-----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, VRvvGQSBsOPvmFfYgdN0bhIPB21/FfhjLAnlkCEdcnaWlFCpMzPCAa5ChxTisOX9 +IHhcbNCvGwX6Bff+U2OmA== 0000950130-97-002945.txt : 19970627 0000950130-97-002945.hdr.sgml : 19970627 ACCESSION NUMBER: 0000950130-97-002945 CONFORMED SUBMISSION TYPE: 424B3 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19970626 SROS: NONE 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: 424B3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-18901 FILM NUMBER: 97630441 BUSINESS ADDRESS: STREET 1: 294 STATE ST CITY: HACKENSACK STATE: NJ ZIP: 07601 BUSINESS PHONE: 2019281000 MAIL ADDRESS: STREET 1: 294 STATE STREET CITY: HACKENSACK STATE: NJ ZIP: 07601 424B3 1 PROSPECTUS SUPPLEMENT NO. 2 DATED 6/25/97 FILED PURSUANT TO RULES 424(B)(3) AND 424(C) REGISTRATION NO. 333-18901 400,000 SHARES IDT CORPORATION COMMON STOCK ----------------------------- PROSPECTUS SUPPLEMENT NO. 2 (TO PROSPECTUS DATED JANUARY 8, 1997) On June 19, 1997, IDT Corporation (the "Company") filed with the Securities and Exchange Commission a Quarterly Report on Form 10-Q for the quarter ended April 30, 1997, a copy of which, without exhibits, is attached to this Prospectus Supplement. This Prospectus Supplement should be read in conjunction with the Company's Propsectus Supplement No.1 dated June 5, 1997, the Company's Prospectus dated January 8, 1997 and the Company's 1996 Annual Report to Stockholders. ----------------------------- THE DATE OF THIS PROSPECTUS SUPPLEMENT IS JUNE 25, 1997. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended April 30, 1997 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.) 294 State 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 date) 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 periods 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 10,336,740 Shares as of June 9, 1997 Class A Common Stock, $.01 par value -- 11,174,330 shares as of June 9, 1997 (Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date) 1 IDT CORPORATION TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Condensed Consolidated Balance Sheets as of July 31, 1996 and April 30, 1997..........3 Condensed Consolidated Statements Of Operations for the nine and three months ended April 30, 1996 and 1997.............................................................4 Condensed Consolidated Statement Of Stockholders' Equity for the nine months ended April 30, 1997......................................................................5 Condensed Consolidated Statements Of Cash Flows for the nine months ended April 30, 1996 and 1997.......................................................................6 Notes To Condensed Consolidated Financial Statements..................................7 Item 2. Management's Discussion And Analysis Of Financial Condition and Results of Operations..........................................................................9 PART II. OTHER INFORMATION Item 1. Legal Proceedings....................................................................14 Item 2. Changes in Securities................................................................14 Item 3. Defaults upon senior securities......................................................14 Item 4. Submission of Matters to a Vote of Security Holders..................................14 Item 5. Other Information....................................................................14 Item 6. Exhibits and Reports on Form 8-K......................................................15 Signatures.....................................................................................16
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS IDT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS April 30, 1997 July 31, 1996 --------------- -------------- ASSETS (unaudited) (Note 1) Current assets Cash and cash equivalents $ 5,527,577 $ 14,893,756 Short-term investments 1,093,802 --- Accounts Receivable (Net) 13,532,301 11,497,565 Other current assets 4,222,197 4,110,090 ------------ ------------ Total current assets 24,375,877 30,501,411 Property and equipment, net 23,877,216 12,453,330 Other assets 3,818,509 842,630 ------------ ------------ Total assets $ 52,071,602 $ 43,797,371 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Trade accounts payable $ 4,083,127 $ 7,778,860 Accrued expenses 8,623,220 7,770,334 Deferred revenue 2,660,120 983,496 Notes payable & current portion of long-term debt and capital lease obligations 3,036,229 --- Advances from officer/shareholder 115,000 --- Other current liabilities 103,000 422,005 ------------ ------------ Total current liabilities 18,620,696 16,954,695 Long-term debt and capital lease obligations 9,431,518 --- Total liabilities 28,052,214 16,954,695 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; 10,336,740 and 9,666,900 shares issued and outstanding 103,367 96,669 Class A stock, $.01 par value; authorized shares - 35,000,000; 11,174,330 shares issued and outstanding 111,743 111,743 Additional paid in capital 46,693,185 44,746,841 Accumulated deficit (22,888,907) (18,112,577) ------------ ------------ Total stockholders' equity 24,019,388 26,842,676 ------------ ------------ Total liabilities and stockholders' equity $ 52,071,602 $ 43,797,371 ============ ============ See notes to condensed consolidated financial statements. 