<PAGE>
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, 1998
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.)
190 Main 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.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes /X/ No / /
Common Stock, $.01 par value - 22,867,475 shares as of June 12, 1998 Class
A Common Stock, $.01 par value -- 10,230,868 shares as of June 12, 1998
(Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date)
<PAGE>
IDT CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of July 31, 1997 and April 30, 1998.....................3
Condensed Consolidated Statements of Operations for the nine and three months ended April
30, 1997 and 1998..............................................................................4
Condensed Consolidated Statement of Stockholders' Equity for the nine months ended
April 30, 1998.................................................................................5
Condensed Consolidated Statements of Cash Flows for the nine months ended April 30,
1997 and 1998..................................................................................6
Notes to Condensed Consolidated Financial Statements.............................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................................10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...............................................................................17
Item 2. Changes in Securities...........................................................................17
Item 3. Defaults upon Senior Securities.................................................................17
Item 4. Submission of Matters to a Vote of Security Holders.............................................17
Item 5. Other Information...............................................................................17
Item 6. Exhibits and Reports on Form 8-K................................................................18
Signatures...............................................................................................20
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
IDT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
April 30, 1998 July 31, 1997
------------ ------------
(Unaudited) (Note 1)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $168,610,044 $ 7,674,313
Short-term investments 10,917,089 ---
Accounts receivable, net 40,240,652 17,128,890
Notes receivable --- 1,291,403
Other current assets 10,093,101 2,922,750
------------ ------------
Total current assets 229,860,886 29,017,356
Property and equipment, net 49,977,265 25,725,805
Goodwill, net 6,288,846 1,357,606
Other assets 35,779,620 2,436,334
------------ ------------
Total assets $321,906,617 $58,537,101
============ ===========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 26,704,627 $ 16,957,656
Accrued expenses 2,092,269 721,142
Deferred revenue 5,640,074 2,442,848
Notes payable - current portion 2,482,247 1,880,939
Capital lease obligations - current portion 2,666,625 1,531,971
Other current liabilities 27,000 595,951
------------ ------------
Total current liabilities 39,612,842 24,130,507
Notes Payable - long-term portion 2,333,945 5,241,088
Capital Lease Obligation - long-term portion 6,102,332 3,906,362
Convertible Debentures 1,000,000 ---
Senior Notes Payable 100,000,000 ---
------------ ------------
Total liabilities 149,049,119 33,277,957
Minority Interest 100,000 --
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;
19,490,702 and 10,636,000 shares issued and outstanding 194,907 106,360
Class A stock, $.01 par value; authorized shares - 35,000,000;
10,230,868 and 11,174,330 shares issued and outstanding 102,309 111,743
Additional paid in capital 184,457,668 46,990,388
Accumulated deficit (11,997,386) (21,949,347)
------------ ------------
Total stockholders' equity 172,757,498 25,259,144
------------ ------------
Total liabilities and stockholders' equity $321,906,617 $58,537,101
============ ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
----------------- -------------------
Apr. 30, 1998 Apr. 30, 1997 Apr. 30, 1998 Apr. 30,1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues $212,815,337 $ 94,174,050 $ 87,111,571 $ 34,451,513
Costs and expenses:
Direct cost of revenues 151,814,495 62,555,120 59,504,684 23,680,618
Selling, general and administrative 44,050,129 33,006,412 20,343,714 9,163,465
Depreciation and amortization 6,553,165 3,363,243 2,765,592 1,316,588
------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES 202,417,789 98,924,775 82,613,990 34,160,671
------------ ------------ ------------ ------------
Income (loss) from operations 10,397,548 (4,750,725) 4,497,581 290,842
Interest and other, net (445,587) (25,605) 337,806 (129,903)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 9,951,961 $ (4,776,330) $ 4,835,387 $ 160,939
============ ============ ============ ============
Net income (loss) per share - basic $ 0.36 ($0.23) $ 0.17 $ 0.01
======= ======= ======= =======
Weighted average number of
shares used in calculation of
earnings per share - basic 27,528,325 20,990,220 28,881,382 21,942,340
============ ============ ============ ============
Net Income (loss) per-share - diluted $ 0.32 ($0.23) $ 0.15 $ 0.01
======= ======= ======= =======
Weighted average number of
shares used in calculation of
earnings per share - diluted 30,808,692 20,990,220 32,693,177 23,248,536
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
COMMON STOCK CLASS A STOCK Additional Accumulated
Shares Amount Shares Amount Paid-in Capital Deficit
------ ------ ------ ------ --------------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1997 10,636,000 $106,360 11,174,330 $111,743 $46,990,388 $ (21,949,347)
Exercise of stock options 1,580,728 15,807 4,812,040
