10-Q/A 1 0001.txt FORM 10-Q/A -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q/A [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended October 31, 1999 or [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 0-27898 ---------------- IDT CORPORATION (Exact Name of Registrant as Specified in its Charter) Delaware 22-3415036 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 520 Broad Street, Newark, New Jersey 07102 (Address of Principal Executive Office) (Zip Code) (201) 928-1000 (Registrant's Telephone Number, Including Area Code) ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Common Stock, $.01 par value--24,100,383 shares as of December 14, 1999 Class A Common Stock, $.01 par value--10,029,758 shares as of December 14, 1999 (Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date) -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- IDT CORPORATION TABLE OF CONTENTS Part I. FINANCIAL INFORMATION Item 1. Financial Statements......................................... 3 Condensed Consolidated Balance Sheets (Restated) as of October 31, 1999 and July 31, 1999.......................... 3 Condensed Consolidated Statements of Income (Restated) for the three months ended October 31, 1999 and 1998............ 4 Condensed Consolidated Statements of Cash Flows (Restated) for the three months ended October 31, 1999 and 1998........ 5 Notes to Condensed Consolidated Financial Statements......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 9 Part II. OTHER INFORMATION............................................... 17 Item 1. Legal Proceedings............................................ 17 Item 2. Changes in Securities........................................ 17 Item 3. Defaults Upon Senior Securities.............................. 17 Item 4. Submission of Matters to a Vote of Security Holders.......... 17 Item 5. Other Information............................................ 17 Item 6. Exhibits and Reports on Form 8-K............................. 18 SIGNATURES............................................................ 20
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements IDT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (RESTATED) (Dollars in thousands, except per share data)
October 31, July 31, 1999 1999 ----------- -------- (Unaudited) (Note 1) ASSETS ------ Current assets: Cash and cash equivalents.............................. $ 99,287 $ 52,903 Marketable securities.................................. 105,498 77,870 Accounts receivable, net............................... 139,650 106,146 Notes receivable--current portion...................... -- 18,968 Other current assets................................... 53,051 36,311 -------- -------- Total current assets.................................. 397,486 292,198 Property, plant and equipment, at cost, net.............. 118,628 114,123 Trademark, net........................................... 4,759 4,792 Notes receivable--long-term portion...................... 2,292 2,187 Intangibles, net......................................... 114,708 117,366 Deferred tax assets, net................................. -- 3,358 Other assets............................................. 19,488 25,847 -------- -------- Total assets.......................................... $657,361 $559,871 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Trade accounts payable................................. $101,923 $ 79,475 Accrued expenses....................................... 3,634 5,355 Interest payable....................................... 1,535 1,565 Deferred revenue....................................... 12,795 13,210 Notes payable--current portion......................... 4,378 4,753 Capital lease obligations--current portion............. 5,821 6,029 Other current liabilities.............................. 5,266 2,397 -------- -------- Total current liabilities............................. 135,352 112,784 Deferred tax liabilities, net............................ 19,618 -- Notes payable--long-term portion......................... 112,054 112,973 Capital lease obligation--long-term portion.............. 14,467 15,742 -------- -------- Total liabilities..................................... 281,491 241,499 Minority interests....................................... 61,808 42,043 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; 24,100,383 and 23,982,854 shares issued and outstanding at October 31, 1999 and July 31, 1999, respectively.......................................... 241 240 Class A stock, $.01 par value; authorized shares-- 35,000,000; 10,029,758 shares issued and outstanding at October 31, 1999 and July 31, 1999................. 100 100 Loans to stockholders.................................. (251) (251) Additional paid-in capital............................. 319,363 317,362 Accumulated deficit.................................... (5,391) (41,122) -------- -------- Total stockholders' equity............................ 314,062 276,329 -------- -------- Total liabilities and stockholders' equity............ $657,361 $559,871 ======== ========
See notes to condensed consolidated financial statements. 3 IDT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (RESTATED) (Dollars in thousands, except per share data) (Unaudited)
Three Months Ended October 31, ------------------------ 1999 1998 ----------- ----------- Revenues............................................. $ 283,421 $ 133,278 Costs and expenses: Direct cost of revenues............................ 230,199 101,074 Selling, general and administrative................ 48,617 17,056 Depreciation and amortization...................... 9,926 7,965 ----------- ----------- Total costs and expenses......................... 288,742 126,095 ----------- ----------- Income (loss) from operations........................ (5,321) 7,183 Interest, net........................................ (411) 205 Other income, net.................................... 65,572 -- ----------- ----------- Income before provision for income taxes and minority interest............................................ 59,840 7,388 Provision for income taxes........................... 26,706 2,547 Minority interest.................................... (2,597) 1,623 ----------- ----------- Net income........................................... $ 35,731 $ 3,218 =========== =========== Net income per share--basic.......................... $ 1.05 $ 0.10 =========== =========== Weighted average number of shares used in calculation of earnings per share--basic........................ 34,065,274 33,199,558 =========== =========== Net income per share--diluted........................ $ 0.98 $ 0.09 =========== =========== Weighted average number of shares used in calculation of earnings per share--diluted...................... 36,602,437 35,701,538 =========== ===========
