<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 January 31, 1999
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 - 23,366,846 shares as of March 15, 1999
Class A Common Stock, $.01 par value - 10,129,417 shares as of March 15, 1999
(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
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Item 1. Financial Statements (Unaudited)..............................................3
Condensed Consolidated Balance Sheets as of January 31, 1999
and July 31, 1998.........................................................3
Condensed Consolidated Statements of Income for the six months
and three months ended January 31, 1999 and 1998..........................4
Condensed Consolidated Statement of Stockholders'Equity
for the six months ended January 31, 1999.................................5
Condensed Consolidated Statements of Cash Flows for the
six months ended January 31, 1999 and 1998................................6
Notes to Condensed Consolidated Financial Statements.........................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of..10
PART II. OTHER INFORMATION...........................................................17
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 (Unaudited)
<TABLE>
<CAPTION>
IDT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, 1999 July 31, 1998
---------------- -------------
(Unaudited) (Note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $60,994,698 $115,283,519
Marketable securities 78,911,968 60,308,768
Accounts receivable, net 61,754,895 38,037,974
Notes receivable - current portion 2,140,000 2,140,000
Other current assets 24,337,711 12,096,803
------------ ------------
Total current assets 228,139,272 227,867,064
Property and equipment, net 100,059,173 75,332,476
Notes receivable - long-term portion 33,021,174 21,767,769
Goodwill, net 73,947,364 74,222,221
Deferred tax assets, net 6,427,072 10,750,000
Other assets 8,996,946 7,256,674
----------- ---------------
Total assets $450,591,001 $417,196,204
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $53,851,188 $38,793,873
Accrued expenses 2,282,298 3,499,301
Interest payable 4,096,140 3,942,577
Deferred revenue 14,026,129 9,175,218
Notes payable-- current portion 2,120,779 1,865,849
Capital lease obligations-- current portion 5,509,497 3,989,375
Other current liabilities 27,000 220,325
------------ --------------
Total current liabilities 81,913,031 61,486,518
Notes payable-- long-term portion 100,679,227 101,833,892
Capital lease obligation-- long-term portion 19,118,759 11,232,053
------------ ------------
Total liabilities 201,711,017 174,552,463
Minority interest 1,149,469 3,895,669
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value; authorized shares - 10,000,000;
no shares issued -- --
Common stock, $.01 par value; authorized shares - 100,000,000;
23,341,746 and 22,848,866 shares issued and outstanding at
January 31, 1999 and July 31, 1998, respectively 233,418 228,489
Class A stock, $.01 par value; authorized shares - 35,000,000;
10,129,517 and 10,255,668 shares issued and outstanding at
January 31, 1999 and July 31, 1998, respectively 101,295 102,557
Additional paid-in capital 268,796,130 266,761,770
Accumulated deficit (21,400,328) (28,344,744)
------------ -------------
Total stockholders' equity 247,730,515 238,748,072
----------- -------------
Total liabilities and stockholders' equity $450,591,001 $417,196,204
============ ============
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Six Months Ended January 31, Three Months Ended January 31,
--------------------------------- ---------------------------------
1999 1998 1999 1998
---- ---- ---- -----
<S> <C> <C> <C> <C>
Revenues $294,018,907 $125,703,766 $160,741,076 $70,952,788
Costs and expenses:
Direct cost of revenues.................... 227,665,779 92,309,811 126,591,672 51,448,794
Selling, general and administrative........ 40,806,085 23,706,415 23,750,521 13,871,468
Depreciation and amortization.............. 11,735,189 3,787,573 6,295,720 2,042,439
------------ ----------- ----------- -----------
Total costs and expenses................... 280,207,053 119,803,799 156,637,913 67,362,701
------------ ----------- ----------- -----------
Income from operations........................ 13,811,854 5,899,967 4,103,163 3,590,087
Interest and other, net....................... 143,501 (783,393) (62,154) (436,458)
------------ ----------- ----------- -----------
Income before provision for income
taxes and minority interest................ 13,955,355 5,116,574 4,041,009 3,153,629
Provision for income taxes.................... 4,825,780 -- 1,426,497 --
Minority interest............................. 2,185,159 -- 561,747 --
------------ ----------- ----------- -----------
Net income.................................... $6,944,416 $5,116,574 $2,052,765 $3,153,629
=========== =========== =========== ===========
Net income per share - basic.................. $0.21 $0.23 $0.06 $0.14
=========== =========== =========== ===========
Weighted average number of
shares used in calculation of
earnings per share - basic................ 33,265,965 22,638,022 33,332,371 23,330,274
=========== =========== =========== ===========
Net income per share - diluted................ $0.20 $0.20 $0.06 $0.12
=========== =========== =========== ===========
Weighted average number of
shares used in calculation of
earnings per share - diluted............ 35,476,587 26,087,362 35,343,627 27,053,511
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Total
Common Stock Class A Stock Additional Accumulated Stockholders'
Shares Amount Shares Amount Paid-in Capital Deficit Equity
------ ------ ------ ------ --------------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31, 1998 22,848,866 $228,489 10,255,668 $102,557 $266,761,770 $(28,344,744) $238,748,072
Exercise of stock options 267,725 2,677 -- -- 794,033 -- 796,710
Conversion of Class A Stock
to Common Stock 126,151 1,262 (126,151) (1,262) -- -- --
Exercise of warrants 99,004 990 -- -- 737,502 -- 738,492
Income tax benefits from
stock options exercised -- -- -- -- 502,825 -- 502,825
Net income for the six
months ended January 31,
1999 -- -- -- -- -- 6,944,416 6,944,416
----------- --------- ---------- -------- ------------ ------------- ------------
Balance at January 31, 1999 23,341,746 $233,418 10,129,517 $101,295 $268,796,130 $(21,400,328) $247,730,515
=========== ========= ========== ======== ============ ============= ============
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended January 31
------------------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash provided by (used in) operating activities.............. $ 4,595,693 $ (2,929,195)
Investing activities
Purchase of short-term investments........................... (18,603,200) --
Issuance of notes receivable................................. (11,253,405)
Receipt of payments on advance............................... -- 811,743
Purchase of property and equipment........................... (22,240,140) (8,794,519)
Net cash used in investing activities........................ (57,028,104) (7,982,776)
Financing activities
Repayment of notes payable................................... (899,735) (871,449)
Proceeds from Convertible Debentures......................... -- 7,500,000
Repayment of capital lease obligations....................... (2,491,877) (825,108)
Proceeds from exercise of stock options...................... 796,710 2,882,279
Proceeds from exercise of Net2Phone option................... -- 100,000
Proceeds from exercise of warrants........................... 738,492 --
Proceeds from notes payable.................................. -- 3,093,294
Distribution of minority interests........................... (4,931,359) --
--------------- ------------
Net cash (used in) provided by financing activities.......... (1,856,410) 11,879,016
--------------- ------------
Net (decrease) increase in cash and cash equivalents......... (54,288,821) 967,045
--------------- ------------
Cash and cash equivalents, beginning of period............... 115,283,519 7,674,313
--------------- ------------
Cash and cash equivalents, end of period..................... $ 60,994,698 $ 8,641,358
=============== ============
Supplemental disclosures of cash flow information
Interest paid................................................ $5,426,422 $ 1,048,462
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 six months and three months ended
January 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending July 31, 1999. For further information, please
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K/A for the year ended July 31, 1998, as
filed with the Securities and Exchange Commission.
Note 2 - Summary of Significant Accounting Policies
Segment Information
The Company must adopt SFAS 131, Disclosures about Segments of an
Enterprise and Related Information in fiscal 1999. Because Statement 131 is not
required to be applied to interim financial statements in the initial year of
adoption, the Company is not required to disclose segment information in
accordance with Statement 131 until its fiscal 1999 annual report, at which time
it will restate prior years' segment disclosure to conform to the Statement 131
segment presentation, if practicable. In the Company's first quarter fiscal 2000
report, and in subsequent quarters, it will present the interim disclosure
required by Statement 131 for both 2000 and 1999.
Note 3 - Property and Equipment
Property and equipment consists of the following:
<TABLE>
<CAPTION>
January 31, 1999 July 31, 1998
---------------- -------------
<S> <C> <C>
Equipment $108,723,138 $77,612,461
Computer software 12,014,963 10,027,335
Leasehold improvements 2,703,329 1,930,769
Furniture and fixtures 2,173,028 1,905,048
125,614,458 91,475,613
Less: Accumulated depreciation
and amortization 25,555,285 16,143,137
------------ -----------
$100,059,173 $75,332,476
============ ===========
</TABLE>
Note 4 - Legal Proceedings and Contingencies
In December 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. The Company's
subsidiary has filed a counterclaim based on interference with prospective
business advantages, breach of contract and improper use of confidential and
proprietary
7
<PAGE>
information, which the Company voluntarily dismissed in November 1998. The suit
is currently in the discovery phase, which was scheduled to end in February 1999
but is continuing until an unspecified date in the future. A trial date has not
been scheduled to date.
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 as 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, in violation of federal and state law. The complaint
seeks compensatory and punitive damages in an unspecified amount and also seeks
statutory multiples of damages. All of the claims arising under federal law were
dismissed by the Court in New Jersey Superior Court, Bergen County, leaving the
plaintiffs with only the remedies available under state law. Further, the Court
granted the Company permission to file counterclaims against all plaintiffs for
the alleged unlawful taking of business records. The Company filed such
counterclaims in October 1998. Discovery is continuing and a trial date is
scheduled for April 28, 1999.
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. In December 1998, the Court denied the
Company's motion for summary judgment; however, the Court limited the class to
include only citizens of the State of New York. The Company is preparing to
oppose application for class certification.
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 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. In August 1998, DigiTEC settled its claims against
CG Com, Inc. and Mr. Carlos Gomez and in November 1998, DigiTEC and the Company
settled all outstanding claims against each other and entered into an agreement
to conduct business on an ongoing basis.