Conversion of Class A to Common 943,462 9,434 (943,462) (9,434)
Purchase of business 625,000 6,250 5,078,125
Conversion of note payable 145,981 1,460 2,031,450
Exercise of warrants 29,000 290 439,335
Conversion of Debentures 436,781 4,368 6,617,235
Secondary equity offering 5,093,750 50,938 118,489,095
Net income for the nine
months ended April 30, 1998 9,951,961
---------- -------- ---------- -------- ------------ -------------
Balance at April 30, 1998 19,490,702 $194,907 10,230,868 $102,309 $184,457,668 $ (11,997,386)
========== ======== ========== ======== ============ =============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended April 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash used in operating activities (1,725,831) (10,562,464)
INVESTING ACTIVITIES
Payment for purchase of Yovelle, net of cash acquired -- 376,843
Purchase of short-term investments -- (1,093,802)
Receipt of payments on note receivable -- 2,175,838
Payment for the purchase of ICS assets -- (2,250,000)
Receipt of payments on advance 1,291,403 --
Purchase of short term investments - net (10,917,089) --
Escrow deposit on pending purchase (20,000,000) --
Issuance of notes receivable (9,000,000) --
Purchase of property and equipment (25,398,142) (7,446,589)
------------ ------------
Net cash used in investing activities (64,023,828) (8,237,710)
FINANCING ACTIVITIES
Repayment of notes payable (3,306,102) (524,592)
Repayment of stockholder, investor and employee loans -- (885,000)
Proceeds from Convertible Debentures 7,500,000 --
Proceeds from stockholder, investor and employee loans -- 1,000,000
Repayment of capital lease obligations (1,509,307) (258,242)
Proceeds from exercise of stock options 4,827,847 1,911,829
------------ ------------
Exercise of stock option - minority interest 100,000 --
Proceeds from exercise of stock warrants 439,625 --
Proceeds from secondary offering 118,540,033 --
Proceeds from senior debt offering - net of financing costs 97,000,000 --
Proceeds from notes 3,093,294 8,190,000
------------ ------------
Net cash provided by financing activities 226,685,390 9,433,995
------------ ------------
Net increase (decrease) in cash and cash equivalents 160,935,731 (9,366,179)
Cash and cash equivalents, beginning of period 7,674,313 14,893,756
------------ ------------
Cash and cash equivalents, end of period $168,610,044 $ 5,527,577
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 3,184,838 $ 438,462
Income taxes paid -- --
</TABLE>
See notes to condensed consolidated financial statements.
6
<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 nine and three months ended April 30,
1998 are not necessarily indicative of the results that may be expected for the
year ending July 31, 1998. 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, 1997, as filed with the
Securities and Exchange Commission.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
April 30, 1998 July 31, 1997
-------------- -------------
Equipment $51,775,157 $24,945,687
Computer software 7,399,062 4,618,931
Leasehold improvements 1,415,124 1,115,822
Furniture and fixtures 1,778,596 1,365,140
Building 116,071 109,525
----------- -----------
62,484,010 32,155,105
Less: Accumulated depreciation
and amortization (12,506,745) (6,429,300)
----------- -----------
$49,977,265 $25,725,805
=========== ===========
NOTE 3 - NOTES PAYABLE, CAPITAL LEASE OBLIGATIONS AND CONVERTIBLE DEBENTURES
During the nine months ended April 30, 1998, the Company borrowed
approximately $3.1 million. These borrowings are represented by interest bearing
notes collateralized by certain equipment or other assets owned by the Company,
and have terms ranging from forty-eight to sixty months.
The Company also entered into various capital lease arrangements during
the nine months ended April 30, 1998 to acquire computer and communications
related equipment totaling approximately $5.0 million, with terms ranging from
thirty-six months to sixty months. These lease arrangements are collateralized
by the equipment.
In September 1997, the Company sold Convertible Debentures in the
aggregate principal amount of $7.5 million (the "Debentures"). The Debentures
bear an interest at the rate of 3.0% per annum. The principal amount and all
unpaid accrued interest on the Debentures are convertible into the Company's
Common Stock at the option of the Investors at a conversion price equal to the
lower of $15.16 per share or the lowest closing price of the Company's Common
Stock on Nasdaq on any one trading day during the twelve consecutive trading day
period preceding the date that notice of conversion is given to the Company. Any
principal amount or unpaid accrued interest outstanding on September 5, 2000
will be automatically converted into shares of the Company's Common Stock.
During the three months ended
7
<PAGE>
April 30, 1998, $6.5 million of the Debentures' principal together with
$121,603 of accrued interest was converted into 436,781 shares of the
Company's Common Stock leaving a remaining outstanding principal balance of
$1.0 million, which was redeemed in May 1998.
NOTE 4 - EQUITY AND DEBT OFFERINGS
The Company completed a public offering of 5,318,750 shares of Common
Stock in February 1998, 5,093,750 shares of which were sold by the Company and
225,000 shares of which were sold by certain stockholders of the Company (the
"Equity Offering"). The net proceeds to the Company from the Equity Offering
were approximately $119.8 million, after deducting underwriting discounts,
commissions and offering expenses.
In addition, in February 1998 the Company completed a private
placement (the "Debt Offering") of $100 million aggregate principal amount of
8 3/4% Senior Notes due 2006, of which the Company received net proceeds of
approximately $97.0 million.
