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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 October 31, 2000
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 (I.R.S. Employer
jurisdiction of Identification
incorporation or Number)
organization)
520 Broad Street, Newark, New Jersey 07102
------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
(973) 438-1000
----------------------------------------------
(Registrant's telephone number, including
area code)
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--26,158,172 shares as of December 14, 2000
Class A Common Stock, $.01 par value--9,897,383 shares as of December 14, 2000
(Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date)
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IDT CORPORATION
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION..................................................................... 3
Item 1. Financial Statements (Unaudited)..................................................... 3
Condensed Consolidated Balance Sheets as of October 31, 2000
and July 31, 2000.................................................................. 3
Condensed Consolidated Statements of Income for the three months
ended October 31, 2000 and 1999.................................................... 4
Condensed Consolidated Statements of Cash Flows for the three months
ended October 31, 2000 and 1999.................................................... 5
Notes to Condensed Consolidated Financial Statements................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 14
PART II. OTHER INFORMATION........................................................................ 16
Item 1. Legal Proceedings.................................................................... 16
Item 2. Changes in Securities................................................................ 16
Item 3. Defaults Upon Senior Securities...................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders.................................. 16
Item 5. Other Information.................................................................... 16
Item 6. Exhibits and Reports on Form 8-K..................................................... 17
SIGNATURES ........................................................................................ 19
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
IDT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
October 31, 2000 July 31, 2000
---------------- -------------
Assets (Unaudited) (Note 1)
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................... $ 1,070,596 $ 162,879
Marketable securities ........................................ 124,799 230,160
Accounts receivable, net ..................................... 139,747 160,995
Notes receivable - current portion ........................... 180 3,630
Deposits ..................................................... 1,043 17,761
Inventory .................................................... 11,516 13,121
Other current assets ......................................... 60,795 53,347
----------- -----------
Total current assets....................................... 1,408,676 641,893
Property, plant and equipment, at cost, net .................. 185,169 225,638
Trademark, net ............................................... -- 10,985
Notes receivable - long-term portion ......................... 7,268 8,001
Intangible assets, net ....................................... 154,915 162,233
Marketable securities ........................................ -- 132,277
Investments .................................................. 119,157 29,319
Other assets ................................................. 322,534 8,709
----------- -----------
Total assets .............................................. $ 2,197,719 $ 1,219,055
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable ....................................... $ 139,688 $ 161,874
Accrued expenses ............................................. 16,472 36,451
Deferred revenue ............................................. 45,901 48,572
Notes payable - current portion .............................. 37,640 22,604
Capital lease obligations - current portion .................. 12,961 13,540
Other current liabilities .................................... 10,821 10,922
----------- -----------
Total current liabilities.................................. 263,483 293,963
Deferred tax liabilities, net .................................. 568,996 168,772
Notes payable - long-term portion ............................ 7,155 12,174
Capital lease obligation - long-term portion ................. 39,629 43,940
Other liabilities ............................................ 166 709
----------- -----------
Total liabilities ......................................... 879,429 519,558
Minority interests ............................................. 7,042 231,309
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;
26,097,872 and 25,959,256 shares issued and outstanding at
October 31, 2000 and July 31, 2000, respectively ............ 260 260
Class A stock, $.01 par value; authorized shares - 35,000,000;
9,970,233 shares issued and outstanding at October 31, 2000
and July 31, 2000 ........................................... 100 100
Loans to stockholders ........................................ (251) (251)
Additional paid-in capital ................................... 375,882 371,005
Treasury stock ............................................... (78,559) --
Accumulated other comprehensive losses ....................... (45,479) (92,653)
Retained earnings ............................................ 1,059,295 189,727
----------- -----------
Total stockholders' equity ................................ 1,311,248 468,188
----------- -----------
Total liabilities and stockholders' equity ............... $ 2,197,719 $ 1,219,055
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
3
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IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended October 31,
------------------------------
2000 1999
---- ----
<S> <C> <C>
Revenue ............................................. $ 276,597 $ 283,421
Costs and expenses:
Direct cost of revenue ............................ 238,619 230,199
Selling, general and administrative ............... 83,382 48,617
Depreciation and amortization ..................... 14,666 9,926
------------ ------------
Total costs and expenses ....................... 336,667 288,742
------------ ------------
