EXHIBIT 99.1
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants F-2
Statements of Assets Acquired and Liabilities Assumed of the
Domestic Operating Assets Previously Used by Old Winstar
and Acquired by IDT Corporation to Operate the Business F-3
Statements of Revenue and Direct Operating Expenses of the
Domestic Operating Assets Previously Used by Old Winstar
and Acquired by IDT Corporation to Operate the Business F-4
Notes to Financial Statements F-5 - F-21
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
IDT Corporation
We have audited the accompanying statement of assets acquired and liabilities
assumed and the related statement of revenue and direct operating expenses of
the domestic operating assets previously used by Winstar Communications, Inc.
and certain of its subsidiaries ("Old Winstar") and acquired by IDT Corporation
("IDT" or the "Company") to operate a competitive local exchange carrier in
multiple jurisdictions using fixed wireless technology (the "Business"), as of
December 31, 2000 and for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audit provides a reasonable
basis for our opinion.
The accompanying statements were prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission (for inclusion
in the Current Report on Form 8-K/A of IDT Corporation) as described in Note A
and are not intended to be a complete presentation of the financial position or
results of operations of the Business.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets acquired and liabilities assumed as of
December 31, 2000, and the related revenue and direct operating expenses for the
year ended December 31, 2000 of the domestic operating assets previously used by
Old Winstar and acquired by the Company to operate the Business, in conformity
with accounting principles generally accepted in the United States of America.
/s/GRANT THORNTON LLP
New York, New York
May 28, 2002 (except for Notes B-6 and H, as to
which the date is July 28, 2002)
F-2
IDT Corporation
STATEMENTS OF ASSETS ACQUIRED AND LIABILITIES ASSUMED OF THE
DOMESTIC OPERATING ASSETS PREVIOUSLY USED BY OLD WINSTAR AND
ACQUIRED BY IDT CORPORATION TO OPERATE THE BUSINESS
As of September 30, 2001 (unaudited) and December 31, 2000
(in thousands)
September 30, December 31,
2001 2000
------------- ------------
(unaudited)
Assets acquired
Trade receivables, less allowance for doubtful accounts of
$22,954 and $21,016, respectively $ 16,945 $ 11,248
Inventories and assets held for sale 16,805 22,521
Prepaid expenses and other assets 171,895 165,649
Property and equipment, net 336,195 897,479
Licenses, net 180,000 451,950
Other intangible assets, net 2,507 14,432
--------- ----------
724,347 1,563,279
--------- ----------
Liabilities assumed
Capital lease obligations 342,954 311,767
Other liabilities 268 3,126
--------- ----------
343,222 314,893
--------- ----------
Commitments and contingencies
Net assets acquired $381,125 $1,248,386
========= ==========
The accompanying notes are an integral part of these statements.
F-3
IDT Corporation
STATEMENTS OF REVENUE AND DIRECT OPERATING EXPENSES OF THE
DOMESTIC OPERATING ASSETS PREVIOUSLY USED BY OLD WINSTAR AND
ACQUIRED BY IDT CORPORATION TO OPERATE THE BUSINESS
For the nine months ended September 30,
2001 and 2000 (unaudited) and the
year ended December 31, 2000
(in thousands)
Nine months Nine months
ended ended Year ended
September 30, September 30, December 31,
2001 2000 2000
----------------- ----------------- ----------------
(unaudited) (unaudited)
Revenue $ 159,915 $ 173,932 $ 230,642
------------ --------- ------------
Direct operating expenses
Cost of revenues 156,582 146,218 203,276
Impairment charges 1,015,930 - 1,753,467
Write-down of inventory and assets
held for sale 79,363 - 42,568
Depreciation and amortization 117,507 188,591 302,501
Selling expenses 27,296 33,004 38,505
Bad debt expense 40,890 12,152 46,317
General and administrative 137,480 127,691 179,324
------------ --------- ------------
Total direct operating expenses 1,575,048 507,656 2,565,958
------------ --------- ------------
Shortfall of revenue over
Direct operating expenses $ (1,415,133) $(333,724) $ (2,335,316)
============ ========= ============
The accompanying notes are an integral part of these statements.