NOTE 5 - LEGAL PROCEEDINGS
On December 29, 1995, Surfers Unlimited, L.L.C. filed a breach of
contract action in the New Jersey Superior Court, Bergen County. The suit
names a subsidiary of the Company as defendant and seeks restitutional and
consequential damages in an unspecified amount for interference with
prospective business advantages, breach of contract and improper use of
confidential and proprietary information. Howard S. Jonas, the Chairman and
Chief Executive Officer of the Company, has also been named as a defendant in
the action. Discovery is scheduled to end on June 30, 1998 and a settlement
conference is scheduled for July 15, 1998.
In January 1997, six former employees alleging employment
discrimination commenced a suit in New Jersey Superior Court, Bergen County.
Howard S. Jonas, the Chairman and Chief Executive Officer of the Company has
also been named a defendant in the action. The action claims that the Company
has made hiring and promotion decisions based upon the religious backgrounds
of the relevant individuals. The complaint seeks compensatory and punitive
damages in an unspecified amount and also seeks statutory multiples of
damages. The case is currently in the discovery stage. The previously set
trial date of March 17, 1998 has been adjourned and a court imposed
settlement conference was held with no resolution of the case. A status
conference has been scheduled for July 14, 1998.
In June 1997, an uncertified class-action suit seeking compensatory
damages in an unspecified amount was brought against the Company in New York
Supreme Court, New York County. The suit concerns advertisements that are no
longer used by the Company, and advertising practices that were voluntarily
terminated by the Company following a prior investigation of the Company by
the Attorneys General of several states. The Company filed a motion to
dismiss and the plaintiff amended its complaint in response.
In September 1997, DigiTEC 2000, Inc. ("DigiTEC") filed a complaint
(subsequently amended) in New York Supreme Court, New York County against the
Company alleging that in connection with its sale of prepaid calling cards,
the Company engaged in unfair competition and tortiously interfered with an
exclusive business relationship between DigiTEC and two co-defendants, CG
Com, Inc. and Mr. Carlos Gomez. The complaint seeks compensatory and
consequential damages in an unspecified amount of not less than $50 million
and also seeks an unspecified amount of punitive damages. The complaint also
alleges that CG Com, Inc. and Mr. Gomez owe DigiTEC more than $500,000. In
November 1997, the Court denied DigiTEC's motion for a preliminary injunction
to bar CG Com, Inc. and Mr. Gomez from distributing the Company's calling
cards. Discovery is scheduled to end on June 15, 1998.
The Company filed a lawsuit against Mr. Glen Miller in August 1997 in
the New Jersey Supreme Court, Bergen County. The action was based upon various
matters arising out of Mr. Miller's employment
8
<PAGE>
with IDT. Mr. Miller answered the complaint and filed a counterclaim against
IDT seeking compensatory and punitive damages for breach of his employment
contract and breach of the covenant of good faith and fair dealing. Mr.
Miller alleges that the Company breached his employment agreement by failing
to compensate him as contemplated by his employment agreement, including by
failing to deliver to him 20,000 shares of the Company's Common Stock. Mr.
Miller also filed a third-party complaint against Howard Balter, the Chief
Operating Officer of the Company, and Jonathan Rand, the Company's former
Director of Human Resources, for fraudulent conduct and misrepresentation.
The Company filed its answer to Mr. Miller's counterclaim in December 1997.
In January 1998, the Court partially granted Mr. Miller's motion for summary
judgment, awarding him severance pay in the amount of approximately $50,000.
Payment of the judgment was stayed pending the Company's motion for leave to
appeal. The court has denied the Company's motion. Discovery is continuing.
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 assurances in this regard, in the
opinion of the Company's management, such proceedings, as well as
aforementioned actions, will not have a material adverse effect on results of
operations or the financial condition of the Company.
NOTE 6 - PURCHASE OF ROCK ASSOCIATES
In November 1997, the Company purchased all of the issued and
outstanding capital stock of Rock Enterprises, Inc., a telecom engineering
firm owned by an officer of the Company, in exchange for 625,000 shares of
the Company's Common Stock. The acquisition was accounted for using the
purchase method of accounting for business combinations and substantially all
of the purchase price was allocated to goodwill.
NOTE 7 - LOAN TO EXECUTIVE TELECARD
In February 1998, the Company loaned $7.5 million to Executive
Telecard, an international communications service company, and announced a
strategic agreement to leverage their respective contacts with carriers and
PTTs to develop relationships with telecommunications companies worldwide.
The Company also received warrants to purchase 500,000 shares of common stock
of Executive Telecard.
NOTE 8 - SUBSEQUENT EVENTS
In April 1998, the Company entered into an Agreement and Plan of
Merger (the "IX Merger Agreement"), pursuant to which it agreed to purchase
all of the issued and outstanding capital stock of InterExchange, Inc., a
Delaware corporation, and four related corporations acquired by
InterExchange, Inc. immediately prior to the transaction (collectively,
"IX"), in exchange for 3,242,323 shares of the Company's Common Stock and
$20.0 million in cash. The closing of this transaction took place on May 6,
1998. A portion of the shares of the Company's Common Stock to be distributed
pursuant to the IX Merger Agreement were deposited into an escrow account to
be delivered to the former stockholders of IX in five equal installments
through October 2002 and a second portion of such shares will remain in
escrow in order to satisfy certain claims that the Company would be entitled
to raise against the former stockholders of IX pursuant to the IX Merger
Agreement. The total purchase price was approximately $128.6 million. The IX
acquisition will be accounted for by the purchase method of accounting for
business combinations and, accordingly, the estimated cost to acquire such
assets will be allocated to the underlying net assets in proportion to their
respective fair values. The valuations and other studies which will provide
the basis for such allocations have not been completed.
