-----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, QGr87c6rEqocpV8W3l1YYql+3UqgpGcBiFP0TKfi3RdDvfLkPWWLWI8KGizUn2mA kCZzv+Eewca+3KULIIECYw== 0001125282-01-000981.txt : 20010320 0001125282-01-000981.hdr.sgml : 20010320 ACCESSION NUMBER: 0001125282-01-000981 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010131 FILED AS OF DATE: 20010319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDT CORP CENTRAL INDEX KEY: 0001005731 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 223415036 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-16371 FILM NUMBER: 1571934 BUSINESS ADDRESS: STREET 1: 190 MAIN ST CITY: HACKENSACK STATE: NJ ZIP: 07601 BUSINESS PHONE: 2019281000 MAIL ADDRESS: STREET 1: 294 STATE STREET CITY: HACKENSACK STATE: NJ ZIP: 07601 10-Q 1 0001.txt FORM 10Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q |X| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended January 31, 2001 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 (I.R.S. Employer jurisdiction of Identification incorporation or Number) organization) 520 Broad Street, Newark, New Jersey 07102 -------------------------------------------- ------------- (Address of principal executive offices) (Zip Code) (973) 438-1000 ---------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Common Stock, $.01 par value--22,296,337 shares as of March 19, 2001 Class A Common Stock, $.01 par value--9,892,488 shares as of March 19, 2001 Class B Common Stock, $.01 par value--no shares outstanding as of March 19, 2001 (Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date) IDT CORPORATION TABLE OF CONTENTS PART I. FINANCIAL INFORMATION..................................................................... 3 Item 1. Financial Statements (Unaudited)..................................................... 3 Condensed Consolidated Balance Sheets as of January 31, 2001 and July 31, 2000...................................................................... 3 Condensed Consolidated Statements of Income for the six months and the three months ended January 31, 2001 and 2000................................... 4 Condensed Consolidated Statements of Cash Flows for the six months ended January 31, 2001 and 2000.................................................... 5 Notes to Condensed Consolidated Financial Statements................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 18 PART II. OTHER INFORMATION........................................................................ 19 Item 1. Legal Proceedings.................................................................... 19 Item 2. Changes in Securities and Use of Proceeds............................................ 19 Item 3. Defaults Upon Senior Securities...................................................... 19 Item 4. Submission of Matters to a Vote of Security Holders.................................. 19 Item 5. Other Information.................................................................... 19 Item 6. Exhibits and Reports on Form 8-K..................................................... 20 SIGNATURES ........................................................................................ 22
PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) IDT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
January 31, 2001 July 31, 2000 ---------------- ------------- (Unaudited) (Note 1) Assets Current assets: Cash and cash equivalents .............................................................. $ 1,051,310 $ 162,879 Marketable securities .................................................................. 26,104 230,160 Accounts receivable, net ............................................................... 141,015 160,995 Notes receivable - current portion ..................................................... 180 3,630 Inventory .............................................................................. 10,187 13,121 Other current assets ................................................................... 38,214 71,108 ----------- ----------- Total current assets................................................................. 1,267,010 641,893 Property, plant and equipment, at cost, net ............................................ 207,001 225,638 Trademark, net ......................................................................... -- 10,985 Notes receivable - long-term portion ................................................... 8,787 8,001 Intangible assets, net ................................................................. 136,701 162,233 Marketable securities .................................................................. -- 132,277 Investments ............................................................................ 99,309 29,319 Other assets ........................................................................... 323,522 8,709 ----------- ----------- Total assets ........................................................................ $ 2,042,330 $ 1,219,055 =========== =========== Liabilities and stockholders' equity Current liabilities: Trade accounts payable ................................................................. $ 124,944 $ 161,874 Accrued expenses ....................................................................... 19,691 36,451 Deferred revenue ....................................................................... 48,314 48,572 Notes payable - current portion ........................................................ 11,323 22,604 Capital lease obligations - current portion ............................................ 20,355 13,540 Other current liabilities .............................................................. 13,651 10,922 ----------- ----------- Total current liabilities ........................................................... 238,278 293,963 Deferred tax liabilities, net ............................................................ 555,511 168,772 Notes payable - long-term portion ...................................................... 390 12,174 Capital lease obligation - long-term portion ........................................... 57,240 43,940 Other liabilities ...................................................................... 267 709 ----------- ----------- Total liabilities ................................................................... 851,686 519,558 Minority interests ....................................................................... 7,142 231,309 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; 22,296,337 and 25,959,256 shares issued and outstanding at January, 31, 2001 and July 31, 2000, respectively ..................................... 223 260 Class A common stock, $.01 par value; authorized shares - 35,000,000; 9,892,488 and 9,970,233 shares issued and outstanding at January 31, 2001 and July 31, 2000 ................................................................ 99 100 Class B common stock, $.01 par value; authorized shares - 100,000,000; no shares issued and outstanding ......................................... -- -- Loans to stockholders .................................................................. (251) (251) Additional paid-in capital ............................................................. 376,808 371,005 Treasury stock ......................................................................... (136,449) -- Accumulated other comprehensive income (losses) ........................................ 881 (92,653) Retained earnings ...................................................................... 942,191 189,727 ----------- ----------- Total stockholders' equity .......................................................... 1,183,502 468,188 ----------- ----------- Total liabilities and stockholders' equity ......................................... $ 2,042,330 $ 1,219,055 =========== ===========
See notes to condensed consolidated financial statements. 3 IDT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data) (Unaudited)
Six Months Ended January 31, Three Months Ended January 31, ---------------------------- ------------------------------ 2001 2000 2001 2000 ---- ---- ---- ---- Revenue .......................................... $ 564,194 $ 558,940 $ 287,597 $ 275,519 Costs and expenses: Direct cost of revenue ......................... 490,772 450,983 252,153 220,783 Selling, general and administrative ............ 152,670 105,338 69,288 56,720 Depreciation and amortization .................. 29,277 20,375 14,611 10,449 ------------ ------------ ------------ ------------ Total costs and expenses ......................... 672,719 576,696 336,052 287,952 ------------ ------------ ------------ ------------ Loss from operations ............................. (108,525) (17,756) (48,455) (12,434) Interest, net .................................... 29,591 818 16,176 1,228 Gain on sale of subsidiary stock ................. 1,037,726 -- -- -- Investment and other income, net ................. 153,301 247,460 (122,577) 181,888 ------------ ------------ ------------ ------------ Income before income taxes, minority interests and extraordinary item ............................. 1,112,093 230,522 (154,856) 170,682 Provision for income taxes ....................... 356,047 101,582 (40,411) 74,877 Minority interests ............................... 3,582 (8,113) 2,659 (5,516) ------------ ------------ ------------ ------------ Income before extraordinary item ................. 752,464 137,053 (117,104) 101,321 Extraordinary loss on retirement of debt, net of income taxes ................................... -- 2,976 -- 2,976 ------------ ------------ ------------ ------------ Net income ....................................... $ 752,464 $ 134,077 $ (117,104) $ 98,346 ============ ============ ============ ============ Income (loss) per share: Income (loss) before extraordinary item: Basic .......................................... $ 22.11 $ 4.02 $ (3.54) $ 2.97 Diluted ........................................ $ 20.32 $ 3.76 $ (3.54) $ 2.78 Extraordinary loss on retirement of debt, net of income taxes: Basic .......................................... $ -- $ (0.09) $ -- $ (0.09) Diluted ........................................ $ -- $ (0.08) $ -- $ (0.08) Net income (loss): Basic .......................................... $ 22.11 $ 3.93 $ (3.54) $ 2.88 ============ ============ ============ ============ Diluted ........................................ $ 20.32 $ 3.68 $ (3.54) $ 2.70 ============ ============ ============ ============ Weighted average number of shares used in calculation of earnings per share - basic ...... 34,030,250 34,115,950 33,095,084 34,132,166 ============ ============ ============ ============ Weighted average number of shares used in calculation of earnings per share - diluted .... 37,031,428 36,421,864 33,095,084 36,438,725 ============ ============ ============ ============
See notes to condensed consolidated financial statements. 4 IDT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited)
Six Months Ended January 31, ---------------------------- 2001 2000 ---- ---- Net cash provided by (used in) operating activities . $ (82,841) $ (41,097) Investing activities Purchases of property, plant and equipment .......... (62,394) (34,630) Net collection (issuance) of notes receivable ....... (786) 17,864 Net proceeds from sale of Net2Phone common stock .... 1,042,113 115,434 Purchases of investments, net ....................... 17,783 (27,296) Net sales (purchases) of marketable securities ...... 129,202 (3,018) ----------- ----------- Net cash provided by investing activities ........... 1,125,918 68,354 Financing activities Proceeds from offerings of common stock of subsidiary -- 263,076 Proceeds from exercise of stock options of subsidiary -- 4,297 Proceeds from exercise of stock options ............. 2,729 1,940 Repayment of borrowings ............................. (42,142) (110,574) Repayment of capital lease obligations .............. 20,115 (1,712) Common stock repurchases ............................ (134,189) -- Distributions to minority shareholder ............... (1,160) (1,573) ----------- ----------- Net cash (used in) provided by financing activities . (154,647) 155,454 ----------- ----------- Net increase in cash and cash equivalents ........... 888,431 182,711 Cash and cash equivalents, beginning of period ...... 162,879 52,903 ----------- ----------- Cash and cash equivalents, end of period ............ $ 1,051,310 $ 235,614 =========== =========== Supplemental disclosures of cash flow information Interest paid ....................................... $ 4,409 $ 7,726 Income taxes paid ................................... $ 1,700 $ 1,050
See notes to condensed consolidated financial statements. 5 IDT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 - Basis of Presentation The accompanying unaudited condensed consolidated financial statements of IDT Corporation and subsidiaries (collectively, the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six and three month periods ended January 31, 2001 are not necessarily indicative of the results that may be expected for the year ending July 31, 2001. The balance sheet at July 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, please 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, 2000, as filed with the Securities and Exchange Commission. On August 11, 2000, the Company completed the sale of 14.9 million shares of its holdings of Net2Phone, Inc.'s ("Net2Phone") Class A Common Stock, at a price of $75 per share to ITelTech, LLC ("ITelTech"), a Delaware limited liability company controlled by AT&T Corporation ("AT&T"). In addition, ITelTech purchased four million newly-issued shares of Class A Common Stock from Net2Phone at a price of $75 per share. These transactions reduced the Company's voting stake in Net2Phone from approximately 56% to 21% and its economic stake in Net2Phone from approximately 45% to 17%. Accordingly, the Company has deconsolidated Net2Phone effective August 11, 2000 and now accounts for its investment in Net2Phone using the equity method. Note 2 - Business Segment Information Operating results and other financial data presented for the principal business segments of the Company are as follows ($ in thousands):
Wholesale Retail Internet Internet Telecommunications Telecommunications -------- -------- Services Services Services Telephony Ventures Total ------------------ ------------------ -------- --------- -------- ----- Three months ended January 31, 2001 Total segment revenue ............. $ 103,295 $ 177,574 $ 3,075 $ -- $ 3,653 $ 287,597 Less: revenues between segments ... -- -- -- -- -- -- Total unaffiliated revenue ........ 103,295 177,574 3,075 -- 3,653 287,597 --------- --------- --------- --------- --------- --------- Loss from operations .............. $ (14,053) $ (14,823) $ (5,209) $ -- $ (14,370) $ (48,455) ========= ========= ========= ========= ========= ========= Three months ended January 31, 2000 Total segment revenue ............. $ 132,348 $ 136,028 $ 3,348 $ 15,509 $ -- $ 287,233 Less: revenues between segments ... 4,687 3,137 300 3,590 -- 11,714 --------- --------- --------- --------- --------- --------- Total unaffiliated revenue ........ 127,661 132,891 3,048 11,919 -- 275,519 Income (loss) from operations ..... $ 4,146 $ 3,685 $ (3,585) $ (13,699) $ (2,983) $ (12,434) ========= ========= ========= ========= ========= =========
6 IDT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Wholesale Retail Internet Internet Telecommunications Telecommunications -------- -------- Services Services Services Telephony Ventures Total ------------------ ------------------ -------- --------- -------- ----- C> Six months ended January 31, 2001 Total segment revenue ........... $ 214,063 $ 334,616 $ 6,710 $ -- $ 8,805 $ 564,194 Less: revenues between segments . -- -- -- -- -- -- --------- --------- --------- --------- --------- --------- Total unaffiliated revenue ...... 214,063 334,616 6,710 -- 8,805 564,194 Income (loss) from operations ... $ (31,868) $ (31,982) $ (7,817) $ -- $ (36,858) $(108,525) ========= ========= ========= ========= ========= ========= Six months ended January 31, 2000 Total segment revenue ........... $ 273,769 $ 266,728 $ 6,848 $ 28,609 $ -- $ 575,954 Less: revenues between segments . 8,287 3,137 300 5,290 -- 17,014 --------- --------- --------- --------- --------- --------- Total unaffiliated revenue ...... 265,482 263,591 6,548 23,319 -- 558,940 Income (loss) from operations ... $ 8,035 $ 7,376 $ (7,185) $ (22,999) $ (2,981) $ (17,756) ========= ========= ========= ========= ========= =========
Note 3 - Property, Plant and Equipment Property, plant and equipment consists of the following ($ in thousands):
