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 April 30, 2001
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 (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 - 26,487,952 shares as of June 13, 2001
Class A Common Stock, $.01 par value - 9,816,988 shares as of June 13, 2001
Class B Common Stock, $.01 par value - 40,785,574 shares as of June 13, 2001
(Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date)
2
IDT CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION..................................................... 3
Item 1.Financial Statements (Unaudited) ....................................... 3
Condensed Consolidated Balance Sheets as of April 30, 2001
and July 31, 2000 ..................................................... 3
Condensed Consolidated Statements of Income for the nine
months and the three months ended April 30, 2001 and 2000 ............. 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended April 30, 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 ................................... 11
Item 3.Quantitative and Qualitative Disclosures About Market Risk ............. 20
PART II. OTHER INFORMATION ....................................................... 21
Item 1.Legal Proceedings ...................................................... 21
Item 2.Changes in Securities and Use of Proceeds .............................. 21
Item 3.Defaults Upon Senior Securities ........................................ 21
Item 4.Submission of Matters to a Vote of Security Holders..................... 21
Item 5.Other Information....................................................... 21
Item 6.Exhibits and Reports on Form 8-K........................................ 21
SIGNATURES......................................................................... 25
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
IDT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
April 30, 2001 July 31, 2000
-------------- -------------
(Unaudited) (Note 1)
Assets
Current assets:
Cash and cash equivalents ............................... $ 1,107,803 $ 162,879
Marketable securities ................................... 11,915 230,160
Accounts receivable, net ................................ 144,043 160,995
Other current assets .................................... 35,895 87,859
----------- -----------
Total current assets ................................. 1,299,656
Property, plant and equipment, net ....................... 215,120 225,638
Trademark, net ........................................... -- 10,985
Intangible assets, net ................................... 180,942 162,233
Marketable securities .................................... -- 132,277
Investments .............................................. 66,829 29,319
Other assets ............................................. 345,979 16,710
----------- -----------
Total assets ......................................... $ 2,108,526 $ 1,219,055
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable .................................. $ 190,548 $ 161,874
Accrued expenses ........................................ 23,884 36,451
Deferred revenue ........................................ 67,156 48,572
Notes payable - current portion ......................... 6,905 22,604
Capital lease obligations - current portion ............. 19,943 13,540
Other current liabilities ............................... 10,668 10,922
----------- -----------
Total current liabilities ............................ 319,104 293,963
Deferred tax liabilities, net ............................ 514,588 168,772
Notes payable - long-term portion ........................ 337 12,174
Capital lease obligations - long-term portion ............ 52,943 43,940
Other liabilities ........................................ 167 709
----------- -----------
Total liabilities .................................... 887,139 519,558
Minority interests ....................................... 13,342 231,309
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; 22,424,287 and 25,959,256 shares issued
and outstanding at April 30, 2001 and July 31, 2000,
respectively ........................................... 224 260
Class A common stock, $.01 par value; authorized shares -
35,000,000; 9,816,988 and 9,970,233 shares issued and
outstanding at April 30, 2001 and July 31, 2000,
respectively ........................................... 98 100
Class B common stock, $.01 par value; authorized shares -
100,000,000; 36,322,907 and 35,929,489 shares issued and
outstanding at April 30, 2001 and July 31, 2000,
respectively ........................................... 363 359
Loans to stockholders ................................... (251) (251)
Additional paid-in capital .............................. 456,630 370,646
Treasury stock .......................................... (138,087) --
Accumulated other comprehensive losses .................. (4,847) (92,653)
Retained earnings ....................................... 893,915 189,727
----------- -----------
Total stockholders' equity ........................... 1,208,045 468,188
----------- -----------
Total liabilities and stockholders' equity .......... $ 2,108,526 $ 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)
Nine Months Ended April 30, Three Months Ended April 30,
------------------------------- -------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenue ................................. $ 899,916 $ 822,050 $ 335,722 $ 263,110
Costs and expenses:
Direct cost of revenue ................ 789,058 661,617 298,286 210,634
Selling, general and administrative ... 226,908 176,682 74,238 71,345
Depreciation and amortization ......... 42,890 32,000 13,613 11,624
Impairment charges .................... 5,156 -- 5,156 --
------------ ------------ ------------ ------------
Total costs and expenses ................ 1,064,012 870,299 391,293 293,603
------------ ------------ ------------ ------------
Loss from operations .................... (164,096) (48,249) (55,571) (30,493)
Interest, net ........................... 42,492 3,977 12,901 3,160
Gain on sale of subsidiary stock ........ 1,037,726 -- -- --
Investment and other income, net ........ 110,402 481,247 (42,899) 233,786
------------ ------------ ------------ ------------
Income (loss) before income taxes,
minority interests and extraordinary
item .................................. 1,026,524 436,975 (85,569) 206,453
Provision for (benefit from) income taxes 316,094 189,932 (39,953) 88,350
Minority interests ...................... 6,243 (15,992) 2,661 (7,879)
------------ ------------ ------------ ------------
Income (loss) before extraordinary item . 704,187 263,035 (48,277) 125,982
Extraordinary loss on retirement of debt,
net of income taxes ................... -- 2,976 -- --
------------ ------------ ------------ ------------
Net income (loss) ....................... $ 704,187 260,059 $ (48,277) 125,982
============ ============ ============ ============
Earnings per share:
Income (loss) before extraordinary item:
Basic ................................. $ 10.43 $ 3.83 $ (0.73) $ 1.82
Diluted ............................... $ 9.46 $ 3.54 $ (0.73) $ 1.66
Extraordinary loss on retirement of
debt, net of income taxes:
Basic ................................. $ -- $ (0.04) $ -- $ --
Diluted ............................... $ -- $ (0.04) $ -- $ --
Net income (loss):
Basic ................................. $ 10.43 $ 3.79 $ (0.73) $ 1.82
============ ============ ============ ============
Diluted ............................... $ 9.46 $ 3.50 $ (0.73) $ 1.66
============ ============ ============ ============
Weighted average number of shares used in
calculation of earnings per share -
basic ................................. 67,517,305 68,668,369 66,470,916 69,080,494
============ ============ ============ ============
Weighted average number of shares used in
calculation of earnings per share -
diluted ............................... 74,444,028 74,234,849 66,470,916 75,992,053
============ ============ ============ ============
See notes to condensed consolidated financial statements.