In May 1998, the Company entered into a joint venture with Mr. Carlos
Gomez, a distributor of prepaid calling cards. Pursuant to the terms of the
transaction, the Company agreed to issue up to 200,000 shares of its Common
Stock, of which 100,000 of such shares were issued in May 1998. Subject to the
satisfaction of certain performance criteria, up to an additional 100,000 of
such shares will be issued in 1999.
9
<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 thereto 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, 1997, as amended, as filed with the Securities and Exchange Commission.
OVERVIEW
IDT is a leading emerging multinational carrier that combines its
position as an international telecommunications operator, its experience as
an Internet service provider and its leading position in Internet telephony
to provide a broad range of telecommunications services to its wholesale and
retail customers worldwide. The Company provides its customers with
integrated and competitively priced international and domestic long distance,
Internet access and, through its Net2Phone product offerings, Internet
telephony services. IDT delivers these services over a high-quality network
consisting of 15 switches in the U.S. and Europe and owned and leased
transmission capacity on 11 undersea fiber optic cables, together with resale
capacity obtained from other carriers. The Company terminates its
international traffic worldwide pursuant to resale arrangements with domestic
carriers and through terminating agreements with 17 PTTs and competitive
foreign carriers. In addition, IDT maintains a domestic Internet backbone to
support both its traditional Internet access service as well as its Internet
telephony services.
Revenues from the Company's telecommunications operations are
derived primarily from the following activities: (i) wholesale carrier
services to other long distance carriers; (ii) prepaid calling cards; (iii)
international retail long distance services to individuals and businesses
worldwide (primarily provided through call reorigination services); and (iv)
domestic long distance services to individuals and businesses. Revenues from
the Company's Internet operations are derived primarily from providing
Internet access services to individuals and businesses. The Company's
Net2Phone revenues are derived from the marketing of Net2Phone and Net2Phone
Direct services and equipment to individuals, businesses and the Company's
foreign partners.
Direct cost of revenues for the Company's telecommunications
services include costs associated with the transmission and termination of
international and domestic long distance services. Historically, this expense
has primarily been variable, based upon minutes of use, and consists mainly
of payments to other long distance carriers and, to a lesser extent,
customer/carrier interconnect charges, leased fiber circuit charges and
switch facility costs. The direct cost of revenues for Internet access and
Net2Phone services consists primarily of leased circuit and network costs and
local access costs. Direct cost of revenues for Internet services also
include fees paid to the Company's Alliance Partners.
Selling expenses consist primarily of sales commissions paid to
independent agents and internal salespersons, which are the primary cost
associated with the acquisition of customers. General and administrative
expenses include salaries, benefits, bad debt expenses and other corporate
overhead costs. These costs have increased in recent fiscal years due to the
development and expansion of the Company's operations and corporate
infrastructure.
10
<PAGE>
NINE MONTHS ENDED APRIL 30, 1998 COMPARED TO NINE MONTHS ENDED APRIL 30, 1997
RESULTS OF OPERATIONS
REVENUES. Revenues increased 125.9% from approximately $94.2 million
for the nine months ended April 30, 1997 to approximately $212.8 million for
the nine months ended April 30, 1998. Revenues from the Company's
telecommunications operations increased 187.3% from approximately $66.1
million for the nine months ended April 30, 1997 to approximately $189.9
million for the nine months ended April 30, 1998. Revenues from the Company's
Internet operations decreased 43.0% from approximately $26.8 million for the
nine months ended April 30, 1997 to approximately $15.3 million for the nine
months ended April 30, 1998, reflecting the Company's decision to
de-emphasize its activities in this area. Internet telephony revenues
increased 483.3% from approximately $1.3 million for the nine months ended
April 30, 1997 to approximately $7.6 million for the nine months ended April
30, 1998.
Telecommunications revenues increased 187.3% primarily as a result
of a 223.8% increase in minutes of use, from approximately 149.0 million to
approximately 482.3 million, offset in part by a decline in revenue per
minute from $0.42 to $0.39. Telecommunications minutes increased primarily
due to the addition of wholesale carrier service clients, increased usage by
existing clients, and increased marketing of the Company's prepaid calling
cards. The offsetting decline in revenue per minute resulted from variations
in the mix of telecommunications revenue. The addition of wholesale carrier
services clients and the increased use by existing clients resulted in an
increase in wholesale carrier services revenues of 198.0%, from approximately
$39.7 million for the nine months ended April 30, 1997 to approximately
$118.4 million for the nine months ended April 30, 1998. As a percentage of
telecommunications revenues, wholesale carrier service revenues increased
from approximately 60.1% to 62.4%. Revenues from the Company's prepaid
calling card business, which the Company began to market in January 1997,
increased from approximately $1.1 million for the nine months ended April 30,
1997 to approximately $50.4 million for the nine months ended April 30, 1998.