The Company filed a lawsuit against Mr. Glen Miller in August 1997 in
the New Jersey Superior Court, Bergen County. The action was based upon various
matters arising out of Mr. Miller's employment with IDT. Mr. Miller answered the
complaint and filed a counterclaim against the Company 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 former Chief Operating Officer of the
Company and the current Chief Executive Officer of Net2Phone, a subsidiary 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. The Company's motion for
leave to appeal this award has been denied, and the action is currently in the
discovery phase. A trial date has been scheduled for April 1999.
In December 1998, PT-1 Communications, Inc. ("PT-1") filed a complaint
against the Company claiming, among other things, that the Company violated its
service marks and trade dress in connection with the sale and marketing of phone
cards. The Company and PT-1 shortly thereafter entered into a confidential
settlement agreement in December 1998. Subsequent to December 1998, PT-1 filed a
motion for a preliminary injunction to enforce and compel the Company's
compliance with the settlement agreement, which it alleges was breached by the
Company. The Company filed opposition papers to the
8
<PAGE>
motion and simultaneously filed a motion for a preliminary injunction. The Court
scheduled a conference for March 1999.
In August 1998, a subsidiary of the Company, InterExchange, Inc.
("IX"), filed a complaint in the New Jersey Superior Court, Middlesex County,
against PT-1. The action has been removed to the U.S. District Court for the
District of New Jersey. The action arises from a contract in which IX and PT-1
agreed that PT-1 would route its traffic from prepaid calling cards through IX's
debit card platform. In the action, IX claimed that PT-1 breached its contract
with IX by failing to make required payments under the contract, and claimed
compensatory damages in the amount of $8.5 million. In February 1999, PT-1 filed
an answer and counterclaim and an answer and third party complaint against IX,
the Company, and certain of their officers, including Howard Jonas. PT-1 alleges
that IX is not entitled to these payments in that IX had breached the agreement,
and that, following IX's 1998 merger agreement with the Company, in which IX
become a wholly-owned subsidiary of the Company, IX violated its covenant in the
agreement that it would not compete with PT-1. PT-1 also alleges, among other
things, that the Company and Mr. Jonas tortiously interfered with the contract
between IX and PT-1, and that they conspired with IX and its personnel to obtain
confidential information relating to PT-1. PT-1 seeks compensatory damages in
the aggregate amount of $200 million, and additional punitive damages in the
amount of $500 million. The Company and Howard Jonas have not yet been served
with the third party complaint and it is anticipated that discovery will
commence shortly.
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 the aforementioned
actions, will not have a material adverse effect on results of operations or the
financial condition of the Company.
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/A for the year ended July 31, 1998, as
filed with the Securities and Exchange Commission.
Overview
The Company is a leading multinational carrier that provides its
wholesale and retail customers with integrated and competitively priced
international and domestic long distance telecommunications service, Internet
access and, through its Net2Phone products and services, Internet telephony
services. The Company delivers these services over a high-quality network
consisting of 68 switches in the U.S. and Europe and owned and leased capacity
on 18 undersea fiber optic cables. In addition, the Company obtains additional
transmission capacity from other carriers.
The Company delivers its international traffic worldwide pursuant to
its agreements with U.S.-based carriers, foreign carriers, and 17 of the
companies that are primarily responsible for providing telecommunications
services in particular countries (which are commonly referred to as "PTTs"). In
addition, the Company maintains a high-speed network that carries Internet
traffic in order to support both its Internet access services and its Internet
telephony services.
Six Months Ended January 31, 1999 Compared to Six Months Ended January 31, 1998
Results of Operations
Revenues. Revenues increased 133.9% from approximately $125.7 million
for the six months ended January 31, 1998 to approximately $294.0 million for
the six months ended January 31, 1999. Telecommunications revenues increased
146.1% from approximately $110.9 million for the six months ended January 31,
1998 to approximately $272.9 million for the six months ended January 31, 1999.
Internet access revenues decreased 14.0% from approximately $10.0 million for
the six months ended January 31, 1998 to approximately $8.6 million for the six
months ended January 31, 1999, reflecting the Company's decision to de-emphasize
its activities in this area. Internet telephony revenues increased 160.4% from
approximately $4.8 million for the six months ended January 31, 1998 to
approximately $12.5 million for the six months ended January 31, 1999.
Telecommunications revenues increased primarily as a result of an
increase in minutes of use from approximately 271.9 million for the six months
ended January 31, 1998 to approximately 1.1 billion for the six months ended
January 31, 1999. The increase in minutes was 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 addition of
wholesale carrier services clients and the increased use by existing clients
resulted in an increase in wholesale carrier services revenues of 39.4%, from
approximately $74.1 million for the six months ended January 31, 1998 to
approximately $103.3 million for the six months ended January 31, 1999. As a
percentage of telecommunications revenues, wholesale carrier service revenues
decreased from approximately 66.8% to 37.9%, primarily due to the significant
increase in prepaid calling card revenues both in real dollars and as a
percentage of overall telecommunications revenues. Revenues from sales of
prepaid calling cards increased 555.6% from approximately $23.4 million for the
six months ended January 31, 1998 to approximately $153.4 million for the six
months ended January 31, 1999 as a result of increased marketing efforts and the
Company's purchase of a majority interest in Union Telecard Alliance, LLC, a
prepaid calling card distributor, in May
10
<PAGE>
1998. As a percentage of telecommunications revenues, prepaid calling card
revenues increased from approximately 21.1% to 56.1%. As a percentage of
telecommunications revenues, international retail services revenues (which
consist primarily of call reorigination services) decreased from approximately
9.7% to 4.3%.
As a percentage of total revenues, Internet access revenues decreased
from approximately 8.0% for the six months ended January 31, 1998 to
approximately 2.9% for the six months ended January 31, 1999. 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 3.8% for the six months ended January 31, 1998 to 4.2% for the six months
ended January 31, 1999. The increase in Internet telephony revenues was
primarily due to an increase in billed-minute usage resulting from increased
marketing of the Company's Internet telephony products and services.
Direct Cost of Revenues. The Company's direct cost of revenues
increased by 146.6%, from approximately $92.3 million for the six months ended
January 31, 1998 to approximately $227.7 million for the six months ended
January 31, 1999. As a percentage of total revenues, these costs increased from
73.4% for the six months ended January 31, 1998 to 77.4% for the six months
ended January 31, 1999. The dollar increase is due primarily to increases in
underlying carrier and connectivity costs, as the Company's telecommunications
minutes of use, and associated revenues, grew substantially. As a percentage of
total revenues, the increase in direct costs reflects lower gross margins
associated with wholesale carrier services and prepaid calling card services as
compared with international retail and Internet access services. Gross margins
were also adversely affected by delayed network deployment.
Selling, General and Administrative. Selling, general and
administrative costs increased 72.1% from approximately $23.7 million for the
six months ended January 31, 1998 to approximately $40.8 million for the six
months ended January 31, 1999. As a percentage of total revenues, these costs
decreased from 18.9% for the six months ended January 31, 1998 to 13.9% for the
six months ended January 31, 1999. The increase in these costs in dollar terms
is due primarily to increased sales and marketing efforts for retail services,
including prepaid calling cards, domestic and international long distance,
Net2Phone and Net2Phone Direct. As a percentage of total revenues, the decrease
was due primarily to the substantial increase in total revenues for the six
months ended January 31, 1999.
Depreciation and Amortization. Depreciation and amortization increased
207.9% from approximately $3.8 million for the six months ended January 31, 1998
to approximately $11.7 million for the six months ended January 31, 1999. As a
percentage of revenues, these costs increased from 3.0% for the six months ended
January 31, 1998 to 4.0% for the six months ended January 31, 1999. These costs
increased primarily as a result of the Company's higher fixed asset base during
the six months ended January 31, 1999 as compared with the six months ended
January 31, 1998 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 will continue to
increase as the Company continues to implement its growth strategy.
Income from Operations. The Company's income from operations increased
133.9% from approximately $5.9 million for the six months ended January 31, 1998
to approximately $13.8 million for the six months ended January 31, 1999. Income
from operations for the Company's telecommunications business increased to
approximately $22.4 million for the six months ended January 31, 1999 from $7.9
million for the six months ended January 31, 1998. As a percentage of
telecommunication revenues, income from operations for the telecommunications
business increased to 8.2% for the six months ended January 31, 1999 from
approximately 7.2% for the six months ended January 31, 1998.
Loss from operations for the Company's Internet access business
increased to approximately $4.1 million for the six months ended January 31,
1999 from approximately $3.0 million for the six months
11
<PAGE>
ended January 31, 1998. The increased loss is primarily due to the decrease in
Internet access revenues reflecting the Company's decision to de-emphasize its
activities in this area.
Loss from operations of the Net2Phone division was approximately $4.5
million for the six months ended January 31, 1999, as compared to income from
operations of approximately $927,000 for the six months ended January 31, 1998.
This change is due to the substantial increase in selling, general and
administrative costs as the Company expands its Internet telephony
infrastructure and seeks to gain additional market share for its Internet
telephony products and services.
Income Taxes. The Company recorded income tax expense of $4.8 million
for the six months ended January 31, 1999. An income tax benefit related to the
tax deduction upon the exercise of stock options was recorded directly into
additional paid-in capital. The Company did not record an income tax benefit for
the six months ended January 31, 1998 as the realization of available tax losses
was not probable at that time.
Three Months Ended January 31, 1999 Compared to Three Months Ended January 31,
1998
Results of Operations
Revenues. Revenues increased 126.3% from approximately $71.0 million
for the three months ended January 31, 1998 to approximately $160.7 million for
the three months ended January 31, 1999. Telecommunications revenues increased
136.8% from approximately $63.0 million for the three months ended January 31,
1998 to approximately $149.3 million for the three months ended January 31,
1999. Internet access revenues decreased 17.0% from approximately $5.2 million
for the three months ended January 31, 1998 to approximately $4.3 million for
the three months ended January 31, 1999, reflecting the Company's decision to
de-emphasize its activities in this area. Internet telephony revenues increased
166.6% from approximately $2.7 million for the three months ended January 31,
1998 to approximately $7.2 million for the three months ended January 31, 1999.
