<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------
Amendment No. 1
to
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MAY 6, 1998
IDT CORPORATION
(Exact name of Registrant as Specified in its Charter)
DELAWARE 0-27898 22-3415036
- ---------------------------- ----------------------- --------------------
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
190 MAIN STREET, HACKENSACK, NEW JERSEY 07601
- ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(201) 928-1000
---------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
================================================================================
<PAGE>
EXPLANATORY NOTE
The purpose of this filing is to amend the Pro Forma Consolidated
Statement of Operations for the year ended July 31, 1997 and for the six
months ended January 31, 1998. In addition, Note (a) to the Pro Forma
Consolidated Financial Statements has been amended.
ITEM 2.
On April 7, 1998, IDT Corporation (the "Company") entered into an
Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which the
parties thereto agreed that a wholly owned subsidiary of the Company would be
merged with and into InterExchange, Inc., a Delaware corporation ("IX"), and
that IX would become a wholly owned subsidiary of the Company. The closing of
this transaction took place on May 6, 1998
Pursuant to the Merger Agreement, all of the outstanding shares of
the common stock of IX (the "IX Common Stock") were exchanged for an
aggregate of 3,242,323 newly issued shares (the "IDT Shares") of common
stock, par value $.01 per share, of the Company (the "IDT Common Stock"), and
$20 million in cash (the "Cash Consideration"), which was funded out of the
Company's working capital. A portion of the IDT Shares will remain in escrow
until October 2002 in order to satisfy certain indemnification obligations
that the former stockholders of IX may have under the Merger Agreement. This
transaction will be treated as a purchase for accounting purposes and is
intended to qualify as a tax-free reorganization under the provisions of
Section 368 of the Internal Revenue Code of 1986, as amended.
IX provides satellite frame relay networking and carrier-grade
Internet telephony to over 20 international destinations and also operates
one of the nation's largest international debit card platform.
Mr. David Turock, the Company's Director of Technology, owned
approximately 50% of the outstanding shares of IX, and served as IX's
Chairman prior to the transactions contemplated by the Merger Agreement.
The information set forth above is qualified in its entirety by
reference to the Merger Agreement, which is incorporated herein by reference.
The Company hereby agrees to furnish a supplementary copy of any omitted
exhibit to the Merger Agreement to the Securities and Commission upon request.
1
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
(i) The Combined Financial Statements of InterExchange, Inc. and
Combined Affiliates as of December 31, 1997, 1996 and 1995 and
for the three years ended December 31, 1997 are filed herewith
as Exhibit 99.1.
(ii) The Unaudited Combined Financial Statements of InterExchange,
Inc. and Combined Affiliates as of March 31, 1998 and March
31, 1997 and for the three months ended March 31, 1998 and
March 31, 1997 are filed herewith as Exhibit 99.2.
(b) PRO FORMA FINANCIAL INFORMATION
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following pro forma consolidated balance sheet of the Company at
January 31, 1998 gives effect to (i) the transactions contemplated by the
Merger Agreement (the "InterExchange Acquisition"), (ii) the Company's
offering of 5,293,750 shares of its common stock, the closing of which
occurred on February 3, 1998 (the "Equity Offering"), and (iii) the Company's
offering of $100,000,000 aggregate principal amount of 8 3/4% Senior Notes
due 2006, the closing of which occurred on February 18, 1998 (the "Debt
Offering, and together with the InterExchange Acquisition and the Equity
Offering, the "Transactions"). The following pro forma consolidated
statements of operations of the Company for the six months ended January 31,
1998 and the year ended July 31, 1997 give effect to the Transactions as if
they occurred at the beginning of such periods. The pro forma consolidated
financial statements should be read in conjunction with (1) the historical
financial statements of the Company, including the notes thereto, which are
contained in the Company's quarterly report on Form 10-Q, as amended, for the
quarter ended January 31, 1998 and the Company's Annual Report on Form 10-K,
as amended, for the year ended July 31, 1997, and (2) the historical
financial statements of IX as of and for the three months ended March 31,
1998 and for the year ended December 31, 1997, which have been filed as
exhibits to this Report.
The pro forma consolidated financial statements are included for
informational purposes only and are not necessarily indicative of the
financial position or operating results that would have occurred if the
Transactions had been consummated as of the dates indicated, nor are they
necessarily indicative of the Company's future financial condition or
operating results.
Pro forma adjustments for the InterExchange Acquisition reflect the
Company's issuance of 3,242,323 shares of common stock and $20,000,000 of
cash. The InterExchange 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. As more fully described in the notes to the pro forma consolidated
financial statements, the allocation of the excess of the cost
2
<PAGE>
over the book value of the net assets acquired has been made preliminarily
for pro forma purposes to goodwill.
