SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended April 30, 1999 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 0-27898 ------- IDT CORPORATION (Exact Name of Registrant as Specified in its Charter) Delaware 22-3415036 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 190 Main Street, Hackensack, New Jersey 07601 - --------------------------------------- ----- (Address of Principal Executive Office) (Zip Code) (201) 928-1000 -------------- (Registrant's Telephone Number, Including Area Code) Not Applicable -------------- (Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ --- Common Stock, $.01 par value - 23,875,174 shares as of June 11, 1999 Class A Common Stock, $.01 par value - 10,129,517 shares as of June 11, 1999 (Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date)
IDT CORPORATION Table Of Contents <TABLE> <S> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited)............................................................. 3 Condensed Consolidated Balance Sheets as of April 30, 1999 and July 31, 1998........................................................................ 3 Condensed Consolidated Statements of Income for the nine months and three months ended April 30, 1999 and 1998........................................... 4 Condensed Consolidated Statement of Stockholders' Equity for the nine months ended April 30, 1999................................................. 5 Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 1999 and 1998................................................ 6 Notes to Condensed Consolidated Financial Statements........................................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 10 PART II. OTHER INFORMATION........................................................................... 17 Item 1. Legal Proceedings........................................................................... 17 Item 2. Changes in Securities....................................................................... 17 Item 3. Defaults Upon Senior Securities............................................................. 17 Item 4. Submission of Matters to a Vote of Security Holders......................................... 17 Item 5. Other Information........................................................................... 17 Item 6. Exhibits and Reports on Form 8-K............................................................ 18 SIGNATURES............................................................................................ 20 </TABLE>
PART I. FINANCIAL INFORMATION Item 1. Financial Statements IDT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) <TABLE> <CAPTION> April 30, 1999 July 31, 1998 -------------- ------------- ASSETS (Unaudited) (Note 1) (in thousands) <S> <C> <C> Current assets: Cash and cash equivalents $ 20,019 $115,284 Marketable securities 82,922 60,309 Accounts receivable, net 78,469 38,038 Notes receivable - current portion 2,140 2,140 Other current assets 29,692 12,096 -------- -------- Total current assets 213,242 227,867 Property and equipment, at cost, net 103,783 75,332 Notes receivable - long-term portion 33,616 21,768 Goodwill, net 75,633 74,222 Deferred tax assets, net 7,132 10,750 Other assets 29,272 7,257 -------- -------- Total assets $462,678 $417,196 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Trade accounts payable $ 53,616 $ 38,794 Accrued expenses 2,640 3,499 Interest payable - 3,943 Deferred revenue 16,498 9,175 Notes payable -- current portion 1,769 1,866 Capital lease obligations -- current portion 5,867 3,989 Other current liabilities 5,168 220 -------- -------- Total current liabilities 85,558 61,486 Notes payable -- long-term portion 100,556 101,834 Capital lease obligation -- long-term portion 17,354 11,232 -------- -------- Total liabilities 203,468 174,552 Minority interest 1,669 3,896 Stockholders' equity: Preferred stock, $.01 par value; authorized shares - - - 10,000,000; no shares issued Common stock, $.01 par value; authorized shares - 238 228 100,000,000; 23,796,770 and 22,848,866 shares issued and outstanding at April 30, 1999 and July 31, 1998, respectively Class A stock, $.01 par value; authorized shares - 101 103 35,000,000; 10,129,517 and 10,255,668 shares issued and outstanding at April 30, 1999 and July 31, 1998, respectively Additional paid-in capital 276,546 266,762 Accumulated deficit (19,344) (28,345) -------- -------- Total stockholders' equity 257,541 238,748 -------- -------- Total liabilities and stockholders' equity $462,678 $417,196 ======== ======== </TABLE> See notes to condensed consolidated financial statements 3
IDT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited) <TABLE> <CAPTION> Nine Months Ended April 30, Three Months Ended April 30, -------------------------- ----------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Revenues $ 485,770 $ 212,815 $ 191,751 $ 87,112 Costs and expenses: Direct cost of revenues................... 377,849 151,814 150,183 59,505 Selling, general and administrative....... 70,772 44,050 29,966 20,344 Depreciation and amortization............. 18,637 6,553 6,902 2,766 ----------- ----------- ----------- ----------- Total costs and expenses.................. 467,258 202,417 187,051 82,615 ----------- ----------- ----------- ----------- Income from operations....................... 18,512 10,398 4,700 4,497 Interest and other, net...................... (9) (446) (153) 338 Income before provision for income taxes and minority interest............... 18,503 9,952 4,547 4,835 Provision for income taxes................... 6,897 - 2,071 - Minority interest............................ 2,605 - 420 - ----------- ----------- ----------- ----------- Net income................................... $ 9,001 $ 9,952 $ 2,056 $ 4,835 =========== =========== =========== =========== Net income per share - basic................. $ 0.27 $ 0.36 $ 0.06 $0.17 =========== =========== =========== =========== Weighted average number of shares used in calculation of earnings per share - basic................ 33,431,628 27,528,325 33,648,800 28,881,382 =========== =========== =========== =========== Net income per share - diluted............... $ 0.25 $ 0.32 $ 0.06 $ 0.15 =========== =========== =========== =========== Weighted average number of shares used in calculation of earnings per share - diluted........... 35,404,696 30,808,692 35,730,964 32,693,177 =========== =========== =========== =========== </TABLE> See notes to condensed consolidated financial statements. 4