4
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine Months Ended April 30,
------------------------------
2001 2000
---- ----
Net cash used in operating activities ............... $ (45,257) $ (85,234)
Investing activities
Purchases of property, plant and equipment .......... (55,596) (55,510)
Net collection (issuance) of notes receivable ....... (16,034) 10,959
Net proceeds from sale of Net2Phone common stock .... 1,042,113 115,434
Purchases of investments, net ....................... (38,262) (40,881)
Sales of marketable securities, net ................. 179,671 (59,748)
----------- -----------
Net cash provided by (used in) investing activities . 1,111,892 (29,746)
Financing activities
Proceeds from offerings of common stock of subsidiary -- 261,189
Proceeds from exercise of stock options of subsidiary -- 8,781
Proceeds from exercise of stock options ............. 2,736 5,632
Proceeds from sale of class B common stock .......... 74,787 --
Repayment of borrowings ............................. (46,613) (111,345)
Repayment of capital lease obligations .............. (8,678) (4,549)
Common stock repurchases ............................ (138,087) --
Proceeds from minority investment in subsidiary ..... -- 5,000
Distributions to minority shareholder ............... (5,856) (2,518)
----------- -----------
Net cash (used in) provided by financing activities . (121,711) 162,190
----------- -----------
Net increase in cash and cash equivalents ........... 944,924 47,210
Cash and cash equivalents, beginning of period ...... 162,879 52,903
----------- -----------
Cash and cash equivalents, end of period ............ $ 1,107,803 $ 100,113
=========== ===========
Supplemental disclosures of cash flow information
Interest paid ....................................... $ 5,677 $ 8,719
Income taxes paid ................................... $ 4,493 $ 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" or "IDT") 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 nine and three month periods ended
April 30, 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, through its subsidiary IDT Investments Inc.
("IDT Investments"), 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
$75 per share. These transactions reduced the Company's voting stake in
Net2Phone from approximately 56% to 21% and its economic stake in Net2Phone from
approximately 45% to 17%. Accordingly, the Company has deconsolidated Net2Phone
effective August 11, 2000 and accounts for its investment in Net2Phone using the
equity method.
On May 4, 2001, the Company declared a stock dividend of one share of Class
B Common Stock for every one share of Common Stock, Class A Common Stock and
Class B Common Stock. The Company distributed the dividend shares on May 31,
2001 to shareholders of record on May 14, 2001. The stock dividend has been
accounted for as a stock split and all references to the number of common shares
and per common share amounts have been restated to give retroactive effect to
the stock dividend for all periods presented.
Note 2 - Business Segment Information
Operating results and other financial data presented for the principal
business segments of the Company are as follows ($ in thousands):
Wholesale Retail
Telecommunications Telecommunications Internet Internet
Services Services Services Telephony Ventures Total
------------------ ------------------ -------- --------- -------- -----
Three months ended April 30, 2001
Total segment revenue ........... $ 93,802 $ 237,588 $ 1,536 $ -- $ 2,796 $ 335,722
Less: revenues between segments . -- -- -- -- -- --
--------- --------- --------- --------- --------- -----------
Total unaffiliated revenue ...... 93,802 237,588 1,536 -- 2,796 335,722
Income (loss) from operations ... $ (18,500) $ (12,973) $ (8,456) $ -- $ (15,642) $ (55,571)
========= ========= ========= ========= ========= ==========
Three months ended April 30, 2000
Total segment revenue ........... $ 127,880 $ 124,583 $ 3,448 $ 18,870 $ 6 $ 274,787
Less: revenues between segments . 6,099 445 150 4,983 -- 11,677
--------- --------- --------- --------- --------- -----------
Total unaffiliated revenue ...... 121,781 124,138 3,298 13,887 6 263,110
Income (loss) from operations ... $ 7,201 $ (6,677) $ (3,971) $(18,108) $ (8,938) $(30,493)
========= ========= ========= ========= ========= ==========
6
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Wholesale Retail
Telecommunications Telecommunications Internet Internet
Services Services Services Telephony Ventures Total
------------------ ------------------ -------- --------- -------- -----
Nine months ended April 30, 2001
Total segment revenue .......... $ 307,865 $ 572,204 $ 8,246 $ -- $ 11,601 $ 899,916
Less: revenues between segments -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total unafifiliated revenue..... 307,865 572,204 8,246 -- 11,601 899,916
Income (loss) from operations .. $ (50,367) $ (44,956) $ (16,273) $ -- $ (52,500) $(164,096)
========= ========= ========= ======== ========= =========
Nine months ended April 30, 2000
Total segment revenue .......... $ 401,649 $ 391,311 $ 10,296 $ 47,479 $ 6 $ 850,741
Less: revenues between segments 14,386 3,582 450 10,273 -- 28,691
--------- --------- --------- --------- --------- ---------
Total unaffiliated revenue ..... 387,263 387,729 9,846 37,206 6 822,050
Income (loss) from operations .. $ 15,237 $ 698 $ (11,156) $ (41,107) $ (11,921) $ (48,249)
========= ========= ========= ======== ========= =========
Note 3 - Property, Plant and Equipment
Property, plant and equipment consists of the following ($ in thousands):
April 30, 2001 July 31, 2000
-------------- -------------
Equipment ..................................... $ 242,331 $ 238,767
Computer software ............................. 12,787 32,216
Leasehold improvements ........................ 17,582 11,918
Furniture and fixtures ........................ 11,560 10,625
Land and building ............................. 8,897 6,327
--------- ---------
293,157 299,853
Less: Accumulated depreciation and amortization (78,037) (74,215)
--------- ---------
$ 215,120 $ 225,638
========= =========
As a result of the Company's gradual exit from the dial-up Internet access
service business, including the sale of the majority of its dial-up Internet
access customers, the Company recorded a charge of $5.2 million during the
quarter ended April 30, 2001 for the write-down of certain Internet Services
segment fixed assets, primarily relating to equipment previously used to provide
dial-up Internet access services.
