-----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, EJM6uqQhhMxUT3QJ/Qlh83q9FJ+pTYGbQ3k8CDxT10zmcWYVMB0yb6i1cztch62I 7qqtiJA/+aay9CBAO62l6w== 0001047469-98-021505.txt : 19980522 0001047469-98-021505.hdr.sgml : 19980522 ACCESSION NUMBER: 0001047469-98-021505 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980506 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980521 SROS: NASD 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: 8-K SEC ACT: SEC FILE NUMBER: 000-27898 FILM NUMBER: 98629904 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 8-K 1 FORM 8-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): MAY 6, 1998 IDT CORPORATION (Exact name of Registrant as Specified in its Charter) DELAWARE 0-27898 22-3415036 - ---------------------------- ----------------------- -------------------- (State or Other Jurisdiction (Commission File Number) (IRS Employer of Incorporation) Identification No.) 190 MAIN STREET, HACKENSACK, NEW JERSEY 07601 - ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (201) 928-1000 --------------------------------------------------- (Registrant's Telephone Number, Including Area Code) ================================================================================ ITEM 2. On April 7, 1998, IDT Corporation (the "Company") entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which the parties thereto agreed that a wholly owned subsidiary of the Company would be merged with and into InterExchange, Inc., a Delaware corporation ("IX"), and that IX would become a wholly owned subsidiary of the Company. The closing of this transaction took place on May 6, 1998 Pursuant to the Merger Agreement, all of the outstanding shares of the common stock of IX (the "IX Common Stock") were exchanged for an aggregate of 3,242,323 newly issued shares (the "IDT Shares") of common stock, par value $.01 per share, of the Company (the "IDT Common Stock"), and $20 million in cash (the "Cash Consideration"), which was funded out of the Company's working capital. A portion of the IDT Shares will remain in escrow until October 2002 in order to satisfy certain indemnification obligations that the former stockholders of IX may have under the Merger Agreement. This transaction will be treated as a purchase for accounting purposes and is intended to qualify as a tax-free reorganization under the provisions of Section 368 of the Internal Revenue Code of 1986, as amended. IX provides satellite frame relay networking and carrier-grade Internet telephony to over 20 international destinations and also operates one of the nation's largest international debit card platform. Mr. David Turock, the Company's Director of Technology, owned approximately 50% of the outstanding shares of IX, and served as IX's Chairman prior to the transactions contemplated by the Merger Agreement. The information set forth above is qualified in its entirety by reference to the Merger Agreement, which is incorporated herein by reference. The Company hereby agrees to furnish a supplementary copy of any omitted exhibit to the Merger Agreement to the Securities and Commission upon request. 1 ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. (a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED (i) The Combined Financial Statements of InterExchange, Inc. and Combined Affiliates as of December 31, 1997, 1996 and 1995 and for the three years ended December 31, 1997 are filed herewith as Exhibit 99.1. (ii) The Unaudited Combined Financial Statements of InterExchange, Inc. and Combined Affiliates as of March 31, 1998 and March 31, 1997 and for the three months ended March 31, 1998 and March 31, 1997 are filed herewith as Exhibit 99.2. (b) PRO FORMA FINANCIAL INFORMATION PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The following pro forma consolidated balance sheet of the Company at January 31, 1998 gives effect to (i) the transactions contemplated by the Merger Agreement (the "InterExchange Acquisition"), (ii) the Company's offering of 5,293,750 shares of its common stock, the closing of which occurred on February 3, 1998 (the "Equity Offering"), and (iii) the Company's offering of $100,000,000 aggregate principal amount of 8 3/4% Senior Notes due 2006, the closing of which occurred on February 18, 1998 (the "Debt Offering, and together with the InterExchange Acquisition and the Equity Offering, the "Transactions"). The following pro forma consolidated statements of operations of the Company for the six months ended January 31, 1998 and the year ended July 31, 1997 give effect to the Transactions as if they occurred at the beginning of such periods. The pro forma consolidated financial statements should be read in conjunction with (1) the historical financial statements of the Company, including the notes thereto, which are contained in the Company's quarterly report on Form 10-Q, as amended, for the quarter ended January 31, 1998 and the Company's Annual Report on Form 10-K, as amended, for the year ended July 31, 1997, and (2) the historical financial statements of IX as of and for the three months ended March 31, 1998 and for the year ended December 31, 1997, which have been filed as exhibits to this Report. The pro forma consolidated financial statements are included for informational purposes only and are not necessarily indicative of the financial position or operating results that would have occurred if the Transactions had been consummated as of the dates indicated, nor are they necessarily indicative of the Company's future financial condition or operating results. Pro forma adjustments for the InterExchange Acquisition reflect the Company's issuance of 3,242,323 shares of common stock and $20,000,000 of cash. The InterExchange Acquisition will be accounted for by the purchase method of accounting for business combinations and, accordingly, the estimated cost to acquire such assets will be allocated to the underlying net assets in proportion to their respective fair values. The valuations and other studies which will provide the basis for such allocations have not been completed. As more fully described in the notes to the pro forma consolidated financial statements, the allocation of the excess of the cost 2 over the book value of the net assets acquired has been made preliminarily for pro forma purposes to goodwill. 3 IDT CORPORATION PRO FORMA CONSOLIDATED BALANCE SHEET JANUARY 31, 1998 (UNAUDITED)