Telecommunications revenues increased primarily as a result of an
increase in minutes of use from approximately 160.4 million for the three months
ended January 31, 1998 to approximately 638.2 million for the three months ended
January 31, 1999. The increase in minutes was 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 addition of
wholesale carrier services clients and the increased use by existing clients
resulted in an increase in wholesale carrier services revenues of 43.1%, from
approximately $38.3 million for the three months ended January 31, 1998 to
approximately $54.8 million for the three months ended January 31, 1999. As a
percentage of telecommunications revenues, wholesale carrier service revenues
decreased from approximately 60.7% to 36.7%, primarily due to the significant
increase in prepaid calling card revenues both in real dollars and as a
percentage of overall telecommunications revenues. Revenues from sales of
prepaid calling cards increased 375.7% from approximately $18.1 million for the
three months ended January 31, 1998 to approximately $86.1 million for the three
months ended January 31, 1999 as a result of increased marketing efforts and the
Company's purchase of a majority interest in Union Telecard Alliance, LLC, a
prepaid calling card distributor in May 1998. As a percentage of
telecommunications revenues, prepaid calling card revenues increased from
approximately 28.7% to 57.7%. As a percentage of telecommunications revenues,
international retail services revenues (which consist primarily of call
reorigination services) decreased from approximately 8.5% to 4.0%.
As a percentage of total revenues, Internet access revenues decreased
from approximately 7.3% for the three months ended January 31, 1998 to
approximately 2.7% for the three months ended January 31, 1999. 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.
12
<PAGE>
Internet telephony revenues as a percentage of total revenues increased
from 3.8% for the three months ended January 31, 1998 to 4.5% for the three
months ended January 31, 1999. The increase in Internet telephony revenues was
primarily due to an increase in billed-minute usage resulting from increased
marketing of the Company's Internet telephony products and services.
Direct Cost of Revenues. The Company's direct cost of revenues
increased by 146.3%, from approximately $51.4 million in the three months ended
January 31, 1998 to approximately $126.6 million in the three months ended
January 31, 1999. As a percentage of total revenues, these costs increased from
72.5% for the three months ended January 31, 1998 to 78.8% for the three months
ended January 31, 1999. The dollar increase is due primarily to increases in
underlying carrier and connectivity costs, as the Company's telecommunications
minutes of use, and associated revenues, grew substantially. As a percentage of
total revenues, the increase in direct costs reflects lower gross margins
associated with wholesale carrier services and prepaid calling card services as
compared with international retail and Internet access services. Gross margins
were also adversely affected by delayed network deployment.
Selling, General and Administrative. Selling, general and
administrative costs increased 71.2% from approximately $13.9 million in the
three months ended January 31, 1998 to approximately $23.8 million in the three
months ended January 31, 1999. As a percentage of total revenues, these costs
decreased from 19.6% for the three months ended January 31, 1998 to 14.8% for
the three months ended January 31, 1999. The increase in these costs in dollar
terms is due primarily to increased sales and marketing efforts for retail
services, including prepaid calling cards, domestic and international long
distance, Net2Phone and Net2Phone Direct. As a percentage of total revenues, the
decrease was due primarily to the substantial increase in total revenues for the
three months ended January 31, 1999.
Depreciation and Amortization. Depreciation and amortization increased
215.0% from approximately $2.0 million for the three months ended January 31,
1998 to approximately $6.3 million for the three months ended January 31, 1999.
As a percentage of revenues, these costs increased from 2.9% for the three
months ended January 31, 1998 to 3.9% for the three months ended January 31,
1999. These costs increased primarily as a result of the Company's higher fixed
asset base during the three months ended January 31, 1999 as compared with the
three months ended January 31, 1998 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 will continue to increase as the Company continues to implement its
growth strategy.
Income from Operations. The Company's income from operations increased
13.9% from approximately $3.6 million for the three months ended January 31,
1998 to approximately $4.1 million for the three months ended January 31, 1999.
Income from operations for the Company's telecommunications business increased
to approximately $9.1 million for the three months ended January 31, 1999 from
$4.8 million for the three months ended January 31, 1998. As a percentage of
telecommunication revenues, income from operations for the telecommunications
business decreased to 6.1% for the three months ended January 31, 1999 from
approximately 7.5% for the three months ended January 31, 1998 due to decreased
margins in the carrier wholesale and prepaid calling card businesses.
Loss from operations for the Company's Internet access business
increased to approximately $2.4 million for the three months ended January 31,
1999 from approximately $1.4 million for the three months ended January 31,
1998. The increased loss is primarily due to the decrease in Internet access
revenues reflecting the Company's decision to de-emphasize its activities in
this area.
Loss from operations of the Net2Phone division was approximately $2.6
million for the three months ended January 31, 1999, as compared to income from
operations of approximately $280,000 for the three months ended January 31,
1998. This change is due to the substantial increase in selling, general and
administrative costs as the Company expands its Internet telephony
infrastructure and seeks to gain additional market share for its Internet
telephony products and services.
Income Taxes. The Company recorded income tax expense of $1.4 million
for the three months ended January 31, 1999. An income tax benefit related to
the tax deduction upon the exercise of stock
13
<PAGE>
options was recorded directly into additional paid-in capital. The Company did
not record an income tax benefit for the three months ended January 31, 1998 as
the realization of available tax losses was not probable at that time.
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. The Company received approximately $1.5
million upon the exercise of stock options and warrants in the six months ended
January 31, 1999.
As of January 31, 1999, the Company had cash, cash equivalents and
marketable securities of $139.9 million and working capital of approximately
$146.2 million. The Company generated positive cash flow from operating
activities of approximately $4.6 million during the six months ended January 31,
1999, compared with negative cash flow from operating activities of
approximately $2.9 million during the six months ended January 31, 1998. The
Company's cash flow from operations varies significantly from quarter to
quarter, depending upon the timing of operating cash receipts and payments,
especially accounts receivable and accounts payable. Accounts receivable,
accounts payable and accrued expenses have increased from period to period as
the Company's businesses have grown.
The Company's capital expenditures increased from approximately $12.7
million in the six months ended January 31, 1998 to approximately $22.2 million
in the six months ended January 31, 1999, as the Company expanded its
international and domestic telecommunications network infrastructure.
The Company experiences intense competition in its telecommunications
business. Increased competition in the telecommunications industry could force
the Company to reduce the prices that it charges for its services, or its profit
margins. Under such circumstances, the Company's cash flows from operations
would be materially adversely affected.
The Company intends to, where appropriate, make strategic acquisitions
to increase its telecommunications customer base. The Company may also make
strategic acquisitions related to its Internet telephony business. From time to
time, the Company evaluates potential acquisitions of companies, technologies,
products and customer accounts that complement the Company's businesses.
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.
Year 2000
The Company is conducting 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. However, the consequences of an incomplete or untimely resolution of
the Year 2000 issue could be expected to have a material adverse effect on the
financial results of the Company; in the absence of such a resolution, the
ability of the Company to route its traffic in a cost effective manner, to
deliver a material portion of its services, to properly obtain payment for such
services, and/or to maintain accurate records of its business and
14
<PAGE>
operations, could be substantially impaired until such issue is remediated. The
Company may become liable for substantial damages in the event that, as a result
of the Year 2000 issue, it fails to deliver any services that it is obligated to
provide. However, the Company expects that its Year 2000 issues will be
satisfactorily resolved before the year 2000.
The Company is conducting a comprehensive review of its computer
systems to ensure that all such systems are, or prior to the end of 1999 will
be, Year 2000 compliant. The Company's plan for its Year 2000 project includes
the following phases: (i) conducting a comprehensive inventory of the Company's
internal systems, including information technology systems and non-information
technology systems (which include switching, billing and other platforms and
electrical systems) and the systems acquired or to be acquired by the Company
from third parties, (ii) assessing and prioritizing any required remediation,
(iii) remediating any problems by repairing or, if appropriate, replacing the
non-compliant systems, (iv) testing all remediated systems for Year 2000
compliance and (v) developing contingency plans that may be employed in the
event that any system used by the Company is unexpectedly affected by a
previously unanticipated problem relating to the Year 2000. The Company
currently expects to complete all of the phases of this process and that all of
its computer systems will be fully Year 2000 compliant before the end of 1999.
The Company has completed a number of acquisitions during its recent
fiscal years, and is in the process of integrating the systems of the acquired
businesses into its operations. Those systems are included in the Company's Year
2000 review and remediation project. During the process of evaluating businesses
for any potential acquisition, and after any such acquisitions, the Company will
evaluate the extent of the Year 2000 problems associated with such acquisitions
and the cost and timing of remediation. No assurance can be given, however, that
the systems of any acquired business will be Year 2000 compliant when acquired
or that they will be capable of timely remediation.
In addition to assessing its own systems, the Company is conducting an
external review of its customers and suppliers, and any other third parties with
which it does business, including equipment and systems providers and other
telecommunications service providers, to determine their vulnerability to Year
2000 problems and any potential impact on the Company. In particular, the
Company may experience problems to the extent that other telecommunications
carriers whose services are resold by the Company or to which the Company sends
traffic for termination are not Year 2000 compliant. The Company's ability to
determine the ability of these third parties to address issues relating to the
Year 2000 problem is necessarily limited. To the extent that a limited number of
carriers experience disruptions in service due to the Year 2000 issue, the
Company believes that it will be able to obtain service from alternate carriers.
However, the Company's ability to provide certain services to customers in
selected geographic locations may be limited. There can be no assurance that
such problems will not have a material adverse effect on the Company.
In addition, the Company is currently in the process of developing
contingency plans with regard to potential Year 2000 problems. The Company
believes that, in the event that one or more of its systems is impaired due to
unanticipated Year 2000 issues, its contingency plans will enable it to
temporarily conduct its operations on a modified basis until such impaired
systems are remediated. There can be no assurances that the Company's suppliers
and customers will achieve full Year 2000 compliance before the end of 1999 or
that the Company will develop or implement effective contingency plans on a
timely basis. A failure of the Company's computer systems or the failure of the
Company's suppliers or customers to effectively upgrade their software and
systems for transition to the year 2000 could have a material adverse effect on
the Company's business, financial conditions and results of operations.
