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, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number: 0-27898
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IDT Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-3415036
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
190 Main Street, Hackensack, New Jersey 07601
- --------------------------------------- -----
(Address of Principal Executive Office) (Zip Code)
(201) 928-1000
--------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
--------------
(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last
Report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Common Stock, $.01 par value - 23,226,833 shares as of December 15, 1998
Class A Common Stock, $.01 par value -- 10,142,855 shares as of
December 15, 1998
(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 July 31, 1998 and October 31, 1998.......................... 3
Condensed Consolidated Statements of Income for the three months ended October 31, 1997
and 1998.............................................................................................. 4
Condensed Consolidated Statement of Stockholders' Equity for the three months ended
October 31, 1998...................................................................................... 5
Condensed Consolidated Statements of Cash Flows for the three months ended
October 31, 1997 and 1998............................................................................. 6
Notes to Condensed Consolidated Financial Statements ................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................... 14
Item 2. Changes in Securities................................................................................. 14
Item 3. Defaults upon Senior Securities....................................................................... 14
Item 4. Submision of Matters to a Vote of Security Holders.................................................... 14
Item 5. Other Information..................................................................................... 14
Item 6. Exhibits and Reports on Form 8-K..................................................................... 15
Signatures......................................................................................................... 17
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IDT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
October 31, 1998 July 31, 1998
---------------- -------------
ASSETS (Unaudited) (Note 1)
Current assets:
Cash and cash equivalents $98,444,138 $115,283,519
Marketable securities 52,452,604 60,308,768
Accounts receivable, net 44,660,028 38,037,974
Notes receivable - current portion 2,140,000 2,140,000
Other current assets 19,108,656 12,096,803
------------ ------------
Total current assets 216,805,426 227,867,064
Property and equipment, net 83,759,831 75,332,476
Notes receivable - long-term portion 29,562,790 21,767,769
Goodwill, net 74,900,114 74,222,221
Deferred tax assets, net 7,668,739 10,750,000
Other assets 11,275,062 7,256,674
------------ ------------
Total assets $423,971,962 $417,196,204
============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $41,286,405 $38,793,873
Accrued expenses 1,757,348 3,499,301
Interest payable 1,908,639 3,942,577
Deferred revenue 10,774,062 9,175,218
Notes payable -- current portion 2,094,045 1,865,849
Capital lease obligations -- current portion 3,568,679 3,989,375
Other current liabilities 200,270 220,325
------------ ------------
Total current liabilities 61,589,448 61,486,518
Notes payable -- long-term portion 101,106,459 101,833,892
Capital lease obligation -- long-term portion 10,725,136 11,232,053
------------ ------------
Total liabilities 173,421,043 174,552,463
Minority interest 5,519,081 3,895,669
Commitments and Contingencies
Stockholders' equity:
Preferred stock, $.01 par value; authorized
shares - 10,000,000; no shares issued -- --
Common stock, $.01 par value; authorized
shares - 100,000,000; 23,199,289 and
22,848,866 shares issued and outstanding
at October 31, 1998 and July 31,
1998, respectively 231,993 228,489
Class A stock, $.01 par value; authorized
shares - 35,000,000; 10,142,868 and
10,255,668 shares issued and outstanding
at October 31, 1998 and July 31,
1998, respectively 101,429 102,557
Additional paid-in capital 268,151,509 266,761,770
Accumulated deficit (23,453,093) (28,344,744)
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Total stockholders' equity 245,031,838 238,748,072
------------ ------------
Total liabilities and stockholders' equity $423,971,962 $417,196,204
============ ============
See notes to condensed consolidated financial statements.