January 31, 2001 July 31, 2000 ---------------- ------------- Equipment ..................................... $ 249,883 $ 238,767 Computer software ............................. 12,028 32,216 Leasehold improvements ........................ 15,401 11,918 Furniture and fixtures ........................ 10,519 10,625 Land and building ............................. 6,327 6,327 --------- --------- 294,158 299,853 Less: Accumulated depreciation and amortization (87,157) (74,215) --------- --------- $ 207,001 $ 225,638 ========= =========
Note 4 - Other Comprehensive Losses Other comprehensive losses for the six and three month periods ended January 31, 2001 consisted primarily of unrealized losses in the fair market value of marketable securities. Note 5 - AT&T Transactions On March 28, 2000, IDT entered into an agreement with AT&T, which was completed on August 11, 2000, pursuant to which the Company's subsidiary IDT Investments, Inc. ("IDT Investments") sold ITelTech 14.9 million shares of Net2Phone's Class A Common Stock at a price of $75 per share. In addition, ITelTech purchased four million newly-issued shares of Class A Common Stock from Net2Phone at a price of $75 per share. Following these transactions, ITelTech has approximately a 39% voting stake and a 32% economic stake in Net2Phone for a total cash investment of approximately $1.4 billion. In recognition of these transactions, a "Gain on sale of subsidiary stock" of $1.038 billion was recorded in the Condensed Consolidated Statement of Income for the three months ended October 31, 2000. These transactions reduced the Company's voting stake in Net2Phone from approximately 56% to 21% and its economic stake in Net2Phone from approximately 45% to 17%. Accordingly, the Company has deconsolidated Net2Phone effective August 11, 2000 and now accounts for its investment in Net2Phone using the equity method. In addition, the Company has granted AT&T a right of first refusal with respect to IDT Investments' 7 IDT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) remaining stake of approximately 10 million shares of Class A Common Stock. AT&T also received the option to convert IDT Investments' remaining 10 million shares of Class A Common Stock into shares of Net2Phone Common Stock, par value $0.01 per share ("Common Stock"). Shares of Class A Common Stock have two votes per share, while shares of Common Stock have one vote per share. In addition, the Company has the option to sell AT&T 2,040,817 shares of its Class B Common Stock for total consideration of $75.0 million. In August 2000, the Company notified AT&T of its intention to exercise this option. The transaction is expected to be completed in March 2001. Note 6 - Tyco Settlement On October 10, 2000, IDT reached a full and final settlement with Tyco of all pending claims brought against one another and their respective affiliates. The settlement agreement is subject to a confidentiality agreement among the parties and only the following disclosure by IDT is permitted under the terms of that agreement. Under the terms of the settlement, TyCom Ltd. ("TyCom") granted to IDT Europe B.V.B.A. ("IDT Europe"), free of charge, certain exclusive rights to use capacity on the transatlantic and transpacific segments of TyCom's global undersea fiber optic network (the "TyCom Global Network"), which TyCom is currently deploying. The settlement agreement provides for IDT Europe to obtain exclusive indefeasible rights to use two 10 Gb/s wavelengths on the transatlantic segment and two 10 Gb/s wavelengths on the transpacific segment for fifteen years from the applicable Handover Dates (as described below). TyCom previously announced that it expects the TyCom transatlantic network to be ready for service in September 2001, and the TyCom transpacific network to be ready for service in the second quarter of 2002, the respective "Ready for Service Dates." Under the terms of the settlement agreement, the Handover Dates for the wavelengths on the transatlantic segment are six months (for the first wavelength) and 18 months (for the second wavelength), respectively, after the Ready for Service Date of the TyCom transatlantic network; and the Handover Date for the wavelengths on the transpacific segment are six months (for the first wavelength) and 18 months (for the second wavelength), respectively, after the Ready for Service Date of the TyCom transpacific network. Operation, administration and maintenance for the wavelengths used by the Company will be provided by TyCom for a fifteen year period after the relevant Handover Date, free of charge. TyCom has also granted the Company certain rights to resell any unused capacity on the wavelengths through TyCom as its sole and exclusive agent. In addition, the Company will also have the option, exercisable at least annually, to convert the available capacity on its wavelengths to available equivalent capacity on another portion of the TyCom Global Network. In recognition of the settlement, a gain of $313.5 million is included as a component of "Investment and other income, net" in the Condensed Consolidated Statement of Income for the six months ended January 31, 2001. Note 7 - Subsequent Events In February 2001, the Company purchased certain assets of PT-1 Communications, Inc. ("PT-1"), a wholly-owned subsidiary of STAR Telecommunications, Inc., relating to its debit card business with a payment of cash and assumption of certain specified liabilities, including the obligation to honor the outstanding phone cards of PT-1. The cash payment and assumption of net liabilities incurred are estimated to be $27 million with substantially all of the purchase price to be recorded as goodwill and amortized over 20 years. 8 IDT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 8 - Legal Proceedings and Contingencies In October 1999, Union Telecard Alliance, LLC, a consolidated subsidiary, commenced an action against DigiTEC 2000, Inc. ("DigiTEC") and TecNet, Inc. ("TecNet") in the Supreme Court of the State of New York, County of New York, alleging damages of approximately $725,000 based upon, among other things, non-payment for prepaid calling cards. DigiTEC and TecNet have answered the complaint and DigiTEC has asserted a third-party claim against IDT seeking damages of $2.5 million dollars based upon IDT's alleged breach of a settlement agreement between IDT and DigiTEC which had resolved a prior litigation between those parties. The court adjourned the return date without assigning a specific return date for IDT to answer the Third-Party Complaint, subject to DigiTEC's right to make a written thirty day demand for an answer. This action is currently in the early stages of discovery. In February 2000, Multi-Tech Systems, Inc. ("Multi-Tech") filed suit against Net2Phone and other companies in the United States Federal District Court in Minneapolis, Minnesota. In its press release, Multi-Tech stated that "the defendant companies are infringing because they are providing the end users with the software necessary to simultaneously transmit voice and data on their computers in the form of making a phone call over the Internet." Net2Phone intends to defend the lawsuit vigorously. Net2Phone believes that the Multi-Tech claims are without merit. However, should a judge issue an injunction against Net2Phone requiring that Net2Phone cease distributing its software or providing its software-based services, such an injunction could have an adverse effect on Net2Phone's business and IDT's investment in Net2Phone. Net2Phone has filed an answer and this action is currently in the early stages of discovery. IDT Corporation filed a Complaint with the United States District Court for the District of New Jersey on January 29, 2001, against Telefonica S.A., Terra Networks, S.A., Terra Networks, U.S.A., Inc. and Lycos, Inc. The complaint asserts claims against the defendants for, among other things, breaches of various contracts, breach of fiduciary duty, securities violations, fraudulent misrepresentation, negligent misrepresentation, fraudulent concealment and tortious interference with prospective economic advantage. Terra Networks, U.S.A., Inc. and Lycos, Inc. have been served with the complaint. Service on Telefonica, S.A. and Terra Networks, S.A. is proceeding through the Hague Convention and is expected to be completed in the near future. The Company is subject to other legal proceedings and claims, which have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be no assurances in this regard, in the opinion of the Company's management, such proceedings, as well as the aforementioned actions, will not have a material adverse effect on results of operations or the financial condition of the Company. 9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the accompanying condensed consolidated financial statements and the associated notes thereto of this Quarterly Report, and the audited consolidated financial statements and the notes thereto and our Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended July 31, 2000, as filed with the Securities and Exchange Commission. Overview General IDT is a leading facilities-based, emerging multinational carrier that provides a broad range of telecommunications services to wholesale and retail customers worldwide. In addition, our IDT Ventures division is developing several innovative telecom and Internet-related businesses. We also hold, through our majority-owned subsidiary, IDT Investments, Inc., equity interests in other technology companies, including our former subsidiary, Net2Phone, Inc. (NASDAQ: NTOP), which offers a variety of Internet telephony products and services. Our telecommunications services include wholesale carrier services, prepaid calling cards, domestic long distance services and international retail services. We deliver our telecommunications services over a high-quality network consisting of over 100 switches in the U.S. and Europe and owned and leased capacity on 16 undersea fiber optic cables. Our network connects our U.S. facilities with our international facilities and with the facilities of our foreign partners in Europe, Latin America and Asia. In addition, we obtain transmission capacity from other carriers. We deliver our international traffic worldwide pursuant to our agreements with U.S.-based carriers, foreign carriers and more than 20 of the companies that are primarily responsible for providing telecommunications services in particular countries. In October 2000, we announced plans to reorganize, creating separate divisions designed to reflect our various businesses and unique strategies. When we complete this reorganization, which is subject to regulatory approval, receipt of counterparty consents and completion of various administrative requirements, IDT Corporation will be a holding company, consisting primarily of two main subsidiaries: IDT Telecom and IDT Ventures. IDT Telecom will conduct our core telecommunications businesses, including providing wholesale international telecommunications services, retail debit card services, domestic long distance services and international retail services. IDT Ventures will consist of our newly-developed telecom and Internet-related businesses, as well as our equity investments in other entities, such as Net2Phone. Outlook In recent years, we have derived the majority of our revenues from our core telecommunications businesses, consisting primarily of wholesale carrier services and retail prepaid calling cards. These businesses have also accounted for the bulk of our operating expenses as well. Since the fourth quarter of Fiscal 1998, we have conducted wholesale carrier and prepaid calling card operations in Europe. We are also developing various new telecom and Internet related businesses. During the second quarter of Fiscal 2001, we incurred approximately $16.1 million in development and marketing costs for these business ventures, which provided us with revenues of approximately $3.7 million. We anticipate that we will continue to incur significant costs related to these and other new ventures. The timing and magnitude of any revenues and/or operating profits to be realized from these new businesses remains uncertain. Our wholesale carrier and prepaid calling card businesses have experienced intense price competition, which has served, over time, to reduce our average per-minute price realizations, putting pressure on our gross margins. In addition, this environment has led some of our competitors to de-emphasize their wholesale carrier and/or prepaid calling card operations in order to focus on higher margin telecommunications businesses. This has helped us to gain some market share, particularly in the retail calling card business. However, in both the wholesale carrier and prepaid calling card businesses, our remaining competitors, although smaller in number, have been pricing their services even 10 more competitively in recent quarters. This has led to a continued decline in average per-minute price realizations, both in our wholesale and retail markets. Therefore, although our telecom minutes-of-use have been increasing strongly, due to market share gains in our retail calling card markets, our telecom revenues have increased at a much slower rate. We remain strongly committed to our wholesale carrier and prepaid calling card businesses. However, we anticipate that we will continue to experience pricing and margin pressure in both our wholesale and retail businesses for at least the next few quarters with gross margins for both businesses generally below the levels experienced prior to the fourth quarter of Fiscal 2000. Historically, our core telecommunications revenues have been about evenly divided between our wholesale carrier and retail calling card business lines. However, in recent quarters, our revenue mix has shifted toward retail business lines, reflecting the strong growth of our debit card business and our domestic long distance business, while wholesale carrier revenues continue to decline due to a shift in our wholesale customer base. We anticipate that this shift in revenue mix will continue over the next two to four quarters, and the majority of our telecommunications revenues over that time will be derived from retail products and services. However, over the longer term, given the anticipated recovery in the wholesale carrier markets in general, and our wholesale carrier business in particular, we expect that our telecommunications revenue mix will revert back to the balanced wholesale/retail mix to which we have historically been accustomed. Accounting Treatment of Net2Phone On August 11, 2000, we completed the sale of 14.9 million of our shares of Net2Phone Class A Common Stock to AT&T for $75 per share. Upon completing this transaction, our ownership interest in Net2Phone was reduced to approximately 10.0 million shares of Class A Common Stock, representing approximately a 17% ownership interest and a 21% voting interest. Consequently, beginning with the first quarter of Fiscal 2001, we are no longer consolidating Net2Phone's results. We are now using the equity method to account for our ownership interest in Net2Phone. This change in the accounting treatment for our ownership stake in Net2Phone will therefore have an impact upon the comparison of results for the six and three month periods ended January 31, 2001 and January 31, 2000 described below. Six Months Ended January 31, 2001 Compared to Six Months Ended January 31, 2000 Results of Operations Revenue. Our revenue increased 0.9%, from approximately $558.9 million for the six months ended January 31, 2000 to approximately $564.2 million for the six months ended January 31, 2001. Our telecommunications revenue increased 3.7%, from approximately $529.1 million for the six months ended January 31, 2000 to approximately $548.7 million for the six months ended January 31, 2001. Our internet services revenue increased 2.5%, from approximately $6.5 million for the six months ended January 31, 2000 to approximately $6.7 million for the six months ended January 31, 2001. As a result of the change in our accounting for our ownership interest in Net2Phone from the full consolidation method to the equity method, we did not record Internet telephony revenue for the six months ended January 31, 2001. We recorded Internet telephony revenue of approximately $23.3 million for the six months ended January 31, 2000. Revenue from our Ventures businesses amounted to approximately $8.8 million for the six months ended January 31, 2001. No revenue from Ventures activities was recorded for the six months ended January 31, 2000. Our telecommunications revenue increased primarily as a result of an approximately 50% increase in minutes of use from approximately 2.04 billion for the six months ended January 31, 2000 to approximately 3.00 billion for the six months ended January 31, 2001. The increase in minutes was due to increased marketing of our prepaid calling cards, which outweighed the effects of lower wholesale carrier minutes. The average revenue per minute decreased