SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended January 31, 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 -- 13,963,877 shares as of March 13, 1998
Class A Common Stock, $.01 par value -- 10,230,868 shares as of March 13,
1998
(Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date)
1
IDT CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of July 31, 1997,
January 31, 1998 and Pro Forma as of January 31, 1998........... 3
Condensed Consolidated Statements of Operations for the six and
three months ended January 31, 1997 and 1998.................... 4
Condensed Consolidated Statement of Stockholders' Equity for
the six months ended January 31, 1998........................... 5
Condensed Consolidated Statements of Cash Flows for the six
months ended January 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............................ 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................. 17
Item 2. Changes in Securities............................................. 17
Item 3. Defaults upon Senior Securities................................... 17
Item 4. Submission of Matters to a Vote of Security Holders............... 17
Item 5. Other Information................................................. 17
Item 6. Exhibits and Reports on Form 8-K.................................. 17
Signatures................................................................. 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IDT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31, 1998 January 31, 1998 July 31, 1997
---------------- ---------------- -------------
ASSETS (Pro Forma*) (Unaudited) (Note 1)
(Unaudited)
Current assets
Cash and cash equivalents $209,335,358 $ 8,641,358 $ 7,674,313
Accounts receivable, net 31,794,759 31,794,759 17,128,890
Notes receivable 479,660 479,660 1,291,403
Other current assets 4,975,009 4,975,008 2,922,750
------------ ------------ ------------
Total current assets 246,584,786 45,890,785 29,017,356
Property and equipment, net 34,843,057 34,843,057 25,725,805
Goodwill, net 6,369,685 6,369,685 1,357,606
Other assets 6,465,944 3,240,506 2,436,334
------------ ----------- ------------
Total assets $294,263,472 $ 90,344,033 $ 58,537,101
============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities
Trade accounts payable $ 23,970,563 $ 23,320,563 $ 16,957,656
Accrued expenses 899,789 599,789 721,142
Deferred revenue 2,504,047 2,504,047 2,442,848
Notes payable - current portion 1,730,138 1,730,138 1,880,939
Capital lease obligations -
current portion 2,936,760 2,936,760 1,531,971
Other current liabilities 142,000 142,000 595,951
------------ ------------ ------------
Total current liabilities 32,183,297 31,233,297 24,130,507
Notes Payable - long-term
portion 5,580,823 5,580,823 5,241,088
Capital Lease Obligation -
long-term portion 5,554,632 5,554,632 3,906,362
Convertible Debentures 7,500,000 7,500,000 ---
Senior Notes Payable 100,000,000 --- ---
------------ ------------ ------------
Total liabilities 50,818,752 49,868,752 33,277,957
Minority Interest 100,000 100,000 ---
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; 18,821,286,
13,502,536 and 10,636,000
shares issued and outstanding 188,213 135,025 106,360
Class A stock, $.01 par value;
authorized shares - 35,000,000;
10,255,868, 10,255,868 and
11,174,330 shares issued and
outstanding 102,558 102,558 111,743
Additional paid in capital 159,886,722 56,970,471 46,990,388
Accumulated deficit (16,832,773) (16,832,773) (21,949,347)
------------ ------------ ------------
Total stockholders' equity 143,344,720 40,375,281 25,259,144
------------ ------------ ------------
Total liabilities and
stockholders' equity $294,263,472 $ 90,344,033 $ 58,537,101
============ ============ ============
* Pro Forma balance sheet gives effect to the Equity Offering and the Debt
Offering (each as defined herein) and the related exercise of certain
stock options (after deducting underwriting discounts, commissions and
estimated offering expenses), as if such offerings had closed on
January 31, 1998.
See notes to condensed consolidated financial statements.
3
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Six Months Ended Three Months Ended
---------------- ------------------
Jan. 31, 1998 Jan. 31, 1997 Jan. 31, 1998 Jan. 31, 1997
------------- ------------- ------------- -------------
REVENUES $125,703,766 $59,722,537 $ 70,952,788 $31,404,866
Costs and expenses:
Direct cost of revenues 92,309,811 38,874,502 51,448,794 20,861,701
Selling, general and administrative 23,706,415 23,842,947 13,871,468 11,245,268
Depreciation and amortization 3,787,573 2,046,655 2,042,439 1,083,222
------------ ----------- ----------- -----------
TOTAL COSTS AND EXPENSES 119,803,799 64,764,104 67,362,701 33,190,191
------------ ----------- ----------- -----------
Loss from operations 5,899,967 (5,041,567) 3,590,087 (1,785,325)
Interest and other, net (783,393) 104,298 (436,458) (45,301)
------------ ----------- ----------- -----------
NET INCOME (loss) $ 5,116,574 $(4,937,269) $ 3,153,629 $(1,830,626)
============ =========== =========== ===========
Net income (loss) per share - basic $ 0.23 $ (0.24) $ 0.14 $ (0.09)
============ =========== =========== ===========
Weighted average number of
shares used in calculation of
earnings per share - basic 22,638,022 20,857,288 23,330,274 20,873,347
============ =========== =========== ===========
Net Income (loss) per-share - diluted $ 0.20 $ (0.24) $ 0.12 $ (0.09)
============ =========== =========== ===========
Weighted average number of
shares used in calculation of
earnings per share - diluted 26,087,362 20,857,288 27,053,511 20,873,347
============ =========== =========== ===========
See notes to condensed consolidated financial statements.