3
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended October 31,
---------------------------------------------------
1998 1997
---- ----
Revenues $133,277,831 $54,750,978
Costs and expenses:
Direct cost of revenues............................ 101,074,107 40,861,017
Selling, general and administrative................ 17,055,564 9,834,947
Depreciation and amortization...................... 5,439,469 1,745,134
------------ -----------
Total costs and expenses........................... 123,569,140 52,441,098
------------ -----------
Income from operations................................ 9,708,691 2,309,880
Interest and other, net............................... 205,655 (346,935)
------------ -----------
Income before provision for income
taxes and minority interest........................ 9,914,346 1,962,945
Provision for income taxes............................ 3,399,283 --
Minority interest..................................... 1,623,412 --
------------ -----------
Net income............................................ $ 4,891,651 $1,962,945
============ ==========
Net income per share - basic.......................... $0.15 $0.09
===== =====
Weighted average number of
shares used in calculation of
earnings per share - basic........................ 33,199,558 21,998,615
========== ==========
Net income per-share - diluted........................ $0.14 $0.08
===== =====
Weighted average number of
shares used in calculation of
earnings per share - diluted.................... 35,701,538 25,479,585
========== ==========
See notes to condensed consolidated financial statements.
4
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
Total
Common Stock Class A Stock Additional Accumulated Stockholders'
Shares Amount Shares Amount Paid-in Capital Deficit Equity
------ ------ ------ ------ --------------- ------- ------
Balance at July 31, 1998 22,848,866 $228,489 10,255,668 $102,557 $266,761,770 $(28,344,744) $238,748,072
Exercise of stock options 174,525 1,745 -- -- 633,312 -- 635,057
Conversion of Class A 112,800 1,128 (112,800) (1,128) -- -- --
Stock to Common Stock
Exercise of warrants 63,098 631 -- -- 438,405 -- 439,036
Income tax benefits from
stock options exercised -- -- -- -- 318,022 -- 318,022
Net income for the three
months ended October 31, 1998
4,891,651 4,891,651
----------- -------- ----------- -------- ------------ ------------ ------------
Balance at October 31, 1998 23,199,289 $231,993 10,142,868 $101,429 $268,151,509 $(23,453,093) $245,031,838
=========== ======== =========== ======== ============ ============ ============
See notes to condensed consolidated financial statements.
5
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended October 31,
------------------------------
1998 1997
---- ----
Cash (used in) provided by operating activities............... $ (3,854,026) $ 33,291
Investing activities
Net sales of marketable securities............................ 7,856,164 --
Issuance of notes receivable.................................. (7,795,021) --
Purchase of property and equipment............................ (12,713,698) (4,598,802)
------------ --------------
Net cash used in investing activities......................... (12,652,555) (4,598,802)
Financing activities
Repayment of notes payable.................................... (499,237) (515,060)
Proceeds from Convertible Debentures.......................... -- 7,500,000
Repayment of capital lease obligations........................ (927,613) (261,818)
Proceeds from exercise of stock options....................... 654,934 2,689,525
Proceeds from exercise of stock warrants...................... 439,036 --
Proceeds from notes payable................................... -- 810,247
--------------- -------------
Net cash (used in) provided by financing activities........... (332,800) 10,222,894
----------------- -------------
Net increase (decrease) in cash and cash equivalents......... (16,839,381) 5,657,383
Cash and cash equivalents, beginning of period................ 115,283,519 7,674,313
--------------- -------------
Cash and cash equivalents, end of period...................... $ 98,444,138 $ 13,331,696
=============== =============
Supplemental disclosures of cash flow information
Interest paid................................................. $ 4,764,448 $ 504,100
Income taxes paid............................................. $ -- $ --
=============== =============
See notes to condensed consolidated financial statements.
6
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, 1998 are
not necessarily indicative of the results that may be expected for the year
ending July 31, 1999. For further information, please refer to the consolidated
financial statements and footnotes thereto included in the Company's Annual
Report on Form 10-K/A for the year ended July 31, 1998, as filed with the
Securities and Exchange Commission.
Note 2 - Summary of Significant Accounting Policies
Comprehensive Income
As of August 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") 130, Reporting Comprehensive Income. Statement 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or stockholders' equity.