F-4
IDT Corporation
Domestic Operating Assets Previously Used by Old Winstar and
Acquired by the Company to Operate the Business
NOTES TO FINANCIAL STATEMENTS
For the nine months ended September 30,
2001 and 2000 (unaudited) and the
year ended December 31, 2000
NOTE A - DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
On December 19, 2001 (the "Closing Date"), IDT Corporation ("IDT" or the
"Company"), through its subsidiary, IDT Winstar Acquisition, LLC ("New
Winstar"), acquired substantially all of the core domestic
telecommunications assets of Winstar Communications, Inc. and certain of
its subsidiaries ("Old Winstar"), which are debtors and debtors in
possession in bankruptcy proceedings pending before the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The
acquisition was made pursuant to an Asset Purchase Agreement (the "Asset
Purchase Agreement"), dated December 18, 2001, between Old Winstar and IDT
Winstar Acquisition, Inc. (which on December 19, 2001, assigned its rights
and obligations thereunder to New Winstar). Old Winstar operated as a
Competitive Local Exchange Carrier ("CLEC") in many jurisdictions using
fixed wireless technology (the "Business"). Old Winstar's core business was
providing telephone and data transmission services to enterprise customers.
The purchase price for the assets acquired was $42.5 million, $30.0 million
of which was paid in cash and $12.5 million of which was paid with 990,267
newly issued shares of IDT Class B Common Stock, plus 5% of the common
equity interests in New Winstar (the remaining 95% of the common equity
interests as well as all of the preferred equity interests in New Winstar
were owned by IDT, through a subsidiary). IDT also agreed to invest $60.0
million into New Winstar to be used as working capital. On April 16, 2002,
IDT, through a subsidiary, repurchased the 5% common equity interest in New
Winstar that it did not already own in exchange for 792,079 newly issued
shares of IDT Class B Common Stock. As a result, IDT now owns 100% of New
Winstar.
In addition, on December 18, 2001, a Management Agreement was entered into
between Old Winstar and IDT Winstar Acquisition, Inc. (which on December
19, 2001, assigned its rights and obligations thereunder to New Winstar),
pursuant to which New Winstar would provide management services to, and
certain funding for the continued operations of, Old Winstar, pending
regulatory approval of the transfer or assignment to New Winstar of Old
Winstar's spectrum under its Federal Communications Commission ("FCC")
licenses and its rights pursuant to certain state regulatory licenses (see
Note B).
F-5
IDT Corporation
Domestic Operating Assets Previously Used by Old Winstar and
Acquired by the Company to Operate the Business
NOTES TO FINANCIAL STATEMENTS (continued)
For the nine months ended September 30,
2001 and 2000 (unaudited) and the
year ended December 31, 2000
NOTE A (continued)
The term of the Management Agreement commenced on December 18, 2001 and
expires upon the earliest to occur of (1) the transfer of the FCC licenses
and state regulatory licenses and the non-transferred assets to New Winstar
pursuant to the terms and subject to the conditions of the Asset Purchase
Agreement and (2) (a) June 30, 2002 or (b) at any time after the Cutoff
Date (as defined in the Management Agreement) as New Winstar, in its
discretion, shall determine.
A unique aspect of IDT's acquisition of the Business was that during the
120-day period following the Closing Date, New Winstar had the ability to
direct Old Winstar and the Old Winstar subsidiaries who joined in Old
Winstar's bankruptcy petition (the "Debtors") to assume (and assign to New
Winstar) or to reject any executory contract or unexpired lease to which
the Debtors were parties. These executory contracts and unexpired leases
included real estate leases and licenses, carrier and connectivity
agreements, software licenses and other miscellaneous agreements. As of the
Closing Date, the Debtors were in default under many of these contracts and
leases due to nonpayment. In order for these contracts and leases to be
assumed, New Winstar would be required to cure the defaults by paying the
past-due amounts. On April 18, 2002, New Winstar directed the Debtors to
assume a number of these contracts and leases, which will require the
payment of associated cure costs of approximately $14 million. The Court
entered orders with respect to such assumptions on May 14, 2002 and June
11, 2002.
The accompanying statements of assets acquired and liabilities assumed as
of September 30, 2001 (unaudited) and December 31, 2000 of the Business and
the related statements of revenue and direct operating expenses for the
nine months ended September 30, 2001 and 2000 (unaudited) and the year
ended December 30, 2000 have been prepared for the purpose of complying
with the rules and regulations of the Securities and Exchange Commission.