To date, the Company has incurred expenses of less than $1.0 million in
connection with its remediation of Year 2000 related issues. No assurance can be
given, however, that the systems of any acquired business will be Year 2000
compliant when acquired or that they will be capable of timely remediation. The
Company does not expect to incur significant costs to become Year 2000
compliant, although the Company's evaluation of the Year 2000 problem is not yet
complete and actual costs may be significantly higher. In particular, such costs
could be higher if certain suppliers of the Company fail to provide Year 2000
related updates to certain switching products purchased by the Company without
charge
15
<PAGE>
in the manner that is currently expected. Costs associated with Year 2000
remediation are expensed by the Company when incurred.
European Currency Conversion
Beginning in January 1999, a new currency called the "euro" was introduced
in certain Economic and Monetary Union ("EMU") countries. Beginning in 2002, all
EMU countries are expected to operate with the euro as their single currency.
Uncertainty exists as to the effect the euro currency will have on the market
for international telecommunications services. Additionally, all of the final
rules and regulations have not yet been defined and finalized by the European
Commission with regard to the euro currency. The Company has not yet completed
its assessment of the effect that the introduction of the euro will have on its
business, operations and sales.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
- ---------------------------------------------------------
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, including statements that contain the
words "believes," "anticipates," "expects," and similar words and phrases. Such
forward-looking statements include, among other things, the Company's plans to
implement its growth strategy, improve its financial performance, expand its
infrastructure, develop new products and services, expand its customer base and
enter international markets, and the possible outcome of litigation relating to
the Company. Such forward-looking statements also include the Company's
expectations concerning factors affecting the markets for its products, such as
changes in the U.S. and the international regulatory environment and the demand
for long-distance telecommunications, Internet access and Internet telephony
services. Actual results could differ from those projected in any
forward-looking statements. The forward-looking statements are made as of the
date of this Report, and the Company assumes no obligation to update the
forward-looking statements, or to update the reasons why actual results could
differ from those projected in the forward-looking statements. Investors should
consult all of the information set forth herein and the other information set
forth from time to time in the Company's reports filed with the Securities and
Exchange Commission pursuant to the Securities Act of 1933 and the Securities
Exchange Act of 1934, including the Company's Annual Report on Form 10-K/A, for
the year ended July 31, 1998.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Incorporated by reference from Part I, Item I, Financial Statements,
Note 4 captioned "Legal Proceedings and Contingencies."
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders (the "Meeting") was held
on December 16, 1998. The following matters were submitted to the Company's
stockholders for their vote, and the results of the vote taken at the Meeting
were as follows:
(1) Four of the Company's Class III Directors were reelected for a
term of three years.
(a) Howard S. Jonas: 41,731,276 votes for; 220,672 votes against;
(b) Joyce J. Mason: 41,731,235 votes for; 220,713 votes against;
(c) James R. Mellor: 41,731,317 votes for; 220,631 votes against;
and
(d) Denis A. Bovin: 41,731,317 votes for; 220,631 votes against.
(2) Amendments to the Company's Amended and Restated 1996 Stock
Option and Incentive Plan (the "Plan") were ratified. The
amendments, among other things, authorized an additional
1,500,000 shares of the Company's Common Stock for grants
under the Plan.
35,975,820 votes for; 5,963,654 votes against; 12,474
abstentions.
(3) The appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending July 31, 1999
was ratified.
41,889,758 votes for; 4,970 votes against; 57,220 abstentions.
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* 1996 Stock Option and Incentive Plan, as amended and restated,
of the Registrant.
10.03(3) Form of Stock Option Agreement under the 1996 Stock Option and
Incentive Plan.
10.04(4) Form of Registration Rights Agreement between certain stockholders
and the Registrant.
10.05(1) Lease of 294 State Street.
10.06(5) Lease of 190 Main Street.
10.7(6) Form of Registration Rights Agreement between Howard S. Jonas and
the Registrant.
10.8(7) Employment Agreement between the Registrant and James Courter.
10.9(8) Agreement between Mr. Cliff Sobel and the Registrant.
10.10(8) Employment Agreement between the Registrant and Mr. Hal Brecher.
10.11(5) Employment Agreement between the Registrant and Mr. David Turock.
10.12(9) Indenture between the Registrant and U.S. Bank Trust National
Association, formerly known as First Trust National Association,
as Trustee.
10.13(10) Agreement and Plan of Merger, dated April 7, 1998, by and among
the Registrant, ADM Corp., InterExchange, Inc., David Turock, Eric
Hecht, Richard Robbins, Bradley Turock, Wai Nam Tam, Mary Jo Altom
and Lisa Mikulynec.
10.14(11) Securities Purchase Agreement between the Registrant, Carlos Gomez
and Union Telecard Alliance, LLC.
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 S-8 filed January 14, 1996 file
no. 333-19727.
(4) Incorporated by reference to Form S-1 filed March 8, 1996 file
no. 333-00204.
(5) Incorporated by reference to Form 10-K/A for the fiscal year ended July
31, 1997, filed February 2, 1998.
(6) Incorporated by reference to Form S-1 filed March 14, 1996 file
no. 333-00204.
(7) Incorporated by reference to Form S-1 filed December 27, 1996 file
no. 333-18901.
18
<PAGE>
(8) Incorporated by reference to Form 10-K for the fiscal year ended July
31, 1997, filed October 29, 1997.
(9) Incorporated by reference to Form 10-Q filed March 17, 1988.
(10) Incorporated by reference to Form 8-K filed April 22, 1998.
(11) Incorporated by reference to Form 10-K/A for the fiscal year ended
July 31, 1998, filed December 4, 1998.
(b) Reports on Form 8-K:
None.
19
<PAGE>
IDT CORPORATION
FORM 10-Q
January 31, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
IDT CORPORATION
March 14, 1999 By: /s/ Howard Jonas
Date ---------------------------
Howard S. Jonas
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
March 14, 1999 By: /s/ James A. Courter
Date ----------------------------
James A. Courter
President
(Principal Executive Officer)
March 14, 1999 By: /s/ Stephen R. Brown
Date ----------------------------
Stephen R. Brown
Chief Financial Officer
(Principal Financial and
Accounting Officer)
20
<PAGE>
Exhibit 10.02
IDT CORPORATION
1996 STOCK OPTION AND INCENTIVE PLAN
(As Amended and Restated)
1. Purpose; Types of Awards; Construction.
--------------------------------------
The purpose of the IDT Corporation 1996 Stock Option and Incentive
Plan (the "Plan") is to provide incentives to executive officers, other key
employees, directors and consultants of IDT Corporation (the "Company"), or any
subsidiary of the Company which now exists or hereafter is organized or acquired
by the Company, to acquire a proprietary interest in the Company, to continue as
officers, employees, directors or consultants, to increase their efforts on
behalf of the Company and to promote the success of the Company's business. The
provisions of the Plan are intended to satisfy the requirements of Section 16(b)
of the Securities Exchange Act of 1934, as amended, and of Section 162(m) of the
Internal Revenue Code of 1986, as amended, and shall be interpreted in a manner
consistent with the requirements thereof.
2. Definitions.
-----------
As used in this Plan, the following words and phrases shall have the
meanings indicated:
(a) "Agreement" shall mean a written agreement entered into between
the Company and a Grantee in connection with an award under the Plan.
(b) "Board" shall mean the Board of Directors of the Company.
(c) "Change in Control" means a change in ownership or control of the
Company effected through either of the following:
(i) any "person," as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than (A) the Company, (B) any trustee or
other fiduciary holding securities under an employee benefit plan of the
Company, (C) any corporation or other entity owned, directly or indirectly,
by the stockholders of the Company in substantially the same proportions as
their ownership of Common Stock, or (D) any person who, immediately prior
to the Initial Public Offering, owned more than 25% of the combined voting
power of the Company's then outstanding voting securities), is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company (not including in the
securities beneficially owned by such person any securities acquired
directly from the Company or any of its affiliates other than in connection
with the acquisition by the Company or its affiliates of
<PAGE>
a business) representing 25% or more of the combined voting power of the
Company's then outstanding voting securities; or
(ii) during any period of not more than two consecutive years,
not including any period prior to the initial adoption of this Plan by the
Board, individuals who at the beginning of such period constitute the
Board, and any new director (other than a director whose initial assumption
of office is in connection with an actual or threatened election contest,
including, but not limited to a consent solicitation, relating to the
election of directors of the Company) whose election by the Board or
nomination for election by the Company's stockholders was approved by a
vote of at least two-thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute at least a majority thereof.
(d) "Class A Common Stock" shall mean shares of Class A common stock,
par value $.01 per share, of the Company.
(e) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
(f) "Committee" shall mean the Compensation Committee of the Board or
such other committee as the Board may designate from time to time to administer
the Plan.
(g) "Common Stock" shall mean shares of common stock, par value $.01
per share, of the Company.
(h) "Company" shall mean IDT Corporation, a corporation organized
under the laws of the State of Delaware, or any successor corporation.
(i) "Continuous Service" means that the provision of services to the
Company or a Related Entity in any capacity of officer, employee, director or
consultant is not interrupted or terminated. Continuous Service shall not be
considered interrupted in the case of (i) any approved leave of absence, (ii)
transfers between locations of the Company or among the Company, any Related
Entity or any successor in any capacity of officer, employee, director or
consultant, or (iii) any change in status as long as the individual remains in
the service of the Company or a Related Entity in any capacity of officer,
employee, director or consultant (except as otherwise provided in the applicable
Agreement). An approved leave of absence shall include sick leave, maternity
leave, military leave or any other authorized personal leave. For purposes of
Incentive Stock Options, no such leave may exceed ninety (90) days unless
reemployment upon expiration of such leave is guaranteed by statute or contract.