See notes to condensed consolidated financial statements. 4 IDT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (RESTATED) (Dollars in thousands) (Unaudited)
Three Months Ended October 31, ------------------ 1999 1998 -------- -------- Cash used in operating activities.......................... $(17,344) $ (3,854) Investing activities Net (purchases) sales of marketable securities............. (27,628) 7,856 Issuance of notes receivable............................... -- (7,795) Collection of notes receivable............................. 18,863 -- Purchases of property, plant and equipment................. (11,270) (12,714) -------- -------- Net cash used in investing activities...................... (20,035) (12,653) Financing activities Proceeds from issuance of common stock by Net2Phone........ 85,221 -- Proceeds from exercise of stock options for Net2Phone...... 1,000 -- Proceeds from exercise of stock options.................... 1,160 655 Proceeds from exercise of stock warrants................... -- 439 Repayment of notes payable................................. (1,294) (499) Repayment of capital lease obligations..................... (1,483) (928) Distribution to minority shareholder....................... (841) -- -------- -------- Net cash provided by (used in) financing activities........ 83,763 (333) -------- -------- Net increase (decrease) in cash and cash equivalents....... 46,384 (16,840) Cash and cash equivalents, beginning of period............. 52,903 115,284 -------- -------- Cash and cash equivalents, end of period................... $ 99,287 $ 98,444 ======== ======== Supplemental disclosures of cash flow information Interest paid.............................................. $ 3,327 $ 4,764 Income taxes paid.......................................... $ 1,050 $ --
See notes to condensed consolidated financial statements. 5 IDT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1--Basis of Presentation The accompanying unaudited condensed consolidated financial statements of IDT Corporation and subsidiaries (collectively "the Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended October 31, 1999 are not necessarily indicative of the results that may be expected for the year ending July 31, 2000. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K as amended for the year ended July 31, 1999, as filed with the Securities and Exchange Commission. The Company has restated its financial statements for the three-month periods ended October 31, 1998 and 1999. The restatement resulted form adjusting i) the timing of a gain recognized on the sale of preferred stock by Net2Phone, Inc., a majority owned subsidiary, and ii) the determination and allocation of the purchase price relating to the Company's acquisition of Interexchange, Inc. The aggregate effect of the aforementioned adjustments on the Company's financial statements for the three months ended October 31, 1998 and October 31, 1999 is as follows:
Three months ended October 31, 1998 ---------------------------------------------- Previously filed Restated Increase/(Decrease) ---------------- -------- ------------------- Depreciation and amortization... $ 5,439 $ 7,965 $ 2,526 Income from operations.......... 9,709 7,183 (2,526) Provision for income taxes...... 3,399 2,547 (852) Net income...................... 4,892 3,218 (1,674) Basic net income per share...... 0.15 0.10 (0.5) Diluted net income per share.... 0.14 0.09 (0.5) Total assets.................... 423,972 466,342 42,370 Stockholders' equity............ 245,032 287,402 42,370 Three months ended October 31, 1999 ---------------------------------------------- Previously filed Restated Increase/(Decrease) ---------------- -------- ------------------- Depreciation and amortization... $ 7,400 $ 9,926 $ 2,526 Loss from operations............ (2,795) (5,321) (2,526) Other, net...................... 43,961 65,572 21,611 Provision for income taxes...... 18,913 26,706 7,793 Net income...................... 24,439 35,731 11,292 Basic net income per share...... 0.72 1.05 0.33 Diluted net income per share.... 0.67 0.98 0.31 Total assets.................... 617,402 657,361 39,959 Stockholders' equity............ 279,846 314,062 34,216
6 Note 2--Business Segment Information Operating results and other financial data presented for the principal business segments of the Company are as follows ($ in thousands):
Wholesale Retail Telecommunications Telecommunications Internet Internet Services Services Services Telephony Total ------------------ ------------------ -------- --------- -------- Three months ended October 31, 1999 Total segment revenue.. $141,400 $130,700 $ 3,500 $13,100 $288,700 Less: revenues between segments............. (3,600) -- -- (1,700) (5,300) -------- -------- ------- ------- -------- Total unaffiliated revenue................ 137,800 130,700 3,500 11,400 283,400 ======== ======== ======= ======= ======== Income (loss) from operations............. 3,884 3,695 (3,600) (9,300) (5,321) ======== ======== ======= ======= ======== Three months ended October 31, 1998 Total segment revenue.. $ 50,600 $ 75,300 $ 4,300 $ 5,700 $135,900 Less: revenues between segments............. (2,200) -- -- (400) (2,600) -------- -------- ------- ------- -------- Total unaffiliated revenue................ 48,400 75,300 4,300 5,300 133,300 ======== ======== ======= ======= ======== Income (loss) from operations............. 6,084 4,799 (1,800) (1,900) 7,183 ======== ======== ======= ======= ========