Note 4 - Other Comprehensive Losses
Other comprehensive losses for the nine and three month periods ended April
30, 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 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 had 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 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' 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.
7
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
In addition, in March 2000 the Company was granted the option to sell AT&T
2,040,817 shares of its Class B Common Stock for approximately $75.0 million. In
March 2001 the Company exercised this option.
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 nine 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 nine 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 three months ended October 31, 2000.
Note 7 - Purchase of PT-1 Assets
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 liabilities, including the obligation to honor
the outstanding phone cards of PT-1. The cash payment and assumption of net
liabilities incurred are approximately $25 million with substantially all of the
purchase price to be recorded as goodwill and amortized over 20 years.
Note 8 - Purchase of Equity Interests in Teligent, Inc. and ICG
Communications, Inc.
In April 2001, through its IDT Investments subsidiary, the Company acquired
from Liberty Media Group ("Liberty Media") 21,436,689 shares of Teligent, Inc.
("Teligent"), as well as an interest in ICG Communications, Inc. ("ICG"),
represented by 50,000 shares of ICG's A-3 Preferred Stock and warrants to
purchase 6,666,667 ICG common shares. In exchange, IDT Investments issued
Liberty Media a total of 15,000 shares of its Class B Common Stock and 60,000
shares of its Preferred Class A stock. Upon completing the transaction, IDT
effectively owned approximately 29% of the equity of Teligent, and effectively
owned approximately 40% of the equity of ICG. The share of the equity losses
recorded by IDT for the quarter ended April 30, 2001, eliminated the carrying
value of the investment in these companies.
8
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 9 - Legal Proceedings and Contingencies
In October 1999, Union Telecard Alliance, LLC 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
informed us that it intends to defend the lawsuit vigorously and that it
believes 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 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. The defendants have been served with the
complaint. IDT has filed an amended complaint and the defendants have filed an
answer to the amended complaint. Terra Networks, S.A., has filed a Counterclaim
for breach of contract alleging that IDT was required to pay to Terra Networks,
S.A. $3,000,000, and that IDT has allegedly failed to do so. A scheduling
conference with the Court has been scheduled for June 15, 2001.
On May 25, 2001, IDT filed a Statement of Claim with the American
Arbitration Association naming Telefonica Internacional, S.A. ("Telefonica") as
the Respondent. The Statement of Claim asserts that IDT and Telefonica entered
into a Memorandum of Understanding ("MOU") that involved, among other things,
the construction and operation of a submarine cable network around South America
("SAm-I"). IDT is claiming, among other things, that Telefonica breached the MOU
by: (1) failing to negotiate SAm-I agreements; (2) refusing to comply with the
equity provisions of the MOU; (3) refusing to sell capacity and back-haul
capacity pursuant to the MOU; and (4) failing to follow through on the joint
venture. In addition to IDT's request that Telefonica comply with the terms of
the MOU, IDT is alleging that it has been damaged in amounts not less than: (1)
$1.15 billion for claim number 1 above; (2) $1.15 billion for claim number 2
above; (3) $100 million for claim number 3 above; and (4) $750 million for claim
number 4 above.
9
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The Company is subject to other legal proceedings and claims, which have
arisen in the ordinary course of its business and have not been finally
adjudicated. Although there can be no assurances in this regard, in the opinion
of the Company's management, such proceedings, as well as the aforementioned
actions, will not have a material adverse effect on results of operations or the
financial condition of the Company.
Note 10 - Stock Buyback Program
In May 2000, the Company's Board of Directors authorized the repurchase of
up to five million shares of its Common Stock. In June 2000, the Company's Board
of Directors authorized an increase in the share repurchase program to 10.0
million shares of Common Stock. In October 2000, the Company's Board of
Directors had authorized a further increase in the share repurchase program to
12.5 million shares of Common Stock. Through June 14, 2001, the Company 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 shares were retired.
