Registrant, filed as Exhibit 3.01).
10.01** Form of Employment Agreement between the Registrant and Howard S.
Jonas.
10.02** Form of Employment Agreement between the Registrant and Howard S.
Balter.
10.03** Form of Employment Agreement between the Registrant and Eric L. Raab.
10.04## Form of 1996 Stock Option and Incentive Plan.
10.05^^ Network Service Provider Agreement between Netscape Communications
Corporation and Registrant
10.06** Marketing Services and Independent Contractor Services Agreement
between Lermer Overseas Telecommunications, Inc. and the Registrant.
10.07# Rebiller Service Agreement between WorldCom, Inc. (formerly LDDS
Communications, Inc.) and the Company.
10.08### Form of Registration Rights Agreement between the Company's
stockholders and the Company
10.09## Lease of 294 State Street.
10.11! Form of Registration Rights Agreement between Howard S. Jonas and
the Registrant.
10.12*** Form of Employment Agreement between the Registrant and James A.
Courter.
10.13*** Form of Employment Agreement between the Registrant and Kenneth
Scharf.
10.14% Agreement between PSINet Inc. And the Registrant.
10.15% Rested Sales Agreement between International Computer Systems, Inc.
and the Registrant
10.16*** Form of Stock Option Agreement under the 1996 Stock Option and
Incentive Plan.
10.17*** Form of Stock Option Agreement under the Employee Stock Option
Program.
21.01% Subsidiaries of the Registrant.
27.00* Financial Data Schedule.
* filed herewith
% incorporated by reference to Form 10-K filed October 20, 1996, as amended
on November 21, 1996 and January 6, 1997, file No. 000-7898
** 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
! incorporated by reference to Form S-1 filed March 14,1996, file No.333-
00204
*** incorporated by reference to Form S-1 filed December 27, 1996, as amended,
on January 6, 1997, file No. 333-18901
(b) Reports on Form 8-K. The registrant did not file any reports on Form 8-K
during the quarter ended January 31, 1997.
<PAGE>
IDT CORPORATION
FORM 10-Q
January 31, 1997
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
March 14, 1997 By /s/ Howard Jonas
Date Howard S. Jonas
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
March 14, 1997 By /s/ Howard Balter
Date Howard Balter
Chief Operating Officer and
Director
(Principal Financial Officer)
March 14, 1997 By /s/ Stephen R. Brown
Date Stephen R. Brown
Chief Financial Officer
(Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number
2.01## Merger Agreement relating to the reincorporation of the Registrant
in Delaware.
3.01## Restated Certificate of Incorporation of the Registrant.
3.02## By-laws of the Registrant.
4.01### Specimen Certificates for shares of the Registrant's Common Stock
and Class A Stock.
4.02## Description of Capital Stock (contained in the Certificate of
Incorporation of the Registrant, filed as Exhibit 3.01).
10.01** Form of Employment Agreement between the Registrant and Howard S.
Jonas.
10.02** Form of Employment Agreement between the Registrant and Howard S.
Balter.
10.03** Form of Employment Agreement between the Registrant and Eric L. Raab.
10.04## Form of 1996 Stock Option and Incentive Plan.
10.05% Network Service Provider Agreement between Netscape Communications
Corporation and Registrant
10.06** Marketing Services and Independent Contractor Services Agreement
between Lermer Overseas Telecommunications, Inc. and the Registrant.
10.07# Rebiller Service Agreement between WorldCom, Inc. (formerly LDDS
Communications, Inc.) and the Company.
10.08### Form of Registration Rights Agreement between the Company's
stockholders and the Company
10.09## Lease of 294 State Street.
10.11! Form of Registration Rights Agreement between Howard S. Jonas and
the Registrant.
10.12*** Form of Employment Agreement between the Registrant and James A.
Courter.
10.13*** Form of Employment Agreement between the Registrant and Kenneth
Scharf.
10.14% Agreement between PSINet Inc. And the Registrant.
10.15% Rested Sales Agreement between International Computer Systems, Inc.
and the Registrant
10.16*** Form of Stock Option Agreement under the 1996 Stock Option and
Incentive Plan.
10.17*** Form of Stock Option Agreement under the Employee Stock Option
Program.
21.01% Subsidiaries of the Registrant.
27.00* Financial Data Schedule.
* filed herewith
% incorporated by reference to Form 10-K filed October 20, 1996, as
amended on November 21, 1996 and January 6, 1997, file No. 000-7898
** 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
! incorporated by reference to Form S-1 filed March 14,1996, file No. 333-
00204
*** incorporated by reference to Form S-1 filed December 27, 1996, as amended,
on January 6, 1997, file No. 333-18901
<TABLE> <S> <C>
<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> 6-MOS 3-MOS
<FISCAL-YEAR-END> JAN-31-1997 JAN-31-1997
<PERIOD-START> AUG-01-1996 NOV-01-1996
<PERIOD-END> JAN-31-1997 JAN-31-1997
<CASH> 7,292,393 7,292,393
<SECURITIES> 1,254,902 1,254,902
<RECEIVABLES> 14,540,972 14,540,972
<ALLOWANCES> 3,467,367 3,467,367
<INVENTORY> 0 0
<CURRENT-ASSETS> 24,411,012 24,411,012
<PP&E> 26,430,767 26,430,767
<DEPRECIATION> 3,669,910 3,669,910
<TOTAL-ASSETS> 50,614,566 50,614,566
<CURRENT-LIABILITIES> 20,779,767 20,779,767
<BONDS> 0 0
0 0
0 0
<COMMON> 98,596 98,596
<OTHER-SE> 22,772,577 22,772,577
<TOTAL-LIABILITY-AND-EQUITY> 50,614,566 50,614,566
<SALES> 0 0
<TOTAL-REVENUES> 59,722,537 31,404,866
<CGS> 0 0
<TOTAL-COSTS> 38,874,502 20,861,701
<OTHER-EXPENSES> 25,889,602 12,328,490
<LOSS-PROVISION> 2,557,000 1,057,000
<INTEREST-EXPENSE> 231,160 182,750
<INCOME-PRETAX> (4,937,269) (1,830,626)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (4,937,269) (1,830,626)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (4,937,269) (1,830,626)
<EPS-PRIMARY> (0.24) (.09)
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