-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SSbdX3wYaWZkmUV8zyoIgXLPI+IHv379Z2sfW7DIoWRAt13sWfZ7S1k7mqqWOaUF RtHoOXhMH1G61JCX9Kr7Xg== 0000950130-99-001491.txt : 19990318 0000950130-99-001491.hdr.sgml : 19990318 ACCESSION NUMBER: 0000950130-99-001491 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990131 FILED AS OF DATE: 19990317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDT CORP CENTRAL INDEX KEY: 0001005731 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 223415036 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-71991 FILM NUMBER: 99567426 BUSINESS ADDRESS: STREET 1: 190 MAIN ST CITY: HACKENSACK STATE: NJ ZIP: 07601 BUSINESS PHONE: 2019281000 MAIL ADDRESS: STREET 1: 294 STATE STREET CITY: HACKENSACK STATE: NJ ZIP: 07601 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended January 31, 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.) 190 Main Street, Hackensack, New Jersey 07601 --------------------------------------- ---------- (Address of Principal Executive Office) (Zip Code) (201) 928-1000 ------------------------------------------------------ (Registrant's Telephone Number, Including Area Code) Not Applicable - --------------------------------------------------------------------------- (Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report.) 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 - 23,366,846 shares as of March 15, 1999 Class A Common Stock, $.01 par value - 10,129,417 shares as of March 15, 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 (Unaudited)..............................................3 Condensed Consolidated Balance Sheets as of January 31, 1999 and July 31, 1998.........................................................3 Condensed Consolidated Statements of Income for the six months and three months ended January 31, 1999 and 1998..........................4 Condensed Consolidated Statement of Stockholders'Equity for the six months ended January 31, 1999.................................5 Condensed Consolidated Statements of Cash Flows for the six months ended January 31, 1999 and 1998................................6 Notes to Condensed Consolidated Financial Statements.........................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of..10 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 (Unaudited)
IDT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS January 31, 1999 July 31, 1998 ---------------- ------------- (Unaudited) (Note 1) ASSETS Current assets: Cash and cash equivalents $60,994,698 $115,283,519 Marketable securities 78,911,968 60,308,768 Accounts receivable, net 61,754,895 38,037,974 Notes receivable - current portion 2,140,000 2,140,000 Other current assets 24,337,711 12,096,803 ------------ ------------ Total current assets 228,139,272 227,867,064 Property and equipment, net 100,059,173 75,332,476 Notes receivable - long-term portion 33,021,174 21,767,769 Goodwill, net 73,947,364 74,222,221 Deferred tax assets, net 6,427,072 10,750,000 Other assets 8,996,946 7,256,674 ----------- --------------- Total assets $450,591,001 $417,196,204 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable $53,851,188 $38,793,873 Accrued expenses 2,282,298 3,499,301 Interest payable 4,096,140 3,942,577 Deferred revenue 14,026,129 9,175,218 Notes payable-- current portion 2,120,779 1,865,849 Capital lease obligations-- current portion 5,509,497 3,989,375 Other current liabilities 27,000 220,325 ------------ -------------- Total current liabilities 81,913,031 61,486,518 Notes payable-- long-term portion 100,679,227 101,833,892 Capital lease obligation-- long-term portion 19,118,759 11,232,053 ------------ ------------ Total liabilities 201,711,017 174,552,463 Minority interest 1,149,469 3,895,669 Commitments and Contingencies Stockholders' equity: Preferred stock, $.01 par value; authorized shares - 10,000,000; no shares issued -- -- Common stock, $.01 par value; authorized shares - 100,000,000; 23,341,746 and 22,848,866 shares issued and outstanding at January 31, 1999 and July 31, 1998, respectively 233,418 228,489 Class A stock, $.01 par value; authorized shares - 35,000,000; 10,129,517 and 10,255,668 shares issued and outstanding at January 31, 1999 and July 31, 1998, respectively 101,295 102,557 Additional paid-in capital 268,796,130 266,761,770 Accumulated deficit (21,400,328) (28,344,744) ------------ ------------- Total stockholders' equity 247,730,515 238,748,072 ----------- ------------- Total liabilities and stockholders' equity $450,591,001 $417,196,204 ============ ============
3
IDT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) Six Months Ended January 31, Three Months Ended January 31, --------------------------------- --------------------------------- 1999 1998 1999 1998 ---- ---- ---- ----- Revenues $294,018,907 $125,703,766 $160,741,076 $70,952,788 Costs and expenses: Direct cost of revenues.................... 227,665,779 92,309,811 126,591,672 51,448,794 Selling, general and administrative........ 40,806,085 23,706,415 23,750,521 13,871,468 Depreciation and amortization.............. 11,735,189 3,787,573 6,295,720 2,042,439 ------------ ----------- ----------- ----------- Total costs and expenses................... 280,207,053 119,803,799 156,637,913 67,362,701 ------------ ----------- ----------- ----------- Income from operations........................ 13,811,854 5,899,967 4,103,163 3,590,087 Interest and other, net....................... 143,501 (783,393) (62,154) (436,458) ------------ ----------- ----------- ----------- Income before provision for income taxes and minority interest................ 13,955,355 5,116,574 4,041,009 3,153,629 Provision for income taxes.................... 4,825,780 -- 1,426,497 -- Minority interest............................. 2,185,159 -- 561,747 -- ------------ ----------- ----------- ----------- Net income.................................... $6,944,416 $5,116,574 $2,052,765 $3,153,629 =========== =========== =========== =========== Net income per share - basic.................. $0.21 $0.23 $0.06 $0.14 =========== =========== =========== =========== Weighted average number of shares used in calculation of earnings per share - basic................ 33,265,965 22,638,022 33,332,371 23,330,274 =========== =========== =========== =========== Net income per share - diluted................ $0.20 $0.20 $0.06 $0.12 =========== =========== =========== =========== Weighted average number of shares used in calculation of earnings per share - diluted............ 35,476,587 26,087,362 35,343,627 27,053,511 =========== =========== =========== ===========
See notes to condensed consolidated financial statements. 4
IDT CORPORATION CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) Total Common Stock Class A Stock Additional Accumulated Stockholders' Shares Amount Shares Amount Paid-in Capital Deficit Equity ------ ------ ------ ------ --------------- ------- ------ Balance at July 31, 1998 22,848,866 $228,489 10,255,668 $102,557 $266,761,770 $(28,344,744) $238,748,072 Exercise of stock options 267,725 2,677 -- -- 794,033 -- 796,710 Conversion of Class A Stock to Common Stock 126,151 1,262 (126,151) (1,262) -- -- -- Exercise of warrants 99,004 990 -- -- 737,502 -- 738,492 Income tax benefits from stock options exercised -- -- -- -- 502,825 -- 502,825 Net income for the six months ended January 31, 1999 -- -- -- -- -- 6,944,416 6,944,416 ----------- --------- ---------- -------- ------------ ------------- ------------ Balance at January 31, 1999 23,341,746 $233,418 10,129,517 $101,295 $268,796,130 $(21,400,328) $247,730,515 =========== ========= ========== ======== ============ ============= ============
See notes to condensed consolidated financial statements. 5
IDT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended January 31 ------------------------------------------ 1999 1998 ---- ---- Cash provided by (used in) operating activities.............. $ 4,595,693 $ (2,929,195) Investing activities Purchase of short-term investments........................... (18,603,200) -- Issuance of notes receivable................................. (11,253,405) Receipt of payments on advance............................... -- 811,743 Purchase of property and equipment........................... (22,240,140) (8,794,519) Net cash used in investing activities........................ (57,028,104) (7,982,776) Financing activities Repayment of notes payable................................... (899,735) (871,449) Proceeds from Convertible Debentures......................... -- 7,500,000 Repayment of capital lease obligations....................... (2,491,877) (825,108) Proceeds from exercise of stock options...................... 796,710 2,882,279 Proceeds from exercise of Net2Phone option................... -- 100,000 Proceeds from exercise of warrants........................... 738,492 -- Proceeds from notes payable.................................. -- 3,093,294 Distribution of minority interests........................... (4,931,359) -- --------------- ------------ Net cash (used in) provided by financing activities.......... (1,856,410) 11,879,016 --------------- ------------ Net (decrease) increase in cash and cash equivalents......... (54,288,821) 967,045 --------------- ------------ Cash and cash equivalents, beginning of period............... 115,283,519 7,674,313 --------------- ------------ Cash and cash equivalents, end of period..................... $ 60,994,698 $ 8,641,358 =============== ============ Supplemental disclosures of cash flow information Interest paid................................................ $5,426,422 $ 1,048,462 Income taxes paid............................................ -- --
See notes to condensed consolidated financial statements. 6 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 six months and three months ended January 31, 1999 are not necessarily indicative of the results that may be expected for the year ending July 31, 1999. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K/A for the year ended July 31, 1998, as filed with the Securities and Exchange Commission. Note 2 - Summary of Significant Accounting Policies Segment Information The Company must adopt SFAS 131, Disclosures about Segments of an Enterprise and Related Information in fiscal 1999. Because Statement 131 is not required to be applied to interim financial statements in the initial year of adoption, the Company is not required to disclose segment information in accordance with Statement 131 until its fiscal 1999 annual report, at which time it will restate prior years' segment disclosure to conform to the Statement 131 segment presentation, if practicable. In the Company's first quarter fiscal 2000 report, and in subsequent quarters, it will present the interim disclosure required by Statement 131 for both 2000 and 1999. Note 3 - Property and Equipment Property and equipment consists of the following:
January 31, 1999 July 31, 1998 ---------------- ------------- Equipment $108,723,138 $77,612,461 Computer software 12,014,963 10,027,335 Leasehold improvements 2,703,329 1,930,769 Furniture and fixtures 2,173,028 1,905,048 125,614,458 91,475,613 Less: Accumulated depreciation and amortization 25,555,285 16,143,137 ------------ ----------- $100,059,173 $75,332,476 ============ ===========