Note 11 - Subsequent Events
In May 2001, through its IDT Investments subsidiary, the Company entered
into an agreement with various affiliates of Hicks, Muse, Tate & Furst
Incorporated ("HMTF") to increase IDT's strategic investments in Teligent and
ICG. Under the terms of the agreement, the HMTF affiliates will receive shares
of IDT Investments' Series B Convertible Preferred Stock in exchange for the
HMTF affiliates' stakes in Teligent and ICG. The HMTF affiliates currently own
219,998 shares of Teligent's Series A Convertible Preferred Stock, 23,000 shares
of ICG's 8% Series A-2 Convertible Preferred Stock and warrants to purchase
3,066,667 shares of ICG's common stock.
In May 2001, Teligent filed a voluntary bankruptcy petition under Chapter 11
of the U.S. Bankruptcy Code. ICG had previously filed for bankruptcy protection
in November 2000.
On May 4, 2001, the Company declared a stock dividend of one share of Class
B Common Stock for every one share of Common Stock, Class A Common Stock and
Class B Common Stock. The shares of IDT's Class B Common Stock are entitled to
one-tenth of a vote per share. IDT distributed the dividend shares on May 31,
2001 to shareholders of record on May 14, 2001. The Class B Common Stock
commenced trading on the New York Stock Exchange, Inc. on June 1, 2001 under the
ticker symbol "IDT.B".
10
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 Ventures segment is developing several
innovative telecom and Internet-related businesses. We also hold, through our
majority-owned subsidiary, IDT Investments, 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.
We are also developing various new telecom and Internet related businesses.
During the third quarter of Fiscal 2001, we incurred approximately $12.2 million
in development and marketing costs for these business ventures, which provided
us with revenues of approximately $2.8 million. In addition, we incurred
approximately $6.0 million in costs related to the discontinuation of our
wireless business. 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
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 and selected
acquisitions of prepaid calling card assets and businesses, our telecom revenues
have increased at a much slower rate.
11
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, aided by the
purchase of the calling card operations of PT-1, 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, with the majority of our telecommunications revenues being derived
from retail products and services.
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 nine and three month periods ended April 30, 2001 and April 30, 2000
described below.
Nine months ended April 30, 2001 Compared to Nine months ended April 30, 2000
Results of Operations
Revenue. Our revenue increased 9.5%, from approximately $822.1 million for
the nine months ended April 30, 2000 to approximately $899.9 million for the
nine months ended April 30, 2001. Our telecommunications revenue increased
13.6%, from approximately $775.0 million for the nine months ended April 30,
2000 to approximately $880.1 million for the nine months ended April 30, 2001.
Our Internet services revenue decreased 16.3%, from approximately $9.8 million
for the nine months ended April 30, 2000 to approximately $8.2 million for the
nine months ended April 30, 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 nine
months ended April 30, 2001. We recorded Internet telephony revenue of
approximately $37.2 million for the nine months ended April 30, 2000. Revenue
from our Ventures businesses amounted to approximately $11.6 million for the
nine months ended April 30, 2001. We did not record material revenue from
Ventures activities during the nine months ended April 30, 2000.
Our telecommunications revenue increased primarily as a result of an
approximately 68% increase in minutes of use (excluding minutes related to our
domestic long distance business) from approximately 3.04 billion for the nine
months ended April 30, 2000 to approximately 5.11 billion for the nine months
ended April 30, 2001. The increase in minutes was due to increased marketing of
our prepaid calling cards and the February 2001 acquisition of the prepaid
calling card operations of PT-1, which outweighed the effects of lower wholesale
carrier minutes. The average revenue per minute decreased from the nine months
ended April 30, 2000 to the nine months ended April 30, 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 20.5%, from approximately $387.3 million for the
nine months ended April 30, 2000 to approximately $307.9 million for the nine
months ended April 30, 2001. As a percentage of telecommunications revenue,
wholesale telecommunications revenue decreased from approximately 50.0% for the
nine months ended April 30, 2000 to approximately 35.0% for the nine months
ended April 30, 2001.
12
Our revenue from retail telecommunications services increased 47.6%, from
approximately $387.7 million for the nine months ended April 30, 2000 to
approximately $572.2 million for the nine months ended April 30, 2001, as a
result of increased sales of IDT-branded prepaid calling cards, the February
2001 acquisition of the prepaid calling card operations of PT-1 and higher
domestic long distance revenues. As a percentage of overall telecommunications
revenue, retail telecommunications revenue increased from approximately 50.0%
for the nine months ended April 30, 2000 to approximately 65.0% for the nine
months ended April 30, 2001. Calling card sales increased 45.5%, from
approximately $364.7 million for the nine months ended April 30, 2000, to
approximately $530.7 million for the nine months ended April 30, 2001, aided in
large part by the acquisition of the calling card operations of PT-1. In
addition, we continued to take market share from competitors who have scaled
back their calling card operations or have left the market entirely. Calling
card sales as a percentage of our retail telecommunication services revenue
decreased from 94.1% for the nine months ended April 30, 2000 to 92.7% for the
nine months ended April 30, 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 324.1%, from approximately $8.6
million for the nine months ended April 30, 2000, to approximately $36.3 million
for the nine months ended April 30, 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 declined to 0.9%
for the nine months ended April 30, 2001, down from 1.2% for the nine months
ended April 30, 2000. The decrease in Internet services revenue in dollar terms
reflects our gradual exit from the dial-up Internet access services business,
including the sale of the majority of our dial-up Internet access customers to
Terra Networks.