IDT CORPORATION CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Unaudited) <TABLE> <CAPTION> Total Common Stock Class A Stock Additional Accumulated Stockholders' Shares Amount Shares Amount Paid-in Capital Deficit Equity ---------- --------- ---------- ---------- --------------- ------------ ------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance at July 31, 1998 22,848,866 $ 228,489 10,255,668 $ 102,557 $ 266,761,770 $(28,344,744) $ 238,748,072 Exercise of stock options 622,749 6,227 - - 3,117,943 - $ 3,124,170 Conversion of Class A Stock to Common Stock 126,151 1,262 (126,151) (1,262) - - - Exercise of warrants 99,004 990 - - 737,502 - 738,492 Income tax benefits from stock options exercised - - - - 3,279,306 - 3,279,306 Issuance of Common Stock in connection with acquired business 100,000 1,000 - - 2,649,000 - 2,650,000 Net income for the nine months ended April 30, 1999 - - - - - 9,000,994 9,000,994 ---------- --------- ---------- ---------- --------------- ------------ ------------- Balance at April 30, 1999 23,796,770 $ 237,968 10,129,517 $ 101,295 $ 276,545,521 $(19,343,750) $ 257,541,035 ========== ========= ========== ========== =============== ============ ============= </TABLE> See notes to condensed consolidated financial statements. 5
IDT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands, except per share data) (Unaudited) <TABLE> <CAPTION> Nine Months Ended April 30, ---------------------------- 1999 1998 --------- -------- (in thousands) <S> <C> <C> Cash provided by (used in) operating activities.............. $ (22,882) $ (1,726) Investing activities Receipt of payments on advance............................... 1,291 Purchase of short-term investments........................... (22,613) (10,917) Escrow deposit on pending purchase........................... (20,000) Issuance of notes receivable................................. (11,848) (9,000) Purchase of property and equipment........................... (31,836) (25,398) Distribution of minority interests........................... (4,831) -- -------- ------- Net cash used in investing activities........................ (71,128) (64,024) Financing activities Repayment of loans payable................................... (1,374) (3,306) Proceeds from Convertible Debentures......................... -- 7,500 Repayment of capital lease obligations....................... (3,742) (1,509) Proceeds from exercise of stock options...................... 3,124 4,828 Proceeds from stock option - minority interest............... -- 100 Proceeds from exercise of stock warrants..................... 738 440 Proceeds from secondary offering............................. -- 118,540 Proceeds from senior debt offering........................... -- 97,000 Proceedds from notes......................................... -- 3,093 --------- -------- Net cash (used in) provided by financing activities.......... (1,254) 226,686 --------- -------- Net (decrease) increase in cash and cash equivalents......... (95,264) 160,936 Cash and cash equivalents, beginning of period............... 115,283 7,674 --------- -------- Cash and cash equivalents, end of period..................... $ 20,019 $168,610 ========= ======== Supplemental disclosures of cash flow information Interest paid................................................ $ 10,419 $ 3,185 Income taxes paid............................................ -- -- </TABLE> See notes to condensed consolidated financial statements. 6
IDT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Basis of Presentation The accompanying unaudited condensed consolidated financial statements of IDT Corporation and subsidiaries (collectively "the Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine months and three months ended April 30, 1999 are not necessarily indicative of the results that may be expected for the year ending July 31, 1999. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K/A for the year ended July 31, 1998, as filed with the Securities and Exchange Commission. Note 2 - Summary of Significant Accounting Policies Segment Information The Company must adopt SFAS 131, Disclosures about Segments of an Enterprise and Related Information in fiscal 1999. Because Statement 131 is not required to be applied to interim financial statements in the initial year of adoption, the Company is not required to disclose segment information in accordance with Statement 131 until its fiscal 1999 annual report, at which time it will restate prior years' segment disclosure to conform to the Statement 131 segment presentation, if practicable. In the Company's first quarter fiscal 2000 report, and in subsequent quarters, it will present the interim disclosure required by Statement 131 for both 2000 and 1999. Note 3 - Property and Equipment Property and equipment consists of the following: <TABLE> <CAPTION> April 30, 1999 July 31, 1998 -------------- ------------- <S> <C> <C> Equipment $109,550,435 $77,612,461 Computer software 13,457,664 10,027,335 Leasehold improvements 3,387,340 1,930,769 Furniture and fixtures 2.297,431 1,905,048 Building and Improvements 6,301,490 -- -------------- ------------- 134,994,360 91,475,613 Less: Accumulated depreciation and amortization 31,210,988 16,143,137 --------------- ------------- $ 103,783,372 $75,332,476 =============== ============= </TABLE> Note 4 - Legal Proceedings and Contingencies In December 1995, Surfers Unlimited, L.L.C. filed a breach of contract action in the New Jersey Superior Court, Bergen County. The suit names a subsidiary of the Company as defendant and seeks restitutional and consequential damages in an unspecified amount for interference with prospective business advantages, breach of contract and improper use of confidential and proprietary information. Howard S. Jonas, the Chairman and Chief Executive Officer of the Company, has also been named as a defendant in the action. The suit is currently in the discovery phase. A trial date has not been scheduled to date. 7