3
<PAGE>
IDT CORPORATION
PRO FORMA CONSOLIDATED BALANCE SHEET
JANUARY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
IDT CORP. IDT CORP. INTEREXCHANGE PRO FORMA IDT
HISTORICAL ADJUSTMENTS AS ADJUSTED HISTORICAL (A) ADJUSTMENTS PRO FORMA
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 8,641,358 $216,280,000(b) $224,921,358 $ 523,056 (20,000,000)(c) $205,444,414
Accounts receivable, net 31,794,759 31,794,759 818,308 32,613,067
Notes receivable 479,660 479,660 - 479,660
Other current assets 4,975,009 4,975,009 - 4,975,009
-------------------------------------------------------------------------------------------
Total current assets 45,890,786 216,280,000 262,170,786 1,341,364 (20,000,000) 243,512,150
Property and equipment, net 34,843,057 34,843,057 5,326,352 40,169,409
Goodwill, net 6,369,685 6,369,685 - 127,546,896 (c) 133,916,581
Other assets 3,240,506 3,500,000(b) 6,740,506 36,154 6,776,660
-------------------------------------------------------------------------------------------
Total assets $90,344,034 $219,780,000 $310,124,034 $6,703,870 107,546,896 $424,374,800
===========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable $23,320,563 23,320,563 2,610,091 25,930,654
Accrued expenses 599,789 599,789 945,282 1,545,071
Deferred revenue 2,504,047 2,504,047 - 2,504,047
Notes payable-current portion 1,730,138 1,730,138 502,839 2,232,977
Capital lease obligations
- current portion 2,936,760 2,936,760 - 2,936,760
Taxes Payable - - 1,033,498 1,033,498
Other current liabilities 142,000 142,000 - 142,000
-------------------------------------------------------------------------------------------
Total current liabilities 31,233,297 31,233,297 5,091,710 36,325,007
Notes Payable-long term portion 5,580,823 5,580,823 430,006 6,010,829
Capital Lease Obligation -
long term portion 5,554,632 5,554,632 - 5,554,632
Convertible Debentures 7,500,000 7,500,000 - 7,500,000
Deferred income taxes - - 112,000 112,000
Senior Notes Payable - $100,000,000(b) 100,000,000 - 100,000,000
-------------------------------------------------------------------------------------------
Total liabilities 49,868,752 100,000,000 149,868,752 5,633,716 155,502,468
Minority Interest 100,000 100,000 - 100,000
Stockholders' equity
Preferred stock - - - -
Common stock 135,025 52,938(b) 187,963 600 32,423 (c) 220,386
(600)(c)
Class A stock 102,558 102,558 - 102,558
Retained earnings - - 1,069,554 (1,069,554)(c) -
Additional paid in capital 56,970,472 119,727,062(b) 176,697,534 - 108,584,627 (c) 285,282,161
Accumulated deficit (16,832,773) (16,832,773) - (16,832,773)
-------------------------------------------------------------------------------------------
Total stockholders' equity 40,375,282 119,780,000 160,155,282 1,070,154 107,546,896 268,772,332
-------------------------------------------------------------------------------------------
Total liabilities and
stockholders'equity $90,344,034 $219,780,000 $310,124,034 $6,703,870 $107,546,896 $424,374,800
===========================================================================================
</TABLE>
4
<PAGE>
IDT CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JANUARY 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
IDT CORP. IDT CORP. INTEREXCHANGE PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED HISTORICAL (D) ADJUSTMENTS PRO FORMA
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $125,703,766 $125,703,766 $7,466,138 $133,169,904
Costs and expenses: -
Direct cost of revenues 92,309,811 92,309,811 1,840,905 94,150,716
Selling, general and
administrative 23,706,415 23,706,415 4,126,542 27,832,957
Depreciation and amortization 3,787,573 3,787,573 1,097,459 $3,188,672 (f) 8,073,704
---------------------------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 119,803,799 119,803,799 7,064,906 3,188,672 130,057,377
---------------------------------------------------------------------------------------------
Earnings (loss) from operations 5,899,967 5,899,967 401,232 (3,188,672) 3,112,527
Interest and other, net (783,393) $(4,375,000)(e) (5,377,143) 275,622 (5,101,521)
(218,750)(e)
---------------------------------------------------------------------------------------------
Earnings before income taxes 5,116,574 (4,593,750) 522,824 676,854 (3,188,672) (1,988,994)
Income taxes - - 226,400 226,400
---------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 5,116,574 $(4,593,750) $ 522,824 $450,454 $(3,188,672) $(2,215,394)
=============================================================================================
Net income (loss) per share-basic $ 0.23 $ (0.02) $ (0.07)
============ =========== ===========
Weighted average number of shares
used in calculation of earnings
per share - basic 22,638,022 27,931,822 31,174,145
============ =========== ===========
Net Income (loss) per share-diluted $ 0.20 $ (0.02) $ (0.07)
============ =========== ===========
Weighted average number of shares
used in calculation of earnings
per share - diluted 26,087,362 31,381,162 31,174,145
============ =========== ===========
</TABLE>
5
<PAGE>
IDT CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED JULY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
IDT CORP. IDT CORP. INTEREXCHANGE PRO FORMA
HISTORICAL ADJUSTMENTS AS ADJUSTED HISTORICAL (D) ADJUSTMENTS PRO FORMA
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues $135,187,227 $135,187,227 $ 9,749,467 $144,936,694
Costs and expenses -
Direct cost of revenues 92,214,223 92,214,223 4,705,566 96,919,789
Selling, general and
administrative 41,544,987 41,544,987 1,472,017 43,017,004
Depreciation and amortization 4,873,142 4,873,142 2,700,070 $ 6,377,344 (f) 13,950,556
-----------------------------------------------------------------------------------------------
Total costs and expenses 138,632,352 138,632,352 8,877,653 6,377,344 153,887,349
-----------------------------------------------------------------------------------------------
Earnings (loss) from operations (3,445,125) (3,445,125) 871,814 (6,377,344) (8,950,655)
Interest and other, net (391,645) $(8,750,000)(e) (9,579,145) 95,355 (9,483,790)
(437,500)(e)
-----------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (3,836,770) (9,187,500) (13,024,270) 967,169 (6,377,344) (18,434,445)
Income taxes - - 427,443 427,443
-----------------------------------------------------------------------------------------------
Net income (loss) $ (3,836,770) $(9,187,500) $(13,024,270) $ 539,726 $(6,377,344) $(18,861,888)
===============================================================================================
Net income (loss) per share-basic $ (0.18) $ (0.49) $ (0.64)
============ ============ ============
Weighted average number of shares
used in calculation of earnings
per share - basic 21,152,927 26,446,727 29,689,050
============ ============ ============
Net income (loss) per share-diluted $ (0.18) $ (0.49) $ (0.64)
============ ============ ============
Weighted average number of shares
used in calculation of earnings
per share - diluted 21,152,927 26,446,727 29,689,050
============ ============ ============
</TABLE>
<PAGE>
IDT Corporation
Notes to Pro Forma Consolidated Financial Statements
a) Reflects the historical assets and liabilities of IX as of
March 31, 1998, as IX's year end is different than the Company's.