4
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
COMMON STOCK CLASS A STOCK Additional Accumulated
Shares Amount Shares Amount Paid-in Capital Deficit
------ ------ ------ ------ --------------- -------
Balance at July 31, 1997 10,636,000 $106,360 11,174,330 $111,743 $46,990,388 $(21,949,347)
Exercise of options 1,177,093 11,770 2,870,508
Conversion of Class A to Common 918,462 9,185 (918,462) (9,185)
Purchase of business 625,000 6,250 5,078,125
Conversion of note payable 145,981 1,460 2,031,450
Net income for the six months ended
January 31, 1998 5,116,574
---------- -------- ---------- -------- ----------- ------------
Balance at January 31, 1998 13,502,536 $135,025 10,225,868 $102,558 $56,970,471 $(16,832,773)
========== ======== ========== ======== =========== ============
See notes to condensed consolidated financial statements.
5
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended January 31,
1998 1997
---- ----
Cash used in operating activities $(2,929,195) $(7,181,770)
INVESTING ACTIVITIES
Payment for purchase of Yovelle, net of cash
acquired -- 376,843
Purchase of short-term investments -- (1,254,902)
Payment for the purchase of ICS assets -- (2,250,000)
Receipt of payments on advance 811,743 1,832,458
Purchase of property and equipment (8,794,519) (7,317,406)
---------- ----------
Net cash used in investing activities (7,982,776) (8,613,007)
FINANCING ACTIVITIES
Proceeds from Convertible Debentures 7,500,000 --
Proceeds from loans payable 3,093,294 6,750,000
Repayment of capital lease obligations (825,108) (86,247)
Repayment of loans payable (871,449) (394,893)
Proceeds from exercise of stock options 2,882,279 924,554
Proceeds from exercise of Net2Phone option 100,000 --
Advances from stockholder -- 1,000,000
---------- ----------
Net cash provided by financing activities 11,879,016 8,193,414
---------- ----------
Net increase (decrease) in cash and cash
equivalents 967,045 (7,601,363)
Cash and cash equivalents, beginning of period 7,674,313 14,893,756
---------- ----------
Cash and cash equivalents, end of period $8,641,358 $7,292,393
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $1,048,462 $231,160
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 six and three months ended January 31,
1998 are not necessarily indicative of the results that may be expected for the
year ending July 31, 1998. For further information, 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, 1997, as filed with the
Securities and Exchange Commission.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
January 31, 1998 July 31, 1997
---------------- -------------
Equipment $35,482,890 $24,945,687
Computer software 6,087,160 4,618,931
Leasehold improvements 1,463,366 1,115,822
Furniture and fixtures 1,672,265 1,365,140
Building 117,147 109,525
----------- -----------
44,822,828 32,155,105
Less: Accumulated depreciation
and amortization (9,979,771) (6,429,300)
----------- -----------
$34,843,057 $25,725,805
=========== ===========
NOTE 3 - LOANS PAYABLE, CAPITAL LEASE OBLIGATIONS AND CONVERTIBLE DEBENTURES
During the six months ended January 31, 1998, the Company borrowed
approximately $3.1 million. These borrowings are represented by interest
bearing notes collateralized by certain equipment or other assets owned by the
Company, and have terms ranging from forty-eight to sixty months.
The Company also entered into various capital lease arrangements during
the six months ended January 31, 1998 to acquire computer and communications
related equipment totaling approximately $3.9 million, with terms ranging from
thirty-six months to sixty months. These lease arrangements are collaterized by
the equipment.
In September 1997, the Company entered into a Securities Purchase
Agreement (the "Agreement") with a group of institutional investors (the
"Investors") pursuant to which the Investors purchased Convertible Debentures in
the aggregate principal amount of $7.5 million (the "Debentures"). The
Debentures bear an interest at the rate of 3.0% per annum.
The principal amount and all unpaid accrued interest on the Debentures
are convertible into the Company's Common Stock at the option of the Investors
at a conversion price equal to the lower of $15.16 per share or the lowest
closing price of the Company's Common Stock on Nasdaq on any one trading day
7
during the twelve consecutive trading day period preceding the date that notice
of conversion is given to the Company. Any principal amount or unpaid accrued
interest outstanding on September 5, 2000 will be automatically converted into
shares of the Company's Common Stock.