from the six months ended January 31, 2000 to the six months ended January 31, 2001, despite the exit of several competitors from our core wholesale and retail markets, due to the intensified price competition initiated by our remaining competitors, as they attempt to defend their remaining share of the market. The decline in wholesale carrier minutes resulted from a reduction in the number of wholesale carrier services clients, reflecting an ongoing transition of our wholesale customer base towards a smaller group of larger, more financially stable 11 customers. The decline in wholesale carrier minutes resulted in a decrease in wholesale telecommunications revenues of 19.4%, from approximately $265.5 million for the six months ended January 31, 2000 to approximately $214.1 million for the six months ended January 31, 2001. As a percentage of telecommunications revenue, wholesale telecommunications revenue decreased from approximately 50.2% for the six months ended January 31, 2000 to approximately 39.0% for the six months ended January 31, 2001. Our revenue from retail telecommunications services increased 26.9%, from approximately $263.6 million for the six months ended January 31, 2000 to approximately $334.6 million for the six months ended January 31, 2001 as a result of increased sales of our prepaid calling cards, and higher domestic long distance revenues. As a percentage of overall telecommunications revenue, retail telecommunications revenue increased from approximately 49.8% for the six months ended January 31, 2000 to approximately 61.0% for the six months ended January 31, 2001. Prepaid calling card sales increased 23.4%, from approximately $250.9 million for the six months ended January 31, 2000, to approximately $309.5 million for the six months ended January 31, 2001, as we continue to take market share from competitors who have scaled back their calling card operations or have left the market entirely. Prepaid calling card sales as a percentage of our retail telecommunication services revenue decreased from 95.2% for the six months ended January 31, 2000 to 92.5% for the six months ended January 31, 2001, as revenues from domestic long distance services grew at a faster rate than did calling card revenues. Our revenues from domestic long distance services increased 295.2%, from approximately $5.5 million for the six months ended January 31, 2000, to approximately $21.9 million for the six months ended January 31, 2001. The domestic long distance revenue gains are attributable to the full introduction of our flat-rate, $0.05 a minute long distance calling plan, which was accompanied by an aggressive marketing campaign, resulting in a significant increase in the number of domestic long distance customers. As a percentage of total revenue, Internet services revenue was approximately 1.2% for both the six months ended January 31, 2000 and six months ended January 31, 2001. The dollar increase in Internet services revenue reflects an increase in dedicated access services, which outweighed the decline in dial-up access services. Internet telephony revenue as a percentage of total revenue amounted to 4.2% for the six months ended January 31, 2000. As mentioned above, no Internet telephony revenue was recorded for the six months ended January 31, 2001, reflecting a change in the accounting treatment of our Net2Phone stake to the equity method beginning in the first quarter of Fiscal 2001. Direct Cost of Revenue. Our direct cost of revenue increased by 8.8%, from approximately $451.0 million for the six months ended January 31, 2000 to approximately $490.8 million for the six months ended January 31, 2001. As a percentage of total revenue, these costs increased from 80.7% for the six months ended January 31, 2000 to 87.0% for the six months ended January 31, 2001. The dollar increase is due primarily to increases in underlying carrier and connectivity costs, as our telecommunications minutes of use grew significantly. As a percentage of total revenue, the increase in direct costs reflects the gross margin pressures experienced by both the wholesale and retail telecommunications divisions, reflecting intensified price competition in these markets, as described above. Partially offsetting this factor was the shift in telecommunications revenue mix towards higher gross margin retail revenues. Selling, General and Administrative. Our selling, general and administrative costs increased 44.9%, from approximately $105.3 million for the six months ended January 31, 2000 to approximately $152.7 million for the six months ended January 31, 2001. As a percentage of total revenue, these costs increased from 18.8% for the six months ended January 31, 2000 to 27.1% for the six months ended January 31, 2001. This increase is due to several factors, including increased international debit card distribution costs, increased sales and marketing efforts for our retail services, such as prepaid calling cards and domestic long distance, as well as increased salaries, facilities costs and professional fees related to the expansion of our infrastructure to facilitate our current and anticipated future sales growth. Also included in selling, general and administrative costs for the six months ended January 31, 2001 is approximately $29.1 million in selling, general and administrative costs associated with our IDT Ventures division, which has several innovative telecommunications and Internet related businesses in various stages of development. This compares to approximately $3.0 million in selling, general and administrative costs associated with our IDT Ventures division, which was recorded during the six months ended January 31, 2000. In addition, IDT Ventures incurred expenses during the first quarter of Fiscal 2001 of $12.5 million related to management incentive compensation arising from the completion of the sale of our Net2Phone shares to AT&T. Partially offsetting these factors was the 12 exclusion of selling, general and administrative expenses related to Net2Phone in the six months ended January 31, 2001. Included in selling, general and administrative for the six months ended January 31, 2000, is $5.2 million of non-cash compensation as a result of option grants made by Net2Phone during the period. Depreciation and Amortization. Depreciation and amortization increased 43.7%, from approximately $20.4 million for the six months ended January 31, 2000 to approximately $29.3 million for the six months ended January 31, 2001. As a percentage of revenue, these costs increased from 3.6% for the six months ended January 31, 2000 to 5.2% for the six months ended January 31, 2001. These costs increased, in both absolute dollars and as a percentage of revenues, primarily as a result of our higher fixed asset base during the six months ended January 31, 2001 as compared with the six months ended January 31, 2000, reflecting our efforts to expand our telecommunications network infrastructure and other facilities partially offset by the deconsolidation of Net2Phone. We anticipate that depreciation and amortization costs will continue to increase as we continue to add to our asset base, allowing us to implement our growth strategy. Loss from Operations. We recorded a loss from operations of approximately $108.5 million for the six months ended January 31, 2001, compared to a loss from operations of approximately $17.8 million for the six months ended January 31, 2000. Our telecommunications business recorded a loss from operations (after the effect of minority interests) of approximately $67.4 million for the six months ended January 31, 2001, compared to income from our telecommunications operations of approximately $13.8 million for the six months ended January 31, 2000. The recording of a loss from operations in the current period as compared with income from operations in the prior year period reflected decreased gross margins, particularly in the wholesale carrier business, and an increase in sales and marketing costs for retail telecommunications services, which outweighed the increase in telecommunications revenues. Loss from operations for our Ventures division for the six months ended January 31, 2001 was approximately $36.9 million, which included $12.5 million of management incentive compensation. The Ventures division recorded an operating loss of $3.0 million in the six months ended January 31, 2000. Loss from operations for our Internet access business increased to approximately $7.8 million for the six months ended January 31, 2001 from approximately $7.2 million for the six months ended January 31, 2000. The increased loss is due to higher direct costs incurred in providing Internet access services. Loss from operations of the Net2Phone subsidiary amounted to approximately $23.4 million for the six months ended January 31, 2000, with no corresponding loss from operations recorded during the six months ended January 31, 2001, reflecting the change in accounting for Net2Phone. Other income. Included in other income for the six months ended January 31, 2001 is a realized gain of $999.6 million on our sale of 14.9 million shares of Net2Phone Class A Common Stock to AT&T, $38.1 million in gains we recognized under Staff Accounting Bulletin No. 51 in conjunction with Net2Phone's sale of newly issued shares to AT&T and approximately $313.5 million in gains related to the settlement of our lawsuit with TyCom Ltd. Partially offsetting this income was a recognized loss of approximately $129.2 million related primarily to the sale of some of our Terra Networks shares, as well as a loss of approximately $32.0 million due to recording our pro-rata share of Net2Phone's loss through the equity method. Included in other income for the six months ended January 31, 2000 is $142.3 million in gains we recognized under Staff Accounting Bulletin No. 51 in conjunction with Net2Phone's sale of shares in its Initial Public Offering and concurrent conversion of Net2Phone's Series A Stock to Class A Common Stock in August 1999 and its secondary offering in December 1999, and a realized gain of $105.8 million on our sale of 2.2 million Net2Phone shares as part of Net2Phone's Secondary Offering. Income Taxes. We recorded income tax expense of approximately $356.0 million for the six months ended January 31, 2001, compared to approximately $101.6 million for the six months ended January 31, 2000. Income tax benefit of approximately $1.2 million for the six months ended January 31, 2001, and approximately $1.3 million for the six months ended January 31, 2000 related to the tax deduction upon the exercise of stock options was recorded directly into additional paid-in capital. 13 Three Months Ended January 31, 2001 Compared to Three Months Ended January 31, 2000 Results of Operations Revenue. Our revenue increased 4.4%, from approximately $275.5 million for the three months ended January 31, 2000 to approximately $287.6 million for the three months ended January 31, 2001. Our telecommunications revenue increased 7.8%, from approximately $260.6 million for the three months ended January 31, 2000 to approximately $280.9 million for the three months ended January 31, 2001. Our Internet services revenue increased 2.5%, from approximately $3.0 million for the three months ended January 31, 2000 to approximately $3.1 million for the three months ended January 31, 2001. As a result of the change in our accounting for our ownership interest in Net2Phone from the full consolidation method to the equity method, we did not record Internet telephony revenue for the three months ended January 31, 2001. We recorded Internet telephony revenue of approximately $11.9 million for the three months ended January 31, 2000. Revenue from our Ventures businesses amounted to approximately $3.7 million for the three months ended January 31, 2001. No revenue from Ventures activities was recorded for the three months ended January 31, 2000. Our telecommunications revenue increased primarily as a result of a 60.4% increase in minutes of use from approximately 1.01 billion for the three months ended January 31, 2000 to approximately 1.62 billion for the three months ended January 31, 2001. The increase in minutes was due to increased marketing of our prepaid calling cards, which outweighed the effects of lower wholesale carrier minutes. The average revenue per minute decreased from the three months ended January 31, 2000 to the three months ended January 31, 2001, despite the exit of several competitors from our core wholesale and retail markets, due to the intensified price competition initiated by our remaining competitors, as they attempt to defend their remaining share of the market. The decline in wholesale carrier minutes resulted from a reduction in the number of wholesale carrier services clients, reflecting an ongoing transition of our wholesale customer base towards a smaller group of larger, more financially stable customers. The decline in wholesale carrier minutes resulted in a decrease in wholesale telecommunications revenues of 19.1%, from approximately $127.7 million for the three months ended January 31, 2000 to approximately $103.3 million for the three months ended January 31, 2001. As a percentage of telecommunications revenue, wholesale telecommunications revenue decreased from approximately 49.0% for the three months ended January 31, 2000 to approximately 36.8% for the three months ended January 31, 2001. Our revenue from retail telecommunications services increased 33.7%, from approximately $132.9 million for the three months ended January 31, 2000 to approximately $177.6 million for the three months ended January 31, 2001, as a result of increased sales of our prepaid calling cards and continued growth of our domestic long distance business. As a percentage of overall telecommunications revenue, retail telecommunications revenue increased from approximately 51.0% for the three months ended January 31, 2000 to approximately 63.2% for the three months ended January 31, 2001. Prepaid calling card sales increased 31.4%, from approximately $124.0 million in the three months ended January 31, 2000, to approximately $162.9 million in the three months ended January 31, 2001, as we continue to take market share from competitors who have scaled back their calling card operations or have left the market entirely. Prepaid calling card sales as a percentage of retail telecommunication services revenue decreased from 93.3% for the three months ended January 31, 2000 to 91.7% for the three months ended January 31, 2001. Our revenues from domestic long distance services increased 391.2%, from approximately $2.7 million in the three months ended January 31, 2000, to approximately $13.2 million in the three months ended January 31, 2001. The domestic long distance revenue gains are attributable to the full introduction of our flat-rate, $0.05 a minute long distance calling plan, which was accompanied by an aggressive marketing campaign, resulting in a significant increase in the number of domestic long distance customers. As a percentage of total revenue, Internet services revenue was approximately 1.1% for both the three months ended January 31, 2000 and three months ended January 31, 2001. The dollar increase in Internet services revenue reflects an increase in dedicated access services, which outweighed the decline in dial-up access services. Internet telephony revenue as a percentage of total revenue amounted to 4.3% for the three months ended January 31, 2000. As mentioned above, no Internet telephony revenue was recorded for the three months ended January 31, 2001, reflecting a change in the accounting treatment of our Net2Phone stake to the equity method beginning in the first quarter of Fiscal 2001. 