b) Adjustments to record the Debt Offering and the Equity Offering,
respectively, reflect (1) the issuance of $100,000,000 aggregate
principal amount of 8 3/4% Senior Notes and the receipt of net proceeds
therefrom of $96,500,000 after deducting $3,500,000 of debt issuance
costs, and (2) the issuance of 5,293,750 shares of common stock and the
receipt of net proceeds therefrom of $119,780,000.
c) Pro forma adjustments to record the InterExchange Acquisition reflect
(1) the Company's issuance of 3,242,323 shares of common stock and
$20,000,000 of cash, (2) the allocation of the excess of the purchase
price over the book value of the net assets acquired of $127,546,896 to
goodwill based on a common stock price of $33.50 per share, and (3) the
elimination of IX's historical stockholders' equity.
d) Reflects the historical operating results of IX for the six months
ended March 31, 1998 and the year ended September 30, 1997, as IX's
year end is different than IDT's.
e) Adjustments to record the Debt Offering for the six months ended
January 31, 1998 and the year ended July 31, 1997 reflect an increase
in interest expense of $4,593,750 and $9,187,500, respectively,
resulting from (1) interest on the $100,000,000 aggregate principal
amount of the 8 3/4% Senior Notes and (2) amortization of deferred debt
issuance costs on a straight-line basis over an eight-year period.
f) Pro forma adjustments to record the InterExchange Acquisition for the
six months ended January 31, 1998 and the year ended July 31, 1997
reflect an increase of $3,188,672 and $6,377,344, respectively, in
depreciation and amortization with respect to the excess cost to
acquire IX that has been allocated to goodwill and amortized on a
straight-line basis over a twenty-year period.
(C) EXHIBITS:
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Agreement and Plan of Merger, dated April 7, 1998, by and
among the Company, ADM Corp., a wholly owned subsidiary of the
Company, IX, David Turock, Eric Hecht, Richard Robbins,
Bradley Turock, Wai Nam Tam, Mary Jo Altom and Lisa Mikulynec.
(incorporated by reference from Exhibit 2.1 of IDT's Current
Report on Form 8-K, as filed with the Securities and Exchange
Commission on April 22, 1998).
23.1 Consent of Amper, Politziner & Mattia P.A.
7
<PAGE>
99.1 The Combined Financial Statements of InterExchange, Inc. and
Combined Affiliates as of December 31, 1997, 1996 and 1995 and
for the three years ended December 31, 1997.
99.2 The Unaudited Combined Financial Statements of InterExchange,
Inc. and Combined Affiliates as of March 31, 1998 and March
31, 1997 and for the three months ended March 31, 1998 and
March 31, 1997.
8
<PAGE>
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 hereunto duly authorized.
IDT CORPORATION
By: /s/ Stephen Brown
------------------------------------
Stephen Brown
Chief Finanical Officer
Date: May 26, 1998
9
<PAGE>
EXHIBIT 23.1
Independent Auditor's Consent
We consent to the incorporation of our report dated April 28, 1998, on
the financial statements of InterExchange, Inc. and Combined Affiliates as of
December 31, 1997, 1996 and 1995 and for the years the ended, which is included
in Form 8-K/A filed by IDT Corporation filed May 26, 1998.
/s/ Amper, Politziner & Mattia P.A.
May 26, 1998
Edison, New Jersey
<PAGE>
EXHIBIT 99.1
INTEREXCHANGE, INC. AND
COMBINED AFFILIATES
For the Years Ended
December 31, 1997, 1996 and 1995
Page
----
Independent Auditors' Report 1
Combined Balance Sheets 2
Combined Statements of Operations 3
Combined Statements of Stockholders' Equity 4
Combined Statements of Cash Flows 5
Notes to Combined Financial Statements 6
<PAGE>
Independent Auditors' Report
The Stockholders of
InterExchange, Inc. and Combined Affiliates
We have audited the accompanying combined balance sheets of InterExchange,
Inc. and Combined Affiliates as of December 31, 1997, 1996 and 1995, and the
related combined statements of operations, retained earnings and cash flows
for the years then ended. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of InterExchange,
Inc. and Combined Affiliates as of December 31, 1997, 1996 and 1995 and the
results of their operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Amper, Politziner & Mattia P.A.
AMPER, POLITZINER & MATTIA P.A.
April 28, 1998
Edison, New Jersey
1
<PAGE>
INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Combined Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Assets
Current assets
Cash and cash equivalents $ 949,184 $ 81,416 $ 65,176
Accounts receivable 457,526 382,768 -
----------- ----------- ----------
1,406,710 464,184 65,176
Equipment, net of accumulated depreciation 5,957,478 5,002,666 172,548
Other assets 36,154 36,227 2,458
----------- ----------- ----------
$ 7,400,342 $ 5,503,077 $ 240,182
----------- ----------- ----------
----------- ----------- ----------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 3,185,674 $ 4,270,260 $ 89,973
Current maturities of long-term debt 458,139 - -
Accrued expenses and other current liabilities 1,115,685 224,525 24,054
Accrued taxes payable 700,000 500,000 -
Income taxes payable 228,039 53,800 -
Customer deposits 350,000 - 129,377
----------- ----------- ----------
6,037,537 5,048,585 243,404
----------- ----------- ----------
----------- ----------- ----------
Long-term debt, net of current maturities 604,490 - -
Deferred income taxes 112,000 185,000 -
Stockholders' equity
Common stock 600 500 400
Retained earnings 645,715 268,992 (3,622)
----------- ----------- ----------
Total stockholders' equity 646,315 269,492 (3,222)
----------- ----------- ----------
$ 7,400,342 $ 5,503,077 $ 240,182
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
See accompanying notes to combined financial statements.