NOTE 4 - LEGAL PROCEEDINGS
On December 29, 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
suit is currently in the discovery phase, and a tentative trial date has been
set for May 1998.
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 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. The complaint seeks compensatory and punitive damages
in an unspecified amount and also seeks statutory multiples of damages. The
case is currently in the discovery stage. The previously set trial date of
March 17, 1998 has been adjourned, and a status conference has been scheduled
for July 14, 1998.
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. The case is currently in preliminary
stages of discovery.
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 of not less than $50 million 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 IDT's calling cards. The case is currently in
preliminary stages of discovery.
The Company filed a lawsuit against Mr. Glen Miller in August 1997 in
the New Jersey Supreme Court, Bergen County. The action was based upon various
matters arising out of Mr. Miller's employment with IDT. Mr. Miller answered
the complaint and filed a counterclaim against IDT 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 IDT, and
Jonathan Rand, IDT's former director of Human Resources, for fraudulent conduct
and misrepresentation. The Company filed its answer to Mr. Miller's
counterclaim in December 1997. In January 1998, the Court partially granted Mr.
Miller's motion for summary judgment, awarding him severance pay in the amount
of approximately $50,000. The Company has filed a motion for leave to appeal
with respect to this award, and the Court granted a stay on the payment while
this motion is pending.
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.
8
NOTE 5 - PURCHASE OF ROCK ASSOCIATES
In November 1997, the Company finalized its purchase of all of the
issued and outstanding capital stock of Rock Enterprises, Inc., a telecom
engineering firm owned by an officer of the Company, in exchange for 625,000
shares of the Company's Common Stock, of which 312,500 shares were issued at
closing. The remaining shares will be issued over several years. The
acquisition was accounted for using the purchase method of accounting for
business combinations and substantially all of the purchase price was allocated
to goodwill.
NOTE 6 - SUBSEQUENT EVENTS
The Company completed a public offering of 5,318,750 shares of Common
Stock in February 1998, 5,093,750 shares of which were sold by the Company and
225,000 shares of which were sold by certain stockholders of the Company (the
"Equity Offering"). The net proceeds to the Company from the Equity Offering
were approximately $119.7 million, after deducting underwriting discounts and
commissions and estimated offering expenses paid or payable by the Company and
after adding the proceeds from the exercise of stock options exercised by
certain selling stockholders. In addition, the Company also completed in
February 1998 a private placement (the "Debt Offering") of $100 million
aggregate principal amount of 8 3/4% Senior Notes due 2006, of which the Company
received net proceeds of approximately $96.5 million. The Company intends to
use the net proceeds from the Equity Offering and the Debt Offering for the
expansion of its international and domestic telecommunications networks, product
development, expansion of its sales and marketing activities, and working
capital and other general corporate purposes, including potential acquisitions.
In February 1998, the Company lent $7.5 million to Executive Telecard,
an international communications service company and announced a strategic
agreement to leverage their respective contacts with carriers and PTTs to
develop relationships with telecommunications companies worldwide. The Company
also received warrants to purchase 500,000 shares of common stock of Executive
Telecard.
9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
accompanying condensed consolidated financial statements and the associated
notes thereto of this Quarterly Report, and the audited consolidated financial
statements and the notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations of the Company contained in the
Company's Annual Report on Form 10-K for the year ended July 31, 1997, as
amended, as filed with the Securities and Exchange Commission.
OVERVIEW
IDT is a leading emerging multinational carrier that combines its
position as an international telecommunications operator, its experience as an
Internet service provider and its leading position in Internet telephony to
provide a broad range of telecommunications services to its wholesale and retail
customers worldwide. The Company provides its customers with integrated and
competitively priced international and domestic long distance, Internet access
and, through its Net2Phone product offerings, Internet telephony services. IDT
delivers these services over a high-quality network consisting of 14 switches in
the U.S. and Europe and owned and leased transmission capacity on 11 undersea
fiber optic cables, together with resale capacity obtained from other carriers.
The Company terminates its international traffic worldwide pursuant to resale
arrangements with domestic carriers and through terminating agreements with 17
PTTs and competitive foreign carriers. In addition, IDT maintains a domestic
Internet backbone to support both its traditional Internet access service as
well as its Internet telephony services.
Revenues from the Company's telecommunications operations are derived
primarily from the following activities: (i) wholesale carrier services to
other long distance carriers; (ii) prepaid calling cards; (iii) international
retail long distance services to individuals and businesses worldwide (primarily
provided through call reorigination services); and (iv) domestic long distance
services to individuals and businesses. Revenues from the Company's Internet
operations are derived primarily from providing Internet access services to
individuals and businesses. The Company's Net2Phone revenues are derived from
the marketing of Net2Phone and Net2Phone Direct services and equipment to
individuals, businesses and the Company's foreign partners.
