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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended October 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.)
520 Broad Street, Newark, New Jersey 07102
(Address of Principal Executive Office) (Zip Code)
(201) 928-1000
(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--24,100,383 shares as of December 14, 1999
Class A Common Stock, $.01 par value--10,029,758 shares as of December 14,
1999
(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>
<C> <S> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements......................................... 3
Condensed Consolidated Balance Sheets (Restated) as of
October 31, 1999 and July 31, 1999.......................... 3
Condensed Consolidated Statements of Income (Restated) for
the three months ended October 31, 1999 and 1998............ 4
Condensed Consolidated Statements of Cash Flows (Restated)
for the three months ended October 31, 1999 and 1998........ 5
Notes to Condensed Consolidated Financial Statements......... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9
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
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
IDT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (RESTATED)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
October 31, July 31,
1999 1999
----------- --------
(Unaudited) (Note 1)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 99,287 $ 52,903
Marketable securities.................................. 105,498 77,870
Accounts receivable, net............................... 139,650 106,146
Notes receivable--current portion...................... -- 18,968
Other current assets................................... 53,051 36,311
-------- --------
Total current assets.................................. 397,486 292,198
Property, plant and equipment, at cost, net.............. 118,628 114,123
Trademark, net........................................... 4,759 4,792
Notes receivable--long-term portion...................... 2,292 2,187
Intangibles, net......................................... 114,708 117,366
Deferred tax assets, net................................. -- 3,358
Other assets............................................. 19,488 25,847
-------- --------
Total assets.......................................... $657,361 $559,871
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Trade accounts payable................................. $101,923 $ 79,475
Accrued expenses....................................... 3,634 5,355
Interest payable....................................... 1,535 1,565
Deferred revenue....................................... 12,795 13,210
Notes payable--current portion......................... 4,378 4,753
Capital lease obligations--current portion............. 5,821 6,029
Other current liabilities.............................. 5,266 2,397
-------- --------
Total current liabilities............................. 135,352 112,784
Deferred tax liabilities, net............................ 19,618 --
Notes payable--long-term portion......................... 112,054 112,973
Capital lease obligation--long-term portion.............. 14,467 15,742
-------- --------
Total liabilities..................................... 281,491 241,499
Minority interests....................................... 61,808 42,043
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; 24,100,383 and 23,982,854 shares issued
and outstanding at October 31, 1999 and July 31, 1999,
respectively.......................................... 241 240
Class A stock, $.01 par value; authorized shares--
35,000,000; 10,029,758 shares issued and outstanding
at October 31, 1999 and July 31, 1999................. 100 100
Loans to stockholders.................................. (251) (251)
Additional paid-in capital............................. 319,363 317,362
Accumulated deficit.................................... (5,391) (41,122)
-------- --------
Total stockholders' equity............................ 314,062 276,329
-------- --------
Total liabilities and stockholders' equity............ $657,361 $559,871
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (RESTATED)
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
October 31,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Revenues............................................. $ 283,421 $ 133,278
Costs and expenses:
Direct cost of revenues............................ 230,199 101,074
Selling, general and administrative................ 48,617 17,056
Depreciation and amortization...................... 9,926 7,965
----------- -----------
Total costs and expenses......................... 288,742 126,095
----------- -----------
Income (loss) from operations........................ (5,321) 7,183
Interest, net........................................ (411) 205
Other income, net.................................... 65,572 --
----------- -----------
Income before provision for income taxes and minority