Income (loss) from operations ....................... (60,070) (5,321)
Interest, net ....................................... 13,415 (411)
Gain on sale of subsidiary stock .................... 1,037,726 --
Investment and other income, net .................... 275,878 65,572
------------ ------------
Income before income taxes and minority interests ... 1,266,949 59,840
Provision for income taxes .......................... 396,458 26,706
Minority interests .................................. 923 (2,597)
------------ ------------
Net income ..................................... $ 869,568 $ 35,731
============ ============
Income per share:
Basic ............................................. $ 24.87 $ 1.05
============ ============
Diluted ........................................... $ 22.53 $ .98
============ ============
Weighted average number of shares used in calculation
of earnings per share - basic ..................... 34,965,416 34,065,274
============ ============
Weighted average number of shares used in calculation
of earnings per share - diluted ................... 38,592,673 36,602,437
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
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IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended October 31,
------------------------------
2000 1999
---- ----
<S> <C> <C>
Net cash used in operating activities ............... $ (31,183) $ (17,344)
Investing activities
Purchases of property, plant and equipment .......... (27,367) (11,270)
Net collections of notes receivable ................. 733 18,863
Proceeds from sale of subsidiary, net ............... 1,042,113 --
Purchases of investments, net ....................... (9,172) --
Net sales (purchases) of marketable securities ...... 22,255 (27,628)
----------- -----------
Net cash provided by (used in) investing activities . 1,028,562 (20,035)
Financing activities
Proceeds from offerings of common stock by Net2Phone -- 85,221
Proceeds from exercise of stock options for Net2Phone -- 1,000
Proceeds from exercise of stock options ............. 1,747 1,160
Net repayments of borrowings ........................ (9,060) (1,294)
Net repayments of capital lease obligations ......... (4,890) (1,483)
Common stock repurchases ............................ (76,299)
Distributions to minority shareholder ............... (1,160) (841)
----------- -----------
Net cash provided by (used in) financing activities . (89,662) 83,763
----------- -----------
Net increase in cash and cash equivalents ........... 907,717 46,384
Cash and cash equivalents, beginning of period ...... 162,879 52,903
----------- -----------
Cash and cash equivalents, end of period ............ $ 1,070,596 $ 99,287
=========== ===========
Supplemental disclosures of cash flow information
Interest paid ....................................... $ 3,315 $ 3,327
Income taxes paid ................................... $ -- $ 1,050
</TABLE>
See notes to condensed consolidated financial statements.
5
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IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 three and month periods ended October
31, 2000 are not necessarily indicative of the results that may be expected for
the year ending July 31, 2001. The balance sheet at July 31, 2000 has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, please
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended July 31, 2000, as
filed with the Securities and Exchange Commission.
On August 11, 2000, the Company completed the sale of 14.9 million of its
holdings of Net2Phone Class A Common Stock, at a price of $75 per share. In
addition, AT&T purchased four million newly-issued shares of Class A Stock from
Net2Phone at a price of $75 per share. These transactions reduce IDT's voting
stake in Net2Phone from approximately 56% to 21% and its economic stake in
Net2Phone from approximately 45% to 17%. Accordingly, IDT has deconsolidated
Net2Phone effective August 11, 2000 and accounts for its investment in Net2Phone
using the equity method.
Note 2 - Business Segment Information
Operating results and other financial data presented for the principal
business segments of the Company are as follows ($ in thousands):
<TABLE>
<CAPTION>
Wholesale Retail
----------------- -----------------
Telecommunications Telecommunications
----------------- ------------------ Internet Internet
Services Services Services Telephony Ventures Total
----------------- ------------------ -------- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
Three months ended October 31, 2000
Total segment revenue..................... $ 110,768 $ 157,042 $ 3,635 $ -- $ 5,152 $ 276,597
Less: revenues between segments........... -- -- -- -- -- --
---------- ---------- -------- -------- ---------- -----------
Total unaffiliated revenue................ $ 110,768 $ 157,042 $ 3,635 $ -- $ 5,152 $ 276,597
Loss from operations...................... $ (17,815) $ (17,159) $ (2,608) $ -- $ (22,488) $ (60,070)
========== ========== ======== ======== ========== ===========
Three months ended October 31, 1999
Total segment revenue...................... $ 141,400 $ 130,700 $ 3,500 $ 13,100 $ -- $ 288,700
Less: revenues between segments........... (3,600) -- -- (1,700) -- (5,300)
---------- ---------- -------- -------- ---------- -----------
Total unaffiliated revenue................ $ 137,800 $ 130,700 $ 3,500 $ 11,400 $ -- $ 283,400
Income (loss) from operations............. $ 3,884 $ 3,695 $ (3,600) $ (9,300) $ -- $ (5,321)
========== ========== ======== ======== ========== ===========
</TABLE>
6
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IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 3 - Property, Plant and Equipment
Property, plant and equipment consists of the following ($ in thousands):
<TABLE>
<CAPTION>
October 31, 2000 July 31, 2000
---------------- -------------
<S> <C> <C>
Equipment .......................................... $ 219,405 $ 238,767
Computer software .................................. 11,329 32,216
Leasehold improvements ............................. 14,485 11,918
Furniture and fixtures ............................. 9,499 10,625
Land and building .................................. 6,327 6,327
--------- ---------
261,045 299,853
Less: Accumulated depreciation and amortization..... (75,876) (74,215)
--------- ---------
$ 185,169 $ 225,638
========= =========
</TABLE>
Note 4 - Other Comprehensive Losses
Other comprehensive losses for the three month period ended October 31,
2000 consisted primarily of unrealized losses in the fair market value of
marketable securities.