Internet telephony revenue as a percentage of total revenue amounted to 4.5%
for the nine months ended April 30, 2000. As mentioned above, no Internet
telephony revenue was recorded for the nine months ended April 30, 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 19.3%, from
approximately $661.6 million for the nine months ended April 30, 2000 to
approximately $789.1 million for the nine months ended April 30, 2001. As a
percentage of total revenue, these costs increased from 80.5% for the nine
months ended April 30, 2000 to 87.7% for the nine months ended April 30, 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. In addition, the increase in direct costs reflects
the increased costs, and lower gross margins, associated with the revenues
resulting from the acquisition of the calling card operations of PT-1, as the
minutes associated with these revenues were carried on PT-1's debit card
platform. Upon completing the migration of these minutes over to IDT's debit
card platform, we anticipate that direct costs, and gross margins, on revenues
from the acquired PT-1 calling card business will be more in line with those of
IDT's calling cards. Partially offsetting these factors was the shift in
telecommunications revenue mix towards higher gross margin retail revenues.
Selling, General and Administrative. Our selling, general and administrative
costs increased 28.4%, from approximately $176.7 million for the nine months
ended April 30, 2000 to approximately $226.9 million for the nine months ended
April 30, 2001. As a percentage of total revenue, these costs increased from
21.5% for the nine months ended April 30, 2000 to 25.2% for the nine months
ended April 30, 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 nine months ended April 30, 2001 is
approximately $40.5 million in selling, general and administrative costs
associated with our Ventures segment, which has several innovative
telecommunications and Internet related businesses in various stages of
development. This compares to approximately $11.8 million in selling, general
and administrative costs associated with our Ventures segment, which was
recorded during the nine months ended April 30, 2000. In addition, our Ventures
segment incurred expenses of approximately $6.0 million during the third quarter
of Fiscal 2001, related to the discontinuation of IDT Wireless, and expenses of
$12.5 million incurred during the first quarter of Fiscal 2001, 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 exclusion
of selling, general and administrative expenses related to Net2Phone for the
nine months ended April 30, 2001. Included in selling, general and
administrative for the nine months ended April 30, 2000, is $8.2 million of
non-cash compensation as a result of option grants made by Net2Phone during the
period.
13
Depreciation and Amortization. Depreciation and amortization increased
34.0%, from approximately $32.0 million for the nine months ended April 30, 2000
to approximately $42.9 million for the nine months ended April 30, 2001. As a
percentage of revenue, these costs increased from 3.9% for the nine months ended
April 30, 2000 to 4.8% for the nine months ended April 30, 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 nine months ended
April 30, 2001 as compared with the nine months ended April 30, 2000, reflecting
our efforts to expand our telecommunications network infrastructure and other
facilities. This was 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.
Impairment Charges. As a result of the sale of the majority of our dial-up
Internet access customers and our gradual exit from the dial-up Internet access
business, we recorded a charge of $5.2 million during the quarter ended
April 30, 2001, to write down certain equipment previously used to provide such
services.
Loss from Operations. We recorded a loss from operations of approximately
$164.1 million for the nine months ended April 30, 2001, compared to a loss from
operations of approximately $48.2 million for the nine months ended April 30,
2000. Our telecommunications business recorded a loss from operations of
approximately $95.3 million for the nine months ended April 30, 2001, compared
to income from our telecommunications operations of approximately $15.9 million
for the nine months ended April 30, 2000. The recording of a loss from
operations in our telecommunications business in the current period as compared
with income from operations in the prior year period reflected decreased gross
margins in both the wholesale carrier business and our prepaid calling card
operations, and an increase in sales and marketing costs for retail
telecommunications services. These factors outweighed the increase in
telecommunications revenues.
Loss from operations for our Ventures segment for the nine months ended
April 30, 2001 was approximately $52.5 million, which included $12.5 million of
management incentive compensation. The Ventures division recorded an operating
loss of $11.9 million for the nine months ended April 30, 2000. The increased
loss reflects increased development costs for various Ventures businesses, as
well as approximately $6.0 million in costs associated with the discontinuation
of the IDT Wireless business in the third quarter of Fiscal 2001.
Loss from operations for our Internet business, exclusive of the $5.2
million impairment charge, was essentially unchanged, at approximately $11.1
million for both the nine months ended April 30, 2001 and the nine months ended
April 30, 2000. The effect of lower Internet revenues, reflecting the phasing
out of the dial-up Internet business, was offset by a corresponding reduction in
costs associated with the provision of Internet services.
Loss from operations of the Net2Phone subsidiary amounted to approximately
$41.1 million for the nine months ended April 30, 2000, with no corresponding
loss from operations recorded during the nine months ended April 30, 2001,
reflecting the change in accounting for Net2Phone.
Other income. Included in other income for the nine months ended April 30,
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 other investment losses
including losses of approximately $51.9 million and $10.8 million associated
with recording our pro-rata share of Net2Phone's and Teligent's losses,
respectively, through the equity method.
14
Included in other income for the nine months ended April 30, 2000 is $142.3
million in gains recognized by the Company under Staff Accounting Bulletin No.
51 in conjunction with Net2Phone's sale of shares in its Initial Public Offering
and concurrent conversion of Net2Phone's series A stock to Class A Common Stock
in August 1999 and secondary offering in December 1999, and a realized gain of
$105.8 million on the Company's sale of 2.2 million Net2Phone shares as part of
Net2Phone's secondary offering. Also included in other income for the period was
a gain of approximately $231.3 million related to the sale of the Company's
interests in two Internet joint ventures with Terra Networks in exchange for
Terra Networks stock.
Income Taxes. We recorded income tax expense of approximately $316.1 million
for the nine months ended April 30, 2001, compared to approximately $189.9
million for the nine months ended April 30, 2000.