-2-
<PAGE>
INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Combined Statements of Operations
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Revenues $10,937,961 $ 4,915,933 $ 56,043
----------- ----------- ----------
Costs and expenses
Direct cost of services 4,161,808 2,469,717 33,245
Selling, general and administrative expenses 3,790,093 590,914 9,998
Depreciation 2,635,135 1,292,849 29,885
----------- ----------- ----------
10,587,036 4,353,480 73,128
----------- ----------- ----------
Earnings (loss) from operations 350,925 562,453 (17,085)
Other income (expense)
Gain on sale of equipment 338,690 - -
Interest income 18,415 19,166 -
Interest expense (43,754) - -
----------- ----------- ----------
313,351 19,166 -
----------- ----------- ----------
Earnings (loss) before income taxes 664,276 581,619 (17,085)
Income taxes - provisions for (benefit from) 251,000 241,000 (2,100)
----------- ----------- ----------
Net income (loss) $ 413,276 $ 340,619 $ (14,985)
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
See accompanying notes to combined financial statements.
-3-
<PAGE>
INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Combined Statements of Stockholders' Equity
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common Stock
--------------------- Total
Number of Retained Stockholders'
Shares Amount Earnings Equity
-------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Balance - January 1, 1995 100 $ 100 $ 33,363 $ 33,463
Net loss - - (14,985) (14,985)
Stock issued - InterExchange, Inc.,
July 1995 200 200 - 200
Stock issued - Doublestone Computing
Enterprises, Inc., December 1995 100 100 - 100
Distributions to stockholders - - (22,000) (22,000)
-------- -------- ---------- -----------
Balance - December 31, 1995 400 400 (3,622) (3,222)
Net income - - 340,619 340,619
Stock issued - Altom Associates, Inc.,
July 1996 100 100 - 100
Distributions to stockholders - - (68,005) (68,005)
-------- -------- ---------- -----------
Balance - December 31, 1996 500 500 268,992 269,492
Net income - - 413,276 413,276
Stock issued - Blue Sky Software, Inc.,
March 1997 100 100 - 100
Distributions to stockholders - - (36,553) (36,553)
-------- -------- ---------- -----------
Balance - December 31, 1997 600 $ 600 $ 645,715 $ 646,315
-------- -------- ---------- -----------
-------- -------- ---------- -----------
</TABLE>
See accompanying notes to combined financial statements.
-4-
<PAGE>
INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Combined Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 413,276 $ 340,619 $ (14,985)
----------- ----------- ----------
Adjustment to reconcile net income (loss)
to net cash from operating activities:
Depreciation 2,626,125 1,295,024 29,885
Deferred income taxes (73,000) 185,000 -
(Increase) decrease in
Accounts receivable (74,758) (382,768) -
Other assets 73 (33,769) (2,458)
Increase (decrease) in
Accounts payable (1,084,586) 4,180,287 89,973
Accrued expenses and other current
liabilities 891,160 200,471 23,273
Accrued taxes payable 200,000 500,000 -
Income taxes payable 174,239 53,800 -
Customer deposits 350,000 (129,377) 129,377
----------- ----------- ----------
Total adjustments 3,009,253 5,868,668 270,050
----------- ----------- ----------
3,422,529 6,209,287 255,065
----------- ----------- ----------
Cash flows from investing activities
Payments for purchase of property and equipment (2,281,138) (6,125,142) (175,089)
----------- ----------- ----------
Cash flows from financing activities
Principal payments of long-term debt (237,170) - -
Distributions to stockholders (36,553) (68,005) (22,000)
Proceeds from issuance of common stock 100 100 300
----------- ----------- ----------
(273,623) (67,905) (21,700)
----------- ----------- ----------
Net change in cash and cash equivalents 867,768 16,240 58,276
Cash and cash equivalents - beginning 81,416 65,176 6,900
----------- ----------- ----------
Cash and cash equivalents - ending $ 949,184 $ 81,416 $ 65,176
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
See accompanying notes to combined financial statements.
-5-
<PAGE>
Note 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The combined financial statements include the accounts of
InterExchange, Inc. ("IX"), Doublestone Computing Enterprises,
Inc., Blue Sky Software, Inc., Altom Associates, Inc. and Mikulynec
Associates, Inc. (the "Company"). All significant intercompany
balances and transactions have been eliminated in the combination.
OPERATIONS
The Company is principally engaged in providing technology and
management services to telecommunications service providers,
including management of debit cards and switching services to
customers in the United States and internationally.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue for management of debit cards and switching services is
recognized as service is provided.
DIRECT COSTS OF REVENUES
Direct cost of revenues consists primarily of connectivity costs
and related costs of personnel.
EQUIPMENT
Equipment and software is recorded at cost and are depreciated
using accelerated methods over the estimated useful lives of the
assets which is five years.
The Company's telecommunications equipment is subject to
technological risks and rapid market changes due to new products
and services and changing customer demand. These changes may
result in future adjustments to the estimated useful lives of
these assets.
SOFTWARE DEVELOPMENT COSTS
Costs for the internal development of new software and substantial
enhancements to existing software are expensed as incurred.
-6-
<PAGE>
Note 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
(continued)
INCOME TAXES
The Company accounts for income taxes on the liability method as
required by Statement of Financial Accounting Standards ("SFAS")
No. 109 Accounting for Income Taxes. Under this method, deferred
tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and
liabilities.
All of the combined affiliates, except for IX, have elected to be
taxed as an S-Corporation under the Internal Revenue Code. Under
this election, the profits, losses, credits and deductions of the
Company are passed through to the individual stockholders.
STOCK BASED COMPENSATION
The Company has adopted the disclosure only provisions of SFAS No.
123, Accounting for Stock-Based Compensation. The Company applies
ABB Opinion No. 25, Accounting for Stock Issued to Employees and
related interpretations in accounting for stock options. Adoption
of the statement had no impact on the Company's financial position,
results of operations or liquidity.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents.
IMPAIRMENT OF LONG-LIVED ASSETS
Effective January 1, 1996, the Company adopted the provisions of
SAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of. This Statement
requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. Adoption of the Statement did not
have a material impact on the Company's financial position,
results of operations or liquidity.
Note 2 - CONCENTRATION OF CASH BALANCE
Cash balances of approximately $864,000 and $244,000 at December
31, 1997 and 1996, were maintained in a bank account insured by
the Federal Deposit Insurance Corporation (FDIC). These balances
exceed the insured amount of $100,000.