F-6
IDT Corporation
Domestic Operating Assets Previously Used by Old Winstar and
Acquired by the Company to Operate the Business
NOTES TO FINANCIAL STATEMENTS (continued)
For the nine months ended September 30,
2001 and 2000 (unaudited) and the
year ended December 31, 2000
NOTE A (continued)
The accompanying financial statements were prepared from the books and
records maintained by Old Winstar, of which the Business represented a
specific business unit. The Business never operated as a separate business
entity or division of Old Winstar but rather was an integrated part of Old
Winstar's consolidated business. The statements of revenue and direct
operating expenses do not include charges from Old Winstar for corporate
selling, general, administrative, interest and income tax expense because
Old Winstar considered such items to be corporate expenses and did not
allocate them to individual business units. Such expenses included costs
for Old Winstar's executive management, information systems support,
corporate accounting and treasury functions, corporate legal matters and
other such costs.
The statements of revenue and direct operating expenses include the revenue
and direct operating expenses that relate to the Business. Direct operating
expenses include salaries and wages, fringe benefits, materials,
depreciation, amortization and other expenses directly associated with
revenue-generating activities. Direct operating expenses also include
allocations of certain expenses, such as marketing, occupancy and
procurement costs, which were directly associated with the Business.
A statement of cash flows is not presented because the Business did not
maintain a separate cash balance. All operating activities were funded by
Old Winstar. In addition, a statement of stockholders' equity is not
presented as the Asset Purchase Agreement was structured such that only
assets were acquired and liabilities were assumed by IDT.
Because the Business never operated as a separate business or division of
Old Winstar, the accompanying financial statements are not intended to be a
complete presentation of the historical financial position, results of
operations and cash flows of the Business. The historical operating results
of the Business may not be indicative of its results in the future.
F-7
IDT Corporation
Domestic Operating Assets Previously Used by Old Winstar and
Acquired by the Company to Operate the Business
NOTES TO FINANCIAL STATEMENTS (continued)
For the nine months ended September 30,
2001 and 2000 (unaudited) and the
year ended December 31, 2000
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the accompanying financial statements follows:
1. Revenue Recognition
Revenue includes amounts derived from high-speed Internet and data
services and local and long-distance voice services. Revenue related to
high-speed Internet and data services and local and long-distance voice
services is recorded as a flat monthly fee or as a monthly usage
charge.
2. Cost of Revenues
Cost of revenues includes (a) network costs, which consist of access,
transport and termination costs, (b) network monitoring and maintenance
costs, (c) building access costs, and (d) costs of capacity. Such costs
are recognized when incurred in connection with the provision of
services. Cost of revenues is exclusive of depreciation and
amortization related to the Old Winstar network and long-term capacity
agreements, which are included in "depreciation and amortization"
presented separately in the accompanying statements of revenue and
direct operating expenses.
3. Concentration of Credit Risk
Financial instruments, which potentially subjected the Business to
concentration of credit risk, consist principally of trade receivables
and other receivables, which are included in "prepaid expenses and
other assets." Concentration of credit risk with respect to these
receivables is generally diversified due to the large number of
customers comprising the customer base and their dispersion across
geographic areas.
No single customer accounted for more than 10% of the Business' revenue
during the nine months ended September 30, 2001 and 2000 (unaudited)
and the year ended December 31, 2000.
F-8
IDT Corporation
Domestic Operating Assets Previously Used by Old Winstar and
Acquired by the Company to Operate the Business
NOTES TO FINANCIAL STATEMENTS (continued)
For the nine months ended September 30,
2001 and 2000 (unaudited) and the
year ended December 31, 2000
NOTE B (continued)
4. Inventories and Assets Held for Sale
Inventories and assets held for sale consist of telecommunications
equipment and computer equipment held for sale. Telecommunications
equipment and computer equipment held for sale are carried at the lower
of cost or market using the specific identification method. The
Business wrote down "inventories and assets held for sale" by
approximately $79.4 million and $42.6 million during the nine months
ended September 30, 2001 (unaudited) and the three months ended
December 31, 2000, respectively.
5. Property and Equipment
Property and equipment are stated at cost, less impairment charges
discussed below. Depreciation and amortization are generally computed
using the straight-line method over the estimated useful lives of the
related assets.
