20030825Application.pdf

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IDT Corporation
520 BroBel Street
legal Department Newark, NJ 07102 USf\
P 973 438/3342
F 973 438/"1455
wwv'.',lclt.ne\
August 22, 2003
VIA OVERNIGHT MAIL \"'0ce.
Secretary Jean Jewell
Idaho Public Utilities Commission
472 W Washington 83702
Boise, ID 83720-0074
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RE:IN THE MATTER OF THE APPLICATION
OF IDT AMERICA, CORP. FOR A
CERTIFICATE OF PUBLIC
CONVENIENCE AND NECESSITY TO
PROVIDE FACILITIES-BASEND AND
RESOLD LOCAL EXCHANGE
TELECOMMUNICATIONS SERV ES
CASE NO. C'
~ -.: (j) ,-(j) ..
Dear Secretary Jewell:
On behalf of IDT America, Corp., I hereby provide an original and two (2) copies
of the above-listed Application. Please date-stamp the additional copy of this cover letter
and return it to me in the enclosed self-addressed envelope.
If you have any questions or concerns, please do not hesitate to contact me at
(9730 438-4854 or Carl.Billek~corp.idt.net.
Respectfully submitted
~WMj
Carl Wolf Billek
IDT America, Corp.
Enclosure
SL lOT
BEFORE THE IDAHO PUBLIC UTILITIES COMMISSION
IN THE MATTER OF THE APPLICATION
OF IDT AMERICA, CORP. FOR A
CERTIFICATE OF PUBLIC
CONVENIENCE AND NECESSITY TO
PROVIDE F ACILITIES- BASEND AND
RESOLD LOCAL EXCHANGE
TELECOMMUNICATIONS SERVICES
CASE NO. CJi.tf 1-11"1/
IDT America, Corp. ("IDT" or "Applicant") hereby provides the following
information in support of its Application for a Certificate of Public Convenience and
Necessity to provide facilities-based and resold local exchange service throughout the
incumbent territories of Qwest Corporation ("Qwest") and V erizon Northwest, Inc.
Verizon
Proposed Services
IDT seeks authorization to provide facilities-based and resold local exchange
service throughout the incumbent territories of Qwest Corporation ("Qwest") and
V erizon state of Idaho.
IDT intends to offer service via the unbundled network elements of the ILEC(s)
and, if fiscally responsible, the resold services of the ILEC(s). IDT does not have
any plans to build its own facilities in the immediate future.
IDT intends to market its services to residential and small business subscribers.
IDT is currently authorized to offer resold interexchange service in Idaho. IDT
will initially market its service to its existing long distance subscriber base.
Subsequently, IDT will market its service via television, radio and print media.
IDT America, Corp. is a wholly owned subsidiary of IDT Domestic Telecom
Inc., a Delaware corporation. IDT Domestic Telecom, Inc. is a wholly owned
subsidiary of IDT Telecom, Inc., also a Delaware corporation. IDT Telecom, Inc.
is a wholly owned subsidiary of IDT Corporation, a Delaware corporation that is
publicly traded on the New York Stock Exchange (IDT, IDT.C).
II.Form of Business
The legal name of Applicant is IDT America, Corp. IDT is a New Jersey
corporation. IDT maintains its principal place of business at:
IDT America, Corp.
520 Broad Street
Newark, New Jersey 07102-3111
Telephone: [phone]
IDT does not maintain a business address within Idaho.
IDT exists for the purpose of providing local exchange and interexchange
telecommunications service.
A certified copy of IDT' s articles of incorporation is provided at Exhibit
A certificate of good standing issued by the Idaho Secretary of State of
Idaho is provided at Exhibit 2.
IDT's registered agent for service in Idaho is:
CT Corporation System
300 North 6th Street
Boise, Idaho 83701
IDT is a wholly-owned subsidiary of IDT Domestic Telecom, Inc., which
is located at the same address as IDT.
The Officers and Directors for Applicant are:
Howard Jonas; Chief Executive Officer, Treasurer, and Chairman
J ames Courter, President and Director
Stephen Brown, Chief Financial Officer
Joyce Mason, Secretary and Director
Doug Mauro, Senior Vice President
Marc Knoller, Director
All Officers and Directors are located at:
520 Broad Street
Newark, New Jersey 07102-3111
Telephone [phone]
Facsimile [phone]
III.
IV.
VI.
VII.
Applicant is a wholly-owned subsidiary of IDT Domestic Telecom, Inc.
IDT Domestic Telecom, Inc. is located at 520 Broad Street, Newark, New
Jersey.
Applicant does not own or control any subsidiaries.
Telecommunication Service
Applicant anticipates it will begin to provide service within two months of
this Application, an Interconnection Agreement and its tariff.
IDT intends to offer voice grade local exchange service and accompanying
service features to residential and small business subscribers.
Service Territory
Applicant seeks authorization to provide local exchange service
throughout the incumbent service territories of Qwest and Verizon.
IDT intends to provide service via unbundled network elements and, if
fiscally permissible, resold service of the ILEC(s). IDT does not own or
control any telecommunications facilities in the state ofIdaho.
IDT will compete with the ILEC(s) and any CLECs, such as AT&T
Sprint and MCI that compete in the areas IDT intends to serve.
IDT does not own or control any telecommunications facilities in the state
of Idaho. It intends to rely on the facilities of the ILEC(s) to provide
servIce.
Financial Information
A copy ofIDT's parent corporation , IDT Corporation s most recent SEC Form
10-K and 10-Q are provided at Exhibit 3.
Illustrative " Tariff Filings
Because IDT has not yet entered into an Interconnection Agreement with any
ILEC, Applicant respectfully requests that it not be required to submit an
illustrative tariff with this Application. Upon approval of this Application and an
Interconnection Agreement, Applicant will submit an initial tariff and price
sheets setting forth rates, rules, terms, and regulations applicable to its service and
Applicant will not provide such service until its tariff has been approved.
Customer Contacts
Contact information for the Applicant.
The name, address, and telephone number and electronic mailing
addresses of the person responsible for consumer inquiries and
complaints from the public is as follows:
Anthony Acevedo, Customer Service Specialist
IDT America, Corp.
520 Broad Street
Newark, New Jersey 07102-3111
[phone] (Telephone)
[phone] (Facsimile)
Anthony.Acevedo~corp.idt.net (Email)
Applicant's toll-free number for customer inquiries and complaints
is [phone].
The name, number and electronic mailing addresses of the
person(s) designated as a contact for the Commission Staff for
resolving complaints, inquiries and matters concerning rates and
price lists or tariffs is as follows:
Carl Wolf Billek, Associate General Counsel
IDT America, Corp.
520 Broad Street
Newark, New Jersey 07102-3111
[phone] (Telephone)
[phone] (Facsimile)
CarI.Billek~corp.idt.net (Email)
VIII. Interconnection Agreements
Applicant intends to initiate interconnection negotiations with Qwest and Verizon
in the near future.
IX.Compliance with Commission Rules
Applicant has reviewed all of the Commission rules and agrees to comply with
them.
Escrow Account or Security Bond
Applicant does not intend to require deposits by its customers, therefore, it has not
submitted a security bond. Should the Commission impose a Bond requirement
for any other reason, IDT shall comply accordingly.
WHEREFORE, for the reasons stated herein, IDT America, Corp. respectfully
requests that the Commission grant this application to provide facilities-based and resold
local exchange service throughout the incumbent territories of Qwest Corporation and
Verizon Northwest, Inc.
Respectfully submitted
&-J IfiJ fJ!hJJil
Carl WolfBillek, Associate General Counsel
IDT America, Corp.
520 Broad Street
Newark, New Jersey 07102-3111
(973) 438-485L1, (Telephone)
[phone] (Facsimile)
Carl.Billek~corp.idt.net (Email)
Dated: August 22, 2003
LIST OF EXHIBITS
Exhibit 1- Articles of Incorporation
Exhibit 2 - Certificate of Good Standing Issues by the Idaho Secretary of State
Exhibit 3 - SEC Form 10-K and 10-Q of IDT Corporation
Exhibit 1- Articles of Incorporation
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CZBlrICATI 0)' :ElrCO.JORI.~IOJI 14
lOt ~C!A, coat.LONNA a. HQQEs.hoNIozr or
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'1'h~ underaiCjJneCi. of the -.,. or ei9b~"n (18) years or Otj~~57
over, tor ~b. purpo.. of forminq a oorpor~tion pursuant to
the p:l:'OV1.ion8 of '1'1~lo leA, CUJl'Jlor..t1on.a~: general, o~ the
.tatut.. of the state. of New Jer..y, cSoe8"hereby exeoute tb.
follov1n9 Cert1flC1ate ot Inaorpora~lon=
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The na1le of the corporation is:1M AMBRICA, CORP.
.;'
The PU~5C!1 or PUrpoH. tor whiClh this oorporationi. organized are:
'lo concluot all actLviU.. Nt forth and peraoitUd
under and by virtue or the teras" c:ondition. andproviaiona of Title leA, -New Jer.ey busin...Corporation Act.
Tne aqqreqate nuaber of ahar.. wbiQb the corparationabe.ll bay. authority to 1aflUe i.;ten thousand(10,000) share., no p'~ value.
The ad-dres8 of the oo~ration'lnitial relj'isteredoffice i. 1506 West Terrace Cl~ole
Unit .6 Teaneck, NJ 07666
The nama ot the corporat:ion'a iriit:ial roqillltere4
aqant at .uch a~dre.. i. t DavieS; Barth
1506 West Terrace CircleV~~ .5 '1"'~k, NJ 07666
Tne number of director. oon8t1tuti~ the initial
Board of Direotors .hall be thr.. (3).
8BVBJITJII The name and adc1t'N5 of each, per. on who shall &erve
8. Diroctor* are as tollow.:
Howard Jona8, 3220 Arliniton Avenue, Rive~ale, NY 10e 63
Of oD5q~
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Deborah Jon.e, 3220 Arlinqton Avenue, Ri~al., 10"63
Joyce .,. Ha8on, 170 W. 231'4 8treet., New York. !lY 10011
,,-
110BTl8 The ped04 ot exbtenoe ot tb1. cOrporation ia
unlla1te4.
.1II"1'BI A director ahall not be P8r.onall~ liable ~o the
oorporat1on or 1~ 8h.r8hol~er. ~or d&8oQ85 ror
breach of any 4uty ow*, to the corporation or it.
.har.holders; except that th18 p~1810n shall not
relieve a director trOD li.bl11t~ tor any breaoh
duty ba8ed upon an Got or oai..1on Ca) 1n breach of
Buoh person 's duty of loyalty to :the corporation or
it. shareholders, (b) not 1n 9004 faith or lnvolvlnq
8 knowing violation of lev or (0) re8ulting in
receipt by 8uch perGon of an 1mptoper personal
ben.tit.
IX W1~WBa. WKlaIOr, the undersigned lnco~orator has hereunto
aubscribed hb name
,.,.
Exhibit 2 - Certificate of Good Standing Issues by the Idaho Secretary of State
IDSOS Document Page 1 of
..,-_.._"...,.. --..
State of Idaho
CERTIFICATE OF AUTHORITY
IDT AMERICA, CORP.
File Number C 125053
I PETE T. CENARRUSA, Secretary of State of the State of Idahoj hereby certify
that an Application for Certificate of Authority, duly executed pursuant to the provisions I
of the Idaho Business Corporation Act, has been received in this office and Is found to
conform to law.
ACCORDINGLY and by virtue of the authority vested in me by law. I issue this
Certificate of Authority to transact business in this State and attach hereto a duplicate of
the Application for such Certificate.
Dated: July 30, 1998
tJi'
SECRETARY OF STA
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Get a certificate of existence for lOT AMERICA. CORP.
IDT AMERICA, CORP.
520 BROAD ST
NEWARK, NJ 07102
Type of Business: CORPORATION, GENERAL BUSINESS
Status: GOODSTANDING , ANREPT SENT 02 May 2003
State of Origin: NEW JERSEY
Date of 30 Jul 1998
Origination! Authorization:
Current Registered Agent:CT CORPORATION SYSTEM
300 N 6TH ST
BOISE, 10 83702
Organizational ID ! Filing C125053
Number:
Number of Authorized Stock NjA
Shares:
Date of Last Annual Report: 27 May 2003
Amendments:
Amendment 0 filed 30 Jul1998 CERTIFICATE OF AUTHORITY
Annual Reports:
Report for year 1999 ANNUAL REPORT
Report for year 2000 ANNUAL REPORT
Report for year 2000 CHNG RAjRO
Report for year 2001 ANNUAL REPORT
Report for year 2002 ANNUAL REPORT
Report for year 2003 ANNUAL REPORT
.....,... ,....,...,... ,..,.............. ..,......---...............,..,. ..,.,..... ,..... .........,.,..,....----......-. . '_".'.'."., ..
Idaho Secretary of State s Main Page
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Exhibit 3 - SEC Form 10-K and 10-Q ofIDT Corporation
IDT Corporation SEC Form 10-
UNITED STATESSECURITIES AND EXCHANGE COMMISSION
' Washii1gt6n,D.C. 20549
"" ' .
FORM 10-FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TOSECTIONS 13 OR 15(d) OF TBESEC1JRIT.JES EXCHANGE ACT OF
1934ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF TEE SECURITJEs EXCHANGE
ACT OF 1934 FOR THE ~CAL YEAR ENDED .TOL Y 31, 2002, OR
TRANSITION REPORT PURSUANT TO, 'SECTION 13 OR 15(d) OF, THE SECURITIEsEXCHANGE ACT OF 1934.
. Commission File Number: 0-27898
IDT C,RP() RA TIO (Exact name of registrant as sp,eci1iedin its chart!r)
Delaware
(State of other jurisdiction ofin~orporationor orgaiUzation)22-3415036
. (I.R;S. Employer Identification Number)
S2O Broad Street
Newark, New Jersey 07102
(Address of principal executive offices, including area code)
Securities registered pursuant to Section 12(b) of the Act:
[phone](Registrant's telephone number, including area code)
Securities registered purSllant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Class B Common Stock, par vaJoe $.01 'per share
(Title of class)
None
Indicate by check mark whether the Registrant (1) has filed all report!: required to
be filed by Section 13 or ~5(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for such shorter
p~od that the Rf:gistrant was requiredto file such reportE), and (2) bas been subject to such :/iling
reqtrirements for the past 90 days. Yes No 0Indicate by check :mark jf disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained berein,and will not be contained, to the best of Registrant's knowledge, m definitive proxy or infOnnation statements Incorporated reference m Part ill of this FoIDJ 10-K or any amendment to this FOIJIll 0- K. 0The aggregate market value of the voting stock hcld by
non-a:EflliRtes of the Registrant, based on the closing price onOctober 25,2002 of the Common Stock of $17.66 and of the Class B Common Stock of $16.30, as reported on the New YorkStock Exchange, was approximately $821 milliOD. Shares of Common Stock held by ellL:h officer and clir~ctor and by eachperson who owns 5% or more of the outstanding Common Stock (assuming conversion of
the Registrant's Class A CommonStock) or Class B Common Stock have been excluded from
this computation, m that such pfmJons may be deemed to beaffiliates of the Registrant This determination of affiliate status is not necessaIily a
conclusive detenDination for any otherpUIpose.
