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, 2001
or
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 0-27898
----------------------
IDT CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 22-3415036
----------------------------- ---------------------
(State or other (I.R.S. Employer
jurisdiction of Identification
incorporation or Number)
organization)
520 Broad Street, Newark, New Jersey 07102
-------------------------------------------- -------------
(Address of principal executive offices) (Zip Code)
(973) 438-1000
----------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Common Stock, $.01 par value--22,296,337 shares as of March 19, 2001
Class A Common Stock, $.01 par value--9,892,488 shares as of March 19, 2001
Class B Common Stock, $.01 par value--no shares outstanding as of March 19, 2001
(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..................................................................... 3
Item 1. Financial Statements (Unaudited)..................................................... 3
Condensed Consolidated Balance Sheets as of January 31, 2001 and
July 31, 2000...................................................................... 3
Condensed Consolidated Statements of Income for the six months and
the three months ended January 31, 2001 and 2000................................... 4
Condensed Consolidated Statements of Cash Flows for the six months
ended January 31, 2001 and 2000.................................................... 5
Notes to Condensed Consolidated Financial Statements................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 18
PART II. OTHER INFORMATION........................................................................ 19
Item 1. Legal Proceedings.................................................................... 19
Item 2. Changes in Securities and Use of Proceeds............................................ 19
Item 3. Defaults Upon Senior Securities...................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders.................................. 19
Item 5. Other Information.................................................................... 19
Item 6. Exhibits and Reports on Form 8-K..................................................... 20
SIGNATURES ........................................................................................ 22
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
IDT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
January 31, 2001 July 31, 2000
---------------- -------------
(Unaudited) (Note 1)
Assets
Current assets:
Cash and cash equivalents .............................................................. $ 1,051,310 $ 162,879
Marketable securities .................................................................. 26,104 230,160
Accounts receivable, net ............................................................... 141,015 160,995
Notes receivable - current portion ..................................................... 180 3,630
Inventory .............................................................................. 10,187 13,121
Other current assets ................................................................... 38,214 71,108
----------- -----------
Total current assets................................................................. 1,267,010 641,893
Property, plant and equipment, at cost, net ............................................ 207,001 225,638
Trademark, net ......................................................................... -- 10,985
Notes receivable - long-term portion ................................................... 8,787 8,001
Intangible assets, net ................................................................. 136,701 162,233
Marketable securities .................................................................. -- 132,277
Investments ............................................................................ 99,309 29,319
Other assets ........................................................................... 323,522 8,709
----------- -----------
Total assets ........................................................................ $ 2,042,330 $ 1,219,055
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable ................................................................. $ 124,944 $ 161,874
Accrued expenses ....................................................................... 19,691 36,451
Deferred revenue ....................................................................... 48,314 48,572
Notes payable - current portion ........................................................ 11,323 22,604
Capital lease obligations - current portion ............................................ 20,355 13,540
Other current liabilities .............................................................. 13,651 10,922
----------- -----------
Total current liabilities ........................................................... 238,278 293,963
Deferred tax liabilities, net ............................................................ 555,511 168,772
Notes payable - long-term portion ...................................................... 390 12,174
Capital lease obligation - long-term portion ........................................... 57,240 43,940
Other liabilities ...................................................................... 267 709
----------- -----------
Total liabilities ................................................................... 851,686 519,558
Minority interests ....................................................................... 7,142 231,309
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; authorized shares -
10,000,000; no shares issued .......................................................... -- --
Common stock, $.01 par value; authorized shares - 100,000,000;
22,296,337 and 25,959,256 shares issued and outstanding at
January, 31, 2001 and July 31, 2000, respectively ..................................... 223 260
Class A common stock, $.01 par value; authorized shares - 35,000,000;
9,892,488 and 9,970,233 shares issued and outstanding at January 31,
2001 and July 31, 2000 ................................................................ 99 100
Class B common stock, $.01 par value; authorized shares -
100,000,000; no shares issued and outstanding ......................................... -- --
Loans to stockholders .................................................................. (251) (251)
Additional paid-in capital ............................................................. 376,808 371,005
Treasury stock ......................................................................... (136,449) --
Accumulated other comprehensive income (losses) ........................................ 881 (92,653)
Retained earnings ...................................................................... 942,191 189,727
----------- -----------
Total stockholders' equity .......................................................... 1,183,502 468,188
----------- -----------
Total liabilities and stockholders' equity ......................................... $ 2,042,330 $ 1,219,055
=========== ===========
See notes to condensed consolidated financial statements.
3
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Six Months Ended January 31, Three Months Ended January 31,
---------------------------- ------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenue .......................................... $ 564,194 $ 558,940 $ 287,597 $ 275,519
Costs and expenses:
Direct cost of revenue ......................... 490,772 450,983 252,153 220,783
Selling, general and administrative ............ 152,670 105,338 69,288 56,720
Depreciation and amortization .................. 29,277 20,375 14,611 10,449
------------ ------------ ------------ ------------
Total costs and expenses ......................... 672,719 576,696 336,052 287,952
------------ ------------ ------------ ------------
Loss from operations ............................. (108,525) (17,756) (48,455) (12,434)
Interest, net .................................... 29,591 818 16,176 1,228
Gain on sale of subsidiary stock ................. 1,037,726 -- -- --
Investment and other income, net ................. 153,301 247,460 (122,577) 181,888
------------ ------------ ------------ ------------
Income before income taxes, minority interests and
extraordinary item ............................. 1,112,093 230,522 (154,856) 170,682
Provision for income taxes ....................... 356,047 101,582 (40,411) 74,877
Minority interests ............................... 3,582 (8,113) 2,659 (5,516)
------------ ------------ ------------ ------------
Income before extraordinary item ................. 752,464 137,053 (117,104) 101,321
Extraordinary loss on retirement of debt, net of
income taxes ................................... -- 2,976 -- 2,976
------------ ------------ ------------ ------------
Net income ....................................... $ 752,464 $ 134,077 $ (117,104) $ 98,346
============ ============ ============ ============
Income (loss) per share:
Income (loss) before extraordinary item:
Basic .......................................... $ 22.11 $ 4.02 $ (3.54) $ 2.97
Diluted ........................................ $ 20.32 $ 3.76 $ (3.54) $ 2.78
Extraordinary loss on retirement of debt,
net of income taxes:
Basic .......................................... $ -- $ (0.09) $ -- $ (0.09)
Diluted ........................................ $ -- $ (0.08) $ -- $ (0.08)
Net income (loss):
Basic .......................................... $ 22.11 $ 3.93 $ (3.54) $ 2.88
============ ============ ============ ============
Diluted ........................................ $ 20.32 $ 3.68 $ (3.54) $ 2.70
============ ============ ============ ============
Weighted average number of shares used in
calculation of earnings per share - basic ...... 34,030,250 34,115,950 33,095,084 34,132,166
============ ============ ============ ============
Weighted average number of shares used in
calculation of earnings per share - diluted .... 37,031,428 36,421,864 33,095,084 36,438,725
============ ============ ============ ============
See notes to condensed consolidated financial statements.
