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 April 30, 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 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)
(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No __
Common Stock, $.01 par value - 26,905,041 shares as of June 13, 2000
Class A Common Stock, $.01 par value - 9,969,733 shares as of June 13, 2000
(Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date)
IDT CORPORATION
Table Of Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)...........................................................................3
Condensed Consolidated Balance Sheets as of April 30, 2000
and July 31, 1999......................................................................................3
Condensed Consolidated Statements of Income for the nine months
and three months ended April 30, 2000 and 1999.........................................................4
Condensed Consolidated Statements of Comprehensive Income for the nine months
and three months ended April 30, 2000 and 1999.........................................................5
Condensed Consolidated Statements of Cash Flows for the
nine months ended April 30, 2000 and 1999..............................................................6
Notes to Condensed Consolidated Financial Statements......................................................7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk...............................................22
PART II. OTHER INFORMATION........................................................................................23
Item 1. Legal Proceedings........................................................................................23
Item 2. Changes in Securities....................................................................................23
Item 3. Defaults Upon Senior Securities..........................................................................23
Item 4. Submission of Matters to a Vote of Security Holders......................................................23
Item 5. Other Information........................................................................................23
Item 6. Exhibits and Reports on Form 8-K.........................................................................24
SIGNATURES.........................................................................................................27
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
IDT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
April 30, 2000 July 31, 1999
-------------- -------------
(Unaudited) (Note 1)
Assets
Current assets:
Cash and cash equivalents $ 100,113 $ 52,903
Marketable securities 64,656 29,435
Accounts receivable, net 164,064 106,146
Investments - short term 181,152 --
Investment in Terra Networks 232,042 --
Notes receivable - current portion 1,700 18,968
Other current assets 75,615 36,311
----------- -----------
Total current assets 819,342 243,763
Property, plant and equipment, at cost, net 185,708 114,123
Trademark, net 4,696 4,792
Notes receivable - long-term portion 8,496 2,187
Goodwill, net 72,939 74,880
Marketable securities - long term 72,961 48,435
Investments - long term 32,058 10,766
Deferred tax assets, net -- 1,309
Other assets 11,003 15,081
----------- -----------
Total assets $ 1,207,203 $ 515,336
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable $ 86,958 $ 79,475
Accrued expenses 7,813 6,920
Deferred revenue 18,415 13,210
Notes payable -- current portion 2,973 4,753
Capital lease obligations -- current portion 11,501 6,029
Other current liabilities 59,765 2,397
----------- -----------
Total current liabilities 187,425 112,784
Deferred tax liabilities, net 128,200 --
Notes payable -- long-term portion 3,407 112,973
Capital lease obligation -- long-term portion 43,397 15,742
----------- -----------
Total liabilities 362,429 241,499
Minority interests 324,125 20,432
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;
24,759,070 and 23,982,854 shares issued and outstanding at April
30, 2000 and July 31, 1999, respectively 248 240
Class A stock, $.01 par value; authorized shares - 35,000,000;
9,969,733 and 10,029,758 shares issued and outstanding at April
30, 2000 and July 31, 1999, respectively 100 100
Loans to stockholders (251) (251)
Additional paid-in capital 286,670 278,744
Accumulated other comprehensive income consisting of
unrealized appreciation of investments, net of deferred taxes 7,196 --
Accumulated earnings (deficit) 226,686 (25,428)
----------- -----------
Total stockholders' equity 520,649 253,405
----------- -----------
Total liabilities and stockholders' equity $ 1,207,203 $ 515,336
=========== ===========
See notes to condensed consolidated financial statements
3
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
Nine Months Ended April 30, Three Months Ended April 30,
---------------------------- ----------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
Revenue ........................................ $ 822,050 $ 485,770 $ 263,110 $ 191,751
Costs and expenses:
Direct cost of revenue ..................... 661,617 377,849 210,634 150,183
Selling, general and administrative ........ 176,683 70,772 71,345 29,966
Depreciation and amortization .............. 24,420 18,637 9,098 6,902
---------- ---------- ---------- ----------
Total costs and expenses ....................... 862,720 467,258 291,077 187,051
---------- ---------- ---------- ----------
Income (loss) from operations .................. (40,670) 18,512 (27,967) 4,700
Interest and other, net ........................ 463,613 (9) 236,946 (153)
---------- ---------- ---------- ----------
Income before income taxes,
minority interests and
extraordinary item .......................... 422,943 18,503 208,979 4,547
Provision for income taxes ..................... 183,845 6,897 89,202 2,071
Minority interests ............................. (15,992) 2,605 (7,879) 420
---------- ---------- ---------- ----------
Income before extraordinary item ............... 255,090 9,001 127,656 2,056
Extraordinary loss on retirement of debt, net of
income taxes ................................ 2,976 -- -- --
---------- ---------- ---------- ----------
Net income ..................................... $ 252,114 $ 9,001 $ 127,656 $ 2,056
========== ========== ========== ==========
Income per share:
Income before extraordinary item:
Basic ...................................... $ 7.43 $ 0.27 $ 3.70 $ 0.06
Diluted .................................... $ 6.87 $ 0.25 $ 3.36 $ 0.06
Extraordinary loss on retirement of debt, net of
income taxes:
Basic ...................................... $ (0.09) $ -- $ -- $ --
Diluted .................................... $ (0.08) $ -- $ -- $ --
Net income:
Basic ...................................... $ 7.34 $ 0.27 $ 3.70 $ 0.06
========== ========== ========== ==========
Diluted .................................... $ 6.79 $ 0.25 $ 3.36 $ 0.06
========== ========== ========== ==========
Weighted average number of
shares used in calculation of