In January 1997, six former employees alleging employment discrimination commenced a suit in New Jersey Superior Court, Bergen County. Howard S. Jonas, the Chairman and Chief Executive Officer of the Company, has also been named as a defendant in the action. The action claims that the Company has made hiring and promotion decisions based upon the religious backgrounds of the relevant individuals, in violation of federal and state law. The complaint seeks compensatory and punitive damages in an unspecified amount and also seeks statutory multiples of damages. All of the claims arising under federal law were dismissed by the Court in New Jersey Superior Court, Bergen County, leaving the plaintiffs with only the remedies available under state law. Further, the Court granted the Company permission to file counterclaims against all plaintiffs for the alleged unlawful taking of business records. The Company filed such counterclaims in October 1998. Discovery is continuing and a settlement conference has been scheduled for June 15, 1999. In June 1997, an uncertified class action suit seeking compensatory damages in an unspecified amount was filed against the Company in New York Supreme Court, New York County. The suit concerns advertisements that are no longer used by the Company, and advertising practices that were voluntarily terminated by the Company following a prior investigation of the Company by the Attorneys General of several states. In December 1998, the Court denied the Company's motion for summary judgment; however, the Court limited the class to include only citizens of the State of New York. This class action suit was discontinued with prejudice since the class representatives agreed to withdraw their claims voluntarily. The Company filed a lawsuit against Mr. Glen Miller in August 1997 in the New Jersey Superior Court, Bergen County. The action was based upon various matters arising out of Mr. Miller's employment with IDT. Mr. Miller answered the complaint and filed a counterclaim against the Company seeking compensatory and punitive damages for breach of his employment contract and breach of the covenant of good faith and fair dealing. Mr. Miller alleges that the Company breached his employment agreement by failing to compensate him as contemplated by his employment agreement, including by failing to deliver to him 20,000 shares of the Company's Common Stock. Mr. Miller also filed a third-party complaint against Howard Balter, the former Chief Operating Officer of the Company and the current Chief Executive Officer of Net2Phone, a subsidiary of the Company, and Jonathan Rand, the Company's former Director of Human Resources and the current Executive Vice President of International Sales and the Treasurer of Net2Phone, for fraudulent conduct and misrepresentation. The Company filed its answer to Mr. Miller's counterclaim in December 1997. In January 1998, the Court partially granted Mr. Miller's motion for summary judgment, awarding him severance pay in the amount of approximately $50,000. The Company's motion for leave to appeal this award was denied. The Company entered into a settlement agreement pursuant to which the Company agreed to permit Mr. Miller to exercise the 20,000 options to purchase shares of the Company's Common Stock granted to him by the Company and to release previously escrowed funds. Both the Company and Mr. Miller signed a Stipulation of Dismissal with Prejudice. In December 1998, PT-1 Communications, Inc. ("PT-1") filed a complaint against the Company claiming, among other things, that the Company violated its service marks and trade dress in connection with the sale and marketing of phone cards. The Company and PT-1 shortly thereafter entered into a confidential settlement agreement in December 1998. Subsequent to December 1998, PT-1 filed a motion for a preliminary injunction to enforce and compel the Company's compliance with the settlement agreement, which it alleges was breached by the Company. The Company filed opposition papers to the motion and simultaneously filed a motion for a preliminary injunction. The Company and PT-1 thereafter entered into a confidential settlement agreement. PT-1 subsequently filed a third complaint which was dismissed by the Court on its own motion on the basis that PT-1 had no claim. In August 1998, a subsidiary of the Company, InterExchange, Inc. ("IX"), filed a complaint in the New Jersey Superior Court, Middlesex County, against PT-1. The action has been removed to the U.S. District Court for the District of New Jersey. The action arises from a contract in which IX and PT-1 agreed that PT-1 would route its traffic from prepaid calling cards through IX's debit card platform. In the action, IX claimed that PT-1 breached its contract with IX by failing to make required payments under the contract, and claimed compensatory damages in the amount of $8.5 million. In February 1999, PT-1 filed an answer and counterclaim and third party complaint against IX, the Company, and certain of their officers, including Howard Jonas. PT-1 alleges that IX is not entitled to these payments in that IX had breached the agreement, and that, following IX's 1998 merger agreement with the Company, in which IX become a wholly-owned subsidiary of the Company, IX violated its covenant in the agreement that it would not compete with PT-1. PT-1 also alleges, among other things, that the Company and Mr. Jonas tortiously interfered with the contract between IX and PT-1, and that they conspired with IX and its personnel 8
to obtain confidential information relating to PT-1. PT-1 seeks compensatory damages and punitive damages. In May 1999, the Company and Howard Jonas filed an answer to PT-1's third party complaint and IX filed a motion for leave to amend their complaint to add Star Telecommunications and Samer Tawfik as additional defendants and to include the additional claims of tortious interference and fraud in the inducement. The Company and individual plaintiffs David Turock, Eric Hecht, Bradley Turock and Richard Robbins have sought leave to amend their counterclaims to include Star Telecommunications as an additional defendant for failure to permit plaintiff IX to execute certain stock warrants to purchase PT- 1 stock. The Court has issued an order which provides that PT-1 may not allege a specific amount of damages although the order does not forbid PT-1 from claiming damages in general. The Company is subject to other legal proceedings and claims which have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be no assurances in this regard, in the opinion of the Company's management, such proceedings, as well as the aforementioned actions, will not have a material adverse effect on results of operations or the financial condition of the Company. 