4
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six Months Ended January 31,
----------------------------
2001 2000
---- ----
Net cash provided by (used in) operating activities . $ (82,841) $ (41,097)
Investing activities
Purchases of property, plant and equipment .......... (62,394) (34,630)
Net collection (issuance) of notes receivable ....... (786) 17,864
Net proceeds from sale of Net2Phone common stock .... 1,042,113 115,434
Purchases of investments, net ....................... 17,783 (27,296)
Net sales (purchases) of marketable securities ...... 129,202 (3,018)
----------- -----------
Net cash provided by investing activities ........... 1,125,918 68,354
Financing activities
Proceeds from offerings of common stock of subsidiary -- 263,076
Proceeds from exercise of stock options of subsidiary -- 4,297
Proceeds from exercise of stock options ............. 2,729 1,940
Repayment of borrowings ............................. (42,142) (110,574)
Repayment of capital lease obligations .............. 20,115 (1,712)
Common stock repurchases ............................ (134,189) --
Distributions to minority shareholder ............... (1,160) (1,573)
----------- -----------
Net cash (used in) provided by financing activities . (154,647) 155,454
----------- -----------
Net increase in cash and cash equivalents ........... 888,431 182,711
Cash and cash equivalents, beginning of period ...... 162,879 52,903
----------- -----------
Cash and cash equivalents, end of period ............ $ 1,051,310 $ 235,614
=========== ===========
Supplemental disclosures of cash flow information
Interest paid ....................................... $ 4,409 $ 7,726
Income taxes paid ................................... $ 1,700 $ 1,050
See notes to condensed consolidated financial statements.
5
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
IDT Corporation and subsidiaries (collectively, the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the six and three month periods ended
January 31, 2001 are not necessarily indicative of the results that may be
expected for the year ending July 31, 2001. The balance sheet at July 31, 2000
has been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. For further
information, please refer to the consolidated financial statements and footnotes
thereto included in the Company's Annual Report on Form 10-K for the year ended
July 31, 2000, as filed with the Securities and Exchange Commission.
On August 11, 2000, the Company completed the sale of 14.9 million shares
of its holdings of Net2Phone, Inc.'s ("Net2Phone") Class A Common Stock, at a
price of $75 per share to ITelTech, LLC ("ITelTech"), a Delaware limited
liability company controlled by AT&T Corporation ("AT&T"). In addition, ITelTech
purchased four million newly-issued shares of Class A Common Stock from
Net2Phone at a price of $75 per share. These transactions reduced the Company's
voting stake in Net2Phone from approximately 56% to 21% and its economic stake
in Net2Phone from approximately 45% to 17%. Accordingly, the Company has
deconsolidated Net2Phone effective August 11, 2000 and now accounts for its
investment in Net2Phone using the equity method.
Note 2 - Business Segment Information
Operating results and other financial data presented for the principal
business segments of the Company are as follows ($ in thousands):
Wholesale Retail Internet Internet
Telecommunications Telecommunications -------- --------
Services Services Services Telephony Ventures Total
------------------ ------------------ -------- --------- -------- -----
Three months ended January 31, 2001
Total segment revenue ............. $ 103,295 $ 177,574 $ 3,075 $ -- $ 3,653 $ 287,597
Less: revenues between segments ... -- -- -- -- -- --
Total unaffiliated revenue ........ 103,295 177,574 3,075 -- 3,653 287,597
--------- --------- --------- --------- --------- ---------
Loss from operations .............. $ (14,053) $ (14,823) $ (5,209) $ -- $ (14,370) $ (48,455)
========= ========= ========= ========= ========= =========
Three months ended January 31, 2000
Total segment revenue ............. $ 132,348 $ 136,028 $ 3,348 $ 15,509 $ -- $ 287,233
Less: revenues between segments ... 4,687 3,137 300 3,590 -- 11,714
--------- --------- --------- --------- --------- ---------
Total unaffiliated revenue ........ 127,661 132,891 3,048 11,919 -- 275,519
Income (loss) from operations ..... $ 4,146 $ 3,685 $ (3,585) $ (13,699) $ (2,983) $ (12,434)
========= ========= ========= ========= ========= =========
6
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Wholesale Retail Internet Internet
Telecommunications Telecommunications -------- --------
Services Services Services Telephony Ventures Total
------------------ ------------------ -------- --------- -------- -----
C>
Six months ended January 31, 2001
Total segment revenue ........... $ 214,063 $ 334,616 $ 6,710 $ -- $ 8,805 $ 564,194
Less: revenues between segments . -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total unaffiliated revenue ...... 214,063 334,616 6,710 -- 8,805 564,194
Income (loss) from operations ... $ (31,868) $ (31,982) $ (7,817) $ -- $ (36,858) $(108,525)
========= ========= ========= ========= ========= =========
Six months ended January 31, 2000
Total segment revenue ........... $ 273,769 $ 266,728 $ 6,848 $ 28,609 $ -- $ 575,954
Less: revenues between segments . 8,287 3,137 300 5,290 -- 17,014
--------- --------- --------- --------- --------- ---------
Total unaffiliated revenue ...... 265,482 263,591 6,548 23,319 -- 558,940
Income (loss) from operations ... $ 8,035 $ 7,376 $ (7,185) $ (22,999) $ (2,981) $ (17,756)
========= ========= ========= ========= ========= =========
Note 3 - Property, Plant and Equipment
Property, plant and equipment consists of the following ($ in thousands):
January 31, 2001 July 31, 2000
---------------- -------------
Equipment ..................................... $ 249,883 $ 238,767
Computer software ............................. 12,028 32,216
Leasehold improvements ........................ 15,401 11,918
Furniture and fixtures ........................ 10,519 10,625
Land and building ............................. 6,327 6,327
--------- ---------
294,158 299,853
Less: Accumulated depreciation and amortization (87,157) (74,215)
--------- ---------
$ 207,001 $ 225,638
========= =========
Note 4 - Other Comprehensive Losses
Other comprehensive losses for the six and three month periods ended
January 31, 2001 consisted primarily of unrealized losses in the fair market
value of marketable securities.
Note 5 - AT&T Transactions
On March 28, 2000, IDT entered into an agreement with AT&T, which was
completed on August 11, 2000, pursuant to which the Company's subsidiary IDT
Investments, Inc. ("IDT Investments") sold ITelTech 14.9 million shares of
Net2Phone's Class A Common Stock at a price of $75 per share. In addition,
ITelTech purchased four million newly-issued shares of Class A Common Stock from
Net2Phone at a price of $75 per share. Following these transactions, ITelTech
has approximately a 39% voting stake and a 32% economic stake in Net2Phone for a
total cash investment of approximately $1.4 billion. In recognition of these
transactions, a "Gain on sale of subsidiary stock" of $1.038 billion was
recorded in the Condensed Consolidated Statement of Income for the three months
ended October 31, 2000. These transactions reduced the Company's voting stake in
Net2Phone from approximately 56% to 21% and its economic stake in Net2Phone from
approximately 45% to 17%. Accordingly, the Company has deconsolidated Net2Phone
effective August 11, 2000 and now accounts for its investment in Net2Phone using
the equity method. In addition, the Company has granted AT&T a right of first
refusal with respect to IDT Investments'
7
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
remaining stake of approximately 10 million shares of Class A Common Stock. AT&T
also received the option to convert IDT Investments' remaining 10 million shares
of Class A Common Stock into shares of Net2Phone Common Stock, par value $0.01
per share ("Common Stock"). Shares of Class A Common Stock have two votes per
share, while shares of Common Stock have one vote per share.
In addition, the Company has the option to sell AT&T 2,040,817 shares of
its Class B Common Stock for total consideration of $75.0 million. In August
2000, the Company notified AT&T of its intention to exercise this option. The
transaction is expected to be completed in March 2001.
Note 6 - Tyco Settlement
On October 10, 2000, IDT reached a full and final settlement with Tyco of
all pending claims brought against one another and their respective affiliates.
The settlement agreement is subject to a confidentiality agreement among the
parties and only the following disclosure by IDT is permitted under the terms of
that agreement.