As of October 25 2002, the Registrant bad outstanding 25 020 972 'shares of Common Stock, $.01 par value, 9 816,988shares of Class A Common Stock, $.01 par value, and 54 091 855 shares of Class B Common Stock, $.01 par value. Includedin th~se numbers 'are 5,419,963 shares of Common Stock and 4 019 163 shares of Class B Common Stock, b~ld by IDTCoIporatioD.
DOCUMENTS lNCORPORATED BY REFERENCEC~ .information in the Registrant s definitive Proxy Statement for its 2002 Annual Meeting of Stockholders, whichwill be filed with the Securities BDd Exchange Commission pursuant to Regulation
14A, not later thBD 120 days after July 312002, is incorporated by reference in Part IT (Item 5)
BDd Part ill (Items 10, II, 12 and 13) of this Form 1O-
INDEX
JDT CORPORA.TION
ANNUAL REPORT ON FORM lO.
PARTr Page No.
Ite:m 1.
Item 2.
Item. 3.
Item 4.
Business ..............................................,
................
Properties "
......
LegalProceec1ings... .......................................
:............ 46Submission of Matters to a Vote of Security Holders
. . . . , . . . . . . . . . . . . . . .,. . . . . ..
PART IT
PART
Market f~ Registrant's Common Equity and ~d Stockholder Matters. . . .
. . . . ..
Selected Financial Data ...............
..................................... "
Management's Discussion and Analysis ofFinaDcial Condition and Results ofOperatioD.S...
;.............:..........:...........:.....;.....
Item 7 A. Quantitative and Qualitative Disclosures about M8l:ket Risks
. . . . . . . . . . . . . . . . . . . "
Item. 8. FinaDcial Statements and Supplementary Data
................................ 79Item 9. Changes :in and Disagreements with Accountants on Accounting and FinancialDisclosure
............................................................. 79
Item 5.
Item 6.
Item 7.
PART IV
Item 10. Directors and Executive Officers of the RegiBtrant
............................. 80Item 11. ExecutiveCompensatiDn .................................................
Item 12. Sectnjo/Ownersbip of Certain Beneiicial Owners and Management
......... . .. . "
Item 13. Certain Relationships and 'Related TramactioDS
............................... 80Item 14. Controls and Procedures
.................................................. 80
Item 15. Exhibits, Financial Statement Schedules, and Reports OD, Form. 8- K . . . . . . . . . . . . . . " SIGNATURES...
.....................
................................................... 85CERTIFICATIONS
.................... ...................................
;............... 87INDEX TO CONSOLIDATED FlNANCIAL STATEMENTS......... .
. .. .. .. . . . .. . .. .' .. ... .. ""
F-1
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCf!BDULE$, AND REPOR:I'S ON FORM 8-
ExbibitNumber
01:(1)
02(1)
03(16)
10.01(2)
10.02(18)
10.03(3)
10.04(4)
10.05(1)
10.06(5)
10.7(6)
10.8(10)
10.9(7)
10.10(10)
10.11(10)
10.12(8)
10.13(9)
10.14(10)
10.15(10)
10.16(10)
10.17(10)
10.18(10)
(a) The following documents are :filed as part oftbis Report:1. Financial Statements.
2. Financial Statement Schedules.
Schedule No.Description
Valuation and QuBlifying Accounts
3. Exhibits
Description of Exhibit
Restated Certificate of Incorporation of the Registrant
By-laws of the RegistraJIt.
Certificate of Amendment to the Restated, Certificate of Incorporation of the Registrant.
Employment Agreement between the Registrant and Howard S. Jonas.
1996 Stock Option and Incentive Plan, as amended and restated, of the RegistrantForm of Stock Option Agreement under the 1996 Stock Option and Incentive Plan.
Form of Registration Rights Agreement between certain stockholders and the Registrant
Lease of 294 State Street
Lease of 190 Main Street
Form of :R6g:iStration Rights Agreement between HowardS. Jonas and the RegistrantEmployment Agreement between the Registrant and James Courter.
Agreement betWeen Cliff Sobel and the Registrant
Employment Agreement between the Registrant and Hal Brecher.
Employment Agreement between the Registrant and Howard S. Jonas.
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, WID NamTam, Mary 10 Altom and Lisa Mikulynec.
Securities Purchase Agreement between the Registrant, Carlos Gomez and Union TelecardAlliance, LLC.
Credit Agreement, dated as of May 10, 1999, by and among the Registrant, various lenders partythereto, Lehman Commercial Paper Inc., C1J3C World Markets Corp. and Bankers TrustCompany;
Pledge Agreement, dated as of May 10, 1999, by and among the Registrant, certain subsidiaries
the Registrant and Bankers Trust Company, as Collateral Agent
Security Agreement, dated as of May 10, 1999, by and among the Registrant, certain subsidiaries ofthe Registrant and Bankers Trust Company, as Collateral Agent.
Subsidiaries Guaranty, dated as of May 1~, 1999, by and among the Registrant, certain subsidiariesof the Registrant and Bankers Trust Company, as Collateral Agent.
Loan Agreement between the Registrant and Stephen Brown.
ExhibitNumber Description of Exhibit
10.19(J 1)IntemetITelecommUDications Agreeme.nt, dated as of May 7, 1999, by and between Registrant and
NetZPhone, Inc.
Joint Marketing Agreement, dated as of May 7, 1999, by and between Registrant and Net2Phone,Inc.
rDT Services Agreement, dated as of May 7,
1999, by and between Registrant and Net2Phone, Inc.Net2Phone Services Agreement, dated as ofMa.y 7,1999, by and between RegiStrant andNet2Phone, Inc.
Assigmnent Agreement, dated as of May 7, 1999, by and between Registrant and Net2Pbone, Inc.Tax Sharing and IndeDJIJi:fication Agreement, dated as of May 7, 1999, by and between Registrantand Net2Phone, Inc.
Separation Agreement, dated as of May 7, 1999, by and between RegistraIlt and Net2Phone
, Inc.Co-location and Facilities :Management Services Agreement, dated as of May 20
, 1999, by andbetween Registrant and Net2PhoDe, Inc.
Lease of 520 Broad S1l'eet, Newark,.New Jersey.
Amendment to Lease of 520 Broad S1Ieet, Newark, New Jersey.
Option Agreement,. dated as of March 3, 2000, between IDT Corporation and AT&T Corp.
Amendment to Option Agreement, dated
as of AprilS, 2000 between IDT Corporation and AT&TCcnp.
Subscription Agreement, dated as of March 24, 2000, between IDT Corporation ,and Liberty MediaCorporation.
Amendment to Subscription Agreement, dated as of
May 26, 2000, between IDT Corporation andLiberty Media Corporation.
Letter Agreement, dated as ofMWch 28 2000, between IDT CoIporation, AT&T Corp. andNet2Phone, Inc.
Letter Agreement, dated as of March 2000, between IDT Corporation, AT&T Corp. andNet2Phone, Inc.
Conversion, Termination and Release Agreement, dated as
Df April 2000, bernleen IDTCorporation, Terra Networks, B., Terra NetwDrks USA, Inc., Terra Networks Access ServicesUSA LLC and Terra Networks Interactive Services
USA !LC.Stock Exchange Agreement, dated as of Apri118
2001 by and among IDT Investm~nts Inc., IDTCorporation, mT America, Corp., 225 Old NB RDad, 'Inc., 226 Old NB Road, Inc., 60 Paik PlaceHold:i11g Company, Inc., Liberty Media Corporation, Microwav~ Holdings, Lt. C. and Liberty 'IFMana.g~ment, Inc.
Stockholders Agr~ement, dated as of November 26
1997, by and among Teligent, Inc., Microwav~Services Inc., Telcom-DTS Investors, LL.C. and NITA&T Investm~nt Inc. (Incorporated byr~ference to Exhibit 2 to Schedul~ 13D, filed by The Associated Group, Inc. and MicrowaveServices, Inc. on December 8, 1997 with resp~ct to securiti~s of Telig~nt, Inc.
Registration Rights Agr~em~nt, dated as of March '
1998 by and between Teligent, IDe. andMicrowave S~rvices, Inc. (Incorporated by reference to Exhibit 6 to Amendment
ND. 1 toSchedule 13D filed by The Associated Group, Inc. and Microwave Servic~s
, Inc, on March 91998 with respect to securities of Teligent, Inc.
10.20(11)
10.21(.1
10.22(11)
10.23(11)
10.24(11)
10.25(11)
10.26(11)
10.27(12)
10.28(12)
10.29(13)
10.30(14)
10.31(13)
10.32(14)
10.33(13 )
10.34(13)
10.35(15)
10.36(19)
10.37(19)
10.38(19)
StOckholders Agrooment, dated as of J~uary 13, 2000, by and among.Alex
J. Mandl, LibertyMedia Corporation, Te1com-DTS Investors, L.C. and Microwave Services, Inc. (Incorporatedby reference to Exhibit 7(i) to Schedu1e 13D, :filed by Liberty AGI, Inc. on January 24,2000 witb.respect to securities of Teligent, Inc.
Amendment to the Employment Agreement between the Registrant and r ames A. Courter
Amendment No., 2 to the Employment Agreement between the Registrant and James A. Courter
Asset Purchase Agreement, dated Decembe.r 18, 2001, between roT Winstar Acquisition, Inc.,Wmstar Communicanons, Inc. and the subsidiaries of Wins tar listed on Appendix 1 thereto.
Employment Agreement between the Registrant and Howard S. Jonas.
Subscription AgTeement, dated as of August 11
2000, by and between Net2Phone and AT&T.
Stock Purchase Agreement, dated as of August 11, 2000, by and between AT&T, IDT and IDTInvestments.
10.46(23) Voting Agreement, dated as of August 11,2000, by and between ITelTech and IDT Investments.
10.47(24) Limited Liability Company Agreement, dated as of October 19, 2001, of Net2Phone Holdings, byIDT D-
ExbibitNumber
10.39(19)
10.40(20)
10.41(20)
10.42(21)
10.43(22)
10.44(23)
10.45(23)
10.48(24)
10.49(24)
10.50(25)
10.31(26)
10.52(26)
10.53*
10.54*
10.55*
10.56*
10.57*
10.58*
10.59*
Description of Exhibit
Amended and Restated Limited Liability Company Agreement, dated as of October 19, 2001, Net2Phone Holdings, by and among AT&T, ITelTech, IDT andIDT D-
Second Amended and Restated Limited Liability Company Agreement, dated as of October 19,2001, of Net2Phone Hoidings, by and among AT&T, ITelTech, IDT, illT D-, IDT Inv~stments,Liberty Media and LMC
Stockholders Agreement, dated as of May 13
, '
1999, by and among IDT, Clifford M. Sobel,Net2Phone and the additional investors listed on Schedule A thereto.
Amended and Restated Limited Liability Company Agreement, dated as of November 8,2001, ofIT Stock, by Net2Phone Holdings.
.Amendment No.1 to the Second Amended and Restated Limited Liability Company Agreement,
dated as of October 31,2001, of Net2Phone Holdings, by and among AT&T, ITelTech, IDT, IDT, roT Investments, Lfberty Media and LMC.
Amendment No.1 to Securities Purchase Agreement, dated April 24, 200~, by and among the
Registrant, UTCG Holdings LLC and Union Telecard Alliance, LLC.
Amended and Restated Operating Agreement ofUIlion Telecom Alliance, LLC, dated April 242002, by and among mCG Holdings LLC, IDT Domestic-Union, 11C the Registrant and UnionTelecard Alliance, LLC.
Amended aDd Restated Distribution Agreement, dated April 24, 2002, by and between IDTNetherlands, B.V. and Union Telecard Alliance, LLC.
UIlit Purchase Agreement, dated April 10, 2002, by and among WCI Capital Corp., Dipchip Corp.the Registrant and Wmstar Holdings. LLC.
Lock-up, Regis1ration Rights and Exchange Agreement, dated June 6, 2000, by and between theRegistrant and Liberty Media Corporation.
Letter Agreement, dated Apri122, 2002, by and between Charles Garner and the Registrant
Employment Agreement, dated February 4, 2002, by and between the Registrant and E. BrianFinkelstein.
ExhibitNumber
10.60'"
Desc:riptlon of Erhibit
Amendment to the Bmployment Agreement, dated October 24. 2002, between the Registrant andB. Brian Finkelstein.
Subsidiaries of the Registrant.
Consent of Brnst & Young LLP.
Certification of Chief Executive Officer
Certification of Chief Financial Officer
21.01 '"
23.01'"
99.1(a)*
99.1(b)*
filed herewith
(1) IncOIpora.ted by reference to Form S-l filed Febmary 21,1996 file no. 333-00204.(2) IncoIporated by reference to Form S~l filetd January 9, 1996 file no. 333-00204.(3) Incorporated by reference to Form $-8 filed January 14, 1996 file no. 333-19727.(4) Incorporated by reference to Form S-l filed March 8, 1996 file no. 33 00204.(5) Incorporated by reference to Form lO-K for the fiscal year ended July 31, 1997, filed October 29, 1997.(6) Incorporated by reference to Form S-l :filed March 14, 1996 file no. 333-00204.(7) Incorporated by reference to Form 10-KlA for the fiscal year ended July 31, 1997, filed February 2, 1998.
(8) Incorpora!ed by reference to Form 8.;K:filed Apiil22, 1998.
' ,
(9) Incorporated by reference to Form 10-KlA for the fiscal YeaI' ended July 31, 1998, filed December 4, 1998.(10) Incorporated by reference to Form 10-Q for the fiscal
quarter ended January 3l, 1999, filed March 17 1999.(11) Incorporated by reference to Form lO-Q for the fiscal quarter ended April 30, 1999. filed June 14, 1999.(12) Incorporated by reference to Form lO-K for the fiscal year ended July 31, 1999 :filed November 4, 1999.(13) Incorporated by reference to Form lO-Q for the fiscal quarter ended April 30, 2001, 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) Inco:r::poratecl by reference to Form lO-Q for the fiscal quarter 6nded April 30, 2000, filed June 14 2000.(17) Incorporated by reference to Form lO-Q for the fiscal quarter ended October 31, 2000; filed December 152000.