Note 3--Property, Plant and Equipment Property, plant and equipment consists of the following ($ in thousands):
October 31, 1999 July 31, 1999 ---------------- ------------- Equipment...................................... $ 122,456 $117,547 Computer software.............................. 25,631 21,515 Leasehold improvements......................... 5,183 3,651 Furniture and fixtures......................... 2,972 2,447 Land and building.............................. 6,500 6,312 --------- -------- 162,742 151,472 Less: Accumulated depreciation and amortization.................................. (44,114) (37,349) --------- -------- $ 118,628 $114,123 ========= ========
Note 4--Gain on Sale of Stock by Subsidiary On August 3, 1999, Net2Phone, Inc. a majority owned subsidiary, completed an initial public offering of 6,210,000 shares of its common stock at a price of $15 per share, resulting in net proceeds of approximately $85.3 million. Upon completion of the initial public offering, 3,140,000 shares of Net2Phone Series A Preferred Stock were converted into 9,420,000 shares of Net2Phone Class A Stock. As a result of the initial public offering and concurrent conversion of Series A Stock to Class A Stock, IDT's ownership percentage in Net2Phone decreased from 90.0% to approximately 56.2%. This resulted in the Company recording a gain on the sale of stock by a subsidiary of approximately $65.6 million. This gain is included in other income, net for the three-months ended October 31, 1999. Deferred taxes of $26.2 million have been provided on the gain. In December 1999 (second quarter of fiscal 2000), the Company recorded a $76.8 million pre-tax gain in connection with Net2Phone's secondary offering of 6.3 million shares of its common stock, at a price of 7 IDT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) $55.00 per share for net proceeds to Net2Phone of approximately $177.4 million. Deferred taxes of approximately $30.7 million have been provided for this gain. In addition, a $105.8 million pre-tax gain was recognized in December 1999 (second quarter of fiscal 2000) in connection with IDT's sale of 2,200,000 shares of common stock of Net2Phone in Net2Phone's secondary offering, at a price of $55.00 per share for net proceeds of approximately $115.4 million. IDT's ownership interest before and after this transaction and the secondary offering (which occurred at the same time) was 56.24% and 47.97%, respectively. Note 5--Legal Proceedings and Contingencies In January 1997, six former employees alleging employment discrimination commenced a suit in New Jersey Superior Court, Bergen County. Howard S. Jonas, the Chairman and Chief Executive Officer of the Company, has also been named as a defendant in the action. The action claims that the Company has made hiring and promotion decisions based upon the religious backgrounds of the relevant individuals, in violation of federal and state law. The complaint seeks compensatory and punitive damages in an unspecified amount and also seeks statutory multiples of damages. All of the claims arising under federal law were dismissed by the Court in New Jersey Superior Court, Bergen County, leaving the plaintiffs with only the remedies available under state law. Further, the Court granted the Company permission to file counterclaims against all plaintiffs for the alleged unlawful taking of business records. The Company filed such counterclaims in October 1998. Discovery is continuing and a trial date has been scheduled for March 7, 2000. In August 1998, a subsidiary of the Company, InterExchange, Inc. ("IX"), filed a complaint in the New Jersey Superior Court, Middlesex County, against PT-1 Communications, Inc. ("PT-1"). The action has been removed to the U.S. District Court for the District of New Jersey. The action arises from a contract in which IX and PT-1 agreed that PT-1 would route its traffic from prepaid calling cards through IX's debit card platform. In the action, IX claimed that PT-1 breached its contract with IX by failing to make required payments under the contract, and claimed compensatory damages in the amount of $8.5 million. In February 1999, PT-1 filed an answer and counterclaim and third party complaint against IX, the Company, and certain of their officers, including Howard S. Jonas. The parties have entered into a settlement agreement. 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. 8 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the accompanying condensed consolidated financial statements and the associated notes thereto of this Quarterly Report, and the audited consolidated financial statements and the notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company contained in the Company's Annual Report on Form 10-K for the year ended July 31, 1999, as filed with the Securities and Exchange Commission. Overview The Company is a leading multinational carrier that provides its wholesale and retail customers with integrated and competitively priced international and domestic long distance telecommunications service, Internet access and, through its Net2Phone products and services, Internet telephony services. The Company delivers these services over a high-quality network consisting of 70 switches in the U.S. and Europe and owned and leased capacity on 16 undersea fiber optic cables. In addition, the Company obtains additional transmission capacity from other carriers. The Company delivers its international traffic worldwide pursuant to its agreements with U.S.