Costs incurred during the application development stage for internal
use software, including operations support systems, are capitalized as
incurred and aggregated approximately $28.8 million, $73.9 million and
$87.9 million for the nine months ended September 30, 2001 and 2000
(unaudited) and the year ended December 31, 2000, respectively.
Interest expense is capitalized as a component of the cost of the
Business' self-constructed telecommunications network. Interest
capitalized amounted to approximately $20.9 million, $33.3 million and
$46.6 million for the nine months ended September 30, 2001 and 2000
(unaudited) and the year ended December 31, 2000, respectively.
In accordance with Statement of Financial Accounting Standards No. 121
("SFAS No. 121"), "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," the carrying value of
property and equipment is assessed when factors indicating a possible
impairment are present. If impairment is present, these assets are
reported at the lower of carrying value or fair value.
F-9
IDT Corporation
Domestic Operating Assets Previously Used by Old Winstar and
Acquired by the Company to Operate the Business
NOTES TO FINANCIAL STATEMENTS (continued)
For the nine months ended September 30,
2001 and 2000 (unaudited) and the
year ended December 31, 2000
NOTE B (continued)
To determine whether an impairment of property and equipment was
present, IDT engaged an independent valuation consultant to perform a
valuation and to assist in measuring the impairment of all of the
tangible long-lived assets of the Business, which included property and
equipment. Based on this valuation, write-offs have been recorded for
the nine months ended September 30, 2001 (unaudited) and the three
months ended December 31, 2000, of approximately $740.0 million and
$1.8 billion, respectively, to reflect the Business' property and
equipment at fair value.
6. Spectrum Licenses and Other Intangible Assets
Spectrum licenses were acquired through business combinations,
third-party purchases, applications to the FCC and FCC auctions.
Intangible assets arose in connection with business combinations and
include purchased customer lists. Spectrum licenses and intangible
assets are being amortized by the straight-line method over their
estimated useful lives. The amortization period for spectrum licenses
is forty years, commencing when service begins in a specific geographic
area.
Old Winstar's 38 GHz licenses and 28 GHz LMDS licenses are subject to
renewal by the FCC with staggered application deadlines ranging from
February 2001 to October 2010. As of September 30, 2001 (unaudited) and
December 31, 2000, the carrying value of the licenses was approximately
$180.0 million and $452.0 million, respectively.
In January 2002, Old Winstar requested the FCC's approval to assign its
FCC licenses to provide domestic telecommunications services to New
Winstar through its subsidiary, Winstar Spectrum, LLC. On or about
April 17, 2002, the FCC approved the applications requesting FCC
consent to assign the licenses, subject to certain conditions. The
April 17, 2002 grant of the assignment of the 15 LMDS licenses formerly
held by Old Winstar is conditional on payment on or before the
consummation date of an unjust enrichment payment of $8.5 million.
Pursuant to the FCC's rules, the assignment must be consummated and
notice provided to the FCC within 180 days of public notice of
approval, and notification of consummation must occur no later than 30
days after consummation, unless a request for extension of time to
consummate is filed prior to the expiration of this 180-day period.
Thus, Winstar Spectrum LLC has until October 14, 2002 to consummate the
assignment of the 15 LMDS licenses and provide notification of the
consummation, unless it is granted an extension of time.
F-10
IDT Corporation
Domestic Operating Assets Previously Used by Old Winstar and
Acquired by the Company to Operate the Business
NOTES TO FINANCIAL STATEMENTS (continued)
For the nine months ended September 30,
2001 and 2000 (unaudited) and the
year ended December 31, 2000
NOTE B (continued)
As a condition of the April 17, 2002 grant of the assignment of its
licenses, Old Winstar was required to identify which of its common
carrier point-to-point licenses were constructed in a timely manner
(with the exception of 13 World Trade Center licenses, for which a
waiver was granted to allow these licenses to remain dark until March
9, 2003). Old Winstar filed the required notice on May 17, 2002, and
the FCC is in the process of canceling the non-constructed
point-to-point licenses. This processing has resulted in a situation
whereby all of the April 17, 2002 assignment grants have not yet been
entered by the FCC staff into the Universal Licensing System ("ULS").