Under the terms of the settlement, TyCom Ltd. ("TyCom") granted to IDT
Europe B.V.B.A. ("IDT Europe"), free of charge, certain exclusive rights to use
capacity on the transatlantic and transpacific segments of TyCom's global
undersea fiber optic network (the "TyCom Global Network"), which TyCom is
currently deploying. The settlement agreement provides for IDT Europe to obtain
exclusive indefeasible rights to use two 10 Gb/s wavelengths on the
transatlantic segment and two 10 Gb/s wavelengths on the transpacific segment
for fifteen years from the applicable Handover Dates (as described below). TyCom
previously announced that it expects the TyCom transatlantic network to be ready
for service in September 2001, and the TyCom transpacific network to be ready
for service in the second quarter of 2002, the respective "Ready for Service
Dates." Under the terms of the settlement agreement, the Handover Dates for the
wavelengths on the transatlantic segment are six months (for the first
wavelength) and 18 months (for the second wavelength), respectively, after the
Ready for Service Date of the TyCom transatlantic network; and the Handover Date
for the wavelengths on the transpacific segment are six months (for the first
wavelength) and 18 months (for the second wavelength), respectively, after the
Ready for Service Date of the TyCom transpacific network. Operation,
administration and maintenance for the wavelengths used by the Company will be
provided by TyCom for a fifteen year period after the relevant Handover Date,
free of charge. TyCom has also granted the Company certain rights to resell any
unused capacity on the wavelengths through TyCom as its sole and exclusive
agent. In addition, the Company will also have the option, exercisable at least
annually, to convert the available capacity on its wavelengths to available
equivalent capacity on another portion of the TyCom Global Network. In
recognition of the settlement, a gain of $313.5 million is included as a
component of "Investment and other income, net" in the Condensed Consolidated
Statement of Income for the six months ended January 31, 2001.
Note 7 - Subsequent Events
In February 2001, the Company purchased certain assets of PT-1
Communications, Inc. ("PT-1"), a wholly-owned subsidiary of STAR
Telecommunications, Inc., relating to its debit card business with a payment of
cash and assumption of certain specified liabilities, including the obligation
to honor the outstanding phone cards of PT-1. The cash payment and assumption of
net liabilities incurred are estimated to be $27 million with substantially all
of the purchase price to be recorded as goodwill and amortized over 20 years.
8
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 8 - Legal Proceedings and Contingencies
In October 1999, Union Telecard Alliance, LLC, a consolidated subsidiary,
commenced an action against DigiTEC 2000, Inc. ("DigiTEC") and TecNet, Inc.
("TecNet") in the Supreme Court of the State of New York, County of New York,
alleging damages of approximately $725,000 based upon, among other things,
non-payment for prepaid calling cards. DigiTEC and TecNet have answered the
complaint and DigiTEC has asserted a third-party claim against IDT seeking
damages of $2.5 million dollars based upon IDT's alleged breach of a settlement
agreement between IDT and DigiTEC which had resolved a prior litigation between
those parties. The court adjourned the return date without assigning a specific
return date for IDT to answer the Third-Party Complaint, subject to DigiTEC's
right to make a written thirty day demand for an answer. This action is
currently in the early stages of discovery.
In February 2000, Multi-Tech Systems, Inc. ("Multi-Tech") filed suit
against Net2Phone and other companies in the United States Federal District
Court in Minneapolis, Minnesota. In its press release, Multi-Tech stated that
"the defendant companies are infringing because they are providing the end users
with the software necessary to simultaneously transmit voice and data on their
computers in the form of making a phone call over the Internet." Net2Phone
intends to defend the lawsuit vigorously. Net2Phone believes that the Multi-Tech
claims are without merit. However, should a judge issue an injunction against
Net2Phone requiring that Net2Phone cease distributing its software or providing
its software-based services, such an injunction could have an adverse effect on
Net2Phone's business and IDT's investment in Net2Phone. Net2Phone has filed an
answer and this action is currently in the early stages of discovery.
IDT Corporation filed a Complaint with the United States District Court for
the District of New Jersey on January 29, 2001, against Telefonica S.A., Terra
Networks, S.A., Terra Networks, U.S.A., Inc. and Lycos, Inc. The complaint
asserts claims against the defendants for, among other things, breaches of
various contracts, breach of fiduciary duty, securities violations, fraudulent
misrepresentation, negligent misrepresentation, fraudulent concealment and
tortious interference with prospective economic advantage. Terra Networks,
U.S.A., Inc. and Lycos, Inc. have been served with the complaint. Service on
Telefonica, S.A. and Terra Networks, S.A. is proceeding through the Hague
Convention and is expected to be completed in the near future.
The Company is subject to other legal proceedings and claims, which have
arisen in the ordinary course of its business and have not been finally
adjudicated. Although there can be no assurances in this regard, in the opinion
of the Company's management, such proceedings, as well as the aforementioned
actions, will not have a material adverse effect on results of operations or the
financial condition of the Company.
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 our Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in our Annual Report on
Form 10-K for the year ended July 31, 2000, as filed with the Securities and
Exchange Commission.
Overview
General
IDT is a leading facilities-based, emerging multinational carrier that
provides a broad range of telecommunications services to wholesale and retail
customers worldwide. In addition, our IDT Ventures division is developing
several innovative telecom and Internet-related businesses. We also hold,
through our majority-owned subsidiary, IDT Investments, Inc., equity interests
in other technology companies, including our former subsidiary, Net2Phone, Inc.
(NASDAQ: NTOP), which offers a variety of Internet telephony products and
services.
Our telecommunications services include wholesale carrier services, prepaid
calling cards, domestic long distance services and international retail
services. We deliver our telecommunications services over a high-quality network
consisting of over 100 switches in the U.S. and Europe and owned and leased
capacity on 16 undersea fiber optic cables. Our network connects our U.S.
facilities with our international facilities and with the facilities of our
foreign partners in Europe, Latin America and Asia. In addition, we obtain
transmission capacity from other carriers. We deliver our international traffic
worldwide pursuant to our agreements with U.S.-based carriers, foreign carriers
and more than 20 of the companies that are primarily responsible for providing
telecommunications services in particular countries.
In October 2000, we announced plans to reorganize, creating separate
divisions designed to reflect our various businesses and unique strategies. When
we complete this reorganization, which is subject to regulatory approval,
receipt of counterparty consents and completion of various administrative
requirements, IDT Corporation will be a holding company, consisting primarily of
two main subsidiaries: IDT Telecom and IDT Ventures. IDT Telecom will conduct
our core telecommunications businesses, including providing wholesale
international telecommunications services, retail debit card services, domestic
long distance services and international retail services. IDT Ventures will
consist of our newly-developed telecom and Internet-related businesses, as well
as our equity investments in other entities, such as Net2Phone.
Outlook
In recent years, we have derived the majority of our revenues from our core
telecommunications businesses, consisting primarily of wholesale carrier
services and retail prepaid calling cards. These businesses have also accounted
for the bulk of our operating expenses as well. Since the fourth quarter of
Fiscal 1998, we have conducted wholesale carrier and prepaid calling card
operations in Europe.
We are also developing various new telecom and Internet related businesses.
During the second quarter of Fiscal 2001, we incurred approximately $16.1
million in development and marketing costs for these business ventures, which
provided us with revenues of approximately $3.7 million. We anticipate that we
will continue to incur significant costs related to these and other new
ventures. The timing and magnitude of any revenues and/or operating profits to
be realized from these new businesses remains uncertain.