(j) "Corporate Transaction" means any of the following transactions:
(i) a merger or consolidation of the Company with any other
corporation or other entity, other than (A) a merger or consolidation which
would result in the voting securities of the Company outstanding
immediately prior thereto continuing
2
<PAGE>
to represent (either by remaining outstanding or by being converted into
voting securities of the surviving or parent entity) 80% or more of the
combined voting power of the voting securities of the Company or such
surviving or parent entity outstanding immediately after such merger or
consolidation or (B) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no
"person" (as defined in the Exchange Act) acquired 25% or more of the
combined voting power of the Company's then outstanding securities; or
(ii) a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or
substantially all of its assets (or any transaction having a similar
effect).
(k) "Disability" shall mean a Grantee's inability to perform his or
her duties with the Company or any of its affiliates by reason of any medically
determinable physical or mental impairment, as determined by a physician
selected by the Grantee and acceptable to the Company.
(l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
(m) "Fair Market Value" per share as of a particular date shall mean
(i) the closing sale price per share of Common Stock on the national securities
exchange on which the Common Stock is principally traded for the last preceding
date on which there was a sale of such Common Stock on such exchange, or (ii) if
the shares of Common Stock are then traded in an over-the-counter market, the
average of the closing bid and asked prices for the shares of Common Stock in
such over-the-counter market for the last preceding date on which there was a
sale of such Common Stock in such market, or (iii) if the shares of Common Stock
are not then listed on a national securities exchange or traded in an over-the-
counter market, such value as the Committee, in its sole discretion, shall
determine; provided, however, that the Fair Market Value per share on the date
of the Initial Public Offering will equal the Initial Public Offering price per
share or such other price that the Committee determines in its sole discretion.
(n) "Grantee" shall mean a person who receives a grant of Options,
Stock Appreciation Rights, Limited Rights or Restricted Stock under the Plan.
(o) "Incentive Stock Option" shall mean any option intended to be,
and designated as, an incentive stock option within the meaning of Section 422
of the Code.
(p) "Initial Public Offering" shall mean the underwritten initial
public offering of shares of Common Stock, which occurred in March 1996.
(q) "Insider" shall mean a Grantee who is subject to the reporting
requirements of Section 16(a) of the Exchange Act.
(r) "Limited Right" shall mean a limited stock appreciation right
granted pursuant to Section 10.
3
<PAGE>
(s) "Non-Employee Director" means a member of the Board who is not an
employee of the Company or any Subsidiary.
(t) "Nonqualified Stock Option" shall mean any option not designated
as an Incentive Stock Option.
(u) "Option" or "Options" shall mean a grant to a Grantee of an
option or options to purchase shares of Common Stock.
(v) "Option Agreement" shall have the meaning set forth in Section 6.
(w) "Option Price" shall mean the exercise price of the shares of
Common Stock covered by an Option.
(x) "Parent" shall mean any company (other than the Company) in an
unbroken chain of companies ending with the Company if, at the time of granting
an Option, each of the companies other than the Company owns stock possessing
fifty percent (50%) or more of the total combined voting power of all classes of
stock in one of the other companies in such chain.
(y) "Plan" means this IDT Corporation 1996 Stock Option and Incentive
Plan, as amended from time to time.
(z) "Related Entity" means any Parent, Subsidiary or any business,
corporation, partnership, limited liability company or other entity in which the
Company, a Parent or a Subsidiary holds a substantial ownership interest,
directly or indirectly.
(aa) "Related Entity Disposition" means the sale, distribution or
other disposition by the Company of all or substantially all of the Company's
interest in any Related Entity effected by a sale, merger or consolidation or
other transaction involving such Related Entity or the sale of all or
substantially all of the assets of such Related Entity.
(bb) "Restricted Period" shall have the meaning set forth in Section
11.
(cc) "Restricted Stock" means shares of Common Stock issued under the
Plan to a Grantee for such consideration, if any, and subject to such
restrictions on transfer, rights of refusal, repurchase provisions, forfeiture
provisions and other terms and conditions as shall be determined by the
Committee.
(dd) "Retirement" shall mean a Grantee's retirement in accordance with
the terms of any tax-qualified retirement plan maintained by the Company or any
of its affiliates in which the Grantee participates.
(ee) "Rule 16b-3" shall mean Rule 16b-3, as from time to time in
effect, promulgated under the Exchange Act, including any successor to such
Rule.
4
<PAGE>
(ff) "Stock Appreciation Right" shall mean the right, granted to a
Grantee under Section 9, to be paid an amount measured by the appreciation in
the Fair Market Value of a share of Common Stock from the date of grant to the
date of exercise of the right, with payment to be made in cash or Common Stock
as specified in the award or determined by the Committee.
(gg) "Subsidiary" shall mean any company (other than the Company) in
an unbroken chain of companies beginning with the Company if, at the time of
granting an Option, each of the companies other than the last company in the
unbroken chain owns stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other companies in
such chain.
(hh) "Tax Event" shall have the meaning set forth in Section 17.
(ii) "Ten Percent Stockholder" shall mean a Grantee who, at the time
an Incentive Stock Option is granted, owns stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or any Parent or Subsidiary.
3. Administration.
--------------
(a) The Plan shall be administered by the Committee, the members of
which shall, except as may otherwise be determined by the Board, be "non-
employee directors" under Rule 16b-3 and "outside directors" under Section
162(m) of the Code.
(b) The Committee shall have the authority in its discretion, subject
to and not inconsistent with the express provisions of the Plan, to administer
the Plan and to exercise all the powers and authorities either specifically
granted to it under the Plan or necessary or advisable in the administration of
the Plan, including, without limitation, the authority to grant Options, Stock
Appreciation Rights, Limited Rights and Restricted Stock; to determine which
options shall constitute Incentive Stock Options and which Options shall
constitute Nonqualified Stock Options; to determine which Options (if any) shall
be accompanied by Limited Rights; to determine the purchase price of the shares
of Common Stock covered by each option; to determine the persons to whom, and
the time or times at which awards shall be granted; to determine the number of
shares to be covered by each award; to interpret the Plan; to prescribe, amend
and rescind rules and regulations relating to the Plan; to determine the terms
and provisions of the Agreements (which need not be identical) and to cancel or
suspend awards, as necessary; and to make all other determinations deemed
necessary or advisable for the administration of the Plan.
(c) All decisions, determinations and interpretations of the Committee
shall be final and binding on all Grantees of any awards under this Plan. No
member of the Board or Committee shall be liable for any action taken or
determination made in good faith with respect to the Plan or any award granted
hereunder.
5
<PAGE>
4. Eligibility.
-----------
Awards may be granted to executive officers, other key employees,
directors and consultants of the Company. In addition to any other awards
granted to Non-Employee Directors hereunder, awards shall be granted to Non-
Employee Directors pursuant to Section 14 hereof. In determining the persons to
whom awards shall be granted and the number of shares to be covered by each
award, the Committee shall take into account the duties of the respective
persons, their present and potential contributions to the success of the Company
and such other factors as the Committee shall deem relevant in connection with
accomplishing the purposes of the Plan.
5. Stock.
-----
(a) The maximum number of shares of Common Stock reserved for the grant
of awards under the Plan shall be 4,800,000, subject to adjustment as provided
in Section 12 hereof. Such shares may, in whole or in part, be authorized but
unissued shares or shares that shall have been or may be reacquired by the
Company.
(b) If any outstanding award under the Plan should, for any reason
expire, be canceled or be forfeited (other than in connection with the exercise
of a Stock Appreciation Right or a Limited Right), without having been exercised
in full, the shares of Common Stock allocable to the unexercised, canceled or
terminated portion of such award shall (unless the Plan shall have been
terminated) become available for subsequent grants of awards under the Plan.
(c) In no event may a Grantee be granted during any calendar year
Options to acquire more than 1,000,000 shares of Common Stock or more than
1,000,000 shares of Restricted Stock, in each case subject to adjustment as
provided in Section 12 hereof.
6. Terms and Conditions of Options.
-------------------------------
(a) OPTION AGREEMENT. Each Option granted pursuant to the Plan shall
be evidenced by a written agreement between the Company and the Grantee (the
"Option Agreement"), in such form and containing such terms and conditions as
the Committee shall from time to time approve, which Option Agreement shall
comply with and be subject to the following terms and conditions, unless
otherwise specifically provided in such Option Agreement. For purposes of
interpreting this Section 6, a director's service as a member of the Board shall
be deemed to be employment with the Company.
(b) NUMBER OF SHARES. Each Option Agreement shall state the number of
shares of Common Stock to which the Option relates.
(c) TYPE OF OPTION. Each Option Agreement shall specifically state
that the Option constitutes an Incentive Stock Option or a Nonqualified Stock
Option. In the absence of such designation, the Option will be deemed to be a
Nonqualified Stock Option.
(d) OPTION PRICE. Each Option Agreement shall state the Option Price,
which, in the case of an Incentive Stock Option, shall not be less than one
hundred percent
6
<PAGE>
(100%) of the Fair Market Value of the shares of Common Stock covered by the
Option on the date of grant. The Option Price shall be subject to adjustment as
provided in Section 12 hereof.
(e) MEDIUM AND TIME OF PAYMENT. The Option Price shall be paid in
full, at the time of exercise, in cash or in shares of Common Stock (whether
then owned by the Grantee or issuable upon exercise of the Option) having a Fair
Market Value equal to such Option Price or in a combination of cash and Common
Stock, including a cashless exercise procedure through a broker-dealer;
provided, however, that in the case of an Incentive Stock Option, the medium of
- -------- -------
payment shall be determined at the time of grant and set forth in the applicable
Option Agreement.
