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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, 2002
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
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(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 |_| No |X|
Common Stock, $.01 par value -- 24,856,847 shares as of June 10, 2002
Class A Common Stock, $.01 par value -- 9,816,988 shares as of June 10, 2002
Class B Common Stock, $.01 par value -- 53,352,238 shares as of June 10, 2002
As of June 10, 2002, 5,419,963 shares of common stock and
4,019,163 shares of Class B common stock were held by IDT Corporation.
(Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date)
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IDT CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION................................................................... 3
Item 1. Financial Statements (Unaudited)..................................................... 3
Condensed Consolidated Balance Sheets as of April 30, 2002 and
July 31, 2001...................................................................... 3
Condensed Consolidated Statements of Operations for the nine months and
the three months ended April 30, 2002 and 2001..................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended April 30, 2002 and 2001...................................................... 5
Notes to Condensed Consolidated Financial Statements................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risks.......................... 23
PART II. OTHER INFORMATION....................................................................... 24
Item 1. Legal Proceedings.................................................................... 24
Item 2. Changes in Securities and Use of Proceeds............................................ 24
Item 3. Defaults Upon Senior Securities...................................................... 24
Item 4. Submission of Matters to a Vote of Security Holders.................................. 24
Item 5. Other Information.................................................................... 24
Item 6. Exhibits and Reports on Form 8-K..................................................... 24
SIGNATURES ........................................................................................ 25
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
IDT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
April 30, 2002 July 31, 2001
(Unaudited) (Note 1)
------------ -------------
Assets
Current assets:
Cash and cash equivalents ........................................... $ 752,969 $ 1,091,071
Marketable securities ............................................... 268,565 3,489
Trade accounts receivable, net ...................................... 133,894 116,759
Other current assets ................................................ 41,092 32,413
----------- -----------
Total current assets ............................................. 1,196,520 1,243,732
----------- -----------
Property, plant and equipment, net .................................. 262,488 224,042
Goodwill............................................................. 31,609 177,107
Licenses and other intangibles, net ................................. 21,982 20,697
Investments ......................................................... 62,392 60,732
Other assets ........................................................ 150,118 155,279
----------- -----------
Total assets ..................................................... $ 1,725,109 $ 1,881,589
=========== ===========
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable .............................................. $ 117,787 $ 163,313
Accrued expenses .................................................... 128,167 54,893
Deferred revenue .................................................... 98,218 71,387
Capital lease obligations - current portion ......................... 23,242 20,927
Other current liabilities ........................................... 12,576 17,819
----------- -----------
Total current liabilities ........................................ 379,990 328,339
Deferred tax liabilities, net ......................................... 314,573 390,914
Capital lease obligations - long-term portion ......................... 47,787 50,179
Other liabilities ..................................................... 96 14,502
----------- -----------
Total liabilities ................................................ 742,446 783,934
Minority interests .................................................... 54,271 21,419
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;
19,406,152 and 22,791,789 shares issued and outstanding at April 30,
2002 and July 31, 2001, respectively ............................... 194 228
Class A common stock, $.01 par value; authorized shares - 35,000,000;
9,816,988 shares issued and outstanding at April 30, 2002 and
July 31, 2001 ...................................................... 98 98
Class B common stock, $.01 par value; authorized shares -
100,000,000; 48,807,902 and 39,291,411 shares issued and outstanding
at April 30, 2002 and July 31, 2001, respectively .................. 488 393
Additional paid-in capital .......................................... 589,327 494,093
Treasury stock, at cost ............................................. (153,713) (138,087)
Accumulated other comprehensive loss ................................ (4,968) (2,575)
Retained earnings ................................................... 496,966 722,086
----------- -----------
Total stockholders' equity ....................................... 928,392 1,076,236
=========== ===========
Total liabilities and stockholders' equity ....................... $ 1,725,109 $ 1,881,589
=========== ===========
See notes to condensed consolidated financial statements.
3
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Nine Months Ended April 30 Three Months Ended April 30,
-------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -------------
Revenues ...................................... $ 1,114,887 $ 899,916 $ 401,653 $ 335,722
Costs and expenses:
Direct cost of revenues (exclusive of items
shown below)............................... 879,607 789,058 319,002 298,286
Selling, general and administrative ......... 268,827 226,908 108,735 74,238
Depreciation and amortization ............... 46,840 42,890 16,745 13,613
Impairment charges .......................... 2,781 5,156 -- 5,156
----------- ----------- ----------- -----------
Total costs and expenses ...................... 1,198,055 1,064,012 444,482 391,293
----------- ----------- ----------- -----------
Loss from operations .......................... (83,168) (164,096) (42,829) (55,571)
Interest income, net .......................... 15,496 42,492 3,947 12,901
Other income (expense):
Equity in loss of affiliate ................. (41,794) (51,869) (25,125) (20,000)
Gain on sale of subsidiary stock ............ -- 1,037,726 -- --
Investment and other income, net ............ (8,315) 162,271 (2,503) (22,899)
----------- ----------- ----------- -----------
Income (loss) before income taxes, minority
interests and cumulative effect of accounting
change ...................................... (117,781) 1,026,524 (66,510) (85,569)
Provision for (benefit from) income taxes ..... (55,173) 316,094 (21,233) (39,953)
Minority interest ............................. 15,529 6,243 4,316 2,661
----------- ----------- ----------- -----------
Income (loss) before cumulative effect of
accounting change ........................... (78,137) 704,187 (49,593) (48,277)
Cumulative effect of accounting change, net of
income taxes of $3,525 ...................... (146,983) -- -- --
----------- ----------- ----------- -----------
Net income (loss) ............................. $ (225,120) $ 704,187 $ (49,593) $ (48,277)
=========== =========== =========== ===========
Earnings per share:
Income (loss) before cumulative
effect of accounting change:
Basic ....................................... $ (1.06) $ 10.43 $ (0.64) $ (0.73)
Diluted ..................................... $ (1.06) $ 9.46 $ (0.64) $ (0.73)
Cumulative effect of accounting change,
net of income taxes:
Basic ....................................... $ (2.00) $ -- $ -- $ --
Diluted ..................................... $ (2.00) $ -- $ -- $ --
Net income (loss):
Basic ....................................... $ (3.06) $ 10.43 $ (0.64) $ (0.73)
Diluted ..................................... $ (3.06) $ 9.46 $ (0.64) $ (0.73)
Weighted-average number of shares used in
calculation of earnings per share - basic ... 73,592 67,517 76,938 66,471
=========== =========== =========== ===========
Weighted-average number of shares used in
calculation of earnings per share - diluted . 73,592 74,444 76,938 66,471
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Nine Months Ended April 30,
-----------------------------
2002 2001
------------ --------------
Net cash provided by (used in) operating activities .... $ 16,249 $ (45,257)
Investing activities
Purchases of property, plant and equipment ............. (28,286) (55,596)
Net issuance of notes receivable ....................... (8,949) (16,034)
Net proceeds from sale of equity interests in subsidiary -- 1,042,113
Acquisitions ........................................... (33,465) --
Purchases of investments, net .......................... (44,974) (38,262)
Purchases of marketable securities ..................... (529,351) --
Sales of marketable securities ......................... 260,855 179,671
----------- -----------
Net cash (used in) provided by investing activities .... (384,170) 1,111,892
Financing activities
Proceeds from exercise of stock options ................ 44,471 2,736
Proceeds from sale of class B common stock ............. -- 74,787
Repayment of borrowings ................................ (3,009) (46,613)
Repayment of capital lease obligations ................. (12,296) (8,678)
Common stock repurchases ............................... (15,639) (138,087)
Distributions to minority shareholder .................. (13,708) (5,856)
Proceeds from sale of subsidiary stock ................. 30,000 --
----------- -----------
Net cash provided by (used in) financing activities .... 29,819 (121,711)
------------ --------------
Net (decrease) increase in cash and cash equivalents ... (338,102) 944,924
Cash and cash equivalents, beginning of period ......... 1,091,071 162,879
----------- -----------
Cash and cash equivalents, end of period ............... $ 752,969 $ 1,107,803
=========== ===========
Supplemental disclosures of cash flow information
Interest paid .......................................... $ 4,233 $ 5,677
Income taxes paid ...................................... $ 11,704 $ 4,493
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 its 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. Certain reclassifications have been made to the prior year's
condensed consolidated financial statements to conform to the current year's
presentation. Operating results for the nine and three month periods ended April
30, 2002 are not necessarily indicative of the results that may be expected for
the year ending July 31, 2002. The balance sheet at July 31, 2001 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, 2001, as
filed with the Securities and Exchange Commission.