interest............................................ 59,840 7,388
Provision for income taxes........................... 26,706 2,547
Minority interest.................................... (2,597) 1,623
----------- -----------
Net income........................................... $ 35,731 $ 3,218
=========== ===========
Net income per share--basic.......................... $ 1.05 $ 0.10
=========== ===========
Weighted average number of shares used in calculation
of earnings per share--basic........................ 34,065,274 33,199,558
=========== ===========
Net income per share--diluted........................ $ 0.98 $ 0.09
=========== ===========
Weighted average number of shares used in calculation
of earnings per share--diluted...................... 36,602,437 35,701,538
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
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IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended October 31,
------------------
1999 1998
-------- --------
<S> <C> <C>
Cash used in operating activities.......................... $(17,344) $ (3,854)
Investing activities
Net (purchases) sales of marketable securities............. (27,628) 7,856
Issuance of notes receivable............................... -- (7,795)
Collection of notes receivable............................. 18,863 --
Purchases of property, plant and equipment................. (11,270) (12,714)
-------- --------
Net cash used in investing activities...................... (20,035) (12,653)
Financing activities
Proceeds from issuance of common stock by Net2Phone........ 85,221 --
Proceeds from exercise of stock options for Net2Phone...... 1,000 --
Proceeds from exercise of stock options.................... 1,160 655
Proceeds from exercise of stock warrants................... -- 439
Repayment of notes payable................................. (1,294) (499)
Repayment of capital lease obligations..................... (1,483) (928)
Distribution to minority shareholder....................... (841) --
-------- --------
Net cash provided by (used in) financing activities........ 83,763 (333)
-------- --------
Net increase (decrease) in cash and cash equivalents....... 46,384 (16,840)
Cash and cash equivalents, beginning of period............. 52,903 115,284
-------- --------
Cash and cash equivalents, end of period................... $ 99,287 $ 98,444
======== ========
Supplemental disclosures of cash flow information
Interest paid.............................................. $ 3,327 $ 4,764
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
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 months
ended October 31, 1999 are not necessarily indicative of the results that may
be expected for the year ending July 31, 2000. For further information, please
refer to the consolidated financial statements and footnotes thereto included
in the Company's Annual Report on Form 10-K as amended for the year ended July
31, 1999, as filed with the Securities and Exchange Commission.
The Company has restated its financial statements for the three-month
periods ended October 31, 1998 and 1999. The restatement resulted form
adjusting i) the timing of a gain recognized on the sale of preferred stock by
Net2Phone, Inc., a majority owned subsidiary, and ii) the determination and
allocation of the purchase price relating to the Company's acquisition of
Interexchange, Inc.
The aggregate effect of the aforementioned adjustments on the Company's
financial statements for the three months ended October 31, 1998 and October
31, 1999 is as follows:
<TABLE>
<CAPTION>
Three months ended October 31, 1998
----------------------------------------------
Previously filed Restated Increase/(Decrease)
---------------- -------- -------------------
<S> <C> <C> <C>
Depreciation and amortization... $ 5,439 $ 7,965 $ 2,526
Income from operations.......... 9,709 7,183 (2,526)
Provision for income taxes...... 3,399 2,547 (852)
Net income...................... 4,892 3,218 (1,674)
Basic net income per share...... 0.15 0.10 (0.5)
Diluted net income per share.... 0.14 0.09 (0.5)
Total assets.................... 423,972 466,342 42,370
Stockholders' equity............ 245,032 287,402 42,370
<CAPTION>
Three months ended October 31, 1999
----------------------------------------------
Previously filed Restated Increase/(Decrease)
---------------- -------- -------------------
<S> <C> <C> <C>
Depreciation and amortization... $ 7,400 $ 9,926 $ 2,526
Loss from operations............ (2,795) (5,321) (2,526)
Other, net...................... 43,961 65,572 21,611
Provision for income taxes...... 18,913 26,706 7,793
Net income...................... 24,439 35,731 11,292
Basic net income per share...... 0.72 1.05 0.33
Diluted net income per share.... 0.67 0.98 0.31
Total assets.................... 617,402 657,361 39,959
Stockholders' equity............ 279,846 314,062 34,216
</TABLE>
6
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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 Total