(18) Incorporated by reference to Form lO-Q, for the fiscal quarter ended January 31 2001, filed March 19, 200l.(19) Incorporated by reference to Schedule 13D filed aD Apru30. 2001. (20) Incorporated by reference to Form lO-Q for the fiscal quarter ended October 31,2001, filed December 17,2001.
(21) Incorporated by referenc~ to Form 8-Kfiled January 3,2002.(22) Incorporated by roference to Forni lO-Q for the fiscal qua,rter ended April 30 2002 filed June 14, 2002.(23) Incorporated by reference to Schedule 13D :filed on August 21, 2000, with respect to Net2Phone, by IDYInvestments, IDT and Howard S. Jonas.
(24) Incorporated by reference to Schedule 13D, filed on October 25, 2001, with respect to Net2Phone, byNet2Phone Holdings, LLC., IDT Domestic-Union, LLC, IDT InvestJ:nents Inc., IDT Nevada HoldingsInc., IDT Domestic Telecom, Inc., IDT Telecom, Inc., IDT Corporation, Howard S. JOD.aB, ITelTech, LLCand AT&T Corp.
(25) Incorporated by reference to Fom lIA of Net2Phone :filed June 20, 1999.(26) Incorporated by reference to Schedule 13D, filed on November 15, 2001, with respect to Net2Phone, by ITStoc:k, Net2Phone Holdings, IDT D-, IDT InveS1ments, IDT Nevada, IDT D-, IDT Telecom, IDTHoward S. Jonas, ITelTech and AT&T.
(b) Reports on Fonn 8-
On 'August 28, 2002, the Registrant filed Amendment No.1 to its Current Report on Form 8-K originallyfIled on January 3, 2002.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securi~es Exchange Act of 1934
, theregiStrant has duly caused this Annual Report on Form iO.
K to be signed on its behalf 1:IY the undersigned,thereunto duly authorized..
!DT CORPORATION
By:/s/ JAMES A. COTJR'IER
James A. CourterVice Chairman and Chief ExeClltive Officer
Date: October 29,2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this .Am1ual Repo~ on Form lO-K hasbeen signed by the following persons on behalf of the
Registrant ~d in the capacities and on the dates indicated.ffi~TI~
/sl HoWARD S. JONAS Chamnan October 29,2002Howard S. JoIlBS
Is! JAMES A. COURTER
James A. Courter
Vice Chairman and Chief Executive
Officer (Principal ExecutiveOfficer)
October 29, 2002
Isl STEPHEN It BROWN
Stephen R.llrown Chief F.inancial Officer and Director
(Principal Financial Officer)October 29, 2002
Isl MARCELO FIsCHER
Marcelo Fischer Chief Accounting Officer and
Controller (Principal Accounting
Officer)
October 29, 2002
Isl MICHAEL FIsCHBERGER
Michael Fischberger Chief Operating Officer and Director October 29, 2002
Isl JOYCE J, MAsON
Joyce J. Mason
Director October 29,2002
Isl MARc E. KNOLLER
Marc E. KnoUer
Director October 29, 2002
/sl MOSHE KAGANOFF
Moshe Kagano:ff
Director
October 2002
Isl GEOFFREYROCHWARGER
Geoffrey Rochwarger
Director October 29, 2002
Is/ MEYER A. BERMAN
Meyer A. Berman
Director
October 29, 2002
Isl J. WARREN BLAKER
J. Warren Blaker
Director October 29, 2002
Isl SAUL Ie. FENSTBR
SaulK. Fenster
Isl MICHAEL J. LEvITr
Michael J. Levitt
Isl WILLIAM AR.!HUR OWENS
William Arthur Owens
Isl PAUL REICHMANN
Paul Reil'hTYIA'III
.'
Isl WILLIAM F. WELD
William F. Weld
Director October 29, 2002
Director October 29, 2002
Director October 29. 2002
Dh'ector October 29, 2002
Director October 29 2002
CERTIFICATIONS
I, James A. Courter, Chief Executive Officer of IDT
Coxporation, certify that:1. I have reviewed this annual report on Fonn lO-
K of IDT Coxporation;2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact oromit to state a material fact necessary to
make the statements made, in light of the circumstances underwhich such statements were made, not misleading with. respect to the period covered by this a.tU1uaIreport; and
Based on my knowledge, the financial statements, and other financial information included in thisannual report, fairly p~esent in all material
respects the financial condition,
results of op~rations andcash flows of the registrant as of, and
for, the periods presented in this annual report.
Date: October 29,2002
Is! JAMES A. COURTER
James A. Courter
CERTIFICATIONS
I, Stephen R. Brown, Chief Financial Officer of IDT Corporation, certify that:1. I have reviewed this annual report on Form lO-I( of IDT Corporation;2. Based on my knowledge, this annual report does not contain any untrue statement of a
ma:teria1. fact oromit to state a material fact necessary to make ~e st$ments made, in light of the circumstances underwhicl1 such statements were made, not misleading with respect to the period covered by this annualreport; and
3. Based on my knowledge, the financial statements, and other financial information included in this
annual report, fajrly present in all material respects the :financial condition, results of operations andcash flows of the regis~t as of, and for, the periods presented in this annual report.
Date: October 29, 200.2
/s/ STEPEEN R. BROWN
Stephen R. Brown
IDT CORPORATION
JNDEX TO CONSOLIDATED FlNANCIAL STATEMENTs
Report of Independent Auditors
........................................................... F-Consolidated Balance Sheets as of July 31,2001 and'2002 ........................ . . . . . .. . . . . . " F-Consolidated Statements of Operations for the Years Ended July 31,
2000, 2001 and 2002 . . . . . . . . . . . .. F-4Consolidated Statements of Stockholders' Equity for the Years Ended July 31,2000,2001 and 2002. . . .. F-Consolidated Statements of Cash Flows for the Years Ended July 31,
2000,2001 and 2002 ............ F-Notes to Consolidated Financial Statements
.................................................. F-Fmancial Statement Schedule-Valuation and Qualifying Accounts.. . . .
... . ... ... " .
. . . . ... . . . . " F-
REPORT OF INDEPENDENT AUDITORS
The Board of Dn-ectors and Stockholders
IDT COrporation
We have audited the accompanying consolidated b
a1ance sheets of IDT CoIporation (the "Company ) as ofJuly 31, 2001 and 2002, and the related consolidated statements of operations, stockholders' equity and cashflows for each of the three ,years ill the period ended July 31, 2002. Our audits also included the financialstatement schedule listed in the Index at Item 15(8.). These financial statements and schedule are theresponsibility of the Company s management. Our. responsibility is to express an opinion on these -financialstatements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement An
audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, theconsolidated financial position of the Company at July 31, 2001 and 2002 and the consolidated results of itsoperations and its cash flows for each of the three years in the period ended July 31" 2002, in conformity withaccounting principles generally accepted ill the United States. Also, in our opmion, the related financial statementschedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in allmaterial respects the iDiormatlon set forth therein.
New York, New York
October 24, 2002
Is/ ERNST & Y DUNG LLP
IDT CORPORATION
CONSOLIDATED BALANCE SHEETS
AsSETSCurrent assets:
Cash and cash equivalents
............................................
Marketab1esecurities ..............................................
Trade accounts receivable, net of allowance for doubtful accounts of $22 508 atJuly 31 2001 and $38 893 at July 31, 2002
..."""."""."..".",,.
Other current assets........................................ ..........
Total CUIrent assets
................................................
Property,P1antandequipment,net................,.......................GOOdWill............................................................
Licensesandotherintangibles,net........................................!nvestJnents
..........................................................
Otherassets..........................................................
Total assets
......................................................
LIABILITmS AND STOCKHOLDERS' EQDITY
Current liabilities:
Trade accounts paYable...........................,........... ........
Accruedexpenses ...................................................Deferredrevenue................,...............,...................
Capital lease obligations-cun-ent portion. .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Othercun-entliabilities
...............................................
Totalcurrentliabilities .,.........
:.................................
Deferredtaxliabilities net':..........,.................................,
Capital lease obIigatioIis-1ong-tennportion . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Otherllabilities...............
:.....,.................................
Totalliabilities
...................................................
l\1:i.norityinterests
..............................................,......
Commitments and contingencies
Stockholders' equity:
Preferred stock, 01 par value; 'authorized shares-lO,OOO,OOO; no sharesissued ......................................................"
Common stock, 01 par value; authorized shares-lOO,oOO OOO; 22 791 789 and19,568 634 shares issued and outstanding in 2001 and 2002 respectively. . . . Class A common stock, $.01 par value; authorized shares-oOO 00O;816 988 shares issued and outstanding in
2001 and 2002
. . . . . . . . . . . . . . . . .
Class B common stock, 01 par value; authorized shares-lOO oOO,OOO;39,291,411 and 49 990 681 shares issued and outstanding in 2001 and 2002respectively......................................................
Additionalpaid-incapital.............................................
Treasurystock,atcost ........................................
.......
Accumulated other comprehensive
loss
..................................
Retainedearnings ........,....................................
......
Totalstoc1cholders equity ..........................................
Total liabilities and stockholders' equity. . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
See accompanying notes to consolidated financial statements.
July 31
2001 2002
(In tholISands, except share data)
$1,091,071 $ 351 248
3,489 658 731
116 759 126 153
32,413 65,291
243 732 201 423
224 042 250 631
178,293 702
19,511 503
60,732 903
155 279 38,758
$1,881,589 607 920
$ 163 313 $ 121 529
893 124.437
387 112 183
927 960
819 866
328 339 392;975
390 914 241 973
179 398502088
783 934 683,434
21,419 956
228 196
393 500494093606387
(138 087)(153 713)
575)675)722 086 418 737
076 236 869,530
881 589 607 920
IDT CORPORATION
CONSOLIDA'rED STATEMENTS OF OPERATIONS
Revenues..................................................Costs and expenses:
Direct cost of revenues (exclusive. of items shown below) . . . . . . . . . .Selling, general and admiIlistrative . . . . . . . . . . . .
. . . . . . . . . . . . . . . .
Depreciationandamortization ...............................
Im.pain:nentcharges
........................................
Total costs and expenses
......................................
Loss from operations
.........................................
Interestincome net..............................
.........'"
Other income (expense):
Equityin1ossofafflliates
...................................
Gainonsalesofsubsidiarystock .............................
InvestInent and other income (expense), net. . . . . .
. . . . . . . . ; . . . . . .
Income (loss) before income taxes, minority interests, extraordinaryitem and cumulative effect of accounting change. . . . .
. . . . . . . . . . . .
l\.1inorityinterests
...........................................
Provision for (benefit from) income taxes
. . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before extraordinary item and cumulative effect of
accountingchange...................................
:.....
Extraordinary loss on retirement of debt, net of income taxes of$1,894 ..................................................
Cumulative effect of accounting change, net of income taxes of
$3,525 ..................................................
Net income (loss)
...........................................
Earnings per share:
Income (loss) before eJ.."traordinary item and cumulative effect ofaccounting change:
Basic ...............,...,............................... $
Diluted......,......
~................................... $
Extraordinary loss on retirement of debt, net of income taxes:
Basic ................................................... $Diluted.........................
........................ $
Cumulative effect of accounting change, net of income taxes:
Basic ................................................... $
Diluted................................................. $
Net income (loss):
Basic ................................................... $Diluted................................................
Weighted-average number of shares used in calculation of earnings per
share:
Basic
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
:Diluted..................................................
Year ended JoJ,y 31
2000 2001 2O0Z
(In tbo1lSllIlds, except per share data)
$1,093,912 $1,230,950 $1,531,614
918,257 066,845 205,003
343,702 337,107 370,577
564 60,351 66,016
199,357 114,310
310,523 663,660 755,906
(216 611)(432,710)(224,292)
231 768 757
(6,289)(75,066)(43,989)
350 344 037,726
258,218 164,762 (12,117)
392,893 747,480 (258 641)
(59,336)726 070
218,403 209 395 (124 345)
233,826 532,359 (156,366)
976)
(146,983)
$ 230,850 $ 532 359 $ (303,349)
7.12
(0.04) $
(0.04) $
7.12
(2.08)
(2.08)
(1.96)
(1.96)
(4.04)
(4.04)
933
75,239
68,301
786
75,108
75,108
See accompanying Dotes to consolidated financial statements.
F-4
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IDT CORPO~npN
CONSOLIDATED'STATEMENTS OF CASB:FLOWS
Opera.ting activities
N~tincome(1oss) .....................................................................
Adjustments to I'8CODci1e net income (1oss) to net cash provided by (us~ in) operating activities:Depreciation and amortization. .
.. . . . .. .. . . . . . .. . . . .. . .. . . . . .. .. . . .. .. . . .. . .. . .. .. .. .. . ..
!mpaiI:m~t charges . . .. . .. . . . . . . . . . .. .. . . .. . . . . .. . .
.. .. . .. .. . . .. .. .. . .. . . . .. .. .. .. .. . . .
ExttaordUwy loss on retirement of debt before income taxes . .. .
.. . . . . . . . .. ~ . . .. . .. . . . . .. . .. . . .
Cw:mUative effect of accounting change before income taxes.. . . .. . .. .. .. '" . .. .. .. . . .. .. . ..
. ..
Minozity intereslB
.....................................................................
Prlcag'UE1'BnteeofClassB common stock
............... ....... ........... .................
DefeIred tax liabilities. ..
.. . . . . . . . . . .. .. .. . .. .. .. . . .. .. . . .. .. . . .. . ... . .. . .. . . .. .. .. . .. . .
Issuance' of common stock to chBI:itab1e foundation. . . . . . . . . .. . .. . . . . . . . . .. . . . . .. . . . . .. ..
.. . . .
Net reaJized (gains)lJosses from sales of marketable securities and
investments. . . . . . . .
. . . . . . . . . . . .
Equity in loss of affi1i.ates .. . . . . . . . . . . . .. . .. . .
.. . . . .. . .. . . .. . .. .. .. . .. . . .. .. .. . . .. .. . .. . .
Non-casbcompensation ................................................................
Gain OD Tycom settlement.
.. . . . . . . . . .. .. .. . .. . . . . . .. .. . .. . .. . .. .. . .. . . . .. . . .. .. . .. . .. . .
Gain onsa1es ofsubsidisry stock
......................................................'"
Changes in asselB and liabilities:
TradeaccoUIlIBrecei.vab1e
"'" '" ......... "" '" .................... .................
Otberass~ ..........................................................
;.............
Trade ,accounts payable, accrued expenses and other liabilities . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . .
Deferredrevenue............................................ ..........
..............
Net cash provided by (us~ in) operating activities. . .. . . . . .
.. . .. . .. . .. . .. . .. . . .. . .. . . . .. .. . . . . .
Investing activities
Purchases of property, plant and equipmem ..