-based carriers, foreign carriers, and 23 of the companies that are primarily responsible for providing telecommunications services in particular countries (many of which are commonly referred to as "PTTs"). In addition, the Company maintains a high-speed network that carries Internet traffic in order to support both its Internet access services and Net2Phone's Internet telephony services. Three Months Ended October 31, 1999 Compared to Three Months Ended October 31, 1998 Results of Operations Revenues. Revenues increased 112.7%, from approximately $133.3 million for the three months ended October 31, 1998 to approximately $283.4 million for the three months ended October 31, 1999. Telecommunications revenues increased 117.0%, from approximately $123.7 million for the three months ended October 31, 1998 to approximately $268.5 million for the three months ended October 31, 1999. Internet access revenues decreased 16.9%, from approximately $4.3 million for the three months ended October 31, 1998 to approximately $3.5 million for the three months ended October 31, 1999. Internet telephony revenues increased 114.7%, from approximately $5.3 million for the three months ended October 31, 1998 to approximately $11.4 million for the three months ended October 31, 1999. Telecommunications revenues increased primarily as a result of a 119.6% increase in minutes of use from approximately 468.9 million for the three months ended October 31, 1998 to approximately 1.03 billion for the three months ended October 31, 1999. The increase in minutes was primarily due to the addition of wholesale carrier service clients, increased usage by existing clients, and increased marketing of the Company's prepaid calling cards. The addition of wholesale carrier services clients, increased use by existing clients and the inclusion of $20 million in revenue related to a one-time tariff opportunity resulted in an increase in wholesale telecommunications revenues of 184.4%, from approximately $48.4 million for the three months ended October 31, 1998 to approximately $137.8 million for the three months ended October 31, 1999. As a percentage of telecommunications revenues, wholesale telecommunications revenues increased from approximately 39.2% to 51.3%, as the increase in wholesale revenues in dollar terms was greater than that of other business lines. Revenues from retail telecommunications services increased 73.7%, from approximately $75.3 million for the three months ended October 31, 1998 to approximately $130.7 million for the three months ended October 31, 1999 as a result of increased marketing efforts for the Company's prepaid calling cards. Prepaid calling card sales as a percentage of retail telecommunication services revenues increased from 89.4% for the three months 9 ended October 31, 1998 to 95.0% for the three months ended October 31, 1999. As a percentage of overall telecommunications revenues, retail telecommunications revenues decreased from approximately 60.8% in the three months ended October 31, 1998 to approximately 48.7% for the three months ended October 31, 1999. As a percentage of total revenues, Internet access revenues decreased from approximately 3.2% for the three months ended October 31, 1998 to approximately 1.3% for the three months ended October 31, 1999. This decrease was due to a dollar decrease in Internet access revenues due to a decrease in total dial-up subscribers as well as the substantial increase in telecommunications revenues during the same period. Internet telephony revenues as a percentage of total revenues was 4.0% for the three months ended October 31, 1999, unchanged from the three months ended October 31, 1998. The increase in Internet telephony revenues, in dollar terms, was primarily due to an increase in billed-minute usage resulting from increased marketing of the Company's Internet telephony products and services. Direct Cost of Revenues. The Company's direct cost of revenues increased by 127.8%, from approximately $101.0 million in the three months ended October 31, 1998 to approximately $230.2 million in the three months ended October 31, 1999. As a percentage of total revenues, these costs increased from 75.8% for the three months ended October 31, 1998 to 81.2% for the three months ended October 31, 1999. The dollar increase is due primarily to increases in underlying carrier and connectivity costs, as the Company's telecommunications minutes of use, and associated revenues, grew substantially. As a percentage of total revenues, the increase in direct costs reflects lower gross margins associated with wholesale telecommunications services as compared to retail telecommunications services as well as the lower gross margins related to telecommunications revenues as compared with Internet access services. Gross margins were also adversely affected by delayed network deployment. Selling, General and Administrative. Selling, general and administrative costs increased 185.1%, from approximately $17.1 million in the three months ended October 31, 1998 to approximately $48.6 million in the three months ended October 31, 1999. As a percentage of total revenues, these costs increased from 12.8% for the three months ended October 31, 1998 to 17.2% for the three months ended October 31, 1999. The increase in these costs is due primarily to increased sales and marketing efforts for retail services, including prepaid calling cards, domestic and international long distance; and for Net2Phone, as well as increased salaries, facilities costs and professional fees related to the expansion of the Company's infrastructure to facilitate its rapid sales growth. Included in salaries is $2.9 million of non-cash compensation as a result of option grants made by our Net2Phone subsidiary during the three months ended October 31, 1999. Depreciation and Amortization. Depreciation and amortization increased 23.8% from approximately $8.0 million for the three months ended October 31, 1998 to approximately $9.9 million for the three months ended October 31, 1999. As a percentage of revenues, these costs decreased from 6.0% for the three months ended October 31, 1998 to 3.5% for the three months ended October 31, 1999. These costs increased, in dollar terms, primarily as a result of amortization of goodwill and other intangible assets that resulted from the Company's acquisition of InterExchange, Inc. in the fourth quarter of fiscal 1998 and the Company's higher fixed asset base during the three months ended October 31, 1999 as compared with the three months ended October 31, 1998, reflecting the Company's efforts to expand its telecommunications network infrastructure and other facilities. The Company anticipates that depreciation and amortization costs