Segment Information
The Company must adopt SFAS 131, Disclosures about Segments of an
Enterprise and Related Information in fiscal 1999. Because Statement 131 is not
required to be applied to interim financial statements in the initial year of
adoption, the Company is not required to disclose segment information in
accordance with Statement 131 until its fiscal 1999 annual report, at which time
it will restate prior years' segment disclosure to conform to the Statement 131
segment presentation, if practicable. In the Company's first quarter fiscal 2000
report, and in subsequent quarters, it will present the interim disclosure
required by Statement 131 for both 2000 and 1999.
Note 3 - Property and Equipment
Property and equipment consists of the following:
October 31, 1998 July 31, 1998
---------------- -------------
Equipment $88,558,584 $77,612,461
Computer software 11,172,593 10,027,335
Leasehold improvements 2,478,713 1,930,769
Furniture and fixtures 1,979,421 1,905,048
--------- ---------
104,189,311 91,475,613
Less: Accumulated depreciation
and amortization (20,429,480) (16,143,137)
------------ ------------
$83,759,831 $75,332,476
=========== ===========
7
Note 4 - Legal Proceedings and Contingencies
In December 1995, Surfers Unlimited, L.L.C. filed a breach of
contract action in the New Jersey Superior Court, Bergen County. The suit names
a subsidiary of the Company as defendant and seeks restitutional and
consequential damages in an unspecified amount for interference with prospective
business advantages, breach of contract and improper use of confidential and
proprietary information. Howard S. Jonas, the Chairman and Chief Executive
Officer of the Company, has also been named as a defendant in the action. The
Company's subsidiary has filed a counterclaim based on interference with
prospective business advantages, breach of contract and improper use of
confidential and proprietary information. The suit is currently in the discovery
phase, which is scheduled to end in February 1999; a trial date has not been
scheduled to date.
In January 1997, six former employees alleging employment
discrimination commenced a suit in New Jersey Superior Court, Bergen County.
Howard S. Jonas, the Chairman and Chief Executive Officer of the Company, has
also been named as a defendant in the action. The action claims that the Company
has made hiring and promotion decisions based upon the religious backgrounds of
the relevant individuals, in violation of federal and state law. The complaint
seeks compensatory and punitive damages in an unspecified amount and also seeks
statutory multiples of damages. All of the claims arising under federal law were
dismissed by the Court in New Jersey Superior Court, Bergen County, leaving the
plaintiffs with only the remedies available under state law. Further, the Court
granted the Company permission to file counterclaims against all plaintiffs for
the alleged unlawful taking of business records. The Company filed such
counterclaims in October 1998. Discovery is continuing and a trial date is
scheduled for February 16, 1999.
In June 1997, an uncertified class-action suit seeking compensatory
damages in an unspecified amount was brought against the Company in New York
Supreme Court, New York County. The suit concerns advertisements that are no
longer used by the Company, and advertising practices that were voluntarily
terminated by the Company following a prior investigation of the Company by the
Attorneys General of several states. A motion to dismiss is presently pending
before the Court.
In September 1997, DigiTEC 2000, Inc. ("DigiTEC") filed a complaint
(subsequently amended) in New York Supreme Court, New York County against the
Company alleging that in connection with its sale of prepaid calling cards, the
Company engaged in unfair competition and tortiously interfered with an
exclusive business relationship between DigiTEC and two co-defendants, CG Com,
Inc. and Mr. Carlos Gomez. The complaint seeks compensatory and consequential
damages in an unspecified amount and also seeks an unspecified amount of
punitive damages. The complaint also alleges that CG Com, Inc. and Mr. Gomez owe
DigiTEC more than $500,000. In November 1997, the Court denied DigiTEC's motion
for a preliminary injunction to bar CG Com, Inc. and Mr. Gomez from distributing
the Company's calling cards. DigiTEC has settled its claims against CG Com, Inc.
and Mr. Carlos Gomez, and therefore, the Company is the only remaining
defendant. DigiTEC and the Company have agreed in principle to settle this
action and are currently engaged in finalizing the settlement agreement.