3 IDT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Nine Months Ended Three Months Ended -------------------------------- -------------------------------- April 30, 1997 April 30, 1996 April 30, 1997 April 30, 1996 --------------- --------------- --------------- --------------- Revenues $94,174,050 $ 34,541,156 $34,451,513 $18,226,089 Costs and expenses: Direct cost of revenues 62,555,120 22,387,928 23,680,618 12,288,911 Selling, general, and administrative 33,006,412 22,594,533 9,163,465 10,135,271 Depreciation and amortization 3,363,243 570,826 1,316,588 264,640 ----------- ------------ ----------- ----------- TOTAL COSTS AND EXPENSES 98,924,775 45,553,287 34,160,671 22,688,822 ----------- ------------ ----------- ----------- Income (loss) from operations (4,750,725) (11,012,131) 290,842 (4,462,733) Interest and other, net (25,605) 30,014 (129,903) 58,689 ----------- ------------ ----------- ----------- Net Income (Loss) before Extraordinary item (4,776,330) (10,982,117) 160,939 (4,404,044) Extraordinary item --- (233,500) --- (233,500) ----------- ------------ ----------- ----------- NET INCOME (LOSS) $(4,776,330) $(11,215,617) $ 160,939 $(4,637,544) =========== ============ =========== =========== Net income (loss) per share ($0.23) ($0.65) $0.01 ($0.25) =========== ============ =========== =========== Weighted average number of shares used in calculation of earnings per share 20,990,220 17,281,282 23,248,536 18,705,261 =========== ============ =========== ===========
See notes to condensed consolidated financial statements. 4 IDT CORPORATION CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited)
Additional Common Stock Class A Stock paid in Accumulated Shares Amount Shares Amount capital Deficit ----------------------------------------------------------------------- Balance at July 31,1996............ 9,666,900 $ 96,669 11,174,330 $111,743 $44,746,841 $(18,112,577) Issuance of Stock options.......... 41,212 Exercise of options................ 669,840 6,698 1,905,132 Net Loss for the nine months ended April 30, 1997............ (4,776,330) ---------- -------- ---------- -------- ----------- ------------ Balance at April 30, 1997 10,336,740 $103,367 11,174,330 $111,743 $46,693,185 $(22,888,907) ========== ======== ========== ======== =========== ============
See notes to condensed consolidated financial statements. 5 IDT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine months ended April 30, 1997 1996 ------------- ------------- Cash used in operating activities $(10,562,464) $(4,574,910) INVESTING ACTIVITIES Payment for purchase of Yovelle, net of cash acquired 376,843 -- Purchase of short-term investments (1,093,802) -- Receipt of payments on note receivable 2,175,838 -- Payment for the purchase of ICS assets (2,250,000) -- Purchase of property and equipment (7,446,589) (6,377,768) ------------ ----------- Net cash used in investing activities (8,237,710) (6,377,768) FINANCING ACTIVITIES Repayment of loans (524,592) (5,001) Repayments of stockholder, investor and employee loans (885,000) (3,360,000) Repayments of capital lease obligation (258,242) -- Proceeds from stockholder, investor and employee loans 1,000,000 3,360,000 Net proceeds from sale of common stock -- 41,904,993 Proceeds from exercise of stock options 1,911,829 -- Advances from affiliates -- 360,000 Proceeds from loans 8,190,000 -- ------------ ----------- Net cash provided by financing activities 9,433,995 42,259,992 ------------ ----------- Net increase (decrease) in cash and cash equivalents (9,366,179) 31,307,314 Cash & cash equivalents, beginning of period 14,893,756 231,592 ------------ ----------- Cash & cash equivalents, end of period $ 5,527,577 $31,538,906 ============ =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Interest paid $ 438,462 $ 110,322 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 nine and three months ended April 30, 1997 are not necessarily indicative of the results that may be expected for the year ending July 31, 1997. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended July 31, 1996 as filed with the Securities and Exchange Commission. Note 2 - Property and Equipment Property and equipment consists of the following: April 30, 1997 July 31, 1996 --------------- -------------- Equipment $22,045,279 $10,661,941 Computer software 4,425,959 1,971,018 Leasehold improvements 932,069 296,718 Furniture and fixtures 1,460,407 1,176,867 ----------- ----------- 28,863,714 14,106,544 Less: Accumulated depreciation and amortization (4,986,498) (1,653,214) ----------- ----------- $23,877,216 $12,453,330 =========== =========== Note 3 - Acquisitions During the nine months ended April 30, 1997, the Company purchased the equipment and networks of two of its alliance partners for approximately $4.4 million of which the Company issued two promissory notes totaling $1,440,000. In addition, to pay a portion of the purchase price the Company borrowed $2,250,000 in a four year note with interest only payments for the first six months at 11% per annum and 42 equal monthly payments of principal and interest at 14% per annum and convertible into Common Stock at the lower of $14 or the market price at the date of conversion per share at the option of the holder after nine months of issuance. In August 1996, the Company purchased all of the issued and outstanding stock of Yovelle Renaissance Corporation, which owns the GENIE online service, for $200,000. The purchase price included the assumption of a note payable of $750,000 to GE Information Services, due and paid by December 15, 1996 and resulted in the recording of Goodwill of $1,372,289 which is included in other assets. 