will continue to increase as the Company continues to add to its asset base, allowing it to implement its growth strategy. Income from Operations. The Company recorded a loss from operations of approximately $5.3 million for the three months ended October 31, 1999, contrasting with income from operations of approximately $7.2 million for the three months ended October 31, 1998. Income from operations for the Company's telecommunications business (after the effect of minority interests) decreased from approximately $9.2 million for the three months ended October 31, 1998 to approximately $6.6 million for the three months ended October 31, 1999. As a percentage of telecommunication revenues, income from operations for the telecommunications business decreased to 2.5% for the three months ended October 31, 1999 from 7.5% for 10 the three months ended October 31, 1998, due to decreased margins in the carrier wholesale and retail telecommunications businesses, and an increase in sales and marketing costs for retail telecommunications services. Loss from operations for the Company's Internet access business increased to approximately $3.6 million for the three months ended October 31, 1999 from approximately $1.8 million for the three months ended October 31, 1998. The increased loss is primarily due to the decrease in Internet access revenues resulting from a decrease in total dial-up subscribers, as well as an increase in marketing expenses. Loss from operations of the Net2Phone subsidiary increased to approximately $9.3 million for the three months ended October 31, 1999, compared to a loss of approximately $1.9 million for the three months ended October 31, 1998. This increase is due primarily to the non-cash compensation charge of $2.9 million described above, coupled with a substantial increase in both sales and marketing expenses as well as general and administrative expenses incurred as Net2Phone expanded distribution relationships, corporate infrastructure and human resources. Income Taxes. The Company recorded income tax expense of approximately $26.7 million for the three months ended October 31, 1999, compared to approximately $2.5 million for the three months ended October 31, 1998. Income tax benefit of approximately $0.8 million for the three months ended October 31, 1999, and approximately $0.3 million for the three months ended October 31, 1998 related to the tax deduction upon the exercise of stock options was recorded directly into additional paid-in capital. Liquidity and Capital Resources General Historically, the Company has satisfied its cash requirements through a combination of cash flow from operating activities, sales of equity and debt securities and borrowings from third parties. The Company received approximately $1.2 million upon the exercise of stock options and warrants in the three months ended October 31, 1999. In May 1999, The Company entered into a credit agreement with Lehman Commercial Paper Inc., CIBC World Markets Corp., Bankers Trust Company and a Syndicate of lenders. These institutions have committed to provide us with a $160 million credit facility that includes term loans in an aggregate amount of up to $135 million and revolving loans in an amount of up to $25 million and an additional uncommitted amount of up to $100 million. Bankers Trust Company serves as administrative agent for the facility. The Company used the proceeds from the initial borrowings under the credit facility of $108.1 million from the initial borrowings under the credit facility to purchase more than 99% of its outstanding 8.75% Senior Notes due 2006, together with accrued and unpaid interest, that the Company purchased in connection with its tender offer for these securities. The amount of $75.0 million of the initial borrowings currently bears interest at a rate of 8.75% per annum and the remaining $33.1 million of the initial borrowings currently bears interest at a rate of 8.25% per annum. As of October 31, 1999, the Company had cash, cash equivalents and marketable securities of $204.8 million and working capital of approximately $262.1 million. The Company generated negative cash flow from operating activities of approximately $17.3 million during the three months ended October 31, 1999, compared with negative cash flow from operating activities of approximately $3.9 million during the three months ended October 31, 1998. The Company's cash flow from operations varies significantly from quarter to quarter, depending upon the timing of operating cash receipts and payments, especially accounts receivable and accounts payable. Accounts receivable, accounts payable and accrued expenses have increased from period to period as the Company's businesses have grown. The Company's capital expenditures were approximately $11.2 million in the three months ended October 31, 1999, compared to approximately $12.7 million in the three months ended October 31, 1998, as the 11 Company expanded its international and domestic telecommunications network infrastructure. The Company financed a portion of its capital expenditures through capital leases and notes payable. The Company experiences intense competition in its telecommunications business. The long distance telecommunications industry has been characterized by declines in both per-minute revenues and per-minute costs. In the past, these factors have tended to generally offset each other. However, as per- minute pricing continues to erode, gross margins could come under increasing pressure. The Company's long term strategy involves terminating a larger proportion of minutes on the Company's own network, thereby lowering costs and preserving margins even in a weaker price environment. However, in the short term, the demand for usage might outpace the rate of deployment of additional network capacity. As such, there can be no assurance that the Company will be able to maintain its gross margins at the current level, in the face of lower per-minute revenues. In addition, the Company will need to make significant capital expenditures in order to expand its network capacity. If the Company is unable to raise