The Company filed a lawsuit against Mr. Glen Miller in August 1997
in the New Jersey Superior Court, Bergen County. The action was based upon
various matters arising out of Mr. Miller's employment with the Company. Mr.
Miller answered the complaint and filed a counterclaim against the Company
seeking compensatory and punitive damages for breach of his employment contract
and breach of the covenant of good faith and fair dealing. Mr. Miller alleges
that the Company breached his employment agreement by failing to compensate him
as contemplated by his employment agreement, including by failing to deliver to
him 20,000 shares of the Company's Common Stock. Mr. Miller also filed a
third-party complaint against Howard Balter, the Chief Operating Officer of the
Company, and Jonathan Rand, the Company's former Director of Human Resources,
for fraudulent conduct and misrepresentation. The Company filed its answer to
Mr. Miller's counterclaim in December 1997. In January 1998, the Court partially
granted Mr. Miller's motion for summary judgment, awarding him severance pay in
the amount of
8
approximately $50,000. The Company's motion for leave to appeal this award has
been denied, and the action is currently in the discovery phase. A trial date
has been scheduled for February 1999.
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 aforementioned
actions, will not have a material adverse effect on results of operations or the
financial condition of the Company.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
accompanying condensed consolidated financial statements and the associated
notes thereto of this Quarterly Report, and the audited consolidated financial
statements and the notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company contained in the
Company's Annual Report on Form 10-K/A for the year ended July 31, 1998, as
filed with the Securities and Exchange Commission.
Overview
The Company is a leading multinational carrier that provides its
wholesale and retail customers with integrated and competitively priced
international and domestic long distance telecommunications service, Internet
access and, through its Net2Phone products and services, Internet telephony
services. The Company delivers these services over a high-quality network
consisting of 66 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 17 of the
companies that are primarily responsible for providing telecommunications
services in particular countries (which are commonly referred to as "PTTs"). In
addition, the Company maintains a high-speed network that carries Internet
traffic in order to support both its Internet access services and its Internet
telephony services.
Three Months Ended October 31, 1998 Compared to Three Months Ended October 31,
1997
Results of Operations
Revenues. Revenues increased 143.2% from approximately $54.8 million
for the three months ended October 31, 1997 to approximately $133.3 million for
the three months ended October 31, 1998. Telecommunications revenues increased
158.8% from approximately $47.8 million for the three months ended October 31,
1997 to approximately $123.7 million for the three months ended October 31,
1998. Internet access revenues decreased 12.2% from approximately $4.9 million
for the three months ended October 31, 1997 to approximately $4.3 million for
the three months ended October 31, 1998, reflecting the Company's decision to
de-emphasize its activities in this area. Internet telephony revenues increased
152.8% from approximately $2.1 million for the three months ended October 31,
1997 to approximately $5.3 million for the three months ended October 31, 1998.
Telecommunications revenues increased primarily as a result of an
increase in minutes of use from approximately 111.5 million for the three months
ended October 31, 1997 to approximately 468.9 million for the three months ended
October 31, 1998. The increase in minutes was primarily due to the addition of
wholesale carrier service clients, increased usage by existing clients, and
increased marketing of the Company's prepaid calling cards. The addition of
wholesale carrier services clients and the increased use by existing clients
resulted in an increase in wholesale carrier services revenues of 35.2%, from
9
approximately $35.8 million for the three months ended October 31, 1997 to
approximately $48.4 million for the three months ended October 31, 1998. As a
percentage of telecommunications revenues, wholesale carrier service revenues
decreased from approximately 74.8% to 39.1%, primarily due to the significant
increase in prepaid calling card revenues both in real dollars and as a
percentage of overall telecommunications revenues. Revenues from sales of the
Company's prepaid calling cards increased from approximately $5.4 million for
the three months ended October 31, 1997 to approximately $67.3 million for the
three months ended October 31, 1998 as a result of increased marketing efforts
and the Company's purchase of a majority interest in Union Telecard Alliance,
LLC, a prepaid calling card distributor in May 1998. As a percentage of
telecommunications revenues, prepaid calling card revenues increased from
approximately 11.3% to 54.4%. As a percentage of telecommunications revenues,
international retail services revenues (which consist primarily of call
reorigination services) decreased from approximately 11.4% to 4.6%.