Note 5 - AT&T Transactions
On March 28, 2000, IDT entered into an agreement with AT&T Corporation
("AT&T"), which closed on August 11, 2000, pursuant to which IDT sold AT&T 14.9
million shares of Net2Phone Class A Common Stock, par value $0.01 per share
("Class A Stock"), at a price of $75 per share. In addition, AT&T purchased four
million newly-issued shares of Class A Stock from Net2Phone at a price of $75
per share. Following these transactions, AT&T has approximately a 39% voting
stake and a 32% economic stake in Net2Phone for a total cash investment of
approximately $1.4 billion. In recognition of these transactions, a "Gain on
sale of subsidiary stock" of $1,038 billion was recorded in the Condensed
Consolidated Statement of Income for the three months ended October 31, 2000.
These transactions reduce IDT's voting stake in Net2Phone from approximately 56%
to 21% and its economic stake in Net2Phone from approximately 45% to 17%.
Accordingly, IDT has deconsolidated Net2Phone effective August 11, 2000 and
accounts for its investment in Net2Phone using the equity method. In addition,
ATT and IDT have reached an agreement that gives AT&T the right of first refusal
to purchase IDT's remaining stake of 10 million shares of Class A Stock. AT&T
also received the option to convert IDT's remaining 10 million shares of Class A
Stock into shares of Net2Phone Common Stock, par value $0.01 per share ("Common
Stock"). Shares of Class A Stock have two votes per share, while shares of
Common Stock have one vote per share.
Note 6 - Tyco Settlement
On October 10, 2000, IDT reached a full and final settlement with Tyco of
all pending claims brought against one another and their respective affiliates.
The settlement agreement is the subject of a confidentiality agreement among the
parties and only the following disclosure by IDT is permitted under the terms of
that agreement.
Under the terms of the settlement, TyCom Ltd. ("TyCom") granted to IDT
Europe B.V.B.A. ("IDT Europe"), free of charge, certain exclusive rights to use
capacity on the transatlantic and transpacific segments of TyCom's global
undersea fiber optic network (the "TyCom Global Network") which TyCom is
currently deploying. The settlement agreement provides for IDT Europe to obtain
exclusive indefeasible rights to use two 10 Gb/s wavelengths on the
transatlantic segment and two 10 Gb/s wavelengths on the transpacific segment
for fifteen years from the applicable Handover Dates (as described below). TyCom
previously announced that it expects the TyCom transatlantic network to be ready
for service in September, 2001, and the TyCom transpacific network to be ready
for service in the second quarter of 2002, the respective "Ready for Service
Dates." Under the terms of the settlement
7
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IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
agreement, the Handover Dates for the wavelengths on the transatlantic segment
are six months (for the first wavelength) and 18 months (for the second
wavelength), respectively, after the Ready for Service Date of the TyCom
transatlantic network; and the Handover Date for the wavelengths on the
transpacific segment are six months (for the first wavelength) and 18 months
(for the second wavelength), respectively, after the Ready for Service Date of
the TyCom transpacific network. Operation, administration and maintenance for
the wavelengths used by IDT will be provided by TyCom for a fifteen year period
after the relevant Handover Date, free of charge. TyCom has also granted IDT
certain rights to resell any unused capacity on the wavelengths through TyCom as
its sole and exclusive agent. In addition, IDT will also have the option,
exercisable at least annually, to convert the available capacity on its
wavelengths to available equivalent capacity on another portion of the TyCom
Global Network. In recognition of the settlement, a gain of $313.5 million is
included as a component of "Investment and other income, net" in the Condensed
Consolidated Statement of Income for the three months ended October 31, 2000.
Note 7 - Legal Proceedings and Contingencies
In October 1999, Union commenced an action against DigiTEC 2000, Inc.
("DigiTEC") and TecNet, Inc. ("TecNet") in the Supreme Court of the State of New
York, County of New York, alleging damages of approximately $725,000 based upon,
among other things, non-payment for prepaid calling cards. DigiTEC and TecNet
have answered the complaint and DigiTEC has asserted a third-party claim against
IDT seeking damages of $2.5 million dollars based upon IDT's alleged breach of a
settlement agreement between IDT and DigiTEC which had resolved a prior
litigation between those parties. The court adjourned the return date without
assigning a specific return date for IDT to answer the Third-Party Complaint,
subject to DigiTEC's right to make a written thirty day demand for an Answer.
This action is currently in the early stages of discovery.
In February 2000, Multi-Tech Systems, Inc. ("Multi-Tech") filed suit
against Net2Phone and other companies in the United States Federal District
Court in Minneapolis, Minnesota. In its press release, Multi-Tech stated that
"the defendant companies are infringing because they are providing the end users
with the software necessary to simultaneously transmit voice and data on their
computers in the form of making a phone call over the Internet." Net2Phone
intends to defend the lawsuit vigorously. Net2Phone believes that the Multi-Tech
claims are without merit. However, should a judge issue an injunction against
Net2Phone requiring that Net2Phone cease distributing its software or providing
its software-based services, such an injunction could have an adverse effect on
Net2Phone's business. Net2Phone has filed an answer and this action is currently
in the early stages of discovery.
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.
8
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
accompanying condensed consolidated financial statements and the associated
notes thereto of this Quarterly Report, and the audited consolidated financial
statements and the notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company contained in the
Company's Annual Report on Form 10-K for the year ended July 31, 2000, as filed
with the Securities and Exchange Commission.