14 Direct Cost of Revenue. Our direct cost of revenue increased by 14.2%, from approximately $220.8 million for the three months ended January 31, 2000 to approximately $252.2 million for the three months ended January 31, 2001. As a percentage of total revenue, these costs increased from 80.1% for the three months ended January 31, 2000 to 87.7% for the three months ended January 31, 2001. The dollar increase is due primarily to increases in underlying carrier and connectivity costs, as our telecommunications minutes of use grew significantly. As a percentage of total revenue, the increase in direct costs reflects the gross margin pressures experienced by both the wholesale and retail telecommunications divisions, reflecting intensified price competition in these markets, as described above. Partially offsetting this factor was the shift in telecommunications revenue mix towards higher gross margin retail revenues. Selling, General and Administrative. Our selling, general and administrative costs increased 22.2%, from approximately $56.7 million for the three months ended January 31, 2000 to approximately $69.3 million for the three months ended January 31, 2001. As a percentage of total revenue, these costs increased from 20.6% for the three months ended January 31, 2000 to 24.1% for the three months ended January 31, 2001. This increase is due to several factors, including increased international debit card distribution costs, increased sales and marketing efforts for our retail services, such as prepaid calling cards and domestic long distance, as well as increased salaries, facilities costs and professional fees related to the expansion of our infrastructure to facilitate our current and anticipated sales growth. Also included in selling, general and administrative costs for the three months ended January 31, 2001 is approximately $16.1 million in selling, general and administrative costs associated with our IDT Ventures division, which has several innovative telecommunications and Internet related businesses in various stages of development. Partially offsetting these factors was the exclusion of selling, general and administrative expenses related to Net2Phone in the three months ended January 31, 2001. Included in salaries for the three months ended January 31, 2000, is $2.3 million of non-cash compensation as a result of option grants made by Net2Phone during the period. Depreciation and Amortization. Depreciation and amortization increased 39.8%, from approximately $10.4 million for the three months ended January 31, 2000 to approximately $14.6 million for the three months ended January 31, 2001. As a percentage of revenue, these costs increased from 3.8% for the three months ended January 31, 2000 to 5.1% for the three months ended January 31, 2001. These costs increased, in both absolute dollars and as a percentage of revenues, primarily as a result of our higher fixed asset base during the three months ended January 31, 2001 as compared with the three months ended January 31, 2000, reflecting our efforts to expand our telecommunications network infrastructure and other facilities. We anticipate that depreciation and amortization costs will continue to increase as we continue to add to our asset base, allowing us to implement our growth strategy. Loss from Operations. We recorded a loss from operations of approximately $48.5 million for the three months ended January 31, 2001, compared to a loss from operations of approximately $12.4 million for the three months ended January 31, 2000. Our telecommunications business recorded a loss from operations (after the effect of minority interests) of approximately $30.9 million for the three months ended January 31, 2001, compared to income from our telecommunications operations of approximately $7.2 million for the three months ended January 31, 2000. The recording of a loss from operations in the current period as compared with income from operations in the prior year period reflected decreased gross margins, particularly in the wholesale carrier business, and an increase in sales and marketing costs for retail telecommunications services, which outweighed the effects of an increase in telecommunications revenues. Loss from operations for our Ventures division for the three months ended January 31, 2001 was approximately $14.4 million, compared to an operating loss of approximately $3.0 million in the three months ended January 31, 2000. The larger loss resulted primarily from increased selling, general and administrative expenses as the Company worked to develop its various Ventures businesses. Loss from operations for our Internet business increased to approximately $5.2 million for the three months ended January 31, 2001 from approximately $3.6 million for the three months ended January 31, 2000. The increased loss is due to higher direct costs incurred in providing Internet access service. Loss from operations of the Net2Phone subsidiary amounted to approximately $14.1 million for the three months ended January 31, 2000, with no corresponding loss from operations recorded during the three months ended January 31, 2001, reflecting the change in accounting for Net2Phone. 15 Other income. Included in other income for the three months ended January 31, 2001 were recognized losses of approximately $91.6 million related primarily to the sale of some of our Terra Networks shares, as well as a loss of approximately $31.0 million due to recording our pro-rata share of Net2Phone's loss through the equity method. Included in other income for the three months ended January 31, 2000 was $76.8 million in gains we recognized under Staff Accounting Bulletin No. 51 in conjunction with Net2Phone's sale of shares in its Secondary Offering in December 1999, and a realized gain of $105.8 million on our sale of 2.2 million Net2Phone shares as part of Net2Phone's Secondary Offering. Income Taxes. We recorded an income tax benefit of approximately $40.4 million for the three months ended January 31, 2001, compared to an income tax expense of approximately $74.9 million for the three months ended January 31, 2000. Income tax benefit of approximately $0.4 million for the three months ended January 31, 2001, and approximately $0.5 million for the three months ended January 31, 2000 related to the tax deduction upon the exercise of stock options was recorded directly into additional paid-in capital. Recent Developments Our common stock began trading on the New York Stock Exchange, Inc. on February 26, 2001 under the ticker symbol "IDT". Our common stock previously traded on the Nasdaq National Market under the symbol "IDTC". Liquidity and Capital Resources General Historically, we have satisfied our cash requirements through a combination of cash flow from operating activities, sales of equity and debt securities and borrowings from third parties. Additionally, we received approximately $1.1 billion from the sale of Net2Phone Class A Common Stock to AT&T in August 2000. As of January 31, 2001, we had cash, cash equivalents and marketable securities of approximately $1.1 billion and working capital of approximately $1.0 billion. We generated negative cash flow from operating activities of approximately $82.8 million during the six months ended January 31, 2001, compared with negative cash flow from operating activities of approximately $82.8 million during the six months ended January 31, 2000. Our cash flow from operations varies significantly from quarter to quarter, depending upon the timing of operating cash receipts and payments, especially accounts receivable and accounts payable. Accounts receivable, accounts payable and accrued expenses have generally increased from period to period as our businesses have grown. Our capital expenditures were approximately $62.4 million for the six months ended January 31, 2001, compared to approximately $34.6 million for the six months ended January 31, 2000, as we have continued to expand our international and domestic telecommunications network infrastructure. From time to time, we will finance a portion of our capital expenditures through capital leases. We experience intense price competition in our telecommunications business. The long distance telecommunications industry has been characterized by significant declines in both per-minute revenues and per-minute costs. In the past, these factors have tended to generally offset each other. However, since the mid-point of Fiscal 2000, as per-minute pricing continued to erode, and began to outpace the drop in per-minute costs, gross margins have come under increasing pressure. Our long term strategy involves terminating a larger proportion of minutes on our own network, thereby lowering costs and preserving margins even in a weaker price environment. However, in the short term, the incremental demand for usage has outpaced the rate of deployment of additional network capacity. In fact, it has become commonplace within the industry for companies to experience delays in network build-out programs. As such, there can be no assurance that we will be able to maintain our gross margins at the current level, in the face of lower per-minute revenues. We continued to fund our Ventures division, which incurred significant start-up, development, marketing and promotional costs. As we move our Ventures businesses through their respective development stages, we anticipate that selling, general and administrative for our Ventures division will exceed, by a significant amount, the revenues generated by this division for the foreseeable future. 16 We will need to make significant capital expenditures in order to expand our network capacity. If we are unable to raise sufficient capital to meet our spending requirements, our network expansion, and the anticipated associated revenue growth and margin improvement, would be delayed. Changes in Other Current Assets, Accounts Receivable, Allowance for Doubtful Accounts and Deferred Revenue Other current assets decreased from $71.1 million at July 31, 2000 to $38.2 million at January 31, 2001, due to decreases in contract deposits, inventories and prepaid expenses due to the deconsolidation of Net2Phone. The average age of our accounts receivable, as measured by number of days sales outstanding, has increased from the levels of one year ago, due to a significant increase in sales to relatively more credit-worthy carriers and distributors of prepaid calling cards. These customers tend to demand, and we are willing to grant, extended payment terms. However, the number of days sales outstanding has remained within a narrow range over the past four quarters, and has declined since the end of Fiscal 2000. Due to the wide range of collection terms, future trends with respect to days sales outstanding generally depend on the proportion of total sales made to carriers, who are often offered extended payment terms of up to 90 days, and prepaid calling card distributors, who generally receive terms of up to 30 days. Therefore, the trends in days sales outstanding will depend, in large part, on the mix of wholesale (carrier) versus retail (debit card distributor) customers. In addition, as we are willing to extend longer payment terms to more credit-worthy customers, an increase in customers belonging to the highest credit classes, as a percentage of total customers, could also lead to an increase in days sales outstanding. However, as the foregoing is difficult to predict, it is not possible at this time to determine whether recent trends in days sales outstanding will continue. The allowance for doubtful accounts as a percentage of accounts receivable increased from 14.3% at July 31, 2000, to 22.8% at January 31, 2001. The increase reflects the deteriorating credit quality of a portion of our existing wholesale customer base, as well as the increase in the number of domestic long distance customers, who require a larger reserve than do wholesale and retail debit card customers. Although we anticipate that our customer base will continue its transition towards a more credit-worthy group, some of our existing accounts receivable are still related to sales made to less credit-worthy customers. In addition, during the first quarter of Fiscal 2001, we collected large amounts of previously unsettled outstanding wholesale receivables against which there were offsetting payables. Therefore, these receivables did not have allowances for doubtful accounts associated with them. Collections of these receivables had the effect of reducing gross receivables, while not having an impact on the allowance for doubtful accounts, resulting in a higher allowance for doubtful accounts when measured as a percentage of accounts receivable. Deferred revenue as a percentage of total revenue varies from period to period depend on the mix and the timing of revenue. During the first six months of Fiscal 2001, we continued to experience a steady increase in the sale of our prepaid calling cards due to increased marketing efforts and a decreased number of competitors in our target markets. This resulted in a continued increase in actual deferred revenue. However, we reported a reduction of deferred revenue during the first six months of Fiscal 2001 because of the elimination of Net2Phone-related deferred revenue due to the deconsolidation of Net2Phone. Significant Transactions In August 2000, we sold 14,900,000 shares of our Net2Phone Class A Common Stock to ITelTech, for a purchase price of $75 per share, for total cash consideration of approximately $1.1 billion. In addition, ITelTech purchased an additional 4 million newly-issued shares of Net2Phone Class A Common Stock, also at a price of $75 per share, paying approximately $300.0 million to Net2Phone. We now hold approximately 17% of Net2Phone's outstanding stock, and approximately 21% of the voting interest. In addition, we have the option to sell to AT&T 2,040,817 shares of our Class B Common Stock for total consideration of $75.0 million. In August 2000, we notified AT&T of our intention to exercise this option. The transaction is expected to be completed in March 2001. 17 Stock Buyback Program In May 2000, our Board of Directors authorized the repurchase of up to five million shares of our Common Stock. In June 2000, our Board of Directors authorized an increase in the share repurchase program to 10.0 million shares of Common Stock. In October 2000, we our Board of Directors had authorized a further increase in the share repurchase program to 12.5 million shares of Common Stock. Through March 13, 2001, we had repurchased approximately 7.1 million shares of Common Stock, for an aggregate purchase price of approximately $237.7 million, of which approximately 3.1 million were retired. Other Sources and Uses of Resources We intend to, where appropriate, make strategic acquisitions to increase our telecommunications customer base. From time to time, we evaluate potential acquisitions of companies, technologies, products and customer accounts that complement our businesses. From November 1, 2000 through March 19, 2001, we have purchased approximately $51 million of assets and stock of several telecommunications and related businesses, including the debit card business of PT-1 Communications, Inc. We believe that, based upon our present business plan, our existing cash resources, expected cash flow from operating activities and access to credit facilities will be sufficient to meet our currently anticipated working capital and capital expenditure requirements for at least the next twelve months. Item 3. Quantitative and Qualitative Disclosures About Market Risk. We have reviewed the disclosure requirements for Item 3 and, based on our current capital structure, scope of operations and financial statement structure, we believe that such disclosure is not warranted at this time. Since conditions may change, we will periodically review our compliance with this disclosure requirement to the extent applicable. CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words "believes," "anticipates," "expects," and similar words and phrases. Such forward-looking statements include, among other things, our plans to implement our growth strategy, improve our financial performance, expand our infrastructure, develop new products and services, expand our customer base and enter international markets, and the possible outcome of our litigation. Such forward-looking statements also include our expectations concerning factors affecting the markets for our products, such as changes in the U.S. and the international regulatory environment and the demand for long-distance telecommunications, Internet access and Internet telephony services. Actual results could differ from those projected in any forward-looking statements. The forward-looking statements are made as of the date of this Report, and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth herein and the other information set forth from time to time in our reports filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our Annual Report on Form 10-K for the year ended July 31, 2000 and Quarterly Report on Form 10-Q for the three months ended October 31, 2000. 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings Incorporated by reference from Part I, Item I, Financial Statements, Note 8 captioned "Legal Proceedings and Contingencies." Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders Our Annual Meeting of Stockholders (the "Meeting") was held on December 14, 2000. The following matters were submitted to our stockholders for their vote, and the results of the vote taken at the Meeting were as follows: 1. Four of our Class II Directors were elected for a term of three years. (a) Hal Brecher: 50,528,543 votes for; 609,133 votes against; (b) Moshe Kaganoff: 50,527,979 votes for; 609,697 votes against; (c) Meyer A. Berman: 50,577,320 votes for; 560,356 votes against; (d) William A. Owens: 50,618,195 votes for; 519,481 votes against; and 0 broker held non-voted shares.