.. . .. . . . . . . .. . .. , .. . .. .. . .. .. . . . . . .. .. . .. . . ,. ..
IssuanceofDotesrece:ivab1e
................,.....................................""'"
Investmentsandacquisitions,Detofcashacquired
""" ............ .......... ...............
Collectionofnotesreccivable..,..... ........
"""" .......,............ "'" ""'"
Sales ofmarketab1esecurities
"""" ........,..... """" ............,.. "" ...........
Purchasc:sofmarketablesecurities
..............,...,......,......................,......
Net proceeds from sale of equity interests in subsidillIj'
,.....,.......,...,....................
Net cash (IlBedm) provided by investing activjties
.....,.,.....................................
Financing activities
Proceeds from e.xercise of stock options far N~t2PhoDe
...,........,..........................,.
J)jS1ributiom to IIrinority sl;weholder ota stibsjdjllIj'
..,........................................
Proceedsfro:nJbolTowings.
..,.,.. """ ,....,......,.. ..,......... .........,. .........,...
Proceedsfrome.xe.rciBeofwarrants
...,.,..,..,.....,.,...,.......,..,......................
ProC~dsfrom=ciseofstockoptioDS"..,
....,.."..,. .........,.... ""'" ""'" """"
RepaymemofcapitaJleueobJigatioDs ',.,.,..,..,....."................,......,.....,.....
Repayment ofboII'Owings.
""'" "'" ....."... '... """"" "" """"" ....,.,......,
Proceeds from wsuance of common stock and Class B common stock. . . . . . . . . . .
. . . . , . . . , . . . . . . . . . .
Proceeds from offerings of common stock by Net2Pbone . . . , . .. . . .. .
.. . . . .. . . .. . .. . .. .. . . .. . . . ..
Collectionof)oanstostockho1dersbyNet2Phone,.,. "'"
"""'" "" .,...,..,.,.. ..,..,.....
ProceedsfromsaJeofrubsidillIj'stock......."...
""" """'" .,..............,........
Proceedsfromwsuanceofstockoptions ............,.......,....,..,..,..".................
Repurcbases of common stock and Class B common stock. , . . . , . . .. .
.. . . . . . . . . . . . . . . . . . . , . , . . . , .
Net cash provided by (used in) financing activhies
.....,.......................................
Net(decrease)increueincash.. .......,......... "" .....,.............,....
....... ""'"
Cash and casb equivalent'; at begjrming of year ..
.. .. .. . , . , .. .. . .. . . , .. . .. . .. .. .. . . .. . .. .. .. .. .
Casb and casbeguivaJents at end of year
.........,............................................
Supplemental disclosure of cash flow information
CashpaymeDtBmadefarinteresc ...............................
........,..................
Cash payments made form come taxes... ...,..,...... '" ............ ............,.........
Supplemental schedule of DOD-cash investing aDd financing activitiesPurchases ofpropeny, plant and equipment through capital Jeue obligations. . . . .. .. .
... .. . . . . . . . .
Exchange of Net2Phone common stock for shares ofYaboo! Inc.
...........................,...
Issuance of Qass B co=on stock for acquisitions, . . . . . . . .. . . . . . . . . .
. . . . . . . . .. . . . . .. .. .. . . . .
See accompanying notes to consolidated financial statements.
Year ended Jill!, 31
2000 2001 2O0Z
(In thousands)
$ 230,850 $ 532.359 (303,349)
48,564 60,351 66,016
199,357 114,310870
150,508(59.336)726 22,070
310216,903 204 188 (127,342)
26,378
(261,025)148,724 80728975,066 43,98942,917 3;082 894
(313 486)
(350,344)(1,037 726)
(52,643)36,029 29,151(28.194)14,234 364)90,053 64,675 (23,238)34,026 271 39.981
r;7,070)228 743
(101,192)(106.513)(39,245)
(12 089)(8,543)(38,803)\73.722)(81,398)9,524
164.052 742,866059)(1.399,171)115,434 042,113
(22,096)013,841 \785,491)
172
177)(18 908)(19,018)~3,898
117
14,534 883 53,924(9,833)(14,736)(19,033)(108 146)(26,054)308)128.648 74,787
261 189
623
000 30,000
000
(101,883)(135,849)(15 640)
209,142 (111,8??)925
109 976 928.192 \l39,823)52,903 162,879 091.071
$ 162,879 $ 1,091,071 $ 351,248
$ 10,074 997 739
050 963 12,176
$ 45,541 27,OJO 19.311
150 000
964
IDT CORPORATION
NOTES TO CONSOLIDATED F1NANCIAL STATEMENTS
July31,2002
1. Summary of Significant Accounting Policies
Description of Business
IDT Corporation C"IDT" or the "Company ) is a facilities-based multinational communications companythat provides services and products to retail "and wholesale customers worldwide, including prepaid debit andrechargeable calling cards, consumer long distance services, and wholesale carrier services. The Company alsooperates several media and entertainment-related businesses, most of which are cUIl'ently m the early stages ofdevelopment.
Winstar Holdings ("Winstar ) , a wholly owned subsidiary of IDT, is a broadband and telephony serviceprovider to commercial and governmental customers. Through its fixed-wireless and fiber infrastructure, Winstaroffers local and long distance phone services, and high speed Intemet and data communications solutions.
On May 4 2001, the Company declared a stock dividend of one share of Class B common stock for everyone share of common stock, Class A common stock and Class B common stock. IDT distributed the dividendshares on May 31, 2001 to shareholders of record on May 14, 2001. The stock dividend has been accounted foras a stock split and all references to the number of common shares, per common share amounts and stock optionshave been restated to give retroactive effect to the stock dividend for all periods ,Presented. The Class B commonstock commenced trading on the New York Stock Exchange on June 1,2001 under the ticker symbol "IDT. B"Investment in Net2Phone
Until August 2000, the Company also provided Intemet telephony services through its majority ownedsubsidiary Net2Phone, Inc. ("Net2Phone ). On August 11, 2000, the Company completed the sale of 14.9 millionshares of its holdings of Net2Phone s Class A common stock, at a price of $75 per share, to ITelTech, LLCC"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 $75per share. These transactions reduced the voting
stake, of illT in Net2Phone from approximately 56% to 21 % a:i1dits economic stake in Net2Phone from approximately 45% to 16%. In recognition
of these transactions, theCompany recorded a gain. on sales of subsidiary stock of
$1.038 billion during the year ended July 31, 2001 anddeconsolidated Net2Phone effective August 11, 2000. Accordingly, the Company accounted for its investment inNet2Phone subsequent to the deconsolidation using the equity method of accounting.
On October 23 2001 IDT, Liberty Media Corporation ("Liberty Media ) and AT&T formed a limitedliability company C"LLC") , which through a series of transac,tions among IDT, Liberty Media and AT&T nowholds an aggregate of 28.9 million shares of Net2Phone s Class A common stock, representing approximately46% of Net2Phone s outstanding capital stock. Because the LLC holds Class A common stock with two votes
per share, the LLC has approximately 63% of the shareholder voting power in Net2Pbone. IDT holds thecontrolling membership interest in the LLC and is the managing member of the LLc. Through July 31 , 2002, theCompany accounted for its investment in the LLC using the equity method since its control of the LLC wasdeemed to be temporary due to unilateralliguidation rights held by each of the LLC members. As of July 31,2002, ID1"s equity investment in Net2Phone was 19.2%.
In August 2001, the Financial Accounting Standards Board C'FASB") issued Statement of FinancialAccounting Standards ("SF AS") No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets,which addresses financial accounting and reporting for the impairment or disposal of long-lived assets andsupersedes SF AS No. 121, Accounting for the Impaimlent of
Long Lived Assets to be Disposed Of, and theaccounting and reporting provisions of Accounting Principles Board ("APB") Opinion No. 3D Reporting theResults of Operations for a Disposal of a Seg1'17:ent of a Business. SF AS No. 144 also amends AccountingResearch Bulletins ARB" 51), Consolidated Financial Statements, as amended by SF AS No. 94 Consolidationof ALL Majority-Owned Subsidiaries to eliminate the exception to consolidation for a subsidiary for which
control is lilcely to be temporary. illT will adopt SFAS No. 144 as of August 1 2002 and will thus no longer
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIALBTA TEMENTS-(Continued)
account for its investment in Net2Phone under the equity
method of accounting. Therefore, effective August 1,2002, Net2Phone will be reconsolidated. The consolidation will result in the inclusion
'of IDT's and Net2Phoneresults of operations and financial position beginJJing
August 1,2002. This change in accounting will Dot chElIlgethe net income or loss t!:Lat would have been reported had the
CompElIlY continued to account for its ulVestment inNet2Phone under. the equity method of accounting. Summarized finElIlcial information for Net2Phone as 'of andfor the year ended July 31 is as follows:
Totalcurrentassets........................................"
Total assets
.............................................................
WorJdngcapitaJ.
.........................................................
Revenues...............................................................
Lossfromoperations .....................................................
2601 2002
(in thousands)
$ 287,572 $ 114,138
411 403 171,696
21-8,100 90 321
150,198 137 855
(240 210) (257 794)
Basis of ConsoZido.tion and Accounting for Investments
The consolidated financial statements include the accounts of IDT and all compames in wlrich IDT has acontrolling voting interest that is not temporary ("subsidiaries ), as if IDT and its subsidiaries were a singlecompany. Significant intercompany accounts and transactions between the consolidated companies have beeneliminated.
Investments in. companies in wlrich IDT has significant influence, but less than and other th.aIJ temporarycontrolling voting interest,. are accounted for using the equity method of
accounting. Investments in companies in .wlri'Ch JDT does not have an other than temporary controlling interest or
EIIl ownership and voting interest solarge as to exert significant influence are accOU1lted for at market value if the investments are publicly traded andthere are no . resale restrictions, or at cost, IT the sale of a publicly-traded investment is restricted or if theIDvestment is not publicly traded. Due to the adoption of
SFAs No. 144, effective August 1, 2002, IDT willconsolidate all companies in which it has a controlling voting interest, regardless of whether that control temporary.
The effect of any changes in IDT's ownership interests resulting from the issuance of equity capital byconsolidated subsidiaries or equity investees to
unaffili;ited parties is included in gain on sales of subsidiary
~~
Reclassifications
Certain prior year amounts have been reclassified to conform to the
CUlTent year s presentation.
Use of Estimates
The preparation of :financial statements in conformity with accounting principles generally accepted in theUnited States requires management to make e:stimates and assumptions that affect the amounts reported in theflDancial statements and accompElIlying notes. Actual results may cliffer
from those estimates.
, IDT CORPORATION
NOTES TO CONSOLIDATED FINANCiAL STATEMENTS-(Continued)
Revenue Recognition
CommUIJications services are recogDized as revenue when services are provided. Revenue on sales ofprepaid calling cards is defelTed upon activation of the cards and recogDized as the card balances aredecremented based on minute usage and service
charges. 'Unused balances are recognized as revenue Uponexpiration of the calling cards, which is generally the later of six months from the date of first use and twelvemonths from activation.
Revenues at 01JI' Winstar segment rel~ted to high-speed Internet and data services and local and long-distance voice services are recogIrized when services are provided.
Purchase of Network Capacity
P1JI'chases of network capacity pursuant to Indefeasible Right of Use ("
IRU") agreements are capitalized atcost and amortized over the term of the capacity agreement, which is generally 15 years. Historically, we havenot been a provider of network capacity.
Direct Cost of Revenues
Direct cost of revenues com;ists primarily Of temrina.tion costs, toll-free costs, and network costs-includingcustomer/carrier interconnect charges and leased fiber circuit charges. Direct cost of
revenues also includesco:nnectivity costs for the Winstar's fixed-wireless network backbone and lease payments for Winstar'
s networkof buildings. Direct cost of revenues excludes depreciation and amortization expense.
Property, Plant and Equipment
Equipment, buildings, and furniture and fixtures are recorded at cost and are depreciated using the straight-line method over the estimated useful lives of the assets, which range as follows: equipment-
5 to 7 years;buildings--40 years; and furniture and fixtures-5 to 7 years. Leasehold improvements are depreciated using thestraight line method over the term of their lease or their
estimated useful lives, whichever is shorter.
Advertising Expense
The majority of IDT's advertising expense relates to its consumer long distance business. Most of theadvertisements are in print or television media, with expenses recorded as they are
incUlTed. Some of theadvertising for the consumer long distance business is also done on a cost-per-acquisition basis, where theCompany pays the provider of advertising based on a :fixed amount per each customer who becomes a subscriber
of jts services. In such cases, the expenses are recorded based on the number of customers who were addeddu.rnig the period in question.
For the years ended July 31 2000,2001 and 2002, advertising expense totaled approximately $46.7 million,$17.1 million and $16.0 million, respectively.
During the year ended July 31, 2000, the Company incurred approximately $28.0 million of costs toterminate advertising arrangements.' These advertising tern:rination costs are included in selling, general andadministrative expenses in the accompanying consolidated statements of operations. No advertising terminationcosts were incUlTed for the years ended July 31, 2001 and 2002.
IDT CORPORATION
NOTES TO CONSOLIDATED FJNANCIAL STATEMENTS-(Continued)
Software Development Costs
Costs for the mtemal development of new software products and substantial enhance.ments to existingsoftware products to be sold are expensed as incurred until technological feasibility has been established, atwhicJ1 time any additional costs are capitalized Por the years ended July 31, 2000,2001 and 2002, research anddevelopment costs totaled approximately $4.7 million, $2.5 million and $1.0 million, respectively.
Capitalized Internal Use Software Costs
The Company capitalizes certain costs mcllIIed in connection with developing or obtaining internal usesoftware. These costs consist of payments made to tJilid pms and the. salaries of employees working on suchsoftware development For the years ended July 31, 2000, 2001 and 2002, the Company has capitalized $8.million, $2.5 million and $1.4 million, respectively, of mtemal llSe software costs as computer software.
Repairs and Maintenance
We charge the cost of repairs and maintenance, including the cost of replacing minor items not constituting
substantial betterment, to selling, general and ar1mi11i~trative expeIl8es as these costs are incurred.
Long-Lived Assets
In accordBDce with SPAS No. 12.1, the Company reviews its long-lived assets and certain identifiableintangibles for imp aliment whenever events or changes in circumstances indicate that the carryIDg amount of anasset may not be recoverable. The analysis of the recoverability utilizes undiscounted cash flows. Themeasurement of the loss, if any, will be calculated as the amount by which the carrying amount of the assetexceeds tI:ie fILiI value:
Cash and Cash Equivalents
The Company considers all highly liquid inveS1ments with a maturity of three
months or less whenpurchased to be cash equivalents. Cash and cash equivalents are carried at cost, which approximates marketvalue. At July 31, 2001 and 2002, the Company had 89% and 60%, respectively, of its cash and cash equivalentsin three and two financial institutiorn:, respectively.