Three Months Ended April 30, 2001 Compared to Three Months Ended April 30, 2000
Results of Operations
Revenue. Our revenue increased 27.6%, from approximately $263.1 million for
the three months ended April 30, 2000 to approximately $335.7 million for the
three months ended April 30, 2001. Our telecommunications revenue increased
34.8%, from approximately $245.9 million for the three months ended April 30,
2000 to approximately $331.4 million for the three months ended April 30, 2001.
Our Internet services revenue decreased 120%, from approximately $3.3 million
for the three months ended April 30, 2000 to approximately $1.5 million for the
three months ended April 30, 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 April 30, 2001. We recorded Internet telephony revenue of
approximately $13.9 million for the three months ended April 30, 2000. Revenue
from our Ventures businesses amounted to approximately $2.8 million for the
three months ended April 30, 2001. We did not record material revenue from
Ventures activities during the three months ended April 30, 2000.
Our telecommunications revenue increased primarily as a result of a 110.4%
increase in minutes of use (excluding minutes related to our domestic long
distance business) from approximately 1.00 billion for the three months ended
April 30, 2000 to approximately 2.10 billion for the three months ended April
30, 2001. The increase in minutes was due primarily to the February 2001
acquisition of the prepaid calling card operations of PT-1 as well as increased
marketing of our prepaid calling cards. These factors outweighed the effects of
lower wholesale carrier minutes. Our minutes of use grew at a faster rate than
did our telecom revenues, reflecting a decline in the average revenue per
minute. The decline in average revenue per minute during the three months ended
April 30, 2001, compared to the three months ended April 30, 2000, occurred
despite the exit of several competitors from our core wholesale and retail
markets, reflecting 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 23.0%, from approximately
$121.8 million for the three months ended April 30, 2000 to approximately $93.8
million for the three months ended April 30, 2001. As a percentage of
telecommunications revenue, wholesale telecommunications revenue decreased from
approximately 49.5% for the three months ended April 30, 2000 to approximately
28.3% for the three months ended April 30, 2001.
Our revenue from retail telecommunications services increased 91.4%, from
approximately $124.1 million for the three months ended April 30, 2000 to
approximately $237.6 million for the three months ended April 30, 2001, as a
result of the acquisition of the prepaid calling card operations of PT-1,
increased sales of IDT-branded calling cards and the growth of our domestic long
distance business. As a percentage of overall telecommunications revenue, retail
telecommunications revenue increased from approximately 50.5% for the three
months ended April 30, 2000 to approximately 71.7% for the three months ended
April 30, 2001. Calling card sales increased 89.8%, from approximately $116.5
million for the three months ended April 30, 2000, to approximately $221.2
million for the three months ended April 30, 2001, aided in large part by the
acquisition of the calling card operations of PT-1. In addition, we continued to
take market share from competitors who have scaled back their calling card
operations or have left the market entirely. Calling card sales as a percentage
of retail telecommunication services revenue decreased from 93.9% for the three
months ended April 30, 2000 to 93.1% for the three months ended April 30, 2001.
Our revenues from domestic long distance services increased 346.8%, from
approximately $3.2 million for the three months ended April 30, 2000, to
approximately $14.3 million for the three months ended April 30, 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.
15
As a percentage of total revenue, Internet services revenue declined to 0.5%
for the three months ended April 30, 2001, from 1.3% for the three months ended
April 30, 2000. The decrease in Internet services revenue in dollar terms
reflects our gradual exit from the dial-up Internet access services business,
including the sale of most of our dial-up Internet access customers to Terra
Networks.
Internet telephony revenue as a percentage of total revenue amounted to 5.3%
for the three months ended April 30, 2000. As mentioned above, no Internet
telephony revenue was recorded for the three months ended April 30, 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 41.6%, from
approximately $210.6 million for the three months ended April 30, 2000 to
approximately $298.3 million for the three months ended April 30, 2001. As a
percentage of total revenue, these costs increased from 80.1% for the three
months ended April 30, 2000 to 88.8% for the three months ended April 30, 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. In addition, the increase in direct costs reflects
the increased costs, and lower gross margins, associated with the revenues
resulting from the acquisition of the calling card operations of PT-1, as the
minutes associated with these revenues were carried on PT-1's debit card
platform. Upon completing the migration of these minutes over to IDT's debit
card platform, we anticipate that direct costs, and gross margins, on revenues
from the acquired PT-1 calling card business will be more in line with those of
IDT's calling cards. Partially offsetting these factors during the three months
ended April 30, 2001 was the shift in telecommunications revenue mix towards
higher gross margin retail revenues.
Selling, General and Administrative. Our selling, general and administrative
costs increased 4.1%, from approximately $71.3 million for the three months
ended April 30, 2000 to approximately $74.2 million for the three months ended
April 30, 2001. As a percentage of total revenue, these costs decreased from
27.1% for the three months ended April 30, 2000 to 22.1% for the three months
ended April 30, 2001. This increase in absolute dollar terms 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
April 30, 2001 is approximately $11.5 million in selling, general and
administrative costs associated with our Ventures segment, which has several
innovative telecommunications and Internet related businesses in various stages
of development. In addition, our Ventures segment incurred expenses of
approximately $6.0 million, related to the discontinuation of IDT Wireless.