sufficient capital to meet its spending requirements, the Company's network expansion, and the associated margin improvement, would be delayed. Changes in Other Assets, Accounts Receivable, Allowance for Doubtful Accounts and Deferred Revenue Other current assets increased from $36 million at July 31, 1999 to $53 million at October 31, 1999, due primarily to increases in contract deposits, carrier deposits and prepaid expenses. The average age of the Company's accounts receivable, as measured by number of days sales outstanding, has been increasing due to a significant increase in sales to relatively more credit- worthy carriers and distributors of prepaid calling cards. These customers tend to demand, and the Company is willing to grant extended payment terms. Due to the wide range of collection terms, future trends with respect to days sales outstanding are generally dependent upon the proportion of total sales made to carriers, who are often offered extended payment terms of up to 90 days, and prepaid calling card distributors, who generally receive terms of up to 30 days. Therefore, the trends in days sales outstanding will depend, in large part, on the mix of (wholesale) carrier versus retail (debit card distributor) customers. In addition, as the Company is willing to extend longer payments terms to credit-worthy customers, an increase in customers belonging to the highest credit class, as a percentage to total customers, could also lead to an increase in days sales outstanding. However, as the foregoing is difficult to predict, it is not possible at this time to determine whether or not the recent trend in days sales outstanding will continue. The allowance for doubtful accounts as a percentage of accounts receivable decreased, from 6.7% at July 31, 1999, to 6.3% at October 31, 1999. Deferred revenue as a percentage of total revenue varies from period to period dependent upon the mix and the timing of revenue. Net2Phone Financings In May 1999, a group of strategic investors purchased from Net2Phone, in the aggregate, 3,140,000 shares of Net2Phone Series A Preferred Stock convertible into 9,420,000 shares of common stock and warrants to purchase up to 180,000 shares of Net2Phone common stock, for a net aggregate purchase price of $29.9 million. Additionally, Net2Phone issued a warrant to purchase 92,400 shares of its common stock to Hambrecht & Quist as part of its fee as placement agent with respect to this transaction. In August 1999, Net2Phone completed its initial public offering of 6.2 million shares of common stock, receiving approximately $85.3 million in net proceeds. At that time, the Series A Preferred Stock was converted into Class A Common Stock. The Company recognized pre-tax gain, net of approximately $65.6 million as a result of these transactions. Such gains have been recorded in other income in the accompanying financial statements. 12 In December 1999, Net2Phone completed a Secondary Offering of 6.3 million shares of common stock. As part of the Offering, the Company sold 2.2 million shares of Net2Phone common stock, yielding approximately $114.4 million in net proceeds. Subsequent to the sale of these shares, the Company used approximately $35.0 million of the proceeds to reduce the outstanding balance of its bank credit facility. In connection with Net2Phone's distribution and marketing agreement with ICQ, a subsidiary of America Online, Net2Phone issued to America Online a warrant to purchase up to 3% of Net2Phone's outstanding capital stock on a fully-diluted basis. This warrant will vest in 1% increments upon the achievement of each of three incremental thresholds of revenue generated under the agreement during the first four years that the warrant is outstanding. The exercise price under the terms of the warrant will be equal to the lesser of $12.00 per share or $450 million divided by the number of Net2Phone's fully- diluted shares on the initial exercise date. The warrants are accounted for in accordance with the provisions of EITF 96- 18, "Accounting for Equity Investments that are Issued to Other than Employees for Acquiring or in Conjunction with Selling Goods or Services." Due to the uncertainty of reaching the performance measures stipulated in the warrant agreement, the Company has not recorded any expense relating to the issuance of the warrant. Upon determination that the achievement of the revenue thresholds is probable, the Company will value the warrant and expense it over the remaining period until the performance criteria is met. The three revenue thresholds are $10 million, $50 million and $75 million and the term of the distribution and marketing agreement is four years. If the three incremental thresholds had been met on October 31, 1999, the Company would have expensed approximately $86.6 million. In November 1999, the warrant was amended to include the right to purchase an additional 0.5% of Net2Phone's outstanding capital stock on a fully-diluted basis at an exercise price of $60.46 per share upon the achievement of $100 million in revenue. Acquisitions of In-Process Research & Development The Company's purchase of InterExchange, Inc. in April 1998 involved the acquisition of two significant in-process research and development projects relating to switch technology. Neither one of these projects has been successfully completed at this time, and both projects have been terminated. Currently, the Company is not contemplating any additional acquisitions of in- process research and development. Other Sources and Uses of Resources The Company intends to, where appropriate, make strategic acquisitions to increase its telecommunications customer base. The Company may also make strategic acquisitions related to its Internet telephony business. From time to time, the Company evaluates potential acquisitions of companies, technologies, products and customer accounts that complement its businesses. The Company believes that, based upon its present business plan, the Company's existing cash resources, expected cash flow from operating activities and borrowings under its credit facility will be sufficient to meet its currently anticipated working capital and capital expenditure requirements for at least the next twelve months. If the Company's growth exceeds current expectations or if the Company acquires the business or assets of another company, or if the Company's cash flow from operations after the end of such period is insufficient to meet its working capital and capital expenditure requirements, the Company will need to raise additional capital from equity or debt sources. There can be no assurance that the Company will be able to raise such capital on favorable terms or at all. If the Company is unable to obtain such additional capital, the Company may be required to reduce the scope of its anticipated expansion, which could have a material adverse effect on the Company's business, financial condition or results of operations. 