On June 14, 2002, New Winstar consummated the assignment of all its 38
GHz licenses and all other FCC licenses subject to the transaction,
other than the 15 LMDS licenses discussed above, and provided
notification to the FCC. Due to the FCC's ongoing processing of the
point-to-point licenses on ULS, New Winstar was unable to file the
required notices of consummation electronically on ULS. However, New
Winstar filed a paper notice with the Commission Secretary. While New
Winstar must file electronic notices of consummation to ensure that it
is properly reflected as the licensee on ULS, the June 14, 2002 notice
of consummation is an adequate notice of consummation under the
circumstances, and New Winstar now holds these licenses.
Old Winstar's policy was to assess intangible long-lived asset
recoverability by considering a number of factors as of each balance
sheet date, including (a) current operating results of the applicable
business, (b) projected future operating results of the applicable
business, (c) the occurrence of any significant regulatory changes
which may have had an impact on the continuity of the business, and (d)
any other material factors that affected the continuity of the
applicable business. The amortization period for purchased customer
lists was determined on a case-by-case basis for each acquisition based
on a review of the nature of the business acquired as well as the
factors cited above.
In accordance with SFAS No. 121, to determine whether an impairment of
the licenses and other long-lived intangible assets was present, IDT
engaged an independent valuation consultant to perform a valuation and
to assist in measuring the impairment of all of the intangible
long-lived assets of the Business. Based on this valuation, which
assumes, among other things, that the Business will have access to
capital at a reasonable rate, write-offs have been recorded for the
nine months ended September 30, 2001 (unaudited) of approximately
$264.0 million to reflect the licenses at fair value. The valuation
consultant determined there was no impairment with respect to the
licenses at December 31, 2000.
F-11
IDT Corporation
Domestic Operating Assets Previously Used by Old Winstar and
Acquired by the Company to Operate the Business
NOTES TO FINANCIAL STATEMENTS (continued)
For the nine months ended September 30,
2001 and 2000 (unaudited) and the
year ended December 31, 2000
NOTE B (continued)
7. Other Assets
Certain costs incurred in connection with installing service to
customers are deferred and amortized on a straight-line basis over the
average customer contract term, which increased from 18 months to 24
months during the fourth quarter of 2000. The effect of this change was
not material. The carrying value of these costs included in "prepaid
expenses and other assets" in the accompanying statements of assets
acquired and liabilities assumed was approximately $29.8 million and
$43.8 million at September 30, 2001 (unaudited) and December 31, 2000,
respectively. (See Note C.)
8. Advertising Costs
Advertising costs are charged to operations when the advertising first
takes place. Advertising costs included in "general and administrative"
expenses in the accompanying statements of revenue and direct operating
expenses for the nine months ended September 30, 2001 and 2000
(unaudited) and the year ended December 31, 2000 were approximately
$3.4 million, $5.8 million and $6.1 million, respectively.
9. Use of Estimates in Preparing Financial Statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses, as well as
disclosures of contingent assets and liabilities. Actual results could
differ from those estimates.
10. Fair Value of Financial Instruments
Financial instruments of the Business consist of trade receivables. The
carrying amounts of the financial instruments of the Business at
September 30, 2001 (unaudited) and December 31, 2000 approximate fair
value based on the short-term nature of these instruments.
F-12
IDT Corporation
Domestic Operating Assets Previously Used by Old Winstar and
Acquired by the Company to Operate the Business
NOTES TO FINANCIAL STATEMENTS (continued)
For the nine months ended September 30,
2001 and 2000 (unaudited) and the
year ended December 31, 2000
NOTE B (continued)
11. Income Taxes
No provision or benefit for income taxes has been provided in the
accompanying financial statements due to the fact that the Business was
not operated as a stand-alone unit and no allocation of Old Winstar's
income tax provision/benefit has been made to the Business.
Pursuant to the Asset Purchase Agreement, no tax-related assets or
liabilities were acquired or assumed by IDT and, accordingly, no
tax-related assets or liabilities are reflected in the accompanying
financial statements.
12. Unaudited Interim Financial Statements
The accompanying unaudited financial information as of September 30,
2001 and for the nine months ended September 30, 2001 and 2000 has been
prepared in accordance with accounting principles generally accepted in
the United States of America for interim financial reporting. In the
opinion of management, the accompanying financial information is
presented on a basis consistent with the audited financial statements
and reflects all adjustments (consisting of normal recurring items)
necessary for a fair presentation of results for the interim period
presented. Results for the interim period are not necessarily
indicative of the results to be expected for the year.