------------------ ------------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
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)
======== ======== ======= ======= ========
Three months ended
October 31, 1998
Total segment revenue.. $ 50,600 $ 75,300 $ 4,300 $ 5,700 $135,900
Less: revenues between
segments............. (2,200) -- -- (400) (2,600)
-------- -------- ------- ------- --------
Total unaffiliated
revenue................ 48,400 75,300 4,300 5,300 133,300
======== ======== ======= ======= ========
Income (loss) from
operations............. 6,084 4,799 (1,800) (1,900) 7,183
======== ======== ======= ======= ========
</TABLE>
Note 3--Property, Plant and Equipment
Property, plant and equipment consists of the following ($ in thousands):
<TABLE>
<CAPTION>
October 31, 1999 July 31, 1999
---------------- -------------
<S> <C> <C>
Equipment...................................... $ 122,456 $117,547
Computer software.............................. 25,631 21,515
Leasehold improvements......................... 5,183 3,651
Furniture and fixtures......................... 2,972 2,447
Land and building.............................. 6,500 6,312
--------- --------
162,742 151,472
Less: Accumulated depreciation and
amortization.................................. (44,114) (37,349)
--------- --------
$ 118,628 $114,123
========= ========
</TABLE>
Note 4--Gain on Sale of Stock by Subsidiary
On August 3, 1999, Net2Phone, Inc. a majority owned subsidiary, completed an
initial public offering of 6,210,000 shares of its common stock at a price of
$15 per share, resulting in net proceeds of approximately $85.3 million. Upon
completion of the initial public offering, 3,140,000 shares of Net2Phone Series
A Preferred Stock were converted into 9,420,000 shares of Net2Phone Class A
Stock. As a result of the initial public offering and concurrent conversion of
Series A Stock to Class A Stock, IDT's ownership percentage in Net2Phone
decreased from 90.0% to approximately 56.2%. This resulted in the Company
recording a gain on the sale of stock by a subsidiary of approximately $65.6
million. This gain is included in other income, net for the three-months ended
October 31, 1999. Deferred taxes of $26.2 million have been provided on the
gain.
In December 1999 (second quarter of fiscal 2000), the Company recorded a
$76.8 million pre-tax gain in connection with Net2Phone's secondary offering of
6.3 million shares of its common stock, at a price of
7
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IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
$55.00 per share for net proceeds to Net2Phone of approximately $177.4 million.
Deferred taxes of approximately $30.7 million have been provided for this gain.
In addition, a $105.8 million pre-tax gain was recognized in December 1999
(second quarter of fiscal 2000) in connection with IDT's sale of 2,200,000
shares of common stock of Net2Phone in Net2Phone's secondary offering, at a
price of $55.00 per share for net proceeds of approximately $115.4 million.
IDT's ownership interest before and after this transaction and the secondary
offering (which occurred at the same time) was 56.24% and 47.97%, respectively.
Note 5--Legal Proceedings and Contingencies
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 has been scheduled for March 7, 2000.
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 Communications, Inc. ("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 third
party complaint against IX, the Company, and certain of their officers,
including Howard S. Jonas. The parties have entered into a settlement
agreement.
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, 1999, 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 70 switches
in the U.S. and Europe and owned and leased capacity on 16 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 23 of the companies
that are primarily responsible for providing telecommunications services in
particular countries (many of 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 Net2Phone's
Internet telephony services.
Three Months Ended October 31, 1999 Compared to Three Months Ended October 31,
1998
Results of Operations
Revenues. Revenues increased 112.7%, from approximately $133.3 million for
the three months ended October 31, 1998 to approximately $283.4 million for the
three months ended October 31, 1999. Telecommunications revenues increased
117.0%, from approximately $123.7 million for the three months ended October
31, 1998 to approximately $268.5 million for the three months ended October 31,
1999. Internet access revenues decreased 16.9%, from approximately $4.3 million
for the three months ended October 31, 1998 to approximately $3.5 million for
the three months ended October 31, 1999. Internet telephony revenues increased
114.7%, from approximately $5.3 million for the three months ended October 31,
1998 to approximately $11.4 million for the three months ended October 31,
1999.