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the accompanying condensed consolidated financial statements and the associated notes thereto of this Quarterly Report, and the audited consolidated financial statements and the notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company contained in the Company's Annual Report on Form 10-K/A for the year ended July 31, 1998, as filed with the Securities and Exchange Commission. Overview The Company is a leading multinational carrier that provides its wholesale and retail customers with integrated and competitively priced international and domestic long distance telecommunications service, Internet access and, through its Net2Phone products and services, Internet telephony services. The Company delivers these services over a high-quality network consisting of 68 switches in the U.S. and Europe and owned and leased capacity on 18 undersea fiber optic cables. In addition, the Company obtains additional transmission capacity from other carriers. The Company delivers its international traffic worldwide pursuant to its agreements with U.S.-based carriers, foreign carriers, and 17 of the companies that are primarily responsible for providing telecommunications services in particular countries (which are commonly referred to as "PTTs"). In addition, the Company maintains a high-speed network that carries Internet traffic in order to support both its Internet access services and its Internet telephony services. Nine Months Ended April 30, 1999 Compared to Nine Months Ended April 30, 1998 Results of Operations Revenues. Revenues increased 128.3% from approximately $212.8 million for the nine months ended April 30, 1998 to approximately $485.8 million for the nine months ended April 30, 1999. Telecommunications revenues increased 138.0% from approximately $189.9 million for the nine months ended April 30, 1998 to approximately $452.1 million for the nine months ended April 30, 1999. Internet access revenues decreased 16.3% from approximately $15.3 million for the nine months ended April 30, 1998 to approximately $12.8 million for the nine months ended April 30, 1999. Internet telephony revenues increased 173.6% from approximately $7.6 million for the nine months ended April 30, 1998 to approximately $20.8 million for the nine months ended April 30, 1999. Telecommunications revenues increased primarily as a result of an increase in minutes of use from approximately 482.3 million for the nine months ended April 30, 1998 to approximately 1.9 billion for the nine months ended April 30, 1999. The increase in minutes was primarily due to the addition of wholesale carrier service clients, increased usage by existing clients, and increased marketing of the Company's prepaid calling cards. The addition of wholesale carrier services clients and the increased use by existing clients resulted in an increase in wholesale carrier services revenues of 50.8%, from approximately $118.4 million for the nine months ended April 30, 1998 to approximately $178.6 million for the nine months ended April 30, 1999. As a percentage of telecommunications revenues, wholesale carrier service revenues decreased from approximately 62.4% to 39.5%, primarily due to the significant increase in prepaid calling card revenues both in real dollars and as a percentage of overall telecommunications revenues. Revenues from sales of prepaid calling cards increased 394.8% from approximately $50.4 million for the nine months ended April 30, 1998 to approximately $249.4 million for the nine months ended April 30, 1999 as a result of increased marketing efforts and the Company's purchase of a majority interest in Union Telecard Alliance, LLC, a prepaid calling card distributor, in May 1998. As a percentage of telecommunications revenues, prepaid calling card revenues increased from approximately 26.6% to 55.1%. As a percentage of telecommunications revenues, international retail services revenues (which consist primarily of call reorigination services) decreased from approximately 8.9% to 3.7%. 10
As a percentage of total revenues, Internet access revenues decreased from approximately 7.2% for the nine months ended April 30, 1998 to approximately 2.6% for the nine months ended April 30, 1999. This decrease was due to the substantial increase in telecommunications revenues as a percentage of total revenues, as well as a dollar decrease in Internet access revenues due to a decrease in total dial-up subscribers. Internet telephony revenues as a percentage of total revenues increased from 3.6% for the nine months ended April 30, 1998 to 4.3% for the nine months ended April 30, 1999. The increase in Internet telephony revenues was primarily due to an increase in billed-minute usage resulting from increased marketing of the Company's Internet telephony products and services. Direct Cost of Revenues. The Company's direct cost of revenues increased by 148.9%, from approximately $151.8 million for the nine months ended April 30, 1998 to approximately $377.8 million for the nine months ended April 30, 1999. As a percentage of total revenues, these costs increased from 71.3% for the nine months ended April 30, 1998 to 77.8% for the nine months ended April 30, 1999. The dollar increase is due primarily to increases in underlying carrier and connectivity costs, as the Company's telecommunications minutes of use, and associated revenues, grew substantially. As a percentage of total revenues, the increase in direct costs reflects lower gross margins associated with wholesale carrier services and prepaid calling card services as compared with international retail and Internet access services. Gross margins were also adversely affected by network constraints as demand for usage outpaced the rate of deployment of additional network capacity. Selling, General and Administrative. Selling, general and administrative costs increased 60.5% from approximately $44.1 million for the nine months ended April 30, 1998 to approximately $70.8 million for the nine months ended April 30, 1999. As a percentage of total revenues, these costs decreased from 20.7% for the nine months ended April 30, 1998 to 14.6% for the nine months ended April 30, 1999. The increase in these costs in dollar terms is due primarily to increased sales and marketing efforts for retail services, including prepaid calling cards, domestic and international long distance, Net2Phone and Net2Phone Direct. As a percentage of total revenues, the decrease was due primarily to the substantial increase in total revenues for the nine months ended April 30, 1999. Depreciation and Amortization. Depreciation and amortization increased 181.8% from approximately $6.6 million for the nine months ended April 30, 1998 to approximately $18.6 million for the nine months ended April 30, 