Our wholesale carrier and prepaid calling card businesses have experienced
intense price competition, which has served, over time, to reduce our average
per-minute price realizations, putting pressure on our gross margins. In
addition, this environment has led some of our competitors to de-emphasize their
wholesale carrier and/or prepaid calling card operations in order to focus on
higher margin telecommunications businesses. This has helped us to gain some
market share, particularly in the retail calling card business. However, in both
the wholesale carrier and prepaid calling card businesses, our remaining
competitors, although smaller in number, have been pricing their services even
10
more competitively in recent quarters. This has led to a continued decline in
average per-minute price realizations, both in our wholesale and retail markets.
Therefore, although our telecom minutes-of-use have been increasing strongly,
due to market share gains in our retail calling card markets, our telecom
revenues have increased at a much slower rate.
We remain strongly committed to our wholesale carrier and prepaid calling
card businesses. However, we anticipate that we will continue to experience
pricing and margin pressure in both our wholesale and retail businesses for at
least the next few quarters with gross margins for both businesses generally
below the levels experienced prior to the fourth quarter of Fiscal 2000.
Historically, our core telecommunications revenues have been about evenly
divided between our wholesale carrier and retail calling card business lines.
However, in recent quarters, our revenue mix has shifted toward retail business
lines, reflecting the strong growth of our debit card business and our domestic
long distance business, while wholesale carrier revenues continue to decline due
to a shift in our wholesale customer base. We anticipate that this shift in
revenue mix will continue over the next two to four quarters, and the majority
of our telecommunications revenues over that time will be derived from retail
products and services. However, over the longer term, given the anticipated
recovery in the wholesale carrier markets in general, and our wholesale carrier
business in particular, we expect that our telecommunications revenue mix will
revert back to the balanced wholesale/retail mix to which we have historically
been accustomed.
Accounting Treatment of Net2Phone
On August 11, 2000, we completed the sale of 14.9 million of our shares of
Net2Phone Class A Common Stock to AT&T for $75 per share. Upon completing this
transaction, our ownership interest in Net2Phone was reduced to approximately
10.0 million shares of Class A Common Stock, representing approximately a 17%
ownership interest and a 21% voting interest. Consequently, beginning with the
first quarter of Fiscal 2001, we are no longer consolidating Net2Phone's
results. We are now using the equity method to account for our ownership
interest in Net2Phone. This change in the accounting treatment for our ownership
stake in Net2Phone will therefore have an impact upon the comparison of results
for the six and three month periods ended January 31, 2001 and January 31, 2000
described below.
Six Months Ended January 31, 2001 Compared to Six Months Ended January 31, 2000
Results of Operations
Revenue. Our revenue increased 0.9%, from approximately $558.9 million for
the six months ended January 31, 2000 to approximately $564.2 million for the
six months ended January 31, 2001. Our telecommunications revenue increased
3.7%, from approximately $529.1 million for the six months ended January 31,
2000 to approximately $548.7 million for the six months ended January 31, 2001.
Our internet services revenue increased 2.5%, from approximately $6.5 million
for the six months ended January 31, 2000 to approximately $6.7 million for the
six months ended January 31, 2001. As a result of the change in our accounting
for our ownership interest in Net2Phone from the full consolidation method to
the equity method, we did not record Internet telephony revenue for the six
months ended January 31, 2001. We recorded Internet telephony revenue of
approximately $23.3 million for the six months ended January 31, 2000. Revenue
from our Ventures businesses amounted to approximately $8.8 million for the six
months ended January 31, 2001. No revenue from Ventures activities was recorded
for the six months ended January 31, 2000.
Our telecommunications revenue increased primarily as a result of an
approximately 50% increase in minutes of use from approximately 2.04 billion for
the six months ended January 31, 2000 to approximately 3.00 billion for the six
months ended January 31, 2001. The increase in minutes was due to increased
marketing of our prepaid calling cards, which outweighed the effects of lower
wholesale carrier minutes. The average revenue per minute decreased from the six
months ended January 31, 2000 to the six months ended January 31, 2001, despite
the exit of several competitors from our core wholesale and retail markets, due
to the intensified price competition initiated by our remaining competitors, as
they attempt to defend their remaining share of the market. The decline in
wholesale carrier minutes resulted from a reduction in the number of wholesale
carrier services clients, reflecting an ongoing transition of our wholesale
customer base towards a smaller group of larger, more financially stable
11
customers. The decline in wholesale carrier minutes resulted in a decrease in
wholesale telecommunications revenues of 19.4%, from approximately $265.5
million for the six months ended January 31, 2000 to approximately $214.1
million for the six months ended January 31, 2001. As a percentage of
telecommunications revenue, wholesale telecommunications revenue decreased from
approximately 50.2% for the six months ended January 31, 2000 to approximately
39.0% for the six months ended January 31, 2001.
Our revenue from retail telecommunications services increased 26.9%, from
approximately $263.6 million for the six months ended January 31, 2000 to
approximately $334.6 million for the six months ended January 31, 2001 as a
result of increased sales of our prepaid calling cards, and higher domestic long
distance revenues. As a percentage of overall telecommunications revenue, retail
telecommunications revenue increased from approximately 49.8% for the six months
ended January 31, 2000 to approximately 61.0% for the six months ended January
31, 2001. Prepaid calling card sales increased 23.4%, from approximately $250.9
million for the six months ended January 31, 2000, to approximately $309.5
million for the six months ended January 31, 2001, as we continue to take market
share from competitors who have scaled back their calling card operations or
have left the market entirely. Prepaid calling card sales as a percentage of our
retail telecommunication services revenue decreased from 95.2% for the six
months ended January 31, 2000 to 92.5% for the six months ended January 31,
2001, as revenues from domestic long distance services grew at a faster rate
than did calling card revenues. Our revenues from domestic long distance
services increased 295.2%, from approximately $5.5 million for the six months
ended January 31, 2000, to approximately $21.9 million for the six months ended
January 31, 2001. The domestic long distance revenue gains are attributable to
the full introduction of our flat-rate, $0.05 a minute long distance calling
plan, which was accompanied by an aggressive marketing campaign, resulting in a
significant increase in the number of domestic long distance customers.
As a percentage of total revenue, Internet services revenue was
approximately 1.2% for both the six months ended January 31, 2000 and six months
ended January 31, 2001. The dollar increase in Internet services revenue
reflects an increase in dedicated access services, which outweighed the decline
in dial-up access services.
Internet telephony revenue as a percentage of total revenue amounted to
4.2% for the six months ended January 31, 2000. As mentioned above, no Internet
telephony revenue was recorded for the six months ended January 31, 2001,
reflecting a change in the accounting treatment of our Net2Phone stake to the
equity method beginning in the first quarter of Fiscal 2001.
Direct Cost of Revenue. Our direct cost of revenue increased by 8.8%, from
approximately $451.0 million for the six months ended January 31, 2000 to
approximately $490.8 million for the six months ended January 31, 2001. As a
percentage of total revenue, these costs increased from 80.7% for the six months
ended January 31, 2000 to 87.0% for the six months ended January 31, 2001. The
dollar increase is due primarily to increases in underlying carrier and
connectivity costs, as our telecommunications minutes of use grew significantly.
As a percentage of total revenue, the increase in direct costs reflects the
gross margin pressures experienced by both the wholesale and retail
telecommunications divisions, reflecting intensified price competition in these
markets, as described above. Partially offsetting this factor was the shift in
telecommunications revenue mix towards higher gross margin retail revenues.