Note 4 - Legal Proceedings and Contingencies In December 1995, Surfers Unlimited, L.L.C. filed a breach of contract action in the New Jersey Superior Court, Bergen County. The suit names a subsidiary of the Company as defendant and seeks restitutional and consequential damages in an unspecified amount for interference with prospective business advantages, breach of contract and improper use of confidential and proprietary information. Howard S. Jonas, the Chairman and Chief Executive Officer of the Company, has also been named as a defendant in the action. The Company's subsidiary has filed a counterclaim based on interference with prospective business advantages, breach of contract and improper use of confidential and proprietary 7 information, which the Company voluntarily dismissed in November 1998. The suit is currently in the discovery phase, which was scheduled to end in February 1999 but is continuing until an unspecified date in the future. A trial date has not been scheduled to date. 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 is scheduled for April 28, 1999. In June 1997, an uncertified class-action suit seeking compensatory damages in an unspecified amount was brought against the Company in New York Supreme Court, New York County. The suit concerns advertisements that are no longer used by the Company, and advertising practices that were voluntarily terminated by the Company following a prior investigation of the Company by the Attorneys General of several states. In December 1998, the Court denied the Company's motion for summary judgment; however, the Court limited the class to include only citizens of the State of New York. The Company is preparing to oppose application for class certification. In September 1997, DigiTEC 2000, Inc. ("DigiTEC") filed a complaint (subsequently amended) in New York Supreme Court, New York County against the Company alleging that in connection with its sale of prepaid calling cards, the Company engaged in unfair competition and tortiously interfered with an exclusive business relationship between DigiTEC and two co-defendants, CG Com, Inc. and Mr. Carlos Gomez. The complaint seeks compensatory and consequential damages in an unspecified amount and also seeks an unspecified amount of punitive damages. The complaint also alleges that CG Com, Inc. and Mr. Gomez owe DigiTEC more than $500,000. In November 1997, the Court denied DigiTEC's motion for a preliminary injunction to bar CG Com, Inc. and Mr. Gomez from distributing the Company's calling cards. In August 1998, DigiTEC settled its claims against CG Com, Inc. and Mr. Carlos Gomez and in November 1998, DigiTEC and the Company settled all outstanding claims against each other and entered into an agreement to conduct business on an ongoing basis. The Company filed a lawsuit against Mr. Glen Miller in August 1997 in the New Jersey Superior Court, Bergen County. The action was based upon various matters arising out of Mr. Miller's employment with IDT. Mr. Miller answered the complaint and filed a counterclaim against the Company seeking compensatory and punitive damages for breach of his employment contract and breach of the covenant of good faith and fair dealing. Mr. Miller alleges that the Company breached his employment agreement by failing to compensate him as contemplated by his employment agreement, including by failing to deliver to him 20,000 shares of the Company's Common Stock. Mr. Miller also filed a third-party complaint against Howard Balter, the former Chief Operating Officer of the Company and the current Chief Executive Officer of Net2Phone, a subsidiary of the Company, and Jonathan Rand, the Company's former Director of Human Resources, for fraudulent conduct and misrepresentation. The Company filed its answer to Mr. Miller's counterclaim in December 1997. In January 1998, the Court partially granted Mr. Miller's motion for summary judgment, awarding him severance pay in the amount of approximately $50,000. The Company's motion for leave to appeal this award has been denied, and the action is currently in the discovery phase. A trial date has been scheduled for April 1999. In December 1998, PT-1 Communications, Inc. ("PT-1") filed a complaint against the Company claiming, among other things, that the Company violated its service marks and trade dress in connection with the sale and marketing of phone cards. The Company and PT-1 shortly thereafter entered into a confidential settlement agreement in December 1998. Subsequent to December 1998, PT-1 filed a motion for a preliminary injunction to enforce and compel the Company's compliance with the settlement agreement, which it alleges was breached by the Company. The Company filed opposition papers to the 8 motion and simultaneously filed a motion for a preliminary injunction. The Court scheduled a conference for March 1999. 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. 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 an answer and third party complaint against IX, the Company, and certain of their officers, including Howard Jonas. PT-1 alleges that IX is not entitled to these payments in that IX had breached the agreement, and that, following IX's 1998 merger agreement with the Company, in which IX become a wholly-owned subsidiary of the Company, IX violated its covenant in the agreement that it would not compete with PT-1. PT-1 also alleges, among other things, that the Company and Mr. Jonas tortiously interfered with the contract between IX and PT-1, and that they conspired with IX and its personnel to obtain confidential information relating to PT-1. PT-1 seeks compensatory damages in the aggregate amount of $200 million, and additional punitive damages in the amount of $500 million. The Company and Howard Jonas have not yet been served with the third party complaint and it is anticipated that discovery will commence shortly. The Company is subject to other legal proceedings and claims which have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be no assurances in this regard, in the opinion of the Company's management, such proceedings, as well as the aforementioned actions, will not have a material adverse effect on results of operations or the financial condition of the Company. 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the accompanying condensed consolidated financial statements and the associated notes thereto of this Quarterly Report, and the audited consolidated financial statements and the notes thereto and 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/A for the year ended July 31, 1998, 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 68 switches in the U.S. and Europe and owned and leased capacity on 18 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 17 of the companies that are primarily responsible for providing telecommunications services in particular countries (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 its Internet telephony services. Six Months Ended January 31, 1999 Compared to Six Months Ended January 31, 1998 Results of Operations Revenues. Revenues increased 133.9% from approximately $125.7 million for the six months ended January 31, 1998 to approximately $294.0 million for the six months ended January 31, 1999. Telecommunications revenues increased 146.1% from approximately $110.9 million for the six months ended January 31, 1998 to approximately $272.9 million for the six months ended January 31, 1999. Internet access revenues decreased 14.0% from approximately $10.0 million for the six months ended January 31, 1998 to approximately $8.6 million for the six months ended January 31, 1999, reflecting the Company's decision to de-emphasize its activities in this area. Internet telephony revenues increased 160.4% from approximately $4.8 million for the six months ended January 31, 1998 to approximately $12.5 million for the six months ended January 31, 1999. Telecommunications revenues increased primarily as a result of an increase in minutes of use from approximately 271.9 million for the six months ended January 31, 1998 to approximately 1.1 billion for the six months ended January 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 and the increased use by existing clients resulted in an increase in wholesale carrier services revenues of 39.4%, from approximately $74.1 million for the six months ended January 31, 1998 to approximately $103.3 million for the six months ended January 31, 1999. As a percentage of telecommunications revenues, wholesale carrier service revenues decreased from approximately 66.8% to 37.9%, primarily due to the significant increase in prepaid calling card revenues both in real dollars and as a percentage of overall telecommunications revenues. Revenues from sales of prepaid calling cards increased 555.6% from approximately $23.4 million for the six months ended January 31, 1998 to approximately $153.4 million for the six months ended January 31, 1999 as a result of increased marketing efforts and the Company's purchase of a majority interest in Union Telecard Alliance, LLC, a prepaid calling card distributor, in May 10 1998. As a percentage of telecommunications revenues, prepaid calling card revenues increased from approximately 21.1% to 56.1%. As a percentage of telecommunications revenues, international retail services revenues (which consist primarily of call reorigination services) decreased from approximately 9.7% to 4.3%. As a percentage of total revenues, Internet access revenues decreased from approximately 8.0% for the six months ended January 31, 1998 to approximately 2.9% for the six months ended January 31, 1999. This decrease was due to the substantial increase in telecommunications revenues as a percentage of total revenues, as well as a dollar decrease in Internet access revenues due to a decrease in total dial-up subscribers. Internet telephony revenues as a percentage of total revenues increased from 3.8% for the six months ended January 31, 1998 to 4.2% for the six months ended January 31, 1999. The increase in Internet telephony revenues 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 146.6%, from approximately $92.3 million for the six months ended January 31, 1998 to approximately $227.7 million for the six months ended January 31, 1999. As a percentage of total revenues, these costs increased from 73.4% for the six months ended January 31, 1998 to 77.4% for the six months ended January 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 carrier services and prepaid calling card services as compared with international retail and Internet access services. Gross margins were also adversely affected by delayed network deployment. Selling, General and Administrative. Selling, general and administrative costs increased 72.1% from approximately $23.7 million for the six months ended January 31, 1998 to approximately $40.8 million for the six months ended January 31, 1999. As a percentage of total revenues, these costs decreased from 18.9% for the six months ended January 31, 1998 to 13.9% for the six months ended January 31, 1999. The increase in these costs in dollar terms is due primarily to increased sales and marketing efforts for retail services, including prepaid calling cards, domestic and international long distance, Net2Phone and Net2Phone Direct. As a percentage of total revenues, the decrease was due primarily to the substantial increase in total revenues for the six months ended January 31, 1999. Depreciation and Amortization. Depreciation and amortization increased 207.9% from approximately $3.8 million for the six months ended January 31, 1998 to approximately $11.7 million for the six months ended January 31, 1999. As a percentage of revenues, these costs increased from 3.0% for the six months ended January 31, 1998 to 4.0% for the six months ended January 31, 1999. These costs increased primarily as a result of the Company's higher fixed asset base during the six months ended January 31, 1999 as compared with the six months ended January 31, 1998 due to the Company's efforts to expand its telecommunications network infrastructure, enhance its Internet network and expand its facilities. The Company anticipates that depreciation and amortization will continue to increase as the Company continues to implement