Partially offsetting these factors was the exclusion of selling, general and
administrative expenses related to Net2Phone for the three months ended April
30, 2001. Included in salaries for the three months ended April 30, 2000, is
$3.1 million of non-cash compensation as a result of option grants made by
Net2Phone during the period. The decrease in selling, general and administrative
costs as a percentage of revenues was due to the significant increase in
revenues during the three months ended April 30, 2001, which outpaced the
increase in selling, general and administrative costs.
16
Depreciation and Amortization. Depreciation and amortization increased
17.2%, from approximately $11.6 million for the three months ended April 30,
2000 to approximately $13.6 million for the three months ended April 30, 2001.
As a percentage of revenue, these costs decreased from 4.4% for the three months
ended April 30, 2000 to 4.1% for the three months ended April 30, 2001. These
costs increased, in absolute dollar terms, primarily as a result of our higher
fixed asset base during the three months ended April 30, 2001 as compared with
the three months ended April 30, 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.
Depreciation and amortization declined as a percentage of revenues, as revenues
for the three months ended April 30, 2001 increased at a faster rate than did
depreciation charges.
Impairment Charges. As a result of the sale of the majority of our dial-up
Internet access customers and our gradual exit from the dial-up Internet access
business, we recorded a charge of $5.2 million during the quarter ended
April 30, 2001, to write down certain equipment previously used to provide such
services.
Loss from Operations. We recorded a loss from operations of approximately
$55.6 million for the three months ended April 30, 2001, compared to a loss from
operations of approximately $30.5 million for the three months ended April 30,
2000. Our telecommunications business recorded a loss from operations of
approximately $31.5 million for the three months ended April 30, 2001, compared
to income from our telecommunications operations of approximately $0.5 million
for the three months ended April 30, 2000. The recording of a loss from
operations in our telecommunications business in the current period, as compared
with income from operations in the prior year period, was due to narrower gross
margins for both the wholesale telecommunications and prepaid calling card
businesses, as well as an increase in sales and marketing costs for retail
telecommunications services. These factors outweighed the increase in
telecommunications revenues.
Loss from operations for our Ventures segment for the three months ended
April 30, 2001 was approximately $15.6 million, compared to an operating loss of
approximately $8.9 million for the three months ended April 30, 2000. The larger
loss resulted primarily from increased selling, general and administrative
expenses as the Company worked to develop its various Ventures businesses, as
well as approximately $6.0 million in costs associated with the discontinuation
of the IDT Wireless business in the third quarter of Fiscal 2001.
Loss from operations for our Internet business, exclusive of the $5.2
million impairment charge, decreased to approximately $3.3 million for the three
months ended April 30, 2001 from approximately $4.0 million for the three months
ended April 30, 2000. The decreased loss, which occurred despite a decline in
Internet revenues, was due to lower direct costs incurred in providing Internet
access service, reflecting the phase-out of our dial-up Internet access
services.
Loss from operations of the Net2Phone subsidiary amounted to approximately
$18.1 million for the three months ended April 30, 2000, with no corresponding
loss from operations recorded during the three months ended April 30, 2001,
reflecting the change in accounting for Net2Phone.
Other income. Included in other income for the three months ended April 30,
2001 were investment losses including losses of approximately $20.0 million and
$10.8 million associated with recording our pro-rata share of Net2Phone's and
Teligent's losses, respectively, through the equity method.
Included in other income for the three months ended April 30, 2000 is a gain
of approximately $231.3 million, related to the sale of the Company's interests
in two Internet joint ventures with Terra Networks in exchange for Terra
Networks stock.
Income Taxes. We recorded an income tax benefit of approximately $40.0
million for the three months ended April 30, 2001, compared to an income tax
expense of approximately $88.3 million for the three months ended April 30,
2000.
17
Recent Developments
Our common stock began trading on the New York Stock Exchange, Inc. ("NYSE")
on February 26, 2001 under the ticker symbol "IDT". Our common stock previously
traded on the Nasdaq National Market under the symbol "IDTC".
On May 4, 2001, we declared a stock dividend of one share of Class B Common
Stock for every one share of Common Stock, Class A Common Stock and Class B
Common Stock. The shares of IDT's Class B Common Stock are entitled to one-tenth
of a vote per share. IDT distributed the dividend shares on May 31, 2001 to
shareholders of record on May 14, 2001. The Class B Common Stock commenced
trading on the NYSE on June 1, 2001 under the ticker symbol "IDT.B".
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 $1.0
billion from the sale of Net2Phone Class A Common Stock to AT&T in August 2000.
As of April 30, 2001, we had cash, cash equivalents and marketable
securities of approximately $1.1 billion and working capital of approximately
$980.6 million. We generated negative cash flow from operating activities of
approximately $45.3 million during the nine months ended April 30, 2001,
compared with negative cash flow from operating activities of approximately
$85.2 million during the nine months ended April 30, 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 $55.6 million for the nine
months ended April 30, 2001, compared to approximately $55.5 million for the
nine months ended April 30, 2000, as we have continued to expand our
international and domestic telecommunications network infrastructure. We
anticipate making significant capital expenditures over the remainder of Fiscal
2001 and in Fiscal 2002, as we expand our telecommunications infrastructure,
primarily to accommodate the anticipated continued increase in
telecommunications minutes of use. 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, particularly in light of the significant increase in minutes
of use we have experienced as a result of the recent acquisition of the calling
card operations of PT-1 and the growth of IDT's existing calling card business.
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 segment, 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 expenses for our Ventures segment will
exceed, by a significant amount, the revenues generated by this segment for the
foreseeable future.