2. Amendment to our 1996 Stock Option and Incentive Plan, as amended and restated (the "Plan") were ratified. The amendments to the Plan effected the following changes: (i) permit the grant of awards of (or with respect to) shares of our Class B Common Stock, par value $.01 per share, under the Plan, (ii) reserve 3,300,000 shares of Class B Common Stock for the grant of awards under the Plan and (iii) certain technical amendments to the Plan. 37,043,293 votes for; 5,114,949 votes against; 53,458 abstentions; and 8,322,049 broker held non-voted shares.
3. The grant of options to purchase shares of our Class B Common Stock to certain of our officers and directors of up to an aggregate of 820,000 shares of our Class B Common Stock granted outside of our 1996 Stock Option and Incentive Plan, as amended and restated. 37,886,220 votes for; 5,144,949 votes against; 53,458 abstentions; and 8,322,049 broker held non-voted shares.
4. The appointment of Ernst & Young LLP as our independent auditors for the fiscal year ending July 31, 2001 was ratified. 50,951,920 votes for; 133,938 votes against; 51,818 abstentions; and 0 broker held non-voted shares.
In connection with the restructuring, Howard S. Jonas executed a written consent on December 15, 2000. 19 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (1) Exhibits:
Exhibit Number Description - ------ ----------- 3.01(1) Restated Certificate of Incorporation of the Registrant. 3.02(1) By-laws of the Registrant. 3.03(16) Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant. 10.01(2) Employment Agreement between the Registrant and Howard S. Jonas. 10.02(*) 1996 Stock Option and Incentive Plan, as amended and restated, of the Registrant. 10.03(3) Form of Stock Option Agreement under the 1996 Stock Option and Incentive Plan. 10.04(4) Form of Registration Rights Agreement between certain stockholders and the Registrant. 10.05(1) Lease of 294 State Street. 10.06(5) Lease of 190 Main Street. 10.7(6) Form of Registration Rights Agreement between Howard S. Jonas and the Registrant. 10.8(10) Employment Agreement between the Registrant and James Courter. 10.9(7) Agreement between Cliff Sobel and the Registrant. 10.10(10) Employment Agreement between the Registrant and Hal Brecher. 10.11(10) Employment Agreement between the Registrant and Howard S. Jonas. 10.12(8) Agreement and Plan of Merger, dated April 7, 1998, by and among the Registrant, ADM Corp., InterExchange, Inc., David Turock, Eric Hecht, Richard Robbins, Bradley Turock, Wai Nam Tam, Mary Jo Altom and Lisa Mikulynec. 10.13(9) Securities Purchase Agreement between the Registrant, Carlos Gomez and Union Telecard Alliance, LLC. 10.14(10) Credit Agreement, dated as of May 10, 1999, by and among the Registrant, various lenders party thereto, Lehman Commercial Paper Inc., CIBC World Markets Corp. and Bankers Trust Company. 10.15(10) Pledge Agreement, dated as of May 10, 1999, by and among the Registrant, certain subsidiaries of the Registrant and Bankers Trust Company, as Collateral Agent. 10.16(10) Security Agreement, dated as of May 10, 1999, by and among the Registrant, certain subsidiaries of the Registrant and Bankers Trust Company, as Collateral Agent. 10.17(10) Subsidiaries Guaranty, dated as of May 10, 1999, by and among the Registrant, certain subsidiaries of the Registrant and Bankers Trust Company, as Collateral Agent. 10.18(10) Loan Agreement between the Registrant and Stephen Brown. 10.19(11) Internet/Telecommunications Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc. 10.20(11) Joint Marketing Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc. 10.21(11) IDT Services Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc. 10.22(11) Net2Phone Services Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc. 10.23(11) Assignment Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc. 10.24(11) Tax Sharing and Indemnification Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc. 10.25(11) Separation Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone, Inc.
20
Exhibit Number Description - ------ ----------- 10.26(11) Co-location and Facilities Management Services Agreement, dated as of May 20, 1999, by and between Registrant and Net2Phone, Inc. 10.27(12) Lease of 520 Broad Street, Newark, New Jersey. 10.28(12) Amendment to Lease of 520 Broad Street, Newark, New Jersey. 10.29(13) Option Agreement, dated as of March 3, 2000, between IDT Corporation and AT&T Corp. 10.30(14) Amendment to Option Agreement, dated as of April 5, 2000 between IDT Corporation and AT&T Corp. 10.31(13) Subscription Agreement, dated as of March 24, 2000, between IDT Corporation and Liberty Media Corporation. 10.32(14) Amendment to Subscription Agreement, dated as of May 26, 2000, between IDT Corporation and Liberty Media Corporation. 10.33(13) Letter Agreement, dated as of March 28, 2000, between IDT Corporation, AT&T Corp. and Net2Phone, Inc. 10.34(13) Letter Agreement, dated as of March 30, 2000, between IDT Corporation, AT&T Corp. and Net2Phone, Inc. 10.35(15) Conversion, Termination and Release Agreement, dated as of April 30, 2000, between IDT Corporation, Terra Networks, S.A., Terra Networks USA, Inc., Terra Networks Access Services USA LLC and Terra Networks Interactive Services USA LLC. 27.01* Financial Data Schedule. - -----------
* Filed herewith. (1) Incorporated by reference to Form S-1 filed February 21, 1996 file no. 333-00204. (2) Incorporated by reference to Form S-1 filed January 9, 1996 file no. 333-00204. (3) Incorporated by reference to Form S-8 filed January 14, 1996 file no. 333-19727. (4) Incorporated by reference to Form S-1 filed March 8, 1996 file no. 333-00204. (5) Incorporated by reference to Form 10-K for the fiscal year ended July 31, 1997, filed October 29, 1997. (6) Incorporated by reference to Form S-1 filed March 14, 1996 file no. 333-00204. (7) Incorporated by reference to Form 10-K/A for the fiscal year ended July 31, 1997, filed February 2, 1998. (8) Incorporated by reference to Form 8-K filed April 22, 1998. (9) Incorporated by reference to Form 10-K/A for the fiscal year ended July 31, 1998, filed December 4, 1998. (10) Incorporated by reference to Form 10-Q for the fiscal quarter ended January 31, 1999, filed March 17, 1999. (11) Incorporated by reference to Form 10-Q for the fiscal quarter ended April 30, 1999, filed June 14, 1999. (12) Incorporated by reference to Form 10-K for the fiscal year ended July 31, 1999, filed November 4, 1999. (13) Incorporated by reference to Form 10-Q for the fiscal quarter ended January 31, 2000, filed March 12, 2000. (14) Incorporated by reference to Form 8-K filed March 31, 2000. (15) Incorporated by reference to Schedule 14C filed June 12, 2000. (16) Incorporated by reference to Form 10-Q for the fiscal quarter ended April 30, 2000, filed June 14, 2000. (17) Incorporated by reference to Form 10-Q for the fiscal quarter ended October 31, 2000, filed December 15, 2000.