Overview
General
IDT is a leading facilities-based, emerging multinational carrier that
provides a broad range of telecommunications services to wholesale and retail
customers worldwide. In addition, our IDT Ventures division is developing
several innovative telecom and Internet-related businesses. Also, through our
wholly-owned IDT Investments subsidiary, we have equity interests in other
technology companies, including our former subsidiary, Net2Phone, Inc. (NASDAQ:
NTOP), which offers a variety of Internet telephony products and services.
IDT's telecommunications services include wholesale carrier services,
prepaid calling cards, domestic long distance services and international retail
services. IDT delivers its telecommunications services over a high-quality
network consisting of over 100 switches in the U.S. and Europe and owned and
leased capacity on 16 undersea fiber optic cables, connecting our U.S.
facilities with our international facilities and with the facilities of our
foreign partners in Europe, Latin America and Asia. In addition, we obtain
transmission capacity from other carriers. We deliver our international traffic
worldwide pursuant to our agreements with U.S.-based carriers, foreign carriers,
and more than 20 of the companies that are primarily responsible for providing
telecommunications services in particular countries.
In October 2000, we announced plans to reorganize the Company, creating
separate divisions designed to reflect our various businesses and their unique
strategies. Upon completing this reorganization, which is subject to regulatory
approval, receipt of counterparty consents and completion of various
administrative requirements, IDT Corporation will be a holding company,
consisting primarily of two main subsidiaries: IDT Telecom and IDT Ventures. IDT
Telecom will conduct the Company's core telecommunications businesses, including
the provision of wholesale international telecommunications services, retail
debit card services, domestic long distance services and international retail
services. IDT Ventures will consist of the Company's newly-developed telecom and
Internet-related businesses, as well as IDT's equity investments in other
entities, such as Net2Phone and Terra Networks.
Outlook
In recent years, we have derived the majority of our revenues from our core
telecommunications businesses, consisting primarily of wholesale carrier
services and retail prepaid calling cards. These businesses have also accounted
for the bulk of our operating expenses as well. Since the fourth quarter of
Fiscal 1998, we have conducted wholesale carrier and prepaid calling card
operations in Europe. As we build our European telecommunications operations, we
expect to experience weaker gross margins and to incur significant sales and
marketing expenses, which will have a negative impact on overall profitability
over the next two to four quarters.
We are also developing various new telecom and Internet related businesses.
During the first quarter of Fiscal 2001, we incurred approximately $12.9 million
in development and marketing costs for these business ventures, which provided
us with revenues of approximately $5.2 million. We anticipate that we will
continue to incur significant costs related to these and other new ventures. The
timing, and magnitude, of any revenues and/or operating profits to be realized
from these new businesses remains uncertain.
Within the wholesale carrier and prepaid calling card business segments, we
have experienced intense competition, which has served, over time, to reduce our
average per-minute price realizations. In addition, this environment has led
some of our competitors to de-emphasize their wholesale carrier and/or prepaid
calling card operations, in order to focus on higher margin telecommunications
businesses. We remain strongly committed to our
9
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wholesale carrier and prepaid calling card businesses. However, we have
experienced pricing and margin pressure in recent quarters. We anticipate that
we will continue to experience pricing and margin pressure in both our wholesale
and retail businesses for at least the next few quarters, with gross margins for
both businesses generally below the levels experienced prior to the fourth
quarter of Fiscal 2000.
Accounting Treatment of Net2Phone
On August 11, 2000, we completed the sale of 14.9 million of our shares of
Net2Phone to AT&T for $75 per share. Upon completing this transaction, our
ownership interest in Net2Phone was reduced to approximately 10.0 million
shares, representing approximately a 17% ownership interest and a 21% voting
interest. Consequently, beginning with the first quarter of Fiscal 2001, we are
no longer consolidating Net2Phone's results. We will be using the equity method
to account for our ownership interest in Net2Phone. This change in the
accounting treatment for our ownership stake in Net2Phone will therefore have an
impact upon the comparison of results for the three month periods ended October
31, 2000 and October 31, 1999 described below.
Three Months Ended October 31, 2000 Compared to Three Months Ended October 31,
1999
Results of Operations
Revenue. Revenue decreased 2.4%, from approximately $283.4 million for the
three months ended October 31, 1999 to approximately $276.6 million for the
three months ended October 31, 2000. Telecommunications revenue decreased 0.3%,
from approximately $268.5 million for the three months ended October 31, 1999 to
approximately $267.8 million for the three months ended October 31, 2000.
Internet services revenue increased 2.9%, from approximately $3.5 million for
the three months ended October 31, 1999 to approximately $3.6 million for the
three months ended October 31, 2000. As a result of the change in our accounting
for our ownership interest in Net2Phone from the full consolidation method to
the equity method, we did not record Internet telephony revenue for the three
months ended October 31, 2000. We recorded Internet telephony revenue of
approximately $11.4 million for the three months ended October 31, 1999. Revenue
from our Ventures businesses amounted to approximately $5.2 million for the
three months ended October 31, 2000. No revenue from Ventures activities was
recorded for the three months ended October 31, 1999.