-7-
<PAGE>
Note 3 - EQUIPMENT
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Computer and telecommunications
equipment and related software $ 9,661,362 $ 6,300,232 $ 175,090
Leasehold improvements 149,000 - -
Automobiles 100,149 29,342 29,342
----------- ----------- ----------
9,910,511 6,329,574 204,432
Accumulated depreciation (3,953,033) (1,326,908) (31,884)
----------- ----------- ----------
Net equipment $ 5,957,478 $ 5,002,666 $ 172,548
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
Note 4 - RELATED PARTY TRANSACTIONS
In 1997, the Company provided services to several companies
with common ownership. Revenues from these companies were $739,402.
A major shareholder of IX entered into a five year employment
contract with a major customer of the Company (IDT Corporation),
which started in September 1997.
Note 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Payroll and bonuses $ 855,616 $ 176,812 $ -
Profit sharing contribution 134,158 - -
Other 15,911 47,713 24,054
----------- ----------- ----------
$ 1,115,685 $ 224,525 $ 24,054
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
-8-
<PAGE>
Note 6 - LONG-TERM DEBT
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Term loan through February 1999, payable in quarterly installments
of $48,593 including imputed interest at 6.5%, collateralized by
various equipment. $ 186,669
Term loan through April 2000, payable in monthly installments of
$19,261 including imputed interest at 11%, collateralized by
various equipment. 443,607
Term loan through May 2000, payable in monthly installments of
$11,652 including imputed interest at 10%, collateralized by
various equipment. 298,073
Term loan through July 2000, payable in monthly installments of
$4,730 including interest at 8.75%. 134,280
----------
1,062,629
Less current maturities 458,139
----------
Long-term debt, net of current maturities $ 604,490
----------
----------
</TABLE>
The approximate aggregate amount of all long-term debt maturities
for the years ending December 31, is as follows:
1998 $ 458,000
1999 436,000
2000 169,000
-9-
<PAGE>
Note 7 - OPERATING LEASES
The Company leases office space under a ten year lease expiring
June 2006 with a renewal option for two five-year periods. Monthly
payments under the current lease are $22,470. The Company is
required to pay property taxes, utilities, insurance and other
costs relating to the leased facilities. Rent expense was $145,000
and $61,000 for 1997 and 1996.
The Company leases equipment under operating leases with terms
ranging from two to three year periods expiring through 2000.
Monthly payments under the leases currently aggregate
approximately $23,500. Equipment lease expense was $221,000 and
$11,000 for 1997 and 1996.
The following is a schedule by years of approximate future minimum
rental payments required under operating leases that have initial
or remaining noncancelable lease terms in excess of one year as of
December 31, 1997:
For the Years Ending
December 31,
--------------------
1998 $ 508,000
1999 317,000
2000 278,000
2001 288,000
2002 306,000
Thereafter 1,070,000
------------
Total minimum payments required $ 2,767,000
------------
------------
Note 8 - EMPLOYEE BENEFIT PLAN
In 1997, the Company implemented an employee profit sharing 401(k)
plan for the benefit of all eligible employees. The plan permits
employees to contribute a percentage of their salaries up to
limits prescribed by the Internal Revenue Service. Employer
contributions to the plan are discretionary. The terms of the plan
define qualified employees as those 18 years of age, with six
months of company service. The profit sharing contribution for
1997 was $134,158.
Note 9 - INCOME TAXES
Deferred tax attributes resulting from differences between financial
accounting amounts and tax bases of assets and liabilities follow:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Noncurrent assets and liabilities
Depreciation $ (112,000) $ (185,000) $ -
Valuation allowance - - -
----------- ----------- ----------
Net noncurrent deferred tax liability $ (112,000) $ (185,000) $ -
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
-10-
<PAGE>
Note 9 - INCOME TAXES - (CONTINUED)
--------------------------
The provisions for income taxes consist of the following:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Current tax expense (benefit) $ 324,000 $ 56,000 $ (2,100)
Deferred tax expense (benefit) (73,000) 185,000 -
Net change in valuation allowance - - -
----------- ----------- ----------
$ 251,000 $ 241,000 $ (2,100)
----------- ----------- ----------
----------- ----------- ----------
</TABLE>
Note 10 - CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
MAJOR CUSTOMERS
One customer accounted for 76% and 75% of revenues during 1997 and
1996. Such customer was 43% of accounts receivable as of
December 31, 1997.
On June 29, 1997, a service agreement was entered into with this
major customer, PT-1 Communications, Inc. ("PT-1"). In connection
with the agreement, PT-1 granted certain warrants for the purchase
of shares of Common Stock to four principals of IX. These warrants
are exercisable for shares of Common Stock with an aggregate fair
market value (as defined) equal to (i) $1,000,000 at a nominal
exercise price and (ii) $2.0 million, at an aggregate exercise
price equal to $1,000,000. Such warrants with respect to one-third
of the Warrant Shares vest and become exercisable upon each of :
(i) the earlier to occur of the closing of a stock offering of
PT-1 or March 31, 1998, (ii) January 1, 1999 and (iii) December 1,
1999, in each case, if the IX Agreement has not been terminated.
These warrants expire upon the fifth anniversary of their
respective vesting dates. These warrants, in the event of change
in control of PT-1 will immediately vest and become exercisable.
In connection with these warrants, the Company will record
revenues and compensation expense of approximately $2.0 million,
the difference between the exercise price and market value, over
the vesting period applicable to each portion of the grant. The
Company has recorded $444,000 revenue and $444,000 compensation
expense, related to these warrants for the year ended December 31,
1997.
Note 11 - SUPPLEMENTAL DISCLOSURE STATEMENT OF CASH FLOWS
NONCASH INVESTING AND FINANCING ACTIVITIES
During 1997, the Company purchased equipment for $1,150,799 and
leasehold improvements for $149,000. In conjunction with these
purchases, liabilities of $1,299,799 were assumed.
Supplemental disclosure of cash paid.