IDT CORP. IDT CORP. INTEREXCHANGE PRO FORMA IDT HISTORICAL ADJUSTMENTS AS ADJUSTED HISTORICAL (A) ADJUSTMENTS PRO FORMA ------------------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $ 8,641,358 $216,280,000(b) $224,921,358 $ 523,056 (20,000,000)(c) $205,444,414 Accounts receivable, net 31,794,759 31,794,759 818,308 32,613,067 Notes receivable 479,660 479,660 - 479,660 Other current assets 4,975,009 4,975,009 - 4,975,009 ------------------------------------------------------------------------------------------- Total current assets 45,890,786 216,280,000 262,170,786 1,341,364 (20,000,000) 243,512,150 Property and equipment, net 34,843,057 34,843,057 5,326,352 40,169,409 Goodwill, net 6,369,685 6,369,685 - 127,546,896 (c) 133,916,581 Other assets 3,240,506 3,500,000(b) 6,740,506 36,154 6,776,660 ------------------------------------------------------------------------------------------- Total assets $90,344,034 $219,780,000 $310,124,034 $6,703,870 107,546,896 $424,374,800 =========================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Trade accounts payable $23,320,563 23,320,563 2,610,091 25,930,654 Accrued expenses 599,789 599,789 945,282 1,545,071 Deferred revenue 2,504,047 2,504,047 - 2,504,047 Notes payable-current portion 1,730,138 1,730,138 502,839 2,232,977 Capital lease obligations - current portion 2,936,760 2,936,760 - 2,936,760 Taxes Payable - - 1,033,498 1,033,498 Other current liabilities 142,000 142,000 - 142,000 ------------------------------------------------------------------------------------------- Total current liabilities 31,233,297 31,233,297 5,091,710 36,325,007 Notes Payable-long term portion 5,580,823 5,580,823 430,006 6,010,829 Capital Lease Obligation - long term portion 5,554,632 5,554,632 - 5,554,632 Convertible Debentures 7,500,000 7,500,000 - 7,500,000 Deferred income taxes - - 112,000 112,000 Senior Notes Payable - $100,000,000(b) 100,000,000 - 100,000,000 ------------------------------------------------------------------------------------------- Total liabilities 49,868,752 100,000,000 149,868,752 5,633,716 155,502,468 Minority Interest 100,000 100,000 - 100,000 Stockholders' equity Preferred stock - - - - Common stock 135,025 52,938(b) 187,963 600 32,423 (c) 220,386 (600)(c) Class A stock 102,558 102,558 - 102,558 Retained earnings - - 1,069,554 (1,069,554)(c) - Additional paid in capital 56,970,472 119,727,062(b) 176,697,534 - 108,584,627 (c) 285,282,161 Accumulated deficit (16,832,773) (16,832,773) - (16,832,773) ------------------------------------------------------------------------------------------- Total stockholders' equity 40,375,282 119,780,000 160,155,282 1,070,154 107,546,896 268,772,332 ------------------------------------------------------------------------------------------- Total liabilities and stockholders'equity $90,344,034 $219,780,000 $310,124,034 $6,703,870 $107,546,896 $424,374,800 ===========================================================================================
4 IDT CORPORATION PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS SIX MONTHS ENDED JANUARY 31, 1998 (UNAUDITED)
IDT CORP. IDT CORP. INTEREXCHANGE PRO FORMA HISTORICAL ADJUSTMENTS AS ADJUSTED HISTORICAL (D) ADJUSTMENTS PRO FORMA - ---------------------------------------------------------------------------------------------------------------------------------- Revenues $125,703,766 $125,703,766 $7,466,138 $133,169,904 Costs and expenses: - Direct cost of revenues 92,309,811 92,309,811 1,840,905 94,150,716 Selling, general and administrative 23,706,415 23,706,415 4,126,542 27,832,957 Depreciation and amortization 3,787,573 3,787,573 1,097,459 $3,188,672 (f) 8,073,704 --------------------------------------------------------------------------------------------- TOTAL COSTS AND EXPENSES 119,803,799 119,803,799 7,064,906 3,188,672 130,057,377 --------------------------------------------------------------------------------------------- Earnings (loss) from operations 5,899,967 401,232 (3,188,672) 3,112,527 Interest and other, net (783,393) $(4,375,000)(e) (5,377,143) 275,622 (5,101,521) (218,750)(e) --------------------------------------------------------------------------------------------- Earnings before income taxes 5,116,574 (4,593,750) (5,377,143) 676,854 (3,188,672) (1,988,994) Income taxes - - 226,400 226,400 --------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 5,116,574 $(4,593,750) $(5,377,143) $450,454 $(3,188,672) $(2,215,394) ============================================================================================= Net income (loss) per share-basic $ 0.23 $ (0.19) $ (0.07) ============ =========== =========== Weighted average number of shares used in calculation of earnings per share - basic 22,638,022 27,931,822 31,174,145 ============ =========== =========== Net Income (loss) per share-diluted $ 0.20 $ (0.19) $ (0.07) ============ =========== =========== Weighted average number of shares used in calculation of earnings per share - diluted 26,087,362 27,931,822 31,174,145 ============ =========== ===========
5 IDT CORPORATION PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED JULY 31, 1997 (UNAUDITED)
IDT CORP. IDT CORP. INTEREXCHANGE PRO FORMA HISTORICAL ADJUSTMENTS AS ADJUSTED HISTORICAL (D) ADJUSTMENTS PRO FORMA ----------------------------------------------------------------------------------------------- Revenues $135,187,227 $135,187,227 $ 9,749,467 $144,936,694 Costs and expenses - Direct cost of revenues 92,214,223 92,214,223 4,705,566 96,919,789 Selling, general and administrative 41,544,987 41,544,987 1,472,017 43,017,004 Depreciation and amortization 4,873,142 4,873,142 2,700,070 $ 6,377,344 (f) 13,950,556 ----------------------------------------------------------------------------------------------- Total costs and expenses 138,632,352 138,632,352 8,877,653 6,377,344 153,887,349 ----------------------------------------------------------------------------------------------- Earnings (loss) from operations (3,445,125) (3,445,125) 871,814 (6,377,344) (8,950,655) Interest and other, net (391,645) $(8,750,000)(e) (9,579,145) 95,355 (9,483,790) (437,500)(e) ----------------------------------------------------------------------------------------------- Earnings (loss) before income taxes (3,836,770) (9,187,500) (13,024,270) 967,169 (6,377,344) (18,434,445) Income taxes - - 427,443 427,443 ----------------------------------------------------------------------------------------------- Net income (loss) $ (3,836,770) $ (3,836,770) $ 539,726 $(6,377,344) $(18,861,888) =============================================================================================== Net income (loss) per share-basic $ (0.18) $ (0.15) $ (0.64) ============ ============ ============ Weighted average number of shares used in calculation of earnings per share - basic 21,152,927 26,446,727 29,689,050 ============ ============ ============ Net income (loss) per share-diluted $ (0.18) $ (0.15) $ (0.64) ============ ============ ============ Weighted average number of shares used in calculation of earnings per share - diluted 21,152,927 26,446,727 29,689,050 ============ ============ ============