7 Note 4 - Loans payable and capital lease obligations During the nine months ended April 30, 1997, the Company borrowed $8,190,000 consisting of five interest bearing notes collateralized by certain equipment owned by the Company and with terms ranging from twenty-four months to forty-eight months. One note of $2,250,000 can be converted into Common Stock at the option of the holder. The Company also entered into various capital lease arrangements during the nine months ended April 30, 1997 to acquire computer and communications related equipment totaling approximately $5.1 million with terms ranging from twenty- four months to sixty months and collateralized by the equipment. The Company received an advance from Howard Jonas, its Chairman of the Board and Chief Executive Officer of $1,000,000 in January 1997 and repaid $885,000 of the advance in March 1997. Note 5 - Legal Proceedings and Contingencies The Company has received a complaint from five former employees alleging religious discrimination under Title 7 of the Civil Rights Act. The Company and its counsel believe that these allegations are unfounded, and intends to defend this matter vigorously. 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 assurance, the opinion of management is that settlement of these actions, when ultimately concluded, will not have a material adverse effect on results of operations, cash flows or the financial condition of the Company. 8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the accompanying condensed consolidated financial statements and the associated notes thereto of this Quarterly Report, and the audited consolidated financial statements and the notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company contained in the Company's Annual Report on Form 10-K for the year ended July 31, 1996, as filed with the Securities and Exchange Commission. Overview IDT is an international telecommunications company offering a broad range of competitively priced long-distance telephone, and Internet access services in the U.S. and abroad and recently began offering Internet telephony services. The Company entered the international call reorigination business in 1990 to capitalize on the opportunity created by the spread between U.S. and foreign- originated international long-distance telephone rates. IDT leveraged the expertise derived from, and calling volume generated by, its call reorigination business to enter the domestic long-distance business in late 1993, by reselling long-distance telecommunications services of other carriers to IDT's domestic customers. As a value-added service for its domestic long-distance customers, the Company began offering Internet access in early 1994, eventually offering dial-up and dedicated Internet access to individuals and businesses as stand- alone services. In 1995, IDT began reselling to other long-distance carriers access to the favorable telephone rates and special tariffs the Company receives because of the calling volume generated by its call reorigination customers. In August 1996, IDT entered the Internet telephony market with its introduction of Net2Phone. Revenues from the Company's telecommunications operations are derived primarily from the following activities: (i) international long-distance call reorigination services; (ii) resale of long-distance minutes to other long- distance carriers; and (iii) marketing to individuals and businesses of domestic long-distance services provided by WorldCom. Revenues from the Company's Internet operations are primarily derived from providing Internet access services to individuals and businesses. The Company's Internet access service revenues depend primarily on the number of subscribers to the Company's services and the types of accounts subscribed for. In February 1997, the Company shifted its dial-up division's marketing efforts from aggressive mass marketing to new reseller programs which entailed significantly lower selling costs and resulted in a lower customer acquisition rate. Whereas revenues from monthly subscribers have substantially increased over the last year as a result of the significant increase in the Company's average monthly subscriber base, revenues from monthly subscribers have recently decreased from the quarter ended April 30, 1997 compared to the prior quarter ended January 31, 1997 as a result of a decrease in the Company's subscriber base. The Company's ability to achieve revenue growth and profitability is dependent upon its ability to acquire and retain customers. The Company's ability to improve