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Interest expense $ 39,463 $ - $ -
Income taxes 126,185 - -
</TABLE>
Note 12 - CONTINGENCIES
RELATED PARTY GUARANTEE
The Company has guaranteed the obligations of a related entity
under common control. At December 31, 1997, the related party's
total future minimum payments, guaranteed by IX amounted to
$683,000.
REGULATORY ENVIRONMENT
The Company is subject to regulation by various government
agencies and jurisdictions and believes it is in compliance with
all applicable laws and regulations. However, implementation and
interpretation of the Telecommunications Act of 1996 (the Act) is
ongoing and subject to litigation by various federal and state
agencies and courts. As a result, the impact of the Act on the
Company is not yet completely determinable and future
interpretations and rulings may impact the financial position and
results of operations of the Company.
ACCRUED TAXES PAYABLE
The taxation of the Company's operations which is related to
telecommunications is evolving. The Company believes it has
adequately provided for any such taxes it may ultimately be
required to pay. Legislation may be enacted which would
specifically provide for taxation of such operations or may
interpret current laws in a manner resulting in additional tax
liabilities.
Note 13 - SUBSEQUENT EVENT
MERGER AGREEMENT
On April 8, 1998, IX announced that it had entered into an
Agreement and Plan of Merger (the "Merger Agreement"), dated as of
April 7, 1998, pursuant to which IX would merge with a wholly
owned subsidiary of IDT Corporation ("IDT") (the "Merger") and IX
would become a wholly owned subsidiary of IDT. The Merger is
subject to the expiration or termination of the required waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, and to certain other conditions, each as set
forth in the Merger Agreement. Immediately prior to the execution
and delivery of the Merger Agreement, IX entered into binding
agreements with the stockholders of the four combined affiliated
companies to purchase all of the shares of common stock of such
companies in exchange for common stock of IX.
Pursuant to the Merger Agreement, all of the outstanding shares of
the common stock of IX (the "IX Common Stock") will be exchanged
for an aggregate of 3,242,323 newly issued shares (the"IDT
Shares") of common stock, par value $.01 per share, of IDT (the
"IDT Common Stock:), and $20 million in cash (the "Cash
Consideration"). The IX Common Stock, the Cash Consideration and
the IDT Common Stock will be held in escrow until the satisfaction
of the conditions set forth in the Merger Agreement. The Merger is
expected to be consummated prior to June 6, 1998. A portion of the
IDT Shares will remain in escrow until October 2002 in order to
satisfy certain possible indemnification obligations that certain
stockholders of IX may have under the Merger Agreement. The Merger
will be treated as a purchase for accounting purposes on IDT and
is intended to qualify as a tax-free reorganization under the
provisions of Section 368 of the Internal Revenue Code of 1986, as
amended.
-12-
<PAGE>
MAJOR CUSTOMER
Following the public announcement of the Merger, PT-1 has
indicated its position that the Merger violates IX's service
agreement with PT-1 (see Note 10). However, PT-1 has taken no
action with respect to such claim.
RESTRICTED STOCK AWARD
Immediately prior to signing of the Merger Agreement, IX issued
shares of restricted common stock to certain individuals. Such
restricted stock will be replaced by 77,277 shares of IDT common
stock after the merger is completed subject to certain defined
restrictions. These restrictions include conclusion of the merger
by a certain date and continued service of the participant with
the Company or its affiliates through April 7, 1999.
-13-
<PAGE>
EXHIBIT 99.2
INTEREXCHANGE, INC. AND
COMBINED AFFILIATES
For the Three Months Ended
March 31, 1998 and 1997
(Unaudited)
Page
----
Combined Balance Sheet 1
Combined Statements of Operations 2
Combined Statements of Stockholders' Equity 3
Combined Statements of Cash Flows 4
Notes to Combined Financial Statements 5
<PAGE>
INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Combined Balance Sheet
March 31, 1998
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 523,056
Accounts receivable 818,308
------------
1,341,364
Equipment, net of accumulated depreciation 5,326,352
Other assets 36,154
------------
$ 6,703,870
------------
------------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 2,610,091
Current maturities of long-term debt 502,839
Accrued expenses and other current liabilities 945,282
Accrued taxes payable 700,000
Income taxes payable 333,498
------------
5,091,710
------------
Long-term debt, net of current maturities 430,006
Deferred income taxes 112,000
Stockholders' equity
Common stock 600
Retained earnings 1,069,554
------------
Total stockholders' equity 1,070,154
------------
$ 6,703,870
------------
------------
See accompanying notes to combined financial statements.
-1-
<PAGE>
INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Combined Statements of Operations
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
1998 1997
------------ ------------
Revenues $ 3,811,900 $ 2,884,490
Costs and expenses
Direct cost of services 1,165,843 1,040,452
Selling, general and administrative expenses 1,321,281 886,483
Depreciation 543,825 658,784
------------ ------------
3,030,949 2,585,719
------------ ------------
Earnings from operations 780,951 298,771
Other income (expense)
Interest income 6,959 4,611
Interest expense (52,771) (10,939)
------------ ------------
(45,812) (6,328)
------------ ------------
Earnings before income taxes 735,139 292,443
Income taxes 308,000 120,000
------------ ------------
Net income $ 427,139 $ 172,443
------------ ------------
------------ ------------
See accompanying notes to combined financial statements.
-3-
<PAGE>
INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Combined Statements of Stockholders' Equity
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
Common Stock
--------------------- Total
Number of Retained Stockholders'
Shares Amount Earnings Equity
-------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Balance - January 1, 1997 500 $ 500 $ 268,992 $ 269,492
Net income - - 172,443 172,443
Stock issued - Blue Sky Software, Inc. 100 100 - 100
Distributions to stockholders - - (9,138) (9,138)
-------- -------- ---------- -----------
Balance - March 31, 1997 600 $ 600 $ 432,297 $ 432,897
-------- -------- ---------- -----------
-------- -------- ---------- -----------
Balance - January 1, 1998 600 $ 600 $ 645,715 $ 646,315
Net income - - 427,139 427,139
Distributions to stockholders - - (3,300) (3,300)
-------- -------- ---------- -----------
Balance - March 31, 1998 600 $ 600 $1,069,554 $ 1,070,154
-------- -------- ---------- -----------
-------- -------- ---------- -----------
</TABLE>
See accompanying notes to combined financial statements.