13. Effects of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities." In June
2000, the FASB issued Statement of Financial Accounting Standards No.
138 ("SFAS No. 138"), which amended certain provisions of SFAS No. 133.
Old Winstar adopted SFAS No. 133 and SFAS No. 138 during the second
quarter of 2000. There was no material effect at adoption on the assets
or revenues, costs and direct operating expenses of the Business.
F-13
IDT Corporation
Domestic Operating Assets Previously Used by Old Winstar and
Acquired by the Company to Operate the Business
NOTES TO FINANCIAL STATEMENTS (continued)
For the nine months ended September 30,
2001 and 2000 (unaudited) and the
year ended December 31, 2000
NOTE B (continued)
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141 ("SFAS No. 141"), "Business Combinations," and
Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"),
"Goodwill and Other Intangible Assets." SFAS No. 141 requires all
business combinations initiated after June 30, 2001 to be accounted for
using the purchase method. Under SFAS No. 142, goodwill and intangible
assets with indefinite lives are no longer amortized, but are reviewed
annually (or more frequently if impairment indicators arise) for
impairment. Separable intangible assets that are not deemed to have
indefinite lives will continue to be amortized over their useful lives
(but with no maximum life). The amortization provisions of SFAS No. 142
apply to goodwill and intangible assets acquired after June 30, 2001.
With respect to goodwill and intangible assets acquired prior to July
1, 2001, the Business would have been required to adopt SFAS No. 142
effective January 1, 2002.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin 101, "Revenue Recognition and Financial Statements"
("SAB 101"). SAB 101 provides guidance on the recognition, presentation
and disclosure of revenue in financial statements. Old Winstar's
adoption of this new guidance during the fourth quarter of 2000 had no
material effect on the assets or revenues, costs and direct operating
expenses of the Business.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. This Statement supersedes SFAS No. 121 and the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events
and Transactions," for the disposal of a segment of a business (as
previously defined in that Opinion). This Statement also amends ARB No.
51, "Consolidated Financial Statements," to eliminate the exception to
consolidation for a subsidiary for which control is likely to be
temporary. The provisions of this Statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early application
encouraged. The provisions of this Statement generally are to be
applied prospectively. Accordingly, the provisions have not been
adopted in the accompanying financial statements.
F-14
IDT Corporation
Domestic Operating Assets Previously Used by Old Winstar and
Acquired by the Company to Operate the Business
NOTES TO FINANCIAL STATEMENTS (continued)
For the nine months ended September 30,
2001 and 2000 (unaudited) and the
year ended December 31, 2000
NOTE C - PREPAID EXPENSES AND OTHER ASSETS
Prepaid expenses and other assets consist of the following:
September December
30, 2001 31, 2000
------------- ----------
(unaudited)
(in thousands)
Deferred installation costs $ 29,801 $ 43,826
Prepaid operations and maintenance costs 55,061 46,875
Prepaid capacity costs 49,667 38,881
Other receivables 19,218 19,218
Other assets 18,148 16,849
--------- ---------
$ 171,895 $ 165,649
========= =========
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
September December Estimated
30, 2001 31, 2000 useful life
------------- ------------- ------------
(unaudited)
(in thousands)
Telecommunications equipment and software $ 247,138 $ 646,876 3 to 25 years
Furniture, fixtures and other 57,707 81,326 4 to 5 years
Lesser of life of
lease or life
Leasehold improvements 8,819 18,697 of the asset
---------- ---------
313,664 746,899
Less accumulated depreciation and amortization (81,214) (155,463)
---------- ---------
232,450 591,436
Network construction in progress 103,745 306,043
---------- ---------
$ 336,195 $ 897,479
========== =========
F-15
IDT Corporation
Domestic Operating Assets Previously Used by Old Winstar and
Acquired by the Company to Operate the Business
NOTES TO FINANCIAL STATEMENTS (continued)
For the nine months ended September 30,
2001 and 2000 (unaudited) and the
year ended December 31, 2000
NOTE D (continued)
Property and equipment at September 30, 2001 (unaudited) and December 31,
2000 include assets purchased from and financed by Lucent Technologies Inc.