(f) TERM AND EXERCISABILITY OF OPTIONS. Each Option Agreement shall
provide the exercise schedule for the Option as determined by the Committee,
provided, that, the Committee shall have the authority to accelerate the
- -------- ----
exercisability of any outstanding option at such time and under such
circumstances as it, in its sole discretion, deems appropriate. The exercise
period will be ten (10) years from the date of the grant of the option unless
otherwise determined by the Committee; provided, however, that in the case of an
-------- -------
Incentive Stock Option, such exercise period shall not exceed ten (10) years
from the date of grant of such Option. The exercise period shall be subject to
earlier termination as provided in Sections 6(g) and 6(h) hereof. An Option may
be exercised, as to any or all full shares of Common Stock as to which the
Option has become exercisable, by written notice delivered in person or by mail
to the Company's transfer agent or other administrator designated by the
Company, specifying the number of shares of Common Stock with respect to which
the Option is being exercised.
(g) TERMINATION. Except as provided in this Section 6(g) and in
Section 6(h) hereof, an Option may not be exercised unless the Grantee is then
in the employ of or maintaining a director or consultant relationship with the
Company or a Subsidiary thereof (or a company or a Parent or Subsidiary of such
company issuing or assuming the Option in a transaction to which Section 424(a)
of the Code applies), and unless the Grantee has remained continuously so
employed or in the director or consultant relationship since the date of grant
of the Option. In the event that the employment or consultant relationship of a
Grantee shall terminate (other than by reason of death, Disability or
Retirement), all Options of such Grantee that are exercisable at the time of
Grantee's termination may, unless earlier terminated in accordance with their
terms, be exercised within thirty (30) days after the date of such termination
(or such different period as the Committee shall prescribe); provided, however,
-------- -------
that Options granted after November 17, 1998 may be exercised within three (3)
months after the date of termination (or such different period as the Committee
shall prescribe).
(h) DEATH, DISABILITY OR RETIREMENT OF GRANTEE. If a Grantee shall die
while employed by, or maintaining a director or consultant relationship with,
the Company or a Subsidiary thereof, or within thirty (30) days after the date
of termination of such Grantee's employment, director or consultant relationship
(or within such different period as the Committee may have provided pursuant to
Section 6(g) hereof), or if the Grantee's employment, director or consultant
relationship shall terminate by reason of Disability, all Options theretofore
7
<PAGE>
granted to such Grantee (to the extent otherwise exercisable) may, unless
earlier terminated in accordance with their terms, be exercised by the Grantee
or by the Grantee's estate or by a person who acquired the right to exercise
such Options by bequest or inheritance or otherwise by result of death or
Disability of the Grantee, at any time within 180 days after the death or
Disability of the Grantee (or such different period as the Committee shall
prescribe). In the event that an Option granted hereunder shall be exercised by
the legal representatives of a deceased or former Grantee, written notice of
such exercise shall be accompanied by a certified copy of letters testamentary
or equivalent proof of the right of such legal representative to exercise such
Option. In the event that the employment or consultant relationship of a Grantee
shall terminate on account of such Grantee's Retirement, all Options of such
Grantee that are exercisable at the time of such Retirement may, unless earlier
terminated in accordance with their terms, be exercised at any time within one
hundred eighty (180) days after the date of such Retirement (or such different
period as the Committee shall prescribe).
(i) OTHER PROVISIONS. The Option Agreements evidencing awards under
the Plan shall contain such other terms and conditions not inconsistent with the
Plan as the Committee may determine.
7. Nonqualified Stock Options.
--------------------------
Options granted pursuant to this Section 7 are intended to constitute
Nonqualified Stock Options and shall be subject only to the general terms and
conditions specified in Section 6 hereof.
8. Incentive Stock Options.
-----------------------
Options granted pursuant to this Section 8 are intended to constitute
Incentive Stock Options and shall be subject to the following special terms and
conditions, in addition to the general terms and conditions specified in Section
6 hereof:
(a) LIMITATION ON VALUE OF SHARES. To the extent that the aggregate
Fair Market Value of shares of Common Stock subject to Options designated as
Incentive Stock Options which become exercisable for the first time by a Grantee
during any calendar year (under all plans of the Company or any Subsidiary)
exceeds $100,000, such excess Options, to the extent of the shares covered
thereby in excess of the foregoing limitation, shall be treated as Nonqualified
Stock Options. For this purpose, Incentive Stock Options shall be taken into
account in the order in which they were granted, and the Fair Market Value of
the shares of Common Stock shall be determined as of the date that the Option
with respect to such shares was granted.
(b) TEN PERCENT STOCKHOLDER. In the case of an Incentive Stock Option
granted to a Ten Percent Stockholder, (i) the Option Price shall not be less
than one hundred ten percent (110%) of the Fair Market Value of the shares of
Common Stock on the date of grant of such Incentive Stock Option, and (ii) the
exercise period shall not exceed five (5) years from the date of grant of such
Incentive Stock Option.
8
<PAGE>
9. Stock Appreciation Rights.
-------------------------
The Committee shall have authority to grant a Stock Appreciation Right
to the Grantee of any Option under the Plan with respect to all or some of the
shares of Common Stock covered by such related Option. A Stock Appreciation
Right shall, except as provided in this Section 9 or as may be determined by the
Committee, be subject to the same terms and conditions as the related Option.
Each Stock Appreciation Right granted pursuant to the Plan shall be evidenced by
a written Agreement between the Company and the Grantee in such form as the
Committee shall from time to time approve, which Agreement shall comply with and
be subject to the following terms and conditions, unless otherwise specifically
provided in such Agreement:
(a) TIME OF GRANT. A Stock Appreciation Right may be granted either at
the time of grant of the related option, or at any time thereafter during the
term of the Option; provided, however, that Stock Appreciation Rights related to
-------- --------
Incentive Stock Options may only be granted at the time of grant of the related
Option.
(b) PAYMENT. A Stock Appreciation Right shall entitle the holder
thereof, upon exercise of the Stock Appreciation Right or any portion thereof,
to receive payment of an amount computed pursuant to Section 9(d).
(c) EXERCISE. A Stock Appreciation Right shall be exercisable at such
time or times and only to the extent that the related Option is exercisable, and
will not be transferable except to the extent the related option may be
transferable. A Stock Appreciation Right granted in connection with an Incentive
Stock Option shall be exercisable only if the Fair Market Value of a share of
Common Stock on the date of exercise exceeds the purchase price specified in the
related Incentive Stock Option. Unless otherwise approved by the Committee, no
Grantee shall be permitted to exercise any Stock Appreciation Right (i) until
six (6) months have elapsed from the date of grant or (ii) during the period
beginning two weeks prior to the end of each of the Company's fiscal quarters
and ending on the second business day following the day on which the Company
releases to the public a summary of its fiscal results for such period.
(d) AMOUNT PAYABLE. Upon the exercise of a Stock Appreciation Right,
the Optionee shall be entitled to receive an amount determined by multiplying
(i) the excess of the Fair Market Value of a share of Common Stock on the date
of exercise of such Stock Appreciation Right over the Option Price of the
related Option, by (ii) the number of shares of Common Stock as to which such
Stock Appreciation Right is being exercised.
(e) TREATMENT OF RELATED OPTIONS AND STOCK APPRECIATION RIGHTS UPON
EXERCISE. Upon the exercise of a Stock Appreciation Right, the related Option
shall be canceled to the extent of the number of shares of Common Stock as to
which the Stock Appreciation Right is exercised. Upon the exercise or surrender
of an option granted in connection with a Stock Appreciation Right, the Stock
Appreciation Right shall be canceled to the extent of the number of shares of
Common Stock as to which the Option is exercised or surrendered.
9
<PAGE>
(f) METHOD OF EXERCISE. Stock Appreciation Rights shall be exercised
by a Grantee only by a written notice delivered to the Company in accordance
with procedures specified by the Company from time to time. Such notice shall
state the number of shares of Common Stock with respect to which the Stock
Appreciation Right is being exercised. A Grantee may also be required to deliver
to the Company the underlying Agreement evidencing the Stock Appreciation Right
being exercised and any related Option Agreement so that a notation of such
exercise may be made thereon, and such Agreements shall then be returned to the
Grantee.
(g) FORM OF PAYMENT. Payment of the amount determined under Section
9(d) may be made solely in whole shares of Common Stock in a number based upon
their Fair Market Value on the date of exercise of the Stock Appreciation Right
or, alternatively, at the sole discretion of the Committee, solely in cash, or
in a combination of cash and shares of Common Stock as the Committee deems
advisable. If the Committee decides to make full payment in shares of Common
Stock, and the amount payable results in a fractional share, payment for the
fractional share will be made in cash.
10. Limited Stock Appreciation Rights.
---------------------------------
The Committee shall have authority to grant a Limited Right to the
Grantee of any Option under the Plan with respect to all or some of the shares
of Common Stock covered by such related Option. Each Limited Right granted
pursuant to the Plan shall be evidenced by a written Agreement between the
Company and the Grantee, in such form as the Committee shall from time to time
approve, which Agreement shall comply with and be subject to the following terms
and conditions, unless otherwise specifically provided in such Agreement:
(a) TIME OF GRANT. A Limited Right granted in tandem with a
Nonqualified Stock Option may be granted either at the time of grant of the
related Option or any time thereafter during its term. A Limited Right granted
in tandem with an Incentive Stock Option may only be granted at the time of
grant of the related Option.
(b) EXERCISE. A Limited Right may be exercised only (i) during the
ninety-day period following the occurrence of a Change in Control or (ii)
immediately prior to the effective date of a Corporate Transaction. Each Limited
Right shall be exercisable only if, and to the extent that, the related Option
is exercisable and, in the case of a Limited Right granted in tandem with an
Incentive Stock Option, only when the Fair Market Value per share of Common
Stock exceeds the Option Price per share. Notwithstanding the provisions of the
two immediately preceding sentences (or unless otherwise approved by the
Committee), a Limited Right granted to a Grantee who is an Insider must be (x)
held by the Insider for at least six (6) months from the date of grant of the
Limited Right before it becomes exercisable and (y) automatically paid out in
cash to the Insider upon the occurrence of a Change in Control or a Corporate
Transaction (provided such six (6) month holding period requirement has been
met).