Direct cost of revenues for the Company's telecommunications services
include costs associated with the transmission and termination of international
and domestic long distance services. Historically, this expense has primarily
been variable, based upon minutes of use, and consists mainly of payments to
other long distance carriers and, to a lesser extent, customer/carrier
interconnect charges, leased fiber circuit charges and switch facility costs.
The direct cost of revenues for Internet access and Net2Phone services consists
primarily of leased circuit and network costs and local access costs. Direct
cost of revenues for Internet services also include fees paid to the Company's
Alliance Partners.
Selling expenses consist primarily of sales commissions paid to
independent agents and internal salespersons, which are the primary cost
associated with the acquisition of customers. General and administrative
expenses include salaries, benefits, bad debt expenses and other corporate
overhead costs. These costs have increased in recent fiscal years due to the
development and expansion of the Company's operations and corporate
infrastructure.
10
SIX MONTHS ENDED JANUARY 31, 1998 COMPARED TO SIX MONTHS ENDED JANUARY 31, 1997
RESULTS OF OPERATIONS
REVENUES. Revenues increased 110.6% from approximately $59.7 million
for the six months ended January 31, 1997 to approximately $125.7 million for
the six months ended January 31, 1998. Revenues from the Company's
telecommunications operations increased 177.3% from approximately $40.0 million
for the six months ended January 31, 1997 to approximately $110.9 million for
the six months ended January 31, 1998. Revenues from the Company's Internet
operations decreased 47.7% from approximately $19.2 million for the six months
ended January 31, 1997 to approximately $10.0 million for the six months ended
January 31, 1998, reflecting the Company's decision to deemphasize its
activities in this area. Internet telephony revenues increased 919.1% from
approximately $472,000 for the six months ended January 31, 1997 to
approximately $4.8 million for the six months ended January 31, 1998.
Telecommunications revenues increased 177.3%, primarily as a result of
a 220.1% increase in minutes of use, from approximately 84.9 million to
approximately 271.9 million, offset in part by a decline in revenue per minute
from $0.44 to $0.42. Telecommunications minutes increased 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
offsetting decline in revenue per minute resulted from variations in the mix of
telecommunications revenue. The addition of wholesale carrier services clients
and the increased use by existing clients resulted in an increase in wholesale
carrier services revenues of 226.6%, from approximately $22.7 million for the
six months ended January 31, 1997 to approximately $74.1 million for the six
months ended January 31, 1998. As a percentage of telecommunications revenues,
wholesale carrier service revenues increased from approximately 56.7% to 66.8%.
Revenues from the Company's prepaid calling card business, which the Company
began to market in January 1997, increased from approximately $170,000 for the
six months ended January 31, 1997 to approximately $23.4 million for the six
months ended January 31, 1998. As a percentage of telecommunications revenues,
prepaid calling card revenues increased from 0.4% to 21.1%. As a percentage of
telecommunications revenues, international retail services revenues decreased
form 36.0% to 9.8%.
As a percentage of total revenues, Internet access revenues decreased
from approximately 32.2% for the six months ended January 31, 1997 to
approximately 8.0% for the six months ended January 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 0.8% for the six months ended January 31, 1997 to 3.8% for the six months
ended January 31, 1998. The increase in Internet telephony revenues was
primarily due to an increase in billed-minute usage, and the sale of $1.5
million of equipment during the six months ended January 31, 1998.
DIRECT COST OF REVENUES. The Company's direct cost of revenues
increased by 137.5%, from approximately $38.9 million in the six months ended
January 31, 1997 to approximately $92.3 million in the six months ended January
31, 1998. As a percentage of total revenues, these costs increased from 65.1%
in the six months ended January 31, 1997 to 73.4% in the six months ended
January 31, 1998. The dollar increase is primarily due to increases in
underlying carrier costs, because the Company's telecommunications minutes of
use, and associated revenue, grew substantially. As a percentage of total
revenues, the increase in direct costs reflects lower gross margins associated
with wholesale carrier services as compared with international retail and
Internet access services.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative costs decreased 0.6% from approximately $23.8 million in the six
months ended January 31, 1997 to approximately $23.7 million in the six months
ended January 31, 1998. As a percentage of total revenues, these costs
decreased from 39.9% in the six months ended January 31, 1996 to 18.9% in the
six months ended January 31, 1998. The decrease in these costs in dollar terms
and as a percentage of total revenues was due primarily to the shift of
11
focus of the Company's Internet access marketing efforts from aggressive mass
marketing to new reseller programs and the increase in wholesale carrier
services revenues relative to total revenues.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization costs
increased 85.1% from approximately $2.0 million in the six months ended January
31, 1997 to approximately $3.8 million in the six months ended January 31, 1998.