Goodwill
In JUDe 2001, the FASB issued SF AS No. 142 Goodwill and Other Intangible &sets. Under the new. rulesgoodwill and intangible assets deemed to have indefinite lives will no longer be amortized but are subject toimpainnent tests, perlormed at least annually, in accordance with the Statement. Other intangible assets will
continue to be amortized over their useful lives.
Other Intangibles
Licenses are amortized over 5 years using the straight-line method. Costs associated with obtaizring the rightto use trademarks and patents owned by third parties are capitalized and amortized on a straight-line basis overthe term of the trademark licenses and patents. Acquired core technology is amortized over 3 to 5 years. TheCompany systematically reviews the recoverability of its acquired licenses and other intangible assets todetermine whether an impairment has occurred. Upon determination that the carrying value of acquired licenses
IDT CORPORATION
NOTES TO CONSOLIDATED F1NANCIAL STA'I'EMENTS-(Continued)
and other intangible assets will not be recovered based on the undiscounted future cash flows of the acquiredbusiness, thecanying value of such acquired licenses and other intangible assets would be deemed ;mpaired andwould be reduced by a charge to operations in the amount that the cmying value exceeds the fair value.
Foreign Currency Translation
Assets aIId liabilities of foreign subsidiaries denominated in foreign cUIrencies at July 31 are translated !ityear-end rates of exchange and monthly results of operations are translated at the average rates of exchange forthat month. Gains or losses resulting from translating foreign currency :financial statements are recorded as aseparate component of accumulated other comprehensive loss in stockholders
' equity.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable todifferences between the financial statements cmying amounts of existing assets and liabilities and theirrespective tax bases. A valuation allowance is provided when it
is more likely than not that some POrtiOD or all ofa deferred tax asset will Dot be realized. The ultimate realization of deferred tax assets is dependant upon thegeneration of future taxable income during the period in which related temporary differences become deductible.Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax
plamring strategies in this assessment. Deferred tax assets and liabilities are measured
using the enacted tax ratesexpected to apply to taxable income in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date.
Earnings Per Share
Basic eanrings per share is computed by dividing the net income (loss) attributable to common stockholdersby the weighted average number of common shares outstanding during the period. Diluted earnings per shareadjusts basic earnings per share for the effects of convertible securities, stock options, warrants, contingentlyissuable shares and other potentially dilutive financial instruments, only in the periods in which such effect isdilutive.
Vub~erabiZity Due to Ce71ain Concentrations
Fmancial ins1ruments that potentially subject the Company to concentration of credit risk consist principallyof cash and cash equivalents, marketable securities and trade accounts receivable. Concentration of credit risk
with respect to trade accounts receivable. is limited due to the large number of customers in vaIious geographic
regions comprising the Company s customer base. No single customer accounted for more than 10% consolidated revenues in Fiscal 2002. However, our 5 largest customers accounted for 15.2% of consolidatedrevenues in Fiscal 2002. This concentration of revenues increases our risk associated with nonpayment by thesecustomers.
The Company is subject to risks associated with its international operations, including changes in exchange
rates, difficulty in trade accounts receivable collection and longer payment cycles.
Management regularly monitors the creditworthiness of its domestic and international customers andbelieves that it has adequately provided for any exposure to potential credit losses.
IDT CORPORA-TION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued) ,
Fair Value of Financial Instruments
The estimated faiI value of financial :ins1ruments has been de.temrined using available
market information orother appropriate valuation meth'odologies. However, considerable judgment is required in'interpreting marketdata to . deyelpp estimates of fair value. Consequently" the estimates are not necessarily indicative of the amounts. that could be realized or would be paid in a CUIl'ent market exchange. At July 31, 2002, the carrying value of theCompa:cy s trade accounts receivable, other cUIrent . assets, trade accounts payable, accrued expenses, defenedrevenue, capital lease obligations and other current liabilities
approximate fair value.
Stock Based Compensation
AI; permitted under SPAS No. 123, AcCOW'Lting for Stock.Based Compensation SPAS 123"), the Companyapplies ME No. 25 in accounting for its stock option plans and, accordingly, compensation cost is recognizedfor its stock options only if it relates to non-qualified stock options for which the exercise price was less than thefaU- market value of the Company s common stock or Class common stock as of the date of gTant Thecompensation cost of these gmnts is amortized on a straight-
line basis over their vesting periods. The Companyfollows the' ~cloSUIe only provisions of SPAS 123 and
provides pro forma disclosures of net income (loss) andnet income (loss) per share as jf the fair value-based 'method of accounting for stock optiom, as defined inSF AS 123, had been applied.
Recently Issued Accounting Standards
In June 2001 , the FASB issued SF AS No. 143 Accountingfor Retil'ement Obligations ("SF AS 143';). SF AS143 establishes accounting standards for the recognition and
measurement of an asset retiremerit 'obligation andits associated asset retirement cost It also provides accounting guidance for legal obligations associated with the .retirement of tangible long-lived a:ssets~ The Company is required to adopt SF AS 143 on August I, 2002 andexpects that the provisions will not have a material impact on
its consolidated :5mincial statements.
In. April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
44 and Amendment of FASB Statement No. and Technical COlleCtiOns (i'SFAS 145"). SF AS 145 updates, clarifiesand simplifies existing accounting pronouncements. SF AS 145 rescinds Statement No., which required allgains and losses from extinguishment of debt to be
aggregated and, jf material, classified as an extraordinaryitem, net of related income tax effect. As a result, the criteria in APB Opinion No. 30 Reporting the Results ofOperations RepOlting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual andInfrequently Occurring Events and Transactions, will now be used to classify those gams and losses becauseStatement No.4 has been .rescinded, Statement No. 44 was issued to establish accounting requirements for theeffects of transition to provisions of the Motor Carner Act of
1980. Because the transition has been completed,Statement No. 44 is no longer necessary.
SF AS 145 amends Statement No. 13 to require that certain lease modifications that have economk effectssimilar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. Thisamendment is consistent with the FASB's goal of requiring similar accounting treatment for transactions thathave similar economic effects. SPAS 145 also makes technical coITections to existing pronouncements. Whilethose corrections are not substantive in nature
, in some instances, they may change accounting practice. IDT isreqwred to adopt SF AS 145, effective for Fiscal 2003. Upon adoption, any gain or loss on ex:tinguishment of debt
previously classified as an extraordinary item in prior periods presented that does not meet the criteria of APB
Opinion No. will be reclassified to conform with the provisions of SPAS 145. The Company does not expect
the adoption of SPAS 145 will have a material impact on its consolidated financial statements.
IDT CORPORATION
NOTES TO CONSOLIDATED FmANCIAL STATEMENTS-(Continned)
In June 2002, the FASB issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal,Activities SFAS 146"). SFAS 146 requjres Companies to recognize costs associated with exit or disposalactivities when they are mcurred rather than at the dat~ of.a commitment to an exit or disposal plan. Previousaccounting guidance was provided by Emerging Issues Task Force ("EITF') Issue No. 94-3, LiabilityRecognition fol. Certain Employee Termination Benefits and Other Costs to Exit an Activity (including CertainCosts Incurred in a Restructuring) (EITF 94-3). SPAS 146 replaces EITF 94-3. The Statement is to be appliedprospectively to exit or disposal activities initiated after
December 31, 2002. The Company does not expect theadoption of SPAS 146 will have a material impact on its consolidated :financial statements.
2. Marketable Securities
The Company classifies all of its marketable securities as "available-for-sale securities." Such marketablesecurities consist primarily U.S. Government Agency Obligations, which are stated at market value, withunrealized gains. and losses in such securities reflected, net of tax, as "other comprehensive income (loss)" instoclcb.01ders ' equity. The Company intends to main~ a liquid portfolio to take advantage of investmentopportunities; therefore, all marketable securities are classified as "short-term." The following is- a summary ofmarketable securities as of July 31, 200~:
Short-term
Available-for-sale securities:
S. Government Agency Obligations. . . .
. . . . . . . . . . . . . .
Other marketable securities
...........................
Gross GrossUnrealizedUnrealizedCostGainsLosses Fair Value
(in thousands)
$628 635 $3,490 $632 12526926,606
$660 904 $3,490 $(5,663 $658 731
The following is a summary of marketable securities as ofJuly 31, 2001:
Short-term.
A vailable-for-sale securities:
S. Governm.entAgency Obligations. . . .
. . . .......... " .
Other marketable securities
...............................
Gross GrossUnrealizedUnrealized FairCostGainsLossesValue
(in thousands)
150 (33)$1,117
318 (3,946)372
$7,468 $(3,979)$3,489
Sales and realized (gains) losses from the sale of available-for-sale securities for the years ended July 31,2000 2001 and 2002 amounted to approxUnately $104.2 million and $(28.3) million, $162.0 million and $126.million, and $742.9 million and $(1.5) million, respectively. The Company uses the spectfic identi:ficationmethod in computing the gross realized gains and gross realized
losses on the sales of marketable securities.
During Fiscal 2000, illT sold approximately $55.
0 million of held-to-maturity securities prior to theirmaturity dates and recorded a loss of approximately $1.2 million. The securities were sold to fund certaintransactions. In CO1m~ction with these sales, marketable securities with a cost basis of approximately $22.million were reclassified as available-for-sale and through July 31, 2000, unrealized losses of approximately $0.million were mcluded in accumulated other comprehensive loss.
IDTCORPORATION
NOTES TO CONSOLIDATED FJNANCIAL STATEMENTS-(ColJt:inued)
Terra Networks Transaction
In October 1999, JDT entered into a joint venture agreement with Terra Networks, SA ("Terra ) pursuantto which the two parties formed two limited liability companies to pro\1de Intemet services and products tocustomers in the United States. One company was formed to provide Intem~t access to customers and the othercompany was fomed to develop and manage an Internet portal that would provide content-based Internetservices. IDT's 49% interest in the Internet access company was accounted for using the equity method ofaccounting. The equity method was used since JDT had sigDificant iDfluence, J;lut less than a controlling votinginterest. IDT's 10% interest in the Internet portal company was accounted for at cost The cost method was usedsince IDT did not have a controlling voting interest, ~ an ownership or voting interest so large as to exertsigDi:ficant influence, and the venture was not publicly traded. On April 3D, 2000, the Company sold its :interestsin the two joint ventures for the right to receive 3.75 million shares of Ten-a common stock. In connection withthese sales, the Company recognized a pre-tax gain of $231.0 million for the year ended July 31,2000. Duringthe years ended July 31, 2000 and 2001, the Company sold a total of 3.745 million ,of its Tma shares andrecognized the~ewith a gain of $24.9 million and' a loss of $129.2 million, resp~ctively, wbich have been includedas a component of "investment and other income (expense).
3. Property, Plant and Equipment
Property, plant and equipment consists of the following:
Equipment ........
.....................,.................................
Computer software........................................... .............
Leasehold,improvements ...................................................
F urni tur e an d fi.xtur e s . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Landandbuilding
......................................................
July 312001 2002
(in thousands)
$264,422 $ 343 874192 ,468
21,603 27,453
11,120 12 242937 8,934
316 274 403 971
(92 232 (153 340
$224 042 $ 250,631
Less accumulated depreciation and amortization
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property,plantandequipment,net ...........................................
Fixed assets under capital leases aggregated $104.2 million and $118.3 million at July 31, 2001 and 2002respectively. The accumulated amortization related to these assets under capita) leases was $35.4 million and$50.2 million at July 31 , 2001 and 2002, respectively. Amortization of :fixed assets uncler capital leases isincluded in depreciation and amortization expense in the accompanying consolidated statements of operations.
During the year ended July 31, 2002, the Company recorded an 1mpamnent charge associated with its
property, plant and equipment of $3.million, primarily resulting from the write-down of certaindecommissioned European telecommunications switch equipment and certain discontinued wireless-relatedequipment
As a result of the Company's gradual exit from the dial-up Internet access service business, including thesale bf a majority of its dial-up Internet access customers. the Company recorded an impairment chargeassociated with its property, plant and equipment of $ million during the year ended July 31, 2001 , primarilyrelating to equipment previously used to provide dial-up Internet access services.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. Goodwill, Licenses and Other Intangibles
In June 2001, the FASB issued SPAS No. 142. Under the new rules, goodwill and intangible assets &emedto have indefinite lives would no longer be amortized but rather be subject to impairment tests performed at least
8IlD.ually, in accordance with the Statement Other intangible assets would continue to be amortized over theiruseful lives.
The Company chose to early adopt the new rules on accounting for goodwill and other intangible assets and
began to apply them beginning in the first quarter of Fiscal 2002. such, the CompaDY performed the required
impainnent tests of goodwill. as of August 1, 2001, and, as a result, the Company recorded an impairment charge
of $147.0 million, net of income taxes of $3.5 million. The impairment charge was recorded in the first quarter of
Fiscal 2002 as a cumulati:ve effect of a change in accounting principle. In &teJ.'IJJining the impairment charge, theCompany obtained an independent valuation of the underlying assets in which discounted cash flows analyses
were utilized. AB a result, it was determined that the fair value of certain reporting units were less thaD their
cmying values. The implied fair value of goodwill was then determined to be below its carrying value. As
result, the Company recorded an impairment chtp'ge to reduce the fair value of goodwill. attributable to these
reporting L1Irits to its cmying value.
During the year ended July 31, 2002, the Company recorded goodwill. of $4.9 million as a result ofacquisitions, primarily in the Company s Media business segment. The table below reconciles the change in the
cmying amount of goodwill. by operating segment for the period from July 31, 2001 to July 31, 2002:
Balance as of July 31, 2001
Effect of adoption of
SFASNo.142.........,.
AcquiBitions during 2002 . . .
Balance as of July 31, 2002
Wholesale Retail
Telecommunications Telecommunications Internet, Services Services W'mstar Telephony Media Corporate Total
Cm thousands)"
$ 44 148 $ 104,211
$-
$- $29,934 $- $178 293
(44 148)(103,635)
446
$ 1,022
(2,725)
4,471
$31,680 $-
(150,508)
917
$ 32 702
IDT CORPORATION
NOTES TO CONSOLIDATED FlNANCIAL STA~(Continued)
The fonowing table presents the impact of SPAS No. 142 on income (loss) before extraordinary item andcumulative effect of accounting change, net income o.oss) and earnings per share had the standard been in effectfor the years ended July 31. 2000 and 2001:
Income o.oss) before extraordinary item and
cumulative effect of accounting change. . . . . . . .
. . . . . . . .. . . . .'
. . . . . .. $233,826 $532 359 $(156.366)Add back: goodwill amortization. . . . . .