Note 2 - Business Segment Information
During Fiscal Year 2001, the Company concluded a restructuring that
transformed IDT Corporation into a holding company, with operations conducted
through two main subsidiaries: IDT Telecom, Inc. and IDT Ventures, Inc. During
the second quarter of Fiscal Year 2002, IDT Ventures, Inc. (the "Ventures"
segment) was renamed IDT Media, Inc. (the "Media/Ventures" segment), in order to
better reflect the Company's focused initiatives in radio, technology, and print
media. The Company's Wholesale Telecommunications Services and Retail
Telecommunications Services business segments are conducted through IDT Telecom,
Inc. As a result of the restructuring, the Company also monitors separately its
general corporate expenses, including its treasury and investment activities,
which are not allocated to the business segments. On December 19, 2001, the
Company, through a subsidiary, acquired certain of the U.S. voice and data
assets of Winstar Communications, Inc. and certain of its subsidiaries, and is
managing the Winstar business as a separate segment. Operating results and other
financial data presented for the principal business segments of the Company are
as follows (in thousands):
Wholesale Retail
Telecommunications Telecommunications Media/
Services Services Ventures Winstar Corporate Total
----------------- ----------------- ----------- ------- --------- ----------
Three months ended April 30, 2002
Revenues.................................... $ 78,963 $ 285,436 $ 4,159 $ 33,095 $ -- $401,653
========= ========= ======== ======== ======= ========
Income (loss) from operations............... $ (6,540) $ 19,079 $ (5,003) $(43,863) $(6,502) $(42,829)
========= ========= ======== ======== ======= ========
Three months ended April 30, 2001
Revenues.................................... $ 93,802 $ 237,588 $ 4,332 $ -- $ -- $335,722
========= ========= ======== ======== ======= ========
Income (loss) from operations............... $ (17,387) $ (10,152) $(21,087) $ -- $(6,945) $(55,571)
========= ========= ======== ======== ======= ========
Goodwill, net of accumulated amortization,
as of April 30, 2002..................... $ 234 $ 788 $ 30,587 $ -- $ -- $ 31,609
========= ========= ======== ======== ======= ========
6
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Wholesale Retail
Telecommunications Telecommunications Media/
Services Services Ventures Winstar(1) Corporate Total
----------------- ------------ --------- ---------- --------- ---------
Nine months ended April 30, 2002
Revenues............................ $ 221,509 $ 825,503 $ 15,606 $ 52,269 $ -- $1,114,887
========== =========== ========= ======== ======== ==========
Income (loss) from operations....... $ (25,349) $ 42,001 $ (17,234) $(62,996) $(19,590) $ (83,168)
========== =========== ========= ======== ======== ==========
Nine months ended April 30, 2001
Revenues............................ $ 307,865 $ 572,204 $ 19,847 $ -- $ -- $ 899,916
========== =========== ========= ======== ======== ==========
Income (loss) from operations....... $ (44,262) $ (35,804) $ (62,645) $ -- $(21,385) $ (164,096)
========== =========== ========= ======== ======== ==========
- --------------------
(1) Since acquisition on December 19, 2001.
Note 3 - Marketable Securities
The Company classifies all of its marketable securities as
"available-for-sale securities." Such marketable securities consist primarily of
United States Government and federal agency securities which are stated at
market value, with unrealized gains and losses in such securities reflected, net
of tax, as "other comprehensive income (loss)" in stockholders' equity.
The Company intends to maintain a liquid portfolio to take advantage of
investment opportunities; therefore, all marketable securities are classified as
"current assets." The Company had $268.6 million and $3.5 million in marketable
securities as of April 30, 2002 and July 31, 2001, respectively.
Note 4 - Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands):
April 30, 2002 July 31, 2001
-------------- ----------
Equipment ..................................... $ 334,579 $ 264,422
Computer software ............................. 16,764 10,192
Leasehold improvements ........................ 26,560 21,603
Furniture and fixtures ........................ 12,110 11,120
Land and building ............................. 8,937 8,937
--------- ---------
398,950 316,274
Less: Accumulated depreciation and amortization (136,462) (92,232)
--------- ---------
Property, plant and equipment, net ............ $ 262,488 $ 224,042
========= =========
During the nine months ended April 30, 2002, the Company recorded an
impairment charge of $2.8 million, primarily resulting from the write-down of
certain decommissioned European telecommunications switch equipment.
7
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 5 -Comprehensive Income (Loss)
The Company's comprehensive income (loss) consists of the following (in
thousands):
Nine Months Ended April 30, Three Months Ended April 30,
--------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- ------------
Net income (loss) ......................... $(225,120) $ 704,187 $ (49,593) $ (48,277)
Foreign currency translation adjustments .. (1,470) (1,390) 3,977 --
Unrealized gain (loss) in the fair market
value of marketable securities ........... (923) 89,196 (489) (5,728)
--------- --------- --------- ---------
Comprehensive income (loss) ............... $(227,513) $ 791,993 $ (46,105) $ (54,005)
========= ========= ========= =========
Note 6 - Winstar Acquisition
On December 19, 2001, the Company, through a subsidiary, acquired certain
of the U.S. voice and data assets of Winstar Communications, Inc. and certain of
its subsidiaries that are debtors and debtors in possession in bankruptcy
proceedings pending before the United States Bankruptcy Court for the District
of Delaware. The acquiring subsidiary was subsequently renamed Winstar Holdings,
LLC ("Winstar"). Winstar operates as a Competitive Local Exchange Carrier
("CLEC") using fixed wireless technology to provide local and long distance
voice services, Internet connectivity and data transmission services.
The purchase price for the Winstar assets was comprised of a $30.0 million
cash payment, $12.5 million in newly issued shares of IDT Class B common stock
and 5% of the common equity interests in the acquiring subsidiary (the remaining
95% of the common equity interests as well as all of the preferred equity
interests in the acquiring subsidiary were owned by IDT). The Company also
agreed to invest $60.0 million into Winstar to be used as working capital. The
acquisition has been accounted for under the purchase method of accounting. The
preliminary allocation of the purchase price, pending final determination of
certain acquired balances, is as follows (in thousands):
Trade accounts receivable and other current assets........ $ 44,601
Property, plant, equipment and intangible assets.......... 46,885
Trade accounts payable, accrued expenses and other
current liabilities..................................... (46,749)
Minority interest......................................... (2,237)
----------
Value of assets acquired.................................. $ 42,500
==========
The fair value of Winstar assets acquired and liabilities assumed would
have exceeded IDT's acquisition cost. Therefore, in accordance with Financial
Accounting Standards Board Statement No. 141, "Business Combinations", the
excess value over the acquisition cost has been allocated as a pro rata
reduction of the amounts that otherwise would have been assigned to the acquired
assets, except with respect to the following:
o Trade accounts receivable - present values of amounts to be received,
less allowances for uncollectibility and collection costs.
o Other current assets (principally assets to be sold) - fair value less
cost to sell.
o Trade accounts payable, accrued expenses and other current liabilities
(principally relating to contractual agreements assumed) - present
values of amounts to be paid.
8
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On April 16, 2002, IDT, through a subsidiary, purchased the 5% of common
equity interests in Winstar that it did not own. Consideration consisted of 0.8
million shares of IDT Class B common stock, which were valued at $13.3 million.
The following pro forma financial information (in thousands, except share
data) presents the combined results of operations of IDT and Winstar, as if the
Winstar acquisition had occurred as of the beginning of the periods presented,
after giving effect to certain adjustments, including depreciation expense,
income taxes and the issuance of IDT Class B common stock as part of the
purchase price. The pro forma financial information does not necessarily reflect
the results of operations that would have occurred had IDT and Winstar been a
single entity during such periods.
Nine Months Ended April 30, Three Months Ended April 30,
------------------------------ -------------------------------
2002 2001 2002 2001
------------- ------------- ------------ --------------
Revenues.................................. $ 1,187,587 $ 1,064,009 $ 401,653 $ 386,443
Income (loss) before cumulative effect of
accounting change...................... $ (126,424) $ 548,900 $ (49,593) $ (87,387)
Net income (loss)......................... $ (273,407) $ 548,900 $ (49,593) $ (87,387)
Earnings per share:
Income (loss) before cumulative effect of
accounting change
Basic.................................. $ (1.69) $ 7.92 $ (0.64) $ (1.28)
Diluted................................ $ (1.69) $ 7.20 $ (0.64) $ (1.28)
Net income (loss)
Basic.................................. $ (3.66) $ 7.92 $ (0.64) $ (1.28)
Diluted................................ $ (3.66) $ 7.20 $ (0.64) $ (1.28)
Note 7 - NTOP Holdings, LLC
On October 23, 2001, IDT entered into an agreement to lead a consortium
that would concentrate ownership of Net2Phone, Inc. ("Net2Phone"). As of April
30, 2002, the consortium's ownership in Net2Phone was approximately 46% (63% of
the voting power). The consortium consists of IDT, Liberty Media Corporation
("Liberty Media"), and AT&T Corporation ("AT&T"), resulting in significant
economic investments in Net2Phone for all three parties. As part of the
agreement, IDT and AT&T contributed their shares of Net2Phone (approximately
10.0 million and 18.9 million shares, respectively) to a newly formed limited
liability company, NTOP Holdings, LLC ("LLC"). Liberty Media then acquired a
substantial portion of the LLC's units from AT&T, while IDT increased its stake
in the LLC and AT&T retained a significant interest. The LLC now holds an
aggregate of 28.9 million shares of Net2Phone's Class A common stock. IDT holds
the controlling membership interest in the LLC and is the managing member of the
LLC. The Company accounts for its investment in the LLC using the equity method
since its control of the LLC is deemed to be temporary due to unilateral
liquidation rights held by each of the LLC members.