operating margins will also depend in part on its ability to retain its customers and there can be no assurances that the Company's investments in telecommunications infrastructure, customer support capabilities and software releases will improve customer retention. The Company's strategies and commitments have required substantial up-front expenditures for additional personnel, marketing, facilities, infrastructure, product development and capital equipment and have and may continue to adversely affect short-term operating results. There can be no assurance that revenue growth will continue or that the Company will in the future achieve or sustain profitability or positive cash flow from operations on either a quarterly or annual basis. NINE MONTHS ENDED APRIL 30, 1997 COMPARED TO NINE MONTHS ENDED APRIL 30, 1996 RESULTS OF OPERATIONS Revenues, Revenues increased 173% from approximately $34.5 million for the nine months ended April 30, 1996 to approximately $94.2 million for the nine months ended April 30, 1997. Revenues from the company's telecommunications operations increased 200% from approximately $22.0 million for the nine months ended April 30, 9 1996 to approximately $66.1 million for the nine months ended April 30, 1997. Revenues from the Company's Internet operations increased 113% from approximately $12.5 million for the nine months ended April 30, 1996 to approximately $26.8 million for the nine months ended April 30, 1997. The increase in telecommunications revenues was due primarily to a 331% increase in rebilled long-distance minutes from 33.5 million minutes to approximately 144.5 million minutes. The increase in rebilling long-distance minutes was due to the addition of wholesale carrier clients and a substantial increase in international call reorigination customers. The number of international call reorigination customers increased from approximately 14,600 at April 30, 1996 to 45,200 customers at April 30, 1997. The addition of wholesale carrier clients resulted in an increase in long-distance arbitrage revenues of 255% from approximately $11.2 million for the nine months ended April 30, 1996 to approximately $39.7 million for the nine months ended April 30, 1997. As a percentage of telecommunications revenues and overall revenues, long-distance arbitrage revenues increased from approximately 50.8% to 60.1% and 32.4% to 42.2%, respectively. As a percentage of total revenues, Internet revenues decreased as a percentage of total revenues from approximately 36.3% for the nine months ended April 30, 1996 to approximately 28.4% for the nine months ended April 30, 1997. The increase in Internet revenues in dollar terms was due primarily to the increase in the dial-up subscribers base, and to a lesser degree increased revenues from on-line services and dedicated customers from the nine months ended April 30, 1996 to the nine months ended April 30, 1997. The decrease in Internet revenues as a percentage was due to the increase of telecommunications revenue as compared to Internet revenue. Internet revenues also included approximately $2.8 million of online service revenues million for the nine months ended April 30,1997 and $0 for the nine months ended April 30, 1996. Net2Phone revenues for the nine months ended April 30, 1997 were approximately $1.3million, compared to $0 for the nine months ended April 30, 1996. Direct Cost of Revenues. Direct cost of revenues consists primarily of the costs paid to carriers for the transmission and termination of switched minutes through IDT's facilities, and to a lesser extent, fees paid to alliance partners, leased circuits and network costs, local access costs, network connectivity costs, switch maintenance costs, and online network processing costs. The Company's direct cost of revenues increased by 179% from approximately $22.4 million in the nine months ended April 30, 1996 to approximately $62.6 million in the nine months ended April 30, 1997. As a percentage of revenues, these costs increased from 64.8% to 66.4% and as a percentage of revenues in the nine months ended April 30, 1996 and 1997, respectively. The increase in absolute dollars is primarily due to increases in underlying carrier costs as the Company's telecommunications minutes of use and associated revenue grew substantially. To a lesser extent, the increase is due to the increase in fees paid to alliance partners, the costs of leased circuits and networks and of access lines and network connectivity to support subscriber growth in both Internet access and international call reorigination and the online network processing costs. The Company expects that direct cost of revenues will continue to increase in absolute dollar terms as the Company expands its telecommunications base. Selling, General and Administrative. Selling, general and administrative costs increased 46% from approximately $22.6 million in the nine months ended April 30, 1996 to approximately $33.0 million in the nine months ended April 30, 1997. As a percentage of revenues, these costs decreased from 65.4% to 35.0% in the nine months ended April 30, 1996 and 1997, respectively. The increase in these costs in dollar terms was due primarily