Excluding sales of non-IDT prepaid calling cards, which decreased from
approximately $36.0 million for the three months ended October 31, 1999 to
approximately $21.0 million for the three months ended October 31, 2000, our
minutes-based telecommunications revenue increased primarily as a result of a
33.8% increase in minutes of use from approximately 1.032 billion for the three
months ended October 31, 1999 to approximately 1.381 billion for the three
months ended October 31, 2000. The increase in minutes was due to increased
marketing of the Company's prepaid calling cards, which outweighed the effects
of lower wholesale carrier minutes. The decline in wholesale carrier minutes
resulted from a reduction in the number of wholesale carrier services clients,
reflecting an ongoing transition of the Company's wholesale customer base,
towards a smaller group of larger, more financially stable customers. This
resulted in a decrease in wholesale telecommunications revenues of 19.6%, from
approximately $137.8 million for the three months ended October 31, 1999 to
approximately $110.8 million for the three months ended October 31, 2000. As a
percentage of telecommunications revenue, wholesale telecommunications revenue
decreased from approximately 51.3% to approximately 41.4% period to period.
Revenue from retail telecommunications services increased 20.1%, from
approximately $130.7 million for the three months ended October 31, 1999 to
approximately $157.0 million for the three months ended October 31, 2000
primarily as a result of increased marketing efforts for the Company's prepaid
calling cards. Prepaid calling card sales as a percentage of retail
telecommunication services revenue decreased from 95% for the three months ended
October 31, 1999 to 93% for the three months ended October 31, 2000. Revenues
from domestic long distance services increased 234.6%, from approximately $2.6
million in the three months ended October 31, 1999, to approximately $8.7
million in the three months ended October 31, 2000, as a result of the full
introduction of the Company's flat-rate, $0.05 a minute long distance calling
plan, which was accompanied by an aggressive marketing campaign. As a percentage
of overall telecommunications revenue, retail telecommunications revenue
increased from approximately 48.7% for the three months ended October 31, 1999
to approximately 58.6% for the three months ended October 31, 2000.
10
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As a percentage of total revenue, Internet services revenue was
approximately 1.3% for both the three months ended October 31, 1999 and three
months ended October 31, 2000.
Internet telephony revenue as a percentage of total revenue amounted to
4.0% for the three months ended October 31, 1999. As mentioned above, no
Internet telephony revenue was recorded for the three months ended October 31,
2000, reflecting a change in the accounting treatment of the Company's Net2Phone
stake to the equity method beginning in the first quarter of Fiscal 2001.
Direct Cost of Revenue. The Company's direct cost of revenue increased by
3.5%, from approximately $230.2 million for the three months ended October 31,
1999 to approximately $238.6 million for the three months ended October 31,
2000. As a percentage of total revenue, these costs increased from 81.2% for the
three months ended October 31, 1999 to 86.3% for the three months ended October
31, 2000. The dollar increase is due primarily to increases in underlying
carrier and connectivity costs, as the Company's telecommunications minutes of
use grew significantly. As a percentage of total revenue, the increase in direct
costs reflects the gross margin pressures experienced by both the wholesale and
retail telecommunications divisions, reflecting intensified competition in these
markets. Partially offsetting this factor was the shift in telecommunications
revenue mix towards higher gross margin retail revenues.
Selling, General and Administrative. Selling, general and administrative
costs increased 71.6%, from approximately $48.6 million for the three months
ended October 31, 1999 to approximately $83.4 million for the three months ended
October 31, 2000. As a percentage of total revenue, these costs increased from
17.2% for the three months ended October 31, 1999 to 30.1% for the three months
ended October 31, 2000. This increase is due to several factors, including
increased international debit card distribution costs, increased sales and
marketing efforts for retail services, including prepaid calling cards and
domestic and international long distance, as well as increased salaries,
facilities costs and professional fees related to the expansion of the Company's
infrastructure to facilitate its rapid sales growth. Also included in selling,
general and administrative costs for the three months ended October 31, 2000 is
approximately $12.0 million in selling, general and administrative costs
associated with the Company's IDT Ventures division, which has several
innovative telecommunications and Internet related businesses in various stages
of development. In addition, IDT Ventures incurred expenses of $12.5 million
related to management incentive compensation arising from the completion of the
sale of the Company's Net2Phone shares to AT&T. Partially offsetting these
factors was the exclusion of selling, general and administrative expenses
related to Net2Phone in the three months ended October 31, 2000. Included in
salaries for the three months ended October 31, 1999, is $2.9 million of
non-cash compensation as a result of option grants made by Net2Phone during the
period.
Depreciation and Amortization. Depreciation and amortization increased
48.5%, from approximately $9.9 million for the three months ended October 31,
1999 to approximately $14.7 million for the three months ended October 31, 2000.