As a percentage of telecommunications revenues, prepaid calling card revenues
increased from 1.7% to 26.6%. As a percentage of telecommunications revenues,
international retail services revenues decreased from 32.0% to 8.9%.
As a percentage of total revenues, Internet access revenues
decreased from approximately 28.4% for the nine months ended April 30, 1997
to approximately 7.2% for the nine months ended April 30, 1998. This decrease
was due to the substantial increase in telecommunications revenues as a
percentage of total revenues, as well as a dollar decrease in Internet access
revenues due to a decrease in total dial-up subscribers.
Internet telephony revenues as a percentage of total revenues
increased from 1.4% for the nine months ended April 30, 1997 to 3.6% for the
nine months ended April 30, 1998. The increase in Internet telephony revenues
was primarily due to an increase in billed-minute usage, and the sale of $1.5
million of equipment during the nine months ended April 30, 1998.
DIRECT COST OF REVENUES. The Company's direct cost of revenues
increased by 142.7%, from approximately $62.6 million in the nine months
ended April 30, 1997 to approximately $151.8 million in the nine months ended
April 30, 1998. As a percentage of total revenues, these costs increased from
66.4% in the nine months ended April 30, 1997 to 71.3% in the nine months
ended April 30, 1998. The dollar increase is due primarily to increases in
underlying carrier costs, because the Company's telecommunications minutes of
use, and associated revenue, grew substantially. As a percentage of total
revenues, the increase in direct costs reflects lower gross margins
associated with wholesale carrier services as compared with international
retail and Internet access services.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative costs increased 33.5% from approximately $33.0 million in the
nine months ended April 30, 1997 to approximately $44.1 million in the nine
months ended April 30, 1998. As a percentage of total revenues, these costs
decreased from
11
<PAGE>
35.0% in the nine months ended April 30, 1997 to 20.7% in the nine months
ended April 30, 1998. The increase in these costs in dollar terms is due
primarily to increased sales and marketing efforts for retail services,
specifically pre-paid calling cards. As a percentage of total revenues, the
decrease was due primarily to the substantial increase in total revenues for
the nine months ended April 30, 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization costs
increased 94.1% from approximately $3.4 million in the nine months ended April
30, 1997 to approximately $6.6 million in the nine months ended April 30, 1998.
As a percentage of revenues, these costs decreased from 3.6% in the nine months
ended April 30, 1997 to 3.1% in the nine months ended April 30, 1998. These
costs increased in absolute terms primarily as a result of the Company's higher
fixed asset base during the nine months ended April 30, 1998 as compared with
the nine months ended April 30,1997 due to the Company's efforts to expand its
telecommunications network infrastructure, enhance its Internet network and
expand its facilities. The Company anticipates that 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 Company's
telecommunications business increased to approximately $15.7 million in the nine
months ended April 30, 1998 from $3.6 million in the nine months ended April 30,
1997. As a percentage of telecommunication revenues, income from operations for
the telecommunications business increased to 8.3% in the nine months ended April
30, 1998 from approximately 5.4% in the nine months ended April 30, 1997.
Loss from operations for the Internet access segment of the Company's
business decreased to approximately $4.9 million in the nine months ended April
30, 1998 from approximately $7.2 million in the nine months ended April 30,
1997. The decreased loss of the Internet access segment is largely due to the
refocusing of the Company's marketing efforts from aggressive mass marketing to
new reseller programs. Loss from operations of the Net2Phone division decreased
to approximately $459,000 for the nine months ended April 30, 1998, compared to
a loss of approximately $1.2 million for the nine months ended April 30, 1997.
This change is due to the substantial increase in Net2Phone revenues since the
product's introduction to the market in July 1996, and the sale of equipment in
the nine months ended April 30, 1998.
INCOME TAXES. The Company did not record an income tax benefit in the
nine months ended April 30, 1997 because the realization of available net
operating loss ("NOL") carryforwards was not probable. In the nine months ended
April 30, 1998 the Company did not recognize income tax expense as a result of
the utilization of NOL carryforwards. As of July 31, 1997, the Company had
federal carryforwards of approximately $21.0 million. The amount of these NOL
carryforwards that can be used in any given year may be limited in the event of
certain changes in the ownership of the Company. The Company does not believe
that prior ownership changes will significantly limit its ability to use its NOL
carryforwards.
THREE MONTHS ENDED APRIL 30, 1998 COMPARED TO THREE MONTHS ENDED APRIL 30, 1997
RESULTS OF OPERATIONS
REVENUES. Revenues increased 152.5% from approximately $34.5 million
for the three months ended April 30, 1997 to approximately $87.1 million for
the three months ended April 30, 1998. Revenues from the Company's
telecommunications operations increased 202.7% from approximately $26.1
million for the three months ended April 30, 1997 to approximately $79.0
million for the three months ended April 30, 1998. Revenues from the
Company's Internet operations decreased 31.6% from approximately $7.6 million
for the three months ended April 30, 1997 to approximately $5.2 million for
the three months ended April 30, 1998, reflecting the Company's decision to
de-emphasize its activities in this area. Internet telephony revenues increased
234.9% from approximately $836,000 for the three months ended April 30, 1997
to approximately $2.8 million for the three months ended April 30, 1998.