1999. As a percentage of revenues, these costs increased from 3.1% for the nine months ended April 30, 1998 to 3.8% for the nine months ended April 30, 1999. These costs increased primarily as a result of the Company's higher fixed asset base during the nine months ended April 30, 1999 as compared with the nine months ended April 30, 1998 due to the Company's efforts to expand its telecommunications network infrastructure, enhance its Internet network and expand its facilities. The Company anticipates that depreciation and amortization will continue to increase as the Company continues to implement its growth strategy. Income from Operations. The Company's income from operations increased 77.9% from approximately $10.4 million for the nine months ended April 30, 1998 to approximately $18.5 million for the nine months ended April 30, 1999. Income from operations for the Company's telecommunications business increased 87.9% from approximately $15.7 million for the nine months ended April 30, 1998 to approximately $29.5 million for the nine months ended April 30, 1999. As a percentage of telecommunication revenues, income from operations for the telecommunications business decreased to 6.5% for the nine months ended April 30, 1999 from approximately 8.3% for the nine months ended April 30, 1998. Loss from operations for the Company's Internet access business increased to approximately $6.2 million for the nine months ended April 30, 1999 from approximately $4.9 million for the nine months ended April 30, 1998. The increased loss is primarily due to the decrease in Internet access revenues resulting from a decrease in total dial-up subscribers. Loss from operations of the Net2Phone division increased to approximately $4.7 million for the nine months ended April 30, 1999 from approximately $459,000 for the nine months ended April 30, 1998. The increased loss is primarily due to the substantial increase in selling, general and administrative costs as the Company expands its Internet telephony infrastructure and seeks to gain additional market share for its Internet telephony products and services. 11
Income Taxes. The Company recorded income tax expense of $6.9 million for the nine months ended April 30, 1999. An income tax benefit of $3.3 million related to the tax deduction upon the exercise of stock options was recorded directly into additional paid-in capital. The Company did not record an income tax benefit for the nine months ended April 30, 1998 as the realization of available tax losses was not probable at that time. Three Months Ended April 30, 1999 Compared to Three Months Ended April 30, 1998 Revenues. Revenues increased 120.2% from approximately $87.1 million for the three months ended April 30, 1998 to approximately $191.8 million for the three months ended April 30, 1999. Telecommunications revenues increased 126.5% from approximately $79.1 million for the three months ended April 30, 1998 to approximately $179.2 million for the three months ended April 30, 1999. Internet access revenues decreased 19.2% from approximately $5.2 million for the three months ended April 30, 1998 to approximately $4.2 million for the three months ended April 30, 1999. Internet telephony revenues increased 196.4% from approximately $2.8 million for the three months ended April 30, 1998 to approximately $8.3 million for the three months ended April 30, 1999. Telecommunications revenues increased primarily as a result of an increase in minutes of use from approximately 210.4 million for the three months ended April 30, 1998 to approximately 745.2 million for the three months ended April 30, 1999. The increase in minutes was primarily due to the addition of wholesale carrier service clients, increased usage by existing clients, and increased marketing of the Company's prepaid calling cards. The addition of wholesale carrier services clients and the increased use by existing clients resulted in an increase in wholesale carrier services revenues of 69.8%, from approximately $44.4 million for the three months ended April 30, 1998 to approximately $75.4 million for the three months ended April 30, 1999. As a percentage of telecommunications revenues, wholesale carrier service revenues decreased from approximately 56.1% to 42.1%, primarily due to the significant increase in prepaid calling card revenues both in real dollars and as a percentage of overall telecommunications revenues. Revenues from sales of prepaid calling cards increased 255.6% from approximately $27.0 million for the three months ended April 30, 1998 to approximately $96.0 million for the three months ended April 30, 1999 as a result of increased marketing efforts and the Company's purchase of a majority interest in Union Telecard Alliance, LLC, a prepaid calling card distributor in May 1998. As a percentage of telecommunications revenues, prepaid calling card revenues increased from approximately 34.2% to 53.6%. As a percentage of telecommunications revenues, international retail services revenues (which consist primarily of call reorigination services) decreased from approximately 7.7% to 2.8%. As a percentage of total revenues, Internet access revenues decreased from approximately 6.0% for the three months ended April 30, 1998 to approximately 2.2% for the three months ended April 30, 1999. This decrease was due to the substantial increase in telecommunications revenues as a percentage of total revenues, as well as a dollar decrease in Internet access revenues due to a decrease in total dial-up subscribers. Internet telephony revenues as a percentage of total revenues increased from 3.2% for the three months ended April 30, 1998 to 4.4% for the three months ended April 30, 1999. The increase in Internet telephony revenues was primarily due to an increase in billed-minute usage resulting from increased marketing of the Company's Internet telephony products and services. Direct Cost of Revenues. The Company's direct cost of revenues increased by 152.4%, from approximately $59.5 million in the three months ended April 30, 1998 to approximately $150.2 million in the three months ended April 30, 1999. As a percentage of total revenues, these costs increased from 68.3% for the three months ended April 30, 1998 to 78.3% for the three months ended April 30, 1999. The dollar increase is due primarily to increases in underlying carrier and connectivity costs, as the Company's telecommunications minutes of use, and associated revenues, grew substantially. As a percentage of total revenues, the increase in direct costs reflects lower gross margins associated with wholesale carrier services and prepaid calling card services as compared with international retail and Internet access services. Gross margins were also adversely affected by delayed network deployment. Selling, General and Administrative. Selling, general and administrative costs increased 47.8% from approximately $20.3 million in the three months ended April 30, 1998 to approximately $30.0 million in the three 12