In March 2001, the Company exercised an option to sell to AT&T
approximately 2.0 million shares of its Class B common stock for approximately
$75.0 million. In conjunction with the formation of the consortium, IDT
guaranteed to AT&T the value of approximately 1.4 million shares of IDT Class B
common stock still being retained by AT&T. If the value of IDT Class B common
stock is less than $27.5 million on October 19, 2002, and AT&T or an affiliate
retains all the shares through such date, then IDT will be obligated to pay AT&T
the difference with cash, additional shares of IDT Class B common stock or a
combination of both, at the option of IDT. In connection with this obligation,
the Company recorded in "other income (expense)" a charge of $14.0 million
during the first quarter of Fiscal Year 2002, which was reduced by $8.1 million
during the second quarter of Fiscal Year 2002 and by $2.2 million during the
third quarter of Fiscal Year 2002. The Company is subject to additional charges
through October 19, 2002 based on changes in the market value of IDT Class B
common stock.
9
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 8 - Recently Issued Accounting Standards
In June 2001, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets, effective for fiscal
years beginning after December 15, 2001, with early adoption permitted for
companies with fiscal years beginning after March 15, 2001. Under the new rules,
goodwill and intangible assets deemed to have indefinite lives no longer are
amortized but are subject to annual impairment tests in accordance with the
Statement. Other intangible assets will continue to be amortized over their
useful lives.
The Company chose to early adopt the new rules on accounting for goodwill
and other intangible assets and began to apply them beginning in the first
quarter of Fiscal Year 2002. As such, the Company performed the required
impairment tests of goodwill as of August 1, 2001, and as a result, the Company
recorded an impairment charge of $147.0 million, net of income taxes of $3.5
million. The impairment charge was recorded in the first quarter of Fiscal Year
2002 as a cumulative effect adjustment of a change in accounting principle.
The following table presents the impact of SFAS No. 142 on income (loss)
before cumulative effect of accounting change, net income (loss) and earnings
(loss) per share had the standard been in effect for the nine months and three
months ended April 30, 2001:
Nine Months Ended April 30, Three Months Ended April 30,
--------------------------- ----------------------------
(In thousands, except share data) 2002 2001 2002 2001
----------- ----------- ----------- -----------
Income (loss) before cumulative effect of
accounting change ...................... $ (78,137) $ 704,187 $ (49,593) $ (48,277)
Goodwill amortization ................... -- 9,239 -- 2,168
----------- ----------- ----------- -----------
Adjusted income (loss) before cumulative
effect of accounting change ............ $ (78,137) $ 713,426 $ (49,593) $ (46,109)
=========== =========== =========== ===========
Earnings per share - basic .............. $ (1.06) $ 10.43 $ (0.64) $ (0.73)
Goodwill amortization ................... -- 0.14 -- 0.04
----------- ----------- ----------- -----------
Adjusted earnings per share - basic ..... $ (1.06) $ 10.57 $ (0.64) $ (0.69)
=========== =========== =========== ===========
Earnings per share - diluted ............ $ (1.06) $ 9.46 $ (0.64) $ (0.73)
Goodwill amortization ................... -- 0.12 -- 0.04
----------- ----------- ----------- -----------
Adjusted earnings per share - diluted ... $ (1.06) $ 9.58 $ (0.64) $ (0.69)
=========== =========== =========== ===========
Net income (loss) ....................... $ (225,120) $ 704,187 $ (49,593) $ (48,277)
Goodwill amortization ................... -- 9,239 -- 2,168
----------- ----------- ----------- -----------
Adjusted net income (loss) .............. $ (225,120) $ 713,426 $ (49,593) $ (46,109)
=========== =========== =========== ===========
Earnings per share - basic .............. $ (3.06) $ 10.43 $ (0.64) $ (0.73)
Goodwill amortization ................... -- 0.14 -- 0.04
----------- ----------- ----------- -----------
Adjusted earnings per share - basic ..... $ (3.06) $ 10.57 $ (0.64) $ (0.69)
=========== =========== =========== ===========
Earnings per share - diluted ............ $ (3.06) $ 9.46 $ (0.64) $ (0.73)
Goodwill amortization ................... -- 0.12 -- 0.04
----------- ----------- ----------- -----------
Adjusted earnings per share - diluted ... $ (3.06) $ 9.58 $ (0.64) $ (0.69)
=========== =========== =========== ===========
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets (SFAS 144), which addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets and supersedes SFAS No. 121, Accounting for the Impairment of Long Lived
Assets to be Disposed of, and the accounting and reporting provisions of APB
Opinion No. 30, Reporting the Results of Operations for a Disposal of a Segment
of a Business. SFAS 144 also amends ARB 51, Consolidated Financial Statements,
as amended by SFAS 94, Consolidation of ALL Majority-Owned Subsidiaries to
eliminate the exception to consolidation for a subsidiary for which control is
likely to be temporary. SFAS 144 is effective for fiscal years beginning after
December 15, 2001, with earlier application encouraged. IDT will adopt SFAS 144
as of August 1, 2002 and has not determined the effect, if any, the adoption of
SFAS 144 will have on IDT's financial position and results of operations.
Licenses and other intangible assets amortization expense was $1.3 million
and $1.5 million for the three and nine months ended April 30, 2002,
respectively. Amortization expense is expected to be approximately $3.9 million
a year for the next five years.
Note 9 - Legal Proceedings and Contingencies
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. $3.0 million, and that IDT has allegedly failed
to do so. The defendants have filed a Motion to Dismiss the Complaint. On
September 14, 2001, the Court issued an Order: (a) permitting IDT to take
discovery relevant to the subject of whether Telefonica S.A. is subject to
personal jurisdiction, (b) denying Telefonica S.A.'s motion to dismiss for lack
of personal jurisdiction without prejudice to Telefonica S.A.'s right to renew
the motion upon the completion of jurisdictional discovery, and (c) carrying on
the calendar defendants' motion to dismiss on non-jurisdictional grounds pending
the completion of jurisdictional discovery, which is ongoing. Each party served
the other party with certain requests for discovery relevant to the subject of
whether Telefonica S.A. is subject to personal jurisdiction. The motions were
denied almost in their entirety. Discovery will now commence. No trial date has
yet been set in this matter.
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. Telefonica has responded to IDT's Statement of Claim and has filed a
Statement of Counterclaim which alleges, inter alia: (1) Fraud in the
Inducement; (2) Tortious Interference with Prospective Business Relations; (3)
Breach of the Obligations of Good Faith and Fair Dealing; and (4) Declaratory
and Injunctive Relief. Discovery is in its final stages and both parties have
submitted expert reports. The arbitration commenced on April 8, 2002, and is
ongoing.
10
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
On December 19, 2001, the Company, through a subsidiary, acquired and
currently manages certain telecommunications assets formerly owned by Winstar
Communications, Inc. ("Old Winstar") and certain of its subsidiaries. Old
Winstar provided telecommunications services by, among other things,
interconnecting with facilities and circuits owned and operated by Regional Bell
Operating Companies ("RBOCs"). The Company, through its subsidiaries, has
entered into interconnection agreements with the relevant RBOCs. Those RBOCs
have asserted that the Company is not entitled to request services under such
interconnection agreements unless the RBOCs receive payment for debts allegedly
owed by Old Winstar prior to its acquisition by the Company, for access to RBOCs
facilities and circuits. The RBOCs seek approximately $8 million to $16 million
in unpaid debts associated with Old Winstar's use of facilities and circuits
that the Company, through its subsidiaries, intends to use. In total, the RBOCs
seek approximately $40 million for all of their unpaid debts associated with Old
Winstar's use of facilities and circuits, including debts associated with
facilities and circuits that the Company does not intend to use.
The RBOCs further contend that the provision in the Order of the Delaware
Bankruptcy Court authorizing the sale of the Winstar assets to the Company,
which required them to continue serving Winstar, expired on or about April 18,
2002. The Company moved to enforce that provision, but the Bankruptcy Court
denied the motion, and the Company has appealed the denial of its motion to the
United States District Court for the District of Delaware. The appeal is
pending. The Company has asked the District Court for interim relief during the
pendency of that appeal to stay the RBOCs and other service providers from
cutting off service until the appeal is decided. The District Court has not yet
ruled on that request, but has temporarily ordered that service providers such
as the RBOCs may not cut off service or otherwise affect the Company's business
without permission of the District Court. The Federal Communications Commission,
represented by the Department of Justice, has asked the District Court to compel
the parties to mediation. The Company and several of the RBOCs have indicated
their willingness to mediate.