IDT Corporation Notes to Pro Forma Consolidated Financial Statements a) Reflects the historical assets and liabilities of IX as of December 31, 1997, as IX's year end is different than the Company's. b) Adjustments to record the Debt Offering and the Equity Offering, respectively, reflect (1) the issuance of $100,000,000 aggregate principal amount of 8 3/4% Senior Notes and the receipt of net proceeds therefrom of $96,500,000 after deducting $3,500,000 of debt issuance costs, and (2) the issuance of 5,293,750 shares of common stock and the receipt of net proceeds therefrom of $119,780,000. c) Pro forma adjustments to record the InterExchange Acquisition reflect (1) the Company's issuance of 3,242,323 shares of common stock and $20,000,000 of cash, (2) the allocation of the excess of the purchase price over the book value of the net assets acquired of $127,546,896 to goodwill based on a common stock price of $33.50 per share, and (3) the elimination of IX's historical stockholders' equity. d) Reflects the historical operating results of IX for the six months ended March 31, 1998 and the year ended September 30, 1997, as IX's year end is different than IDT's. e) Adjustments to record the Debt Offering for the six months ended January 31, 1998 and the year ended July 31, 1997 reflect an increase in interest expense of $4,593,750 and $9,187,500, respectively, resulting from (1) interest on the $100,000,000 aggregate principal amount of the 8 3/4% Senior Notes and (2) amortization of deferred debt issuance costs on a straight-line basis over an eight-year period. f) Pro forma adjustments to record the InterExchange Acquisition for the six months ended January 31, 1998 and the year ended July 31, 1997 reflect an increase of $3,188,672 and $6,377,344, respectively, in depreciation and amortization with respect to the excess cost to acquire IX that has been allocated to goodwill and amortized on a straight-line basis over a twenty-year period. (C) EXHIBITS: EXHIBIT NO. DESCRIPTION - ----------- ----------- 2.1 Agreement and Plan of Merger, dated April 7, 1998, by and among the Company, ADM Corp., a wholly owned subsidiary of the Company, IX, David Turock, Eric Hecht, Richard Robbins, Bradley Turock, Wai Nam Tam, Mary Jo Altom and Lisa Mikulynec. (incorporated by reference from Exhibit 2.1 of IDT's Current Report on Form 8-K, as filed with the Securities and Exchange Commission on April 22, 1998). 23.1 Consent of Amper, Politziner & Mattia P.A. 7 99.1 The Combined Financial Statements of InterExchange, Inc. and Combined Affiliates as of December 31, 1997, 1996 and 1995 and for the three years ended December 31, 1997. 99.2 The Unaudited Combined Financial Statements of InterExchange, Inc. and Combined Affiliates as of March 31, 1998 and March 31, 1997 and for the three months ended March 31, 1998 and March 31, 1997. 8 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 hereunto duly authorized. IDT CORPORATION By: /s/ Joyce J. Mason ------------------------------------ Joyce J. Mason Secretary and General Counsel Date: May 21, 1998 9 EX-23.1 2 CONSENT OF AMPER, POLITZINER & MATTIA P.A. EXHIBIT 23.1 Independent Auditor's Consent We consent to the incorporation of our report dated April 28, 1998, on the financial statements of InterExchange, Inc. and Combined Affiliates as of December 31, 1997, 1996 and 1995 and for the years the ended, which is included in Form 8-K filed by IDT Corporation filed about May 21, 1998. /s/ Amper, Politziner & Mattia P.A. May 20, 1998 Edison, New Jersey EX-99.1 3 COMBINED FINANCIALS OF INTERCHANGE EXHIBIT 99.1 INTEREXCHANGE, INC. AND COMBINED AFFILIATES For the Years Ended December 31, 1997, 1996 and 1995 Page ---- Independent Auditors' Report 1 Combined Balance Sheets 2 Combined Statements of Operations 3 Combined Statements of Stockholders' Equity 4 Combined Statements of Cash Flows 5 Notes to Combined Financial Statements 6 Independent Auditors' Report The Stockholders of InterExchange, Inc. and Combined Affiliates We have audited the accompanying combined balance sheets of InterExchange, Inc. and Combined Affiliates as of December 31, 1997, 1996 and 1995, and the related combined statements of operations, retained earnings and cash flows for the years then ended. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of InterExchange, Inc. and Combined Affiliates as of December 31, 1997, 1996 and 1995 and the results of their operations and cash flows for the years then ended in conformity with generally accepted accounting principles. /s/ Amper, Politziner & Mattia P.A. AMPER, POLITZINER & MATTIA P.A. April 28, 1998 Edison, New Jersey 1 INTEREXCHANGE, INC. AND COMBINED AFFILIATES Combined Balance Sheets
DECEMBER 31, ------------------------------------------ 1997 1996 1995 ----------- ----------- ---------- Assets Current assets Cash and cash equivalents $ 949,184 $ 81,416 $ 65,176 Accounts receivable 457,526 382,768 - ----------- ----------- ---------- 1,406,710 464,184 65,176 Equipment, net of accumulated depreciation 5,957,478 5,002,666 172,548 Other assets 36,154 36,227 2,458 ----------- ----------- ---------- $ 7,400,342 $ 5,503,077 $ 240,182 ----------- ----------- ---------- ----------- ----------- ---------- Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 3,185,674 $ 4,270,260 $ 89,973 Current maturities of long-term debt 458,139 - - Accrued expenses and other current liabilities 1,115,685 224,525 24,054 Accrued taxes payable 700,000 500,000 - Income taxes payable 228,039 53,800 - Customer deposits 350,000 - 129,377 ----------- ----------- ---------- 6,037,537 5,048,585 243,404 ----------- ----------- ---------- ----------- ----------- ---------- Long-term debt, net of current maturities 604,490 - - Deferred income taxes 112,000 185,000 - Stockholders' equity Common stock 600 500 400 Retained earnings 645,715 268,992 (3,622) ----------- ----------- ---------- Total stockholders' equity 646,315 269,492 (3,222) ----------- ----------- ---------- $ 7,400,342 $ 5,503,077 $ 240,182 ----------- ----------- ---------- ----------- ----------- ----------