months ended April 30, 1999. As a percentage of total revenues, these costs decreased from 23.4% for the three months ended April 30, 1998 to 15.6% for the three months ended April 30, 1999. The increase in these costs in dollar terms is due primarily to increased sales and marketing efforts for retail services, including prepaid calling cards, domestic and international long distance, Net2Phone and Net2Phone Direct. As a percentage of total revenues, the decrease was due primarily to the substantial increase in total revenues for the three months ended April 30, 1999. Depreciation and Amortization. Depreciation and amortization increased 146.4% from approximately $2.8 million for the three months ended April 30, 1998 to approximately $6.9 million for the three months ended April 30, 1999. As a percentage of revenues, these costs increased from 3.2% for the three months ended April 30, 1998 to 3.6% for the three months ended April 30, 1999. These costs increased primarily as a result of the Company's higher fixed asset base during the three months ended April 30, 1999 as compared with the three months ended April 30, 1998 due to the Company's efforts to expand its telecommunications network infrastructure, enhance its Internet network and expand its facilities. The Company anticipates that depreciation and amortization will continue to increase as the Company continues to implement its growth strategy. Income from Operations. The Company's income from operations increased 4.4% from approximately $4.5 million for the three months ended April 30, 1998 to approximately $4.7 million for the three months ended April 30, 1999. Income from operations for the Company's telecommunications business remained unchanged at approximately $7.8 million for the three months ended April 30, 1999 and $7.8 million for the three months ended April 30, 1998. As a percentage of telecommunication revenues, income from operations for the telecommunications business decreased to 4.4% for the three months ended April 30, 1999 from approximately 9.9% for the three months ended April 30, 1998 due to decreased margins in the carrier wholesale and prepaid calling card businesses. Loss from operations for the Company's Internet access business increased to approximately $2.1 million for the three months ended April 30, 1999 from approximately $1.9 million for the three months ended April 30, 1998. The increased loss is primarily due to the decrease in Internet access revenues resulting from a decrease in total dial-up subscribers. Loss from operations of the Net2Phone division decreased to approximately $1.0 million for the three months ended April 30, 1999, from approximately $1.4 million for the three months ended April 30, 1998. The decreased loss resulted primarily from the increase in revenues as the Company gains customers for its Internet telephony products and services. Income Taxes. The Company recorded income tax expense of $2.1 million for the three months ended April 30, 1999. An income tax benefit of $2.8 million related to the tax deduction upon the exercise of stock options was recorded directly into additional paid-in capital. The Company did not record an income tax benefit for the three months ended April 30, 1998 as the realization of available tax losses was not probable at that time. Liquidity and Capital Resources Historically, the Company has satisfied its cash requirements through a combination of cash flow from operating activities, sales of equity and debt securities and borrowings from third parties. The Company received approximately $3.9 million upon the exercise of stock options and warrants in the nine months ended April 30, 1999. In May 1999, the Company entered into a credit agreement with Lehman Commercial Paper Inc., CIBC World Markets Corp., Bankers Trust Company and a Syndicate of lenders. These institutions have committed to provide us with a $150 million credit facility that will include term loans in an aggregate amount of up to $125 million and revolving loans in an amount of up to $25 million and an additional uncommitted amount of up to $100 million. Bankers Trust Company serves as administrative agent for the facility. The Company used the proceeds from the initial borrowings under the credit facility of $108 million from the initial borrowings under the credit facility to purchase more than 99% of its outstanding 8.75% Senior Notes due 2006, together with accrued and unpaid interest, that the Company purchased in connection with its tender offer for these securities. The amount of $75.0 million of the initial borrowings currently bears interest at a rate of 8.75% per annum and the remaining $33.1 million of the initial borrowings currently bears interest at a rate of 8.25% per annum. As of April 30, 1999, the Company had cash, cash equivalents and marketable securities of $102.9 million and working capital of approximately $127.7 million. The Company generated negative cash flow from operating activities of approximately $22.9 million during the nine months ended April 30, 1999, compared with negative cash flow from operating activities of approximately $1.7 million during the nine months ended April 30, 1998. The Company's cash flow from operations varies significantly from quarter to quarter, depending upon the timing of operating cash receipts and payments, especially accounts receivable and accounts payable. Accounts receivable, accounts payable and accrued expenses have increased from period to period as the Company's businesses have grown. 13