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 - Stockholders' Equity
Stock Buyback Program
The Company's Board of Directors has authorized the repurchase of up to 45
million shares of IDT common stock and Class B common stock. The Company
repurchased approximately 1.4 million shares of its common stock, for an
aggregate purchase price of approximately $15.6 million, during the nine months
ended April 30, 2002. Through April 30, 2002, the Company has repurchased an
aggregate of 15.6 million shares of its common stock under the authorized stock
buyback program, of which approximately 6.2 million shares have been retired.
Liberty Media Conversion
Pursuant to a Lock-Up, Registration Rights and Exchange Agreement between
the Company and Liberty Media, on October 11, 2001 the Company issued to Liberty
Media 3,810,265 shares of IDT Class B common stock in exchange for 3,728,949
shares of IDT common stock. The exchange rate was based upon the relative
average market prices for the IDT Class B common stock and the IDT common stock
during a specified 30 trading day period.
Liberty Media Investment in IDT Telecom, Inc.
On January 30, 2002, IDT Telecom, Inc., a subsidiary of IDT, sold 7,500
newly issued shares of its common stock to Liberty Media at a price of $4,000
per share, for total aggregate proceeds of $30.0 million. As a result of this
investment, Liberty Media became the owner of approximately 4.8% of the common
equity of IDT Telecom, Inc. (0.5% of the voting power). The Company owns the
remaining common equity of IDT Telecom, Inc.
11
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 11 - Related Party Transactions
The Company has entered into a number of agreements with Net2Phone.
Pursuant to these agreements, during the nine months ended April 30, 2002, the
Company billed Net2Phone approximately $27.1 million and Net2Phone billed the
Company approximately $11.6 million. The net balance owed to the Company by
Net2Phone was approximately $5.8 million as of April 30, 2002.
The Company currently leases one of its facilities in Hackensack, New
Jersey from a corporation which is wholly owned by the Company's Chairman.
Aggregate lease payments under such lease was approximately $18,000 for the nine
months ended April 30, 2002.
The Company has obtained various insurance policies that have been arranged
through a company affiliated with an individual related to both the Chairman and
the General Counsel of the Company. The aggregate premiums paid by the Company
with respect to such policies was approximately $2.2 million for the nine months
ended April 30, 2002.
On December 14, 2001, IDT granted to its Chairman options to purchase 1
million shares of IDT Class B common stock, at an exercise price of $12.06 per
share. The options were to vest over a period of 5 years, at a rate of 50,000
options per quarter, commencing on January 1, 2002. On May 14, 2002, IDT's
Chairman waived and agreed to the cancellation of any rights under the options,
and, as a result, all the options were cancelled retroactive to their December
14, 2001 date of grant.
James Courter, the Chief Executive Officer and Vice-Chairman of the
Company, is a partner in a law firm that has served as counsel to the Company
since July 1996. In addition, a Director of the Company is of counsel to a law
firm that has served as counsel to the Company since November 1999. Fees paid to
these law firms by the Company were less than 5% of the law firms' gross
revenues for each fiscal year in which these law firms represented the Company.
In addition, the Company has loans outstanding to officers and employees
aggregating approximately $12.0 million as of April 30, 2002.
12
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, 2001, as filed with the Securities and
Exchange Commission.
Overview
General
IDT Corporation ("IDT") is a leading facilities-based emerging
multinational carrier that provides a broad range of telecommunication services
to retail and wholesale customers worldwide. During Fiscal Year 2001, we
concluded a restructuring that transformed IDT Corporation into a holding
company, with operations conducted through two main subsidiaries: IDT Telecom,
Inc. and IDT Ventures, Inc. During the second quarter of Fiscal Year 2002, IDT
Ventures, Inc. (formerly the "Ventures" segment) was renamed IDT Media, Inc.
(the "Media/Ventures" segment), in order to better reflect our focused
initiatives in radio, technology, and print media.
IDT's telecommunication services, conducted by its IDT Telecom, Inc.
subsidiary, consist of retail services, including prepaid and rechargeable
calling cards and domestic long distance services (the "Retail
Telecommunications Services" segment), as well as wholesale carrier services
(the "Wholesale Telecommunications Services" segment). IDT delivers its
telecommunications services over a high-quality switch network based in the U.S.
and Europe and owned and leased capacity on undersea fiber-optic cables, which
connect our U.S. facilities with our international facilities and with the
facilities of our foreign partners in Europe, Latin America and Asia. We monitor
our network 24 hours a day, seven days a week through an automated network
operations center. In addition, we obtain transmission capacity from other
carriers. We deliver our international traffic worldwide pursuant to our
agreements with U.S.-based carriers and more than 20 of the companies that are
primarily responsible for providing telecommunication services in particular
countries (commonly referred to as "Post, Telephone and Telegraphs," or "PTTs").
IDT offers retail long distance services to approximately 450,000
individual and business customers in the U.S. In addition, we have approximately
185 wholesale customers located in the U.S. and Europe.
On December 19, 2001, one of our subsidiaries acquired certain of the U.S.
voice and data assets of Winstar Communications, Inc. and certain of its
subsidiaries which are debtors and debtors in possession in bankruptcy
proceedings pending before the United States Bankruptcy Court for the District
of Delaware. The acquiring subsidiary was subsequently renamed Winstar Holdings,
LLC ("Winstar"). Winstar operates as a Competitive Local Exchange Carrier
("CLEC") using fixed wireless technology to provide local and long distance
voice services, internet connectivity, and data transmission services. Winstar's
wireless technology uses microwave antennas on the roof of the customer's
building to direct voice and data transmission to hub sites that serve as
aggregation points for the reception and distribution of customer traffic. We
seek to deliver a network that will carry bandwidth-intensive traffic from point
of origination to point of termination for a substantial portion of the
companies comprising the business communications market in the United States.
As a result of the Winstar acquisition on December 19, 2001, our Condensed
Consolidated Financial Statements for the nine months ended April 30, 2002
include Winstar's operating results since the acquisition date.
Outlook
In recent years, we have derived the majority of our revenues from our core
telecommunications businesses, consisting primarily of retail prepaid calling
cards and wholesale carrier services. These businesses have accounted for the
bulk of our operating expenses as well.
13
Intense competition in the prepaid calling card and wholesale carrier
businesses has led to significant pricing pressure in these markets. Initially,
pricing fell at a significantly faster rate than did costs, resulting in
narrower margins for most participants in both the prepaid calling and wholesale
carrier segments of the market. This environment led some of our competitors to
de-emphasize their prepaid calling card and/or wholesale carrier operations in
order to focus on higher margin telecommunications businesses. This has helped
us gain some market share, particularly in the retail calling card business,
while experiencing a lower average per-minute price realization. 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.
However, in recent quarters, we have experienced an accelerating decline in
our per-minute costs. In addition, although our overall per-minute price
realization continues to decline, we have witnessed price stabilization in some
of our key markets. Therefore, our gross margins for both prepaid calling cards
and wholesale carrier services have widened throughout Fiscal 2002.
Historically, our core telecommunications revenues were evenly divided
between our retail calling card and wholesale carrier business lines. During
Fiscal 2001 and the first quarter of Fiscal 2002, our revenue mix shifted
dramatically toward retail business lines, reflecting the strong growth of our
prepaid card business and our domestic long distance business, while wholesale
carrier revenues declined due to a shift in our wholesale customer base. During
the second and third quarters of Fiscal 2002, however, wholesale carrier
revenues increased sequentially, and accounted for approximately 21.5% of total
telecommunications revenue. We anticipate that wholesale carrier revenues will
continue to account for between 20%-25% of total telecommunications revenue for
the foreseeable future.
We are also developing various new media related businesses. 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.
Nine Months Ended April 30, 2002 Compared to Nine Months Ended April 30, 2001
Results of Operations
Revenue. Revenues increased 23.9%, from approximately $899.9 million for
the nine months ended April 30, 2001 to approximately $1,114.9 million for the
nine months ended April 30, 2002. Excluding Winstar, revenues increased 18.1%,
to approximately $1,062.6 million for the nine months ended April 30, 2002.
Telecommunications revenues increased 19.0%, from approximately $880.1 million
for the nine months ended April 30, 2001 to approximately $1,047.0 million for
the nine months ended April 30, 2002. Revenues from Media/Ventures businesses
decreased 21.4%, from approximately $19.8 million for the nine months ended
April 30, 2001 to approximately $15.6 million for the nine months ended April
30, 2002.