See accompanying notes to combined financial statements. -2- INTEREXCHANGE, INC. AND COMBINED AFFILIATES Combined Statements of Operations For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 ----------- ----------- ---------- Revenues $10,937,961 $ 4,915,933 $ 56,043 ----------- ----------- ---------- Costs and expenses Direct cost of services 4,161,808 2,469,717 33,245 Selling, general and administrative expenses 3,790,093 590,914 9,998 Depreciation 2,635,135 1,292,849 29,885 ----------- ----------- ---------- 10,587,036 4,353,480 73,128 ----------- ----------- ---------- Earnings (loss) from operations 350,925 562,453 (17,085) Other income (expense) Gain on sale of equipment 338,690 - - Interest income 18,415 19,166 - Interest expense (43,754) - - ----------- ----------- ---------- 313,351 19,166 - ----------- ----------- ---------- Earnings (loss) before income taxes 664,276 581,619 (17,085) Income taxes - provisions for (benefit from) 251,000 241,000 (2,100) ----------- ----------- ---------- Net income (loss) $ 413,276 $ 340,619 $ (14,985) ----------- ----------- ---------- ----------- ----------- ----------
See accompanying notes to combined financial statements. -3- INTEREXCHANGE, INC. AND COMBINED AFFILIATES Combined Statements of Stockholders' Equity For the Years Ended December 31, 1997, 1996 and 1995
Common Stock --------------------- Total Number of Retained Stockholders' Shares Amount Earnings Equity -------- -------- ---------- ----------- Balance - January 1, 1995 100 $ 100 $ 33,363 $ 33,463 Net loss - - (14,985) (14,985) Stock issued - InterExchange, Inc., July 1995 200 200 - 200 Stock issued - Doublestone Computing Enterprises, Inc., December 1995 100 100 - 100 Distributions to stockholders - - (22,000) (22,000) -------- -------- ---------- ----------- Balance - December 31, 1995 400 400 (3,622) (3,222) Net income - - 340,619 340,619 Stock issued - Altom Associates, Inc., July 1996 100 100 - 100 Distributions to stockholders - - (68,005) (68,005) -------- -------- ---------- ----------- Balance - December 31, 1996 500 500 268,992 269,492 Net income - - 413,276 413,276 Stock issued - Blue Sky Software, Inc., March 1997 100 100 - 100 Distributions to stockholders - - (36,553) (36,553) -------- -------- ---------- ----------- Balance - December 31, 1997 600 $ 600 $ 645,715 $ 646,315 -------- -------- ---------- ----------- -------- -------- ---------- -----------
See accompanying notes to combined financial statements. -4- INTEREXCHANGE, INC. AND COMBINED AFFILIATES Combined Statements of Cash Flows For the Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995 ----------- ----------- ---------- Cash flows from operating activities Net income (loss) $ 413,276 $ 340,619 $ (14,985) ----------- ----------- ---------- Adjustment to reconcile net income (loss) to net cash from operating activities: Depreciation 2,626,125 1,295,024 29,885 Deferred income taxes (73,000) 185,000 - (Increase) decrease in Accounts receivable (74,758) (382,768) - Other assets 73 (33,769) (2,458) Increase (decrease) in Accounts payable (1,084,586) 4,180,287 89,973 Accrued expenses and other current liabilities 891,160 200,471 23,273 Accrued taxes payable 200,000 500,000 - Income taxes payable 174,239 53,800 - Customer deposits 350,000 (129,377) 129,377 ----------- ----------- ---------- Total adjustments 3,009,253 5,868,668 270,050 ----------- ----------- ---------- 3,422,529 6,209,287 255,065 ----------- ----------- ---------- Cash flows from investing activities Payments for purchase of property and equipment (2,281,138) (6,125,142) (175,089) ----------- ----------- ---------- Cash flows from financing activities Principal payments of long-term debt (237,170) - - Distributions to stockholders (36,553) (68,005) (22,000) Proceeds from issuance of common stock 100 100 300 ----------- ----------- ---------- (273,623) (67,905) (21,700) ----------- ----------- ---------- Net change in cash and cash equivalents 867,768 16,240 58,276 Cash and cash equivalents - beginning 81,416 65,176 6,900 ----------- ----------- ---------- Cash and cash equivalents - ending $ 949,184 $ 81,416 $ 65,176 ----------- ----------- ---------- ----------- ----------- ----------
See accompanying notes to combined financial statements. -5- Note 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION The combined financial statements include the accounts of InterExchange, Inc. ("IX"), Doublestone Computing Enterprises, Inc., Blue Sky Software, Inc., Altom Associates, Inc. and Mikulynec Associates, Inc. (the "Company"). All significant intercompany balances and transactions have been eliminated in the combination. OPERATIONS The Company is principally engaged in providing technology and management services to telecommunications service providers, including management of debit cards and switching services to customers in the United States and internationally. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION Revenue for management of debit cards and switching services is recognized as service is provided. DIRECT COSTS OF REVENUES Direct cost of revenues consists primarily of connectivity costs and related costs of personnel. EQUIPMENT Equipment and software is recorded at cost and are depreciated using accelerated methods over the estimated useful lives of the assets which is five years. The Company's telecommunications equipment is subject to technological risks and rapid market changes due to new products and services and changing customer demand. These changes may result in future adjustments to the estimated useful lives of these assets. SOFTWARE DEVELOPMENT COSTS Costs for the internal development of new software and substantial enhancements to existing software are expensed as incurred. -6- Note 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued) INCOME TAXES The Company accounts for income taxes on the liability method as required by Statement of Financial Accounting Standards ("SFAS") No. 109 Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities. All of the combined affiliates, except for IX, have elected to be taxed as an S-Corporation under the Internal Revenue Code. Under this election, the profits, losses, credits and deductions of the Company are passed through to the individual stockholders. STOCK BASED COMPENSATION The Company has adopted the disclosure only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. The Company applies ABB Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for stock options. Adoption of the statement had no impact on the Company's financial position, results of operations or liquidity. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. IMPAIRMENT OF LONG-LIVED ASSETS Effective January 1, 1996, the Company adopted the provisions of SAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Adoption of the Statement did not have a material impact on the Company's financial position, results of operations or liquidity. Note 2 - CONCENTRATION OF CASH BALANCE Cash balances of approximately $864,000 and $244,000 at December 31, 1997 and 1996, were maintained in a bank account insured by the Federal Deposit Insurance Corporation (FDIC). These balances exceed the insured amount of $100,000. -7- Note 3 - EQUIPMENT