-3-
<PAGE>
INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Combined Statements of Cash Flows
For the Three Months Ended March 31, 1998 and 1997
(Unaudited)
1998 1997
---------- ----------
Cash flows from operating activities
Net income $ 427,139 $ 172,443
---------- ----------
Adjustment to reconcile net income to net
cash from operating activities:
Depreciation 543,825 658,784
Deferred income taxes - (157,000)
(Increase) decrease in
Accounts receivable (360,782) (17,568)
Other assets - 18
Increase (decrease) in
Accounts payable (575,583) (393,021)
Accrued expenses and other current liabilities (170,403) (84,144)
Accrued taxes payable - 50,000
Income taxes payable 105,459 100,810
Customer deposits (350,000) 350,000
---------- ----------
Total adjustments (807,484) 507,879
---------- ----------
(380,345) 680,322
---------- ----------
Cash flows from investing activities
Payments for purchase of property and equipment - (562,733)
Retirement of property and equipment 87,301 -
---------- ----------
87,301 (562,733)
---------- ----------
Cash flows from financing activities
Principal payments of long-term debt (129,784) -
Distributions to stockholders (3,300) (9,138)
Proceeds from issuance of common stock - 100
---------- ----------
(133,084) (9,038)
---------- ----------
Net change in cash and cash equivalents (426,128) 108,551
Cash and cash equivalents - beginning 949,184 81,416
---------- ----------
Cash and cash equivalents - ending $ 523,056 $ 189,967
---------- ----------
---------- ----------
See accompanying notes to combined financial statements.
-4-
<PAGE>
INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Notes to Combined Financial Statements
(Unaudited)
Note 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The combined financial statements include the accounts of
InterExchange, Inc. ("IX"), Doublestone Computing Enterprises,
Inc., Blue Sky Software, Inc., Altom Associates, Inc. and Mikulynec
Associates, Inc. (the "Company"). All significant intercompany
balances and transactions have been eliminated in the combination.
OPERATIONS
The Company is principally engaged in providing technology and
management services to telecommunications service providers,
including management of debit cards and switching services to
customers in the United States and internationally.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue for management of debit cards and switching services is
recognized as service is provided.
DIRECT COSTS OF REVENUES
Direct cost of revenues consists primarily of connectivity costs
and related costs of personnel.
EQUIPMENT
Equipment and software is recorded at cost and are depreciated
using accelerated methods over the estimated useful lives of the
assets which is five years.
The Company's telecommunications equipment is subject to
technological risks and rapid market changes due to new products
and services and changing customer demand. These changes may result
in future adjustments to the estimated useful lives of these assets.
SOFTWARE DEVELOPMENT COSTS
Costs for the internal development of new software and substantial
enhancements to existing software are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes on the liability method as
required by Statement of Financial Accounting Standards ("SFAS")
No. 109 Accounting for Income Taxes. Under this method, deferred
tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and
liabilities.
-5-
<PAGE>
INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Notes to Combined Financial Statements
(Unaudited)
Note 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -
(continued)
INCOME TAXES - (continued)
All of the combined affiliates, except for IX, have elected to be
taxed as an S-Corporation under the Internal Revenue Code. Under
this election, the profits, losses, credits and deductions of the
Company are passed through to the individual stockholders.
STOCK BASED COMPENSATION
The Company has adopted the disclosure only provisions of SFAS No.
123, Accounting for Stock-Based Compensation. The Company applies
ABB Opinion No. 25, Accounting for Stock Issued to Employees and
related interpretations in accounting for stock options. Adoption
of the statement had no impact on the Company's financial position,
results of operations or liquidity.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash equivalents.
Note 2 - CONCENTRATION OF CASH BALANCE
A cash balance of $363,000 at March 31, 1998, was maintained in a
bank account insured by the Federal Deposit Insurance Corporation
(FDIC). This balance exceeds the insured amount of $100,000.
Note 3 - EQUIPMENT
1998
-----------
Computer and telecommunications
equipment and related software $ 9,661,362
Leasehold improvements 149,000
-----------
9,810,362
Accumulated depreciation (4,484,010)
-----------
Net equipment $ 5,326,352
-----------
-----------
Note 4 - RELATED PARTY TRANSACTIONS
The Company provided services to several companies with common
ownership. Revenues from these companies were $290,000 and
$185,000 for 1998 and 1997.
A major shareholder of IX entered into a five year employment
contract with a major customer of the Company (IDT Corporation),
which started in September 1997.
-6-
<PAGE>
INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Notes to Combined Financial Statements
(Unaudited)
Note 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
1998
-----------
Payroll and bonuses $ 875,282
Legal 70,000
-----------
$ 945,282
-----------
-----------
Note 6 - LONG-TERM DEBT
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
Term loan through February 1999, payable quarterly at $48,593
including imputed interest at 6.5%, collateralized by various
equipment. $ 141,072
Term loan through April 2000, payable monthly at $19,261 including
imputed interest at a 11%, collateralized by various
equipment. 397,644
Term loan through May 2000, payable monthly at $11,652 including
imputed interest at a fixed rate of 10%, collateralized
by various equipment. 271,218
Term loan through July 2000, payable monthly
at $4,730 including interest at 8.75%. 122,911
-----------
Less current maturities 502,839
-----------
Long-term debt, net of current maturities $ 430,006
-----------
-----------
</TABLE>
The approximate aggregate amount of all long-term debt maturities
for the years ending March 31, follows:
1999 $ 504,000
2000 364,000
2001 65,000
Note 7 - OPERATING LEASES
The Company leases office space under a ten year lease expiring
June 2006 with a renewal option for two five-year periods. Monthly
payments under the current lease are $22,470. The Company is
required to pay property taxes, utilities, insurance and
-7-
<PAGE>
INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Notes to Combined Financial Statements
(Unaudited)
other costs relating to the leased facilities. Rent expense was
$57,000 and $36,000 for 1998 and 1997.