earnings per share - basic ................. 34,334,185 33,431,628 34,540,247 33,648,800
========== ========== ========== ==========
Weighted average number of
shares used in calculation of
earnings per share - diluted ............. 37,117,425 35,404,696 37,996,026 35,730,964
========== ========== ========== ==========
See notes to condensed consolidated financial statements
4
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Nine Months Ended April 30, Three Months Ended April 30,
--------------------------- ----------------------------
2000 1999 2000 1999
Net income $252,114 $ 9,001 $127,656 $ 2,056
Other comprehensive income:
Change in unrealized appreciation of investments,
net of deferred taxes 7,196 -- 7,196 --
-------- ------- -------- --------
Other comprehensive income 7,196 -- 7,196 --
-------- ------- -------- --------
Comprehensive income $259,310 $ 9,001 $134,852 $ 2,056
======== ======== ======== ========
See notes to condensed consolidated financial statements
5
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended April 30,
---------------------------
2000 1999
Net cash used in operating activities ............... $ (85,234) $ (22,882)
Investing activities
Net proceeds from sale of Net2Phone common stock .... 115,434 --
Net collection (issuance) of notes receivable ....... 10,959 (11,848)
Purchases of investments, net ....................... (40,881) (22,613)
Purchases of property, plant and equipment .......... (55,510) (31,836)
Net purchases of marketable securities .............. (59,748) --
--------- ---------
Net cash used in investing activities ............... (29,746) (66,297)
Financing activities
Proceeds from offerings of common stock by Net2Phone 261,189 --
Proceeds from exercise of stock options for Net2Phone 8,781 --
Proceeds from exercise of stock options ............. 5,632 3,124
Proceeds from minority investment in subsidiary ..... 5,000 --
Proceeds from exercise of warrants .................. -- 738
Distributions to minority shareholder ............... (2,518) (4,831)
Repayment of capital lease obligations .............. (4,549) (3,742)
Repayment of borrowings ............................. (111,345) (1,374)
--------- ---------
Net cash provided by (used in) financing activities . 162,190 (6,085)
--------- ---------
Net increase (decrease) in cash and cash equivalents 47,210 (95,264)
Cash and cash equivalents, beginning of period ...... 52,903 115,283
--------- ---------
Cash and cash equivalents, end of period ............ $ 100,113 $ 20,019
========= =========
Supplemental disclosures of cash flow information
Interest paid ....................................... $ 8,719 $ 10,419
Income taxes paid ................................... $ 1,050 $ --
See notes to condensed consolidated financial statements
6
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. The condensed consolidated financial statements include the accounts
of IDT and all companies in which IDT has a controlling voting interest
including Union Telecard Alliance, LLC ("Union") and Net2Phone, Inc.
("Net2Phone"), as if IDT and its subsidiaries were a single company. Significant
intercompany accounts and transactions between the consolidated companies have
been eliminated. Operating results for the three and nine month periods ended
April 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending July 31, 2000. The balance sheet at July 31, 1999
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, 1999, as filed with the Securities and Exchange Commission.
Note 2 - Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is required to be adopted in fiscal
years beginning after June 15, 2000. The Company believes that the adoption of
this standard will not have a material effect on the Company's consolidated
results of operations or financial position due to its limited use of derivative
instruments.
Note 3--Business Segment Information
Operating results and other financial data presented for the principal
business segments of the Company are as follows ($ in thousands):
Wholesale Retail
Telecommunications Telecommunications Internet Internet
Services Services Services Telephony Ventures Total
Three months ended April 30, 2000
Total segment revenue ........... $ 127,880 $ 124,583 $ 3,448 $ 18,870 6 $ 274,787
Less: revenues between segments . 6,099 445 150 4,983 -- 11,677
Total unaffiliated revenue ...... 121,781 124,138 3,298 13,887 6 263,110
Income (loss) from operations ... 8,717 (5,667) (3,971) (18,108) (8,938) (27,967)
========= ========= ========= ========= ======== =========
Three months ended April 30, 1999
Total segment revenue ........... $ 75,381 $ 103,809 $ 4,367 $ 9,037 $-- $ 192,594
Less: revenues between segments . -- -- 150 693 -- 843
Total unaffiliated revenue ...... 75,381 103,809 4,217 8,344 -- 191,751
Income (loss) from operations ... 4,285 3,554 (2,111) (1,028) -- 4,700
========= ========= ========= ========= ======== =========
7
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Wholesale Retail
Telecommunications Telecommunications Internet Internet
Services Services Services Telephony Ventures Total
Nine months ended April 30, 2000
Total segment revenue ........... $ 401,649 $ 391,311 $ 10,296 $ 47,479 $ 6 $ 850,741
Less: revenues between segments . 14,386 3,582 450 10,273 -- 28,691
Total unaffiliated revenue ...... 387,263 387,729 9,846 37,206 6 822,050
Income (loss) from operations ... 19,785 3,729 (11,156) (41,107) (11,921) (40,670)
========= ========= ========= ========= ========= =========
Nine months ended April 30, 1999
Total segment revenue ........... $ 178,632 $ 273,505 $ 13,247 $ 22,203 -- $ 487,587
Less: revenues between segments -- -- 450 1,367 -- 1,817
Total unaffiliated revenue ...... 178,632 273,505 12,797 20,836 -- 485,770
Income (loss) from operations ... 15,086 14,379 (6,225) (4,728) -- 18,512
========= ========= ========= ========= ========= =========
Note 4 - Property, Plant and Equipment
Property, plant and equipment consists of the following ($ in thousands):
April 30, 2000 July 31, 1999
Equipment .......................................... $ 195,171 $ 117,547
Computer software .................................. 27,903 21,515
Leasehold improvements ............................. 9,217 3,651
Furniture and fixtures ............................. 6,040 2,447
Land and building .................................. 6,327 6,312
--------- ---------
244,658 151,472
Less: Accumulated depreciation and amortization..... (58,950) (37,349)
--------- ---------
$ 185,708 $ 114,123
========= =========
8
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 5--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
the Company seeking damages of $2.5 million dollars based upon the Company's
alleged breach of a settlement agreement between the Company 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.
In February 2000, IDT Europe B.V.B.A., a subsidiary of the Company, filed a
Complaint against Tyco Group S.A.R.L. ("Tyco") and Tyco Submarine Systems, Ltd.