As a percentage of total revenues, Internet access revenues
decreased from approximately 8.9% for the three months ended October 31, 1997 to
approximately 3.2% for the three months ended October 31, 1998. This decrease
was due to the substantial increase in telecommunications revenues as a
percentage of total revenues, as well as a dollar decrease in Internet access
revenues due to a decrease in total dial-up subscribers.
Internet telephony revenues as a percentage of total revenues
increased from 3.8% for the three months ended October 31, 1997 to 4.0% for the
three months ended October 31, 1998. The increase in Internet telephony revenues
was primarily due to an increase in billed-minute usage.
Direct Cost of Revenues. The Company's direct cost of revenues
increased by 147.4%, from approximately $40.9 million in the three months ended
October 31, 1997 to approximately $101.1 million in the three months ended
October 31, 1998. As a percentage of total revenues, these costs increased from
74.6% in the three months ended October 31, 1997 to 75.8% in the three months
ended October 31, 1998. The dollar increase is due primarily to increases in
underlying carrier and connectivity costs, as the Company's telecommunications
minutes of use, and associated revenues, grew substantially. As a percentage of
total revenues, the increase in direct costs reflects lower gross margins
associated with wholesale carrier services and prepaid calling card services as
compared with international retail and Internet access services.
Selling, General and Administrative. Selling, general and
administrative costs increased 74.5% from approximately $9.8 million in the
three months ended October 31, 1997 to approximately $17.1 million in the three
months ended October 31, 1998. As a percentage of total revenues, these costs
decreased from 18.0% in the three months ended October 31, 1997 to 12.8% in the
three months ended October 31, 1998. The increase in these costs in dollar terms
is due primarily to increased sales and marketing efforts for retail services,
including prepaid calling cards, domestic and international long distance,
Net2Phone and Net2Phone Direct. As a percentage of total revenues, the decrease
was due primarily to the substantial increase in total revenues for the three
months ended October 31, 1998.
Depreciation and Amortization. Depreciation and amortization costs
increased 217.6% from approximately $1.7 million in the three months ended
October 31, 1997 to approximately $5.4 million in the three months ended October
31, 1998. As a percentage of revenues, these costs increased from 3.2% in the
three months ended October 31, 1997 to 4.1% in the three months ended October
31, 1998. These costs increased primarily as a result of the Company's higher
fixed asset base during the three months ended October 31, 1998 as compared with
the three months ended October 31,1997 due to the Company's efforts to expand
its telecommunications network infrastructure, enhance its Internet network and
expand its facilities. The Company anticipates that depreciation and
amortization costs will continue to increase as the Company continues to
implement its growth strategy.
Income from Operations. The Company's income from operations
increased 321.7% from approximately $2.3 million for the three months ended
October 31, 1997 to approximately $9.7 million for
10
the three months ended October 31, 1998. Income from operations for the
Company's telecommunications business increased to approximately $11.7 million
for the three months ended October 31, 1998 from $3.2 million for the three
months ended October 31, 1997. As a percentage of telecommunication revenues,
income from operations for the telecommunications business increased to 9.5% for
the three months ended October 31, 1998 from approximately 6.7% for the three
months ended October 31, 1997.
Loss from operations for the Company's Internet access business
increased to approximately $1.8 million for the three months ended October 31,
1998 from approximately $1.5 million for the three months ended October 31,
1997. The increased loss is primarily due to the decrease in Internet access
revenues reflecting the Company's decision to de-emphasize its activities in
this area.
Loss from operations of the Net2Phone division was approximately
$1.9 million for the three months ended October 31, 1998, as compared to income
from operations of approximately $647,000 for the three months ended October 31,
1997. This change is due to the substantial increase in selling, general and
administrative costs as the Company expands its Internet telephony
infrastructure and seeks to gain additional market share for its Internet
telephony products and services.