Telecommunications revenues increased primarily as a result of a 119.6%
increase in minutes of use from approximately 468.9 million for the three
months ended October 31, 1998 to approximately 1.03 billion for the three
months ended October 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, increased use by existing
clients and the inclusion of $20 million in revenue related to a one-time
tariff opportunity resulted in an increase in wholesale telecommunications
revenues of 184.4%, from approximately $48.4 million for the three months ended
October 31, 1998 to approximately $137.8 million for the three months ended
October 31, 1999. As a percentage of telecommunications revenues, wholesale
telecommunications revenues increased from approximately 39.2% to 51.3%, as the
increase in wholesale revenues in dollar terms was greater than that of other
business lines. Revenues from retail telecommunications services increased
73.7%, from approximately $75.3 million for the three months ended October 31,
1998 to approximately $130.7 million for the three months ended October 31,
1999 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 revenues increased from 89.4% for the three months
9
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ended October 31, 1998 to 95.0% for the three months ended October 31, 1999. As
a percentage of overall telecommunications revenues, retail telecommunications
revenues decreased from approximately 60.8% in the three months ended October
31, 1998 to approximately 48.7% for the three months ended October 31, 1999.
As a percentage of total revenues, Internet access revenues decreased from
approximately 3.2% for the three months ended October 31, 1998 to approximately
1.3% for the three months ended October 31, 1999. This decrease was due to a
dollar decrease in Internet access revenues due to a decrease in total dial-up
subscribers as well as the substantial increase in telecommunications revenues
during the same period.
Internet telephony revenues as a percentage of total revenues was 4.0% for
the three months ended October 31, 1999, unchanged from the three months ended
October 31, 1998. The increase in Internet telephony revenues, in dollar terms,
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
127.8%, from approximately $101.0 million in the three months ended October 31,
1998 to approximately $230.2 million in the three months ended October 31,
1999. As a percentage of total revenues, these costs increased from 75.8% for
the three months ended October 31, 1998 to 81.2% for the three months ended
October 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 telecommunications services as compared to retail
telecommunications services as well as the lower gross margins related to
telecommunications revenues as compared with Internet access services. Gross
margins were also adversely affected by delayed network deployment.
Selling, General and Administrative. Selling, general and administrative
costs increased 185.1%, from approximately $17.1 million in the three months
ended October 31, 1998 to approximately $48.6 million in the three months ended
October 31, 1999. As a percentage of total revenues, these costs increased from
12.8% for the three months ended October 31, 1998 to 17.2% for the three months
ended October 31, 1999. The increase in these costs is due primarily to
increased sales and marketing efforts for retail services, including prepaid
calling cards, domestic and international long distance; and for Net2Phone, 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. Included in salaries is $2.9 million of non-cash compensation as a
result of option grants made by our Net2Phone subsidiary during the three
months ended October 31, 1999.
Depreciation and Amortization. Depreciation and amortization increased 23.8%
from approximately $8.0 million for the three months ended October 31, 1998 to
approximately $9.9 million for the three months ended October 31, 1999. As a
percentage of revenues, these costs decreased from 6.0% for the three months
ended October 31, 1998 to 3.5% for the three months ended October 31, 1999.
These costs increased, in dollar terms, primarily as a result of amortization
of goodwill and other intangible assets that resulted from the Company's
acquisition of InterExchange, Inc. in the fourth quarter of fiscal 1998 and the
Company's higher fixed asset base during the three months ended October 31,
1999 as compared with the three months ended October 31, 1998, 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.
Income from Operations. The Company recorded a loss from operations of
approximately $5.3 million for the three months ended October 31, 1999,
contrasting with income from operations of approximately $7.2 million for the
three months ended October 31, 1998. Income from operations for the Company's
telecommunications business (after the effect of minority interests) decreased
from approximately $9.2 million for the three months ended October 31, 1998 to
approximately $6.6 million for the three months ended October 31, 1999. As a
percentage of telecommunication revenues, income from operations for the
telecommunications business decreased to 2.5% for the three months ended
October 31, 1999 from 7.5% for
10
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the three months ended October 31, 1998, due to decreased margins in the
carrier wholesale and retail telecommunications businesses, and an increase in
sales and marketing costs for retail telecommunications services.