("TSSL") in the United States District Court, Newark, New Jersey, alleging
breach of implied covenant of good faith and fair dealing and breach of contract
for breaching a Memorandum of Understanding and Instruction to Proceed entered
into on November 9, 1999. The Company is seeking to enjoin and restrain Tyco and
TSSL from undertaking contrary business activity inconsistent with the
Memorandum of Understanding and Instruction to Proceed and is seeking
compensatory, consequential and punitive damages. On March 24, 2000, Tyco filed
an answer and a motion to dismiss the action for lack of subject matter
jurisdiction and Tyco, TSSL, Tyco International Ltd., Tyco International (US)
Inc., and Tycom Ltd. filed suit against IDT Europe B.V.B.A. and the Company in
the Supreme Court for New York county. The suit alleges breach of contract and
tortious interference with prospective business relations and seeks declaratory
and/or injunctive relief. The plaintiffs are seeking compensatory damages in an
undefined amount and punitive damages in the amount of $3 billion. On April 13,
2000, the Company filed a motion to dismiss the action for lack of personal
jurisdiction and failure to state a claim, on which a hearing has been scheduled
for June 19, 2000. On June 7, 1999, the United States District Court in Newark,
New Jersey dismissed the Company's complaint for lack of federal court
jurisdiction. On June 14, 2000, the Company filed a substantially similar action
in the New Jersey state court.
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 a scheduling conference
is planned for June 26, 2000.
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, was also named as a
defendant in the action. The action claimed that the Company made hiring and
promotion decisions based upon the religious backgrounds of the relevant
individuals, in violation of federal and state law. The complaint sought
compensatory and punitive damages in an unspecified amount and also sought
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. This suit has been resolved and a Stipulation of
Dismissal with prejudice was filed on June 7, 2000.
9
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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.
Note 6--Significant Events
AT&T transaction
On March 28, 2000, IDT entered into an agreement with AT&T Corporation
("AT&T") pursuant to which IDT will sell, and a consortium led by AT&T through a
newly formed business entity ("Holdco") will purchase, 14.9 million shares of
Class A Common Stock, par value $0.01 per share, of Net2Phone ("Class A Stock"),
at a price of $75 per share. In addition, Holdco will purchase four million
newly-issued shares of Class A Stock from Net2Phone at a price of $75 per share.
Following these transactions, Holdco will have a 39% voting stake and a 32%
economic stake in Net2Phone for a total cash investment of approximately $1.4
billion. These transactions will reduce IDT's voting stake in Net2Phone from its
current 56% to 21% and its economic stake in Net2Phone from its current 45% to
17%.
In addition, Holdco and IDT have reached an agreement that gives Holdco the
right of first refusal to purchase IDT's remaining stake of 10 million shares of
Class A Stock. If this right is exercised, Holdco will have a 60% voting
interest and a 49% economic interest in Net2Phone. Holdco will also receive the
option to convert IDT's remaining 10 million shares of Class A Stock into shares
of Common Stock, par value $0.01 per share, of Net2Phone ("Common Stock").
Shares of Class A Stock have two votes per share, while shares of Common Stock
have one vote per share.
On March 3, 2000, AT&T entered into an agreement with IDT granting IDT an
option, for a period of 180 days, to cause AT&T to purchase 2,040,817 shares of
Class B Common Stock of IDT, at a price of $36.75 per share for an aggregate
purchase price of approximately $75,000,000. The option is exercisable from
April 2, 2000 until the earlier of (i) 180 days following March 3, 2000 and (ii)
the date IDT sells at least 12,500,000 shares of Class A Stock, $0.01 par value,
of Net2Phone to a current holder of shares of such Class A Stock of Net2Phone.
The Class B Common Stock will carry 1/10 of a vote per share.
For a period of 18 months, if Holdco buys shares of Class A Stock from
another holder of shares of Class A Stock, IDT will have the option to cause
Holdco to purchase up to 5 million additional shares of its Class A Stock on the
same terms and conditions.
AT&T and IDT have agreed to enter into various definitive commercial
arrangements for a period of three years.
Holdco shall have the right to nominate three members to the Board of
Directors of Net2Phone. Until August 1, 2003 Holdco and IDT will agree to vote
their shares in favor of mutually acceptable nominees to the Board of Directors
of Net2Phone.
Net2Phone will also grant each of AT&T and IDT a license to use Net2Phone's
technologies in their own communications services.
The transaction has been approved by the board of directors of AT&T, IDT
and Net2Phone and is expected to close in August 2000. A special meeting of
stockholders must approve amendments to the certificate of incorporation of
Net2Phone authorizing an increase in the number of authorized shares of Class A
Stock and an increase to the size of the Board of Directors. The transaction is
also subject to the receipt of regulatory approvals and certain other
conditions.
Liberty Media Group transaction
IDT announced on March 27, 2000 that Liberty Media Group had agreed to
purchase approximately 9.9% of the equity of IDT, equal to approximately
3,775,000 shares of IDT's common stock exchangeable for shares of Class B Common
Stock. On June 6, 2000, Liberty Media Group completed the purchase of 3,728,949
shares of IDT's Common Stock at a price of $34.50 per share, resulting in total
cash consideration of approximately $128.6 million. Liberty Media also has the
right to nominate a director for election to the IDT Board of Directors.
10
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Terra Networks transaction
In October 1999, IDT entered into a joint venture agreement with Terra
Networks, S.A. ("Terra") pursuant to which the two parties formed two limited
liability companies to provide Internet services and products to customers in
the United States. One company was formed to provide internet access to
customers and the other company was formed to develop and manage an internet
portal that will provide content-based Internet services. IDT's 49% interest in
the Internet access company was accounted for using the equity method of
accounting. The equity method was used since IDT had significant influence, but
less than a controlling voting interest. IDT's 10% interest in the Internet
portal company was accounted for at cost. The cost method was used since IDT did
not have a controlling voting interest, or an ownership or voting interest so
large as to exert significant influence, and the venture was not publicly
traded.
On April 30, 2000, the Company sold its interests in the two joint ventures
for the right to receive 3,750,000 shares of Terra common stock. The Company
recognized a pre-tax gain of approximately $231.3 million in connection with
this transaction for the quarter ended April 30, 2000.
Stock buyback program
On May 17, 2000 the Company announced that its Board of Directors had
authorized the repurchase of up to five million shares of the Company's common
stock. As of June 13, 2000, the Company had repurchased 1,431,773 shares of
common stock under the program for aggregate consideration of $43.5 million.
Net2Phone subsidiary stock sales
During the course of the nine months ended April 30, 2000, the company
recognized approximately $226.5 million in gains related to Net2Phone subsidiary
stock sales as follows:
. A $43.9 million pre-tax gain was recognized in August 1999 (first
quarter of fiscal 2000) in connection with Net2Phone's intial public
offering of 6.2 million shares of its common stock, at a price of
$15.00 per share for net proceeds to Net2Phone of approximately
$83.8 million, in accordance with the provisions of Staff Accounting
Bulletin No. 51. Deferred taxes have been provided for this gain.