1997 1996 1995 ----------- ----------- ---------- Computer and telecommunications equipment and related software $ 9,661,362 $ 6,300,232 $ 175,090 Leasehold improvements 149,000 - - Automobiles 100,149 29,342 29,342 ----------- ----------- ---------- 9,910,511 6,329,574 204,432 Accumulated depreciation (3,953,033) (1,326,908) (31,884) ----------- ----------- ---------- Net equipment $ 5,957,478 $ 5,002,666 $ 172,548 ----------- ----------- ---------- ----------- ----------- ----------
Note 4 - RELATED PARTY TRANSACTIONS In 1997, the Company provided services to several companies with common ownership. Revenues from these companies were $739,402. A major shareholder of IX entered into a five year employment contract with a major customer of the Company (IDT Corporation), which started in September 1997. Note 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
1997 1996 1995 ----------- ----------- ---------- Payroll and bonuses $ 855,616 $ 176,812 $ - Profit sharing contribution 134,158 - - Other 15,911 47,713 24,054 ----------- ----------- ---------- $ 1,115,685 $ 224,525 $ 24,054 ----------- ----------- ---------- ----------- ----------- ----------
-8- Note 6 - LONG-TERM DEBT
1997 ---------- Term loan through February 1999, payable in quarterly installments of $48,593 including imputed interest at 6.5%, collateralized by various equipment. $ 186,669 Term loan through April 2000, payable in monthly installments of $19,261 including imputed interest at 11%, collateralized by various equipment. 443,607 Term loan through May 2000, payable in monthly installments of $11,652 including imputed interest at 10%, collateralized by various equipment. 298,073 Term loan through July 2000, payable in monthly installments of $4,730 including interest at 8.75%. 134,280 ---------- 1,062,629 Less current maturities 458,139 ---------- Long-term debt, net of current maturities $ 604,490 ---------- ----------
The approximate aggregate amount of all long-term debt maturities for the years ending December 31, is as follows: 1998 $ 458,000 1999 436,000 2000 169,000 -9- Note 7 - OPERATING LEASES The Company leases office space under a ten year lease expiring June 2006 with a renewal option for two five-year periods. Monthly payments under the current lease are $22,470. The Company is required to pay property taxes, utilities, insurance and other costs relating to the leased facilities. Rent expense was $145,000 and $61,000 for 1997 and 1996. The Company leases equipment under operating leases with terms ranging from two to three year periods expiring through 2000. Monthly payments under the leases currently aggregate approximately $23,500. Equipment lease expense was $221,000 and $11,000 for 1997 and 1996. The following is a schedule by years of approximate future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1997: For the Years Ending December 31, -------------------- 1998 $ 508,000 1999 317,000 2000 278,000 2001 288,000 2002 306,000 Thereafter 1,070,000 ------------ Total minimum payments required $ 2,767,000 ------------ ------------ Note 8 - EMPLOYEE BENEFIT PLAN In 1997, the Company implemented an employee profit sharing 401(k) plan for the benefit of all eligible employees. The plan permits employees to contribute a percentage of their salaries up to limits prescribed by the Internal Revenue Service. Employer contributions to the plan are discretionary. The terms of the plan define qualified employees as those 18 years of age, with six months of company service. The profit sharing contribution for 1997 was $134,158. Note 9 - INCOME TAXES Deferred tax attributes resulting from differences between financial accounting amounts and tax bases of assets and liabilities follow:
1997 1996 1995 ----------- ----------- ---------- Noncurrent assets and liabilities Depreciation $ (112,000) $ (185,000) $ - Valuation allowance - - - ----------- ----------- ---------- Net noncurrent deferred tax liability $ (112,000) $ (185,000) $ - ----------- ----------- ---------- ----------- ----------- ----------
-10- Note 9 - INCOME TAXES - (CONTINUED) -------------------------- The provisions for income taxes consist of the following:
For the Years Ended December 31, ------------------------------------------ 1997 1996 1995 ----------- ----------- ---------- Current tax expense (benefit) $ 324,000 $ 56,000 $ (2,100) Deferred tax expense (benefit) (73,000) 185,000 - Net change in valuation allowance - - - ----------- ----------- ---------- $ 251,000 $ 241,000 $ (2,100) ----------- ----------- ---------- ----------- ----------- ----------
Note 10 - CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS MAJOR CUSTOMERS One customer accounted for 76% and 75% of revenues during 1997 and 1996. Such customer was 43% of accounts receivable as of December 31, 1997. On June 29, 1997, a service agreement was entered into with this major customer, PT-1 Communications, Inc. ("PT-1"). In connection with the agreement, PT-1 granted certain warrants for the purchase of shares of Common Stock to four principals of IX. These warrants are exercisable for shares of Common Stock with an aggregate fair market value (as defined) equal to (i) $1,000,000 at a nominal exercise price and (ii) $2.0 million, at an aggregate exercise price equal to $1,000,000. Such warrants with respect to one-third of the Warrant Shares vest and become exercisable upon each of : (i) the earlier to occur of the closing of a stock offering of PT-1 or March 31, 1998, (ii) January 1, 1999 and (iii) December 1, 1999, in each case, if the IX Agreement has not been terminated. These warrants expire upon the fifth anniversary of their respective vesting dates. These warrants, in the event of change in control of PT-1 will immediately vest and become exercisable. In connection with these warrants, the Company will record revenues and compensation expense of approximately $2.0 million, the difference between the exercise price and market value, over the vesting period applicable to each portion of the grant. The Company has recorded $444,000 revenue and $444,000 compensation expense, related to these warrants for the year ended December 31, 1997. Note 11 - SUPPLEMENTAL DISCLOSURE STATEMENT OF CASH FLOWS NONCASH INVESTING AND FINANCING ACTIVITIES During 1997, the Company purchased equipment for $1,150,799 and leasehold improvements for $149,000. In conjunction with these purchases, liabilities of $1,299,799 were assumed. Supplemental disclosure of cash paid.