its growth strategy. Income from Operations. The Company's income from operations increased 133.9% from approximately $5.9 million for the six months ended January 31, 1998 to approximately $13.8 million for the six months ended January 31, 1999. Income from operations for the Company's telecommunications business increased to approximately $22.4 million for the six months ended January 31, 1999 from $7.9 million for the six months ended January 31, 1998. As a percentage of telecommunication revenues, income from operations for the telecommunications business increased to 8.2% for the six months ended January 31, 1999 from approximately 7.2% for the six months ended January 31, 1998. Loss from operations for the Company's Internet access business increased to approximately $4.1 million for the six months ended January 31, 1999 from approximately $3.0 million for the six months 11 ended January 31, 1998. The increased loss is primarily due to the decrease in Internet access revenues reflecting the Company's decision to de-emphasize its activities in this area. Loss from operations of the Net2Phone division was approximately $4.5 million for the six months ended January 31, 1999, as compared to income from operations of approximately $927,000 for the six months ended January 31, 1998. This change is due to the substantial increase in selling, general and administrative costs as the Company expands its Internet telephony infrastructure and seeks to gain additional market share for its Internet telephony products and services. Income Taxes. The Company recorded income tax expense of $4.8 million for the six months ended January 31, 1999. An income tax benefit related to the tax deduction upon the exercise of stock options was recorded directly into additional paid-in capital. The Company did not record an income tax benefit for the six months ended January 31, 1998 as the realization of available tax losses was not probable at that time. Three Months Ended January 31, 1999 Compared to Three Months Ended January 31, 1998 Results of Operations Revenues. Revenues increased 126.3% from approximately $71.0 million for the three months ended January 31, 1998 to approximately $160.7 million for the three months ended January 31, 1999. Telecommunications revenues increased 136.8% from approximately $63.0 million for the three months ended January 31, 1998 to approximately $149.3 million for the three months ended January 31, 1999. Internet access revenues decreased 17.0% from approximately $5.2 million for the three months ended January 31, 1998 to approximately $4.3 million for the three months ended January 31, 1999, reflecting the Company's decision to de-emphasize its activities in this area. Internet telephony revenues increased 166.6% from approximately $2.7 million for the three months ended January 31, 1998 to approximately $7.2 million for the three months ended January 31, 1999. Telecommunications revenues increased primarily as a result of an increase in minutes of use from approximately 160.4 million for the three months ended January 31, 1998 to approximately 638.2 million for the three months ended January 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 and the increased use by existing clients resulted in an increase in wholesale carrier services revenues of 43.1%, from approximately $38.3 million for the three months ended January 31, 1998 to approximately $54.8 million for the three months ended January 31, 1999. As a percentage of telecommunications revenues, wholesale carrier service revenues decreased from approximately 60.7% to 36.7%, primarily due to the significant increase in prepaid calling card revenues both in real dollars and as a percentage of overall telecommunications revenues. Revenues from sales of prepaid calling cards increased 375.7% from approximately $18.1 million for the three months ended January 31, 1998 to approximately $86.1 million for the three months ended January 31, 1999 as a result of increased marketing efforts and the Company's purchase of a majority interest in Union Telecard Alliance, LLC, a prepaid calling card distributor in May 1998. As a percentage of telecommunications revenues, prepaid calling card revenues increased from approximately 28.7% to 57.7%. As a percentage of telecommunications revenues, international retail services revenues (which consist primarily of call reorigination services) decreased from approximately 8.5% to 4.0%. As a percentage of total revenues, Internet access revenues decreased from approximately 7.3% for the three months ended January 31, 1998 to approximately 2.7% for the three months ended January 31, 1999. This decrease was due to the substantial increase in telecommunications revenues as a percentage of total revenues, as well as a dollar decrease in Internet access revenues due to a decrease in total dial-up subscribers. 12 Internet telephony revenues as a percentage of total revenues increased from 3.8% for the three months ended January 31, 1998 to 4.5% for the three months ended January 31, 1999. The increase in Internet telephony revenues 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 146.3%, from approximately $51.4 million in the three months ended January 31, 1998 to approximately $126.6 million in the three months ended January 31, 1999. As a percentage of total revenues, these costs increased from 72.5% for the three months ended January 31, 1998 to 78.8% for the three months ended January 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 carrier services and prepaid calling card services as compared with international retail and Internet access services. Gross margins were also adversely affected by delayed network deployment. Selling, General and Administrative. Selling, general and administrative costs increased 71.2% from approximately $13.9 million in the three months ended January 31, 1998 to approximately $23.8 million in the three months ended January 31, 1999. As a percentage of total revenues, these costs decreased from 19.6% for the three months ended January 31, 1998 to 14.8% for the three months ended January 31, 1999. The increase in these costs in dollar terms is due primarily to increased sales and marketing efforts for retail services, including prepaid calling cards, domestic and international long distance, Net2Phone and Net2Phone Direct. As a percentage of total revenues, the decrease was due primarily to the substantial increase in total revenues for the three months ended January 31, 1999. Depreciation and Amortization. Depreciation and amortization increased 215.0% from approximately $2.0 million for the three months ended January 31, 1998 to approximately $6.3 million for the three months ended January 31, 1999. As a percentage of revenues, these costs increased from 2.9% for the three months ended January 31, 1998 to 3.9% for the three months ended January 31, 1999. These costs increased primarily as a result of the Company's higher fixed asset base during the three months ended January 31, 1999 as compared with the three months ended January 31, 1998 due to the Company's efforts to expand its telecommunications network infrastructure, enhance its Internet network and expand its facilities. The Company anticipates that depreciation and amortization will continue to increase as the Company continues to implement its growth strategy. Income from Operations. The Company's income from operations increased 13.9% from approximately $3.6 million for the three months ended January 31, 1998 to approximately $4.1 million for the three months ended January 31, 1999. Income from operations for the Company's telecommunications business increased to approximately $9.1 million for the three months ended January 31, 1999 from $4.8 million for the three months ended January 31, 1998. As a percentage of telecommunication revenues, income from operations for the telecommunications business decreased to 6.1% for the three months ended January 31, 1999 from approximately 7.5% for the three months ended January 31, 1998 due to decreased margins in the carrier wholesale and prepaid calling card businesses. Loss from operations for the Company's Internet access business increased to approximately $2.4 million for the three months ended January 31, 1999 from approximately $1.4 million for the three months ended January 31, 1998. The increased loss is primarily due to the decrease in Internet access revenues reflecting the Company's decision to de-emphasize its activities in this area. Loss from operations of the Net2Phone division was approximately $2.6 million for the three months ended January 31, 1999, as compared to income from operations of approximately $280,000 for the three months ended January 31, 1998. This change is due to the substantial increase in selling, general and administrative costs as the Company expands its Internet telephony infrastructure and seeks to gain additional market share for its Internet telephony products and services. Income Taxes. The Company recorded income tax expense of $1.4 million for the three months ended January 31, 1999. An income tax benefit related to the tax deduction upon the exercise of stock 13 options was recorded directly into additional paid-in capital. The Company did not record an income tax benefit for the three months ended January 31, 1998 as the realization of available tax losses was not probable at that time. Liquidity and Capital Resources Historically, the Company has satisfied its cash requirements through a combination of cash flow from operating activities, sales of equity securities and borrowings from third parties. The Company received approximately $1.5 million upon the exercise of stock options and warrants in the six months ended January 31, 1999. As of January 31, 1999, the Company had cash, cash equivalents and marketable securities of $139.9 million and working capital of approximately $146.2 million. The Company generated positive cash flow from operating activities of approximately $4.6 million during the six months ended January 31, 1999, compared with negative cash flow from operating activities of approximately $2.9 million during the six months ended January 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 increased from approximately $12.7 million in the six months ended January 31, 1998 to approximately $22.2 million in the six months ended January 31, 1999, as the Company expanded its international and domestic telecommunications network infrastructure. The Company experiences intense competition in its telecommunications business. Increased competition in the telecommunications industry could force the Company to reduce the prices that it charges for its services, or its profit margins. Under such circumstances, the Company's cash flows from operations would be materially adversely affected. 