(c) AMOUNT PAYABLE. Upon the exercise of a Limited Right, the Grantee
thereof shall receive in cash whichever of the following amounts is applicable:
10
<PAGE>
(i) in the case of the realization of Limited Rights by reason of
an acquisition of Common Stock described in clause (i) of the definition of
"Change in Control" (Section 2(c) above), an amount equal to the
Acquisition Spread as defined in Section 10(d)(ii) below; or
(ii) in the case of the realization of Limited Rights by reason of
stockholder approval of an agreement or plan described in clause (i) of the
definition of "Corporate Transaction" (Section 2(j) above), an amount equal
to the Merger Spread as defined in Section 10(d)(iv) below; or
(iii) in the case of the realization of Limited Rights by reason of
the change in composition of the Board described in clause (ii) of the
definition of "Change in Control" or stockholder approval of a plan or
agreement described in clause (ii) of the definition of Corporate
Transaction, an amount equal to the Spread as defined in Section 10(d)(v)
below.
Notwithstanding the foregoing provisions of this Section 10(c) (or
unless otherwise approved by the Committee), in the case of a Limited Right
granted in respect of an Incentive Stock Option, the Grantee may not receive an
amount in excess of the maximum amount that will enable such option to continue
to qualify under the Code as an Incentive Stock Option.
(d) DETERMINATION OF AMOUNTS PAYABLE. The amounts to be paid to a
Grantee pursuant to Section 10(c) shall be determined as follows:
(i) The term "Acquisition Price per Share" as used herein shall
mean, with respect to the exercise of any Limited Right by reason of an
acquisition of Common Stock described in clause (i) of the definition of
Change in Control, the greatest of (A) the highest price per share shown on
the Statement on Schedule 13D or amendment thereto filed by the holder of
25% or more of the voting power of the Company that gives rise to the
exercise of such Limited Right, (B) the highest price paid in any tender or
exchange offer which is in effect at any time during the ninety-day period
ending on the date of exercise of the Limited Right, or (C) the highest
Fair Market Value per share of Common Stock during the ninety-day period
ending on the date the Limited Right is exercised.
(ii) The term "Acquisition Spread" as used herein shall mean an
amount equal to the product computed by multiplying (A) the excess of (1)
the Acquisition Price per Share over (2) the Option Price per share of
Common Stock at which the related option is exercisable, by (B) the number
of shares of Common Stock with respect to which such Limited Right is being
exercised.
(iii) The term "Merger Price per Share" as used herein shall mean,
with respect to the exercise of any Limited Right by reason of stockholder
approval of an agreement described in clause (i) of the definition of
Corporate Transaction, the greatest of (A) the fixed or formula price for
the acquisition of shares of Common Stock specified
11
<PAGE>
in such agreement, if such fixed or formula price is determinable on the
date on which such Limited Right is exercised, (B) the highest price paid
in any tender or exchange offer which is in effect at any time during the
ninety-day period ending on the date of exercise of the Limited Right, (C)
the highest Fair Market Value per share of Common Stock during the ninety-
day period ending on the date on which such Limited Right is exercised.
(iv) The term "Merger Spread" as used herein shall mean an amount
equal to the product computed by multiplying (A) the excess of (1) the
Merger Price per Share over (2) the Option Price per share of Common Stock
at which the related Option is exercisable, by (B) the number of shares of
Common Stock with respect to which such Limited Right is being exercised.
(v) The term "Spread" as used herein shall mean, with respect to
the exercise of any Limited Right by reason of a change in the composition
of the Board described in clause (ii) of the definition of Change in
Control or stockholder approval of a plan or agreement described in clause
(ii) of the definition of Corporate Transaction, an amount equal to the
product computed by multiplying (i) the excess of (A) the greater of (1)
the highest price paid in any tender or exchange offer which is in effect
at any time during the ninety-day period ending on the date of exercise of
the Limited Right or (2) the highest Fair Market Value per share of Common
Stock during the ninety-day period ending on the date the Limited Right is
exercised over (B) the Option Price per share of Common Stock at which the
related Option is exercisable, by (ii) the number of shares of Common Stock
with respect to which the Limited Right is being exercised.
(e) TREATMENT OF RELATED OPTIONS AND LIMITED RIGHTS UPON EXERCISE.
Upon the exercise of a Limited Right, the related Option shall cease to be
exercisable to the extent of the shares of Common Stock with respect to which
such Limited Right is exercised but shall be considered to have been exercised
to that extent for purposes of determining the number of shares of Common Stock
available for the grant of further awards pursuant to this Plan. Upon the
exercise or termination of a related Option, the Limited Right with respect to
such related Option shall terminate to the extent of the shares of Common Stock
with respect to which the related Option was exercised or terminated.
(f) METHOD OF EXERCISE. To exercise a Limited Right, the Grantee shall
(i) deliver written notice to the Company specifying the number of shares of
Common Stock with respect to which the Limited Right is being exercised, and
(ii) if requested by the Committee, deliver to the Company the Agreement
evidencing the Limited Rights being exercised and, if applicable, the Option
Agreement evidencing the related Option; the Company shall endorse thereon a
notation of such exercise and return such Agreements to the Grantee. The date of
exercise of a Limited Right that is validly exercised shall be deemed to be the
date on which there shall have been delivered the instruments referred to in the
first sentence of this paragraph (f).
12
<PAGE>
11. Restricted Stock.
----------------
The Committee may award shares of Restricted Stock to any eligible
employee or consultant. Each award of Restricted Stock under the Plan shall be
evidenced by a written Agreement between the Company and the Grantee, in such
form as the Committee shall from time to time approve, which Agreement shall
comply with and be subject to the following terms and conditions, unless
otherwise specifically provided in such Agreement:
(a) NUMBER OF SHARES. Each Agreement shall state the number of shares
of Restricted Stock to be subject to an award.
(b) RESTRICTIONS. Shares of Restricted Stock may not be sold,
assigned, transferred, pledged, hypothecated or otherwise disposed of, except by
will or the laws of descent and distribution, for such period as the Committee
shall determine from the date on which the award is granted (the "Restricted
Period"). The Committee may also impose such additional or alternative
restrictions and conditions on the shares as it deems appropriate including the
satisfaction of performance criteria. Such performance criteria may include
sales, earnings before interest and taxes, return on investment, earnings per
share, any combination of the foregoing or rate of growth of any of the
foregoing, as determined by the Committee. Certificates for shares of stock
issued pursuant to Restricted Stock awards shall bear an appropriate legend
referring to such restrictions, and any attempt to dispose of any such shares of
stock in contravention of such restrictions shall be null and void and without
effect. During the Restricted Period, such certificates shall be held in escrow
by an escrow agent appointed by the Committee. In determining the Restricted
Period of an award, the Committee may provide that the foregoing restrictions
shall lapse with respect to specified percentages of the awarded shares on
successive anniversaries of the date of such award.
(c) FORFEITURE. Subject to such exceptions as may be determined by the
Committee, if the Grantee's continuous employment or consultant relationship
with the Company or any Subsidiary shall terminate for any reason prior to the
expiration of the Restricted Period of an award, any shares remaining subject to
restrictions (after taking into account the provisions of Subsection (e) of this
Section 11) shall thereupon be forfeited by the Grantee and transferred to, and
retired by, the Company without cost to the Company or such Subsidiary.
(d) OWNERSHIP. During the Restricted Period the Grantee shall possess
all incidents of ownership of such shares, subject to Subsection (b) of this
Section 11, including the right to receive dividends with respect to such shares
and to vote such shares.
(e) ACCELERATED LAPSE OF RESTRICTIONS. Upon the occurrence of any of
the events specified in Section 13 (and subject to the conditions set forth
therein), all restrictions then outstanding on any shares of Restricted Stock
awarded under the Plan shall lapse as of the applicable date set forth in
Section 13. The Committee shall have the authority (and the Agreement may so
provide) to cancel all or any portion of any outstanding restrictions prior to
the expiration of the Restricted Period with respect to any or all of the shares
of Restricted Stock awarded on such terms and conditions as the Committee shall
deem appropriate.
13
<PAGE>
12. Effect of Certain Changes.
-------------------------
(a) ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of any
extraordinary dividend, stock dividend, recapitalization, merger, consolidation,
stock split, warrant or rights issuance, or combination or exchange of such
shares, or other similar transactions, the Committee shall equitably adjust (i)
the maximum number of Options or shares of Restricted Stock that may be awarded
to a Grantee in any calendar year (as provided in Section 5 hereof), (ii) the
number of shares of Common Stock available for awards under the Plan, (iii) the
number of such shares covered by outstanding awards and (iv) the price per share
of Options or the applicable market value of Stock Appreciation Rights or
Limited Rights, in each such case so as to reflect such event and preserve the
value of such awards; provided, however, that any fractional shares resulting
-------- -------
from such adjustment shall be eliminated.
(b) CHANGE IN COMMON STOCK. In the event of a change in the Common
Stock of the Company as presently constituted that is limited to a change of all
of its authorized shares of Common Stock into the same number of shares with a
different par value or without par value, the shares resulting from any such
change shall be deemed to be the Common Stock within the meaning of the Plan.
13. Corporate Transaction; Change in Control; Related Entity
--------------------------------------------------------
Disposition.
- ------------
(a) CORPORATE TRANSACTION. In the event of a Corporate Transaction,
each award which is at the time outstanding under the Plan shall automatically
become fully vested and exercisable and, in the case of an award of Restricted
Stock, shall be released from any restrictions on transfer and repurchase or
forfeiture rights, immediately prior to the specified effective date of such
Corporate Transaction. Effective upon the consummation of the Corporate
Transaction, all outstanding awards of Options, Stock Appreciation Rights and
Limited Rights under the Plan shall terminate. However, all such awards shall
not terminate if the awards are, in connection with the Corporate Transaction,
assumed by the successor corporation or Parent thereof.