Income Taxes. The Company recorded income tax expense of $3.4
million for the three months ended October 31, 1998. An income tax benefit
related to the tax deduction upon the exercise of stock options was recorded
directly into additional paid-in capital. The Company did not record an income
tax benefit for the three months ended October 31, 1997 as the realization of
available tax losses was not probable at that time.
Liquidity and Capital Resources
Historically, the Company has satisfied its cash requirements
through a combination of cash flow from operating activities, sales of equity
securities and borrowings from third parties. The Company received approximately
$1.1 million upon the exercise of stock options and warrants in the three months
ended October 31, 1998.
As of October 31, 1998, the Company had cash, cash equivalents and
marketable securities of $150.9 million and working capital of approximately
$155.3 million. The Company generated negative cash flow from operating
activities of approximately $4.2 million during the three months ended October
31, 1998, compared with positive cash flow from operating activities of
approximately $33,000 during the three months ended October 31, 1997. 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 (net of
allowances) were approximately $44.7 million and $24.5 million at October 31,
1998 and 1997, respectively. Accounts receivable, accounts payable and accrued
expenses have increased from period to period as the Company's businesses have
grown.
The Company's capital expenditures increased from approximately $5.7
million in the three months ended October 31, 1997 to approximately $12.7
million in the three months ended October 31, 1998, as the Company expanded its
international and domestic telecommunications network infrastructure.
The Company experiences intense competition in its
telecommunications business. Increased competition in the telecommunications
industry could force the Company to reduce the prices that it charges for its
services, or its profit margins. Under such circumstances, the Company's cash
flows from operations would be materially adversely affected.
The Company intends to, where appropriate, make strategic
acquisitions to increase its telecommunications customer base. The Company may
also make strategic acquisitions related to its Internet or its Internet
telephony businesses. From time to time, the Company evaluates potential
11
acquisitions of companies, technologies, products and customer accounts that
complement the Company's businesses.
The Company believes that, based upon its present business plan, the
Company's existing cash resources, and expected cash flow from operating
activities, will be sufficient to meet its currently anticipated working capital
and capital expenditure requirements for at least the next twelve months. If the
Company's growth exceeds current expectations or if the Company acquires the
business or assets of another company, or if the Company's cash flow from
operations after the end of such period is insufficient to meet its working
capital and capital expenditure requirements, the Company will need to raise
additional capital from equity or debt sources. There can be no assurance that
the Company will be able to raise such capital on favorable terms or at all. If
the Company is unable to obtain such additional capital, the Company may be
required to reduce the scope of its anticipated expansion, which could have a
material adverse effect on the Company's business, financial condition or
results of operations.
Year 2000
The Company is conducting a review of its computer hardware and
software to ensure that its computer-related applications will not fail or
create erroneous results as a result of the use of two digits in various program
date fields (the "Year 2000 issue"). The Company's cost of addressing the Year
2000 issue is not expected to be material to its operations or financial
position. However, the consequences of an incomplete or untimely resolution of
the Year 2000 issue could be expected to have a material adverse effect on the
financial results of the Company; in the absence of such a resolution, the
ability of the Company to route its traffic in a cost effective manner, to
deliver a material portion of its services, to properly obtain payment for such
services, and/or to maintain accurate records of its business and operations,
could be substantially impaired until such issue is remediated. The Company may
become liable for substantial damages in the event that, as a result of the Year
2000 issue, it fails to deliver any services that it is obligated to provide.
However, the Company expects that its Year 2000 issues will be satisfactorily
resolved before the year 2000.