Selling, General and Administrative. Our selling, general and
administrative costs increased 44.9%, from approximately $105.3 million for the
six months ended January 31, 2000 to approximately $152.7 million for the six
months ended January 31, 2001. As a percentage of total revenue, these costs
increased from 18.8% for the six months ended January 31, 2000 to 27.1% for the
six months ended January 31, 2001. This increase is due to several factors,
including increased international debit card distribution costs, increased sales
and marketing efforts for our retail services, such as prepaid calling cards and
domestic long distance, as well as increased salaries, facilities costs and
professional fees related to the expansion of our infrastructure to facilitate
our current and anticipated future sales growth. Also included in selling,
general and administrative costs for the six months ended January 31, 2001 is
approximately $29.1 million in selling, general and administrative costs
associated with our IDT Ventures division, which has several innovative
telecommunications and Internet related businesses in various stages of
development. This compares to approximately $3.0 million in selling, general and
administrative costs associated with our IDT Ventures division, which was
recorded during the six months ended January 31, 2000. In addition, IDT Ventures
incurred expenses during the first quarter of Fiscal 2001 of $12.5 million
related to management incentive compensation arising from the completion of the
sale of our Net2Phone shares to AT&T. Partially offsetting these factors was the
12
exclusion of selling, general and administrative expenses related to Net2Phone
in the six months ended January 31, 2001. Included in selling, general and
administrative for the six months ended January 31, 2000, is $5.2 million of
non-cash compensation as a result of option grants made by Net2Phone during the
period.
Depreciation and Amortization. Depreciation and amortization increased
43.7%, from approximately $20.4 million for the six months ended January 31,
2000 to approximately $29.3 million for the six months ended January 31, 2001.
As a percentage of revenue, these costs increased from 3.6% for the six months
ended January 31, 2000 to 5.2% for the six months ended January 31, 2001. These
costs increased, in both absolute dollars and as a percentage of revenues,
primarily as a result of our higher fixed asset base during the six months ended
January 31, 2001 as compared with the six months ended January 31, 2000,
reflecting our efforts to expand our telecommunications network infrastructure
and other facilities partially offset by the deconsolidation of Net2Phone. We
anticipate that depreciation and amortization costs will continue to increase as
we continue to add to our asset base, allowing us to implement our growth
strategy.
Loss from Operations. We recorded a loss from operations of approximately
$108.5 million for the six months ended January 31, 2001, compared to a loss
from operations of approximately $17.8 million for the six months ended January
31, 2000. Our telecommunications business recorded a loss from operations (after
the effect of minority interests) of approximately $67.4 million for the six
months ended January 31, 2001, compared to income from our telecommunications
operations of approximately $13.8 million for the six months ended January 31,
2000. The recording of a loss from operations in the current period as compared
with income from operations in the prior year period reflected decreased gross
margins, particularly in the wholesale carrier business, and an increase in
sales and marketing costs for retail telecommunications services, which
outweighed the increase in telecommunications revenues.
Loss from operations for our Ventures division for the six months ended
January 31, 2001 was approximately $36.9 million, which included $12.5 million
of management incentive compensation. The Ventures division recorded an
operating loss of $3.0 million in the six months ended January 31, 2000.
Loss from operations for our Internet access business increased to
approximately $7.8 million for the six months ended January 31, 2001 from
approximately $7.2 million for the six months ended January 31, 2000. The
increased loss is due to higher direct costs incurred in providing Internet
access services.
Loss from operations of the Net2Phone subsidiary amounted to approximately
$23.4 million for the six months ended January 31, 2000, with no corresponding
loss from operations recorded during the six months ended January 31, 2001,
reflecting the change in accounting for Net2Phone.
Other income. Included in other income for the six months ended January 31,
2001 is a realized gain of $999.6 million on our sale of 14.9 million shares of
Net2Phone Class A Common Stock to AT&T, $38.1 million in gains we recognized
under Staff Accounting Bulletin No. 51 in conjunction with Net2Phone's sale of
newly issued shares to AT&T and approximately $313.5 million in gains related to
the settlement of our lawsuit with TyCom Ltd. Partially offsetting this income
was a recognized loss of approximately $129.2 million related primarily to the
sale of some of our Terra Networks shares, as well as a loss of approximately
$32.0 million due to recording our pro-rata share of Net2Phone's loss through
the equity method.
Included in other income for the six months ended January 31, 2000 is
$142.3 million in gains we recognized under Staff Accounting Bulletin No. 51 in
conjunction with Net2Phone's sale of shares in its Initial Public Offering and
concurrent conversion of Net2Phone's Series A Stock to Class A Common Stock in
August 1999 and its secondary offering in December 1999, and a realized gain of
$105.8 million on our sale of 2.2 million Net2Phone shares as part of
Net2Phone's Secondary Offering.
Income Taxes. We recorded income tax expense of approximately $356.0
million for the six months ended January 31, 2001, compared to approximately
$101.6 million for the six months ended January 31, 2000. Income tax benefit of
approximately $1.2 million for the six months ended January 31, 2001, and
approximately $1.3 million for the six months ended January 31, 2000 related to
the tax deduction upon the exercise of stock options was recorded directly into
additional paid-in capital.
13
Three Months Ended January 31, 2001 Compared to Three Months Ended January 31,
2000
Results of Operations
Revenue. Our revenue increased 4.4%, from approximately $275.5 million for
the three months ended January 31, 2000 to approximately $287.6 million for the
three months ended January 31, 2001. Our telecommunications revenue increased
7.8%, from approximately $260.6 million for the three months ended January 31,
2000 to approximately $280.9 million for the three months ended January 31,
2001. Our Internet services revenue increased 2.5%, from approximately $3.0
million for the three months ended January 31, 2000 to approximately $3.1
million for the three months ended January 31, 2001. As a result of the change
in our accounting for our ownership interest in Net2Phone from the full
consolidation method to the equity method, we did not record Internet telephony
revenue for the three months ended January 31, 2001. We recorded Internet
telephony revenue of approximately $11.9 million for the three months ended
January 31, 2000. Revenue from our Ventures businesses amounted to approximately
$3.7 million for the three months ended January 31, 2001. No revenue from
Ventures activities was recorded for the three months ended January 31, 2000.
Our telecommunications revenue increased primarily as a result of a 60.4%
increase in minutes of use from approximately 1.01 billion for the three months
ended January 31, 2000 to approximately 1.62 billion for the three months ended
January 31, 2001. The increase in minutes was due to increased marketing of our
prepaid calling cards, which outweighed the effects of lower wholesale carrier
minutes. The average revenue per minute decreased from the three months ended
January 31, 2000 to the three months ended January 31, 2001, despite the exit of
several competitors from our core wholesale and retail markets, due to the
intensified price competition initiated by our remaining competitors, as they
attempt to defend their remaining share of the market. The decline in wholesale
carrier minutes resulted from a reduction in the number of wholesale carrier
services clients, reflecting an ongoing transition of our wholesale customer
base towards a smaller group of larger, more financially stable customers. The
decline in wholesale carrier minutes resulted in a decrease in wholesale
telecommunications revenues of 19.1%, from approximately $127.7 million for the
three months ended January 31, 2000 to approximately $103.3 million for the
three months ended January 31, 2001. As a percentage of telecommunications
revenue, wholesale telecommunications revenue decreased from approximately 49.0%
for the three months ended January 31, 2000 to approximately 36.8% for the three
months ended January 31, 2001.
Our revenue from retail telecommunications services increased 33.7%, from
approximately $132.9 million for the three months ended January 31, 2000 to
approximately $177.6 million for the three months ended January 31, 2001, as a
result of increased sales of our prepaid calling cards and continued growth of
our domestic long distance business. As a percentage of overall
telecommunications revenue, retail telecommunications revenue increased from
approximately 51.0% for the three months ended January 31, 2000 to approximately
63.2% for the three months ended January 31, 2001. Prepaid calling card sales
increased 31.4%, from approximately $124.0 million in the three months ended
January 31, 2000, to approximately $162.9 million in the three months ended
January 31, 2001, as we continue to take market share from competitors who have
scaled back their calling card operations or have left the market entirely.