Loss from operations for the Company's Internet access business increased to
approximately $3.6 million for the three months ended October 31, 1999 from
approximately $1.8 million for the three months ended October 31, 1998. The
increased loss is primarily due to the decrease in Internet access revenues
resulting from a decrease in total dial-up subscribers, as well as an increase
in marketing expenses.
Loss from operations of the Net2Phone subsidiary increased to approximately
$9.3 million for the three months ended October 31, 1999, compared to a loss of
approximately $1.9 million for the three months ended October 31, 1998. This
increase is due primarily to the non-cash compensation charge of $2.9 million
described above, coupled with a substantial increase in both sales and
marketing expenses as well as general and administrative expenses incurred as
Net2Phone expanded distribution relationships, corporate infrastructure and
human resources.
Income Taxes. The Company recorded income tax expense of approximately $26.7
million for the three months ended October 31, 1999, compared to approximately
$2.5 million for the three months ended October 31, 1998. Income tax benefit of
approximately $0.8 million for the three months ended October 31, 1999, and
approximately $0.3 million for the three months ended October 31, 1998 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. The Company received
approximately $1.2 million upon the exercise of stock options and warrants in
the three months ended October 31, 1999.
In May 1999, The Company entered into a credit agreement with Lehman
Commercial Paper Inc., CIBC World Markets Corp., Bankers Trust Company and a
Syndicate of lenders. These institutions have committed to provide us with a
$160 million credit facility that includes term loans in an aggregate amount of
up to $135 million and revolving loans in an amount of up to $25 million and an
additional uncommitted amount of up to $100 million. Bankers Trust Company
serves as administrative agent for the facility. The Company used the proceeds
from the initial borrowings under the credit facility of $108.1 million from
the initial borrowings under the credit facility to purchase more than 99% of
its outstanding 8.75% Senior Notes due 2006, together with accrued and unpaid
interest, that the Company purchased in connection with its tender offer for
these securities. The amount of $75.0 million of the initial borrowings
currently bears interest at a rate of 8.75% per annum and the remaining $33.1
million of the initial borrowings currently bears interest at a rate of 8.25%
per annum.
As of October 31, 1999, the Company had cash, cash equivalents and
marketable securities of $204.8 million and working capital of approximately
$262.1 million. The Company generated negative cash flow from operating
activities of approximately $17.3 million during the three months ended October
31, 1999, compared with negative cash flow from operating activities of
approximately $3.9 million during the three months ended October 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 were approximately $11.2 million in the
three months ended October 31, 1999, compared to approximately $12.7 million in
the three months ended October 31, 1998, as the
11
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Company expanded its international and domestic telecommunications network
infrastructure. The Company financed a portion of its capital expenditures
through capital leases and notes payable.
The Company experiences intense competition in its 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, as per-
minute pricing continues to erode, gross margins could come under increasing
pressure. The Company's long term strategy involves terminating a larger
proportion of minutes on the Company's own network, thereby lowering costs and
preserving margins even in a weaker price environment. However, in the short
term, the demand for usage might outpace the rate of deployment of additional
network capacity. As such, there can be no assurance that the Company will be
able to maintain its gross margins at the current level, in the face of lower
per-minute revenues.
In addition, the Company will need to make significant capital expenditures
in order to expand its network capacity. If the Company is unable to raise
sufficient capital to meet its spending requirements, the Company's network
expansion, and the associated margin improvement, would be delayed.
Changes in Other Assets, Accounts Receivable, Allowance for Doubtful Accounts
and Deferred Revenue
Other current assets increased from $36 million at July 31, 1999 to $53
million at October 31, 1999, due primarily to increases in contract deposits,
carrier deposits and prepaid expenses. The average age of the Company's
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 the Company is 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 the Company is willing to extend longer
payments terms to credit-worthy customers, an increase in customers belonging
to the highest credit class, as a percentage to 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 trend in days sales outstanding will continue.