Telecommunications revenues increased primarily as a result of an
approximately 58.9% growth in minutes of use (excluding minutes related to the
domestic long distance business) from approximately 5.11 billion for the nine
months ended April 30, 2001 to approximately 8.12 billion for the nine months
ended April 30, 2002. The increase in minutes was due to increased marketing of
our calling cards in the U.S. and the continued growth of European operations,
which outweighed the effects of lower wholesale carrier minutes. Minutes of use
grew at a faster rate than did telecom revenues, reflecting a decline in the
average revenue per minute. The average revenue per minute decreased during the
nine months ended April 30, 2002, compared to the nine months ended April 30,
2001, despite the exit of several competitors from our core retail and wholesale
markets, due to the intensified price competition initiated by our remaining
competitors, as they attempt to defend their remaining share of the market. The
domestic long distance business, in which we act as a switchless reseller of
another company's network, also experienced significant growth in minutes of
use, fueled by the large increase in the number of domestic long distance
customers. 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 28.1%, from
approximately $307.9 million for the nine months ended April 30, 2001 to
approximately $221.5 million for the nine months ended April 30, 2002. As a
percentage of telecommunications revenues, wholesale telecommunications revenues
decreased from approximately 35.0% for the nine months ended April 30, 2001 to
approximately 21.2% for the nine months ended April 30, 2002.
14
Revenues from retail telecommunications services increased 44.3%, from
approximately $572.2 million for the nine months ended April 30, 2001 to
approximately $825.5 million for the nine months ended April 30, 2002, as a
result of increased sales of IDT-branded calling cards and higher domestic long
distance revenues. As a percentage of overall telecommunications revenue, retail
telecommunications revenue increased from approximately 65.0% for the nine
months ended April 30, 2001 to approximately 78.8% for the nine months ended
April 30, 2002. Calling card sales increased 40.2%, from approximately $531.5
million for the nine months ended April 30, 2001, to approximately $745.4
million for the nine months ended April 30, 2002, fueled by the introduction of
several new calling cards in the U.S., the continued strong growth of European
operations and a continued expansion of market share. 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 revenues decreased from 92.9% for the nine months
ended April 30, 2001 to 90.3% for the nine months ended April 30, 2002, as
revenues from domestic long distance services grew at a faster rate than did
calling card revenues. Revenues from domestic long distance services increased
115.5%, from approximately $36.3 million for the nine months ended April 30,
2001, to approximately $78.2 million for the nine months ended April 30, 2002.
The domestic long distance revenue gains are attributable to the continued
aggressive growth of our flat-rate, $0.05 a minute long distance calling plan,
which has been driven by increased marketing expenditures, resulting in a
significant increase in the number of domestic long distance customers. Revenues
from other retail businesses, consisting primarily of call reorigination
services, amounted to $1.9 million for the nine months ended April 30, 2002
versus $4.4 million for the nine months ended April 30, 2001.
Revenues from Winstar were $52.3 million for the nine months ended April
30, 2002, representing 4.7% of our total revenue.
As a percentage of total revenues, Media/Ventures businesses revenues
decreased to 1.4% for the nine months ended April 30, 2002, from 2.2% for the
nine months ended April 30, 2001. The decrease in Media/Ventures businesses
revenues reflects our gradual exit from the dial-up and DSL Internet access
businesses.
Direct Cost of Revenues. Direct cost of revenues increased by 11.5%, from
approximately $789.1 million for the nine months ended April 30, 2001 to
approximately $879.6 million for the nine months ended April 30, 2002. Excluding
Winstar, direct cost of revenues increased 3.6% to approximately $817.1 million
for the nine months ended April 30, 2002. As a percentage of total revenues,
these costs decreased from 87.7% for the nine months ended April 30, 2001 to
78.9% for the nine months ended April 30, 2002. Excluding Winstar, as a
percentage of total revenues, direct costs decreased to 76.9% for the nine
months ended April 30, 2002. The dollar increase is due primarily to the
significant growth in our telecommunications minutes of use, partially offset by
decreases in underlying carrier and connectivity costs per-minute. Included in
direct cost of revenues for the second quarter of Fiscal Year 2002 is a $4.5
million charge related to the early termination of a long-term bandwidth
contract, as we seek to take advantage of the currently depressed bandwidth
market to replace existing, above-market price bandwidth, with significantly
lower-cost bandwidth. As a percentage of total revenues, the decrease in direct
costs reflects the higher gross margins experienced across all business lines,
reflecting economies of scale and continued operating efficiency gains, as well
as a continued shift in revenue mix towards higher-margin retail business lines.
Selling, General and Administrative. Selling, general and administrative
costs increased 18.5%, from approximately $226.9 million for the nine months
ended April 30, 2001 to approximately $268.8 million for the nine months ended
April 30, 2002. Excluding Winstar, selling, general and administrative costs
decreased 3.3% to approximately $219.4 million for the nine months ended April
30, 2002. As a percentage of total revenues, these costs decreased from 25.2%
for the nine months ended April 30, 2001 to 24.1% for the nine months ended
April 30, 2002. Excluding Winstar, as a percentage of total revenues, selling,
general and administrative costs decreased to 20.6% for the nine months ended
April 30, 2002. Selling, general and administrative expenses from
telecommunications operations increased 19.8% from $144.4 million for the nine
months ended April 30, 2001 to $172.9 million for the nine months ended April
30, 2002. The increase in selling, general and administrative expenses for our
telecommunications operations is due to several factors, including increased
international calling 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 and bases of operation to
facilitate our current and anticipated future sales growth.
15
Included in selling, general and administrative costs for the nine months
ended April 30, 2002 is approximately $28.9 million in selling, general and
administrative costs associated with our Media/Ventures segment, compared to
$61.2 million for the nine months ended April 30, 2001. The decrease in selling,
general, and administrative costs in our Media/Ventures businesses reflects the
implementation of stricter management controls over operating expenses, the
gradual exit from the dial-up and DSL Internet access businesses, as well as the
restructuring of our Media/Ventures business portfolio, with a shift from highly
speculative ventures to more stable, entrepreneurial initiatives in the radio,
technology and print media businesses.
Selling, general and administrative costs associated with Winstar were
$49.5 million for the nine months ended April 30, 2002. We also recorded $17.6
million in general corporate expenses - including expenses associated with our
treasury and investment activities - for the nine months ended April 30, 2002,
compared to $21.4 million recorded in the same period last year.
We anticipate that selling, general and administrative expenses will
increase in dollar terms in the future, and will continue to be equivalent to a
significant percentage to total revenues, as we expand both our core
telecommunications businesses and our new Winstar and Media/Ventures businesses.
Over the next few quarters, as we move our different Media/Ventures businesses
through their respective development stages, we anticipate that selling, general
and administrative expenses for our Media/Ventures division could exceed, in
dollar terms, the revenues generated from this division.
Depreciation and Amortization. Depreciation and amortization increased
9.2%, from approximately $42.9 million for the nine months ended April 30, 2001
to approximately $46.8 million for the nine months ended April 30, 2002.
Excluding Winstar, depreciation and amortization increased 1.6% to approximately
$43.6 million for the nine months ended April 30, 2002. As a percentage of
revenues, these costs decreased from 4.8% for the nine months ended April 30,
2001 to 4.2% for the nine months ended April 30, 2002. Excluding Winstar, as a
percentage of revenues, depreciation and amortization decreased to 4.1% for the
nine months ended April 30, 2002. These costs increased, in absolute dollar
terms, primarily as a result of our higher fixed asset base during the nine
months ended April 30, 2002 as compared with the nine months ended April 30,
2001, reflecting our efforts to expand our telecommunications network
infrastructure and our facilities, and also due to the Winstar acquisition.
Partially offsetting the increase in depreciation expense is the fact that we no
longer amortize goodwill as a result of the adoption, as of August 1, 2001, of
SFAS No. 142. Depreciation and amortization declined as a percentage of
revenues, as revenues for the nine months ended April 30, 2002 increased at a
faster rate than did depreciation charges. We anticipate that depreciation
expense will continue to increase in absolute dollars but decrease as a
percentage of revenues, as we continue to add to our asset base, particularly in
our telecommunications businesses, allowing us to implement our growth strategy.
Impairment Charges. We recorded an impairment charge of $2.8 million during
the nine months ended April 30, 2002, primarily resulting from the write-down
of certain decommissioned European telecommunications switch equipment.
Loss from Operations. Loss from operations was $83.2 million for the nine
months ended April 30, 2002, compared to a loss from operations of $164.1
million for the nine months ended April 30, 2001. Excluding Winstar, loss from
operations was $20.2 million. Our telecommunications businesses recorded income
from operations of approximately $16.7 million for the nine months ended April
30, 2002, compared to a loss of approximately $80.1 million for the nine months
ended April 30, 2001, due to the higher gross margins resulting from the revenue
growth and the continued operating efficiency gains, as described above.
Loss from operations for our Media/Ventures segment for the nine months
ended April 30, 2002 was $17.2 million, compared to an operating loss of $62.6
million for the nine months ended April 30, 2001, reflecting the implementation
of stricter management controls over operating expenses, as well as the
restructuring of our Media/Ventures business portfolio, as described above.
Loss from operations for our Winstar segment for the nine months ended
April 30, 2002 was $63.0 million. Our loss from operations associated with
general corporate expenses - including expenses associated with our treasury and
investment activities - was $19.6 million for the nine months ended April 30,
2002, compared to $21.4 million recorded in the same period last year.