12
<PAGE>
Telecommunications revenues increased 202.7%, primarily as a result of
a 228.7% increase in minutes of use, from approximately 64.0 million to
approximately 210.4 million, offset in part by a decline in revenue per minute
from $0.39 to $0.37. Telecommunications minutes increased primarily due to the
addition of wholesale carrier service clients, increased usage by existing
clients, and increased marketing of the Company's prepaid calling cards. The
offsetting decline in revenue per minute resulted from variations in the mix of
telecommunications revenue. The addition of wholesale carrier services clients
and the increased use by existing clients resulted in an increase in wholesale
carrier services revenues of 160.0% from approximately $17.1 million for the
three months ended April 30, 1997 to approximately $44.4 million for the three
months ended April 30, 1998. As a percentage of telecommunications revenues,
wholesale carrier service revenues decreased from approximately 65.5% to 56.1%
primarily due to the substantial increase in revenues from the Company's prepaid
calling card business, which the Company began to market in January 1997.
Prepaid calling card revenues increased from approximately $924,000 for the
three months ended April 30, 1997 to approximately $27.0 million for the three
months ended April 30, 1998. As a percentage of telecommunications revenues,
prepaid calling card revenues increased from 3.5% to 34.2%. As a percentage of
telecommunications revenues, international retail services revenues decreased
from 25.9% to 7.7%.
As a percentage of total revenues, Internet access revenues decreased
from approximately 21.9% for the three months ended April 30, 1997 to
approximately 6.0% for the three months ended April 30, 1998. This decrease was
due to the substantial increase in telecommunications revenues as a percentage
of total revenues, as well as a dollar decrease in Internet access revenues due
to a decrease in total dial-up subscribers.
Internet telephony revenues as a percentage of total revenues increased
from 2.4% for the three months ended April 30, 1997 to 3.2% for the three months
ended April 30, 1998. The increase in Internet telephony revenues was primarily
due to an increase in billed-minute usage.
DIRECT COST OF REVENUES. The Company's direct cost of revenues
increased by 151.0%, from approximately $23.7 million in the three months ended
April 30, 1997 to approximately $59.5 million in the three months ended April
30, 1998. As a percentage of total revenues, these costs decreased from 68.7% in
the three months ended April 30, 1997 to 68.3% in the three months ended April
30, 1998. The dollar increase is primarily due to increases in underlying
carrier costs, because the Company's telecommunications minutes of use, and
associated revenue, grew substantially. As a percentage of total revenues, the
decrease in direct costs reflects higher gross margins associated with the
growing prepaid calling card revenues.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative costs increased 120.6% from approximately $9.2 million in the
three months ended April 30, 1997 to approximately $20.3 million in the three
months ended April 30, 1998. As a percentage of total revenues, these costs
decreased from 26.6% in the three months ended April 30, 1997 to 23.3% in the
three months ended April 30, 1998. The decrease in these costs as a percentage
of total revenues was due primarily to the shift of focus of the Company's
Internet access marketing efforts from aggressive mass marketing to new reseller
programs and the increase in wholesale carrier services revenues relative to
total revenues. The increase in these costs in dollar terms was due primarily to
the selling costs associated with the marketing and distribution of the
Company's prepaid calling cards.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization costs
increased 115.4% from approximately $1.3 million in the three months ended April
30, 1997 to approximately $2.8 million in the three months ended April 30, 1998.
As a percentage of revenues, these costs decreased from 3.8% in the three months
ended April 30, 1997 to 3.2% in the three months ended April 30, 1998. These
costs increased in absolute terms primarily as a result of the Company's higher
fixed asset base during the three months ended April 30, 1998 as compared with
the three months ended April 30,1997 due to the Company's efforts to expand its
telecommunications network infrastructure, enhance its Internet network
13
<PAGE>
and expand its facilities. The Company anticipates that 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 Company's
telecommunications business increased to approximately $7.8 million in the three
months ended April 30, 1998 from $1.5 million in the three months ended April
30, 1997. As a percentage of telecommunication revenues, income from operations
for the Company's telecommunications business increased to 9.9% in the three
months ended April 30, 1998 from approximately 5.8% in the three months ended
April 30, 1997.
Net loss from operations for the Internet access segment of the
Company's business increased to approximately $1.9 million in the three months
ended April 30, 1998 from approximately $1.1 million in the three months ended
April 30, 1997. The increased loss of the Internet access segment is largely due
to the decrease in revenues due to the decrease in total dial-up subscribers.
Net loss from the operations of the Net2Phone division increased to
approximately $1.4 million for the three months ended April 30, 1998, compared
to a loss of approximately $129,000 for the three months ended April 30, 1997.
This change is primarily due to the increased selling, general and
administrative costs as the Company continues to grow this division in an effort
to increase market share.