to the addition of sales, marketing and technical and customer support personnel hired to support the growth of the Company's Internet access business, the increased advertising to attract Internet dial-up subscribers and costs incurred in developing and marketing Net2Phone. The decrease in selling , general and administrative costs as a percentage of total revenue was primarily due to the increase of telecommunications revenue as compared to Internet revenue. The Company anticipates selling, general and administrative costs in dollar terms will continue to increase as the Company implements its growth strategy, but will decrease as a percentage of total revenues as a result of the shift of focus to the telecommunications division and away from dial-up Internet access. Depreciation and Amortization. Depreciation and amortization costs increased 489% from approximately $571,000 in the nine months ended April 30, 1996 to approximately $3.4 million in the nine months ended April 30, 1997. As a percentage of revenues, these costs increased from 1.7% to 3.6% in the nine months ended April 30, 1996 and 1997, respectively. These costs increased in absolute terms primarily as a result of the Company's higher fixed asset base during the nine months ended April 30, 1997 as compared with the nine months ended April 30,1996 due to the Company's installation of additional Company- owned POPs, enhancement its network infrastructure and expanding of its facilities. The Company anticipates depreciation and amortization costs will continue to increase as the Company continues to implement its growth strategy. Income (loss) from Operations. Income from operations for the telecommunications segment increased to approximately $3.6 million in the nine months ended April 30, 1997 from $2.2 million in the nine months ended April 30, 1996 and as a percentage of telecommunication revenues decreased to 5.4% from 10.1%. The increase in dollars resulted principally from increased revenue generated by the expansion of operations. The decrease as a percentage of 10 telecommunication revenues resulted from increased selling general and administrative expenses as well as the increased percentage of long-distance arbitrage revenues which typically carry lower margins. Loss from operations for the Internet access segment decreased to approximately $7.2 million in the nine months ended April 30, 1997 from approximately $13.0 million in the nine months ended April 30, 1996. The loss from operations from the Internet access segment was principally due to the initial costs of acquiring customers and increased personnel and facilities costs to sustain growth. The decreased loss of the Internet access segment is largely due to the refocusing of its marketing efforts from aggressive mass marketing to new reseller programs. The loss generated from the development and marketing of Net2Phone was approximately $1.2 million and $0 for the nine months ended April 30, 1997 and 1996 respectively. Income Taxes. The Company records income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). The Company did not record an income tax benefit in the nine months ended April 30, 1996 or 1997, as the realization of available tax losses was not probable. THREE MONTHS ENDED APRIL 30, 1997 COMPARED TO THREE MONTHS ENDED APRIL 30, 1996 RESULTS OF OPERATIONS Revenues. Revenues increased 89% from approximately $18.2 million for the three months ended April 30, 1996 to approximately $34.5 million for the three months ended April 30, 1997. Revenues from the company's telecommunications operations increased 130% from approximately $11.3 million for the three months ended April 30, 1996 to approximately $26.1 million for the three months ended April 30, 1997. Revenues from the Company's Internet operations increased 10% from approximately $6.9 million for the three months ended April 30, 1996 to approximately $7.6 million for the three months ended April 30, 1997. The increase in telecommunications revenues was due primarily to a 318% increase in rebilled long-distance minutes from approximately 15.3 million minutes to approximately 64.0 million minutes. The increase in rebilling long-distance minutes was due to the addition of wholesale carrier clients and a substantial increase in international call reorigination customers. The number of international call reorigination customers increased from approximately 14,600 at april 30, 1996 to approximately 45,200 customers at April 30, 1997. The addition of wholesale carrier clients resulted in an increase in long-distance arbitrage revenues of 137% from approximately $7.2 million for the three months ended April 30, 1996 to approximately $17.1 million for the three months ended April 30, 1997. As a percentage of telecommunications revenues and overall revenues, long-distance arbitrage revenues increased from approximately 63.5% to 65.5% and 39.4% to 49.5%, respectively. As a percentage of total revenues, internet revenues decreased from approximately 37.8% for the three months ended April 30, 1996 to approximately 21.9% for the three months ended April 30, 1997. The increase in Internet revenues in dollar terms was due primarily to increased