IDT's ownership interest before and after the initial public
offering was 85.14% and 56.24%, respectively.
. A $76.8 million pre-tax gain was recognized in December 1999 (second
quarter of fiscal 2000) in connection with Net2Phone's secondary
offering of 6.3 million shares of its common stock, at a price of
$55.00 per share for net proceeds to Net2Phone of approximately
$177.4 million, in accordance with the provisions of Staff
Accounting Bulletin No. 51. Deferred taxes have been provided for
this gain.
. 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, at a price of $55.00 per share for net proceeds of
approximately $115.4 million. Current taxes have been provided for
this gain. IDT's ownership interest before and after this
transaction and the secondary (which occurred at the same time) was
56.24% and 47.97%, respectively.
11
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 fiscal year ended July 31, 1999, as
filed with the Securities and Exchange Commission.
Overview
The Company is a leading facilities-based multinational telecommunications
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 subsidiary's products and
services, Internet telephony services. The Company delivers these services over
a high-quality network consisting of 70 Company owned switches in the U.S. and
Europe, owned and leased capacity on 23 undersea fiber optic cables and capacity
on 7 dedicated satellite transponders. 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.
In recent years, the Company has derived the majority of its revenues from
its core telecommunications businesses, consisting primarily of wholesale
carrier services and retail pre-paid calling cards. These businesses have also
accounted for the bulk of the Company's operating expenses as well. Since the
fourth quarter of Fiscal 1998, the Company has conducted wholesale carrier and
pre-paid calling card operations in Europe. As the Company builds its European
telecommunications operations, the Company expects 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.
The Company is also developing various new telecom and Internet related
businesses. During the nine months ended April 30, 2000, the Company incurred
approximately $11.9 million in development costs for these business ventures,
which did not have any significant revenues. The Company anticipates that it
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 pre-paid calling card business segments,
the Company has experienced intense competition, which has served, over time, to
reduce the average revenue per minute realized by the Company. In addition, this
environment has led some of the Company's competitors to de-emphasize their
wholesale carrier and/or pre-paid calling card operations, in order to focus on
higher margin telecommunications businesses. The Company remains strongly
committed to its wholesale carrier and pre-paid calling card businesses.
However, the Company has experienced pricing and margin pressure in recent
quarters. In addition, the Company's overall minutes of use began trending lower
in August 1999, although overall minutes of use has begun to trend upward again
since March 2000. The Company anticipates that it will continue to experience
pricing and margin pressure in both its wholesale and retail businesses for at
least the next few quarters.
Nine Months Ended April 30, 2000 Compared to Nine Months Ended April 30, 1999
Results of Operations
Revenue. Revenue increased 69.2%, from approximately $485.8 million for the
nine months ended April 30, 1999 to approximately $822.1 million for the nine
months ended April 30, 2000.
12
Telecommunications revenues increased 71.4%, from approximately $452.1 million
for the nine months ended April 30, 1999 to approximately $774.9 million for the
nine months ended April 30, 2000. Internet services revenues decreased 23.1%,
from approximately $12.8 million for the nine months ended April 30, 1999 to
approximately $9.8 million for the nine months ended April 30, 2000. Internet
telephony revenues increased 78.6%, from approximately $20.8 million for the
nine months ended April 30, 1999 to approximately $37.2 million for the nine
months ended April 30, 2000.
Telecommunications revenue increased primarily as a result of a 64.0%
increase in minutes of use from approximately 1.86 billion for the nine months
ended April 30, 1999 to approximately 3.04 billion for the nine months ended
April 30, 2000. 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 for the quarter ended October 31, 1999
related to a one-time tariff opportunity resulted in an increase in wholesale
telecommunications revenues of 116.7%, from approximately $178.6 million for the
nine months ended April 30, 1999 to approximately $387.3 million for the nine
months ended April 30, 2000. As a percentage of telecommunications revenue,
wholesale telecommunications revenue increased from approximately 39.5% in the
nine months ended April 30, 1999 to approximately 50.0% in the nine months ended
April 30, 2000. Revenue from retail telecommunications services increased 41.8%
from approximately $273.5 million for the nine months ended April 30, 1999 to
approximately $387.7 million for the nine months ended April 30, 2000 as a
result of increased marketing efforts for the Company's prepaid calling cards.
Prepaid calling card sales as a percentage of retail telecommunications services
revenue increased from 91.2% for the nine months ended April 30, 1999 to 94.1%
for the nine months ended April 30, 2000. As a percentage of overall
telecommunications revenue, retail telecommunications revenue decreased from
approximately 60.5% in the nine months ended April 30, 1999 to approximately
50.0% in the nine months ended April 30, 2000.
As a percentage of total revenue, Internet services revenue decreased from
approximately 2.6% for the nine months ended April 30, 1999 to approximately
1.2% for the nine months ended April 30, 2000. This was due primarily to
decreased revenue caused by the contribution of the majority of the Company's
dial-up subscribers to the joint venture formed with Terra Networks, S.A. during
the quarter ended October 31, 1999 as well as the substantial increase in
telecommunications revenue during the same period.
Internet telephony revenue as a percentage of total revenue was 4.5% for
the nine months ended April 30, 2000, representing a slight increase from 4.3%
for the nine months ended April 30, 1999. The increase in Internet telephony
revenue, in dollar terms, was due to an increase in billed minutes of use
resulting from increased marketing of Net2Phone's Internet telephony products
and services.
Direct Cost of Revenue. The Company's direct cost of revenue increased by
75.1%, from approximately $377.8 million for the nine months ended April 30,
1999 to approximately $661.6 million for the nine months ended April 30, 2000.
As a percentage of total revenue, these costs increased from 77.8% for the nine
months ended April 30, 1999 to 80.5% for the nine months ended April 30, 2000.
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 revenue, the
increase in direct costs reflects a change in revenue mix, in which the Company
experiences lower gross margins associated with wholesale telecommunications
services as compared to retail telecommunications services as well as lower
gross margins related to telecommunications revenue as compared with Internet
access services.