Interest and other income (expense). Net interest income amounted to $15.5
million for the nine months ended April 30, 2002, compared to net interest
income of $42.5 million in the same period last year. Other income (expense)
amounted to an expense of $50.1 million for the nine months ended April 30,
2002, compared to income of $1,148.1 million in the same period last year.
16
Included in other income (expense) for the nine months ended April 30, 2002
were investment losses including losses of approximately $41.8 million
associated with recording our pro-rata share of Net2Phone's losses through the
equity method, and a charge of $3.7 million related to an obligation to
guarantee to AT&T the value of approximately 1.4 million shares of IDT Class B
common stock being retained by AT&T. Also included were net other investment
losses totaling $4.6 million.
Included in other income (expense) for the nine months ended April 30, 2001
is a realized gain of $999.6 million on the our sale of 14.9 million shares of
Net2Phone Class A common stock to AT&T, $38.1 million in gains we recognized 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. Also included were net other investment losses totaling $11.2
million.
Taxes. We recorded an income tax benefit of approximately $55.2 million for
the nine months ended April 30, 2002, compared to an income tax expense of
approximately $316.1 million for the nine months ended April 30, 2001.
Cumulative Effect of Accounting Change. In June 2001, the FASB issued SFAS
No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001, with early adoption permitted for companies
with fiscal years beginning after March 15, 2001. Under the new rules, goodwill
and intangible assets deemed to have indefinite lives no longer are amortized
but are subject to annual impairment tests in accordance with the Statement.
Other intangible assets continue to be amortized over their useful lives. We
chose to early adopt the new rules on accounting for goodwill and other
intangible assets and to apply them effective with the beginning of the first
quarter of Fiscal Year 2002. In accordance with our adoption of these rules, we
performed the required impairment tests of goodwill as of August 1, 2001, and as
a result, we recorded an impairment charge of $147.0 million, net of income
taxes of $3.5 million. The impairment charge was recorded as a cumulative effect
adjustment of a change in accounting principle.
Three Months Ended April 30, 2002 Compared to Three Months Ended April 30, 2001
Results of Operations
Revenue. Revenues increased 19.6%, from approximately $335.7 million for
the three months ended April 30, 2001 to approximately $401.7 million for the
three months ended April 30, 2002. Excluding Winstar, revenues increased 9.8%,
to approximately $368.6 million for the three months ended April 30, 2002.
Telecommunications revenues increased 10.0%, from approximately $331.4 million
for the three months ended April 30, 2001 to approximately $364.4 million for
the three months ended April 30, 2002. Revenues from Media/Ventures businesses
decreased 4.0%, from approximately $4.3 million for the three months ended April
30, 2001 to approximately $4.2 million for the three months ended April 30,
2002.
Telecommunications revenues increased primarily as a result of an
approximately 43.7% growth in minutes of use (excluding minutes related to the
domestic long distance business) from approximately 2.04 billion for the three
months ended April 30, 2001 to approximately 2.93 billion for the three months
ended April 30, 2002. The increase in minutes was due to increased marketing of
our calling cards in the U.S. and the continued growth of European operations,
which outweighed the effects of lower wholesale carrier minutes. Minutes of use
grew at a faster rate than did telecom revenues, reflecting a decline in the
average revenue per minute. The average revenue per minute decreased during the
three months ended April 30, 2002, compared to the three months ended April 30,
2001, despite the exit of several competitors from our core retail and wholesale
markets, due to the intensified price competition initiated by our remaining
competitors, as they attempt to defend their remaining shares of the market. The
domestic long distance business, in which we act as a switchless reseller of
another company's network, also experienced significant growth in minutes of
use, fueled by the large increase in the number of domestic long distance
customers. 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 15.8%, from
approximately $93.8 million for the three months ended April 30, 2001 to
approximately $79.0 million for the three months ended April 30, 2002. As a
percentage of telecommunications revenues, wholesale telecommunications revenues
decreased from approximately 28.3% for the three months ended April 30, 2001 to
approximately 21.7% for the three months ended April 30, 2002.
17
Revenues from retail telecommunications services increased 20.1%, from
approximately $237.6 million for the three months ended April 30, 2001 to
approximately $285.4 million for the three months ended April 30, 2002, as a
result of increased sales of IDT-branded calling cards and higher domestic long
distance revenues. As a percentage of overall telecommunications revenue, retail
telecommunications revenue increased from approximately 71.7% for the three
months ended April 30, 2001 to approximately 78.3% for the three months ended
April 30, 2002. Calling card sales increased 15.0%, from approximately $222.0
million for the three months ended April 30, 2001, to approximately $255.3
million for the three months ended April 30, 2002, fueled by the introduction of
several new calling cards in the U.S., the continued strong growth of European
operations and a continued expansion of market share. 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 revenues decreased from 93.5% for the three months
ended April 30, 2001 to 89.4% for the three months ended April 30, 2002, as
revenues from domestic long distance services grew at a faster rate than did
calling card revenues. Revenues from domestic long distance services increased
106.7%, from approximately $14.3 million for the three months ended April 30,
2001, to approximately $29.7 million for the three months ended April 30, 2002.
The domestic long distance revenue gains are attributable to the continued
aggressive growth of our flat-rate, $0.05 a minute long distance calling plan,
which has been driven by increased marketing expenditures, resulting in a
significant increase in the number of domestic long distance customers. Revenues
from other retail businesses, consisting primarily of call reorigination
services, amounted to $0.5 million for the three months ended April 30, 2002
versus $1.2 million for the three months ended April 30, 2001.
Revenues from Winstar were $33.1 million for the three months ended April
30, 2002, representing 8.2% of our total revenue.
As a percentage of total revenues, Media/Ventures businesses revenues
decreased to 1.0% for the three months ended April 30, 2002, from 1.3% for the
three months ended April 30, 2001. The decrease in Media/Ventures businesses
revenues reflects our gradual exit from the dial-up and DSL Internet access
businesses.
Direct Cost of Revenues. Direct cost of revenues increased by 6.9%, from
approximately $298.3 million for the three months ended April 30, 2001 to
approximately $319.0 million for the three months ended April 30, 2002.
Excluding Winstar, direct cost of revenues decreased 7.2% to approximately
$276.9 million for the three months ended April 30, 2002. As a percentage of
total revenues, these costs decreased from 88.8% for the three months ended
April 30, 2001 to 79.4% for the three months ended April 30, 2002. Excluding
Winstar, as a percentage of total revenues, direct costs decreased to 75.1% for
the three months ended April 30, 2002. Excluding Winstar, the dollar decrease is
due primarily to decreases in underlying carrier and connectivity costs as a
result of continuing operating efficiency gains. As a percentage of total
revenues, the decrease in direct costs reflects the higher gross margins
experienced across all business lines, reflecting economies of scale and
operating efficiency gains, as well as a continued shift in revenue mix towards
higher-margin retail business lines.
Selling, General and Administrative. Selling, general and administrative
costs increased 46.5%, from approximately $74.2 million for the three months
ended April 30, 2001 to approximately $108.7 million for the three months ended
April 30, 2002. Excluding Winstar, selling, general and administrative costs
increased 3.5% to approximately $76.8 million for the three months ended April
30, 2002. As a percentage of total revenues, these costs increased from 22.1%
for the three months ended April 30, 2001 to 27.1% for the three months ended
April 30, 2002. Excluding Winstar, as a percentage of total revenues, selling,
general and administrative costs decreased to 20.9% for the three months ended
April 30, 2002. Selling, general and administrative expenses from
telecommunications operations increased 23.7%, from $50.6 million for the three
months ended April 30, 2001 to $62.6 million for the three months ended April
30, 2002. The increase in selling, general and administrative expenses for our
telecommunications operations is due to several factors, including increased
international calling 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.
18
Included in selling, general and administrative costs for the three months
ended April 30, 2002 is approximately $8.3 million in selling, general and
administrative costs associated with our Media/Ventures segment compared to
$16.7 million for the three months ended April 30, 2001. The decrease in
selling, general and administrative costs in our Media/Ventures businesses
reflects the implementation of stricter management controls over operating
expenses, the gradual exit form the dial-up and DSL Internet access businesses,
as well as the restructuring of our Media/Ventures business portfolio, with a
shift from highly speculative ventures to more stable, entrepreneurial
initiatives in the radio, technology and print media businesses. Selling,
general, and administrative costs associated with Winstar were $31.9 million for
the three months ended April 30, 2002. We also recorded approximately $5.9
million in general corporate expenses - including expenses associated with our
treasury and investment activities - for the three months ended April 30, 2002,
compared to $6.9 million recorded in the same period last year.
Depreciation and Amortization. Depreciation and amortization increased
23.0%, from approximately $13.6 million for the three months ended April 30,
2001 to approximately $16.7 million for the three months ended April 30, 2002.