As a percentage of revenue, these costs increased from 3.5 % for the three
months ended October 31, 1999 to 5.3% for the three months ended October 31,
2000. These costs increased, in both absolute dollars and as a percentage of
revenues, primarily as a result of the Company's higher fixed asset base during
the three months ended October 31, 2000 as compared with the three months ended
October 31, 1999, reflecting the Company's efforts to expand its
telecommunications network infrastructure and other facilities. The Company
anticipates that depreciation and amortization costs will continue to increase
as the Company continues to add to its asset base, allowing it to implement its
growth strategy.
Loss from Operations. The Company recorded a loss from operations of
approximately $60.1 million for the three months ended October 31, 2000,
compared to a loss from operations of approximately $5.3 million for the three
months ended October 31, 1999. The Company's telecommunications business
recorded a loss from operations (after the effect of minority interests) of
approximately $35.9 million for the three months ended October 31, 2000,
compared to income from the Company's telecommunications operations of
approximately $6.6 million for the three months ended October 31, 1999. The
recording of a loss from operations in the current period as compared with
income from operations in the prior year period reflected decreased gross
margins, particularly in the wholesale carrier business, and an increase in
sales and marketing costs for retail telecommunications services, while
telecommunications revenues were essentially unchanged.
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<PAGE>
Loss from Operations for the Company's Ventures division for the three
months ended October 31, 2000 was approximately $22.5 million, which included
the $12.4 million of management incentive compensation. The Ventures division
had no activity in the three months ended October 31, 1999.
Loss from operations for the Company's Internet access business decreased
to approximately $2.6 million for the three months ended October 31, 2000 from
approximately $3.6 million for the three months ended October 31, 1999. The
decreased loss is due to reduced costs, as we continue to scale back the
unprofitable segments of our Internet business.
Loss from operations of the Net2Phone subsidiary amounted to approximately
$9.3 million for the three months ended October 31, 1999, with no corresponding
loss from operations recorded during the three months ended October 31, 2000,
reflecting the change in accounting for Net2Phone.
Other income. Included in other income for the three months ended October
31, 2000 is a realized gain of $999.6 million on the Company's sale of 14.9
million Net2Phone shares to AT&T, $38.1 million in gains recognized by the
Company under Staff Accounting Bulletin No. 51 in conjunction with Net2Phone's
sale of newly issued shares to AT&T and approximately $313.5 million in gains
related to the settlement of the Company's lawsuit with TyCom Ltd. Partially
offsetting this income was a recognized loss of approximately $39.0 million
related to the sale of some of the Company's Terra Networks shares.
Income Taxes. The Company recorded income tax expense of approximately
$396.5 million for the three months ended October 31, 2000, compared to
approximately $26.7 million for the three months ended October 31, 1999. Income
tax benefit of approximately $0.8 million for the three months ended October 31,
2000, and approximately $0.8 million for the three months ended October 31, 1999
related to the tax deduction upon the exercise of stock options was recorded
directly into additional paid-in capital.
Liquidity and Capital Resources
General
Historically, the Company has satisfied its cash requirements through a
combination of cash flow from operating activities, sales of equity and debt
securities and borrowings from third parties. Additionally, the Company received
approximately $1.1 million upon the exercise of stock options in the three
months ended October 31, 2000.
As of October 31, 2000, the Company had cash, cash equivalents and
marketable securities of approximately $1,195.4 million and working capital of
approximately $1,145.2 million. The Company generated negative cash flow from
operating activities of approximately $31.2 million during the three months
ended October 31, 2000, compared with negative cash flow from operating
activities of approximately $17.3 million during the three months ended October
31, 1999. 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 were approximately $27.4 million for the
three months ended October 31, 2000, compared to approximately $11.3 million for
the three months ended October 31, 1999, as the Company expanded its
international and domestic telecommunications network infrastructure. The
Company financed a portion of its capital expenditures through capital leases.
We experience intense competition in our telecommunications business. The
long distance telecommunications industry has been characterized by declines in
both per-minute revenues and per-minute costs. In the past, these factors have
tended to generally offset each other. However, since the mid-point of Fiscal
2000, as per-minute pricing continued to erode, gross margins have come under
increasing pressure. Our long term strategy involves terminating a larger
proportion of minutes on our own network, thereby lowering costs and preserving
margins even in a weaker price environment. However, in the short term, the
demand for usage has outpaced the rate of deployment of additional network
capacity. In fact, it has become commonplace within the industry for companies
12
<PAGE>
to experience delays in network build-out programs. As such, there can be no
assurance that we will be able to maintain our gross margins at the current
level, in the face of lower per-minute revenues.
We continued to fund our Ventures division, which incurred significant
start-up, development, marketing and promotional costs. As we move our Ventures
businesses through their respective development stages, we anticipate that
selling, general and administrative for our Ventures division will exceed the
revenues generated by this division for the foreseeable future.
We will need to make significant capital expenditures in order to expand
our network capacity. If we are unable to raise sufficient capital to meet our
spending requirements, our network expansion, and the anticipated margin
improvement, would be delayed.