As a percentage of revenues, these costs decreased from 3.4% in the six months
ended January 31, 1997 to 3.0% in the six months ended January 31, 1998. These
costs increased in absolute terms primarily as a result of the Company's higher
fixed asset base during the six months ended January 31, 1998 as compared with
the six months ended January 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 (LOSS) FROM OPERATIONS. Income from operations for the
Company's telecommunications business increased to approximately $7.9 million in
the six months ended January 31, 1998 from $2.1 million in the six months ended
January 31, 1997. As a percentage of telecommunication revenues, income from
operations for the telecommunications business increased to 7.2% in the six
months ended January 31, 1998 from approximately 5.2% in the six months ended
January 31, 1997.
Loss from operations for the Internet access segment of the Company's
business decreased to approximately $3.0 million in the six months ended
January 31, 1998 from approximately $6.1 million in the six months ended January
31, 1997. The decreased loss of the Internet access segment is largely due to
the refocusing of the Company's marketing efforts from aggressive mass marketing
to new reseller programs. Income generated from the operations of the Net2Phone
division increased to approximately $927,000 for the six months ended January
31, 1998, compared to a loss of approximately $1.0 million for the six months
ended January 31, 1997. This change is due to the substantial increase in
Net2Phone revenues since the product's introduction to the market in July 1996,
and the sale of equipment in the six months ended January 31, 1998.
INCOME TAXES. The Company did not record an income tax benefit in the
six months ended January 31, 1997 because the realization of available net
operating loss ("NOL") carryforwards was not probable. In the six months ended
January 31, 1998 the Company did not recognize income tax expense as a result of
the utilization of NOL carryforwards. As of July 31, 1997, the Company had
federal carryforwards of approximately $21.0 million. The amount of these NOL
carryforwards that can be used in any given year may be limited in the event of
certain changes in the ownership of the Company. The Company does not believe
that prior ownership changes will significantly limit its ability to use its NOL
carryforwards.
THREE MONTHS ENDED JANUARY 31, 1998 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1997
RESULTS OF OPERATIONS
REVENUES. Revenues increased 125.9% from approximately $31.4 million
for the three months ended January 31, 1997 to approximately $71.0 million for
the three months ended January 31, 1998. Revenues from the Company's
telecommunications operations increased 187.4% from approximately $21.9 million
for the three months ended January 31, 1997 to approximately $63.0 million for
the three months ended January 31, 1998. Revenues from the Company's Internet
operations decreased 42.8% from approximately $9.1 million for the three months
ended January 31, 1997 to approximately $5.2 million for the three months ended
January 31, 1998, reflecting the Company's decision to deemphasize its
activities in this area. Internet telephony revenues increased 590.7% from
approximately $392,000 for the three months ended January 31, 1997 to
approximately $2.7 million for the three months ended January 31, 1998.
Telecommunications revenues increased 187.4%, primarily as a result of
a 249.3% increase in minutes of use, from approximately 45.9 million to
approximately 160.4 million, offset in part by a decline in revenue per minute
from $0.46 to $0.39. Telecommunications minutes increased primarily due to the
addition of wholesale carrier service clients, increased usage by existing
clients, and increased marketing of
12
the Company's prepaid calling cards. The offsetting decline in revenue per
minute resulted from variations in the mix of telecommunications revenue. The
addition of wholesale carrier services clients and the increased use by existing
clients resulted in an increase in wholesale carrier services revenues of 195.3%
from approximately $13.0 million for the three months ended January 31, 1997 to
approximately $38.3 million for the three months ended January 31, 1998. As a
percentage of telecommunications revenues, wholesale carrier service revenues
increased from approximately 59.1% to 60.7%. Revenues from the Company's
prepaid calling card business, which the Company began to market in January
1997, increased from approximately $148,000 for the three months ended January
31, 1997 to approximately $18.1 million for the three months ended January 31,
1998. As a percentage of telecommunications revenues, prepaid calling card
revenues increased from 0.7% to 28.7%. As a percentage of telecommunications
revenues, international retail services revenues decreased from 33.5% to 8.5%.
As a percentage of total revenues, Internet access revenues decreased
from approximately 28.9% for the three months ended January 31, 1997 to
approximately 7.3% for the three months ended January 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 1.2% for the three months ended January 31, 1997 to 3.8% for the three
months ended January 31, 1998. The increase in Internet telephony revenues was
primarily due to an increase in billed-minute usage, and the sale of
approximately $750,000 of equipment during the three months ended January 31,
1998.