(2) Reports on Form 8-K. None. 21 IDT CORPORATION FORM 10-Q JANUARY 31, 2001 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. IDT CORPORATION March 19, 2001 By: /s/ Howard S. Jonas - -------------- ----------------------------------------------------- Date Howard S. Jonas Chairman of the Board and Chief Executive Officer (Principal Executive Officer) March 19, 2001 By: /s/ Stephen R. Brown - -------------- ---------------------------------------------------- Date Stephen R. Brown Chief Financial Officer (Principal Financial and Accounting Officer) 22 EX-10.02 2 0002.txt 1996 STOCK OPTION AND INCENTIVE PLAN AS AMENDED AND RESTATED Exhibit 10.02 IDT CORPORATION 1996 STOCK OPTION AND INCENTIVE PLAN (As Amended and Restated) 1. Purpose; Types of Awards; Construction. The purpose of the IDT Corporation 1996 Stock Option and Incentive Plan (the "Plan") is to provide incentives to executive officers, other key employees, directors and consultants of IDT Corporation (the "Company"), or any subsidiary of the Company which now exists or hereafter is organized or acquired by the Company, to acquire a proprietary interest in the Company, to continue as officers, employees, directors or consultants, to increase their efforts on behalf of the Company and to promote the success of the Company's business. The provisions of the Plan are intended to satisfy the requirements of Section 16(b) of the Securities Exchange Act of 1934, as amended, and of Section 162(m) of the Internal Revenue Code of 1986, as amended, and shall be interpreted in a manner consistent with the requirements thereof. 2. Definitions. As used in this Plan, the following words and phrases shall have the meanings indicated: (a) "Agreement" shall mean a written agreement entered into between the Company and a Grantee in connection with an award under the Plan. (b) "Board" shall mean the Board of Directors of the Company. (c) "Change in Control" means a change in ownership or control of the Company effected through either of the following: (i) any "person," as such term is used in Sections 13(d) and 14(d) of the Exchange Act (other than (A) the Company, (B) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, (C) any corporation or other entity owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of Common Stock, or (D) any person who, immediately prior to the Initial Public Offering, owned more than 25% of the combined voting power of the Company's then outstanding voting securities), is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such person any securities acquired directly from the Company or any of its affiliates other than in connection with the acquisition by the Company or its affiliates of a business) representing 25% or more of the combined voting power of the Company's then outstanding voting securities; or (ii) during any period of not more than two consecutive years, not including any period prior to the initial adoption of this Plan by the Board, individuals who at the beginning of such period constitute the Board, and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including, but not limited to a consent solicitation, relating to the election of directors of the Company) whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority thereof. (d) "Class A Common Stock" shall mean shares of Class A common stock, par value $.01 per share, of the Company. (e) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (f) "Committee" shall mean the Compensation Committee of the Board or such other committee as the Board may designate from time to time to administer the Plan. 1 (g) "Common Stock" shall mean shares of common stock, par value $.01 per share, of the Company, or, if determined by the Committee and set forth in an Agreement, shares of class B common stock, par value $.01 per share, of the Company. (h) "Company" shall mean IDT Corporation, a corporation organized under the laws of the State of Delaware, or any successor corporation. (i) "Continuous Service" means that the provision of services to the Company or a Related Entity in any capacity of officer, employee, director or consultant is not interrupted or terminated. Continuous Service shall not be considered interrupted in the case of (i) any approved leave of absence, (ii) transfers between locations of the Company or among the Company, any Related Entity or any successor in any capacity of officer, employee, director or consultant, or (iii) any change in status as long as the individual remains in the service of the Company or a Related Entity in any capacity of officer, employee, director or consultant (except as otherwise provided in the applicable Agreement). An approved leave of absence shall include sick leave, maternity leave, military leave or any other authorized personal leave. For purposes of Incentive Stock Options, no such leave may exceed ninety (90) days unless reemployment upon expiration of such leave is guaranteed by statute or contract. (j) "Corporate Transaction" means any of the following transactions: (i) a merger or consolidation of the Company with any other corporation or other entity, other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving or parent entity) 80% or more of the combined voting power of the voting securities of the Company or such surviving or parent entity outstanding immediately after such merger or consolidation or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as defined in the Exchange Act) acquired 25% or more of the combined voting power of the Company's then outstanding securities; or (ii) a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of its assets (or any transaction having a similar effect). (k) "Disability" shall mean a Grantee's inability to perform his or her duties with the Company or any of its affiliates by reason of any medically determinable physical or mental impairment, as determined by a physician selected by the Grantee and acceptable to the Company. (l) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (m) "Fair Market Value" per share as of a particular date shall mean (i) the closing sale price per share of Common Stock on the national securities exchange on which the Common Stock is principally traded for the last preceding date on which there was a sale of such Common Stock on such exchange, or (ii) if the shares of Common Stock are then traded in an over-the-counter market, the average of the closing bid and asked prices for the shares of Common Stock in such over-the-counter market for the last preceding date on which there was a sale of such Common Stock in such market, or (iii) if the shares of Common Stock are not then listed on a national securities exchange or traded in an over-the-counter market, such value as the Committee, in its sole discretion, shall determine; provided, however, that the Fair Market Value per share on the date of the Initial Public Offering will equal the Initial Public Offering price per share or such other price that the Committee determines in its sole discretion. (n) "Grantee" shall mean a person who receives a grant of Options, Stock Appreciation Rights, Limited Rights or Restricted Stock under the Plan. (o) "Incentive Stock Option" shall mean any option intended to be, and designated as, an incentive stock option within the meaning of Section 422 of the Code. (p) "Initial Public Offering" shall mean the underwritten initial public offering of shares of Common Stock, which occurred in March 1996. 2 (q) "Insider" shall mean a Grantee who is subject to the reporting requirements of Section 16(a) of the Exchange Act. (r) "Limited Right" shall mean a limited stock appreciation right granted pursuant to Section 10. (s) "Non-Employee Director" means a member of the Board who is not an employee of the Company or any Subsidiary. (t) "Nonqualified Stock Option" shall mean any option not designated as an Incentive Stock Option. (u) "Option" or "Options" shall mean a grant to a Grantee of an option or options to purchase shares of Common Stock. (v) "Option Agreement" shall have the meaning set forth in Section 6. (w) "Option Price" shall mean the exercise price of the shares of Common Stock covered by an Option. (x) "Parent" shall mean any company (other than the Company) in an unbroken chain of companies ending with the Company if, at the time of granting an Option, each of the companies other than the Company owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other companies in such chain. (y) "Plan" means this IDT Corporation 1996 Stock Option and Incentive Plan, as amended from time to time. (z) "Related Entity" means any Parent, Subsidiary or any business, corporation, partnership, limited liability company or other entity in which the Company, a Parent or a Subsidiary holds a substantial ownership interest, directly or indirectly. (aa) "Related Entity Disposition" means the sale, distribution or other disposition by the Company of all or substantially all of the Company's interest in any Related Entity effected by a sale, merger or consolidation or other transaction involving such Related Entity or the sale of all or substantially all of the assets of such Related Entity. (bb) "Restricted Period" shall have the meaning set forth in Section 11. (cc) "Restricted Stock" means shares of Common Stock issued under the Plan to a Grantee for such consideration, if any, and subject to such restrictions on transfer, rights of refusal, repurchase provisions, forfeiture provisions and other terms and conditions as shall be determined by the Committee. (dd) "Retirement" shall mean a Grantee's retirement in accordance with the terms of any tax-qualified retirement plan maintained by the Company or any of its affiliates in which the Grantee participates. (ee) "Rule 16b-3" shall mean Rule 16b-3, as from time to time in effect, promulgated under the Exchange Act, including any successor to such Rule. (ff) "Stock Appreciation Right" shall mean the right, granted to a Grantee under Section 9, to be paid an amount measured by the appreciation in the Fair Market Value of a share of Common Stock from the date of grant to the date of exercise of the right, with payment to be made in cash or Common Stock as specified in the award or determined by the Committee. (gg) "Subsidiary" shall mean any company (other than the Company) in an unbroken chain of companies beginning with the Company if, at the time of granting an Option, each of the companies other than the last company in the unbroken chain owns stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other companies in such chain. (hh) "Tax Event" shall have the meaning set forth in Section 17. (ii) "Ten Percent Stockholder" shall mean a Grantee who, at the time an Incentive Stock Option is granted, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary. 3 3. Administration. (a) The Plan shall be administered by the Committee, the members of which shall, except as may otherwise be determined by the Board, be "non-employee directors" under Rule 16b-3 and "outside directors" under Section 162(m) of the Code. (b) The Committee shall have the authority in its discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan, including, without limitation, the authority to grant Options, Stock Appreciation Rights, Limited Rights and Restricted Stock; to determine which options shall constitute Incentive Stock Options and which Options shall constitute Nonqualified Stock Options; to determine which Options (if any) shall be accompanied by Limited Rights; to determine the purchase price of the shares of Common Stock covered by each option; to determine the persons to whom, and the time or times at which awards shall be granted; to determine the number of shares to be covered by each award; to interpret the Plan; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the Agreements (which need not be identical) and to cancel or suspend awards, as necessary; and to make all other determinations deemed necessary or advisable for the administration of the Plan. (c) All decisions, determination and interpretations of the Committee shall be final and binding on all Grantees of any awards under this Plan. No member of the Board or Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any award granted hereunder. 4. Eligibility. Awards may be granted to executive officers, other key employees, directors and consultants of the Company. In addition to any other awards granted to Non-Employee Directors hereunder, awards shall be granted to Non-Employee Directors pursuant to Section 14 hereof. In determining the persons to whom awards shall be granted and the number of shares to be covered by each award, the Committee shall take into account the duties of the respective persons, their present and potential contributions to the success of the Company and such other factors as the Committee shall deem relevant in connection with accomplishing the purposes of the Plan. 5. Stock. (a) The maximum number of shares of Common Stock reserved for the grant of awards under the Plan shall be 9,600,000, of which 6,300,000 shall be shares of common stock and 3,300,000 shall be shares of Class B common stock, in each case subject to adjustment as provided in Section 12 hereof. Such shares may, in whole or in part, be authorized but unissued shares or shares that shall have been or may be reacquired by the Company. (b) If any outstanding award under the Plan should, for any reason expire, be canceled or be forfeited (other than in connection with the exercise of a Stock Appreciation Right or a Limited Right), without having been exercised in full, the shares of Common Stock allocable to the unexercised, canceled or terminated portion of such award shall (unless the Plan shall have been terminated) become available for subsequent grants of awards under the Plan. (c) In no event may a Grantee be granted during any calendar year Options to acquire more than 1,000,000 shares of Common Stock or more than 1,000,000 shares of Restricted Stock, in each case subject to adjustment as provided in Section 12 hereof. 6. Terms and Conditions of Options. (a) OPTION AGREEMENT. Each Option granted pursuant to the Plan shall be evidenced by a written agreement between the Company and the Grantee (the "Option Agreement"), in such form and containing such terms and conditions as the Committee shall from time to time approve, which Option Agreement shall comply with and be subject to the following terms and conditions, unless otherwise specifically provided in such Option Agreement. For purposes of interpreting this Section 6, a director's service as a member of the Board shall be deemed to be employment with the Company. 