Selling, General and Administrative. Selling, general and administrative
costs increased 149.7%, from approximately $70.8 million for the nine months
ended April 30, 1999 to approximately $176.7 million for the nine months ended
April 30, 2000. As a percentage of total revenue, these costs increased from
14.6% for the nine months ended April 30, 1999 to 21.5% for the nine months
ended April 30, 2000. This increase is due to increased international debit card
distribution costs, increased sales and marketing efforts for retail services,
including prepaid calling cards and 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, including expenditures related to expansion of the Company's
telecommunications operations in Europe. Also included in selling, general and
administrative costs for the nine months ended April 30, 2000 is approximately
$11.9 million in costs associated with the Company's ventures division, which
has several innovative telecommunications
13
and Internet related businesses under various stages of development, and
approximately $8.2 million of non-cash compensation as a result of option grants
made by our Net2Phone subsidiary.
Depreciation and Amortization. Depreciation and amortization increased
31.0%, from approximately $18.6 million for the nine months ended April 30, 1999
to approximately $24.4 million for the nine months ended April 30, 2000. As a
percentage of revenue, these costs decreased from 3.8% for the nine months ended
April 30, 1999 to 3.0% for the nine months ended April 30, 2000. These costs
increased, in dollar terms, primarily as a result of the Company's higher fixed
asset base during the nine months ended April 30, 2000 as compared with the nine
months ended April 30, 1999, reflecting the Company's efforts to expand its
telecommunications network infrastructure and other facilities, both in the U.S.
and abroad. The Company anticipates that depreciation and amortization costs
will continue to increase as the Company continues to add to its asset base,
both in the U.S. and abroad, allowing it to implement its global growth
strategy.
Income from Operations. The Company recorded a loss from operations of
approximately $40.7 million for the nine months ended April 30, 2000, compared
to income from operations of approximately $18.5 million for the nine months
ended April 30, 1999. Income from operations for the Company's
telecommunications business declined to approximately $23.5 million for the nine
months ended April 30, 2000 from approximately $29.5 million for the nine months
ended April 30, 1999. As a percentage of telecommunications revenue, income from
operations for the telecommunications business decreased to 3.0% for the nine
months ended April 30, 2000 from 6.5% for the nine months ended April 30, 1999
due primarily to decreased margins in the carrier wholesale and retail
telecommunications businesses; a higher proportion of relatively lower margin
wholesale revenues; and an increase in sales and marketing costs for retail
telecommunications services, relating primarily to the expansion of the
Company's European operations.
Loss from operations for the Company's Internet services business increased
to approximately $11.2 million for the nine months ended April 30, 2000 from
approximately $6.2 million for the nine months ended April 30, 1999. The
increased loss is primarily due to the decrease in revenue caused by the
contribution of the majority of the Company's dial-up subscribers to the joint
venture formed with Terra Networks, S.A. during the quarter ended October 31,
1999, lower gross margins and an increase in marketing expenses.
Loss from operations from the Company's Ventures division, which is
developing several new telecom and Internet-related businesses, was
approximately $11.9 million for the nine months ended April 30, 2000, reflecting
start-up and development costs.
Loss from operations of the Net2Phone subsidiary increased to approximately
$41.1 million for the nine months ended April 30, 2000, compared to a loss of
approximately $4.7 million for the nine months ended April 30, 1999. This
increase is due primarily to a substantial increase in selling, general and
administrative expenses incurred as Net2Phone expanded distribution
relationships, corporate infrastructure and human resources as well as the
non-cash compensation charge of $8.2 million described above.
Other income. Included in other income for the nine months ended April 30,
2000 is $120.7 million in gains recognized by the Company under Staff Accounting
Bulletin No. 51 in conjunction with Net2Phone's sale of shares in its Initial
Public Offering and Secondary Offering in August 1999 and December 1999,
respectively, and a realized gain of $105.8 million on the Company's sale of 2.2
million Net2Phone shares as part of Net2Phone's Secondary Offering. Also
included in other income for the period was a gain of approximately $231.3
million, recorded in the three months ended April 30, 2000, related to the
sale of the Company's interests in two Internet joint ventures with Terra
Networks.
Income Taxes. The Company recorded income tax expense of approximately
$183.8 million for the nine months ended April 30, 2000, compared to
approximately $6.9 million for the nine months ended April 30, 1999.
Three Months Ended April 30, 2000 Compared to Three Months Ended April 30, 1999
Results of Operations
14
Revenue. Revenue increased 37.2%, from approximately $191.8 million for the
three months ended April 30, 1999 to approximately $263.1 million for the three
months ended April 30, 2000. Telecommunications revenue increased 37.2%, from
approximately $179.2 million for the three months ended April 30, 1999 to
approximately $245.9 million for the three months ended April 30, 2000. Internet
services revenue decreased 21.8%, from approximately $4.2 million for the three
months ended April 30, 1999 to approximately $3.3 million for the three months
ended April 30, 2000. Internet telephony revenue increased 66.4%, from
approximately $8.3 million for the three months ended April 30, 1999 to
approximately $13.9 million for the three months ended April 30, 2000.
Telecommunications revenue increased as a result of a 34.5% increase in
minutes of use from approximately 746.6 million for the three months ended April
30, 1999 to approximately 1.00 billion for the three months ended April 30,
2000. The increase in minutes was due to the addition of wholesale carrier
service clients, increased usage by existing clients, and increased marketing of
the Company's prepaid calling cards. The addition of wholesale carrier services
clients and increased use by existing clients resulted in an increase in
wholesale telecommunications revenues of 61.6%, from approximately $75.4 million
for the three months ended April 30, 1999 to approximately $121.8 million for
the three months ended April 30, 2000. As a percentage of telecommunications
revenue, wholesale telecommunications revenue increased from approximately 42.1%
in the three months ended April 30, 1999 to approximately 49.5% in the three
months ended April 30, 2000. Revenue from retail telecommunications services
increased 19.6%, from approximately $103.8 million for the three months ended
April 30, 1999 to approximately $124.1 million for the three months ended April
30, 2000 as a result of increased marketing efforts for the Company's prepaid
calling cards. Prepaid calling card sales as a percentage of retail
telecommunications services revenue increased from 92.5% for the three months
ended April 30, 1999 to 94.2% for the three months ended April 30, 2000. As a
percentage of overall telecommunications revenue, retail telecommunications
revenue decreased from approximately 57.9% for the three months ended April 30,
1999 to approximately 50.5% for the three months ended April 30, 2000.