. . . . . . . . . . . . . .. . .. . .. . . . . . . . .
926 16,313Adjusted inCO,IIJ.e (loss) before extraordinary item
and cumulative effect of accounting change. . . . . . . .
. . . . .. . . . . . . . . . . .
Earningspershare-basic......................................."
Add back: goodwill amortization
...................................
Adjustedeamingspershare-basic
..........................,....... $
Earningspershare-diluted .......................................
Add back: goodwill amortization
...................................
Adjustedearningspershare-diluted................................
Net income (loss)
...............................................
Addbaclc:goodwillamortization
...................................
Adjusted net income (1oss)
........................................
EanJingspershare-basic.. ............... ...... .......... ........
Add back: goodwill amortization
...................................
Adjustedeamingspershare-basic
................................. $
Eamingspershare-diluted.
...................................... $
Add back goodwill amortization
...................................
Adjustedeamingspershare-diluted............................... $
Year Ended July 31,
:WOO ZOOl 2002 .
em thousands, except per share data)
$248,752
$ 3.
11 $
$ 3.
$230,850
926
$245 776
3.30
07 $
27 $
$548;672
$ .7.
12 $
7.34
$532 359
313
$548,672
$ 7.
12 $
7.34 $
$(156,366
$ (2.08)
(2.
(2.08)
$ (2.
$(303,349)
$(303,349
$ (4.04)
(4.
(4.04)
(4.04)
The following disclosure presents certain information on the Company s licenses and other intangibleassets. An licenses and intangible assets are being amortized
over their estimated useful lives with no estimatedresidual values.
Weighted
Average GrossAmortizationCarrying Accumulated NetPeriodAmountAmortizationBalance
(in thousands)
years $23 994 $ (3 175)$20 819years295(611)684
$29 289 $ (3 786)$25 503
years $42 523 $(23 038)$19 485years817791)
$45 340 $(25 829)$19 511
As of July 31, 2002
Amortized intangible assets:
Licenses ......................................
Core technology, trademark and patents
.............
Total. . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of July 31, 2001
Amortized iDtangible assets:
Licenses ......................................
Core technology, trademark and patents.
. . . . . . . . " . .
Total. . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Licenses and other intangible assets amortization expense was $0.million, $4.9 million and $3.8 millionfor the years ended July 31, 2000, 2001 and 2002, respectively. The Company estimates that amortization
expense of licenses and other mtangib1e assets for each of the ne:i..'t five fiscal years ending July 31 will beapproxUnately $5.1 million.
S. Related Party TransactioDB
The Company has entered into a number of agreements with Net2Phone. Pursuant to these agreements,during the years ended July 31, 2001 and 2002 the Company billed Net2Phone approximately $56.8 million and$31.6 million, respectively, and Net2Phone billed the Company approximately $19.2 million and $16.1 million,respectively. In the year ended July 31; 2000, Net2Phone was included ill the Company s consolidated financialstatements and any amounts billed were eliminated in consolidation. The net balance owed to the Company by
Net2Phone was approximately $19.3 million and $0.8 million as of July 31, 2001 and 2002 respectively.
The Company currently leases one of its facilities ill Hackensack. New Jersey from a corporation which iswholly owned by the Company s Chairman. Aggregate lease payments under such lease was approximately$24 000 for the years ended July 31, 2000, 2001 and 2002. Tb.e Company made payments for food relatedexpenses to a cafeteria owned and operated by the son of the Company s chairman. Such payments were $0.1
million and $0.6 million in fiscal years 2001 and 2002, respectively. No payments were made to the cafeteria in
fiscal 2000.
The Company bas obtained varipus insurance policies that have been arraJiged through a .company affiJiatedwith individuals related to both the Chairman and the General Counsel of the Company. The aggregate prenliumspaid by the Company with respect to such policies was approximately $0.1 million, $2.2 million and $3.6 millionfor the years ended July 31, 2000, 2001 and 2002, respectively. IDT retained the services of a private insurance
consulting firm to ensure that these insurance policies were both necessary and reasonable. The commissions that
were earned on such premiums are shared with several insurance wholesalers that access excess and surplus lines
of insurance held by the Company.
On December 13, 2001, IDT granted to its Chairman options to purchase 1 million shares of IDT Class Bcommon stock, at an exercise price of $12.06 per share. The options were to vest over a period of 5 years, at a
raie of 000 options per quarter, commencing on January 1,2002. On May 14, 2002, IDT's Chairman waivedand agreed to the cancellation of any rights under the options, and, as a result, all the options were cancelled
re1roactive to their December 13 , 2001 date of grant
The Chief Executive Officer and Vice-Chah-rnan of the Company is a partner in a law film that has servedas counsel to the Company since July 1996. Fees paid to this law firm by the Compan.y amounted to $0.3 million$0.0 million and $0.5 million for fiscal years ended. July 31, 2000 2001 and 2002 respectively. In addition, aDirector of the Company is of counsel to a law firm that has served as counsel to the Company since November
1999. Fees paid to this law :firm by the Company amounted to $1.0 million, $3.1 million and $6.3 million forfiscal years ended July 31 , 2000, 2001 and 2002, respectively.
In addition, the Company had loans outstanding to officers and employees aggregating approximately $7.
million and $10.3 million as of July 31, 2001 and 2002, respectively, whic;:h are included within "other assets" inthe accompanying consolidated balance sheets.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STA~NTS-(Con$ued)
An of the Company s related party transactions are reviewed by the. Audit Committee of the CompanyBoard of Directors.
6. Income Taxes
SigIiliicant components of the Company s defen-ed tax assets and deferred tax liabilities consist of thefollowing:
DefeIred tax assets:
Unrealized losses on securities.................................. $
Baddebtreserve .............................................
Exerciseofstockoptions "
Reserves ...................................................
Charitable contributions
.......................................
Net operating loss
..........,.................................
Other. . . .
. . . . . . . .. . . . . . . . . , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defe:credtaxassets
....,..........................................
Deferred tax liabilities:
Defe:credrevenue .............................
................
Partnership
.................................................
Umecognizt.!igainonsecurities...........
......................
Gainonsalesofs:ubsidiarystock
................................
Depreciation
................................................
Identi:fiableintangibles
......,...,.............................
Other. . . .
. . . . . . . . . , . . , . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . . . . . .
DefeII'edtax.liabilities
............................................
Netdeferredtaxliabilities
.........................................
July 312001 2002
(in thousands)
857 $
980
857
500
765
10,179
857
500
10,795
170,404
899
215 634
992
38,951
(196,000)
(278,000)
(100,313) (28 709)
(105,466) , (120 574)
(16 074) (1-4 801)
(3,583) (7,083)
(8,429 (8,440
(429 865 (457 607)
$(390 914) $(241,973)
The provision for (benefit from) income taxes consists of the following for the years ended July 31:
Current:
Federal............................................ $
State and local and foreign
............................
2000 2001 2002
('m thousands)
600
(394)249 (30 683)
(394)849 (30,683)
Deferred:Federal...,...................................
.....
State and local and foreign
....,.......................
175 191
41,712
216,903
$216,509
150,997
549
188,546
$209,395
(72 788)
(17 349
(90,137
$(120,820)
IDT CORPORATION.
NOTES TO C;::ONSOLIDATED FINANCIAL STATEMENTS-(Continned)
The income statement classification of the provision for (benefit from) income taxes consists of thefollowing at July 31:
2000 2001
(in th~usands)
2002
Provision for (benefit from) income taxes attributable
continuing operations "
Income tax benefit attributable to extraordinary loss. . . . . . . . . .
. .
Income tax benefit attributable to cumulative effect of accountingchange..............................................
$218 403 $209,395 $(124 345)
(1,894)
525
$216,509 $209,395 $(120,820)
The differences between income taxes expected at the U.S. federal statlJ.tory mcome tax. rate and incometaxes provided are as follows:
2000 2001
(in thousands)
$261,618 $(149,693)
(99,563) (53,806)
19,141 87,602162 52,921
26,037 (57,844)
2002
Federal income tax. at statutory rate. .
. . . . . ~ . . , . . . . . . . . . . . . . .
Foreigntaxrateclifferential
...............................
Losses for which no benefit provided. . . .
. . . . . . . . . . . . . . . . . . . .
Nondeductibleexpenses ..................................
State and local and foreign income tax, net or federal benefit. . .
. .
Other, .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . , . . . . . . . . . . . .
$137 513
703
625
28,612
$216 509
7. Stockholders' Equity
Common Stock, Class A Common Stock, and Class B Common Stock
The rights of holders of common stock, Class A common stock and Class B common stock are identical
except for certain voting and conversion rights and restrictions on transferability. The holders of Class Acommon stock are entitled to three votes per share. The holders of Class B common stock are entitled to one-
tenth of a vote per share, and the holders of common stock are entitled to one vote per share. Class A common
stock is subject to certain limitations on transferability that do not apply to the common stock and Class Bcommon stock. Each share or Class A common stock may be converted into one share of common stocle, at anytime, at the option of the holder.
Stock Options
Prior to March 15, 1996, the Company had an informal stock option program whereby employees weregranted options to purchase shares of common stock. Under this informal program, options to pllTchase 4 317 540shares of common stock were granted.
The Company adopted a stock option plan as amended (the "Option Plan ) for officers, employees and non-employee directors to purchase up to 6,300 000 shares of the Company s common stock. In May 2000, the Boardof Directors of the Company approved an amendment to the Option Plan to reserve for issuance 300
000 sharesof Class B comInon stock. In September 2000, the Board of Directors of the Company approved an amendment
to the Option Plan to reserve for issuance of an additional 3 000,000 shares of Class B common stock. On May
, 2002, the Company distributed a stock dividend of ODe share of Class B common stock for each share of theCompanys common stock, Class A common stock and Class B common stock. Accordingly, pursuant to the
terms of the Option Plan, up to an additional 9,600,000 shares of Class B COmmon stock were reserved forissuance under the Option Plan. In October 2001, the Board of Directors of the Company approved anamendn;1ent to the Option Plan to reserve for issuance an additional 3,000,000 shares of Class B common stock.
In September 2002, the Board of Directors of the Company approved an amendment to the Option Plan toreserve for issuance of an additional 3,000 000 shares of Class B common stock. Generally, options becomeexercisable over vesting periods up to six years and expire ten years from the date of grant.
$209,395 $(120,820)
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
A summary of stock option activity under the Company s stock option plan and stock option program is asfollows:
Outstan~gatJu1y31.1999
..............................
Granted...............................................Exerc::is~d..............................................
Canc~led .,............................................
Forl~ited
..............................................
Outstanding at July 31, 2000
.......... ~ . . . . .. .. .. .. . .. .. " .
Granted...............................................Exercised......................
;.......................
Canc~led ..,...........................................
Forleited
..............................................
Outstanding at July 31, 2001
..............................
Granted.....................................
..........
Exercised..............................................
Canceled ..............................................
Forfeited "
'....................................
OutstandingatJuly31 2002
..............................
Shares
175.932
851,086
621,400)
(95,000)
(31,500
279,118
112 004
(1.041,451)
(299,247)
(55 200)
995,224
599,982
403 708)
(1,012 376)
(19,900
159,222 "
Weighted-
Average
ExerciSe
Price
$ 5.
10.
12.
12.
8.42
11.96
11.99
$ 9.
The following table summarizes the status of stock options outstanding and exercisable at July 31 2002:
Stock Options Outstanding
Weighted.
Average
R.emaiu1ng Number ofNumber of Contractual Stock,OptionsOptionsLife (in years)Exercisable
290 296 290 296
632 632
000 000
000 000
639,500 639 500
489,550 489,550
649,968 016,499
144 618 657 050
861,658 8.4 070,358
159,222 7.5 246 885
Range of Exercise Prices
$0.10-$0.
.,...................................
$0.21-$0.
...,................,................
$0.41-$0.
................,....................
$0.83-$0.
....................,................
$2.19-$2.
..........................,..........
$3.44-$4.
..............,......................
$5.63-$8.
....,...........,....................
$8.72-$12.
....................................
$13.13-$18.51
...................................
The weighted-average fair value of options granted was $7.42, $7.05 and $9.34 for the years ended July 312000, 2001 and 2002, respectively.
Pro forma information regarding net income (1oss) and net income (1oss) per share is required by SPAS 123and has been determined as if the Company had accounted for employees' stock options under the fair valuemethod provided by that statement. The fair value of the stock options was estimated at the date of
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
grant using the Black-Scholes option pricing model with the following assumptions for vested and non-vestedoptions:
Assumptions
Aveiagerisk-freeinterestrate.. ... "
" ............ ... ........ ...
Dividendyield................................................
Volatility factor of the expected market price ofllie Company s commonstock ..............
:.......................................
Averagelife.............................................."
2000 2001 2002
6.49%77%22%
81% 90% 73%
5 years 5 years 5 years
The Black-Scholes option valuation model was developed for use in estimating the fair value of tradedoptions which have no vesting restrictions and are fully transferable. In addition, option valuation models requirethe mput of Jrigbly subjective assumptions including the expected stock price volatility. Because the Companyemployee stock options have characterisncs significantly different from those of traded options, and becausechanges in the subjective input asSumptions can materially affect the fair value estimate, in management'sopinion, the existing models do not necessarily provide a reliable single measure of the fair value of itsemployees' stock options.
For pUIposes of pro forma disclosures, the estimated fair value of the options under SF AS No. 123 is amortizedto expense over the options ' vesting period. For the years ended July 31, 2000 , 2001 and 2002, pro forma netIncome (loss) imd pro forma net mcome (loss) per share under SPAS No. 123 amounted to the following:
2000 2001 2002
(in thousandS, except per share data)
Net mcome (loss), as reported
. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . .
.. $230 850 $532 359 $(303 349)Pro forma net income (loss) ....................................... $214 286 $514 716 $(328 611)Net mcome (loss) per share, as reported:
Basic ...................................,................. $Diluted,..,.....................,......................"
Pro forma net income (loss) per share:
Basic .,.....................................,............. $Diluted.....,......................,..................."
3.30 (4.04)
(4.04)
(4.38)
(4.38)
The Company has mocJi:tied stock options granted for certain employees of the Company to accelerate orextend their tenns. Accordingly, the Company recorded additional compensanon expense of approximately $1.0
million, $3.1 million and $1.9 million for the years ended July 31, 2000, 2001 and 2002, respectively. DuringFiscal 2002, the Company granted options to certain employees to purchase 14 546 shares of common stock in itssubsidiary, IDT Telecom, at an average exercise price of $366.67 per share. No such options were exercisedduring the year.