13 Year 2000 The Year 2000 issue affects Company's installed computer systems, network systems and software applications due to the fact that many computers and applications define dates by the last two digits of the year and "00" may not be properly recognized by such programs as the year 2000. The Company has dedicated the time and resources it deems appropriate to address and correct potential Year 2000 problems. The Company has established a Year 2000 compliance committee (the "Committee"). The Committee's objectives are to eliminate any possible disruptions in services and operations that may result from the date change in the Year 2000. The Committee has developed a plan to identify and repair any systems that may be affected by the Year 2000. The plan consists of (1) identifying and inventorying all systems; (2) assessing and testing the systems for Year 2000 compliance; (3) modifying, upgrading or replacing any non- compliant systems; and (4) testing the corrected systems to ensure compliance. The Committee has implemented this plan throughout the company and, in addition to reviewing its own systems, the Company has initiated inquiries and submitted requests to its third-party vendors and service providers to obtain information regarding their compliance with the Year 2000. Inventory, assessment, remediation and testing of software applications and hardware systems, including network systems, is substantially complete. The Company completed the modification, updating or replacement of any systems that to its knowledge are not Year 2000 compliant in November 1999. Testing of the corrected systems has been implemented and will continue on an ongoing basis through October 2000 due to the date October 10, 2000, being the first occurrence of a date requiring the use of eight digits to define the date. In particular, the Company has focused on the testing and remediation of its switching facilities to ensure that its network operations through which it provides communications services to its customers are not disrupted by the Year 2000. The Company is confident that its own network systems are Year 2000 compliant due to the nature and extent of the testing the Company has conducted and continues to implement on such systems. The greatest risk to the Company's ability to provide communications services is the failure of third party service providers to be Year 2000 compliant. While many other carriers and Internet providers have plans to independently become Year 2000 compliant, there is the risk that some (particularly smaller carriers and providers) will not address or properly resolve Year 2000 issues. If this were to occur, the Company would be affected only to the same degree as other carriers and Internet providers in the communications industry. In providing telecommunications services, the Company connects directly and indirectly with thousands of other carriers through switches of the Company and other carriers. The Company has obtained written assurances and information from its primary vendors and providers regarding their Year 2000 compliance and, to the best of the Company's knowledge based on such assurances and information, the Company believes there is not a significant risk that the Company's provision of telecommunication services will be materially impacted. In addition, it is unlikely that a network failure of a smaller carrier would have a significant impact on the Company's ability to provide telecommunications services, however, fully addressing any of these risks is beyond the Company's control. In addition, the Company is unable to fully assess the degree to which the manufacturers of switches and similar equipment have assessed and remediated their equipment and software since most are manufactured and maintained by independent third parties. However, most switches are manufactured by manufacturers with a wide range of customers, therefore, such manufacturers would have a vested interest in ensuring Year 2000 compliance and prompt remediation of any Year 2000 issues. To date, the Company has incurred expenses of less than $1.0 million in connection with its remediation of Year 2000 related issues. The Company constantly monitors its progress of the Year 2000 plan and anticipates that it will resolve any outstanding internal issues before the end of 1999. Contingency plans will be developed and implemented before the end of 1999 for critical systems on an as-needed basis should the Company identify any areas for which such plans are appropriate. 14 European Currency Conversion In January 1999, a new currency called the "euro" was introduced in certain Economic and Monetary Union ("EMU") countries. The EMU countries adopted the euro as their common legal currency, and through January 1, 2002, both the existing national currency of the respective EMU country and the euro will be accepted as legal currency. Beginning in 2002, all EMU countries are expected to operate with the euro as their single currency. Uncertainty exists as to the effect the euro currency will have on the market for international telecommunications services. Additionally, all of the final rules and regulations have not yet been defined and finalized by the European Commission with regard to the euro currency. IDT's management is still evaluating the effect that the introduction of the euro will have on its business, but it does not anticipate, based on information currently available, that the euro will have a material adverse impact the Company's operations and sales. 