The allowance for doubtful accounts as a percentage of accounts receivable
decreased, from 6.7% at July 31, 1999, to 6.3% at October 31, 1999.
Deferred revenue as a percentage of total revenue varies from period to
period dependent upon the mix and the timing of revenue.
Net2Phone Financings
In May 1999, a group of strategic investors purchased from Net2Phone, in the
aggregate, 3,140,000 shares of Net2Phone Series A Preferred Stock convertible
into 9,420,000 shares of common stock and warrants to purchase up to 180,000
shares of Net2Phone common stock, for a net aggregate purchase price of
$29.9 million. Additionally, Net2Phone issued a warrant to purchase 92,400
shares of its common stock to Hambrecht & Quist as part of its fee as placement
agent with respect to this transaction.
In August 1999, Net2Phone completed its initial public offering of 6.2
million shares of common stock, receiving approximately $85.3 million in net
proceeds. At that time, the Series A Preferred Stock was converted into Class A
Common Stock. The Company recognized pre-tax gain, net of approximately $65.6
million as a result of these transactions. Such gains have been recorded in
other income in the accompanying financial statements.
12
<PAGE>
In December 1999, Net2Phone completed a Secondary Offering of 6.3 million
shares of common stock. As part of the Offering, the Company sold 2.2 million
shares of Net2Phone common stock, yielding approximately $114.4 million in net
proceeds. Subsequent to the sale of these shares, the Company used
approximately $35.0 million of the proceeds to reduce the outstanding balance
of its bank credit facility.
In connection with Net2Phone's distribution and marketing agreement with
ICQ, a subsidiary of America Online, Net2Phone issued to America Online a
warrant to purchase up to 3% of Net2Phone's outstanding capital stock on a
fully-diluted basis. This warrant will vest in 1% increments upon the
achievement of each of three incremental thresholds of revenue generated under
the agreement during the first four years that the warrant is outstanding. The
exercise price under the terms of the warrant will be equal to the lesser of
$12.00 per share or $450 million divided by the number of Net2Phone's fully-
diluted shares on the initial exercise date.
The warrants are accounted for in accordance with the provisions of EITF 96-
18, "Accounting for Equity Investments that are Issued to Other than Employees
for Acquiring or in Conjunction with Selling Goods or Services." Due to the
uncertainty of reaching the performance measures stipulated in the warrant
agreement, the Company has not recorded any expense relating to the issuance of
the warrant. Upon determination that the achievement of the revenue thresholds
is probable, the Company will value the warrant and expense it over the
remaining period until the performance criteria is met. The three revenue
thresholds are $10 million, $50 million and $75 million and the term of the
distribution and marketing agreement is four years. If the three incremental
thresholds had been met on October 31, 1999, the Company would have expensed
approximately $86.6 million.
In November 1999, the warrant was amended to include the right to purchase
an additional 0.5% of Net2Phone's outstanding capital stock on a fully-diluted
basis at an exercise price of $60.46 per share upon the achievement of $100
million in revenue.
Acquisitions of In-Process Research & Development
The Company's purchase of InterExchange, Inc. in April 1998 involved the
acquisition of two significant in-process research and development projects
relating to switch technology. Neither one of these projects has been
successfully completed at this time, and both projects have been terminated.
Currently, the Company is not contemplating any additional acquisitions of in-
process research and development.
Other Sources and Uses of Resources
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 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 borrowings under its credit facility 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.
13
<PAGE>
Year 2000
The Year 2000 issue affects Company's installed computer systems, network
systems and software applications due to the fact that many computers and
applications define dates by the last two digits of the year and "00" may not
be properly recognized by such programs as the year 2000. The Company has
dedicated the time and resources it deems appropriate to address and correct
potential Year 2000 problems.