The Company is conducting a comprehensive review of its computer
systems to ensure that all such systems are, or prior to the end of 1999 will
be, Year 2000 compliant. The Company's plan for its Year 2000 project includes
the following phases: (i) conducting a comprehensive inventory of the Company's
internal systems, including information technology systems and non-information
technology systems (which include switching, billing and other platforms and
electrical systems) and the systems acquired or to be acquired by the Company
from third parties, (ii) assessing and prioritizing any required remediation,
(iii) remediating any problems by repairing or, if appropriate, replacing the
non-compliant systems, (iv) testing all remediated systems for Year 2000
compliance and (v) developing contingency plans that may be employed in the
event that any system used by the Company is unexpectedly affected by a
previously unanticipated problem relating to the Year 2000. The Company
currently expects to complete all of the phases of this process and that all of
its computer systems will be fully Year 2000 compliant before the end of 1999.
The Company has completed a number of acquisitions during its recent
fiscal years, and is in the process of integrating the systems of the acquired
businesses into its operations. Those systems are included in the Company's Year
2000 review and remediation project. During the process of evaluating businesses
for any potential acquisition, and after any such acquisitions, the Company will
evaluate the extent of the Year 2000 problems associated with such acquisitions
and the cost and timing of remediation. No assurance can be given, however, that
the systems of any acquired business will be Year 2000 compliant when acquired
or that they will be capable of timely remediation.
In addition to assessing its own systems, the Company is conducting
an external review of its customers and suppliers, and any other third parties
with which it does business, including equipment and systems providers and other
telecommunications service providers, to determine their vulnerability to Year
2000 problems and any potential impact on the Company. In particular, the
Company may experience
12
problems to the extent that other telecommunications carriers whose services are
resold by the Company or to which the Company sends traffic for termination are
not Year 2000 compliant. The Company's ability to determine the ability of these
third parties to address issues relating to the Year 2000 problem is necessarily
limited. To the extent that a limited number of carriers experience disruptions
in service due to the Year 2000 issue, the Company believes that it will be able
to obtain service from alternate carriers. However, the Company's ability to
provide certain services to customers in selected geographic locations may be
limited. There can be no assurance that such problems will not have a material
adverse effect on the Company.
In addition, the Company is currently in the process of developing
contingency plans with regard to potential Year 2000 problems. The Company
believes that, in the event that one or more of its systems is impaired due to
unanticipated Year 2000 issues, its contingency plans will enable it to
temporarily conduct its operations on a modified basis until such impaired
systems are remediated. There can be no assurances that the Company's suppliers
and customers will achieve full Year 2000 compliance before the end of 1999 or
that the Company will develop or implement effective contingency plans on a
timely basis. A failure of the Company's computer systems or the failure of the
Company's suppliers or customers to effectively upgrade their software and
systems for transition to the year 2000 could have a material adverse effect on
the Company's business, financial conditions and results of operations.
To date, the Company has incurred expenses of less than $1.0 million
in connection with its remediation of Year 2000 related issues. No assurance can
be given, however, that the systems of any acquired business will be Year 2000
compliant when acquired or that they will be capable of timely remediation. The
Company does not expect to incur significant costs to become Year 2000
compliant, although the Company's evaluation of the Year 2000 problem is not yet
complete and actual costs may be significantly higher. In particular, such costs
could be higher if certain suppliers of the Company fail to provide Year 2000
related updates to certain switching products purchased by the Company without
charge in the manner that is currently expected. Costs associated with Year 2000
remediation are expensed by the Company when incurred.
EUROPEAN CURRENCY CONVERSION
- ----------------------------
Beginning in January 1999, a new currency called the "euro" is
expected to be introduced in certain Economic and Monetary Union ("EMU")
countries. Beginning in 2002, all EMU countries are expected to operate with
the euro as their single currency. Uncertainty exists as to the effect the euro
currency will have on the market for international telecommunications services.
Additionally, all of the final rules and regulations have not yet been defined
and finalized by the European Commission with regard to the euro currency. The
Company has not yet completed its assessment of the effect that the introduction
of the euro will have on its business, operations and sales.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
- ---------------------------------------------------------
This Quarterly Report on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. 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. Such forward-looking statements also include the
Company's expectations concerning factors affecting the markets for its
products, such as changes in the U.S. and the international regulatory
environment and the demand for long-distance telecommunications, Internet access
and Internet telephony services. Actual results could differ from those
projected in any forward-looking statements. The forward-looking statements are
made as of the date of this Report, and the Company assumes no obligation to
update the forward-looking statements, or to update the reasons why actual
results could differ from those projected in the forward-looking statements.