15 CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words "believes," "anticipates," "expects," and similar words and phrases. Such forward-looking statements include, among other things, the Company's plans to implement its growth strategy, improve its financial performance, expand its infrastructure, develop new products and services, expand its customer base and enter international markets, and the possible outcome of litigation relating to the Company. Such forward-looking statements also include the Company's expectations concerning factors affecting the markets for its products, such as changes in the U.S. and the international regulatory environment and the demand for long-distance telecommunications, Internet access and Internet telephony services. Actual results could differ from those projected in any forward- looking statements. The forward-looking statements are made as of the date of this Report, and the Company assumes 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 the Company's reports filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including the Company's Annual Report on Form 10-K for the year ended July 31, 1999. 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings Incorporated by reference from Part I, Item 1, Financial Statements, Note 4 captioned "Legal Proceedings and Contingencies." Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None 17 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. 10.01(2) Employment Agreement between the Registrant and Howard S. Jonas. 10.02(10) 1996 Stock Option and Incentive Plan, as amended and restated, of the Registrant. 10.03(3) Form of Stock Option Agreement under the 1996 Stock Option and Incentive Plan. 10.04(4) Form of Registration Rights Agreement between certain stockholders and the Registrant. 10.05(1) Lease of 294 State Street. 10.06(5) Lease of 190 Main Street. 10.7(6) Form of Registration Rights Agreement between Howard S. Jonas and the Registrant. 10.8(11) Employment Agreement between the Registrant and James Courter. 10.9(7) Agreement between Cliff Sobel and the Registrant. 10.10(11) Employment Agreement between the Registrant and Hal Brecher. 10.11(11) Employment Agreement between the Registrant and Howard S. Jonas. 10.12(8) Agreement and Plan of Merger, dated April 7, 1998, by and among the Registrant, ADM Corp., InterExchange, Inc., David Turock, Eric Hecht, Richard Robbins, Bradley Turock, Wai Nam Tam, Mary Jo Altom and Lisa Mikulynec. 10.13(9) Securities Purchase Agreement between the Registrant, Carlos Gomez and Union Telecard Alliance, LLC. 10.14(11) Credit Agreement, dated as of May 10, 1999, by and among the Registrant, various lenders party thereto, Lehman Commercial Paper Inc., CIBC World Markets Corp. and Bankers Trust Company. 10.15(11) Pledge Agreement, dated as of May 10, 1999, by and among the Registrant, certain subsidiaries of the Registrant and Bankers Trust Company, as Collateral Agent. 10.16(11) Security Agreement, dated as of May 10, 1999, by and among the Registrant, certain subsidiaries of the Registrant and Bankers Trust Company, as Collateral Agent. 10.17(11) Subsidiaries Guaranty, dated as of May 10, 1999, by and among the Registrant, certain subsidiaries of the Registrant and Bankers Trust Company, as Collateral Agent. 10.18(11) Loan Agreement between the Registrant and Stephen Brown. 10.19(12) Internet/Telecommunications Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc. 10.20(12) Joint Marketing Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc. 10.21(12) IDT Services Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc. 10.22(12) Net2Phone Services Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc. 10.23(12) Assignment Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc. 10.24(12) Tax Sharing and Indemnification Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc. 10.25(12) Separation Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc.
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Exhibit Number Description ------- ----------- 10.26(12) Co-location and Facilities Management Services Agreement, dated as of May 20, 1999, by and between Registrant and Net2Phone, Inc. 27.01* Financial Data Schedule.
-------- * filed herewith (1) Incorporated by reference to Form S-1 filed February 21, 1996 file no. 333-00204. (2) Incorporated by reference to Form S-1 filed January 9, 1996 file no. 333- 00204. (3) Incorporated by reference to Form S-8 filed January 14, 1996 file no. 333- 19727. (4) Incorporated by reference to Form S-1 filed March 8, 1996 file no. 333- 00204. (5) Incorporated by reference to Form 10-K for the fiscal year ended July 31, 1997, filed October 29, 1997. (6) Incorporated by reference to Form S-1 filed March 14, 1996 file no. 333- 00204. (7) Incorporated by reference to Form 10-K/A for the fiscal year ended July 31, 1997, filed February 2, 1998. (8) Incorporated by reference to Form 8-K filed April 22, 1998. (9) Incorporated by reference to Form 10-K/A for the fiscal year ended July 31, 1998, filed December 4, 1998. (10) Incorporated by reference to Form 10-Q for the fiscal quarter ended January 31, 1999, filed March 17, 1999. (11) Incorporated by reference to Form 10-Q for the fiscal quarter ended April 30, 1999, filed June 14, 1999. (12) Incorporated by reference to Form 10-K for the fiscal year ended July 31, 1999, filed November 4, 1999. (b) Reports on Form 8-K. None. 19 IDT CORPORATION FORM 10-Q/A October 31, 1999 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 August 11, By: /s/ Howard S. Jonas 2000 __________________________________ ______________ Howard S. Jonas Date Chairman of the Board and Chief Executive Officer August 11, 2000 (Principal Executive Officer) ______________ By: /s/ Stephen R. Brown Date __________________________________ Stephen R. Brown Chief Financial Officer (Principal Financial and Accounting Officer)
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