("Lucent"). Under its agreements with Lucent, Old Winstar could purchase,
among other things, all equipment and labor associated with the
construction of the Winstar network and certain tangible assets. Property
and equipment are stated net of their impaired value as of September 30,
2001 (unaudited) and December 31, 2000. (See Note H.)
NOTE E - OTHER INTANGIBLE ASSETS
Other intangible assets consist of the following:
September December Estimated
30, 2001 31, 2000 useful life
------------- ------------- ------------
(unaudited)
(in thousands)
Purchased customer lists $2,581 $ 16,000 5 to 25 years
Covenants not to compete and other 320 320 5 to 10 years
------ --------
2,901 16,320
Less accumulated amortization (394) (1,888)
------ --------
$2,507 $ 14,432
====== =========
Other intangible assets are stated net of their impaired value as of
September 30, 2001 (unaudited) and December 31, 2000. (See Note H.)
F-16
IDT Corporation
Domestic Operating Assets Previously Used by Old Winstar and
Acquired by the Company to Operate the Business
NOTES TO FINANCIAL STATEMENTS (continued)
For the nine months ended September 30,
2001 and 2000 (unaudited) and the
year ended December 31, 2000
NOTE F - CAPITAL LEASE OBLIGATIONS
Old Winstar leased telecommunications and other assets through various
equipment lease financing facilities. Such leases were historically
accounted for as capital leases.
In October 1999, Old Winstar entered into an agreement with Metromedia
Fiber Network ("MFN") to obtain dark fiber capacity in 38 major markets in
the United States and three major international markets. MFN would be paid
approximately $300.0 million over a 20-year period commencing with the
delivery of the fiber. As of December 31, 2000, Old Winstar had paid $0.3
million under this agreement and had total capital lease obligations of
$4.0 million for fiber delivered through December 31, 2000. The carrying
value, after impairment adjustments, of this fiber, which was accounted for
as a capital lease, was approximately $6.6 million and $9.3 million at
September 30, 2001 (unaudited) and December 31, 2000, respectively.
In December 1998, the Business purchased an Indefeasible Right to Use
("IRU") from Williams Communications Inc. ("Williams") consisting of four
strands of dark fiber optic cable on a national route of 14,684 route miles
and a seven-year option to purchase two additional strands of dark fiber
optic cable on the same route. In April 1999, the original IRU was amended
to include an additional exclusive 20-year indefeasible right to use
additional specified fixed circuits, which extended the long haul network
of the Business. Under the December 1998 agreement, the Business was
obligated to pay monthly installments of $7.7 million, through December
2005, for a total of $643.0 million. Pursuant to the April 1999 amendment,
the Business was obligated to pay Williams an additional $100.0 million in
various monthly installments through December 2005. The seven-year option
was exercisable for an additional payment of $51.0 million, which option
was never exercised by Old Winstar. The carrying value, after impairment
adjustments, of this fiber, which was accounted for as a capital lease, was
approximately $54.8 million and $146.3 million at September 30, 2001
(unaudited) and December 31, 2000, respectively.
F-17
IDT Corporation
Domestic Operating Assets Previously Used by Old Winstar and
Acquired by the Company to Operate the Business
NOTES TO FINANCIAL STATEMENTS (continued)
For the nine months ended September 30,
2001 and 2000 (unaudited) and the
year ended December 31, 2000
NOTE F (continued)
As of December 31, 2000, the future minimum lease payments on these capital
leases were as follows:
Year ending December 31, (in thousands)
------------------------ --------------
2001 $ 125,373
2002 112,888
2003 115,281
2004 11,173
2005 10,461
Thereafter 7,954
---------
383,130
Less amount representing interest (71,363)
---------
Present value of minimum lease payments $ 311,767
=========
The carrying value of assets under capital leases was $72.8 million and
$174.8 million at September 30, 2001 (unaudited) and December 31, 2000,
respectively, and is included in property and equipment. Amortization of
these assets is included in "depreciation and amortization " expense in the
accompanying statements of revenue and direct operating expenses.