Investors should consult all of the information set forth herein and the other
information set forth from time to time in the Company's reports filed with the
Securities and Exchange Commission pursuant to the Securities Act of 1933 and
the Securities Exchange Act of 1934, including the Company's Annual Report on
Form 10-K/A, for the year ended July 31, 1998.
13
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Incorporated by reference from Part I, Item I, Financial Statements,
Note 4 captioned "Legal Proceedings and Contingencies."
Item 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
14
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
- -----------------------------------
3.01(1) Restated Certificate of Incorporation of the Registrant.
3.02(1) By-laws of the Registrant.
10.01(2) Employment Agreement between the Registrant and Howard S. Jonas.
10.02(2) Employment Agreement between the Registrant and Howard S. Balter.
10.03(3) 1996 Stock Option and Incentive Plan, as amended and restated, of
the Registrant.
10.04(4) Form of Stock Option Agreement under the 1996 Stock Option and
Incentive Plan.
10.05(5) Form of Registration Rights Agreement between certain stockholders
and the Registrant.
10.06(1) Lease of 294 State Street.
10.07(6) Lease of 190 Main Street.
10.8(7) Form of Registration Rights Agreement between Howard S. Jonas and
the Registrant.
10.9(8) Employment Agreement between the Registrant and James Courter.
10.10(9) Agreement between Mr. Cliff Sobel and the Registrant.
10.11(9) Employment Agreement between the Registrant and Mr. Hal Brecher.
10.12(6) Employment Agreement between the Registrant and Mr. David Turock.
10.13(10) Indenture between the Registrant and U.S. Bank Trust National
Association, formerly known as First Trust National Association, as
Trustee.
10.14(11) 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.
10.15(12) Securities Purchase Agreement between the Registrant, Carlos Gomez
and Union Telecard Alliance, LLC.
27.01* Financial Data Schedule.
- ------------------------
* filed herewith
(1) Incorporated by reference to Form S-1 filed February 21, 1996 file no.
333-00204.
(2) Incorporated by reference to Form S-1 filed January 9, 1996 file no.
333-00204.
(3) Incorporated by reference to Schedule 14A, filed November 25, 1998.
15
(4) Incorporated by reference to Form S-8 filed January 14, 1996 file no.
333-19727.
(5) Incorporated by reference to Form S-1 filed March 8, 1996 file no.
333-00204.
(6) Incorporated by reference to Form 10-K/A for the fiscal year ended July
31, 1997, filed February 2, 1998.
(7) Incorporated by reference to Form S-1 filed March 14, 1996 file no.
333-00204.
(8) Incorporated by reference to Form S-1 filed December 27, 1996 file no.
333-18901.
(9) Incorporated by reference to Form 10-K for the fiscal year ended July 31,
1997, filed October 29, 1997.
(10) Incorporated by reference to Form 10-Q filed March 17, 1988.
(11) Incorporated by reference to Form 8-K filed April 22, 1998.
(12) Incorporated by reference to Form 10-K/A for the fiscal year ended July
31, 1998, filed December 4, 1998.
(b) Reports on Form 8-K:
On September 29, 1998, the Company filed Amendment No. 2 to its
Current Report on Form 8-K, which was originally filed with the Commission on
May 21, 1998. The purpose of the filing was to amend and refile an exhibit to
such report.
16
IDT CORPORATION
FORM 10-Q/A
October 31, 1998
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
December 22, 1998 By: /s/ Howard Jonas
- ----------------- ----------------
Date Howard S. Jonas
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
December 22, 1998 By: /s/ Stephen R. Brown
- ----------------- --------------------
Date Stephen R. Brown
Chief Financial Officer
(Principal Accounting Officer)
17