Prepaid calling card sales as a percentage of retail telecommunication services
revenue decreased from 93.3% for the three months ended January 31, 2000 to
91.7% for the three months ended January 31, 2001. Our revenues from domestic
long distance services increased 391.2%, from approximately $2.7 million in the
three months ended January 31, 2000, to approximately $13.2 million in the three
months ended January 31, 2001. The domestic long distance revenue gains are
attributable to the full introduction of our flat-rate, $0.05 a minute long
distance calling plan, which was accompanied by an aggressive marketing
campaign, resulting in a significant increase in the number of domestic long
distance customers.
As a percentage of total revenue, Internet services revenue was
approximately 1.1% for both the three months ended January 31, 2000 and three
months ended January 31, 2001. The dollar increase in Internet services revenue
reflects an increase in dedicated access services, which outweighed the decline
in dial-up access services.
Internet telephony revenue as a percentage of total revenue amounted to
4.3% for the three months ended January 31, 2000. As mentioned above, no
Internet telephony revenue was recorded for the three months ended January 31,
2001, reflecting a change in the accounting treatment of our Net2Phone stake to
the equity method beginning in the first quarter of Fiscal 2001.
14
Direct Cost of Revenue. Our direct cost of revenue increased by 14.2%, from
approximately $220.8 million for the three months ended January 31, 2000 to
approximately $252.2 million for the three months ended January 31, 2001. As a
percentage of total revenue, these costs increased from 80.1% for the three
months ended January 31, 2000 to 87.7% for the three months ended January 31,
2001. The dollar increase is due primarily to increases in underlying carrier
and connectivity costs, as our telecommunications minutes of use grew
significantly. As a percentage of total revenue, the increase in direct costs
reflects the gross margin pressures experienced by both the wholesale and retail
telecommunications divisions, reflecting intensified price competition in these
markets, as described above. Partially offsetting this factor was the shift in
telecommunications revenue mix towards higher gross margin retail revenues.
Selling, General and Administrative. Our selling, general and
administrative costs increased 22.2%, from approximately $56.7 million for the
three months ended January 31, 2000 to approximately $69.3 million for the three
months ended January 31, 2001. As a percentage of total revenue, these costs
increased from 20.6% for the three months ended January 31, 2000 to 24.1% for
the three months ended January 31, 2001. This increase is due to several
factors, including increased international debit card distribution costs,
increased sales and marketing efforts for our retail services, such as prepaid
calling cards and domestic long distance, as well as increased salaries,
facilities costs and professional fees related to the expansion of our
infrastructure to facilitate our current and anticipated sales growth. Also
included in selling, general and administrative costs for the three months ended
January 31, 2001 is approximately $16.1 million in selling, general and
administrative costs associated with our IDT Ventures division, which has
several innovative telecommunications and Internet related businesses in various
stages of development. Partially offsetting these factors was the exclusion of
selling, general and administrative expenses related to Net2Phone in the three
months ended January 31, 2001. Included in salaries for the three months ended
January 31, 2000, is $2.3 million of non-cash compensation as a result of option
grants made by Net2Phone during the period.
Depreciation and Amortization. Depreciation and amortization increased
39.8%, from approximately $10.4 million for the three months ended January 31,
2000 to approximately $14.6 million for the three months ended January 31, 2001.
As a percentage of revenue, these costs increased from 3.8% for the three months
ended January 31, 2000 to 5.1% for the three months ended January 31, 2001.
These costs increased, in both absolute dollars and as a percentage of revenues,
primarily as a result of our higher fixed asset base during the three months
ended January 31, 2001 as compared with the three months ended January 31, 2000,
reflecting our efforts to expand our telecommunications network infrastructure
and other facilities. We anticipate that depreciation and amortization costs
will continue to increase as we continue to add to our asset base, allowing us
to implement our growth strategy.
Loss from Operations. We recorded a loss from operations of approximately
$48.5 million for the three months ended January 31, 2001, compared to a loss
from operations of approximately $12.4 million for the three months ended
January 31, 2000. Our telecommunications business recorded a loss from
operations (after the effect of minority interests) of approximately $30.9
million for the three months ended January 31, 2001, compared to income from our
telecommunications operations of approximately $7.2 million for the three months
ended January 31, 2000. The recording of a loss from operations in the current
period as compared with income from operations in the prior year period
reflected decreased gross margins, particularly in the wholesale carrier
business, and an increase in sales and marketing costs for retail
telecommunications services, which outweighed the effects of an increase in
telecommunications revenues.
Loss from operations for our Ventures division for the three months ended
January 31, 2001 was approximately $14.4 million, compared to an operating loss
of approximately $3.0 million in the three months ended January 31, 2000. The
larger loss resulted primarily from increased selling, general and
administrative expenses as the Company worked to develop its various Ventures
businesses.
Loss from operations for our Internet business increased to approximately
$5.2 million for the three months ended January 31, 2001 from approximately $3.6
million for the three months ended January 31, 2000. The increased loss is due
to higher direct costs incurred in providing Internet access service.
Loss from operations of the Net2Phone subsidiary amounted to approximately
$14.1 million for the three months ended January 31, 2000, with no corresponding
loss from operations recorded during the three months ended January 31, 2001,
reflecting the change in accounting for Net2Phone.
15
Other income. Included in other income for the three months ended January
31, 2001 were recognized losses of approximately $91.6 million related primarily
to the sale of some of our Terra Networks shares, as well as a loss of
approximately $31.0 million due to recording our pro-rata share of Net2Phone's
loss through the equity method.
Included in other income for the three months ended January 31, 2000 was
$76.8 million in gains we recognized under Staff Accounting Bulletin No. 51 in
conjunction with Net2Phone's sale of shares in its Secondary Offering in
December 1999, and a realized gain of $105.8 million on our sale of 2.2 million
Net2Phone shares as part of Net2Phone's Secondary Offering.
Income Taxes. We recorded an income tax benefit of approximately $40.4
million for the three months ended January 31, 2001, compared to an income tax
expense of approximately $74.9 million for the three months ended January 31,
2000. Income tax benefit of approximately $0.4 million for the three months
ended January 31, 2001, and approximately $0.5 million for the three months
ended January 31, 2000 related to the tax deduction upon the exercise of stock
options was recorded directly into additional paid-in capital.
Recent Developments
Our common stock began trading on the New York Stock Exchange, Inc. on
February 26, 2001 under the ticker symbol "IDT". Our common stock previously
traded on the Nasdaq National Market under the symbol "IDTC".
Liquidity and Capital Resources
General
Historically, we have satisfied our cash requirements through a combination
of cash flow from operating activities, sales of equity and debt securities and
borrowings from third parties. Additionally, we received approximately $1.1
billion from the sale of Net2Phone Class A Common Stock to AT&T in August 2000.
As of January 31, 2001, we had cash, cash equivalents and marketable
securities of approximately $1.1 billion and working capital of approximately
$1.0 billion. We generated negative cash flow from operating activities of
approximately $82.8 million during the six months ended January 31, 2001,
compared with negative cash flow from operating activities of approximately
$82.8 million during the six months ended January 31, 2000. Our cash flow from
operations varies significantly from quarter to quarter, depending upon the
timing of operating cash receipts and payments, especially accounts receivable
and accounts payable. Accounts receivable, accounts payable and accrued expenses
have generally increased from period to period as our businesses have grown.
Our capital expenditures were approximately $62.4 million for the six
months ended January 31, 2001, compared to approximately $34.6 million for the
six months ended January 31, 2000, as we have continued to expand our
international and domestic telecommunications network infrastructure. From time
to time, we will finance a portion of our capital expenditures through capital
leases.