As a percentage of total revenue, Internet services revenue decreased from
approximately 2.2% for the three months ended April 30, 1999 to approximately
1.3% for the three months ended April 30, 2000. This was due primarily to
decreased revenue caused by the contribution of the majority of the Company's
dial-up subscribers to the joint venture formed with Terra Networks, S.A. during
the quarter ended October 31, 1999 as well as the substantial increase in
telecommunications revenues during the same period.
Internet telephony revenue as a percentage of total revenue amounted to
5.3% for the three months ended April 30, 2000, up from 4.4% for the three
months ended April 30, 1999. The increase in Internet telephony revenue, in both
dollar and percentage terms, was primarily due to an increase in billed minutes
of use resulting from increased marketing of Net2Phone's Internet telephony
products and services.
Direct Cost of Revenue. The Company's direct cost of revenue increased by
40.3%, from approximately $150.2 million for the three months ended April 30,
1999 to approximately $210.6 million for the three months ended April 30, 2000.
As a percentage of total revenue, these costs increased from 78.3% for the three
months ended April 30, 1999 to 80.1% for the three months ended April 30, 2000.
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 revenue, the
increase in direct costs reflects a change in revenue mix, in which the Company
experiences lower gross margins associated with wholesale telecommunications
services as compared to retail telecommunications services as well as lower
gross margins related to telecommunications revenue as compared with Internet
access service.
Selling, General and Administrative. Selling, general and administrative
costs increased 138.1%, from approximately $30.0 million for the three months
ended April 30, 1999 to approximately $71.3 million for the three months ended
April 30, 2000. As a percentage of total revenue, these costs increased from
15.6% for the three months ended April 30, 1999 to 27.1% for the three months
ended April 30, 2000. This increase is due primarily to increased international
debit card distribution costs, increased sales and marketing efforts for retail
services, including prepaid calling cards and 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, including expenditures related to expansion
of the Company's telecommunications operations in Europe. Also included in
selling, general
15
and administrative costs for the three months ended April 30, 2000 is
approximately $8.9 million in costs associated with the Company's ventures
division, which has several innovative telecommunications and internet related
businesses under various stages of development, and $3.1 million of non-cash
compensation as a result of option grants made by our Net2Phone subsidiary.
Depreciation and Amortization. Depreciation and amortization increased
31.8%, from approximately $6.9 million for the three months ended April 30, 1999
to approximately $9.1 million for the three months ended April 30, 2000. As a
percentage of revenue, these costs decreased slightly from 3.6% for the three
months ended April 30, 1999 to 3.5% for the three months ended April 30, 2000.
These costs increased, in dollar terms, primarily as a result of the Company's
higher fixed asset base during the three months ended April 30, 2000 as compared
with the three months ended April 30, 1999, reflecting the Company's efforts to
expand its telecommunications network infrastructure and other facilities, both
in the U.S. and abroad. The Company anticipates that depreciation and
amortization costs will continue to increase as the Company continues to add to
its asset base, both in the U.S. and abroad, allowing it to implement its global
growth strategy.
Income from Operations. The Company recorded a loss from operations (prior
to the effects of minority interests) of approximately $28.0 million for the
three months ended April 30, 2000, compared to income from operations of
approximately $4.7 million for the three months ended April 30, 1999. Income
from operations for the Company's telecommunications business (after the effect
of minority interests) decreased from approximately $7.8 million for the three
months ended April 30, 1999 to approximately $3.0 million for the three months
ended April 30, 2000. As a percentage of telecommunications revenue, income from
operations for the telecommunications business decreased to 1.1% for the three
months ended April 30, 2000 from 4.1% for the three months ended April 30, 1999,
due primarily to decreased margins in the carrier wholesale business, and an
increase in sales and marketing costs for retail telecommunications services.
Specifically, gross margins for European telecommunications operations were
hampered by capacity constraints, which caused the Company's per-minute direct
cost of revenues to rise. In addition, increased spending for marketing,
salaries and facilities costs related to the Company's European operations
contributed significantly to the rise in selling, general and administrative
expenses.
Loss from operations for the Company's Internet services business increased
to approximately $4.0 million for the three months ended April 30, 2000 from
approximately $2.1 million for the three months ended April 30, 1999. The
increased loss is primarily due to the decrease in revenue caused by the
contribution of the majority of the Company's dial-up subscribers to the joint
venture formed with Terra Networks, S.A. during the quarter ended October 31,
1999, combined with lower gross margins and increased selling, general and
administrative expenses.
Loss from operations from the Company's Ventures division, which is
developing several new telecom and Internet-related businesses, was
approximately $8.9 million for the three months ended April 30, 2000, reflecting
start-up and development costs.
Loss from operations of the Net2Phone subsidiary increased to approximately
$18.1 million for the three months ended April 30, 2000, compared to a loss of
approximately $1.0 million for the three months ended April 30, 1999. This
increase is due primarily to a substantial increase in selling, general and
administrative expenses incurred as Net2Phone expanded distribution
relationships, corporate infrastructure and human resources as well as the
non-cash compensation charge of $3.1 million described above.
Other income. Included in other income for the three months ended April 30,
2000 is a gain of approximately $231.3 million, recorded in the three months
ended April 30, 2000, related to the sale of the Company's interests in two
Internet joint ventures with Terra Networks in exchange for Terra Networks
stock.
Income Taxes. The Company recorded income tax expense of approximately
$89.2 million for the three months ended April 30, 2000, compared to
approximately $2.1 million for the three months ended April 30, 1999.
Liquidity and Capital Resources
General
16
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,
including Net2Phone, received approximately $14.4 million upon the exercise of
stock options in the nine months ended April 30, 2000.
In May 1999, the Company entered into a credit agreement with a syndicate
of lenders whereby these institutions committed to provide a $160 million credit
facility. The Company used the proceeds from the initial borrowings under the
credit facility of $108.1 million to purchase more than 99% of its outstanding
8.75% Senior Notes due 2006, together with accrued and unpaid interest. During
the quarter ended January 31, 2000, the Company paid off the outstanding
indebtedness under the facility of $108.1 million, plus fees and accrued and
unpaid interest, using the proceeds from the sale of Net2Phone shares as part of
Net2Phone's December 1999 Secondary Offering and the facility terminated.