INCOME TAXES. The Company did not record an income tax benefit in the
three months ended April 30, 1997 because the realization of available net
operating loss ("NOL") carryforwards was not probable. In the three months ended
April 30, 1998 the Company did not recognize income tax expense as a result of
the utilization of NOL carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has satisfied its cash requirements through a
combination of cash flow from operating activities, sales of equity securities
and borrowings from third parties (including borrowings from certain of its
stockholders). In September 1997, the Company completed a $7.5 million private
placement of 3.0% convertible debentures. In March and April 1998, $6.5 million
in aggregate principal amount of the convertible debentures were converted into
shares of the Company's Common Stock and in May 1998 the Company redeemed the
remaining $1.0 million in aggregate principal amount. The Company received
approximately $5.3 million upon the exercise of stock options and warrants in
the nine months ended April 30, 1998. In February 1998, the Company completed
the Equity Offering, raising net proceeds of approximately $119.8 million, after
deducting underwriting discounts, commissions and offering expenses, and
including proceeds from the exercise of stock options by certain selling
stockholders. In February 1998, the Company completed a private placement of
$100.0 million aggregate principal amount of 8 3/4% Senior Notes, in connection
with which the Company received net proceeds of approximately $97.0 million. As
of April 30, 1998, the Company had cash and cash equivalents of $168.6 million
and working capital of approximately $190.3 million.
The Company generated negative cash flow from operating activities of
approximately $1.7 million during the nine months ended April 30, 1998, compared
with negative cash flow from operating activities of approximately $10.6 million
during the nine months ended April 30, 1997. The improvement in cash flow was
primarily due to the increased net profits of the Company. 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 receivable (net of allowances) were approximately
$13.5 million and $40.2 million at April 30, 1997 and 1998, respectively.
Accounts receivable, accounts payable and accrued expenses have increased from
period to period as the Company's businesses have grown.
The Company's capital expenditures increased from approximately $14.8
million in the nine months ended April 30, 1997 to approximately $30.3 million
in the nine months ended April 30, 1998, as the Company expanded its
international and domestic telecommunications network infrastructure. The
Company financed a large portion of its capital expenditures since the beginning
of Fiscal 1997 through
14
<PAGE>
capital leases and notes payable. Payments on purchases of fixed assets
increased from approximately $7.4 million in the nine months ended April 30,
1997 to approximately $25.4 million in the nine months ended April 30, 1998.
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 November 1997, the Company purchased the outstanding capital stock
of Rock Enterprises, Inc. in exchange for 625,000 shares of the Company's Common
Stock.
In April 1998, the Company entered into an Agreement and Plan of Merger
(the "IX Merger Agreement"), pursuant to which it agreed to purchase all of the
issued and outstanding capital stock of InterExchange, Inc., a Delaware
corporation, and four related corporations acquired by InterExchange, Inc.
immediately prior to the transaction (collectively, "IX"), in exchange for
3,242,323 shares of the Company's Common Stock and $20.0 million in cash. The
closing of this transaction took place on May 6, 1998.
In May 1998, the Company entered into a joint venture with Mr. Carlos
Gomez, a distributor of prepaid calling cards. Pursuant to the terms of the
transaction, the Company agreed to issue up to 200,000 shares of its Common
Stock, of which 100,000 of such shares were issued in May 1998. Subject to the
satisfaction of certain performance criteria, up to an additional 100,000 of
such shares will be issued in 1999.
The Company believes that, based upon its present business plan, the
Company's existing cash resources, and expected cash flow from operating
activities, will be sufficient to meet its currently anticipated working capital
and capital expenditure requirements for at least the next twelve months. If the
Company's growth exceeds current expectations or if the Company acquires the
business or assets of another company, or if the Company's cash flow from
operations after the end of such period is insufficient to meet its working
capital and capital expenditure requirements, the Company will need to raise
additional capital from equity or debt sources. There can be no assurance that
the Company will be able to raise such capital on favorable terms or at all. If
the Company is unable to obtain such additional capital, the Company may be
required to reduce the scope of its anticipated expansion, which could have a
material adverse effect on the Company's business, financial condition or
results of operations.
The Company has initiated a review of its computer hardware and
software to ensure that its computer-related applications will not fail or
create erroneous results as a result of the use of two digits in various program
date fields (the "Year 2000 issue"). The Company's cost of addressing the Year
2000 issue is not expected to be material to its operations or financial
position. While the consequences of an incomplete or untimely resolution of the
Year 2000 issue could be expected to have a negative effect on the future
financial results of the Company, the Company expects that its Year 2000 issues
will be satisfactorily resolved well before the year 2000.
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.
15
<PAGE>
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. Investors should also consult the "Risk Factors" section in the
Company's Annual Report on Form 10-K, as amended, for the year ended July 31,
1997, 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.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Incorporated by reference from Part I, Item I, Financial Statements,
Note 5 captioned "Legal Proceedings."
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
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
- ------- -----------
3.01(1) Restated Certificate of Incorporation of the Registrant.
3.02(1) By-laws of the Registrant.
10.01(2) Employment Agreement between the Registrant and Howard S. Jonas
10.02(2) Employment Agreement between the Registrant and Howard S. Balter
10.03(3) Amended and Restated 1996 Stock Option and Incentive Plan of IDT
Corporation.