1997 1996 1995 ----------- ----------- ---------- Interest expense $ 39,463 $ - $ - Income taxes 126,185 - -
Note 12 - CONTINGENCIES RELATED PARTY GUARANTEE The Company has guaranteed the obligations of a related entity under common control. At December 31, 1997, the related party's total future minimum payments, guaranteed by IX amounted to $683,000. REGULATORY ENVIRONMENT The Company is subject to regulation by various government agencies and jurisdictions and believes it is in compliance with all applicable laws and regulations. However, implementation and interpretation of the Telecommunications Act of 1996 (the Act) is ongoing and subject to litigation by various federal and state agencies and courts. As a result, the impact of the Act on the Company is not yet completely determinable and future interpretations and rulings may impact the financial position and results of operations of the Company. ACCRUED TAXES PAYABLE The taxation of the Company's operations which is related to telecommunications is evolving. The Company believes it has adequately provided for any such taxes it may ultimately be required to pay. Legislation may be enacted which would specifically provide for taxation of such operations or may interpret current laws in a manner resulting in additional tax liabilities. Note 13 - SUBSEQUENT EVENT MERGER AGREEMENT On April 8, 1998, IX announced that it had entered into an Agreement and Plan of Merger (the "Merger Agreement"), dated as of April 7, 1998, pursuant to which IX would merge with a wholly owned subsidiary of IDT Corporation ("IDT") (the "Merger") and IX would become a wholly owned subsidiary of IDT. The Merger is subject to the expiration or termination of the required waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and to certain other conditions, each as set forth in the Merger Agreement. Immediately prior to the execution and delivery of the Merger Agreement, IX entered into binding agreements with the stockholders of the four combined affiliated companies to purchase all of the shares of common stock of such companies in exchange for common stock of IX. Pursuant to the Merger Agreement, all of the outstanding shares of the common stock of IX (the "IX Common Stock") will be exchanged for an aggregate of 3,242,323 newly issued shares (the"IDT Shares") of common stock, par value $.01 per share, of IDT (the "IDT Common Stock:), and $20 million in cash (the "Cash Consideration"). The IX Common Stock, the Cash Consideration and the IDT Common Stock will be held in escrow until the satisfaction of the conditions set forth in the Merger Agreement. The Merger is expected to be consummated prior to June 6, 1998. A portion of the IDT Shares will remain in escrow until October 2002 in order to satisfy certain possible indemnification obligations that certain stockholders of IX may have under the Merger Agreement. The Merger will be treated as a purchase for accounting purposes on IDT and is intended to qualify as a tax-free reorganization under the provisions of Section 368 of the Internal Revenue Code of 1986, as amended. -12- MAJOR CUSTOMER Following the public announcement of the Merger, PT-1 has indicated its position that the Merger violates IX's service agreement with PT-1 (see Note 10). However, PT-1 has taken no action with respect to such claim. RESTRICTED STOCK AWARD Immediately prior to signing of the Merger Agreement, IX issued shares of restricted common stock to certain individuals. Such restricted stock will be replaced by 77,277 shares of IDT common stock after the merger is completed subject to certain defined restrictions. These restrictions include conclusion of the merger by a certain date and continued service of the participant with the Company or its affiliates through April 7, 1999. -13- EX-99.2 4 UNAUDITED COMBINED FINANCIALS OF INTERCHANGE EXHIBIT 99.2 INTEREXCHANGE, INC. AND COMBINED AFFILIATES For the Three Months Ended March 31, 1998 and 1997 (Unaudited) Page ---- Combined Balance Sheet 1 Combined Statements of Operations 2 Combined Statements of Stockholders' Equity 3 Combined Statements of Cash Flows 4 Notes to Combined Financial Statements 5 INTEREXCHANGE, INC. AND COMBINED AFFILIATES Combined Balance Sheet March 31, 1998 (Unaudited) Assets Current assets Cash and cash equivalents $ 523,056 Accounts receivable 818,308 ------------ 1,341,364 Equipment, net of accumulated depreciation 5,326,352 Other assets 36,154 ------------ $ 6,703,870 ------------ ------------ Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 2,610,091 Current maturities of long-term debt 502,839 Accrued expenses and other current liabilities 945,282 Accrued taxes payable 700,000 Income taxes payable 333,498 ------------ 5,091,710 ------------ Long-term debt, net of current maturities 430,006 Deferred income taxes 112,000 Stockholders' equity Common stock 600 Retained earnings 1,069,554 ------------ Total stockholders' equity 1,070,154 ------------ $ 6,703,870 ------------ ------------ See accompanying notes to combined financial statements. -1- INTEREXCHANGE, INC. AND COMBINED AFFILIATES Combined Statements of Operations For the Three Months Ended March 31, 1998 and 1997 (Unaudited) 1998 1997 ------------ ------------ Revenues $ 3,811,900 $ 2,884,490 Costs and expenses Direct cost of services 1,165,843 1,040,452 Selling, general and administrative expenses 1,321,281 886,483 Depreciation 543,825 658,784 ------------ ------------ 3,030,949 2,585,719 ------------ ------------ Earnings from operations 780,951 298,771 Other income (expense) Interest income 6,959 4,611 Interest expense (52,771) (10,939) ------------ ------------ (45,812) (6,328) ------------ ------------ Earnings before income taxes 735,139 292,443 Income taxes 308,000 120,000 ------------ ------------ Net income $ 427,139 $ 172,443 ------------ ------------ ------------ ------------ See accompanying notes to combined financial statements. -3- INTEREXCHANGE, INC. AND COMBINED AFFILIATES Combined Statements of Stockholders' Equity For the Three Months Ended March 31, 1998 and 1997 (Unaudited)
Common Stock --------------------- Total Number of Retained Stockholders' Shares Amount Earnings Equity -------- -------- ---------- ----------- Balance - January 1, 1997 500 $ 500 $ 268,992 $ 269,492 Net income - - 172,443 172,443 Stock issued - Blue Sky Software, Inc. 100 100 - 100 Distributions to stockholders - - (9,138) (9,138) -------- -------- ---------- ----------- Balance - March 31, 1997 600 $ 600 $ 432,297 $ 432,897 -------- -------- ---------- ----------- -------- -------- ---------- ----------- Balance - January 1, 1998 600 $ 600 $ 645,715 $ 646,315 Net income - - 427,139 427,139 Distributions to stockholders - - (3,300) (3,300) -------- -------- ---------- ----------- Balance - March 31, 1998 600 $ 600 $1,069,554 $ 1,070,154 -------- -------- ---------- ----------- -------- -------- ---------- -----------