18
Changes in Other Current Assets, Accounts Receivable, Allowance for Doubtful
Accounts and Deferred Revenue
Other current assets decreased from $87.9 million at July 31, 2000 to $35.9
million at April 30, 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
been increasing over the previous four quarters, due to a significant increase
in sales to 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 declined since
the end of Fiscal 2000, and during the three months ended April 30, 2001,
despite an increase in receivables in absolute dollar terms, as recent revenue
growth has outpaced the increases in accounts receivable over that same period.
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 25.3% at April 30, 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 depending on the mix and the timing of revenue. During the nine months
ended April 30, 2001, we experienced a steady increase in the sale of our
prepaid calling cards due to increased marketing efforts for existing IDT
prepaid calling cards and the acquisition of the prepaid calling card operations
of PT-1. This resulted in a continued increase in actual deferred revenue.
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 hold currently approximately 17% of Net2Phone's outstanding stock, and
approximately 21% of the voting interest.
In addition, in March 2000 we were granted the option to sell to AT&T
2,040,817 shares of our Class B Common Stock for approximately $75.0 million. In
March 2001, we exercised this option.
In February 2001, we purchased certain assets of 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 $25
million with substantially all of the purchase price to be recorded as goodwill
and amortized over 20 years.
19
In April 2001, through our IDT Investments subsidiary, we acquired from
Liberty Media 21,436,689 shares of Teligent, as well as an interest in ICG,
represented by 50,000 shares of ICG's A-3 Preferred Stock and warrants to
purchase 6,666,667 ICG common shares. In exchange, IDT Investments issued
Liberty Media a total of 15,000 shares of its Class B Common Stock and 60,000
shares of its Preferred Class A stock.
Subsequent Events
In May 2001, through our IDT Investments subsidiary, we entered into an
agreement with various affiliates of HMTF to increase our strategic investments
in Teligent and ICG. Under the terms of the agreement, the HMTF affiliates will
receive shares of IDT Investments' Series B Convertible Preferred Stock in
exchange for the HMTF affiliates' stakes in Teligent and ICG. The HMTF
affiliates currently own 219,998 shares of Teligent's Series A Convertible
Preferred Stock, 23,000 shares of ICG's 8% Series A-2 Convertible Preferred
Stock and warrants to purchase 3,066,667 shares of ICG's common stock.
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, our Board of Directors had authorized a further
increase in the share repurchase program to 12.5 million shares of Common Stock.
Through June 14, 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 shares 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.
During the nine months ended April 30, 2001, we purchased approximately $68
million of assets and stock of several telecommunications and related
businesses, including the debit card business of PT-1.
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.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Incorporated by reference from Part I, Item I, Financial Statements
(Unaudited), Note 9, captioned "Legal Proceedings and Contingencies."
Item 2. Changes in Securities and Use of Proceeds
On March 20, 2001, the Company issued 2,040,817 shares of its Class B Common
Stock to AT&T for approximately $75.0 million. This sale was made pursuant to
the option to sell previously entered into between the parties. The issuance was
made under the exemption from registration provided by Section 4(2) of the
Securities Act of 1933, being a transaction not involving any public offering.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None.
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.
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(18) 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.
21
Exhibit
Number Description
- ------ -----------
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.
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.
10.36(19) Stock Exchange Agreement, dated as of April 18, 2001, by and among IDT
Investments Inc., IDT Corporation, IDT America, Corp., 225 Old NB Road,
Inc., 226 Old NB Road, Inc., 60 Park Place Holding Company, Inc., Liberty
Media Corporation, Microwave Holdings, L.L.C. and Liberty TP Management, Inc.
10.37(19) Stockholders Agreement, dated as of November 26, 1997, by and among
Teligent, Inc., Microwave Services, Inc., Telcom-DTS Investors, L.L.C. and
NTTA&T Investment Inc. (Incorporated by reference to Exhibit 2 to Schedule
13D, filed by The Associated Group, Inc. and Microwave Services, Inc. on
December 8, 1997 with respect to securities of Teligent, Inc.)
22
Exhibit
Number Description
- ------ -----------
10.38(19) Registration Rights Agreement, dated as of March 6, 1998, by and between
Teligent, Inc. and Microwave Services, Inc. (Incorporated by reference to
Exhibit 6 to Amendment No. 1 to Schedule 13D, filed by The Associated Group,
Inc. and Microwave Services, Inc. on March 9, 1998 with respect to
securities of Teligent, Inc.)
10.39(19) Stockholders Agreement, dated as of January 13, 2000, by and among Alex J.
Mandl, Liberty Media Corporation, Telcom-DTS Investors, L.L.C. and Microwave
Services, Inc. (Incorporated by reference to Exhibit 7(i) to Schedule 13D,
filed by Liberty AGI, Inc. on January 24, 2000 with respect to securities of
Teligent, Inc.)
- -----------
* 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
April 30, 2001, 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.
(18) Incorporated by reference to Form 10-Q for the fiscal quarter ended
January 31, 2001, filed March 19, 2001.
(19) Incorporated by reference to Schedule 13D filed on April 30, 2001.
(b) Reports on Form 8-K.
None.
23
IDT CORPORATION
FORM 10-Q
APRIL 30, 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
June 14, 2001 By: /s/ Howard S. Jonas
------------- -------------------------
Date Howard S. Jonas
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
June 14, 2001 By: /s/ Stephen R. Brown
------------- -------------------------
Date Stephen R. Brown
Chief Financial Officer
(Principal Financial and Accounting Officer)
25