4 (b) NUMBER OF SHARES. Each Option Agreement shall state the number of shares of Common Stock to which the Option relates. (c) TYPE OF OPTION. Each Option Agreement shall specifically state that the Option constitutes an Incentive Stock Option or a Nonqualified Stock Option. In the absence of such designation, the Option will be deemed to be a Nonqualified Stock Option. (d) OPTION PRICE. Each Option Agreement shall state the Option Price, which, in the case of an Incentive Stock Option, shall not be less than one hundred percent (100%) of the Fair Market Value of the shares of Common Stock covered by the Option on the date of grant. The Option Price shall be subject to adjustment as provided in Section 12 hereof. (e) MEDIUM AND TIME OF PAYMENT. The Option Price shall be paid in full, at the time of exercise, in cash or in shares of Common Stock (whether then owned by the Grantee or issuable upon exercise of the Option) having a Fair Market Value equal to such Option Price or in a combination of cash and Common Stock, including a cashless exercise procedure through a broker-dealer; provided, however, that in the case of an Incentive Stock Option, the medium of payment shall be determined at the time of grant and set forth in the applicable Option Agreement. (f) TERM AND EXERCISABILITY OF OPTIONS. Each Option Agreement shall provide the exercise schedule for the Option as determined by the Committee, provided, that, the Committee shall have the authority to accelerate the exercisability of any outstanding option at such time and under such circumstances as it, in its sole discretion, deems appropriate. The exercise period will be ten (10) years from the date of the grant of the option unless otherwise determined by the Committee; provided, however, that in the case of an Incentive Stock Option, such exercise period shall not exceed ten (10) years from the date of grant of such Option. The exercise period shall be subject to earlier termination as provided in Sections 6(g) and 6(h) hereof. An Option may be exercised, as to any or all full shares of Common Stock as to which the Option has become exercisable, by written notice delivered in person or by mail to the Company's transfer agent or other administrator designated by the Company, specifying the number of shares of Common Stock with respect to which the Option is being exercised. (g) TERMINATION. Except as provided in this Section 6(g) and in Section 6(h) hereof, an Option may not be exercised unless the Grantee is then in the employ of or maintaining a director or consultant relationship with the Company or a Subsidiary thereof (or a company or a Parent or Subsidiary of such company issuing or assuming the Option in a transaction to which Section 424(a) of the Code applies), and unless the Grantee has remained continuously so employed or in the director or consultant relationship since the date of grant of the Option. In the event that the employment or consultant relationship of a Grantee shall terminate (other than by reason of death, Disability or Retirement), all Options of such Grantee that are exercisable at the time of Grantee's termination may, unless earlier terminated in accordance with their terms, be exercised within thirty (30) days after the date of such termination (or such different period as the Committee shall prescribe); provided, however, that Options granted after November 17, 1998 may be exercised within three (3) months after the date of termination (or such different period as the Committee shall prescribe). (h) DEATH, DISABILITY OR RETIREMENT OF GRANTEE. If a Grantee shall die while employed by, or maintaining a director or consultant relationship with, the Company or a Subsidiary thereof, or within thirty (30) days after the date of termination of such Grantee's employment, director or consultant relationship (or within such different period as the Committee may have provided pursuant to Section 6(g) hereof), or if the Grantee's employment, director or consultant relationship shall terminate by reason of Disability, all Options theretofore granted to such Grantee (to the extent otherwise exercisable) may, unless earlier terminated in accordance with their terms, be exercised by the Grantee or by the Grantee's estate or by a person who acquired the right to exercise such Options by bequest or inheritance or otherwise by result of death or Disability of the Grantee, at any time within 180 days after the death or Disability of the Grantee (or such different period as the Committee shall prescribe). In the event that an Option granted hereunder shall be exercised by the legal representatives of a deceased or former Grantee, written notice of such exercise shall be accompanied by a certified copy of letters testamentary or equivalent proof of the right of such legal representative to exercise such Option. In the event that the employment or consultant relationship of a 5 Grantee shall terminate on account of such Grantee's Retirement, all Options of such Grantee that are exercisable at the time of such Retirement may, unless earlier terminated in accordance with their terms, be exercised at any time within one hundred eighty (180) days after the date of such Retirement (or such different period as the Committee shall prescribe). (i) OTHER PROVISIONS. The Option Agreements evidencing awards under the Plan shall contain such other terms and conditions not inconsistent with the Plan as the Committee may determine. 7. Nonqualified Stock Options. Options granted pursuant to this Section 7 are intended to constitute Nonqualified Stock Options and shall be subject only to the general terms and conditions specified in Section 6 hereof. 8. Incentive Stock Options. Options granted pursuant to this Section 8 are intended to constitute Incentive Stock Options and shall be subject to the following special terms and conditions, in addition to the general terms and conditions specified in Section 6 hereof: (a) LIMITATION ON VALUE OF SHARES. To the extent that the aggregate Fair Market Value of shares of Common Stock subject to Options designated as Incentive Stock Options which become exercisable for the first time by a Grantee during any calendar year (under all plans of the Company or any Subsidiary) exceeds $100,000, such excess Options, to the extent of the shares covered thereby in excess of the foregoing limitation, shall be treated as Nonqualified Stock Options. For this purpose, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the shares of Common Stock shall be determined as of the date that the Option with respect to such shares was granted. (b) TEN PERCENT STOCKHOLDER. In the case of an Incentive Stock Option granted to a Ten Percent Stockholder, (i) the Option Price shall not be less than one hundred ten percent (110%) of the Fair Market Value of the shares of Common Stock on the date of grant of such Incentive Stock Option, and (ii) the exercise period shall not exceed five (5) years from the date of grant of such Incentive Stock Option. 9. Stock Appreciation Rights. The Committee shall have authority to grant a Stock Appreciation Right to the Grantee of any Option under the Plan with respect to all or some of the shares of Common Stock covered by such related Option. A Stock Appreciation Right shall, except as provided in this Section 9 or as may be determined by the Committee, be subject to the same terms and conditions as the related Option. Each Stock Appreciation Right granted pursuant to the Plan shall be evidenced by a written Agreement between the Company and the Grantee in such form as the Committee shall from time to time approve, which Agreement shall comply with and be subject to the following terms and conditions, unless otherwise specifically provided in such Agreement: (a) TIME OF GRANT. A Stock Appreciation Right may be granted either at the time of grant of the related option, or at any time thereafter during the term of the Option; provided, however, that Stock Appreciation Rights related to Incentive Stock Options may only be granted at the time of grant of the related Option. (b) PAYMENT. A Stock Appreciation Right shall entitle the holder thereof, upon exercise of the Stock Appreciation Right or any portion thereof, to receive payment of an amount computed pursuant to Section 9(d). (c) EXERCISE. A Stock Appreciation Right shall be exercisable at such time or times and only to the extent that the related Option is exercisable, and will not be transferable except to the extent the related option may be transferable. A Stock Appreciation Right granted in connection with an Incentive Stock Option shall be exercisable only if the Fair Market Value of a share of Common Stock on the date of exercise exceeds the purchase price specified in the related Incentive Stock Option. Unless otherwise approved by the Committee, no Grantee shall be permitted to exercise any Stock Appreciation Right (i) until six (6) months have elapsed from the date of grant or (ii) during the period beginning two weeks prior to the end of each of 6 the Company's fiscal quarters and ending on the second business day following the day on which the Company releases to the public a summary of its fiscal results for such period. (d) AMOUNT PAYABLE. Upon the exercise of a Stock Appreciation Right, the Optionee shall be entitled to receive an amount determined by multiplying (i) the excess of the Fair Market Value of a share of Common Stock on the date of exercise of such Stock Appreciation Right over the Option Price of the related Option, by (ii) the number of shares of Common Stock as to which such Stock Appreciation Right is being exercised. (e) TREATMENT OF RELATED OPTIONS AND STOCK APPRECIATION RIGHTS UPON EXERCISE. Upon the exercise of a Stock Appreciation Right, the related Option shall be canceled to the extent of the number of shares of Common Stock as to which the Stock Appreciation Right is exercised. Upon the exercise or surrender of an option granted in connection with a Stock Appreciation Right, the Stock Appreciation Right shall be canceled to the extent of the number of shares of Common Stock as to which the Option is exercised or surrendered. (f) METHOD OF EXERCISE. Stock Appreciation Rights shall be exercised by a Grantee only by a written notice delivered to the Company in accordance with procedures specified by the Company from time to time. Such notice shall state the number of shares of Common Stock with respect to which the Stock Appreciation Right is being exercised. A Grantee may also be required to deliver to the Company the underlying Agreement evidencing the Stock Appreciation Right being exercised and any related Option Agreement so that a notation of such exercise may be made thereon, and such Agreements shall then be returned to the Grantee. (g) FORM OF PAYMENT. Payment of the amount determined under Section 9(d) may be made solely in whole shares of Common Stock in a number based upon their Fair Market Value on the date of exercise of the Stock Appreciation Right or, alternatively, at the sole discretion of the Committee, solely in cash, or in a combination of cash and shares of Common Stock as the Committee deems advisable. If the Committee decides to make full payment in shares of Common Stock, and the amount payable results in a fractional share, payment for the fractional share will be made in cash. 10. Limited Stock Appreciation Rights. The Committee shall have authority to grant a Limited Right to the Grantee of any Option under the Plan with respect to all or some of the shares of Common Stock covered by such related Option. Each Limited Right granted pursuant to the Plan shall be evidenced by a written Agreement between the Company and the Grantee, in such form as the Committee shall from time to time approve, which Agreement shall comply with and be subject to the following terms and conditions, unless otherwise specifically provided in such Agreement: (a) TIME OF GRANT. A Limited Right granted in tandem with a Nonqualified Stock Option may be granted either at the time of grant of the related Option or any time thereafter during its term. A Limited Right granted in tandem with an Incentive Stock Option may only be granted at the time of grant of the related Option. (b) EXERCISE. A Limited Right may be exercised only (i) during the ninety-day period following the occurrence of a Change in Control or (ii) immediately prior to the effective date of a Corporate Transaction. Each Limited Right shall be exercisable only if, and to the extent that, the related Option is exercisable and, in the case of a Limited Right granted in tandem with an Incentive Stock Option, only when the Fair Market Value per share of Common Stock exceeds the Option Price per share. Notwithstanding the provisions of the two immediately preceding sentences (or unless otherwise approved by the Committee), a Limited Right granted to a Grantee who is an Insider must be (x) held by the Insider for at least six (6) months from the date of grant of the Limited Right before it becomes exercisable and (y) automatically paid out in cash to the Insider upon the occurrence of a Change in Control or a Corporate Transaction (provided such six (6) month holding period requirement has been met). (c) AMOUNT PAYABLE. Upon the exercise of a Limited Right, the Grantee thereof shall receive in cash whichever of the following amounts is applicable: 7 (i) in the case of the realization of Limited Rights by reason of an acquisition of Common Stock described in clause (i) of the definition of "Change in Control" (Section 2(c) above), an amount equal to the Acquisition Spread as defined in Section 10(d)(ii) below; or (ii) in the case of the realization of Limited Rights by reason of stockholder approval of an agreement or plan described in clause (i) of the definition of "Corporate Transaction" (Section 2(j) above), an amount equal to the Merger Spread as defined in Section 10(d)(iv) below; or (iii) in the case of the realization of Limited Rights by reason of the change in composition of the Board described in clause (ii) of the definition of "Change in Control" or stockholder approval of a plan or agreement described in clause (ii) of the definition of Corporate Transaction, an amount equal to the Spread as defined in Section 10(d)(v) below. Notwithstanding the foregoing provisions of this Section 10(c) (or unless otherwise approved by the Committee), in the case of a Limited Right granted in respect of an Incentive Stock Option, the Grantee may not receive an amount in excess of the maximum amount that will enable such option to continue to qualify under the Code as an Incentive Stock Option. (d) DETERMINATION OF AMOUNTS PAYABLE. The amounts to be paid to a Grantee pursuant to Section 10(c) shall be determined as follows: (i) The term "Acquisition Price per Share" as used herein shall mean, with respect to the exercise of any Limited Right by reason of an acquisition of Common Stock described in clause (i) of the definition of Change in Control, the greatest of (A) the highest price per share shown on the Statement on Schedule 13D or amendment thereto filed by the holder of 25% or more of the voting power of the Company that gives rise to the exercise of such Limited Right, (B) the highest price paid in any tender or exchange offer which is in effect at any time during the ninety-day period ending on the date of exercise of the Limited Right, or (C) the highest Fair Market Value per share of Common Stock during the ninety day period ending on the date the Limited Right is exercised. (ii) The term "Acquisition Spread" as used herein shall mean an amount equal to the product computed by multiplying (A) the excess of (1) the Acquisition Price per Share over (2) the Option Price per share of Common Stock at which the related option is exercisable, by (B) the number of shares of Common Stock with respect to which such Limited Right is being exercised. (iii) The term "Merger Price per Share" as used herein shall mean, with respect to the exercise of any Limited Right by reason of stockholder approval of an agreement described in clause (i) of the definition of Corporate Transaction, the greatest of (A) the fixed or formula price for the acquisition of shares of Common Stock specified in such agreement, if such fixed or formula price is determinable on the date on which such Limited Right is exercised, (B) the highest price paid in any tender or exchange offer which is in effect at any time during the ninety-day period ending on the date of exercise of the Limited Right, (C) the highest Fair Market Value per share of Common Stock during the ninety-day period ending on the date on which such Limited Right is exercised. (iv) The term "Merger Spread" as used herein shall mean an amount equal to the product. computed by multiplying (A) the excess of (1) the Merger Price per Share over (2) the Option Price per share of Common Stock at which the related Option is exercisable, by (B) the number of shares of Common Stock with respect to which such Limited Right is being exercised. (v) The term "Spread" as used herein shall mean, with respect to the exercise of any Limited Right by reason of a change in the composition of the Board described in clause (ii) of the definition of Change in Control or stockholder approval of a plan or agreement described in clause (ii) of the definition of Corporate Transaction, an amount equal to the product computed by multiplying (i) the excess of (A) the greater of (1) the highest price paid in any tender or exchange offer which is in effect at any time during the ninety-day period ending on the date of exercise of the Limited Right or (2) the highest Fair Market Value per share of Common Stock during the ninety-day period ending on the date the Limited Right is exercised over (B) the Option Price per share of Common Stock at which the 8 related Option is exercisable, by (ii) the number of shares of Common Stock with respect to which the Limited Right is being exercised. (e) TREATMENT OF RELATED OPTIONS AND LIMITED RIGHTS UPON EXERCISE. Upon the exercise of a Limited Right, the related Option shall cease to be exercisable to the extent of the shares of Common Stock with respect to which such Limited Right is exercised but shall be considered to have been exercised to that extent for purposes of determining the number of shares of Common Stock available for the grant of further awards pursuant to this Plan. Upon the exercise or termination of a related Option, the Limited Right with respect to such related Option shall terminate to the extent of the shares of Common Stock with respect to which the related Option was exercised or terminated. (f) METHOD OF EXERCISE. To exercise a Limited Right, the Grantee shall (i) deliver written notice to the Company specifying the number of shares of Common Stock with respect to which the Limited Right is being exercised, and (ii) if requested by the Committee, deliver to the Company the Agreement evidencing the Limited Rights being exercised and, if applicable, the Option Agreement evidencing the related Option; the Company shall endorse thereon a notation of such exercise and return such Agreements to the Grantee. The date of exercise of a Limited Right that is validly exercised shall be deemed to be the date on which there shall have been delivered the instruments referred to in the first sentence of this paragraph (f). 