The Company's capital expenditures increased from approximately $12.7 million in the nine months ended April 30, 1998 to approximately $22.2 million in the nine months ended April 30, 1999, as the Company expanded its international and domestic telecommunications network infrastructure. The Company experiences intense competition in its telecommunications business. Increased competition in the telecommunications industry could force the Company to reduce the prices that it charges for its services, or its profit margins. Under such circumstances, the Company's cash flows from operations would be materially adversely affected. Pursuant to Series A Subscription Agreements, dated as of May 13, 1999, SOFTBANK Technology Ventures IV, GE Capital Equity Investments, America Online, Access Technology Partners, Hambrecht & Quist and its affiliates and BT Alex. Brown and its affiliates, purchased from us, in the aggregate, 9,420,000 shares of Net2Phone Series A preferred stock and warrants to purchase 180,000 shares of Net2Phone common stock, for a net aggregate purchase price of $29.9 million. Additionally, a warrant to purchase 92,400 shares of Net2Phone common stock was issued to Hambrecht & Quist as part of its fee as placement agent with respect to the sale of such Series A preferred stock. On May 18, 1999, our subsidiary, Net2Phone filed a registration statement with the Securities and Exchange Commission to register shares of its common stock in an initial public offering. The Company intends to, where appropriate, make strategic acquisitions to increase its telecommunications customer base. The Company may also make strategic acquisitions related to its Internet telephony business. From time to time, the Company evaluates potential acquisitions of companies, technologies, products and customer accounts that complement it's businesses. The Company believes that, based upon its present business plan, the Company's existing cash resources, expected cash flow from operating activities and borrowings under its credit facility, will be sufficient to meet its currently anticipated working capital and capital expenditure requirements for at least the next twelve months. If the Company's growth exceeds current expectations or if the Company acquires the business or assets of another company, or if the Company's cash flow from operations after the end of such period is insufficient to meet its working capital and capital expenditure requirements, the Company will need to raise additional capital from equity or debt sources. There can be no assurance that the Company will be able to raise such capital on favorable terms or at all. If the Company is unable to obtain such additional capital, the Company may be required to reduce the scope of its anticipated expansion, which could have a material adverse effect on the Company's business, financial condition or results of operations. 14
Year 2000 The Company is conducting a review of its computer hardware and software to ensure that its computer-related applications will not fail or create erroneous results as a result of the use of two digits in various program date fields (the "Year 2000 issue"). The Company's cost of addressing the Year 2000 issue is not expected to be material to its operations or financial position. However, the consequences of an incomplete or untimely resolution of the Year 2000 issue could be expected to have a material adverse effect on the financial results of the Company; in the absence of such a resolution, the ability of the Company to route its traffic in a cost effective manner, to deliver a material portion of its services, to properly obtain payment for such services, and/or to maintain accurate records of its business and operations, could be substantially impaired until such issue is remediated. The Company may become liable for substantial damages in the event that, as a result of the Year 2000 issue, it fails to deliver any services that it is obligated to provide. However, the Company expects that its Year 2000 issues will be satisfactorily resolved before the year 2000. The Company is conducting a comprehensive review of its computer systems to ensure that all such systems are, or prior to the end of 1999 will be, Year 2000 compliant. The Company's plan for its Year 2000 project includes the following phases: (i) conducting a comprehensive inventory of the Company's internal systems, including information technology systems and non-information technology systems (which include switching, billing and other platforms and electrical systems) and the systems acquired or to be acquired by the Company from third parties, (ii) assessing and prioritizing any required remediation, (iii) remediating any problems by repairing or, if appropriate, replacing the non- compliant systems, (iv) testing all remediated systems for Year 2000 compliance and (v) developing contingency plans that may be employed in the event that any system used by the Company is unexpectedly affected by a previously unanticipated problem relating to the Year 2000. The Company currently expects to complete all of the phases of this process and that all of its computer systems will be fully Year 2000 compliant before the end of 1999. The Company has completed a number of acquisitions during its recent fiscal years, and is in the process of integrating the systems of the acquired businesses into its operations. Those systems are included in the Company's Year 2000 review and remediation project. During the process of evaluating businesses for any potential acquisition, and after any such acquisitions, the Company will evaluate the extent of the Year 2000 problems associated with such acquisitions and the cost and timing of remediation. No assurance can be given, however, that the systems of any acquired business will be Year 2000 compliant when acquired or that they will be capable of timely remediation. In addition to assessing its own systems, the Company is conducting an external review of its customers and suppliers, and any other third parties with which it does business, including equipment and systems providers and other telecommunications service providers, to determine their vulnerability to Year 2000 problems and any potential impact on the Company. In particular, the Company may experience problems to the extent that other telecommunications carriers whose services are resold by the Company or to which the Company sends traffic for termination are not Year 2000 compliant. The Company's ability to determine the ability of these third parties to address issues relating to the Year 2000 problem is necessarily limited. To the extent that a limited number of carriers experience disruptions in service due to the Year 2000 issue, the Company believes that it will be able to obtain service from alternate carriers. However, the Company's ability to provide certain services to customers in selected geographic locations may be limited. There can be no assurance that such problems will not have a material adverse effect on the Company. In addition, the Company is currently in the process of developing contingency plans with regard to potential Year 2000 problems. The Company believes that, in the event that one or more of its systems is impaired due to unanticipated Year 2000 issues, its contingency plans will enable it to temporarily conduct its operations on a modified basis until such impaired systems are remediated. There can be no assurances that the Company's suppliers and customers will achieve full Year 2000 compliance before the end of 1999 or that the Company will develop or implement effective contingency plans on a timely basis. A failure of the Company's computer systems or the failure of the Company's suppliers or customers to effectively upgrade their software and systems for 15