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 the Company's businesses. The Company believes that, based upon its present business plan, the Company's existing cash resources, and expected cash flow from operating activities, 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. Year 2000 The Company is conducting a review of its computer hardware and software to ensure that its computer-related applications will not fail or create erroneous results as a result of the use of two digits in various program date fields (the "Year 2000 issue"). The Company's cost of addressing the Year 2000 issue is not expected to be material to its operations or financial position. However, the consequences of an incomplete or untimely resolution of the Year 2000 issue could be expected to have a material adverse effect on the financial results of the Company; in the absence of such a resolution, the ability of the Company to route its traffic in a cost effective manner, to deliver a material portion of its services, to properly obtain payment for such services, and/or to maintain accurate records of its business and 14 operations, could be substantially impaired until such issue is remediated. The Company may become liable for substantial damages in the event that, as a result of the Year 2000 issue, it fails to deliver any services that it is obligated to provide. However, the Company expects that its Year 2000 issues will be satisfactorily resolved before the year 2000. The Company is conducting a comprehensive review of its computer systems to ensure that all such systems are, or prior to the end of 1999 will be, Year 2000 compliant. The Company's plan for its Year 2000 project includes the following phases: (i) conducting a comprehensive inventory of the Company's internal systems, including information technology systems and non-information technology systems (which include switching, billing and other platforms and electrical systems) and the systems acquired or to be acquired by the Company from third parties, (ii) assessing and prioritizing any required remediation, (iii) remediating any problems by repairing or, if appropriate, replacing the non-compliant systems, (iv) testing all remediated systems for Year 2000 compliance and (v) developing contingency plans that may be employed in the event that any system used by the Company is unexpectedly affected by a previously unanticipated problem relating to the Year 2000. The Company currently expects to complete all of the phases of this process and that all of its computer systems will be fully Year 2000 compliant before the end of 1999. The Company has completed a number of acquisitions during its recent fiscal years, and is in the process of integrating the systems of the acquired businesses into its operations. Those systems are included in the Company's Year 2000 review and remediation project. During the process of evaluating businesses for any potential acquisition, and after any such acquisitions, the Company will evaluate the extent of the Year 2000 problems associated with such acquisitions and the cost and timing of remediation. No assurance can be given, however, that the systems of any acquired business will be Year 2000 compliant when acquired or that they will be capable of timely remediation. In addition to assessing its own systems, the Company is conducting an external review of its customers and suppliers, and any other third parties with which it does business, including equipment and systems providers and other telecommunications service providers, to determine their vulnerability to Year 2000 problems and any potential impact on the Company. In particular, the Company may experience problems to the extent that other telecommunications carriers whose services are resold by the Company or to which the Company sends traffic for termination are not Year 2000 compliant. The Company's ability to determine the ability of these third parties to address issues relating to the Year 2000 problem is necessarily limited. To the extent that a limited number of carriers experience disruptions in service due to the Year 2000 issue, the Company believes that it will be able to obtain service from alternate carriers. However, the Company's ability to provide certain services to customers in selected geographic locations may be limited. There can be no assurance that such problems will not have a material adverse effect on the Company. In addition, the Company is currently in the process of developing contingency plans with regard to potential Year 2000 problems. The Company believes that, in the event that one or more of its systems is impaired due to unanticipated Year 2000 issues, its contingency plans will enable it to temporarily conduct its operations on a modified basis until such impaired systems are remediated. There can be no assurances that the Company's suppliers and customers will achieve full Year 2000 compliance before the end of 1999 or that the Company will develop or implement effective contingency plans on a timely basis. A failure of the Company's computer systems or the failure of the Company's suppliers or customers to effectively upgrade their software and systems for transition to the year 2000 could have a material adverse effect on the Company's business, financial conditions and results of operations. To date, the Company has incurred expenses of less than $1.0 million in connection with its remediation of Year 2000 related issues. No assurance can be given, however, that the systems of any acquired business will be Year 2000 compliant when acquired or that they will be capable of timely remediation. The Company does not expect to incur significant costs to become Year 2000 compliant, although the Company's evaluation of the Year 2000 problem is not yet complete and actual costs may be significantly higher. In particular, such costs could be higher if certain suppliers of the Company fail to provide Year 2000 related updates to certain switching products purchased by the Company without charge 15 in the manner that is currently expected. Costs associated with Year 2000 remediation are expensed by the Company when incurred. European Currency Conversion Beginning in January 1999, a new currency called the "euro" was introduced in certain Economic and Monetary Union ("EMU") countries. 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. The Company has not yet completed its assessment of the effect that the introduction of the euro will have on its business, operations and sales. 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/A, for the year ended July 31, 1998. 16 PART II. OTHER INFORMATION Item 1. Legal Proceedings Incorporated by reference from Part I, Item I, 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 The Company's Annual Meeting of Stockholders (the "Meeting") was held on December 16, 1998. The following matters were submitted to the Company's stockholders for their vote, and the results of the vote taken at the Meeting were as follows: (1) Four of the Company's Class III Directors were reelected for a term of three years. (a) Howard S. Jonas: 41,731,276 votes for; 220,672 votes against; (b) Joyce J. Mason: 41,731,235 votes for; 220,713 votes against; (c) James R. Mellor: 41,731,317 votes for; 220,631 votes against; and (d) Denis A. Bovin: 41,731,317 votes for; 220,631 votes against. (2) Amendments to the Company's Amended and Restated 1996 Stock Option and Incentive Plan (the "Plan") were ratified. The amendments, among other things, authorized an additional 1,500,000 shares of the Company's Common Stock for grants under the Plan. 35,975,820 votes for; 5,963,654 votes against; 12,474 abstentions. (3) The appointment of Ernst & Young LLP as the Company's independent auditors for the fiscal year ending July 31, 1999 was ratified. 41,889,758 votes for; 4,970 votes against; 57,220 abstentions. 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* 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(7) Employment Agreement between the Registrant and James Courter. 10.9(8) Agreement between Mr. Cliff Sobel and the Registrant. 10.10(8) Employment Agreement between the Registrant and Mr. Hal Brecher. 10.11(5) Employment Agreement between the Registrant and Mr. David Turock. 10.12(9) Indenture between the Registrant and U.S. Bank Trust National Association, formerly known as First Trust National Association, as Trustee. 10.13(10) 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. 10.14(11) Securities Purchase Agreement between the Registrant, Carlos Gomez and Union Telecard Alliance, LLC. 27.01* Financial Data Schedule. - ------------ * filed herewith (1) Incorporated by reference to Form S-1 filed February 21, 1996 file no. 333-00204. (2) Incorporated by reference to Form S-1 filed January 9, 1996 file no. 333-00204. (3) Incorporated by reference to Form S-8 filed January 14, 1996 file no. 333-19727. (4) Incorporated by reference to Form S-1 filed March 8, 1996 file no. 333-00204. (5) Incorporated by reference to Form 10-K/A for the fiscal year ended July 31, 1997, filed February 2, 1998. (6) Incorporated by reference to Form S-1 filed March 14, 1996 file no. 333-00204. (7) Incorporated by reference to Form S-1 filed December 27, 1996 file no. 333-18901. 18 (8) Incorporated by reference to Form 10-K for the fiscal year ended July 31, 1997, filed October 29, 1997. (9) Incorporated by reference to Form 10-Q filed March 17, 1988. (10) Incorporated by reference to Form 8-K filed April 22, 1998. (11) Incorporated by reference to Form 10-K/A for the fiscal year ended July 31, 1998, filed December 4, 1998. (b) Reports on Form 8-K: None. 19 IDT CORPORATION FORM 10-Q January 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 March 14, 1999 By: /s/ Howard Jonas Date --------------------------- Howard S. Jonas Chairman of the Board and Chief Executive Officer (Principal Executive Officer) March 14, 1999 By: /s/ James A. Courter Date ---------------------------- James A. Courter President (Principal Executive Officer) March 14, 1999 By: /s/ Stephen R. Brown Date ---------------------------- Stephen R. Brown Chief Financial Officer (Principal Financial and Accounting Officer) 20 EX-10.02 2 1996 STOCK OPTION AND INCENTIVE PLAN Exhibit 10.02 IDT CORPORATION 1996 STOCK OPTION AND INCENTIVE PLAN (As Amended and Restated) 1. Purpose; Types of Awards; Construction. -------------------------------------- The purpose of the IDT Corporation 1996 Stock Option and Incentive Plan (the "Plan") is to provide incentives to executive officers, other key employees, directors and consultants of IDT Corporation (the "Company"), or any subsidiary of the Company which now exists or hereafter is organized or acquired by the Company, to acquire a proprietary interest in the Company, to continue as officers, employees, directors or consultants, to increase their efforts on behalf of the Company and to promote the success of the Company's business. The provisions of the Plan are intended to satisfy the requirements of Section 16(b) of the Securities Exchange Act of 1934, as amended, and of Section 162(m) of the Internal Revenue Code of 1986, as amended, and shall be interpreted in a manner consistent with the requirements thereof. 2. Definitions. ----------- As used in this Plan, the following words and phrases shall have the meanings indicated: (a) "Agreement" shall mean a written agreement entered into between the Company and a Grantee in connection with an award under the Plan. (b) "Board" shall mean the Board of Directors of the Company. (c) "Change in Control" means a change in ownership or control of the Company effected through either of the following: (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than (A) the Company, (B) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, (C) any corporation or other entity owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Common Stock, or (D) any person who, immediately prior to the Initial Public Offering, owned more than 25% of the combined voting power of the Company's then outstanding voting securities), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such person any securities acquired directly from the Company or any of its affiliates other than in connection with the acquisition by the Company or its affiliates of a business) representing 25% or more of the combined voting power of the Company's then outstanding voting securities; or (ii) during any period of not more than two consecutive years, not including any period prior to the initial adoption of this Plan by the Board, individuals who at the beginning of such period constitute the Board, and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including, but not limited to a consent solicitation, relating to the election of directors of the Company) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof. (d) "Class A Common Stock" shall mean shares of Class A common stock, par value $.01 per share, of the Company. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" shall mean the Compensation Committee of the Board or such other committee as the Board may designate from time to time to administer the Plan. (g) "Common Stock" shall mean shares of common stock, par value $.01 per share, of the Company. (h) "Company" shall mean IDT Corporation, a corporation organized under the laws of the State of Delaware, or any successor corporation. (i) "Continuous Service" means that the provision of services to the Company or a Related Entity in any capacity of officer, employee, director or consultant is not interrupted or terminated. Continuous Service shall not be considered interrupted in the case of (i) any approved leave of absence, (ii) transfers between locations of the Company or among the Company, any Related Entity or any successor in any capacity of officer, employee, director or consultant, or (iii) any change in status as long as the individual remains in the service of the Company or a Related Entity in any capacity of officer, employee, director or consultant (except as otherwise provided in the applicable Agreement). An approved leave of absence shall include sick leave, maternity leave, military leave or any other authorized personal leave. For purposes of Incentive Stock Options, no such leave may exceed ninety (90) days unless reemployment upon expiration of such leave is guaranteed by statute or contract. (j) "Corporate Transaction" means any of the following transactions: (i) a merger or consolidation of the Company with any other corporation or other entity, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing 2 to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 80% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as defined in the Exchange Act) acquired 25% or more of the combined voting power of the Company's then outstanding securities; or (ii) a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of its assets (or any transaction having a similar effect). (k) "Disability" shall mean a Grantee's inability to perform his or her duties with the Company or any of its affiliates by reason of any medically determinable physical or mental impairment, as determined by a physician selected by the Grantee and acceptable to the Company. (l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (m) "Fair Market Value" per share as of a particular date shall mean (i) the closing sale price per share of Common Stock on the national securities exchange on which the Common Stock is principally traded for the last preceding date on which there was a sale of such Common Stock on such exchange, or (ii) if the shares of Common Stock are then traded in an over-the-counter market, the average of the closing bid and asked prices for the shares of Common Stock in such over-the-counter market for the last preceding date on which there was a sale of such Common Stock in such market, or (iii) if the shares of Common Stock are not then listed on a national securities exchange or traded in an over-the- counter market, such value as the Committee, in its sole discretion, shall determine; provided, however, that the Fair Market Value per share on the date of the Initial Public Offering will equal the Initial Public Offering price per share or such other price that the Committee determines in its sole discretion. (n) "Grantee" shall mean a person who receives a grant of Options, Stock Appreciation Rights, Limited Rights or Restricted Stock under the Plan. (o) "Incentive Stock Option" shall mean any option intended to be, and designated as, an incentive stock option within the meaning of Section 422 of the Code. (p) "Initial Public Offering" shall mean the underwritten initial public offering of shares of Common Stock, which occurred in March 1996. (q) "Insider" shall mean a Grantee who is subject to the reporting requirements of Section 16(a) of the Exchange Act. (r) "Limited Right" shall mean a limited stock appreciation right granted pursuant to Section 10. 3 (s) "Non-Employee Director" means a member of the Board who is not an employee of the Company or any Subsidiary. (t) "Nonqualified Stock Option" shall mean any option not designated as an Incentive Stock Option. (u) "Option" or "Options" shall mean a grant to a Grantee of an option or options to purchase shares of Common Stock. (v) "Option Agreement" shall have the meaning set forth in Section 6. (w) "Option Price" shall mean the exercise price of the shares of Common Stock covered by an Option. (x) "Parent" shall mean any company (other than the Company) in an unbroken chain of companies ending with the Company if, at the time of granting an Option, each of the companies other than the Company owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other companies in such chain. (y) "Plan" means this IDT Corporation 1996 Stock Option and Incentive Plan, as amended from time to time. (z) "Related Entity" means any Parent, Subsidiary or any business, corporation, partnership, limited liability company or other entity in which the Company, a Parent or a Subsidiary holds a substantial ownership interest, directly or indirectly. (aa) "Related Entity Disposition" means the sale, distribution or other disposition by the Company of all or substantially all of the Company's interest in any Related Entity effected by a sale, merger or consolidation or other transaction involving such Related Entity or the sale of all or substantially all of the assets of such Related Entity. (bb) "Restricted Period" shall have the meaning set forth in Section 11. (cc) "Restricted Stock" means shares of Common Stock issued under the Plan to a Grantee for such consideration, if any, and subject to such restrictions on transfer, rights of refusal, repurchase provisions, forfeiture provisions and other terms and conditions as shall be determined by the Committee. (dd) "Retirement" shall mean a Grantee's retirement in accordance with the terms of any tax-qualified retirement plan maintained by the Company or any of its affiliates in which the Grantee participates. (ee) "Rule 16b-3" shall mean Rule 16b-3, as from time to time in effect, promulgated under the Exchange Act, including any successor to such Rule. 4 (ff) "Stock Appreciation Right" shall mean the right, granted to a Grantee under Section 9, to be paid an amount measured by the appreciation in the Fair Market Value of a share of Common Stock from the date of grant to the date of exercise of the right, with payment to be made in cash or Common Stock as specified in the award or determined by the Committee. (gg) "Subsidiary" shall mean any company (other than the Company) in an unbroken chain of companies beginning with the Company if, at the time of granting an Option, each of the companies other than the last company in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other companies in such chain. (hh) "Tax Event" shall have the meaning set forth in Section 17. (ii) "Ten Percent Stockholder" shall mean a Grantee who, at the time an Incentive Stock Option is granted, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary. 3. Administration. -------------- (a) The Plan shall be administered by the Committee, the members of which shall, except as may otherwise be determined by the Board, be "non- employee directors" under Rule 16b-3 and "outside directors" under Section 162(m) of the Code. (b) The Committee shall have the authority in its discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority to grant Options, Stock Appreciation Rights, Limited Rights and Restricted Stock; to determine which options shall constitute Incentive Stock Options and which Options shall constitute Nonqualified Stock Options; to determine which Options (if any) shall be accompanied by Limited Rights; to determine the purchase price of the shares of Common Stock covered by each option; to determine the persons to whom, and the time or times at which awards shall be granted; to determine the number of shares to be covered by each award; to interpret the Plan; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the Agreements (which need not be identical) and to cancel or suspend awards, as necessary; and to make all other determinations deemed necessary or advisable for the administration of the Plan. (c) All decisions, determinations and interpretations of the Committee shall be final and binding on all Grantees of any awards under this Plan. No member of the Board or Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any award granted hereunder. 5 4. Eligibility. ----------- Awards may be granted to executive officers, other key employees, directors and consultants of the Company. In addition to any other awards granted to Non-Employee Directors hereunder, awards shall be granted to Non- Employee Directors pursuant to Section 14 hereof. In determining the persons to whom awards shall be granted and the number of shares to be covered by each award, the Committee shall take into account the duties of the respective persons, their present and potential contributions to the success of the Company and such other factors as the Committee shall deem relevant in connection with accomplishing the purposes of the Plan. 5. Stock. ----- (a) The maximum number of shares of Common Stock reserved for the grant of awards under the Plan shall be 4,800,000, subject to adjustment as provided in Section 12 hereof. Such shares may, in whole or in part, be authorized but unissued shares or shares that shall have been or may be reacquired by the Company. (b) If any outstanding award under the Plan should, for any reason expire, be canceled or be forfeited (other than in connection with the exercise of a Stock Appreciation Right or a Limited Right), without having been exercised in full, the shares of Common Stock allocable to the unexercised, canceled or terminated portion of such award shall (unless the Plan shall have been terminated) become available for subsequent grants of awards under the Plan. (c) In no event may a Grantee be granted during any calendar year Options to acquire more than 1,000,000 shares of Common Stock or more than 1,000,000 shares of Restricted Stock, in each case subject to adjustment as provided in Section 12 hereof. 