We experience intense price competition in our telecommunications business.
The long distance telecommunications industry has been characterized by
significant declines in both per-minute revenues and per-minute costs. In the
past, these factors have tended to generally offset each other. However, since
the mid-point of Fiscal 2000, as per-minute pricing continued to erode, and
began to outpace the drop in per-minute costs, gross margins have come under
increasing pressure. Our long term strategy involves terminating a larger
proportion of minutes on our own network, thereby lowering costs and preserving
margins even in a weaker price environment. However, in the short term, the
incremental demand for usage has outpaced the rate of deployment of additional
network capacity. In fact, it has become commonplace within the industry for
companies to experience delays in network build-out programs. As such, there can
be no assurance that we will be able to maintain our gross margins at the
current level, in the face of lower per-minute revenues.
We continued to fund our Ventures division, which incurred significant
start-up, development, marketing and promotional costs. As we move our Ventures
businesses through their respective development stages, we anticipate that
selling, general and administrative for our Ventures division will exceed, by a
significant amount, the revenues generated by this division for the foreseeable
future.
16
We will need to make significant capital expenditures in order to expand
our network capacity. If we are unable to raise sufficient capital to meet our
spending requirements, our network expansion, and the anticipated associated
revenue growth and margin improvement, would be delayed.
Changes in Other Current Assets, Accounts Receivable, Allowance for Doubtful
Accounts and Deferred Revenue
Other current assets decreased from $71.1 million at July 31, 2000 to $38.2
million at January 31, 2001, due to decreases in contract deposits, inventories
and prepaid expenses due to the deconsolidation of Net2Phone. The average age of
our accounts receivable, as measured by number of days sales outstanding, has
increased from the levels of one year ago, due to a significant increase in
sales to relatively more credit-worthy carriers and distributors of prepaid
calling cards. These customers tend to demand, and we are willing to grant,
extended payment terms. However, the number of days sales outstanding has
remained within a narrow range over the past four quarters, and has declined
since the end of Fiscal 2000.
Due to the wide range of collection terms, future trends with respect to
days sales outstanding generally depend on the proportion of total sales made to
carriers, who are often offered extended payment terms of up to 90 days, and
prepaid calling card distributors, who generally receive terms of up to 30 days.
Therefore, the trends in days sales outstanding will depend, in large part, on
the mix of wholesale (carrier) versus retail (debit card distributor) customers.
In addition, as we are willing to extend longer payment terms to more
credit-worthy customers, an increase in customers belonging to the highest
credit classes, as a percentage of total customers, could also lead to an
increase in days sales outstanding. However, as the foregoing is difficult to
predict, it is not possible at this time to determine whether recent trends in
days sales outstanding will continue.
The allowance for doubtful accounts as a percentage of accounts receivable
increased from 14.3% at July 31, 2000, to 22.8% at January 31, 2001. The
increase reflects the deteriorating credit quality of a portion of our existing
wholesale customer base, as well as the increase in the number of domestic long
distance customers, who require a larger reserve than do wholesale and retail
debit card customers. Although we anticipate that our customer base will
continue its transition towards a more credit-worthy group, some of our existing
accounts receivable are still related to sales made to less credit-worthy
customers. In addition, during the first quarter of Fiscal 2001, we collected
large amounts of previously unsettled outstanding wholesale receivables against
which there were offsetting payables. Therefore, these receivables did not have
allowances for doubtful accounts associated with them. Collections of these
receivables had the effect of reducing gross receivables, while not having an
impact on the allowance for doubtful accounts, resulting in a higher allowance
for doubtful accounts when measured as a percentage of accounts receivable.
Deferred revenue as a percentage of total revenue varies from period to
period depend on the mix and the timing of revenue. During the first six months
of Fiscal 2001, we continued to experience a steady increase in the sale of our
prepaid calling cards due to increased marketing efforts and a decreased number
of competitors in our target markets. This resulted in a continued increase in
actual deferred revenue. However, we reported a reduction of deferred revenue
during the first six months of Fiscal 2001 because of the elimination of
Net2Phone-related deferred revenue due to the deconsolidation of Net2Phone.
Significant Transactions
In August 2000, we sold 14,900,000 shares of our Net2Phone Class A Common
Stock to ITelTech, for a purchase price of $75 per share, for total cash
consideration of approximately $1.1 billion. In addition, ITelTech purchased an
additional 4 million newly-issued shares of Net2Phone Class A Common Stock, also
at a price of $75 per share, paying approximately $300.0 million to Net2Phone.
We now hold approximately 17% of Net2Phone's outstanding stock, and
approximately 21% of the voting interest.
In addition, we have the option to sell to AT&T 2,040,817 shares of our
Class B Common Stock for total consideration of $75.0 million. In August 2000,
we notified AT&T of our intention to exercise this option. The transaction is
expected to be completed in March 2001.
17
Stock Buyback Program
In May 2000, our Board of Directors authorized the repurchase of up to five
million shares of our Common Stock. In June 2000, our Board of Directors
authorized an increase in the share repurchase program to 10.0 million shares of
Common Stock. In October 2000, we our Board of Directors had authorized a
further increase in the share repurchase program to 12.5 million shares of
Common Stock. Through March 13, 2001, we had repurchased approximately 7.1
million shares of Common Stock, for an aggregate purchase price of approximately
$237.7 million, of which approximately 3.1 million were retired.
Other Sources and Uses of Resources
We intend to, where appropriate, make strategic acquisitions to increase
our telecommunications customer base. From time to time, we evaluate potential
acquisitions of companies, technologies, products and customer accounts that
complement our businesses.
From November 1, 2000 through March 19, 2001, we have purchased
approximately $51 million of assets and stock of several telecommunications and
related businesses, including the debit card business of PT-1 Communications,
Inc.
We believe that, based upon our present business plan, our existing cash
resources, expected cash flow from operating activities and access to credit
facilities will be sufficient to meet our currently anticipated working capital
and capital expenditure requirements for at least the next twelve months.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We have reviewed the disclosure requirements for Item 3 and, based on our
current capital structure, scope of operations and financial statement
structure, we believe that such disclosure is not warranted at this time. Since
conditions may change, we will periodically review our compliance with this
disclosure requirement to the extent applicable.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934, including statements that contain the
words "believes," "anticipates," "expects," and similar words and phrases. Such
forward-looking statements include, among other things, our plans to implement
our growth strategy, improve our financial performance, expand our
infrastructure, develop new products and services, expand our customer base and
enter international markets, and the possible outcome of our litigation. Such
forward-looking statements also include our expectations concerning factors
affecting the markets for our 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 we assume
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 our reports filed with the
Securities and Exchange Commission pursuant to the Securities Act of 1933 and
the Securities Exchange Act of 1934, including our Annual Report on Form 10-K
for the year ended July 31, 2000 and Quarterly Report on Form 10-Q for the three
months ended October 31, 2000.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Incorporated by reference from Part I, Item I, Financial Statements, Note 8
captioned "Legal Proceedings and Contingencies."
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Stockholders (the "Meeting") was held on December 14,
2000. The following matters were submitted to our stockholders for their vote,
and the results of the vote taken at the Meeting were as follows:
1. Four of our Class II Directors were elected for a term of three years.
(a) Hal Brecher: 50,528,543 votes for; 609,133 votes against;
(b) Moshe Kaganoff: 50,527,979 votes for; 609,697 votes against;
(c) Meyer A. Berman: 50,577,320 votes for; 560,356 votes against;
(d) William A. Owens: 50,618,195 votes for; 519,481 votes against; and
0 broker held non-voted shares.