11. Restricted Stock. The Committee may award shares of Restricted Stock to any eligible employee or consultant. Each award of Restricted Stock under the Plan shall be evidenced by a written Agreement between the Company and the Grantee, in such form as the Committee shall from time to time approve, which Agreement shall comply with and be subject to the following terms and conditions, unless otherwise specifically provided in such Agreement: (a) NUMBER OF SHARES. Each Agreement shall state the number of shares of Restricted Stock to be subject to an award. (b) RESTRICTIONS. Shares of Restricted Stock may not be sold, assigned, transferred, pledged, hypothecated or otherwise disposed of, except by will or the laws of descent and distribution, for such period as the Committee shall determine from the date on which the award is granted (the "Restricted Period"). The Committee may also impose such additional or alternative restrictions and conditions on the shares as it deems appropriate including the satisfaction of performance criteria. Such performance criteria may include sales, earnings before interest and taxes, return on investment, earnings per share, any combination of the foregoing or rate of growth of any of the foregoing, as determined by the Committee. Certificates for shares of stock issued pursuant to Restricted Stock awards shall bear an appropriate legend referring to such restrictions, and any attempt to dispose of any such shares of stock in contravention of such restrictions shall be null and void and without effect. During the Restricted Period, such certificates shall be held in escrow by an escrow agent appointed by the Committee. In determining the Restricted Period of an award, the Committee may provide that the foregoing restrictions shall lapse with respect to specified percentages of the awarded shares on successive anniversaries of the date of such award. (c) FORFEITURE. Subject to such exceptions as may be determined by the Committee, if the Grantee's continuous employment or consultant relationship with the Company or any Subsidiary shall terminate for any reason prior to the expiration of the Restricted Period of an award, any shares remaining subject to restrictions (after taking into account the provisions of Subsection (e) of this Section 11) shall thereupon be forfeited by the Grantee and transferred to, and retired by, the Company without cost to the Company or such Subsidiary. (d) OWNERSHIP. During the Restricted Period the Grantee shall possess all incidents of ownership of such shares, subject to Subsection (b) of this Section 11, including the right to receive dividends with respect to such shares and to vote such shares. (e) ACCELERATED LAPSE OF RESTRICTIONS. Upon the occurrence of any of the events specified in Section 13 (and subject to the conditions set forth therein), all restrictions then outstanding on any shares of Restricted Stock awarded under the Plan shall lapse as of the applicable date set forth in Section 13. The 9 Committee shall have the authority (and the Agreement may so provide) to cancel all or any portion of any outstanding restrictions prior to the expiration of the Restricted Period with respect to any or all of the shares of Restricted Stock awarded on such terms and conditions as the Committee shall deem appropriate. 12. Effect of Certain Changes. (a) ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of any extraordinary dividend, stock dividend, recapitalization, merger, consolidation, stock split, warrant or rights issuance, or combination or exchange of such shares, or other similar transactions, the Committee shall equitably adjust (i) the maximum number of Options or shares of Restricted Stock that may be awarded to a Grantee in any calendar year (as provided in Section 5 hereof), (ii) the number of shares of Common Stock available for awards under the Plan, (iii) the number of such shares covered by outstanding awards and (iv) the price per share of Options or the applicable market value of Stock Appreciation Rights or Limited Rights, in each such case so as to reflect such event and preserve the value of such awards; provided, however, that any fractional shares resulting from such adjustment shall be eliminated. (b) CHANGE IN COMMON STOCK. In the event of a change in any of the common stock of the Company as presently constituted that is limited to a change of all of its authorized shares of Common Stock into the same number of shares with a different par value or without par value, the shares resulting from any such change shall be deemed to be the Common Stock within the meaning of the Plan. 13. Corporate Transaction; Change in Control; Related Entity Disposition. (a) CORPORATE TRANSACTION. In the event of a Corporate Transaction, each award which is at the time outstanding under the Plan shall automatically become fully vested and exercisable and, in the case of an award of Restricted Stock, shall be released from any restrictions on transfer and repurchase or forfeiture rights, immediately prior to the specified effective date of such Corporate Transaction. Effective upon the consummation of the Corporate Transaction, all outstanding awards of Options, Stock Appreciation Rights and Limited Rights under the Plan shall terminate. However, all such awards shall not terminate if the awards are, in connection with the Corporate Transaction, assumed by the successor corporation or Parent thereof. (b) CHANGE IN CONTROL. In the event of a Change in Control (other than a Change in Control which is also a Corporate Transaction), each award which is at the time outstanding under the Plan automatically shall become fully vested and exercisable and, in the case of an award of Restricted Stock, shall be released from any restrictions on transfer and repurchase or forfeiture rights, immediately prior to the specified effective date of such Change in Control. (c) RELATED ENTITY DISPOSITION. With respect only to awards granted under the Plan after November 17, 1998, the Continuous Service of each Grantee (who is primarily engaged in service to a Related Entity at the time it is involved in a Related Entity Disposition) shall terminate effective upon the consummation of such Related Entity Disposition, and each outstanding award of such Grantee under the Plan shall become fully vested and exercisable and, in the case of an award of Restricted Stock, shall be released from any restrictions on transfer; provided, however, that no such award shall vest pursuant to this Section 13(c) in connection with a Related Entity Disposition consummated prior to November 17, 2000 if such vesting would defeat the ability to account for such transaction as a "pooling" under generally accepted accounting principles. The Continuous Service of a Grantee shall not be deemed to terminate if an outstanding award is assumed by the surviving corporation or its parent entity in connection with a Related Entity Disposition. 14. Non-Employee Director Options. The provisions of this Section 14 shall apply only to certain grants of Options to Non-Employee Directors, as provided below. Except as set forth in this Section 14, the other provisions of the Plan shall apply to grants of Options to Non-Employee Directors to the extent not inconsistent with this Section. For purposes of interpreting Section 6 of the Plan, a Non-Employee Director's service as a member of the Board shall be deemed to be employment with the Company. 10 (a) GENERAL. Non-Employee Directors shall receive Nonqualified Stock Options in accordance with this Section 14. The Option Price per share of Common Stock purchasable under Options granted to Non-Employee Directors shall be the Fair Market Value of a share on the date of grant. Options granted pursuant to this Section 14 shall be subject to the terms of such section and shall not be subject to discretionary acceleration of exercisability by the Committee. (b) INITIAL GRANTS. On the date of the Initial Public Offering, each Non-Employee Director will be granted automatically, without action by the Committee, an Option to purchase 10,000 shares of Common Stock. The Option Price shall equal the offering price of the Common Stock in connection with the Initial Public Offering. (c) SUBSEQUENT GRANTS. Each person who, after the Initial Public Offering, becomes a Non-Employee Director for the first time, will, at the time such director is elected and duly qualified, be granted automatically, without action by the Committee, an Option to purchase 10,000 shares of Common Stock. The Option Price shall equal the Fair Market Value of the Common Stock as of the date of grant. (d) ANNUAL GRANTS. Each Non-Employee Director who was initially elected to the Board prior to the Initial Public Offering shall automatically be granted an Option to purchase 10,000 shares of Class B Common Stock on each anniversary date of the Initial Public Offering. Each Non-Employee Director who was initially elected to the Board after the Initial Public Offering shall automatically be granted an Option to purchase 10,000 shares of Class B Common Stock on each anniversary of their election to the Board. The Options granted under this paragraph shall be granted without action by the Committee. The Option Price shall equal the Fair Market Value of the Class B Common Stock as of the date of grant. (e) VESTING. Each option granted under this Section 14 shall be fully exercisable on the date of grant. Sections 6(f), 6(g) and 6(h) hereof shall not apply to Options granted to Non-Employee Directors. (f) DURATION. Each Option granted to a Non-Employee Director shall expire on the first to occur of (i) the tenth anniversary of the date of grant of the Option, (ii) the first anniversary of the Non-Employee Director's termination of service as a member of the Board other than for Cause or (iii) three months following the Non-Employee Director's removal from the Board for Cause. The Committee may not provide for an extended exercise period beyond the periods set forth in this Section 14. (g) DEFINITION OF "CAUSE." For purposes of this Section 14, "cause" shall mean the termination of service as a member of the Board by a Non-Employee Director due to any act of (i) fraud or intentional misrepresentation, or (ii) embezzlement, misappropriation or conversion of assets or opportunities of the Company or any Subsidiary. 15. Period During which Awards May Be Granted. Awards may be granted pursuant to the Plan from time to time within a period of ten (10) years from February 7, 1996, the date the Plan was initially adopted by the Board. 16. Transferability of Awards. (a) Incentive Stock Options (and any Stock Appreciation Rights related thereto) may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by the laws of descent and distribution and may be exercised, during the lifetime of the Grantee, only by the Grantee or his or her guardian or legal representative. (b) Nonqualified Stock Options (together with any Stock Appreciation Rights or Limited Rights related thereto) shall be transferable in the manner and to the extent acceptable to the Committee, as evidenced by a writing signed by the Company and the Grantee. Nonqualified Stock Options (together with any Stock Appreciation Rights or Limited Rights related thereto) granted after October 31, 2000 shall be transferable by a Grantee as a gift to the Grantee's "family members" (as defined in Form S-8) without prior approval of the Committee; provided that written evidence of such assignment is provided to the Committee and the Grantee receives no consideration for the transfer. Notwithstanding the transfer by a Grantee of a Nonqualified Stock Option, the transferred Nonqualified Stock Option shall continue to be subject to the same terms and 11 conditions as were applicable to the Nonqualified Stock Option immediately before the transfer and the Grantee will continue to remain subject to the withholding tax requirements set forth in Section 17 hereof. (c) The terms of any award granted under the Plan, including the transferability of any such award, shall be binding upon the executors, administrators, heirs and successors of the Grantee. 17. Agreement by Grantee regarding Withholding Taxes. If the Committee shall so require, as a condition of exercise of an Option, Stock Appreciation Right or Limited Right or the expiration of a Restricted Period (each, a "Tax Event"), each Grantee shall agree that no later than the date of the Tax Event, the Grantee will pay to the Company or make arrangements satisfactory to the Committee regarding payment of any federal, state or local taxes of any kind required by law to be withheld upon the Tax Event. Alternatively, the Committee may provide that a Grantee may elect, to the extent permitted or required by law, to have the Company deduct federal, state and local taxes of any kind required by law to be withheld upon the Tax Event from any payment of any kind due to the Grantee. The withholding obligation may be satisfied by the withholding or delivery of Common Stock. 18. Rights as a Stockholder. Except as provided in Section 11(d) hereof, a Grantee or a transferee of an award shall have no rights as a stockholder with respect to any shares covered by the award until the date of the issuance of a stock certificate to him or her for such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distribution of other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 12(a) hereof. 19. No Rights to Employment. Nothing in the Plan or in any award granted or Agreement entered into pursuant hereto shall confer upon any Grantee the right to continue in the employ of, or in a consultant relationship with, the Company or any Subsidiary or to be entitled to any remuneration or benefits not set forth in the Plan or such Agreement or to interfere with or limit in any way the right of the Company or any such Subsidiary to terminate such Grantee's employment. Awards granted under the Plan shall not be affected by any change in duties or position of a Grantee as long as such Grantee continues to be employed by, or in a consultant relationship with, the Company or any Subsidiary. 20. Beneficiary. A Grantee may file with the Committee a written designation of a beneficiary on such form as may be prescribed by the Committee and may, from time to time, amend or revoke such designation. If no designated beneficiary survives the Grantee, the executor or administrator of the Grantee's estate shall be deemed to be the Grantee's beneficiary. 21. Stockholder Approval; Amendment and Termination of the Plan. (a) STOCKHOLDER APPROVAL. The Plan initially became effective when adopted by the Board on February 7, 1996 and shall terminate on the tenth anniversary of such date. The Plan was ratified by the Company's stockholders on February 27, 1997. In December 1997, the Board submitted to the Company's stockholders for approval an amendment authorizing an additional 1,000,000 shares for awards under the Plan, making a total of 3,300,000 shares authorized for awards. On September 28, 1998, the Board authorized an additional 1,000,000 shares for awards under the Plan, on November 20, 1998, the Board approved the Plan, as amended and restated herein, and on November 23, 1998 the Executive Committee approved the further increase of 500,000 shares, bringing the total number of shares authorized for issuance under the Plan to 4,800,000 shares. The Company's stockholders approved the September and November 1998 increases in December 1998 and an additional increase of 1,500,000 shares of Common Stock in December 1999. On May 24, 2000, the Board authorized 300,000 shares of the Company's Class B Common Stock for awards under the Plan, subject to stockholder approval. On September 12, 2000, the Board authorized an additional 3,000,000 shares of the Company's Class B Common Stock for awards under the Plan, subject to stockholder approval. 12 (b) AMENDMENT AND TERMINATION OF THE PLAN. The Board at any time and from time to time may suspend, terminate, modify or amend the Plan; however, unless otherwise determined by the Board, an amendment that requires stockholder approval in order for the Plan to continue to comply with Rule 16b-3 or any other law, regulation or stock exchange requirement shall not be effective unless approved by the requisite vote of stockholders. Except as provided in Section 12(a) hereof, no suspension, termination, modification or amendment of the Plan may adversely affect any award previously granted, unless the written consent of the Grantee is obtained. The amendment of Section 6(g) (extending the post-termination exercise period of Options from thirty (30) days to three (3) months) and the addition of Section 13(c) in respect of Related Entity Dispositions shall apply prospectively only to Options granted after November 17, 1998, the date that the Plan, as amended and restated herein, was adopted by the Board. 22. Governing Law. The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of Delaware. 13 EX-27.01 3 0003.txt FDS
5 6-MOS JUL-31-2001 JAN-31-2001 1,051,310 26,104 182,748 41,733 10,187 1,267,010 294,159 87,158 2,042,330 238,278 0 0 0 233 1,183,279 2,042,330 564,194 564,194 490,772 672,719 129,185 0 4,418 1,108,511 356,047 752,464 0 0 0 752,464 22.11 20.32
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