10.04(4) Form of Stock Option Agreement under the 1996 Stock Option and
Incentive Plan.
10.05(5) Form of Registration Rights Agreement between certain stockholders
and the Company.
10.06(1) Lease of 294 State Street.
10.07(6) Lease of 190 Main Street.
10.8(7) Form of Registration Rights Agreement between Howard S. Jonas and
the Registrant.
10.9(8) Employment Agreement between the Registrant and James Courter.
10.10(9) Restated Sales Agreement between International Computer Systems, Inc.
and the Registrant.
10.11(9) Restated Consultant and Customer Support Agreement between the
Registrant and International Computer Systems, Inc.
10.12(10) Warrants (No. 1 and No. 2) for the Purchase of Common Stock between
the Registrant and Prime Leasing, Inc.
10.13(11) Agreement between Mr. Cliff Sobel and the Registrant.
10.14(10) Employment Agreement between the Registrant and Mr. Hal Brecher.
10.15(6) Employment Agreement between the Registrant and Mr. David Turock.
10.16(12) Indenture between the Registrant and First Trust National Association,
as Trustee.
10.17(12) Registration Rights Agreement between the Registrant, BT Alex. Brown
Incorporated, Hambrecht & Quist LLC, Jefferies & Company, Inc. and
Friedman, Billings, Ramsey & Co., Inc.
10.18(13) Agreement and Plan of Merger, dated April 7, 1998, by and among the
Company, ADM Corp., IX, David Turock, Eric Hecht, Richard Robbins,
Bradley Turock, Wai Nam Tam, Mary Jo Altom and Lisa Mikulynec.
18
<PAGE>
27.01* Financial Data Schedule.
- ------------------------
* filed herewith
(1) Incorporated by reference to Form S-1 filed February 21, 1996 file no.
333-00204.
(2) Incorporated by reference to Form S-1 filed January 9, 1996 file no.
333-00204.
(3) Incorporated by reference to Form 14A, filed November 14, 1997.
(4) Incorporated by reference to Form S-8 filed January 14, 1996 file no.
333-19727.
(5) Incorporated by reference to Form S-1 filed March 8, 1996 file no.
333-00204.
(6) Incorporated by reference to Form 10-K/A for the fiscal year ended July
31, 1997 filed February 2, 1998.
(7) Incorporated by reference to Form S-1 filed March 14, 1996 file no.
333-00204.
(8) Incorporated by reference to Form S-1 filed December 27, 1996 file no.
333-18901.
(9) Incorporated by reference to Form 10-K for the fiscal year ended July 31,
1996 filed October 29, as amended November 21, 1996.
(10) Incorporated by reference to Form 10-K/A for the fiscal year ended July
31, 1997, filed October 29, 1997.
(11) Incorporated by reference to Form 10-K/A for the fiscal year ended July
31, 1997, filed December 4, 1997.
(12) Incorporated by reference to Form 10-Q filed March 17, 1988.
(13) Incorporated by reference to Form 8-K filed April 22, 1998.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K, dated February 19,
1998, announcing the Company's private placement of $100,000,000 aggregate
principal amount of 8-3/4% Senior Notes due 2006.
The Company filed a Current Report on Form 8-K, dated April 22,
1998, announcing the Agreement and Plan of Merger entered into with
InterExchange, Inc.
19
<PAGE>
IDT CORPORATION
FORM 10-Q
APRIL 30, 1998
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 15, 1998 By /s/ Howard Jonas
- ------------- -----------------------
Date Howard S. Jonas
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
June 15, 1998 By /s/ Howard Balter
- ------------- -----------------------
Date Howard Balter
Chief Operating Officer and
Director
(Principal Financial Officer)
June 15, 1998 By /s/ Stephen R. Brown
- ------------- -----------------------
Date Stephen R. Brown
Chief Financial Officer
(Principal Accounting Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED APRIL 30, 1998, 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> JUL-31-1998 JUL-31-1998
<PERIOD-START> AUG-01-1997 FEB-01-1998
<PERIOD-END> APR-30-1998 APR-30-1998
<CASH> 160,610,044 168,610,044
<SECURITIES> 10,917,089 10,917,089
<RECEIVABLES> 40,240,652 40,240,652
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 229,860,886 229,860,886
<PP&E> 49,977,265 49,977,265
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 321,906,617 321,906,617
<CURRENT-LIABILITIES> 39,612,842 39,612,842
<BONDS> 100,000,000 100,000,000
0 0
0 0
<COMMON> 194,907 194,907
<OTHER-SE> 172,562,591 172,562,591
<TOTAL-LIABILITY-AND-EQUITY> 321,906,617 321,906,617
<SALES> 0 0
<TOTAL-REVENUES> 212,815,337 87,111,571
<CGS> 0 0
<TOTAL-COSTS> 151,814,495 59,504,684
<OTHER-EXPENSES> 50,603,294 23,109,306
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 445,587 (337,806)
<INCOME-PRETAX> 9,951,961 4,835,387
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 9,951,961 4,835,387
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 9,951,961 4,835,387
<EPS-PRIMARY> 0.36 0.17
<EPS-DILUTED> 0.32 0.15
</TABLE>