6. Terms and Conditions of Options. ------------------------------- (a) OPTION AGREEMENT. Each Option granted pursuant to the Plan shall be evidenced by a written agreement between the Company and the Grantee (the "Option Agreement"), in such form and containing such terms and conditions as the Committee shall from time to time approve, which Option Agreement shall comply with and be subject to the following terms and conditions, unless otherwise specifically provided in such Option Agreement. For purposes of interpreting this Section 6, a director's service as a member of the Board shall be deemed to be employment with the Company. (b) NUMBER OF SHARES. Each Option Agreement shall state the number of shares of Common Stock to which the Option relates. (c) TYPE OF OPTION. Each Option Agreement shall specifically state that the Option constitutes an Incentive Stock Option or a Nonqualified Stock Option. In the absence of such designation, the Option will be deemed to be a Nonqualified Stock Option. (d) OPTION PRICE. Each Option Agreement shall state the Option Price, which, in the case of an Incentive Stock Option, shall not be less than one hundred percent 6 (100%) of the Fair Market Value of the shares of Common Stock covered by the Option on the date of grant. The Option Price shall be subject to adjustment as provided in Section 12 hereof. (e) MEDIUM AND TIME OF PAYMENT. The Option Price shall be paid in full, at the time of exercise, in cash or in shares of Common Stock (whether then owned by the Grantee or issuable upon exercise of the Option) having a Fair Market Value equal to such Option Price or in a combination of cash and Common Stock, including a cashless exercise procedure through a broker-dealer; provided, however, that in the case of an Incentive Stock Option, the medium of - -------- ------- payment shall be determined at the time of grant and set forth in the applicable Option Agreement. (f) TERM AND EXERCISABILITY OF OPTIONS. Each Option Agreement shall provide the exercise schedule for the Option as determined by the Committee, provided, that, the Committee shall have the authority to accelerate the - -------- ---- exercisability of any outstanding option at such time and under such circumstances as it, in its sole discretion, deems appropriate. The exercise period will be ten (10) years from the date of the grant of the option unless otherwise determined by the Committee; provided, however, that in the case of an -------- ------- Incentive Stock Option, such exercise period shall not exceed ten (10) years from the date of grant of such Option. The exercise period shall be subject to earlier termination as provided in Sections 6(g) and 6(h) hereof. An Option may be exercised, as to any or all full shares of Common Stock as to which the Option has become exercisable, by written notice delivered in person or by mail to the Company's transfer agent or other administrator designated by the Company, specifying the number of shares of Common Stock with respect to which the Option is being exercised. (g) TERMINATION. Except as provided in this Section 6(g) and in Section 6(h) hereof, an Option may not be exercised unless the Grantee is then in the employ of or maintaining a director or consultant relationship with the Company or a Subsidiary thereof (or a company or a Parent or Subsidiary of such company issuing or assuming the Option in a transaction to which Section 424(a) of the Code applies), and unless the Grantee has remained continuously so employed or in the director or consultant relationship since the date of grant of the Option. In the event that the employment or consultant relationship of a Grantee shall terminate (other than by reason of death, Disability or Retirement), all Options of such Grantee that are exercisable at the time of Grantee's termination may, unless earlier terminated in accordance with their terms, be exercised within thirty (30) days after the date of such termination (or such different period as the Committee shall prescribe); provided, however, -------- ------- that Options granted after November 17, 1998 may be exercised within three (3) months after the date of termination (or such different period as the Committee shall prescribe). (h) DEATH, DISABILITY OR RETIREMENT OF GRANTEE. If a Grantee shall die while employed by, or maintaining a director or consultant relationship with, the Company or a Subsidiary thereof, or within thirty (30) days after the date of termination of such Grantee's employment, director or consultant relationship (or within such different period as the Committee may have provided pursuant to Section 6(g) hereof), or if the Grantee's employment, director or consultant relationship shall terminate by reason of Disability, all Options theretofore 7 granted to such Grantee (to the extent otherwise exercisable) may, unless earlier terminated in accordance with their terms, be exercised by the Grantee or by the Grantee's estate or by a person who acquired the right to exercise such Options by bequest or inheritance or otherwise by result of death or Disability of the Grantee, at any time within 180 days after the death or Disability of the Grantee (or such different period as the Committee shall prescribe). In the event that an Option granted hereunder shall be exercised by the legal representatives of a deceased or former Grantee, written notice of such exercise shall be accompanied by a certified copy of letters testamentary or equivalent proof of the right of such legal representative to exercise such Option. In the event that the employment or consultant relationship of a Grantee shall terminate on account of such Grantee's Retirement, all Options of such Grantee that are exercisable at the time of such Retirement may, unless earlier terminated in accordance with their terms, be exercised at any time within one hundred eighty (180) days after the date of such Retirement (or such different period as the Committee shall prescribe). (i) OTHER PROVISIONS. The Option Agreements evidencing awards under the Plan shall contain such other terms and conditions not inconsistent with the Plan as the Committee may determine. 7. Nonqualified Stock Options. -------------------------- Options granted pursuant to this Section 7 are intended to constitute Nonqualified Stock Options and shall be subject only to the general terms and conditions specified in Section 6 hereof. 8. Incentive Stock Options. ----------------------- Options granted pursuant to this Section 8 are intended to constitute Incentive Stock Options and shall be subject to the following special terms and conditions, in addition to the general terms and conditions specified in Section 6 hereof: (a) LIMITATION ON VALUE OF SHARES. To the extent that the aggregate Fair Market Value of shares of Common Stock subject to Options designated as Incentive Stock Options which become exercisable for the first time by a Grantee during any calendar year (under all plans of the Company or any Subsidiary) exceeds $100,000, such excess Options, to the extent of the shares covered thereby in excess of the foregoing limitation, shall be treated as Nonqualified Stock Options. For this purpose, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the shares of Common Stock shall be determined as of the date that the Option with respect to such shares was granted. (b) TEN PERCENT STOCKHOLDER. In the case of an Incentive Stock Option granted to a Ten Percent Stockholder, (i) the Option Price shall not be less than one hundred ten percent (110%) of the Fair Market Value of the shares of Common Stock on the date of grant of such Incentive Stock Option, and (ii) the exercise period shall not exceed five (5) years from the date of grant of such Incentive Stock Option. 8 9. Stock Appreciation Rights. ------------------------- The Committee shall have authority to grant a Stock Appreciation Right to the Grantee of any Option under the Plan with respect to all or some of the shares of Common Stock covered by such related Option. A Stock Appreciation Right shall, except as provided in this Section 9 or as may be determined by the Committee, be subject to the same terms and conditions as the related Option. Each Stock Appreciation Right granted pursuant to the Plan shall be evidenced by a written Agreement between the Company and the Grantee in such form as the Committee shall from time to time approve, which Agreement shall comply with and be subject to the following terms and conditions, unless otherwise specifically provided in such Agreement: (a) TIME OF GRANT. A Stock Appreciation Right may be granted either at the time of grant of the related option, or at any time thereafter during the term of the Option; provided, however, that Stock Appreciation Rights related to -------- -------- Incentive Stock Options may only be granted at the time of grant of the related Option. (b) PAYMENT. A Stock Appreciation Right shall entitle the holder thereof, upon exercise of the Stock Appreciation Right or any portion thereof, to receive payment of an amount computed pursuant to Section 9(d). (c) EXERCISE. A Stock Appreciation Right shall be exercisable at such time or times and only to the extent that the related Option is exercisable, and will not be transferable except to the extent the related option may be transferable. A Stock Appreciation Right granted in connection with an Incentive Stock Option shall be exercisable only if the Fair Market Value of a share of Common Stock on the date of exercise exceeds the purchase price specified in the related Incentive Stock Option. Unless otherwise approved by the Committee, no Grantee shall be permitted to exercise any Stock Appreciation Right (i) until six (6) months have elapsed from the date of grant or (ii) during the period beginning two weeks prior to the end of each of the Company's fiscal quarters and ending on the second business day following the day on which the Company releases to the public a summary of its fiscal results for such period. (d) AMOUNT PAYABLE. Upon the exercise of a Stock Appreciation Right, the Optionee shall be entitled to receive an amount determined by multiplying (i) the excess of the Fair Market Value of a share of Common Stock on the date of exercise of such Stock Appreciation Right over the Option Price of the related Option, by (ii) the number of shares of Common Stock as to which such Stock Appreciation Right is being exercised. (e) TREATMENT OF RELATED OPTIONS AND STOCK APPRECIATION RIGHTS UPON EXERCISE. Upon the exercise of a Stock Appreciation Right, the related Option shall be canceled to the extent of the number of shares of Common Stock as to which the Stock Appreciation Right is exercised. Upon the exercise or surrender of an option granted in connection with a Stock Appreciation Right, the Stock Appreciation Right shall be canceled to the extent of the number of shares of Common Stock as to which the Option is exercised or surrendered. 9 (f) METHOD OF EXERCISE. Stock Appreciation Rights shall be exercised by a Grantee only by a written notice delivered to the Company in accordance with procedures specified by the Company from time to time. Such notice shall state the number of shares of Common Stock with respect to which the Stock Appreciation Right is being exercised. A Grantee may also be required to deliver to the Company the underlying Agreement evidencing the Stock Appreciation Right being exercised and any related Option Agreement so that a notation of such exercise may be made thereon, and such Agreements shall then be returned to the Grantee. (g) FORM OF PAYMENT. Payment of the amount determined under Section 9(d) may be made solely in whole shares of Common Stock in a number based upon their Fair Market Value on the date of exercise of the Stock Appreciation Right or, alternatively, at the sole discretion of the Committee, solely in cash, or in a combination of cash and shares of Common Stock as the Committee deems advisable. If the Committee decides to make full payment in shares of Common Stock, and the amount payable results in a fractional share, payment for the fractional share will be made in cash. 10. Limited Stock Appreciation Rights. --------------------------------- The Committee shall have authority to grant a Limited Right to the Grantee of any Option under the Plan with respect to all or some of the shares of Common Stock covered by such related Option. Each Limited Right granted pursuant to the Plan shall be evidenced by a written Agreement between the Company and the Grantee, in such form as the Committee shall from time to time approve, which Agreement shall comply with and be subject to the following terms and conditions, unless otherwise specifically provided in such Agreement: (a) TIME OF GRANT. A Limited Right granted in tandem with a Nonqualified Stock Option may be granted either at the time of grant of the related Option or any time thereafter during its term. A Limited Right granted in tandem with an Incentive Stock Option may only be granted at the time of grant of the related Option. (b) EXERCISE. A Limited Right may be exercised only (i) during the ninety-day period