DIRECT COST OF REVENUES. The Company's direct cost of revenues
increased by 146.6%, from approximately $20.9 million in the three months ended
January 31, 1997 to approximately $51.4 million in the three months ended
January 31, 1998. As a percentage of total revenues, these costs increased from
66.4% in the three months ended January 31, 1997 to 72.5% in the three months
ended January 31, 1998. The dollar increase is primarily due to increases in
underlying carrier costs, because the Company's telecommunications minutes of
use, and associated revenue, grew substantially. As a percentage of total
revenues, the increase in direct costs reflects lower gross margins associated
with wholesale carrier services as compared with international retail and
Internet access services.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative costs increased 23.3% from approximately $11.2 million in the
three months ended January 31, 1997 to approximately $13.8 million in the three
months ended January 31, 1998. As a percentage of total revenues, these costs
decreased from 35.8% in the three months ended January 31, 1997 to 19.5% in the
three months ended January 31, 1998. The decrease in these costs as a
percentage of total revenues was due primarily to the shift of focus of the
Company's Internet access marketing efforts from aggressive mass marketing to
new reseller programs and the increase in wholesale carrier services revenues
relative to total revenues. The increase in these costs in dollar terms was due
primarily to the selling costs associated with the marketing and distribution of
the Company's prepaid calling cards.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization costs
increased 88.7% from approximately $1.1 million in the three months ended
January 31, 1997 to approximately $2.0 million in the three months ended January
31, 1998. As a percentage of revenues, these costs decreased from 3.4% in the
three months ended January 31, 1997 to 2.9% in the three months ended January
31, 1998. These costs increased in absolute terms primarily as a result of the
Company's higher fixed asset base during the three months ended January 31, 1998
as compared with the three months ended January 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 (LOSS) FROM OPERATIONS. Income from operations for the
Company's telecommunications business increased to approximately $4.8 million in
the three months ended January 31, 1998 from $1.5 million in the three months
ended January 31, 1997. As a percentage of telecommunication revenues,
13
income from operations for the Company's telecommunications business increased
to 7.5% in the three months ended January 31, 1998 from approximately 6.7% in
the six months ended January 31, 1997.
Net loss from operations for the Internet access segment of the
Company's business decreased to approximately $1.4 million in the three months
ended January 31, 1998 from approximately $2.8 million in the three months ended
January 31, 1997. The decreased loss of the Internet access segment is largely
due to the refocusing of the Company's marketing efforts from aggressive mass
marketing to new reseller programs. Income generated from the operations of the
Net2Phone division increased to approximately $280,000 for the three months
ended January 31, 1998, compared to a loss of approximately $407,000 for the
three months ended January 31, 1997. This change is due to the substantial
increase in Net2Phone revenues since the product's introduction to the market in
July 1996, and the sale of equipment in the three months ended January 31, 1998.
INCOME TAXES. The Company did not record an income tax benefit in the
three months ended January 31, 1997 because the realization of available net
operating loss ("NOL") carryforwards was not probable. In the three months
ended January 31, 1998 the Company did not recognize income tax expense as a
result of the utilization of NOL carryforwards. As of July 31, 1997, the
Company had federal carryforwards of approximately $21.0 million. The amount of
these NOL carryforwards that can be used in any given year may be limited in the
event of certain changes in the ownership of the Company. The Company does not
believe that prior ownership changes will significantly limit its ability to use
its NOL carryforwards.
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 (including borrowings from
certain of its stockholders and under certain credit facilities). In
September 1997, the Company completed a $7.5 million private placement of
3.0% convertible debentures with a group of institutional investors. The
debentures are convertible into shares of the Company's Common Stock. In
December 1997, the Company obtained a $10.0 million line of credit from
Transamerica Technology Finance, a subsidiary of Transamerica Corporation,
which is guaranteed by certain of the Company's subsidiaries, and is secured
by the Company's carrier receivables and certain other assets. The Company
also received approximately $2.9 million upon the exercise of stock options
in the six months ended January 31, 1998. As of January 31, 1998, the
Company had cash and cash equivalents of $8.6 million and working capital of
approximately $14.7 million. In February 1998, the Company completed the
Equity Offering, raising net proceeds of $119.7 million, after deducting
underwriting discounts and commissions and offering expenses paid or payable
by the Company, and after adding proceeds from the exercise of stock options
by certain selling stockholders. In February 1998, the Company completed a
private placement of $100.0 million aggregate principal amount of 8 3/4%
Senior Notes (the "Debt Offering"), in connection with which the Company
received net proceeds of approximately $96.5 million. As of January 31,
1998, on a pro forma basis after giving effect to the Equity Offering, the
Company had cash and cash equivalents of $209.3 million and working capital
of approximately $214.4 million.