transition to the year 2000 could have a material adverse effect on the Company's business, financial conditions and results of operations. To date, the Company has incurred expenses of less than $1.0 million in connection with its remediation of Year 2000 related issues. No assurance can be given, however, that the systems of any acquired business will be Year 2000 compliant when acquired or that they will be capable of timely remediation. The Company does not expect to incur significant costs to become Year 2000 compliant, although the Company's evaluation of the Year 2000 problem is not yet complete and actual costs may be significantly higher. In particular, such costs could be higher if certain suppliers of the Company fail to provide Year 2000 related updates to certain switching products purchased by the Company without charge in the manner that is currently expected. Costs associated with Year 2000 remediation are expensed by the Company when incurred. European Currency Conversion Beginning in January 1999, a new currency called the ''euro'' was introduced in certain Economic and Monetary Union (''EMU'') countries. Beginning in 2002, all EMU countries are expected to operate with the euro as their single currency. Uncertainty exists as to the effect the euro currency will have on the market for international telecommunications services. Additionally, all of the final rules and regulations have not yet been defined and finalized by the European Commission with regard to the euro currency. The Company has not yet completed its assessment of the effect that the introduction of the euro will have on its business, operations and sales. CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS - --------------------------------------------------------- This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words "believes," "anticipates," "expects," and similar words and phrases. Such forward-looking statements include, among other things, the Company's plans to implement its growth strategy, improve its financial performance, expand its infrastructure, develop new products and services, expand its customer base and enter international markets, and the possible outcome of litigation relating to the Company. Such forward-looking statements also include the Company's expectations concerning factors affecting the markets for its products, such as changes in the U.S. and the international regulatory environment and the demand for long-distance telecommunications, Internet access and Internet telephony services. Actual results could differ from those projected in any forward- looking statements. The forward-looking statements are made as of the date of this Report, and the Company assumes no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth herein and the other information set forth from time to time in the Company's reports filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including the Company's Annual Report on Form 10-K/A, for the year ended July 31, 1998. 16
PART II. OTHER INFORMATION Item 1. Legal Proceedings Incorporated by reference from Part I, Item I, Financial Statements, Note 4 captioned "Legal Proceedings and Contingencies." Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None 17
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number Description - ------ ----------- 3.01(1) Restated Certificate of Incorporation of the Registrant. 3.02(1) By-laws of the Registrant. 10.01(2) Employment Agreement between the Registrant and Howard S. Jonas. 10.02* 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* Employment Agreement between the Registrant and James Courter. 10.9(7) Agreement between Mr. Cliff Sobel and the Registrant. 10.10* Employment Agreement between the Registrant and Hal Brecher. 10.11* Employment Agreement between the Registrant and Howard S. Jonas. 10.12(8) Agreement and Plan of Merger, dated April 7, 1998, by and among the Registrant, ADM Corp., InterExchange, Inc., David Turock, Eric Hecht, Richard Robbins, Bradley Turock, Wai Nam Tam, Mary Jo Altom and Lisa Mikulynec. 10.13(9) Securities Purchase Agreement between the Registrant, Carlos Gomez and Union Telecard Alliance, LLC. 10.14* 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* 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* 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* 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* Loan Agreement between the Registrant and Stephen Brown. 18
27.01* Financial Data Schedule. - ------------ * filed herewith (1) Incorporated by reference to Form S-1 filed February 21, 1996 file no. 333- 00204. (2) Incorporated by reference to Form S-1 filed January 9, 1996 file no. 333- 00204. (3) Incorporated by reference to Form S-8 filed January 14, 1996 file no. 333- 19727. (4) Incorporated by reference to Form S-1 filed March 8, 1996 file no. 333- 00204. (5) Incorporated by reference to Form 10-K/A for the fiscal year ended July 31, 1997, filed 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 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. (b) Reports on Form 8-K: None. 19
IDT CORPORATION FORM 10-Q April 30, 1999 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. IDT CORPORATION June 14, 1999 By: /s/ Howard S. Jonas - ------------- ----------------------------------- Date Howard S. Jonas Chairman of the Board and Chief Executive Officer (Principal Executive Officer) June 14, 1999 By: /s/ James A. Courter - ------------- ----------------------------------- Date James A. Courter President (Principal Executive Officer) June 14, 1999 By: /s/ Stephen R. Brown - ------------- ------------------------------ Date Stephen R. Brown Chief Financial Officer (Principal Financial and Accounting Officer) 20