following the occurrence of a Change in Control or (ii) immediately prior to the effective date of a Corporate Transaction. Each Limited Right shall be exercisable only if, and to the extent that, the related Option is exercisable and, in the case of a Limited Right granted in tandem with an Incentive Stock Option, only when the Fair Market Value per share of Common Stock exceeds the Option Price per share. Notwithstanding the provisions of the two immediately preceding sentences (or unless otherwise approved by the Committee), a Limited Right granted to a Grantee who is an Insider must be (x) held by the Insider for at least six (6) months from the date of grant of the Limited Right before it becomes exercisable and (y) automatically paid out in cash to the Insider upon the occurrence of a Change in Control or a Corporate Transaction (provided such six (6) month holding period requirement has been met). (c) AMOUNT PAYABLE. Upon the exercise of a Limited Right, the Grantee thereof shall receive in cash whichever of the following amounts is applicable: 10 (i) in the case of the realization of Limited Rights by reason of an acquisition of Common Stock described in clause (i) of the definition of "Change in Control" (Section 2(c) above), an amount equal to the Acquisition Spread as defined in Section 10(d)(ii) below; or (ii) in the case of the realization of Limited Rights by reason of stockholder approval of an agreement or plan described in clause (i) of the definition of "Corporate Transaction" (Section 2(j) above), an amount equal to the Merger Spread as defined in Section 10(d)(iv) below; or (iii) in the case of the realization of Limited Rights by reason of the change in composition of the Board described in clause (ii) of the definition of "Change in Control" or stockholder approval of a plan or agreement described in clause (ii) of the definition of Corporate Transaction, an amount equal to the Spread as defined in Section 10(d)(v) below. Notwithstanding the foregoing provisions of this Section 10(c) (or unless otherwise approved by the Committee), in the case of a Limited Right granted in respect of an Incentive Stock Option, the Grantee may not receive an amount in excess of the maximum amount that will enable such option to continue to qualify under the Code as an Incentive Stock Option. (d) DETERMINATION OF AMOUNTS PAYABLE. The amounts to be paid to a Grantee pursuant to Section 10(c) shall be determined as follows: (i) The term "Acquisition Price per Share" as used herein shall mean, with respect to the exercise of any Limited Right by reason of an acquisition of Common Stock described in clause (i) of the definition of Change in Control, the greatest of (A) the highest price per share shown on the Statement on Schedule 13D or amendment thereto filed by the holder of 25% or more of the voting power of the Company that gives rise to the exercise of such Limited Right, (B) the highest price paid in any tender or exchange offer which is in effect at any time during the ninety-day period ending on the date of exercise of the Limited Right, or (C) the highest Fair Market Value per share of Common Stock during the ninety-day period ending on the date the Limited Right is exercised. (ii) The term "Acquisition Spread" as used herein shall mean an amount equal to the product computed by multiplying (A) the excess of (1) the Acquisition Price per Share over (2) the Option Price per share of Common Stock at which the related option is exercisable, by (B) the number of shares of Common Stock with respect to which such Limited Right is being exercised. (iii) The term "Merger Price per Share" as used herein shall mean, with respect to the exercise of any Limited Right by reason of stockholder approval of an agreement described in clause (i) of the definition of Corporate Transaction, the greatest of (A) the fixed or formula price for the acquisition of shares of Common Stock specified 11 in such agreement, if such fixed or formula price is determinable on the date on which such Limited Right is exercised, (B) the highest price paid in any tender or exchange offer which is in effect at any time during the ninety-day period ending on the date of exercise of the Limited Right, (C) the highest Fair Market Value per share of Common Stock during the ninety- day period ending on the date on which such Limited Right is exercised. (iv) The term "Merger Spread" as used herein shall mean an amount equal to the product computed by multiplying (A) the excess of (1) the Merger Price per Share over (2) the Option Price per share of Common Stock at which the related Option is exercisable, by (B) the number of shares of Common Stock with respect to which such Limited Right is being exercised. (v) The term "Spread" as used herein shall mean, with respect to the exercise of any Limited Right by reason of a change in the composition of the Board described in clause (ii) of the definition of Change in Control or stockholder approval of a plan or agreement described in clause (ii) of the definition of Corporate Transaction, an amount equal to the product computed by multiplying (i) the excess of (A) the greater of (1) the highest price paid in any tender or exchange offer which is in effect at any time during the ninety-day period ending on the date of exercise of the Limited Right or (2) the highest Fair Market Value per share of Common Stock during the ninety-day period ending on the date the Limited Right is exercised over (B) the Option Price per share of Common Stock at which the related Option is exercisable, by (ii) the number of shares of Common Stock with respect to which the Limited Right is being exercised. (e) TREATMENT OF RELATED OPTIONS AND LIMITED RIGHTS UPON EXERCISE. Upon the exercise of a Limited Right, the related Option shall cease to be exercisable to the extent of the shares of Common Stock with respect to which such Limited Right is exercised but shall be considered to have been exercised to that extent for purposes of determining the number of shares of Common Stock available for the grant of further awards pursuant to this Plan. Upon the exercise or termination of a related Option, the Limited Right with respect to such related Option shall terminate to the extent of the shares of Common Stock with respect to which the related Option was exercised or terminated. (f) METHOD OF EXERCISE. To exercise a Limited Right, the Grantee shall (i) deliver written notice to the Company specifying the number of shares of Common Stock with respect to which the Limited Right is being exercised, and (ii) if requested by the Committee, deliver to the Company the Agreement evidencing the Limited Rights being exercised and, if applicable, the Option Agreement evidencing the related Option; the Company shall endorse thereon a notation of such exercise and return such Agreements to the Grantee. The date of exercise of a Limited Right that is validly exercised shall be deemed to be the date on which there shall have been delivered the instruments referred to in the first sentence of this paragraph (f). 12 11. Restricted Stock. ---------------- The Committee may award shares of Restricted Stock to any eligible employee or consultant. Each award of Restricted Stock under the Plan shall be evidenced by a written Agreement between the Company and the Grantee, in such form as the Committee shall from time to time approve, which Agreement shall comply with and be subject to the following terms and conditions, unless otherwise specifically provided in such Agreement: (a) NUMBER OF SHARES. Each Agreement shall state the number of shares of Restricted Stock to be subject to an award. (b) RESTRICTIONS. Shares of Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, for such period as the Committee shall determine from the date on which the award is granted (the "Restricted Period"). The Committee may also impose such additional or alternative restrictions and conditions on the shares as it deems appropriate including the satisfaction of performance criteria. Such performance criteria may include sales, earnings before interest and taxes, return on investment, earnings per share, any combination of the foregoing or rate of growth of any of the foregoing, as determined by the Committee. Certificates for shares of stock issued pursuant to Restricted Stock awards shall bear an appropriate legend referring to such restrictions, and any attempt to dispose of any such shares of stock in contravention of such restrictions shall be null and void and without effect. During the Restricted Period, such certificates shall be held in escrow by an escrow agent appointed by the Committee. In determining the Restricted Period of an award, the Committee may provide that the foregoing restrictions shall lapse with respect to specified percentages of the awarded shares on successive anniversaries of the date of such award. (c) FORFEITURE. Subject to such exceptions as may be determined by the Committee, if the Grantee's continuous employment or consultant relationship with the Company or any Subsidiary shall terminate for any reason prior to the expiration of the Restricted Period of an award, any shares remaining subject to restrictions (after taking into account the provisions of Subsection (e) of this Section 11) shall thereupon be forfeited by the Grantee and transferred to, and retired by, the Company without cost to the Company or such Subsidiary. (d) OWNERSHIP. During the Restricted Period the Grantee shall possess all incidents of ownership of such shares, subject to Subsection (b) of this Section 11, including the right to receive dividends with respect to such shares and to vote such shares. (e) ACCELERATED LAPSE OF RESTRICTIONS. Upon the occurrence of any of the events specified in Section 13 (and subject to the conditions set forth therein), all restrictions then outstanding on any shares of Restricted Stock awarded under the Plan shall lapse as of the applicable date set forth in Section 13. The Committee shall have the authority (and the Agreement may so provide) to cancel all or any portion of any outstanding restrictions prior to the expiration of the Restricted Period with respect to any or all of the shares of Restricted Stock awarded on such terms and conditions as the Committee shall deem appropriate. 