As of April 30, 2000, the Company had cash, cash equivalents and marketable
securities of approximately $237.7 million and working capital of approximately
$631.9 million. The Company generated negative cash flow from operating
activities of approximately $85.2 million during the nine months ended April 30,
2000, compared with negative cash flow from operating activities of
approximately $22.9 million during the nine months ended April 30, 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 $55.5 million for the
nine months ended April 30, 2000, compared to approximately $31.8 million for
the nine months ended April 30, 1999, as the 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 have 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. In fact, it has become commonplace within the industry for companies
to experience delays in network build-out programs. 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.
IDT's European telecommunications operations account for an increasing
proportion of overall telecommunications revenue. Recognizing the significant
opportunities offered by the rapidly evolving European telecommunications
market, the Company intends to expand its network in Europe to further develop
its operations in that region. Such expansion may have a negative impact on the
Company's gross margins over the next two to four quarters. In addition, the
Company is entering several new markets within Europe. Such market entries are
likely to result in significantly increased selling, general and administrative
expenses, as the Company incurs overhead, promotional and human resource-related
expenses for each country it enters.
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 anticipated margin improvement, would be delayed.
Changes in Other Assets, Accounts Receivable, Allowance for Doubtful Accounts
and Deferred Revenue
Other current assets increased from $36.3 million at July 31, 1999 to
$75.6 million at April 30, 2000, due primarily to increases in contract deposits
and prepaid expenses at Net2Phone. 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.
17
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
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
decreased marginally, from 6.7% at July 31, 1999, to 6.5% at April 30, 2000.
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, receiving approximately $83.8 million in net proceeds. At that
time, the Series A Preferred Stock was converted into Class A Common Stock. The
Company recognized a pre-tax gain of approximately $43.9 million as a result of
this transaction.
In December 1999, Net2Phone completed a Secondary Offering of 6.3 million
shares, receiving approximately $177.4 million in net proceeds. As part of the
Secondary Offering, the Company sold 2.2 million Net2Phone shares, yielding
approximately $115.4 million in net proceeds. Subsequent to the sale of these
shares, the Company used approximately $108.1 million of the proceeds to pay off
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 April 30, 2000, the Company would have expensed
approximately $77 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.
Significant Transactions
In March 2000, the Company announced that a consortium led by AT&T
Corporation had agreed to purchase 14.9 million of the Company's approximately
24.9 million shares of Net2Phone Class A Common Stock, for a purchase price
18
of $75 per share. In addition, Net2Phone will sell four million of its shares to
AT&T for a purchase price of $75 per share. The Company anticipates that this
transaction will close during the first quarter of Fiscal 2001. In addition, the
Company received the right, at its option, to sell to AT&T 2,040,817 shares of
its Class B Common Stock for total cash consideration of $75.0 million.
In June 2000, Liberty Media Group completed the purchase of approximately
9.9% of the equity of IDT. Under the terms of the agreement, IDT issued and sold
to Liberty Media 3,728,949 shares of IDT's Common Stock, exchangeable for shares
of Class B Common Stock, at a price of $34.50 per share, resulting in total cash
consideration of approximately $128.6 million.
On April 30, 2000, the Company sold its interests in two joint ventures
with Terra Networks for the right to receive 3,750,000 Terra ordinary shares.
The Company recognized a pre-tax gain of approximately $231.3 million in
connection with this transaction for the quarter ended April 30, 2000.
On May 17, 2000 the Company announced that its Board of Directors had
authorized the repurchase of up to five million shares of the Company's common
stock. As of June 14, 2000 the Company had repurchased 1,431,773 shares of
common stock under the program for aggregate consideration of approximately
$43.5 million.
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, or any of its
new venture businesses. 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 will be sufficient to meet its currently
anticipated working capital and capital expenditure requirements and to fund any
potential operating cash flow deficits 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 operating cash flow
deficit exceeds the Company's expectations to the point that the Company cannot
meet its working capital and capital expenditure requirements, the Company will
need to raise additional capital from equity or debt sources. There can be no
assurance that the Company will be able to raise such capital on favorable terms
or at all. If the Company is unable to obtain such additional capital, the
Company may be required to reduce the scope of its anticipated expansion, which
could have a material adverse effect on the Company's business, financial
condition or results of operations.
Year 2000
Prior to January 1, 2000, the Company reviewed and evaluated the possible
effects of the Year 2000 issue upon its installed computer systems, network
systems and software applications. The Year 2000 issue involved the fact that
many computers and applications define dates by the last two digits of the year
and "00" would possibly not be properly recognized by such programs as the year
2000. The Company dedicated the time and resources it deemed appropriate to
address and correct potential Year 2000 problems.
In response to the Year 2000 issue, the Company established a Year 2000
compliance committee (the "Committee") to eliminate any possible disruptions in
services and operations due to the date change in the Year 2000. The Committee
developed a plan to identify and repair any systems that may be affected by the
Year 2000. The plan consisted of (1) identifying and inventorying all systems;
(2) assessing and testing
19
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 implemented this plan throughout the company and, in addition
to reviewing its own systems, the Company initiated inquiries and submitted
requests to its third-party vendors and service providers to obtain information
regarding their compliance with the Year 2000. Furthermore, as a result of the
Company's focus on the testing and remediation of its switching facilities, its
network operations through which it provides communications services to its
customers, were not disrupted by the Year 2000 issue.
Inventory, assessment, remediation and testing of software applications and
hardware systems, including network systems, was substantially completed. The
Company completed the modification, updating or replacement of any systems that
to its knowledge were 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.
The Company is confident that its own network systems are Year 2000
compliant due to the nature and extent of the testing the Company conducted and
continues to implement on such systems.
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. 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 does not anticipate, based on information
currently available, that the euro will have a material adverse impact on the
Company's operations and sales.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, including statements that contain the
words "believes," "anticipates," "expects," and similar words and phrases. Such
forward-looking statements include, among other things, the Company's plans to
implement its growth strategy, improve its financial performance, expand its
infrastructure, develop new products and services, expand its customer base and
enter international markets, and the possible outcome of litigation relating to
the Company. Such forward-looking statements also include the Company's
expectations concerning factors affecting the markets for its products, such as
changes in the U.S. and the international regulatory environment and the demand
for long-distance telecommunications, Internet access and Internet telephony
services. Actual results could differ from those projected in any
forward-looking statements.