Excluding Winstar, depreciation and amortization increased 1.5% to approximately
$13.8 million for the three months ended April 30, 2002. As a percentage of
revenues, these costs increased from 4.1% for the three months ended April 30,
2001 to 4.2% for the three months ended April 30, 2002. Excluding Winstar, as a
percentage of revenues, depreciation and amortization decreased to 3.7% for the
three months ended April 30, 2002. These costs increased primarily as a result
of our higher fixed asset base during the three months ended April 30, 2002 as
compared with the three months ended April 30, 2001, reflecting our efforts to
expand our telecommunications network infrastructure and our facilities, and
also due to the Winstar acquisition. Partially offsetting the increase in
depreciation expense is the fact that we no longer amortize goodwill as a result
of the adoption, as of August 1, 2001, of SFAS No. 142. We anticipate that
depreciation expense will continue to increase in absolute dollars but decrease
as a percentage of revenues, as we continue to add to our asset base,
particularly in our telecommunications businesses, allowing us to implement our
growth strategy.
Loss from Operations. Loss from operations was $42.8 million for the three
months ended April 30, 2002, compared to a loss from operations of $55.6 million
for the three months ended April 30, 2001. Excluding Winstar, income from
operations was $1.0 million. Our telecommunications businesses recorded income
from operations of approximately $12.5 million for the three months ended April
30, 2002, compared to a loss from operations of approximately $27.5 million for
the three months ended April 30, 2001, due to higher gross margins resulting
from the revenue growth and the continued operating efficiency gains, as
described above.
Loss from operations for our Media/Ventures segment for the three months
ended April 30, 2002 was $5.0 million, compared to an operating loss of $21.1
million for the three months ended April 30, 2001, reflecting the implementation
of stricter management controls over operating expenses, as well as the
restructuring of our Media/Ventures business portfolio, as described above.
Loss from operations for our Winstar segment for the three months ended
April 30, 2002 was $43.9 million. Our loss from operations associated with
general corporate expenses - including expenses associated with our treasury and
investment activities - was $6.5 million for the three months ended April 30,
2002, compared to $6.9 million recorded in the same period last year.
Interest and other income (expense). Net interest income amounted to $3.9
million for the three months ended April 30, 2002, compared to net interest
income of $12.9 million in the same period last year. Other income (expense)
amounted to an expense of $27.6 million for the three months ended April 30,
2002, compared to an expense of $42.9 million in the same period last year.
Included in other income (expense) for the three months ended April 30,
2002 were investment losses including losses of approximately $25.1 million
associated with recording our pro-rata share of Net2Phone's losses through the
equity method, and a gain of $2.2 million related to an obligation to guarantee
to AT&T the value of approximately 1.4 million shares of IDT Class B common
stock being retained by AT&T. Also included were net other investment losses
totaling $4.7 million.
Included in other income (expense) 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. Also included were
net other investment losses totaling $12.1 million.
Taxes. We recorded an income tax benefit of approximately $21.2 million for
the three months ended April 30, 2002, compared to an income tax benefit of
approximately $40.0 million for the three months ended April 30, 2001.
19
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, 2002, we had cash, cash equivalents and marketable
securities of approximately $1.0 billion. Our working capital as of April 30,
2002 was approximately $816.5 million. We generated positive cash flow from
operating activities of approximately $16.2 million during the nine months ended
April 30, 2002, compared with negative cash flow from operating activities of
approximately $45.3 million during the nine months ended April 30, 2001. Our
cash flow from operations varies significantly from quarter to quarter and from
year to year, depending on the timing of operating cash receipts and payments,
especially trade accounts receivable and accounts payable. Trade accounts
receivable, accounts payable and accrued expenses have generally increased from
period to period as our businesses have grown.
On December 19, 2001, one of our subsidiaries acquired certain of the U.S.
voice and data assets of Winstar Communications, Inc. and certain of its
subsidiaries which are debtors and debtors in possession in bankruptcy
proceedings pending before the United States Bankruptcy Court for the District
of Delaware. The acquiring subsidiary was subsequently renamed Winstar Holdings
LLC ("Winstar"). The purchase price for the Winstar assets was comprised of a
$30.0 million cash payment, $12.5 million in newly issued shares of IDT Class B
common stock and 5% of the common equity interests in the acquiring subsidiary
(the remaining 95% of the common equity interests as well as all of the
preferred equity interests in the acquiring subsidiary were owned by IDT). We
also agreed to invest $60.0 million into Winstar to be used as working capital.
On April 16, 2002, IDT, through a subsidiary, purchased the 5% of common equity
interests in Winstar that it did not own. Consideration consisted of 0.8 million
shares of IDT Class B common stock, which were valued at $13.3 million.
On January 30, 2002, IDT Telecom, Inc., a subsidiary of IDT, sold 7,500
newly issued shares of its common stock to Liberty Media at a price of $4,000
per share, for total aggregate proceeds of $30.0 million. As a result of the
investment, Liberty Media became the owner of approximately 4.8% of the common
equity of IDT Telecom, Inc. (0.5% of the voting power).
We continue to expand our international and domestic telecommunications
network infrastructure. Our capital expenditures were approximately $28.3
million for the nine months ended April 30, 2002, compared to approximately
$55.6 million for the nine months ended April 30, 2001. We anticipate making
additional capital expenditures over the remainder of Fiscal 2002 and beyond, as
we expand our telecommunications infrastructure, primarily to accommodate the
anticipated continued increase in calling-card related telecommunications
minutes of use. In carrying out our capital expansion plans, we have benefited
from the significant decline in the costs of equipment, which has allowed us to
build out our network at a lower cost than we originally anticipated. We believe
that this lower price environment will persist through Fiscal 2003. From time to
time, we will finance a portion of our capital expenditures through capital
leases, with the cost of such financing the primary consideration in determining
our financing activity.
We experience intense price competition in our telecommunications
businesses. The long distance telecommunications industry has been characterized
by significant declines in both per-minute revenues and per-minute costs. 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. Over the short term, we have been able to reduce our cost
structure as our minutes of use have steadily grown, by leveraging our
burgeoning buying power as well as our financial stability to negotiate more
favorable rates with our suppliers. However, over the long term, we believe that
the only way to preserve lower costs - and higher gross margins - is to
terminate more minutes on our own network. As such, and given the uncertainty
related to the rate of deployment of additional network capacity, there can be
no assurance that we will be able to maintain our gross margins at the current
level, in the face of rapidly increasing minutes-of-use and lower per-minute
revenues.
20
We continued to fund our Media/Ventures segment throughout the nine months
ended April 30, 2002, incurring significant start-up, development, marketing and
promotional costs. As we move our Media/Ventures businesses through their
respective development stages, we anticipate that selling, general and
administrative expenses for our Media/Ventures segment will exceed the revenues
generated by this segment for the foreseeable future. Due to the start-up nature
of many of our Media/Ventures businesses, the exact timing and magnitude of
future revenues remains difficult to predict.
Changes in Other Current Assets, Trade Accounts Receivable, Allowance for
Doubtful Accounts and Deferred Revenue
Other current assets increased from $32.4 million at July 31, 2001 to $41.1
million at April 30, 2002 due to an increase in European prepaid distribution
and marketing costs as well as the acquisition of Winstar. The average age of
our trade accounts receivable, as measured by number of days sales outstanding,
has continued to decrease over the previous year. This decline is due primarily
to the recent growth in revenues, which has served to reduce the number of days
sales outstanding, partially offset by the acquisition of Winstar.
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 versus those made to prepaid calling card distributors, who generally
receive shorter payment terms than do carrier customers. As such, the trends in
days sales outstanding will depend, in large part, on the mix of carrier
customers versus prepaid calling card distributors. As we anticipate that in the
near term prepaid calling card revenues will continue to account for a majority
proportion of overall revenues, we could experience further declines in the
average age of our trade accounts receivable for the remainder of Fiscal Year
2002. Conversely, 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 lead to an increase in
days sales outstanding. In addition, future trends with respect to days sales
outstanding will depend also on the growth of our domestic long distance
customers and our Winstar segment customers, whose trade receivables have
traditionally a longer average collection age. As such, due to the above
factors, future trends in days sales outstanding remain difficult to predict,
and 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 trade accounts
receivable increased from 16.2% at July 31, 2001, to 22.0% at April 30, 2002.
The increase reflects the increase in the number of domestic long distance
customers, who have traditionally required a larger reserve than do wholesale
and retail calling card customers. Although we anticipate that our customer base
across all business lines will continue its transition towards a more
credit-worthy group, some of our existing trade accounts receivable are still
related to sales made to less credit-worthy customers.
Deferred revenue as a percentage of total revenues vary from period to
period depending on the mix and the timing of revenues. During the nine months
ended April 30, 2002, we experienced a steady increase in the sale of our
prepaid calling cards due to the introduction of several new calling cards in
the U.S., the continued growth of European operations and increased marketing
efforts for existing IDT prepaid calling cards. This resulted in a continued
increase in actual deferred revenue.