Changes in Other Assets, Accounts Receivable, Allowance for Doubtful Accounts
and Deferred Revenue
Other current assets increased from $53.3 million at July 31, 2000 to $60.8
million at October 31, 2000, due to increases in contract deposits, inventories
and prepaid expenses. The average age of our accounts receivable, as measured by
number of days sales outstanding, has been increasing due to a significant
increase in sales to relatively more credit-worthy carriers and distributors of
prepaid calling cards. These customers tend to demand, and we are willing to
grant, extended payment terms.
Due to the wide range of collection terms, future trends with respect to
days sales outstanding are generally dependent upon the proportion of total
sales made to carriers, who are often offered extended payment terms of up to 90
days, and prepaid calling card distributors, who generally receive terms of up
to 30 days. Therefore, the trends in days sales outstanding will depend, in
large part, on the mix of wholesale (carrier) versus retail (debit card
distributor) customers. In addition, as we are willing to extend longer payment
terms to more credit-worthy customers, an increase in customers belonging to the
highest credit classes, as a percentage of total customers, could also lead to
an increase in days sales outstanding. However, as the foregoing is difficult to
predict, it is not possible at this time to determine whether or not the recent
upward trend in days sales outstanding will continue.
The allowance for doubtful accounts as a percentage of accounts receivable
increased from 14.3% at July 31, 2000, to 20.8% at October 31, 2000. The
increase in the allowance for doubtful accounts as a percentage of accounts
receivable reflects the deteriorating credit quality of a portion of our
existing wholesale customer base, as well as the increase in the number of
domestic long distance customers, who require a larger reserve than do wholesale
and retail debit card customers. Although, as mentioned above, we anticipate
that our customer base will continue its transition towards a more credit-worthy
group, some of our existing accounts receivable are still related to sales made
to less credit-worthy customers. In addition, during the first quarter, we
collected large amounts of previously unsettled outstanding wholesale
receivables, which had not had allowances for doubtful accounts associated with
them. This had the effect of reducing gross receivables, while not having an
impact on the allowance for doubtful accounts, resulting in a higher allowance
for doubtful accounts when measured as a percentage of accounts receivable.
Deferred revenue as a percentage of total revenue varies from period to
period dependent upon the mix and the timing of revenue. During the first
quarter of Fiscal 2001, we continued to experience a steady increase in the sale
of our prepaid calling cards, due to increased marketing efforts and decreased
competition in our target markets. This resulted in a continued increase in
actual deferred revenue. We reported a reduction of deferred revenue during the
first quarter, though, because of the elimination of Net2Phone-related deferred
revenue due to the deconsolidation of Net2Phone's results.
Significant Transactions
In August 2000, we sold 14,900,000 of our Net2Phone shares to AT&T Corp.,
for a purchase price of $75.00 per share, for total cash consideration of
approximately $1.1 billion. In addition, AT&T purchased an additional 4,000,000
newly-issued Net2Phone shares, also at a price of $75.00 per share, paying
proceeds of approximately $300 million to Net2Phone. IDT now holds 16.8% of
Net2Phone's outstanding stock, and a 20.5% voting interest.
13
<PAGE>
In addition, we received the right, at our option, to sell to AT&T
2,040,817 shares of our Class B Common Stock for total consideration of $75.0
million. In August 2000, we announced that we had notified AT&T of our intention
to exercise this option.
Stock Buyback Program
In May 2000, we announced that our Board of Directors had authorized the
repurchase of up to five million shares of our common stock. In July 2000, we
announced that our Board of Directors had authorized an increase in the share
repurchase program to 10 million shares. In October 2000, we announced that our
Board of Directors had authorized a further increase in the share repurchase
program to 12.5 million shares. Through December 12, 2000, we had repurchased
7,064,905 shares, for an aggregate purchase price of approximately $236.9
million.
Other Sources and Uses of Resources
The Company intends to, where appropriate, make strategic acquisitions to
increase its telecommunications customer base. From time to time, the Company
evaluates potential acquisitions of companies, technologies, products and
customer accounts that complement its businesses.
The Company believes that, based upon its present business plan, the
Company's existing cash resources, expected cash flow from operating activities
and access to credit facilities 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.
European Currency Conversion
In January 1999, a new currency called the "euro" was introduced in certain
Economic and Monetary Union ("EMU") countries. The EMU countries adopted the
euro as their common legal currency, and through January 1, 2002, both the
existing national currency of the respective EMU country and the euro will be
accepted as legal currency. 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. IDT's management is still evaluating the
effect that the introduction of the euro will have on its business, but it does
not anticipate, based on information currently available, that the euro will
have a material adverse impact on the Company's operations and sales.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
None.
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
14
<PAGE>
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, for
the year ended July 31, 2000.
15
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Incorporated by reference from Part I, Item I, Financial Statements, Note 7
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
None
Item 5. Other Information
None
16
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.01(1) Restated Certificate of Incorporation of the Registrant.
3.02(1) By-laws of the Registrant.
3.03* Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant.
10.01(2) Employment Agreement between the Registrant and Howard S. Jonas.
10.02(10) 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(11) Employment Agreement between the Registrant and James Courter.
10.9(7) Agreement between Cliff Sobel and the Registrant.