(b) CHANGE IN CONTROL. In the event of a Change in Control (other than
a Change in Control which is also a Corporate Transaction), each award which is
at the time outstanding under the Plan automatically shall become fully vested
and exercisable and, in the case of an award of Restricted Stock, shall be
released from any restrictions on transfer and repurchase or forfeiture rights,
immediately prior to the specified effective date of such Change in Control.
(c) RELATED ENTITY DISPOSITION. With respect only to awards granted
under the Plan after November 17, 1998, the Continuous Service of each Grantee
(who is primarily engaged in service to a Related Entity at the time it is
involved in a Related Entity Disposition) shall terminate effective upon the
consummation of such Related Entity Disposition, and each outstanding award of
such Grantee under the Plan shall become fully vested and exercisable and, in
the case of an award of Restricted Stock, shall be released from any
restrictions on transfer; provided, however, that no such award shall vest
-------- -------
pursuant to this Section 13(c) in connection with a Related Entity Disposition
consummated prior to
14
<PAGE>
November 17, 2000 if such vesting would defeat the ability to account for such
transaction as a "pooling" under generally accepted accounting principles. The
Continuous Service of a Grantee shall not be deemed to terminate if an
outstanding award is assumed by the surviving corporation or its parent entity
in connection with a Related Entity Disposition.
14. Non-Employee Director Options.
-----------------------------
The provisions of this Section 14 shall apply only to certain grants
of Options to Non-Employee Directors, as provided below. Except as set forth in
this Section 14, the other provisions of the Plan shall apply to grants of
Options to Non-Employee Directors to the extent not inconsistent with this
Section. For purposes of interpreting Section 6 of the Plan, a Non-Employee
Director's service as a member of the Board shall be deemed to be employment
with the Company.
(a) GENERAL. Non-Employee Directors shall receive Nonqualified Stock
Options in accordance with this Section 14. The Option Price per share of Common
Stock purchasable under Options granted to Non-Employee Directors shall be the
Fair Market Value of a share on the date of grant. Options granted pursuant to
this Section 14 shall be subject to the terms of such section and shall not be
subject to discretionary acceleration of exercisability by the Committee.
(b) INITIAL GRANTS. On the date of the Initial Public Offering, each
Non-Employee Director will be granted automatically, without action by the
Committee, an Option to purchase 10,000 shares of Common Stock. The Option Price
shall equal the offering price of the Common Stock in connection with the
Initial Public Offering.
(c) SUBSEQUENT GRANTS. Each person who, after the Initial Public
Offering, becomes a Non-Employee Director for the first time, will, at the time
such director is elected and duly qualified, be granted automatically, without
action by the Committee, an Option to purchase 10,000 shares of Common Stock.
The Option Price shall equal the Fair Market Value of the Common Stock as of the
date of grant.
(d) ANNUAL GRANTS. On December 15 each year, commencing with December
15, 1998, each Non-Employee Director will be granted automatically with respect
to the next succeeding calendar year and without action by the Committee, an
Option to purchase 10,000 shares of Common Stock. The Option Price shall equal
the Fair Market Value of the Common Stock as of the date of grant.
(e) VESTING. Each option granted under this Section 14 shall be fully
exercisable on the date of grant. Sections 6(f), 6(g) and 6(h) hereof shall not
apply to Options granted to Non-Employee Directors.
(f) DURATION. Each Option granted to a Non-Employee Director shall
expire on the first to occur of (i) the tenth anniversary of the date of grant
of the Option, (ii) the first anniversary of the Non-Employee Director's
termination of service as a member of the Board other than for Cause or (iii)
three months following the Non-Employee Director's removal
15
<PAGE>
from the Board for Cause. The Committee may not provide for an extended exercise
period beyond the periods set forth in this Section 14.
(g) DEFINITION OF "CAUSE." For purposes of this Section 14, "cause"
shall mean the termination of service as a member of the Board by a Non-Employee
Director due to any act of (i) fraud or intentional misrepresentation, or (ii)
embezzlement, misappropriation or conversion of assets or opportunities of the
Company or any Subsidiary.
15. Period During which Awards May Be Granted.
-----------------------------------------
Awards may be granted pursuant to the Plan from time to time within a
period of ten (10) years from February 7, 1996, the date the Plan was initially
adopted by the Board.
16. Transferability of Awards.
-------------------------
(a) Incentive Stock Options (and any Stock Appreciation Rights or
Limited Rights related thereto) may not be sold, pledged, assigned,
hypothecated, transferred or disposed of in any manner other than by the laws of
descent and distribution and may be exercised, during the lifetime of the
Grantee, only by the Grantee or his or her guardian or legal representative.
(b) Nonqualified Stock Options (together with any Stock Appreciation
Rights related thereto) shall be transferable in the manner and to the extent
acceptable to the Committee, as evidenced by a writing signed by the Company and
the Grantee. Notwithstanding the transfer by a Grantee of a Nonqualified Stock
Option, the Grantee will continue to remain subject to the withholding tax
requirements set forth in Section 17 hereof.
(c) The terms of any award granted under the Plan, including the
transferability of any such award, shall be binding upon the executors,
administrators, heirs and successors of the Grantee.
17. Agreement by Grantee regarding Withholding Taxes.
------------------------------------------------
If the Committee shall so require, as a condition of exercise of an
Option, Stock Appreciation Right or Limited Right or the expiration of a
Restricted Period (each, a "Tax Event"), each Grantee shall agree that no later
than the date of the Tax Event, the Grantee will pay to the Company or make
arrangements satisfactory to the Committee regarding payment of any federal,
state or local taxes of any kind required by law to be withheld upon the Tax
Event. Alternatively, the Committee may provide that a Grantee may elect, to
the extent permitted or required by law, to have the Company deduct federal,
state and local taxes of any kind required by law to be withheld upon the Tax
Event from any payment of any kind due to the Grantee. The withholding
obligation may be satisfied by the withholding or delivery of Common Stock.
18. Rights as a Stockholder.
-----------------------
Except as provided in Section 11(d) hereof, a Grantee or a transferee
of an award shall have no rights as a stockholder with respect to any shares
covered by the award until the
16
<PAGE>
date of the issuance of a stock certificate to him or her for such shares. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distribution of other rights for which
the record date is prior to the date such stock certificate is issued, except as
provided in Section 12(a) hereof.
19. No Rights to Employment.
-----------------------
Nothing in the Plan or in any award granted or Agreement entered into
pursuant hereto shall confer upon any Grantee the right to continue in the
employ of, or in a consultant relationship with, the Company or any Subsidiary
or to be entitled to any remuneration or benefits not set forth in the Plan or
such Agreement or to interfere with or limit in any way the right of the Company
or any such Subsidiary to terminate such Grantee's employment. Awards granted
under the Plan shall not be affected by any change in duties or position of a
Grantee as long as such Grantee continues to be employed by, or in a consultant
relationship with, the Company or any Subsidiary.
20. Beneficiary.
-----------
A Grantee may file with the Committee a written designation of a
beneficiary on such form as may be prescribed by the Committee and may, from
time to time, amend or revoke such designation. If no designated beneficiary
survives the Grantee, the executor or administrator of the Grantee's estate
shall be deemed to be the Grantee's beneficiary.
21. Stockholder Approval; Amendment and Termination of the Plan.
------------------------------------------------------------
(a) STOCKHOLDER APPROVAL. The Plan initially became effective when
adopted by the Board on February 7, 1996 and shall terminate on the tenth
anniversary of such date. The Plan was ratified by the Company's stockholders on
February 27, 1997. In December 1997, the Board submitted to the Company's
stockholders for approval an amendment authorizing an additional 1,000,000
shares for awards under the Plan, making a total of 3,300,000 shares authorized
for awards. On September 28, 1998, the Board authorized an additional 1,000,000
shares for awards under the Plan, on November 20, 1998, the Board approved the
Plan, as amended and restated herein, and on November 23, 1998, the Executive
Committee approved the further increase of 500,000 shares, bringing the total
number of shares authorized for issuance under the Plan to 4,800,000 shares. The
Plan, as amended and restated herein, will be submitted to the stockholders of
the Company for ratification at the next general meeting of stockholders to be
held after such date.
(b) AMENDMENT AND TERMINATION OF THE PLAN. The Board at any time and
from time to time may suspend, terminate, modify or amend the Plan; however,
unless otherwise determined by the Board, an amendment that requires stockholder
approval in order for the Plan to continue to comply with Rule 16b-3 or any
other law, regulation or stock exchange requirement shall not be effective
unless approved by the requisite vote of stockholders. Except as provided in
Section 12(a) hereof, no suspension, termination, modification or amendment of
the Plan may adversely affect any award previously granted, unless the written
consent of the Grantee is obtained. The amendment of Section 6(g) (extending
17
<PAGE>
the post-termination exercise period of Options from thirty (30) days to three
(3) months) and the addition of Section 13(c) in respect of Related Entity
Dispositions shall apply prospectively only to Options granted after November
17, 1998, the date that the Plan, as amended and restated herein, was adopted by
the Board.
22. Governing Law.
-------------
The Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of Delaware.
18
<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 SIX MONTHS ENDED JANUARY 31, 1999, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 60,994,698
<SECURITIES> 78,911,968
<RECEIVABLES> 68,151,775
<ALLOWANCES> 6,396,880
<INVENTORY> 0
<CURRENT-ASSETS> 228,139,272
<PP&E> 125,614,458
<DEPRECIATION> 25,555,285
<TOTAL-ASSETS> 450,591,001
<CURRENT-LIABILITIES> 81,913,031
<BONDS> 100,000,000
0
0
<COMMON> 233,418
<OTHER-SE> 247,497,097
<TOTAL-LIABILITY-AND-EQUITY> 450,591,001
<SALES> 0
<TOTAL-REVENUES> 294,018,907
<CGS> 227,665,779
<TOTAL-COSTS> 280,207,054
<OTHER-EXPENSES> 2,185,159
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (143,501)
<INCOME-PRETAX> 13,955,355
<INCOME-TAX> 4,825,780
<INCOME-CONTINUING> 6,944,416
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,944,416
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.20
</TABLE>