Significant Transactions
On December 19, 2001, one of our subsidiaries acquired certain of the U.S.
voice and data assets of Winstar Communications, Inc. and certain of its
subsidiaries. Winstar operates as a CLEC using fixed wireless technology to
provide local and long distance voice services, Internet connectivity, and data
transmission services. See Note 6 to the Condensed Consolidated Financial
Statements, captioned "Winstar Acquisition."
On October 23, 2001, we entered into an agreement to lead a consortium that
would concentrate ownership of Net2Phone. As of April 30, 2002, the consortium's
ownership in Net2Phone was approximately 46% (63% of the voting power). The
consortium consists of IDT, Liberty Media, and AT&T, resulting in significant
economic investments in Net2Phone for all three parties. As part of the
agreement, IDT and AT&T contributed their shares of Net2Phone (approximately
10.0 million and 18.9 million shares, respectively) to a newly formed limited
liability company, NTOP Holdings, LLC ("LLC"). Liberty Media then acquired a
substantial portion of the LLC's units from AT&T, while IDT increased its stake
in the LLC and AT&T retained a significant interest. The LLC now holds an
aggregate of 28.9 million shares of Net2Phone's Class A common stock. We hold
the controlling membership interest in the LLC and we are the managing member of
the LLC. We account for our investment in the LLC using the equity method,
since our control of the LLC is deemed to be temporary due to unilateral
liquidation rights held by each of the LLC members.
21
On October 11, 2001, we issued to Liberty Media 3,810,265 shares of IDT
Class B common stock in exchange for 3,728,949 shares of IDT common stock. The
exchange rate was based upon the relative average market prices for the IDT
Class B common stock and the IDT common stock during a specified 30 trading day
period.
On March 15, 2001, we exercised an option to sell to AT&T approximately 2.0
million shares of our Class B common stock for approximately $75.0 million. In
conjunction with the formation of the consortium, we guaranteed to AT&T the
value of approximately 1.4 million shares of IDT Class B common stock still
being retained by AT&T. If the value of IDT Class B common stock is less than
$27.5 million on October 19, 2002, and AT&T or an affiliate retains all the
shares through such date, then we will be obligated to pay AT&T the difference
with cash, additional shares of IDT Class B common stock or a combination of
both, at the option of IDT. In connection with this obligation, we recorded in
"other income (expense)" a charge of $14.0 million during the first quarter of
Fiscal Year 2002, which was reduced by $8.1 million during the second quarter of
Fiscal Year 2002 and by $2.2 million during the third quarter of Fiscal Year
2002. We are subject to additional charges through October 19, 2002, based on
changes in the market value of IDT Class B common stock.
Stock Buyback Program
Our Board of Directors has authorized the repurchase of up to 45 million
shares of our common stock and Class B common stock. We repurchased
approximately 1.4 million shares of our common stock, for an aggregate purchase
price of approximately $15.6 million, during the nine months ended April 30,
2002. Through April 30, 2002, we have repurchased approximately 15.6 million
shares of our common stock under the authorized stock buyback program, of which
approximately 6.2 million shares have been retired.
Other Sources and Uses of Resources
We intend to, where appropriate, make strategic acquisitions to expand our
telecommunications businesses. These acquisitions could include, but are not
limited to, acquisitions of telecommunications equipment, telecommunications
network capacity, customer bases or other assets. We may also make strategic
acquisitions related to any of our new Media/Ventures businesses. From time to
time, we evaluate potential acquisitions of companies, technologies, products
and customer accounts that complement our businesses, particularly in light of
the financial distress currently being encountered by many telecommunications
firms. These conditions have resulted in the availability for sale of numerous
strategic assets and businesses.
We believe that, based upon our present business plan, and as a result of
the cash proceeds generated by the sale of the majority of our Net2Phone shares
to AT&T in August 2000, our existing cash resources will be sufficient to meet
our currently anticipated working capital and capital expenditure requirements,
and to fund any potential operating cash flow deficits for at least the next
twelve months. If our growth exceeds current expectations or if we acquire the
business or assets of another company, or if our operating cash flow deficit
exceeds our expectations to the point that we cannot meet our working capital
and capital expenditure requirements, we will need to raise additional capital
from equity or debt sources. There can be no assurance that we will be able to
raise such capital on favorable terms or at all. If we are unable to obtain such
additional capital, we may be required to reduce the scope of our anticipated
expansion, which could have a material effect on our business, financial
condition, or results of operations.
The following tables quantify our future contractual obligations and
commercial commitments, which consist primarily of capital and operating lease
obligations (in millions).
Contractual Obligations
-----------------------
Payments Due by Period
Less than After
Total 1 year 1 - 3 years 4 - 5 years 5 years
----------- ----------- ------------ ----------- -----------
Capital lease obligations... $ 78.5 $ 28.1 $ 38.2 $ 12.2 --
Operating leases............ 403.4 67.2 122.1 76.3 137.8
----------- ----------- ------------ ----------- -----------
Total contractual cash
obligations............... $ 481.9 $ 95.3 $ 160.3 $ 88.5 $ 137.8
=========== =========== ============ =========== ===========
22
Other Commercial Commitments
----------------------------
Payments Due by Period
Less than After
Total 1 year 1 - 3 years 4 - 5 years 5 years
----------- ----------- ----------- ----------- -----------
Standby letters of credit. $ 8.7 $ 0.5 $ 4.7 $ 2.1 $ 1.4
Guarantees................ 3.1 -- -- -- 3.1
----------- ----------- ----------- ----------- -----------
Total commercial commitments $ 11.8 $ 0.5 $ 4.7 $ 2.1 $ 4.5
=========== =========== =========== =========== ============
Item 3. Quantitative and Qualitative Disclosures About Market Risks.
The Securities and Exchange Commission's rule related to market risk
disclosure requires that we describe and quantify our potential losses from
market risk sensitive instruments attributable to reasonably possible market
changes. Market risk sensitive instruments include all financial or commodity
instruments and other financial instruments (such as investments and debt) that
are sensitive to future changes in interest rates, currency exchange rates,
commodity prices or other market factors. We are not exposed to market risks
from changes in commodity prices, and we do not consider the market risk
exposure relating to foreign currency exchange to be material. We are exposed to
changes in interest rates primarily from our investments in cash equivalents and
marketable securities. Under our current policies, we do not use interest rate
derivative instruments to manage our exposure to interest rate changes. We do
not hold derivative financial instruments. In addition to but separate from our
primary business, we hold a small portion of our total asset portfolio in hedge
funds for speculative and strategic purposes. As of April 30, 2002 our
investments in such hedge funds was approximately $28 million. Investments in
hedge funds carry significant degree of risk which will depend to a great extent
on correct assessments of the future course of price movements of securities and
other instruments. There can be no assurance that hedge fund money managers will
be able to accurately predict these price movements. The securities markets have
in recent years been characterized by great volatility and unpredictability.
Accordingly, the value of our interests in these funds may go down as well as up
and we may not receive, upon redemption, the amount originally invested.
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," "plans," "intends," 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 sales
force, 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. These forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ
materially from the results projected in any forward-looking statements. These
risks and uncertainties include, but are not limited to, those risks discussed
in this report. In addition to the factors specifically noted in the
forward-looking statements, other important factors that could result in those
differences include (a) general economic conditions in the telecommunications
and Internet markets, including inflation, recession, interest rates, and other
economic factors; (b) casualty to or other disruption of our facilities and
operations; (c) those discussed in our Annual Report on Form 10K for the year
ended July 31, 2001; and (d) other factors that generally affect the business of
telecommunications, Internet and other communications companies. 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, 2001 and Quarterly Reports on Form 10-Q for the
three months ended October 31, 2001 and January 31, 2002.
23
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
Pursuant to a Unit Purchase Agreement dated April 16, 2002, among WCI
Capital Corp., Dipchip Corp., IDT Corporation, Winstar Holdings, LLC and IDT
Advanced Communication Services, LLC, the Company issued 792,079 shares of its
Class B common stock, par value $.01 per share, to WCI Capital Corp. in exchange
for its 5% common equity interest in Winstar Holdings, LLC.
This 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. No underwriters were involved in the issuance of the
above-described securities.
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(2) Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant.
10.43* Employment Agreement between the Registrant and Howard S.
Jonas.
- -----------
* Filed herewith.
(1) Incorporated by reference to Form S-1 filed February 21, 1996 file no.
333-00204.
(2) Incorporated by reference to Form 10-Q for the fiscal quarter ended
April 30, 2000, filed June 14, 2000.
(b) Reports on Form 8-K.
None.
24
IDT CORPORATION
FORM 10-Q
APRIL 30, 2002
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, 2002 By: /s/ James A. Courter
- ------------- -----------------------------------------
Date James A. Courter
Chief Executive Officer and Vice-Chairman
(Principal Executive Officer)
June 14, 2002 By: /s/ Stephen R. Brown
- ------------- -----------------------------------------
Date Stephen R. Brown
Chief Financial Officer
(Principal Financial Officer)
25