See accompanying notes to combined financial statements. -3- INTEREXCHANGE, INC. AND COMBINED AFFILIATES Combined Statements of Cash Flows For the Three Months Ended March 31, 1998 and 1997 (Unaudited) 1998 1997 ---------- ---------- Cash flows from operating activities Net income $ 427,139 $ 172,443 ---------- ---------- Adjustment to reconcile net income to net cash from operating activities: Depreciation 543,825 658,784 Deferred income taxes - (157,000) (Increase) decrease in Accounts receivable (360,782) (17,568) Other assets - 18 Increase (decrease) in Accounts payable (575,583) (393,021) Accrued expenses and other current liabilities (170,403) (84,144) Accrued taxes payable - 50,000 Income taxes payable 105,459 100,810 Customer deposits (350,000) 350,000 ---------- ---------- Total adjustments (807,484) 507,879 ---------- ---------- (380,345) 680,322 ---------- ---------- Cash flows from investing activities Payments for purchase of property and equipment - (562,733) Retirement of property and equipment 87,301 - ---------- ---------- 87,301 (562,733) ---------- ---------- Cash flows from financing activities Principal payments of long-term debt (129,784) - Distributions to stockholders (3,300) (9,138) Proceeds from issuance of common stock - 100 ---------- ---------- (133,084) (9,038) ---------- ---------- Net change in cash and cash equivalents (426,128) 108,551 Cash and cash equivalents - beginning 949,184 81,416 ---------- ---------- Cash and cash equivalents - ending $ 523,056 $ 189,967 ---------- ---------- ---------- ---------- See accompanying notes to combined financial statements. -4- INTEREXCHANGE, INC. AND COMBINED AFFILIATES Notes to Combined Financial Statements (Unaudited) Note 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION The combined financial statements include the accounts of InterExchange, Inc. ("IX"), Doublestone Computing Enterprises, Inc., Blue Sky Software, Inc., Altom Associates, Inc. and Mikulynec Associates, Inc. (the "Company"). All significant intercompany balances and transactions have been eliminated in the combination. OPERATIONS The Company is principally engaged in providing technology and management services to telecommunications service providers, including management of debit cards and switching services to customers in the United States and internationally. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION Revenue for management of debit cards and switching services is recognized as service is provided. DIRECT COSTS OF REVENUES Direct cost of revenues consists primarily of connectivity costs and related costs of personnel. EQUIPMENT Equipment and software is recorded at cost and are depreciated using accelerated methods over the estimated useful lives of the assets which is five years. The Company's telecommunications equipment is subject to technological risks and rapid market changes due to new products and services and changing customer demand. These changes may result in future adjustments to the estimated useful lives of these assets. SOFTWARE DEVELOPMENT COSTS Costs for the internal development of new software and substantial enhancements to existing software are expensed as incurred. INCOME TAXES The Company accounts for income taxes on the liability method as required by Statement of Financial Accounting Standards ("SFAS") No. 109 Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities. -5- INTEREXCHANGE, INC. AND COMBINED AFFILIATES Notes to Combined Financial Statements (Unaudited) Note 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued) INCOME TAXES - (continued) All of the combined affiliates, except for IX, have elected to be taxed as an S-Corporation under the Internal Revenue Code. Under this election, the profits, losses, credits and deductions of the Company are passed through to the individual stockholders. STOCK BASED COMPENSATION The Company has adopted the disclosure only provisions of SFAS No. 123, Accounting for Stock-Based Compensation. The Company applies ABB Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for stock options. Adoption of the statement had no impact on the Company's financial position, results of operations or liquidity. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Note 2 - CONCENTRATION OF CASH BALANCE A cash balance of $363,000 at March 31, 1998, was maintained in a bank account insured by the Federal Deposit Insurance Corporation (FDIC). This balance exceeds the insured amount of $100,000. Note 3 - EQUIPMENT 1998 ----------- Computer and telecommunications equipment and related software $ 9,661,362 Leasehold improvements 149,000 ----------- 9,810,362 Accumulated depreciation (4,484,010) ----------- Net equipment $ 5,326,352 ----------- ----------- Note 4 - RELATED PARTY TRANSACTIONS The Company provided services to several companies with common ownership. Revenues from these companies were $290,000 and $185,000 for 1998 and 1997. A major shareholder of IX entered into a five year employment contract with a major customer of the Company (IDT Corporation), which started in September 1997. -6- INTEREXCHANGE, INC. AND COMBINED AFFILIATES Notes to Combined Financial Statements (Unaudited) Note 5 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES 1998 ----------- Payroll and bonuses $ 875,282 Legal 70,000 ----------- $ 945,282 ----------- ----------- Note 6 - LONG-TERM DEBT
1998 ----------- Term loan through February 1999, payable quarterly at $48,593 including imputed interest at 6.5%, collateralized by various equipment. $ 141,072 Term loan through April 2000, payable monthly at $19,261 including imputed interest at a 11%, collateralized by various equipment. 397,644 Term loan through May 2000, payable monthly at $11,652 including imputed interest at a fixed rate of 10%, collateralized by various equipment. 271,218 Term loan through July 2000, payable monthly at $4,730 including interest at 8.75%. 122,911 ----------- Less current maturities 502,839 ----------- Long-term debt, net of current maturities $ 430,006 ----------- -----------