14
The Company generated negative cash flow from operating activities of
approximately $2.9 million during the six months ended January 31, 1998,
compared with negative cash flow from operating activities of approximately $7.2
million during the six months ended January 31, 1997. The improvement in cash
flow from operating activities from the six months ended January 31, 1998 to the
six months ended January 31, 1997 was primarily due to the decrease in the
Company's net loss. Cash flow from operations varied 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 $17.1 million and $31.8 million at January 31,
1997 and 1998, 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 $12.3
million in the six months ended January 31, 1997 to approximately $12.7 million
in the six months ended January 31, 1998, as the Company expanded its
international and domestic telecommunications network infrastructure. The
Company financed a large portion of its capital expenditures since the beginning
of Fiscal 1997 through capital leases and notes payable. Payments on purchases
of fixed assets increased from approximately $7.3 million in the six months
ended January 31, 1997 to approximately $8.8 million in the six months ended
January 31, 1998.
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 business. From time to time, the
Company evaluates potential acquisitions of companies, technologies, products
and customer accounts that complement the Company's businesses. In Fiscal 1997,
the Company purchased the equipment and networks of two of its Alliance Partners
for approximately $4.4 million. The purchase price includes a cash payment of
$2.3 million, which the Company financed through a four-year convertible note,
assumption of trade liabilities of approximately $280,000 (excluding $429,000
due to the Company), and the issuance of promissory notes totaling approximately
$1.4 million, of which $690,000 is a two-year note paying interest at 8.25% per
annum, and $750,000 is a four-year note paying interest at 10% per annum. In
December 1997, the four-year convertible note was converted by the holder into
shares of the Company's Common Stock.
In November 1997, the Company purchased the outstanding capital stock
of Rock Enterprises, Inc. in exchange for 625,000 shares of the Company's Common
Stock, 312,500 shares of which were issued immediately and the remainder of
which the Company is obligated to issue over five years, commencing in 1998.
The Company is currently engaged in negotiations to enter into a joint
venture with a distributor of telephone calling cards. If the transaction is
completed, the Company expects to issue up to 200,000 shares of its Common Stock
to its partner in the joint venture, 100,000 of which will be issued upon
closing of the transaction, and with the remainder to be issued in 1999.
The Company believes that, based upon its present business plan, the
proceeds from the Equity Offering and the Debt Offering, together with the
Company's existing cash resources, credit facilities 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, 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.
The Company has initiated 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. While the consequences of an
incomplete or untimely resolution of the Year 2000 issue could be expected to
have a negative effect on the future financial results of the Company,
15
the Company expects that its Year 2000 issues will be satisfactorily resolved
well before the year 2000.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
The statements contained in this Report on Form 10-Q that are not
purely historical are 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 regarding the Company's expectations, hopes,
intentions, beliefs or strategies regarding the future. Forward looking
statements include the Company's liquidity, anticipated cash needs and
availability, and anticipated expense levels under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations." All
forward looking statements included in this document are based on information
available to the Company on the date of this Report, and the Company assumes no
obligation to update any such forward looking statement. It is important to
note that the Company's actual results could differ materially from those
expressed or implied in such forward looking statements. Among the factors that
could cause actual results to differ materially are the Company's recent entry
into new telecommunications markets and new service offerings, the intense
competition in the markets in which the Company operates and the domination of
many markets by large industry participants, the Company's dependence on others
to support or provide many of the services offered by the Company, technological
change and uncertainty, regulatory developments and the Company's ability to
manage its anticipated growth. Investors should also consult the "Risk Factors"
section in the Company's Annual Report on Form 10-K, as amended, for the year
ended July 31, 1997 as well as those factors listed from time to time in the
Company's other reports filed with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934 and the Securities Act of 1933.
16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Incorporated by reference from Part I, Item I, Financial Statements,
Note 4 captioned "Legal Proceedings."
ITEM 2. CHANGES IN SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders (the "Meeting") was
held on December 11, 1997. The following matters were submitted to the
Company's stockholders for their vote, and the results of the vote taken at the
Meeting were as follows:
(1) Three of the Company's Class II Directors were reelected for
a term of three years.
(a) Howard S. Balter: 40,656,873 votes for; 12,650 votes
against;
(b) Meyer A. Berman: 40,657,773 votes for; 11,750 votes
against; and
(c) Hal Brecher: 40,657,773 votes for; 11,750 votes
against.
(2) An amendment to the Company's Amended and Restated 1996
Stock Option and Incentive Plan (the "Plan") was ratified. The
amendment authorized an additional 1,000,000 shares of the Company's
Common Stock for grants under the Plan.
38,700,428 votes for; 1,627,612 votes against; 33,382
abstentions; 308,101 broker non-votes.
(3) The appointment of Ernst & Young LLP as the Company's
independent auditors for the fiscal year ending July 31, 1998 was
ratified.