revenues from on-line services and dedicated customers. The decrease in Internet revenues as a percentage of total revenues was due to the increase of telecommunications revenue as compared to Internet revenue. Internet revenues included approximately $617,000 of online service revenues for the three months ended April 30,1997 and $0 for the three months ended April 30, 1996. Net2Phone revenues for the three months ended April 30, 1997 were approximately $836,000, compared to $0 for the three months ended April 30, 1996. Direct Cost of Revenues. Direct cost of revenues consists primarily of the costs paid to carriers for the transmission and termination of switched minutes through IDT's facilities, and to a lesser extent, fees paid to alliance partners, leased circuits and network costs, local access costs, network connectivity costs, switch maintenance costs, and online network processing costs. The Company's direct cost of revenues increased by 93% from approximately $12.3 million in the three months ended April 30, 1996 to approximately $23.7 million in the three months ended April 30, 1997. As a percentage of revenues, these costs increased from 67.4% to 68.7% in the three months ended April 30, 1996 and 1997, respectively. The increase in absolute dollars is primarily due to increases in underlying carrier costs as the Company's telecommunications minutes of use, and associated revenue, grew substantially. To a lesser extent, the increase is due to the increase in the costs of leased circuits and networks of access lines and network connectivity to maintain the subscriber base in both Internet access and growth in the international call reorigination and the online network processing costs. The Company expects that direct cost of revenues will continue to increase in absolute dollar terms as the Company expands its telecommunications base. Selling, General and Administrative. Selling, general and administrative costs decreased 10% from approximately $10.1 million in the three months ended April 30, 1996 to approximately $9.2 million in the three months ended April 30, 1997. As a percentage of revenues, these costs decreased from 55.6% to 26.6% in the three months ended April 30, 1996 and 1997, respectively. The decrease in selling, general and administrative costs in dollar terms and as a percentage of total revenues was primarily due to the shift of focus of the Internet division's marketing efforts from aggressive mass marketing to new reseller programs which entail significantly lower selling costs. The Company anticipates selling, 11 general and administrative costs in dollar terms will increase as the Company implements its growth strategy, but will decrease as a percentage of total revenues. Depreciation and Amortization. Depreciation and amortization costs increased 398% from approximately $265,000 in the three months ended April 30, 1996 to approximately $1.3 million in the three months ended April 30, 1997. As a percentage of revenues, these costs increased from 1.5% to 3.8% in the three months ended April 30, 1996 and 1997, respectively. These costs increased in absolute terms primarily as a result of the Company's higher fixed asset base during the three months ended April 30, 1997 as compared with the three months ended April 30,1996 due to the Company's efforts to install additional Company- owned POPs, enhance its network infrastructure and expand its facilities. The Company anticipates depreciation and amortization costs will continue to increase as the Company continues to implement its growth strategy. Income (loss) from Operations. Income from operations for the telecommunications segment increased to approximately $1.5 million in the three months ended April 30, 1997 from $787,000 in the three months ended April 30, 1996 and as a percentage of telecommunication revenues decreased to 5.8% from 6.9%. The increase in dollars resulted principally from increased revenue generated by the expansion of operations. The decrease as a percentage of telecommunication revenues resulted from the increased percentage of long- distance arbitrage revenues which typically carry lower margins. Loss from operations for the Internet access segment decreased to approximately $1.1 million in the three months ended April 30, 1997 from approximately $5.3 million in the three months ended April 30, 1996. The loss from operations from the Internet access segment was principally due to the initial costs of acquiring customers, increased personnel and facilities costs to sustain growth and substantial marketing expenses to create customer awareness. The decreased loss of the Internet access segment is largely due to a reduction of the selling, general and administrative costs as the Company refocused its marketing efforts from aggressive mass marketing to new reseller programs. The loss generated from the development and marketing of Net2Phone was approximately $129,000 and $0 for the three months ended April 30, 1997, and April 30, 1996. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has satisfied its cash requirements principally through a combination of cash flow from operations, sales of equity securities and borrowings from third parties (including its stockholders). In Fiscal 1996, the Company raised $3,477,000 through the issuance of notes. The proceeds from the issuance of the notes were used for general corporate purposes, including working capital. In March 1996, the Company completed an initial public offering of 4,600,000 shares of Common Stock for $10 per share. The Company realized approximately $41.5 million from this offering. A portion of the proceeds were used to repay $3,477,000, the principal amount of short-term notes previously issued during Fiscal 1996. In connection with the repayment of such notes, the Company incurred prepayment penalty of $233,500. Such prepayment penalty was classified as an extraordinary loss for the early retirement of debt in the Company's consolidated statement of operations for the year ended July 31, 1996. The Company used the remaining net proceeds from the offering for general corporate purposes, capital expenditures and working capital, including to (i) expand and improve the Company's Internet network infrastructure, (ii) increase the Company's sales and marketing efforts, (iii) expand and improve the Company's customer support and fulfillment capabilities, (iv) intensify the Company's research and development activities, (v) develop new Internet applications and content, and (vi) expand the Company's telecommunications operations. As of April 30, 1997, the Company had cash, and cash equivalents of $6.6 million and working capital of approximately $5.8 million. The Company generated negative cash flow from operating activities of approximately $10.6 million during the nine months ended April 30, 1997, compared to a negative cash flow from operating activities of approximately $4.6 million during the nine months ended April 30, 1996. The changes in operating cash flows from the nine months ended April 30, 1996 to the nine months ended April 30, 1997 were primarily due to increases in accounts receivable and prepaid and other assets in relation to accounts payable and other current liabilities. Cash flow from operations varied significantly from quarter to quarter, depending upon the timing of operating cash receipts and payments, especially accounts receivable and accounts payable. Accounts receivable (net of allowances) were approximately $6.7 million and $13.5 million at April 30, 1996 and 1997, respectively. Accounts receivable, accounts payable and accrued expenses have increased period to period as the Company's businesses have grown. Payments on purchases of fixed assets increased from approximately $6.4 million in nine months ended April 30, 1996 to approximately $7.4 million in nine months ended April 30, 1997, primarily as a result of purchases of equipment to support expansion of the Company's network infrastructure, and expansion of the Company's facilities. The Company is 12 upgrading and expanding its existing network infrastructure by building a new, higher capacity, frame-relay based network backbone and through international network expansion. The Company experiences intense competition in both its telecommunications and Internet access businesses. If additional competition were to lead to significant price reductions 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 business. From time to time, the Company evaluates potential acquisitions of companies, technologies, products and customer accounts that complement the Company's businesses. In the nine months ended April 30, 1997, the Company purchased the equipment and networks of two of its alliance partners for approximately $4.4 million. The purchase price includes cash of $2,250,000, which was financed by a four year note, assumption of trade liabilities of approximately $280,000, excluding $429,000 due to the Company) and the issuance of promissory notes totaling approximately $1,440,000 of which $690,000 is a two year note at 8.25% interest per annum, and $750,000 is a four year note at 10% per annum. No additional acquisitions are currently contemplated. The Company believes that, based upon its present business plan, its existing cash resources and expected cash flow from operating activities and equipment financing 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 the Company expedites or expands its network expansion or if the Company cannot finance its new equipment or if the Company's cash flow from operations 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 presently anticipated expansion, which could adversely affect the Company's business and results of operations and its ability to compete. CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS - --------------------------------------------------------- The statements contained in this Report on Form 10-Q that are not purely historical are 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 regarding the Company's expectations, hopes, intentions, beliefs or strategies regarding the future. Forward looking statements include the Company's liquidity, anticipated cash needs and availability, and anticipated expense levels under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations." All forward looking statements included in this document