10.10(11) Employment Agreement between the Registrant and Hal Brecher.
10.11(11) Employment Agreement between the Registrant and Howard S. Jonas.
10.12(8) 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.
10.13(9) Securities Purchase Agreement between the Registrant, Carlos Gomez and Union Telecard
Alliance, LLC.
10.14(11) Credit Agreement, dated as of May 10, 1999, by and among the Registrant, various lenders party
thereto, Lehman Commercial Paper Inc., CIBC World Markets Corp. and Bankers Trust Company.
10.15(11) Pledge Agreement, dated as of May 10, 1999, by and among the Registrant, certain subsidiaries
of the Registrant and Bankers Trust Company, as Collateral Agent.
10.16(11) Security Agreement, dated as of May 10, 1999, by and among
the Registrant, certain subsidiaries of the Registrant and
Bankers Trust Company, as Collateral Agent.
10.17(11) Subsidiaries Guaranty, dated as of May 10, 1999, by and
among the Registrant, certain subsidiaries of the Registrant
and Bankers Trust Company, as Collateral Agent.
10.18(11) Loan Agreement between the Registrant and Stephen Brown.
10.19(12) Internet/Telecommunications Agreement, dated as of May 7, 1999, by and between Registrant and
Net2Phone, Inc.
10.20(12) Joint Marketing Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone,
Inc.
10.21(12) IDT Services Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc.
10.22(12) Net2Phone Services Agreement, dated as of May 7, 1999, by and between Registrant and
Net2Phone, Inc.
10.23(12) Assignment Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc.
10.24(12) Tax Sharing and Indemnification Agreement, dated as of May 7, 1999, by and between Registrant
and Net2Phone, Inc.
10.25(12) Separation Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc.
10.26(12) Co-location and Facilities Management Services Agreement, dated as of May 20, 1999, by and
between Registrant and Net2Phone, Inc.
10.27(13) Lease of 520 Broad Street, Newark, New Jersey.
10.28(13) Amendment to Lease of 520 Broad Street, Newark, New Jersey.
10.29(14) Option Agreement, dated as of March 3, 2000, between IDT Corporation and AT&T Corp.
</TABLE>
17
<PAGE>
<TABLE>
<S> <C>
10.30(15) Amendment to Option Agreement, dated as of April 5, 2000 between IDT Corporation and AT&T Corp.
10.31(14) Subscription Agreement, dated as of March 24, 2000, between IDT Corporation and Liberty Media
Corporation.
10.32(15) Amendment to Subscription Agreement, dated as of May 26, 2000, between IDT Corporation and
Liberty Media Corporation.
10.33(14) Letter Agreement, dated as of March 28, 2000, between IDT Corporation, AT&T Corp. and
Net2Phone, Inc.
10.34(14) Letter Agreement, dated as of March 30, 2000, between IDT Corporation, AT&T Corp. and
Net2Phone, Inc.
10.35(16) Conversion, Termination and Release Agreement, dated as of April 30, 2000, between IDT
Corporation, Terra Networks, S.A., Terra Networks USA, Inc., Terra Networks Access Services
USA LLC and Terra Networks Interactive Services USA LLC.
27.01* Financial Data Schedule.
</TABLE>
-----------
* Filed herewith.
<TABLE>
<S> <C>
(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 for the fiscal year ended July 31, 1997,
filed October 29, 1997.
(6) Incorporated by reference to Form S-1 filed March 14, 1996 file no. 333-00204.
(7) Incorporated by reference to Form 10-K/A for the fiscal year ended July 31, 1997,
filed February 2, 1998.
(8) Incorporated by reference to Form 8-K filed April 22, 1998.
(9) Incorporated by reference to Form 10-K/A for the fiscal year ended July
31, 1998, filed December 4, 1998.
(10) Incorporated by reference to Form 10-Q for the fiscal quarter ended
January 31, 1999, filed March 17, 1999.
(11) Incorporated by reference to Form 10-Q for the fiscal quarter ended April
30, 1999, filed June 14, 1999.
(12) Incorporated by reference to Form 10-K for the fiscal year ended July 31,
1999, filed November 4, 1999.
(13) Incorporated by reference to Form 10-Q for the fiscal quarter ended
January 31, 2000, filed March 12, 2000.
(14) Incorporated by reference to Form 8-K filed March 31, 2000.
(15) Incorporated by reference to Schedule 14C filed June 12, 2000.
(16) Incorporated by reference to Form 10-Q for the fiscal quarter ended April 30, 2000,
filed June 14, 2000.
</TABLE>
(b) Reports on Form 8-K.
None.
18
<PAGE>
IDT CORPORATION
FORM 10-Q
OCTOBER 31, 2000
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.
<TABLE>
<S> <C>
IDT CORPORATION
December 14, 2000 By: /s/ Howard S. Jonas
----------------- ---------------------------------------------------------
Date Howard S. Jonas
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
December 14, 2000 By: /s/ Stephen R. Brown
----------------- ---------------------------------------------------------
Date Stephen R. Brown
Chief Financial Officer
(Principal Financial and Accounting Officer)
</TABLE>
19