Forward-looking statements are based on management's current views and
assumptions and involve known and unknown risks that could cause actual results,
performance or events to differ materially from those expressed or implied in
those statements. These risks include but are not limited to the following
risks:
each of our business lines is highly sensitive to declining prices;
competition in our core businesses could substantially reduce our revenues
and our profits;
we may not be able to grow our operations in the future if we cannot raise
enough capital;
our revenues and profits will not increase if we are unable to continue to
expand our telecommunications business;
our expenses will increase substantially if we expand our network at a
rate that is faster or slower than the growth of our telecommunications traffic;
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our operations would be impaired if we are unable to obtain the products
and services of the telecommunications companies that we are dependent upon;
termination of our carrier agreements with foreign partners or our
inability to enter into carrier agreements in the future could materially and
adversely affect our ability to compete in foreign countries;
our revenues and our growth will suffer if our retailers and sales
representatives fail to effectively market and distribute our products and
services;
we may not be able to integrate our joint ventures, direct investments and
acquisitions successfully with our existing business;
rapid technological change and frequent new product introductions in our
markets could render our products and services obsolete;
our growth may be limited if we cannot effectively manage our
international operations;
our business will not grow without increased use of the Internet;
our revenues will be impaired if we experience difficulties in collecting
our receivables;
we will not be profitable if we do not receive attractive rates from other
carriers for our long distance traffic;
federal, state, and international government regulation may reduce our
ability to provide services, or make our business less profitable and we may
become subject to increased costs of operations due to uncertainty over the
amount of payphone surcharges and Federal Universal Service Fund obligations;
we may become subject to increased price competition from other carriers
due to federal regulatory changes in determining international settlement rates;
European regulation of telecommunications services may not continue to
evolve towards streamlined regulation;
telecommunications regulations of other countries may restrict our
operations;
government regulation of Internet access may increase our costs of
operations and we may become subject to Internet access charges;
we may be subject to liability for information disseminated over our
Internet network;
the infringement or duplication of our proprietary technology could
increase our competition and we could incur substantial costs in defending or
pursuing any claims relating to proprietary rights;
network construction delays and system disruptions or failures could
prevent us from providing our services, cause us to lose customers and adversely
affect our business;
our quarterly operating results are subject to variation, which could
cause us not to meet the expectations of securities analysts, and should not be
relied upon as an accurate indicator of our overall performance;
if we are unable to attract and retain qualified management and technical
personnel, we may not remain profitable; and
IDT is controlled by its principal stockholder, which limits the ability
of other stockholders to affect the management of IDT.
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
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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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Incorporated by reference from Part I, Item I, Financial Statements, Note
5 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
On March 14, 2000, March 26, 2000 and April 18, 2000, the Board of
Directors of the Company adopted resolutions authorizing amendments to the
Company's restated certificate of incorporation and recommending that the
stockholders of the Company adopt the following amendments:
1. Increase the authorized capital stock of the Company from
145,000,000 shares to 245,000,000 shares.
2. Create and authorize a new class of common stock, Class B Common
Stock, par value $0.01 per share.
3. Increase the number of directors on the Company's Board of Directors
from fifteen (15) to seventeen (17).
On April 28, 2000, Mr. Howard S. Jonas executed a written consent
approving the amendments to the Company's restated certificate of incorporation.
Mr. Jonas executed the written consent as the beneficial owner of 951,605 shares
of the Company's Common Stock, par value $0.01 per share, and 9,969,733 shares
of the Company's Class A Common Stock, par value $0.01 per share, representing
approximately 56.6% of the combined voting power of the Company as of April 28,
2000.
Item 5. Other Information
None
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description
3.01(1) Restated Certificate of Incorporation of the Registrant.
3.02(1) By-laws of the Registrant.
3.03(3) Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant.
10.29(2) Option Agreement, dated as of March 3, 2000, between IDT
Corporation and AT&T Corp.
10.30(3) Amendment to Option Agreement, dated as of April 5, 2000 between
IDT Corporation and AT&T Corp.
10.31(2) Subscription Agreement, dated as of March 24, 2000, between IDT
Corporation and Liberty Media Corporation.
10.32(3) Amendment to Subscription Agreement, dated as of May 26, 2000,
between IDT Corporation and Liberty Media Corporation.
10.33(2) Letter Agreement, dated as of March 28, 2000, between IDT
Corporation, AT&T Corp. and Net2Phone, Inc.
10.34(2) Letter Agreement, dated as of March 30, 2000, between IDT
Corporation, AT&T Corp. and Net2Phone, Inc.
10.35+ 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.
--------------
* filed herewith
+ previously filed
(1) Incorporated by reference to Form S-1 filed February 21, 1996 file no.
333-00204.
(2) Incorporated by reference to Form 8-K filed March 31, 2000.
(3) Incorporated by reference to Schedule 14C filed June 12, 2000.
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(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K on March 31, 2000,
announcing that on March 28, 2000, the Company entered into an agreement
with AT&T, whereby AT&T, through a newly formed business entity, would
purchase 14.9 million shares of Class A Common Stock, par value $0.01 per
share, of Net2Phone, Inc. at a price of $75 per share.
The Company also announced that on March 3, 2000 it entered into
an agreement with AT&T in which the Company granted an option to AT&T, for
a period of 180 days, to purchase 2,040,817 shares of Class B Common Stock
of the Company for an aggregate purchase price of approximately
$75,000,000.
The Company also announced that on March 24, 2000 it entered into an
agreement with Liberty Media Corporation pursuant to which Liberty Media
Corporation agreed to purchase approximately 9.9% of the Company's Common
Stock for an aggregate purchase price of approximately $130,000,000.
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IDT CORPORATION
FORM 10-Q
April 30, 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.
IDT CORPORATION
June 22, 2000 By: /s/ HOWARD S. JONAS
------------- ---------------------
Date Howard S. Jonas
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
June 22, 2000 By: /s/ STEPHEN R. BROWN
------------- ----------------------
Date Stephen R. Brown
Chief Financial Officer
(Principal Financial and
Accounting Officer)
26