are based on information available to the Company on the date of this Report, and the Company assumes no obligation to update any such forward looking statement. It is important to note that the Company's actual results could differ materially from those expressed or implied in such forward looking statements. Among the factors that could cause actual results to differ materially are the Company's recent entry into new telecommunications markets and new service offerings, the intense competition in the markets in which the Company operates and the domination of many markets by large industry participants, the Company's dependence on others to support or provide many of the services offered by the Company, technological change and uncertainty, regulatory developments and the Company's ability to manage its anticipated growth. You should also consult the "Risk Factors" section in the Company's Annual Report on Form 10-K from the year ended July 31, 1996 as well as those factors listed from time to time in the Company's other reports filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 and the Securities Act of 1933. 13 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company has received a complaint from five former employees alleging religious discrimination under Title 7 of the Civil Rights Act. The Company and its counsel believe that these allegations are unfounded. 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 assurance, the opinion of management is that settlement of these actions, when ultimately concluded, will not have a material adverse effect on results of operations, cash flows or the financial condition of the Company. ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION On May 22, 1997 David Steiner resigned from the Company's Board of Directors in order to pursue his real estate interests on a full-time basis. 14 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit Number - ------ 2.01## Merger Agreement relating to the reincorporation of the Registrant in Delaware. 3.01## Restated Certificate of Incorporation of the Registrant. 3.02## By-laws of the Registrant. 4.01### Specimen Certificates for shares of the Registrant's Common Stock and Class A Stock. 4.02## Description of Capital Stock (contained in the Certificate of Incorporation of the Registrant, filed as Exhibit 3.01). 10.01** Form of Employment Agreement between the Registrant and Howard S Jonas. 10.02** Form of Employment Agreement between the Registrant and Howard S. Balter. 10.03** Form of Employment Agreement between the Registrant and Eric L. Raab. 10.04## Form of 1996 Stock Option and Incentive Plan. 10.05% Network Service Provider Agreement between Netscape Communications Corporation and Registrant 10.06** Marketing Services and Independent Contractor Services Agreement between Lermer Overseas Telecommunications, Inc. and the Registrant. 10.07# Rebiller Service Agreement between WorldCom, Inc. (formerly LDDS Communications, Inc.) and the Company. 10.08### Form of Registration Rights Agreement between the Company's stockholders and the Company 10.09## Lease of 294 State Street. 10.11! Form of Registration Rights Agreement between Howard S. Jonas and the Registrant. 10.12*** Form of Employment Agreement between the Registrant and James A. Courter. 10.13*** Form of Employment Agreement between the Registrant and Kenneth Scharf. 10.14% Agreement between PSINet Inc. And the Registrant. 10.15% Rested Sales Agreement between International Computer Systems, Inc. and the Registrant 10.16*** Form of Stock Option Agreement under the 1996 Stock Option and Incentive Plan. 10.17*** Form of Stock Option Agreement under the Employee Stock Option Program. 21.01% Subsidiaries of the Registrant. 27.00* Financial Data Schedule. * filed herewith % incorporated by reference to Form 10-K filed October 20, 1996, as amended on November 21, 1996 and January 6, 1997, file No. 000-7898 ** incorporated by reference to Form S-1 filed January 9, 1996, file No. 333-00204 # incorporated by reference to Form S-1 filed January 22, 1996, file No. 333-00204 ## incorporated by reference to Form S-1 filed February 21, 1996, file No. 333-00204 ### incorporated by reference to Form S-1 filed March 8, 1996, file No. 333-00204 ! incorporated by reference to Form S-1 filed March 14, 1996, file No. 333-00204 *** incorporated by reference to Form S-1 filed December 27, 1996, as amended, on January 6, 1997, file No. 333-18901 (b) Reports on Form 8-K. The registrant did not file any reports on Form 8-K during the quarter ended April 30, 1997. 15 IDT CORPORATION FORM 10-Q APRIL 30, 1997 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. IDT CORPORATION June 16, 1997 By /s/ Howard Jonas - ------------- ----------------- Date Howard S. Jonas Chairman of the Board and Chief Executive Officer (Principal Executive Officer) June 16, 1997 By /s/ Howard Balter - ------------- ----------------- Date Howard Balter Chief Operating Officer and Director (Principal Financial Officer) June 16, 1997 By /s/ Stephen R. Brown - ------------- --------------------- Date Stephen R. Brown Chief Financial Officer (Principal Accounting Officer) 16 -----END PRIVACY-ENHANCED MESSAGE-----