The Company has established a Year 2000 compliance committee (the
"Committee"). The Committee's objectives are to eliminate any possible
disruptions in services and operations that may result from the date change in
the Year 2000. The Committee has developed a plan to identify and repair any
systems that may be affected by the Year 2000. The plan consists of (1)
identifying and inventorying all systems; (2) assessing and testing the systems
for Year 2000 compliance; (3) modifying, upgrading or replacing any non-
compliant systems; and (4) testing the corrected systems to ensure compliance.
The Committee has implemented this plan throughout the company and, in
addition to reviewing its own systems, the Company has initiated inquiries and
submitted requests to its third-party vendors and service providers to obtain
information regarding their compliance with the Year 2000.
Inventory, assessment, remediation and testing of software applications and
hardware systems, including network systems, is substantially complete. The
Company completed the modification, updating or replacement of any systems that
to its knowledge are not Year 2000 compliant in November 1999. Testing of the
corrected systems has been implemented and will continue on an ongoing basis
through October 2000 due to the date October 10, 2000, being the first
occurrence of a date requiring the use of eight digits to define the date.
In particular, the Company has focused on the testing and remediation of its
switching facilities to ensure that its network operations through which it
provides communications services to its customers are not disrupted by the Year
2000. The Company is confident that its own network systems are Year 2000
compliant due to the nature and extent of the testing the Company has conducted
and continues to implement on such systems.
The greatest risk to the Company's ability to provide communications
services is the failure of third party service providers to be Year 2000
compliant. While many other carriers and Internet providers have plans to
independently become Year 2000 compliant, there is the risk that some
(particularly smaller carriers and providers) will not address or properly
resolve Year 2000 issues. If this were to occur, the Company would be affected
only to the same degree as other carriers and Internet providers in the
communications industry.
In providing telecommunications services, the Company connects directly and
indirectly with thousands of other carriers through switches of the Company and
other carriers. The Company has obtained written assurances and information
from its primary vendors and providers regarding their Year 2000 compliance
and, to the best of the Company's knowledge based on such assurances and
information, the Company believes there is not a significant risk that the
Company's provision of telecommunication services will be materially impacted.
In addition, it is unlikely that a network failure of a smaller carrier would
have a significant impact on the Company's ability to provide
telecommunications services, however, fully addressing any of these risks is
beyond the Company's control. In addition, the Company is unable to fully
assess the degree to which the manufacturers of switches and similar equipment
have assessed and remediated their equipment and software since most are
manufactured and maintained by independent third parties. However, most
switches are manufactured by manufacturers with a wide range of customers,
therefore, such manufacturers would have a vested interest in ensuring Year
2000 compliance and prompt remediation of any Year 2000 issues.
To date, the Company has incurred expenses of less than $1.0 million in
connection with its remediation of Year 2000 related issues. The Company
constantly monitors its progress of the Year 2000 plan and anticipates that it
will resolve any outstanding internal issues before the end of 1999.
Contingency plans will be developed and implemented before the end of 1999 for
critical systems on an as-needed basis should the Company identify any areas
for which such plans are appropriate.
14
<PAGE>
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 the Company's operations and sales.
15
<PAGE>
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 for
the year ended July 31, 1999.
16
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Incorporated by reference from Part I, Item 1, 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
None
Item 5. Other Information
None
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
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(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.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.26(12) Co-location and Facilities Management Services Agreement, dated as
of May 20, 1999, by and between Registrant and Net2Phone, Inc.
27.01* Financial Data Schedule.
</TABLE>
--------
* 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 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.
(b) Reports on Form 8-K.
None.
19
<PAGE>
IDT CORPORATION
FORM 10-Q/A
October 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
<TABLE>
<S> <C>
August 11, By: /s/ Howard S. Jonas
2000 __________________________________
______________ Howard S. Jonas
Date
Chairman of the Board
and Chief Executive Officer
August 11, 2000 (Principal Executive Officer)
______________
By: /s/ Stephen R. Brown
Date __________________________________
Stephen R. Brown
Chief Financial Officer
(Principal Financial and Accounting
Officer)
</TABLE>
20