The historical carrying value of the future minimum lease payment
obligations set forth in the table above is not indicative of future
liabilities associated with these assets. This is because IDT has
determined that the capital leases related to certain of those assets were
not executory contracts or unexpired leases, and therefore were not subject
to assumption or rejection after the Closing Date. Accordingly, the assets
were acquired outright on the Closing Date, free and clear of all
liabilities for future payments. Certain payments aggregating approximately
$8.0 million were made by New Winstar in connection with these assets to
maintain ongoing relationships with former creditors of Old Winstar.
F-18
IDT Corporation
Domestic Operating Assets Previously Used by Old Winstar and
Acquired by the Company to Operate the Business
NOTES TO FINANCIAL STATEMENTS (continued)
For the nine months ended September 30,
2001 and 2000 (unaudited) and the
year ended December 31, 2000
NOTE G - CORPORATE ALLOCATIONS
Certain operating expenses of the Business were shared by Old Winstar, the
consolidated entity. These expenses include, but are not limited to
marketing, occupancy, procurement and other shared expenses. These expenses
are allocated to the Business based on factors such as sales volume,
headcounts and identifiable assets. Expenses allocated to the Business are
as follows (in thousands):
Nine months Nine months
ended ended Year ended
September 30, September 30, December 31,
2001 2000 2000
---------------- --------------- ------------
(unaudited) (unaudited)
Cost of revenues $ 95,483 $ 75,103 $100,460
Selling expenses 10,184 12,699 14,075
General and administrative 58,301 43,723 66,409
--------- --------- --------
Total direct expenses $ 163,968 $ 131,525 $180,944
========= ========= ========
Allocated expenses do not include corporate, treasury, legal, tax,
information systems, interest, management fees and other similar corporate
expenses. These expenses are not considered direct expenses of the
Business.
NOTE H - IMPAIRMENT CHARGES
During the nine months ended September 30, 2001 and the three months ended
December 31, 2000, it became apparent that the future undiscounted cash
flows associated with the Business' long-lived assets would not be
sufficient to recover the net book value of such assets. In accordance with
SFAS No. 121, impairment charges of approximately $1.0 billion and $1.8
billion during the nine months ended September 30, 2001 (unaudited) and the
three months ended December 31, 2000, respectively, have been recorded to
adjust the Business' long-lived assets, principally property, equipment,
licenses and
F-19
IDT Corporation
Domestic Operating Assets Previously Used by Old Winstar and
Acquired by the Company to Operate the Business
NOTES TO FINANCIAL STATEMENTS (continued)
For the nine months ended September 30,
2001 and 2000 (unaudited) and the
year ended December 31, 2000
NOTE H (continued)
goodwill and other intangibles to fair value. The estimated fair values of
the long-lived assets are based in part on a valuation of such assets
performed by an independent valuation consultant. The fair values, as
required by SFAS No. 121, did not consider the value of such assets in a
forced sale or liquidation and have been based primarily upon discounted
estimated future cash flows and comparative market prices. The assumptions
supporting the estimated future cash flows, including the discount rates
and estimated terminal values used, reflect management's best estimates.
The discount rates used were primarily based upon the weighted-average cost
of capital for comparable companies.
NOTE I - COMMITMENTS AND CONTINGENGIES
The Business has operating leases for most sales and support offices,
switching facilities and warehousing facilities, along with various
equipment and roof access rights.
Future minimum lease payments under noncancellable operating leases that
were assumed by New Winstar are as follows:
Year ending December 31, s (in thousands)
------------------------ --------------
2001 $ 38,773
2002 32,417
2003 27,105
2004 21,734
2005 17,450
Thereafter 65,138
---------
$ 202,617
=========
F-20
IDT Corporation
Domestic Operating Assets Previously Used by Old Winstar and
Acquired by the Company to Operate the Business
NOTES TO FINANCIAL STATEMENTS (continued)
For the nine months ended September 30,
2001 and 2000 (unaudited) and the
year ended December 31, 2000
NOTE I (continued)
Rent expense for the nine months ended September 30, 2001 and 2000
(unaudited) and the year ended December 30, 2000 was $38.9 million, $42.3
million and $61.4 million, respectively.
NOTE J - EMPLOYEE BENEFIT PLANS
For all periods presented, the Business participated in various employee
benefit plans, including a 401(k) savings plan and employee stock purchase
plan, which were sponsored by Old Winstar. An allocation of costs in
connection with these plans is included as part of "general and
administrative" expenses in the accompanying statements of revenue and
direct operating expenses.
F-21