2. Amendment to our 1996 Stock Option and Incentive Plan, as amended and
restated (the "Plan") were ratified. The amendments to the Plan
effected the following changes: (i) permit the grant of awards of (or
with respect to) shares of our Class B Common Stock, par value $.01 per
share, under the Plan, (ii) reserve 3,300,000 shares of Class B Common
Stock for the grant of awards under the Plan and (iii) certain
technical amendments to the Plan.
37,043,293 votes for; 5,114,949 votes against; 53,458 abstentions; and
8,322,049 broker held non-voted shares.
3. The grant of options to purchase shares of our Class B Common Stock to
certain of our officers and directors of up to an aggregate of 820,000
shares of our Class B Common Stock granted outside of our 1996 Stock
Option and Incentive Plan, as amended and restated.
37,886,220 votes for; 5,144,949 votes against; 53,458 abstentions; and
8,322,049 broker held non-voted shares.
4. The appointment of Ernst & Young LLP as our independent auditors for the
fiscal year ending July 31, 2001 was ratified.
50,951,920 votes for; 133,938 votes against; 51,818 abstentions; and
0 broker held non-voted shares.
In connection with the restructuring, Howard S. Jonas executed a written
consent on December 15, 2000.
19
Item 5.
Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(1) Exhibits:
Exhibit
Number Description
- ------ -----------
3.01(1) Restated Certificate of Incorporation of the Registrant.
3.02(1) By-laws of the Registrant.
3.03(16) Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant.
10.01(2) Employment Agreement between the Registrant and Howard S. Jonas.
10.02(*) 1996 Stock Option and Incentive Plan, as amended and restated, of the Registrant.
10.03(3) Form of Stock Option Agreement under the 1996 Stock Option and Incentive Plan.
10.04(4) Form of Registration Rights Agreement between certain stockholders and the Registrant.
10.05(1) Lease of 294 State Street.
10.06(5) Lease of 190 Main Street.
10.7(6) Form of Registration Rights Agreement between Howard S. Jonas and the Registrant.
10.8(10) Employment Agreement between the Registrant and James Courter.
10.9(7) Agreement between Cliff Sobel and the Registrant.
10.10(10) Employment Agreement between the Registrant and Hal Brecher.
10.11(10) Employment Agreement between the Registrant and Howard S. Jonas.
10.12(8) Agreement and Plan of Merger, dated April 7, 1998, by and among the Registrant, ADM Corp.,
InterExchange, Inc., David Turock, Eric Hecht, Richard Robbins, Bradley Turock, Wai Nam Tam,
Mary Jo Altom and Lisa Mikulynec.
10.13(9) Securities Purchase Agreement between the Registrant, Carlos Gomez and Union Telecard Alliance, LLC.
10.14(10) Credit Agreement, dated as of May 10, 1999, by and among the Registrant, various lenders party
thereto, Lehman Commercial Paper Inc., CIBC World Markets Corp. and Bankers Trust Company.
10.15(10) Pledge Agreement, dated as of May 10, 1999, by and among the Registrant, certain subsidiaries
of the Registrant and Bankers Trust Company, as Collateral Agent.
10.16(10) Security Agreement, dated as of May 10, 1999, by and among the Registrant, certain subsidiaries of the
Registrant and Bankers Trust Company, as Collateral Agent.
10.17(10) Subsidiaries Guaranty, dated as of May 10, 1999, by and among the Registrant, certain subsidiaries of the
Registrant and Bankers Trust Company, as Collateral Agent.
10.18(10) Loan Agreement between the Registrant and Stephen Brown.
10.19(11) Internet/Telecommunications Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc.
10.20(11) Joint Marketing Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc.
10.21(11) IDT Services Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc.
10.22(11) Net2Phone Services Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc.
10.23(11) Assignment Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc.
10.24(11) Tax Sharing and Indemnification Agreement, dated as of May 7, 1999, by and between Registrant
and Net2Phone, Inc.
10.25(11) Separation Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc.
20
Exhibit
Number Description
- ------ -----------
10.26(11) Co-location and Facilities Management Services Agreement, dated as of May 20, 1999, by and between Registrant
and Net2Phone, Inc.
10.27(12) Lease of 520 Broad Street, Newark, New Jersey.
10.28(12) Amendment to Lease of 520 Broad Street, Newark, New Jersey.
10.29(13) Option Agreement, dated as of March 3, 2000, between IDT Corporation and AT&T Corp.
10.30(14) Amendment to Option Agreement, dated as of April 5, 2000 between IDT Corporation and AT&T Corp.
10.31(13) Subscription Agreement, dated as of March 24, 2000, between IDT Corporation and Liberty Media Corporation.
10.32(14) Amendment to Subscription Agreement, dated as of May 26, 2000, between IDT Corporation and Liberty Media
Corporation.
10.33(13) Letter Agreement, dated as of March 28, 2000, between IDT Corporation, AT&T Corp. and Net2Phone, Inc.
10.34(13) Letter Agreement, dated as of March 30, 2000, between IDT Corporation, AT&T Corp. and Net2Phone, Inc.
10.35(15) Conversion, Termination and Release Agreement, dated as of April 30, 2000, between IDT Corporation, Terra
Networks, S.A., Terra Networks USA, Inc., Terra Networks Access Services USA LLC and Terra Networks Interactive
Services USA LLC.
27.01* Financial Data Schedule.
- -----------
* Filed herewith.
(1) Incorporated by reference to Form S-1 filed February 21, 1996 file no. 333-00204.
(2) Incorporated by reference to Form S-1 filed January 9, 1996 file no. 333-00204.
(3) Incorporated by reference to Form S-8 filed January 14, 1996 file no. 333-19727.
(4) Incorporated by reference to Form S-1 filed March 8, 1996 file no. 333-00204.
(5) Incorporated by reference to Form 10-K for the fiscal year ended July 31, 1997,
filed October 29, 1997.
(6) Incorporated by reference to Form S-1 filed March 14, 1996 file no. 333-00204.
(7) Incorporated by reference to Form 10-K/A for the fiscal year ended July 31, 1997,
filed February 2, 1998.
(8) Incorporated by reference to Form 8-K filed April 22, 1998.
(9) Incorporated by reference to Form 10-K/A for the fiscal year ended July
31, 1998, filed December 4, 1998.
(10) Incorporated by reference to Form 10-Q for the fiscal quarter ended
January 31, 1999, filed March 17, 1999.
(11) Incorporated by reference to Form 10-Q for the fiscal quarter ended April
30, 1999, filed June 14, 1999.
(12) Incorporated by reference to Form 10-K for the fiscal year ended July 31,
1999, filed November 4, 1999.
(13) Incorporated by reference to Form 10-Q for the fiscal quarter ended
January 31, 2000, filed March 12, 2000.
(14) Incorporated by reference to Form 8-K filed March 31, 2000.
(15) Incorporated by reference to Schedule 14C filed June 12, 2000.
(16) Incorporated by reference to Form 10-Q for the fiscal quarter ended April 30, 2000,
filed June 14, 2000.
(17) Incorporated by reference to Form 10-Q for the fiscal quarter ended
October 31, 2000, filed December 15, 2000.
(2) Reports on Form 8-K.
None.
21
IDT CORPORATION
FORM 10-Q
JANUARY 31, 2001
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 19, 2001 By: /s/ Howard S. Jonas
- -------------- -----------------------------------------------------
Date Howard S. Jonas
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
March 19, 2001 By: /s/ Stephen R. Brown
- -------------- ----------------------------------------------------
Date Stephen R. Brown
Chief Financial Officer
(Principal Financial and Accounting Officer)
22