Net2Phone Stock Options
During the quarter ended July 31, 2000, stock options issued to certain officers and employees ofNet2Pbone were accelerated in accordance with the original stock option awards and as a result Net2Phone
recorded $12.5 million in compensation charges as a result of the acceleration. During the quarter ended July 31,
2000, stock options issued to certain officers and employees of illT were modiiied and as a result, Net2Phonerecorded $18.3 million in compensation charges.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CContinued)
Stock Buyback Program
Our Board of Directors has authorized the repurchase of up to 45 million shares (adjusted for the May 2001stock dividend) of our common stock and Class .B common stock. During Fiscal 2002, we repurchasedapproximately 1.4 million shares of our common stock, for an aggregate purchase price of $15.6 million.Combined with the 6.8 million (adjusted) shares and 7.4 million (adjusted) shares repurchased during Fiscal 2001and Fiscal 2000, respectively, we have repurchased a total of 15.6 IDillion shares under the share repurchaseprogram through the end of Fiscal 2002, of which 6.2 million shares were retired as of July 31, 2002.
Liberty Media Transaction
On March 27,2000, Liberty Media agreed to purchase approximately 9.9% of the equity of IDT, equal toapproximately 3.775 million shares of IDT's common stock and exchangeable for shares of Class B commonstock (before adjusting for the May 2001 stock dividend). On June 6, 2000, Liberty Media completed thepurchase of 3.729 million shares of IDT' s common stock (before adjusting for the May 2001 stock dividend) at$34.50 per share (before adjusting for the May 2001 stock dhridend), resulting in aggregate cash consideration of$128.6 million. Libe:~ Media also has the right to nominate a clirector for election to the IDT Board of Directors.
On October II, 2001 IDT issued to Liberty Media 3.810 million shares of IDT Class B common stock inexchange for the 3.729 million shares of IDT common stock held by Liberty Media.. The exchange rate wasbased upon the relative average market prices for the IDr Class B common stock and the IDT common stock
during a spectfied 30 trading day period.
Liberty Media Investment in IDT Telecom, Inc.
On January 3D, 2002, IDT Telecom sold 7 500 newly issued shares of its common stP,ck to Liberty Media a price of $4 000 per share, for total aggregate proceeds of $30.0 million. As a result of this investment, LibertyMedia became the OVirner of approximately 4.8% of ' the common equity of IDT Telecom (0.5% of the votingpower). The Company owns thereInaimng common equity ofIDT Telecom.
AT&T Transaction
In March 2000, the Company was granted the. option to sell to AT&T 4.1 million shares of its Class Bcommon stock for approXimately $74.8 million. In March 2001, the Company exercised this option.
Hicks, Muse, Tate Furst Transaction
In June 2001, the Company issued stock options to Hicks, Muse, Tate & Furst Incorporated ("IDl'IF") topurchase up to 2.2 million shares of the Company s Class B common stock at exercise prices ranging from
$11.25 to $15.00 per share, as defined. The stock options are exercisable on the first anniversary of theagreement, and expire on the fifth anniversary date. In consideration for the stock options issued to .HM:TF, theCompany received $2.0 million in cash.
!DT Charitable Foundation.
In May 2001, the Company established the IDT Charitable Foundation (the
. "
Foundation ) with the purposeof obtaining money or property to be contributed from time to time to eligible charitable organizations. TheFoundation also aclministers a matching gifts program available to illT's directors, officers, employees andretilees.
In July 2001, the Company funded the Foundation with 2.2 million shares of Class B common stock worthapproximately $26.4 million at that time.
IDT CORPORATION
NOTES TO CONSOLIDATED FJNANCIAL STATEMENTS-(Continued)
8. Commitments and Contingencies
Legal Proceedings
On January 29, 2001, the Company filed a Complaint with the United States District Court for the District
of New Jersey, against Telefonica S.A., Terra. Networks, S.A., Tem. Networks, U., Inc. and Lycos, Inc. The
complaint asserts claims against the defendants for, among other things, breaches of various contracts, breach fiduciary duty, securities violations, fraudulent misrepresentation, negligent misrepresentation, fraudulent
concealment and tortious interference with prospective economic advantage. The defendants have been served
with the Complaint. The Company has filed an Amended complaint and the defendants have filed an answer to
the amended complamt. Terra Networks, S.A. has filed a counterclaim for breach of contract alleging that the
Company was required to pay to TelTa NetWorks, S.A $3.0 million, and failed to do so. The defendants have
filed a motion to dismiss the complaint On September 14, 2001, the Court issued an Order: (a) permitting the
Company to take discovery relevant to the subj ect of whether Telefonica S .A. is subject to personal jurisdiction,
(b) denying Telefonica S.A. 's motion to dismiss for lack of personal jurisdiction without prejudice to Telefonica
S .A. 's right to renew the motion upon the completion of jurisdictional discovery, and (c) ca.ITY1ng on the calendar
defendants' motion to dismiss on non-jurisdictional grounds pending the completion of jurisdictional discovery,
which is ongoing. Bach party served the other party with certain requests for discovery relevant to the subject
whether Telefomca S.A. is subject to personal jurisdiction. The motions were denied almost in their entirety. The
case continues in the early stages of discovery. No trial date has yet been set in this matter,
On May 25, 2001, we filed a statement of claim with the American Arbitration Association n.amingTelefomca Internacional, SA ("Telefonica ) as the Respondent. The statement of claim asserts that the
Company and Telefonica entered mto a Memorandum of Understanding ("MOU") that involved, among other
things, the construction and operation of . submarine cable network around South America ("SAm-r'). TheCompany is claiming, among other things, th3.t Telefomca breached the MOU by: (1) failing to negotiate SAm-
agreements; (2) refusing to comply with the equity provisions of the MOD; (3) refusing to sell capacity and back..
haul capacity pursuant to the MOD; and (4) failing to follow through on the joint venture. Telefomca has
responded to IDT's Statement of Claim and has filed a Statement of Counterclaim which alleges, among other
things: (1) Fraud in the Inducement; (2) Tortious Interference with Prospective Business Relations; (3) Breach
the Obligations of Good Faith and Fair Dealing; and (4) Declaratory and Injunctive Relief. Discovery is in its
final stages and both parties have submitted expert reports. The arbitration is ongoing and is expected to continueinto 2003.
In September 2001, Alfred West filed a complaint against the Company and its wholly-owned subsidiary,
IDT Telecom, me. in the Federal District Court in Newark, New Jersey seeking monetary damages of $25
million for alleged breach of contract, breach of implied covenant of good faith and fair dealing, fraud, negligent
misrepresentation, promissory estoppeL quantum meruit, tortious interlerence and UIJiair competition. The
Company filed counterclaims for fraud, negligent misrepresentation., breach of fiduciary duty, tortious
interference and breach of contract. Several depositions have been completed, and discovery should be
completed by the end of October 2002.
Winstar acquired certain domestic telecommunications assets formerly owned by Old Winstar, which was
approved by the Bankruptcy Court on December 19, 2001 (the "Sale Order ). Although many of the purchased
assets were transfelTed to Winstar at the time of the sale, the transfer of certain of Old WinStaI's regulated
telecommunications assets, including its customer base, was subject to a number of federal and state regulatory
approvals and on Winstar s obtaining the necessary telecommunications facilities and services necessary to serve
the customers it agreed to purchase from Old Winstar. Subsequently, Winstar has entered into interconnection
agTeements with the relevant RBOCs and has sought to use services and facilities obtained pursuant to those
F..
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
agreements and pursuant to RBOC tariffs to complete its network and ther~fore to b~ able to transition thecustomers from service by Old Winstar to Winstar.
Although all of the regulatory approvals necessary for this transition h2.ve now been issued, the RBOCs h2.veasserted thB:t Wmstar is nevertheless not entitled to obtain unintenupted services under then- interconnectionagreements and tariffs unless the RBOCs receive payment of approximately $40 million, in the aggregate
, allegedlyowed by Old Wmstar for access to RBOC facilities and circuits. Based on the claim that Wmstar must pay thiscure" amount as a condition of receiving unmtenupted service. the RBOCs have refused in certain instances toprovide facilities and service to W'mstar that it needs in order to serve its customers directly. As a result, WlIlBtar is
operating the business of Old WIristar pursuant to a management agreement approved by the bankruptcy court, and
is providing services to the customers on behalf of Old Winstar.
Wmstar contends that, even were it to assume the Old Wmstar contracts with the RBOCs, the amounts setforth in the RBOC's proofs 'of claim greatly exceed any reasonable "cure" for' facilities and services that Winstarseeks to obtain from the RBOCs, since the claims include significant amounts that Old
WlIlBtar owed for servicesand facilities that IDT Wmstar has not requested, and does not need to be able to provide services to thecustomers following the transition. Winstar also disputes the RBOC's claims that they are not obligated toprovide services and facilities to Winstar without an assumption or assignment of the Old Winstar contracts and apayment of "cure" amounts. In response to the RBOC's refusal to provide service, on April 17, 2000 Winstarfiled an Emergency Petition for a Declaratory Ruling at the FCC (Inc. Docket No. 02-80) asldng that the FCCdeclare that the refusal of the RBOCs to provide the requested services and facilities pursuant to theIrinterconnection agreements and tariffs, and theh refusal to transition such services in a manner that does notintenupt services to the customers is unreasonable and therefore unlawful under federal law. In response
, oneRBOC (Vemon) filed a counter-petition asldng that the FCC declare that the federal teI6colIlmunications laws do
not requiIe it to provide facilities and services to Winstar without "cure" of Old Win:s~'s debts. A number ofparties filed comments in the FCC proceeding on both sides of the issue and the proceeding is still pending at theFCC. Winstar believes that the RBOCs have acted unreasonably and unlawfully .in denying its requests forservices and facilities and will continue absent a settlement with the RBOCs to advocate
its position vigorously.
In addition, faced with likely termination of service to Old Winstar customers .in violation of theTelecommunications Act and number our FCC regulations, we sought injunctive relief (in addition to other
remedies) .in the U.S. District Court for the District of New Jersey against Verizon, Qwest Corp. and QwestCommUDications Corp. ("QCC") to prevent them :crom discontinuing underlying services which would prevent usfrom providing service to our customers. Certain interim. relief was secured, and Verizon, Qwest and QCCsubsequently agreed not to terminate .service without appropriate notice to us. The District of New Jersey action
is ongoing.
The RBOCs further contend that the provision in the Sale Order requiring them to continue servingOld Winstar and its subsidiaries exp:ixed on or about April 18, 2002. Winstar promptly moved to enforce thatprovision of the Sale Order, but the banlauptcy court denied its motion. Winstar bas appealed the denial of thatmotion to the u.S. District Court for the District of Delaware. In addition, Winstar asked the District Court for
interim relief during the pendency of its appeal to stay the REOCs and other service providers from cutting off
service until the appeal is decided. The District Conn has not yet ruled on that request, but has temporarilyordered that service providers, including the RBOCs may not terminate service or otherwise affect Winstfl!busines s without permission of the Court.
DuriDg preliminary status hearings before the District Court on May 24 and June 4, 2002, the RBOCs andWinstar advised the Court of their willingness to enter into settlement discussions and/or non-binding mediation
IDT CORPORATION
NOTES TO CONSOLIDATED FrnANCIAL STATEMENTs-(Continned)
in an attempt to resolve their disputes. Those settlement discussions and mediations are ongoing, and the DistrictCourt appeal is therefore still pending. It is too soon to predict whether settlements will be reached with any
aU of the RBOCs or, jf so, to quantify the monetary effect of such settlements, jf any, on Winstar. To the extentt1ta.t a settlement agreement is not reached with any or all of the RBOCs, we expect that the appellate proceedings
will resume. One possible outcome of an adverse ruling by the District Court on either the interim reliefre-quested by Winstar or on the merits of the case could be to permit the RBOCs to terminate services tha.t are
being provided to our customers and therefore to prevent the uninterrupted transition of those customers toWinstar service. A status conference is scheduled for November 8, 2002, for the parties to report on the progress
of the:iI efforts to mediate the disputes.
Winstar believes that the RBOCs have acted unreasonably and unlawfully in denying its request for servicesand facilities and will continue absent a settlement to advocate its positions vigorously. However, adverse resultsin one or more of the above-described RBOC litigations could have a material adverse effect on us, including
payment of the "core" amount desClibed above, or the inability of Winstar to access the RBOCs services andfacilities, in which its business is substantially dependent.
On or about July 25 2002, PT-l Communications, Inc. ("PT-) flled a summons and complaint against theCompany and its subsidiaries, IDT Netherlands, B.V., illT Telecom, Inc. and mT Domestic Telecom, Inc.(collectively "the Company ) in the United States Bankruptcy Court for the Eastern District of New York. PT-seeks (a) to recover damages for certain fraudulent transfers of property of the Debtor s bankruptcy estate, (b) torecover damages for unjust enrichment, and (c) to recover damages from breaches under the agreement between
the parties for the sale of the Debtor s debit card business to the Company, including the Company s allegedfailure to remit payment for use of certain telecommunication and platform services on or through PT -1 switches.In total, PT-1 is seeIcing $24 million in damages as well .as certain unstated amounts. The Company served itsanswer on September 18, 2002. Initial discovery will commence shortly. .
On or about September 16, 2002, a complaint was filed by Mark B. Aronson in the Court of Common Pleasof Allegheny County, Pennsylvania seeking certification of.a class consisting of consumers who were charged afee when the Company switched underlying carners from Global Crossing ~o AT&T. At this point no specmcdamages have been specified in the complaint Thus, the Company cannot yet quantify its exposure.
On or about September 19, 2002, a complaint was filed by Ramon Ruiz against the Company and Union
Telecard Alliance, ILC in the Supreme Court of the State of New York seeking certi:fication of a class consisting
of consumers who allegedly purchased and used the Company s pre-paid calling cards and were charged any fee
that was not specifically disclosed on the card packaging prior to purchase. The complaint seeks damages in
excess of one hundred million dollars.
On or about October II, 2002, a complaint was filed by Paul Zedeck against us and Union Telecard in the
Circuit Court of the 15th Judicial C:iIcuit in and for Palm Beach County, Florida, seeking certification of a classconsisting of consumers who allegedly purchased and used our prepaid calling cards and were charged any fee
that was not specifically disclosed on the card packaging prior to purchase. The damages sought have not yetbeen quantified. Because we only recently received the complaint, we are still evaluating the potential impact andour approach to contesting the claims or attempts to certify the classes.
On or about October 18, 2002, a complaint was flled by Moms Amsel against us and mT Telecom in the
Supreme Court of the State of New York seeking certification of a class consisting of consumers who allegedlypurchased our calling cards. Plaintiff's complaint relates to payphone charges and international rates. The
complaint seeks damages of not less that $100 million. Because we only recently received the complaint, we are
still evalu.ating the potential impact and our approach to contesting the claims or attempts to certify the classes.
F..