The Company leases equipment under operating leases with terms
ranging from two to three year periods expiring through 2000.
Monthly payments under the leases currently aggregate approximately
$23,500. Equipment lease expense was $70,000 and $55,000 for 1998
and 1997.
The following is a schedule by years of approximate future minimum
rental payments required under operating leases that have initial
or remaining noncancelable lease terms in excess of one year as of
March 31, 1998:
For the Years Ending
March 31,
--------------------
1999 $ 469,000
2000 300,000
2001 275,000
2002 297,000
2003 306,000
Thereafter 993,000
-----------
Total minimum payments required $ 2,640,000
-----------
-----------
Note 8 - CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS
MAJOR CUSTOMERS
One customer accounted for 78% and 76% of revenues during 1998 and
1997. Such customer was 93% of accounts receivable as of March 31,
1998.
On June 29, 1997, a service agreement was entered into with this
major customer, PT-1 Communications, Inc. ("PT-1"). In connection
with the agreement, PT-1 granted certain warrants for the purchase
of shares of Common Stock to four principals of IX. These warrants
are exercisable for shares of Common Stock with an aggregate fair
market value (as defined) equal to (i) $1,000,000 at a nominal
exercise price and (ii) $2.0 million, at an aggregate exercise
price equal to $1,000,000. Such warrants with respect to one-third
of the Warrant Shares vest and become exercisable upon each of: (i)
the earlier to occur of the closing of a stock offering of PT-1 or
March 31, 1998, (ii) January 1, 1999 and (iii) December 1, 1999, in
each case, if the IX Agreement has not been terminated. These
warrants expire upon the fifth anniversary of their respective
vesting dates. These warrants, in the event of change in control of
PT-1 will immediately vest and become exercisable.
In connection with these warrants, the Company will record revenues
and compensation expense of approximately $2.0 million, the
difference between the exercise price and market value, over the
vesting period applicable to each portion of
-8-
<PAGE>
INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Notes to Combined Financial Statements
(Unaudited)
the grant. The Company has recorded $220,000 revenue and $220,000
compensation expense, related to these warrants for the three
months ended March 31, 1998.
Note 9 - SUPPLEMENTAL DISCLOSURE STATEMENT OF CASH FLOWS
NONCASH INVESTING AND FINANCING ACTIVITIES
During the three months ended March 31, 1997, the Company
purchased equipment for $362,000. In conjunction with this
purchase, liabilities of $362,000 were assumed.
Supplemental disclosure of cash paid.
1998 1997
--------- ---------
Interest expense $ 52,771 $ 10,939
Income taxes 200,000 55,000
Note 10 - CONTINGENCIES
RELATED PARTY GUARANTEE
The Company has guaranteed the obligations of a related entity
under common control. At March 31, 1998, the related party's total
future minimum payments, guaranteed by IX amounted $520,000.
REGULATORY ENVIRONMENT
The Company is subject to regulation by various government
agencies and jurisdictions and believes it is in compliance with
all applicable laws and regulations. However, implementation and
interpretation of the Telecommunications Act of 1996 (the Act) is
ongoing and subject to litigation by various federal and state
agencies and courts. As a result, the impact of the Act on the
Company is not yet completely determinable and future
interpretations and rulings may impact the financial position and
results of operations of the Company.
ACCRUED TAXES PAYABLE
The taxation of the Company's operations which is related to
telecommunications is evolving. The Company believes it has
adequately provided for any such taxes it may ultimately be
required to pay. Legislation may be enacted which would
specifically provide for taxation of such operations or may
interpret current laws in a manner resulting in additional tax
liabilities.
-9-
<PAGE>
INTEREXCHANGE, INC. AND COMBINED AFFILIATES
Notes to Combined Financial Statements
(Unaudited)
Note 11 - SUBSEQUENT EVENT
MERGER AGREEMENT
On April 8, 1998, IX announced that it had entered into an
Agreement and Plan of Merger (the "Merger Agreement"), dated as of
April 7, 1998, pursuant to which IX would merge with a wholly
owned subsidiary of IDT Corporation ("IDT") (the "Merger") and IX
would become a wholly owned subsidiary of IDT. Immediately prior
to the execution and delivery of the Merger Agreement, IX entered
into binding agreements with the stockholders of the four combined
affiliated companies to purchase all of the shares of common stock
of such companies in exchange for common stock of IX.
Pursuant to the Merger Agreement, all of the outstanding shares of
the common stock of IX (the "IX Common Stock") will be exchanged
for an aggregate of 3,242,323 newly issued shares (the "IDT
Shares") of common stock, par value $.01 per share, of IDT (the
"IDT Common Stock", and $20 million in cash (the "Cash
Consideration"). The IX Common Stock, the Cash Consideration and
the IDT Common Stock will be held in escrow until the satisfaction
of the conditions set forth in the Merger Agreement. The Merger is
expected to be consummated prior to June 6, 1998. A portion of the
IDT Shares will remain in escrow until October 2002 in order to
satisfy certain possible indemnification obligations that certain
stockholders of IX may have under the Merger Agreement. The Merger
will be treated as a purchase for accounting purposes on IDT and
is intended to qualify as a tax-free reorganization under the
provisions of Section 368 of the Internal Revenue Code of 1986, as
amended.
MAJOR CUSTOMER
Following the public announcement of the Merger, PT-1 has
indicated its position that the Merger violates IX's service
agreement with PT-1 (see Note 8). However, PT-1 has taken no
action with respect to such claim.
RESTRICTED STOCK AWARD
Immediately prior to signing of the Merger Agreement, IX issued
shares of restricted common stock to certain individuals. Such
restricted stock will be replaced by 77,277 shares of IDT common
stock after the merger is completed subject to certain defined
restrictions. These restrictions include conclusion of the merger
by a certain date and continued service of the participant with
the Company or its affiliates through April 7, 1999.
-10-