The approximate aggregate amount of all long-term debt maturities for the years ending March 31, follows: 1999 $ 504,000 2000 364,000 2001 65,000 Note 7 - OPERATING LEASES The Company leases office space under a ten year lease expiring June 2006 with a renewal option for two five-year periods. Monthly payments under the current lease are $22,470. The Company is required to pay property taxes, utilities, insurance and -7- INTEREXCHANGE, INC. AND COMBINED AFFILIATES Notes to Combined Financial Statements (Unaudited) other costs relating to the leased facilities. Rent expense was $57,000 and $36,000 for 1998 and 1997. The Company leases equipment under operating leases with terms ranging from two to three year periods expiring through 2000. Monthly payments under the leases currently aggregate approximately $23,500. Equipment lease expense was $70,000 and $55,000 for 1998 and 1997. The following is a schedule by years of approximate future minimum rental payments required under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of March 31, 1998: For the Years Ending March 31, -------------------- 1999 $ 469,000 2000 300,000 2001 275,000 2002 297,000 2003 306,000 Thereafter 993,000 ----------- Total minimum payments required $ 2,640,000 ----------- ----------- Note 8 - CURRENT VULNERABILITY DUE TO CERTAIN CONCENTRATIONS MAJOR CUSTOMERS One customer accounted for 78% and 76% of revenues during 1998 and 1997. Such customer was 93% of accounts receivable as of March 31, 1998. On June 29, 1997, a service agreement was entered into with this major customer, PT-1 Communications, Inc. ("PT-1"). In connection with the agreement, PT-1 granted certain warrants for the purchase of shares of Common Stock to four principals of IX. These warrants are exercisable for shares of Common Stock with an aggregate fair market value (as defined) equal to (i) $1,000,000 at a nominal exercise price and (ii) $2.0 million, at an aggregate exercise price equal to $1,000,000. Such warrants with respect to one-third of the Warrant Shares vest and become exercisable upon each of: (i) the earlier to occur of the closing of a stock offering of PT-1 or March 31, 1998, (ii) January 1, 1999 and (iii) December 1, 1999, in each case, if the IX Agreement has not been terminated. These warrants expire upon the fifth anniversary of their respective vesting dates. These warrants, in the event of change in control of PT-1 will immediately vest and become exercisable. In connection with these warrants, the Company will record revenues and compensation expense of approximately $2.0 million, the difference between the exercise price and market value, over the vesting period applicable to each portion of -8- INTEREXCHANGE, INC. AND COMBINED AFFILIATES Notes to Combined Financial Statements (Unaudited) the grant. The Company has recorded $220,000 revenue and $220,000 compensation expense, related to these warrants for the three months ended March 31, 1998. Note 9 - SUPPLEMENTAL DISCLOSURE STATEMENT OF CASH FLOWS NONCASH INVESTING AND FINANCING ACTIVITIES During the three months ended March 31, 1997, the Company purchased equipment for $362,000. In conjunction with this purchase, liabilities of $362,000 were assumed. Supplemental disclosure of cash paid. 1998 1997 --------- --------- Interest expense $ 52,771 $ 10,939 Income taxes 200,000 55,000 Note 10 - CONTINGENCIES RELATED PARTY GUARANTEE The Company has guaranteed the obligations of a related entity under common control. At March 31, 1998, the related party's total future minimum payments, guaranteed by IX amounted $520,000. REGULATORY ENVIRONMENT The Company is subject to regulation by various government agencies and jurisdictions and believes it is in compliance with all applicable laws and regulations. However, implementation and interpretation of the Telecommunications Act of 1996 (the Act) is ongoing and subject to litigation by various federal and state agencies and courts. As a result, the impact of the Act on the Company is not yet completely determinable and future interpretations and rulings may impact the financial position and results of operations of the Company. ACCRUED TAXES PAYABLE The taxation of the Company's operations which is related to telecommunications is evolving. The Company believes it has adequately provided for any such taxes it may ultimately be required to pay. Legislation may be enacted which would specifically provide for taxation of such operations or may interpret current laws in a manner resulting in additional tax liabilities. -9- INTEREXCHANGE, INC. AND COMBINED AFFILIATES Notes to Combined Financial Statements (Unaudited) Note 11 - SUBSEQUENT EVENT MERGER AGREEMENT On April 8, 1998, IX announced that it had entered into an Agreement and Plan of Merger (the "Merger Agreement"), dated as of April 7, 1998, pursuant to which IX would merge with a wholly owned subsidiary of IDT Corporation ("IDT") (the "Merger") and IX would become a wholly owned subsidiary of IDT. Immediately prior to the execution and delivery of the Merger Agreement, IX entered into binding agreements with the stockholders of the four combined affiliated companies to purchase all of the shares of common stock of such companies in exchange for common stock of IX. Pursuant to the Merger Agreement, all of the outstanding shares of the common stock of IX (the "IX Common Stock") will be exchanged for an aggregate of 3,242,323 newly issued shares (the "IDT Shares") of common stock, par value $.01 per share, of IDT (the "IDT Common Stock", and $20 million in cash (the "Cash Consideration"). The IX Common Stock, the Cash Consideration and the IDT Common Stock will be held in escrow until the satisfaction of the conditions set forth in the Merger Agreement. The Merger is expected to be consummated prior to June 6, 1998. A portion of the IDT Shares will remain in escrow until October 2002 in order to satisfy certain possible indemnification obligations that certain stockholders of IX may have under the Merger Agreement. The Merger will be treated as a purchase for accounting purposes on IDT and is intended to qualify as a tax-free reorganization under the provisions of Section 368 of the Internal Revenue Code of 1986, as amended. MAJOR CUSTOMER Following the public announcement of the Merger, PT-1 has indicated its position that the Merger violates IX's service agreement with PT-1 (see Note 8). However, PT-1 has taken no action with respect to such claim. RESTRICTED STOCK AWARD Immediately prior to signing of the Merger Agreement, IX issued shares of restricted common stock to certain individuals. Such restricted stock will be replaced by 77,277 shares of IDT common stock after the merger is completed subject to certain defined restrictions. These restrictions include conclusion of the merger by a certain date and continued service of the participant with the Company or its affiliates through April 7, 1999. -10- -----END PRIVACY-ENHANCED MESSAGE-----