13 12. Effect of Certain Changes. ------------------------- (a) ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of any extraordinary dividend, stock dividend, recapitalization, merger, consolidation, stock split, warrant or rights issuance, or combination or exchange of such shares, or other similar transactions, the Committee shall equitably adjust (i) the maximum number of Options or shares of Restricted Stock that may be awarded to a Grantee in any calendar year (as provided in Section 5 hereof), (ii) the number of shares of Common Stock available for awards under the Plan, (iii) the number of such shares covered by outstanding awards and (iv) the price per share of Options or the applicable market value of Stock Appreciation Rights or Limited Rights, in each such case so as to reflect such event and preserve the value of such awards; provided, however, that any fractional shares resulting -------- ------- from such adjustment shall be eliminated. (b) CHANGE IN COMMON STOCK. In the event of a change in the Common Stock of the Company as presently constituted that is limited to a change of all of its authorized shares of Common Stock into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be the Common Stock within the meaning of the Plan. 13. Corporate Transaction; Change in Control; Related Entity -------------------------------------------------------- Disposition. - ------------ (a) CORPORATE TRANSACTION. In the event of a Corporate Transaction, each award which is at the time outstanding under the Plan shall automatically become fully vested and exercisable and, in the case of an award of Restricted Stock, shall be released from any restrictions on transfer and repurchase or forfeiture rights, immediately prior to the specified effective date of such Corporate Transaction. Effective upon the consummation of the Corporate Transaction, all outstanding awards of Options, Stock Appreciation Rights and Limited Rights under the Plan shall terminate. However, all such awards shall not terminate if the awards are, in connection with the Corporate Transaction, assumed by the successor corporation or Parent thereof. (b) CHANGE IN CONTROL. In the event of a Change in Control (other than a Change in Control which is also a Corporate Transaction), each award which is at the time outstanding under the Plan automatically shall become fully vested and exercisable and, in the case of an award of Restricted Stock, shall be released from any restrictions on transfer and repurchase or forfeiture rights, immediately prior to the specified effective date of such Change in Control. (c) RELATED ENTITY DISPOSITION. With respect only to awards granted under the Plan after November 17, 1998, the Continuous Service of each Grantee (who is primarily engaged in service to a Related Entity at the time it is involved in a Related Entity Disposition) shall terminate effective upon the consummation of such Related Entity Disposition, and each outstanding award of such Grantee under the Plan shall become fully vested and exercisable and, in the case of an award of Restricted Stock, shall be released from any restrictions on transfer; provided, however, that no such award shall vest -------- ------- pursuant to this Section 13(c) in connection with a Related Entity Disposition consummated prior to 14 November 17, 2000 if such vesting would defeat the ability to account for such transaction as a "pooling" under generally accepted accounting principles. The Continuous Service of a Grantee shall not be deemed to terminate if an outstanding award is assumed by the surviving corporation or its parent entity in connection with a Related Entity Disposition. 14. Non-Employee Director Options. ----------------------------- The provisions of this Section 14 shall apply only to certain grants of Options to Non-Employee Directors, as provided below. Except as set forth in this Section 14, the other provisions of the Plan shall apply to grants of Options to Non-Employee Directors to the extent not inconsistent with this Section. For purposes of interpreting Section 6 of the Plan, a Non-Employee Director's service as a member of the Board shall be deemed to be employment with the Company. (a) GENERAL. Non-Employee Directors shall receive Nonqualified Stock Options in accordance with this Section 14. The Option Price per share of Common Stock purchasable under Options granted to Non-Employee Directors shall be the Fair Market Value of a share on the date of grant. Options granted pursuant to this Section 14 shall be subject to the terms of such section and shall not be subject to discretionary acceleration of exercisability by the Committee. (b) INITIAL GRANTS. On the date of the Initial Public Offering, each Non-Employee Director will be granted automatically, without action by the Committee, an Option to purchase 10,000 shares of Common Stock. The Option Price shall equal the offering price of the Common Stock in connection with the Initial Public Offering. (c) SUBSEQUENT GRANTS. Each person who, after the Initial Public Offering, becomes a Non-Employee Director for the first time, will, at the time such director is elected and duly qualified, be granted automatically, without action by the Committee, an Option to purchase 10,000 shares of Common Stock. The Option Price shall equal the Fair Market Value of the Common Stock as of the date of grant. (d) ANNUAL GRANTS. On December 15 each year, commencing with December 15, 1998, each Non-Employee Director will be granted automatically with respect to the next succeeding calendar year and without action by the Committee, an Option to purchase 10,000 shares of Common Stock. The Option Price shall equal the Fair Market Value of the Common Stock as of the date of grant. (e) VESTING. Each option granted under this Section 14 shall be fully exercisable on the date of grant. Sections 6(f), 6(g) and 6(h) hereof shall not apply to Options granted to Non-Employee Directors. (f) DURATION. Each Option granted to a Non-Employee Director shall expire on the first to occur of (i) the tenth anniversary of the date of grant of the Option, (ii) the first anniversary of the Non-Employee Director's termination of service as a member of the Board other than for Cause or (iii) three months following the Non-Employee Director's removal 15 from the Board for Cause. The Committee may not provide for an extended exercise period beyond the periods set forth in this Section 14. (g) DEFINITION OF "CAUSE." For purposes of this Section 14, "cause" shall mean the termination of service as a member of the Board by a Non-Employee Director due to any act of (i) fraud or intentional misrepresentation, or (ii) embezzlement, misappropriation or conversion of assets or opportunities of the Company or any Subsidiary. 15. Period During which Awards May Be Granted. ----------------------------------------- Awards may be granted pursuant to the Plan from time to time within a period of ten (10) years from February 7, 1996, the date the Plan was initially adopted by the Board. 16. Transferability of Awards. ------------------------- (a) Incentive Stock Options (and any Stock Appreciation Rights or Limited Rights related thereto) may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by the laws of descent and distribution and may be exercised, during the lifetime of the Grantee, only by the Grantee or his or her guardian or legal representative. (b) Nonqualified Stock Options (together with any Stock Appreciation Rights related thereto) shall be transferable in the manner and to the extent acceptable to the Committee, as evidenced by a writing signed by the Company and the Grantee. Notwithstanding the transfer by a Grantee of a Nonqualified Stock Option, the Grantee will continue to remain subject to the withholding tax requirements set forth in Section 17 hereof. (c) The terms of any award granted under the Plan, including the transferability of any such award, shall be binding upon the executors, administrators, heirs and successors of the Grantee. 17. Agreement by Grantee regarding Withholding Taxes. ------------------------------------------------ If the Committee shall so require, as a condition of exercise of an Option, Stock Appreciation Right or Limited Right or the expiration of a Restricted Period (each, a "Tax Event"), each Grantee shall agree that no later than the date of the Tax Event, the Grantee will pay to the Company or make arrangements satisfactory to the Committee regarding payment of any federal, state or local taxes of any kind required by law to be withheld upon the Tax Event. Alternatively, the Committee may provide that a Grantee may elect, to the extent permitted or required by law, to have the Company deduct federal, state and local taxes of any kind required by law to be withheld upon the Tax Event from any payment of any kind due to the Grantee. The withholding obligation may be satisfied by the withholding or delivery of Common Stock. 18. Rights as a Stockholder. ----------------------- Except as provided in Section 11(d) hereof, a Grantee or a transferee of an award shall have no rights as a stockholder with respect to any shares covered by the award until the 16 date of the issuance of a stock certificate to him or her for such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distribution of other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 12(a) hereof. 19. No Rights to Employment. ----------------------- Nothing in the Plan or in any award granted or Agreement entered into pursuant hereto shall confer upon any Grantee the right to continue in the employ of, or in a consultant relationship with, the Company or any Subsidiary or to be entitled to any remuneration or benefits not set forth in the Plan or such Agreement or to interfere with or limit in any way the right of the Company or any such Subsidiary to terminate such Grantee's employment. Awards granted under the Plan shall not be affected by any change in duties or position of a Grantee as long as such Grantee continues to be employed by, or in a consultant relationship with, the Company or any Subsidiary. 20. Beneficiary. ----------- A Grantee may file with the Committee a written designation of a beneficiary on such form as may be prescribed by the Committee and may, from time to time, amend or revoke such designation. If no designated beneficiary survives the Grantee, the executor or administrator of the Grantee's estate shall be deemed to be the Grantee's beneficiary. 21. Stockholder Approval; Amendment and Termination of the Plan. ------------------------------------------------------------ (a) STOCKHOLDER APPROVAL. The Plan initially became effective when adopted by the Board on February 7, 1996 and shall terminate on the tenth anniversary of such date. The Plan was ratified by the Company's stockholders on February 27, 1997. In December 1997, the Board submitted to the Company's stockholders for approval an amendment authorizing an additional 1,000,000 shares for awards under the Plan, making a total of 3,300,000 shares authorized for awards. On September 28, 1998, the Board authorized an additional 1,000,000 shares for awards under the Plan, on November 20, 1998, the Board approved the Plan, as amended and restated herein, and on November 23, 1998, the Executive Committee approved the further increase of 500,000 shares, bringing the total number of shares authorized for issuance under the Plan to 4,800,000 shares. The Plan, as amended and restated herein, will be submitted to the stockholders of the Company for ratification at the next general meeting of stockholders to be held after such date. (b) AMENDMENT AND TERMINATION OF THE PLAN. The Board at any time and from time to time may suspend, terminate, modify or amend the Plan; however, unless otherwise determined by the Board, an amendment that requires stockholder approval in order for the Plan to continue to comply with Rule 16b-3 or any other law, regulation or stock exchange requirement shall not be effective unless approved by the requisite vote of stockholders. Except as provided in Section 12(a) hereof, no suspension, termination, modification or amendment of the Plan may adversely affect any award previously granted, unless the written consent of the Grantee is obtained. The amendment of Section 6(g) (extending 17 the post-termination exercise period of Options from thirty (30) days to three (3) months) and the addition of Section 13(c) in respect of Related Entity Dispositions shall apply prospectively only to Options granted after November 17, 1998, the date that the Plan, as amended and restated herein, was adopted by the Board. 22. Governing Law. ------------- The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of Delaware. 18 EX-27.01 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S REPORT ON FORM 10-Q FOR THE SIX MONTHS ENDED JANUARY 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS JUL-31-1999 AUG-01-1998 JAN-31-1999 60,994,698 78,911,968 68,151,775 6,396,880 0 228,139,272 125,614,458 25,555,285 450,591,001 81,913,031 100,000,000 0 0 233,418 247,497,097 450,591,001 0 294,018,907 227,665,779 280,207,054 2,185,159 0 (143,501) 13,955,355 4,825,780 6,944,416 0 0 0 6,944,416 0.21 0.20
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