40,659,483 votes for; 5,970 votes against; 4,070 abstentions.
Item 5. OTHER INFORMATION
None
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.
17
4.01* Indenture between the Registrant and First Trust National
Association, as Trustee.
4.02* Registration Rights Agreement between the Registrant, BT Alex. Brown
Incorporated, Hambrecht & Quist LLC, Jefferies & Company, Inc. and
Friedman, Billings, Ramsey & Co., Inc.
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) Amended and Restated 1996 Stock Option and Incentive Plan of IDT
Corporation.
10.04(4) Form of Stock Option Agreement under the 1996 Stock Option and
Incentive Plan.
10.05(5) Network Service Provider Agreement between Netscape Communications
Corporation and the Registrant.
10.06(6) Form of Registration Rights Agreement between certain stockholders
and the Company.
10.07(1) Lease of 294 State Street.
10.08(7) Lease of 190 Main Street.
10.9(8) Form of Registration Rights Agreement between Howard S. Jonas and
the Registrant.
10.10(9) Employment Agreement between the Registrant and James Courter.
10.11(5) Restated Sales Agreement between International Computer Systems,
Inc. and the Registrant.
10.12(5) Restated Consultant and Customer Support Agreement between the
Registrant and International Computer Systems, Inc.
10.13(10) Form of Debenture between the Registrant, RGC International
Investors, LDC, Pangaea Fund Ltd., Special Situations Private Equity
Fund, L.P. and Halifax Fund L.P.
10.14(10) Securities Purchase Agreement among the Registrant, RGC
International Investors, LDC, Pangaea Fund Ltd., Special Situations
Private Equity Fund, L.P. and Halifax Fund L.P.
10.15(10) Registration Rights Agreement among the Registrant, RGC
International Investors, LDC, Pangaea Fund Ltd., Special Situations
Private Equity Fund, L.P. and Halifax Fund L.P.
10.16(11) Warrants (No. 1 and No. 2) for the Purchase of Common Stock between
the Registrant and Prime Leasing, Inc.
10.17(11) Stock Purchase Agreement between the Registrant and Mr. David
Turock.
10.18(12) Agreement between Mr. Cliff Sobel and the Registrant.
10.19(11) Employment Agreement between the Registrant and Mr. Hal Brecher.
10.20(7) Employment Agreement between the Registrant and Mr. David Turock.
10.21(7) Loan and Security Agreement between the Registrant and Transamerica
Business Credit Corporation.
10.22(7) Revolving Credit Note issued by the Registrant to Transamerica
Business Credit Corporation.
18
10.23(7) Security Agreement executed by certain subsidiaries of the
Registrant in favor of Transamerica Business Credit Corporation.
10.24(7) Guaranty executed by certain subsidiaries of the Registrant in favor
of Transamerica Business Credit Corporation.
27.01* Financial Data Schedule.
- ------------------------
* filed herewith
(1) Incorporated by reference to Form S-1 filed February 21, 1996 file no.
333-00204.
(2) Incorporated by reference to Form S-1 filed January 9, 1996 file no.
333-00204.
(3) Incorporated by reference to Form 14A, filed November 14, 1997.
(4) Incorporated by reference to Form S-8 filed January 14, 1996 file no.
333-19727.
(5) Incorporated by reference to Form 10-K for the fiscal year ended July 31,
1996 filed October 29, as amended November 21, 1996.
(6) Incorporated by reference to Form S-1 filed March 8, 1996 file no.
333-00204.
(7) Incorporated by reference to Form 10-K/A for the fiscal year ended July 31,
1997 filed February 2, 1998.
(8) Incorporated by reference to Form S-1 filed March 14, 1996 file no.
333-00204.
(9) Incorporated by reference to Form S-1 filed December 27, 1996 file no.
333-18901.
(10) Incorporated by reference to Form 8-K filed September 19, 1997.
(11) Incorporated by reference to Form 10-K/A for the fiscal year ended July 31,
1997, filed October 29, 1997.
(12) Incorporated by reference to Form 10-K/A for the fiscal year ended July 31,
1997, filed December 4, 1997.
(b) Reports on Form 8-K. The registrant did not file any reports on Form 8-K
during the three months ended January 31, 1998.
19
IDT CORPORATION
FORM 10-Q
JANUARY 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
March 17, 1998 By /s/ Howard Jonas
- -------------- --------------------
Date Howard S. Jonas
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
March 17, 1998 By /s/ Howard Balter
- -------------- --------------------
Date Howard Balter
Chief Operating Officer and
Director
(Principal Financial Officer)
March 17, 1998 By /s/ Stephen R. Brown
- -------------- --------------------
Date Stephen R. Brown
Chief Financial Officer
(Principal Accounting Officer)
20