IDT CORPORATION
NOTES TO CONSOLIDATED FJNANCIAL STATEMENTs-CContinued)
On or about October 24. 2002, Wmstar filed suit against Superior Logistics Management Services, Inc.Superior ) m the United States District Court for the Eastern District of Virginia. The complaint alleges countsfor breach of c:ontract (Superior breached a settlement agreement with Wmstar) , conversion (for retainingWinstar's property), and detinue (for return of the property). Winstar is seelcing approximately $50 million indamages, plus punitive damages, costs, and attorney s fees.
The Company is subject to other legal proceedings and claims, which have arisen in the ordinBljT course ofits business and have not been finally adjudicated. Although there can be no assurances in this
regard, in theopinion of the Coinpany s management, such proceedings, as well as the aforementioned actions, will not have a
material adverse effect on results of operations, cash flows or the :financial condition of the Company.
Lease Obligations
The future miIrimum payments for capital and operating leases as of July 31, 2002 are approximately asfollows:
Yea!' ending July 31:
2003 ........................................................
2004 ........................................................
2005 ........................................................
2006 ........................................................
2007 ..........,.............................................Thereafter.............,.........,............................
Totalpayments............................................."
Operating CapitalLeases Leases
em thousands)
$ 69,420
174
43,961
39,340
37,003
150,991
$392,889
$ 27,110
23.482
747
10,808
317
Less amount representing interest
,....................................
Lesscun-entportion ................................................
Capital lease obligations-lang-term portion.
. . . . . . . . . . . . . . . . . , . . . . . . . . .
76,464
(8,106)
(22,960
$ 45 398
Rental expense under operating leases was approximately $6.9 million, $4.9 million and $27.3 million forthe years ended July 31 , 2000 2001 and 2002, respectively. The significant increase in rental expense m Fiscal
2002 is due primarily to the significantly higher number of operating leases associated with our Winstar segment,which was acquir~d in December 2001.
Commitments
The Company has entered into purchase commitments of approximately $25 million as of July 31, 2002primarily related to connectivity agreements. In addition, in April 2002, the Company entered into a four-yearagreement to grant a telecommunications provider an exclusive right to service the Company s consumer longdistance business traffic, m which the Company agl:eed to purchase a minimum usage over the term of the
agreement In the event that the Company terminates the agreement before the expiration date, the Company issubject to an early termination penalty of $15 million if cancelled in the first
year, $10 million if canceled in thesecond year, $5 million if cancelled in the t:!md year and $2 million if cancelled in the fourth year.
The Company guMantees payments of certain of its vendors through August 2009. Such guaranteesamounted to $3.4 million as of July 31, 2002. In addition, the Company also provides certain such guarantees toits vendors in the fonD of letters of credit, tbrougl1 June 2008. Such guarantees amounted to $8.6 million as ofJuly 31, 2002.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(ContiJiued)
9. Defined Contribution Plan
The Company maintains a 401(k) Plan (the "Plan") available to all employees meeting certain eligibility
criteria. The Plan permits participants to .contribute up to 20% of their salary, not to exceed the limits established
by the Internal Revenue Code. The Plan provides for a matching contribution up to a maximum of 6% of covered
compensation, which vests over five years. All contributions made by participants vest immediately into the
participant's account. For the years ended July 31, 2000, 2001 and 2002, Company contributions to the Plan
amounted to approximately $0.3 million, $0.8 million and $0.9 million, respectively. The Company s common
stock and Class B common stock axe not investment options for Plan participants.
10. Business Segment Information
The Company has identified five reportable business segments: Wholesale TelecommUDications Services,Retali Telecommunications Services, Winstax, Internet Telephony and Media. The operating results of these
business segments are distinguishable and are re~axly reviewed by the chief operating decision maker.
The Wholesale TelE:Communications Services business segment is comprised of wholesale carrier services
provided to other long distance. earners. The Retail Telecommunications Services business segment includes
domestic and international prepaid and rechargeable calling cards and consumer long distance services to
individuals and businesses. The Winstax business segment operates as a competitive local exchange carner
CLEC") using fixed wireless technology to provide local and long distance phone services, and high speed
Intemet and dAta communications solutions. The Internet Telephony business segment reflects the results of the
Company s formerly majority-owned subsidiary, Net2Phone. The Media business segment operates several
media and entertainment-related businesses, most ofwbich are cun-ently in the early stages of development.
The Company evaluates the performance of its business segments based primarily on operating income
(loss) after depreciation, amortization and impairment, charges, but prior to interest income (expense), other
income (expense), income taxes, extraordinary items and cumulative effect of accounting changes. All corporate
overhead is allocated to the business segments based on time and usage studies, except for certain specific
corporate costs, such as treasury management and investment-related costs, which are not allocated to the
business segments. Operating results and other financial data presented for the principal business segments of the
Company for the years ended J~y 31,2000 2001 and 2002 are as follows (in thousands):
Wholesale RetailTe!ecommtmicationE Te!ecommDDicatiollS InternetSenicesServicesWinstar(l)TeJephoDy(2)Media(3)Corpornte TotaJ
Year ended July 31,
2000Revenues,.,....,....$520,518
.$
502,512 56,075 14,807 $1,093 912Segment loss, . . , . . . . ,(8,409)(11 477)(125,865)(39,134)(31,726)(216,611)Depreciation and
17,252 16,656 804 228 624 48,564amortiza!ion .,...',
Total assets. .. . .. . . . .416,045 345 682 401,286 11,945 097 219,055Year ended July 31,
2001Revenues............388,120 816 384 26,446 230,950Segmcnt10ss ., .
... , . .
(69.454)(34,118)(265,600)(63,538)(432,710)Depreciation and
23.472 26,719 519 641 60,351amortization.. .
....
Totalassets
"""""
516,395 028,069 269,062 68,063 881,589Year ended July 31,
2002Rcvcnucs........"..308,987 121 674 79,604 21,349 531,614Segment income
(30.572)61,396 (96 644)(132,006)(26,466)(loss) .............(224,292)Depreciation and
20,696 33,988 691 253 388 66,016amortization. . .
. . ,.
Total assets
."".,..,
$220.060 $1,078,195 $159,726 91,776 .$ 58,163 $1,607 920
roT CORPORATION
NOTES TO CONSQLIDATED FINANCIAL STATEMENT~Continued)
Revenue from customers located outside of the. United ~te.s represented approximately 17%16% and 18%of total revenues for the years ended .July 31, 2000, 2001 and 2002, respectively, with .no single foreigngeographic area representing more than 10% of total
revenues for the year ended July 31, 2000, and WesternEurope representing 15% and 17% of total
revenues for the years ended July 31, 2001 and
2002, respectively.ReveJ;lile,s are attributed to foreign geographic areaS based on the location where the cUstomer is invoiced. Grossand net long-Jived assets maiDly held in Western Europe totaled approximately $28.
3 million and $18.7 million,and $31.9 million and $28.2 million as of July 31,2901 and 2002, respectively.
(1) Since acqujsition of Winstar in December 2001.
(2) Included m loss from operations for the Internet Telephony business segm,ent for' the year ended July, 2000'was approximately $41.0 million of non-cash compeDBation as a result of stock option grants,modifications and accelerations made by Net2Pbone. In addition, contributing to the loss fromoperations was the significant level of sales and marketing expenses, as well as
general andadmini~trative expenses, as Net2Phone expanded its distribution relationships, corporate
iDfrastructureand human resources.
(3) Included in loss from operations for our Media business segment for the years ended July 31. 2001 and2002 were $193.4 million and $110.4 million, respectively, of impairment cl:1arges related to the write-down of the undersea fiber asset obtained as part of the TyCom Ltd. ("TyCom ) settlement.
Reconciliation To Consolidated Financial Information
A reconciliation of the results for the operating segments to the applicable line items in the consolidatedfinancial statements is as follows (in thousands):
Segmentloss-reportablesegments........................... "
Interest income, net
' ...........................................
Other income (expense):
Equityinlossofaffiliates...................................
Gain on sales of subsidiary stock
........ "'" ... ...........
Investment and other income (expense), net. .
. . . . . . . . . . . . . . . . . .
Income (loss) before miDority interests, income taxes, extraordinary itemand cumulative effect of accounting change
. . . . . . . . . . . . . . . . . . . . . .
Minorityinterests
.............................................
Provision for (benefit from) income taxes. . . . . . . . . .
. . . . . . . . . . . . . . . .
IDcome (loss) before extraordinary item and cumulative effect of
accounting change
..........................................
ExtraordinB1)T loss on retirement of debt, net of income taxes of $1 894 ..Cumulative effect of accounting change, net of income taxes of $3 525 . . .
Consolidated net income (loss)-reported
. . . . . . . . . . . . . . . . . . . . . . . . . .
2000 2001 2002
$(216,611) $ (432 710)$(224 292)
231 768 21;757
289)(75,066)(43 9~9.)350 344 037 726
258,218 164 762 (12 117)
392 893 747 480 (258,641)
(59 336)726 070
218,403 209,395 (124 345)
233,826 532 359 (156 366)
976)
(146.983)
$ 230 850 532 359 $(303 349)
11. Additional Financial Information
Trade accounts payable includes approximately $112.9 million and $84.1 million due to telecommunicationearners at July 31, 2001 and 2002, respectively.
IDT CORPORATION
NOTES TO CONSOLIDATED FrnANCIAL STA TEMENTS-(Continued)
12. Acquisitions
CTM Erochure Di~play, Inc.
On June 30, 2000, the Company acquired a 100% interest in CTM Brochure Display, Inc. ("CTM"), abrochure distribution company, for an aggregate purchase price of approximately $23.8 million. The purchaseprice consisted primarily of $5.1 million in cash, $16.9 million in notes payable to the former owners and theliquidation of $1.4 million of crn's bank debt In connection with this transaction, the Company recordedgoodwill of $23.0 million and tax liabilities of $3.0 million. The acquisition was accounted for as a purchase, andaccordingly, the net assets and results of operations of the acquired business have been included in theconsolidated financial statements from the date of acquisition. During the year ended July 31, 2001, the Company
repaid the entire principal balance on the notes payable, together with accrued interest
Aplio SA.
On July 7, 2000,' Net2Phone acquired all of the outstanding capital stock of Aplio, SA ("ApIio ) , acompany located in France with technology that enables V oIP devices. Consideration consisted of $2.9 million incash at closing, 0.6 million shares of Net2Phone s common stock which were valued at $35.50 per share
issuance of promissory notes aggregati11g $6.5 million, $1.1 million in acquisition related costs and $4.8 millionin cash that was paid witbiD eighteen months of the closing of the transaction.
The aggregate purchase price of $36.0 million plus the fair value of net liabilities assumed of $2.7 million
was allocated as follows: approximately $17.5 million to goodwill, $20.7 million to core technology and patentsand $0.5 million to assembled workforce. The acquisition was accounted for under the purchase method of
accounting by Net2Phone, and accordingly, the net assets and results of operations of the acquired business was
included in the consolidated financial statements through July 2000.
PT-) Communications
In February 2001, the Company purchased certain prepaid calling card business assets of PT-
Communications, Inc. CUPT-), a wholly-owned subsidiary of STAR Telecommunications, Inc., with a paymentof cash and assumption of certain liabilities, including the obligation to honor the outstanding phone cards of PT-
1. The cash payment and assumption of net liabilities incUlTed were approximately $26.3 million with
substantially all of the purchase price recorded as goodwill.
Equity Interests in TeZigent, Inc. and lCG Communications, Inc.
In April 2001, through its IDT Investments, Inc. subsidiary ("IDT Investments ), the Company acquired
from Liberty Media (i) a company whose sole asset was 21.4 milli,on shares of Teligent, Inc. (UTeligent") Class A
common stock, as well as (ll) an interest in rCG Communications, Inc. ("rCG"), represented by 50 000 shares ofrCG's 8% Series A-I convertible prefeITed stock and wan-ants to purchase approximately 6.7 million shares of
rCG's common stock. In exchange, IDT Investments issued Liberty Media a total of 10,000 shares of its Class Bcommon stock and 40,000 shares of its Series A convertible prefeITed stock. Upon completing the transaction,
IDT effectively owned approximately 32% of the equity of Teligent, and approximately 29% of the equity oflCG. The total consideration for Teligent and rCG's April 2001 transaction was approximately $10.3 and $3.4million, respectively.
In May 2001, through its IDT Investments subsidiary, the Company entered into an agreement with various
affiliates of HMTF to increase IDT's strategic investments. in Teligent and lCG. Under the terms of the
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
agreement, the HMTF affiliates received 18,195 shares of IDT Investments' Series B convertible preferred stock
in exchange for the E1\-ITF affiliates' stakes in Te1igent and rCG. The HMTF affiliates owned 219,998 shares ofTeJigent's Series A 7314% convertible prefexred stock, 23,000 shares of lCG 's 8% Series A-2 convertibleprefelTed stock and warrants to purchase approximately 3.1 million shares of lCG's common stock. Uponcompleting the transaction, !DT effectively owned approxnnately 37% of the equity of Te1igent, andapproximately 42% of the equity of lCG. The total consideration for TeJigent and lCG's May 2001 transactionwas approximately $2.0 an~ $1.6 million, respectively.
The pro-rata share of the losses of Tengent and lCG recorded by IDT subsequent to these acquisitions have
fully eliJ::amated the carrying value of the Company s investment in these companies.
In May 2001, TeJigent filed a voluntary bankmptcy petinon under Chapter 11 of the u.S. Bankmptcy Code.
rCG had previously filed for bankruptcy protection in November 2000.
Winstar
On December 19, 2001, the Company, through a subsidiary, acquired the core domestic telecommunications
assets of Winstar Communications. Inc. and certain of its subsidiaries that are debtors . and debtors in possessionin bankruptcy proceedings pending before the United States Bankruptcy Court for the Disirict of Delaware. The
acquiring subsidiary was subsequently renamed Wmstar Holdings, LLC. Winstar operates as a CLEC using :fixedwireless technology to provide local and long distance phone services, and high speed Internet and datacommUI1ic:ations solutions.
The purchase price for the Winstar assets was comprised of a $30.0 million cash payment, $12.5 million innewly issued shares of IDT Class B common stock and. 5% of the common equity interests in the acquiring
subsidiary (the rem.a.iDing 95% of the common equity interests as. well as all of the preferred equity interests in
the acquiring subsidiary were owned by IDT). The Company also agreed to invest $60.n:iillion into Winstar tobe used as working capital. The acquisItion has been accounted for under the purchase method of accounting.The results of operations of Winstar have been included in the Company s consolidated statements of operationssince the date of acquisition. The. preliminary allocation of the purchase price, pending final determination of
certain acquired balances, is as follows (in thousands):
Trade accounts receivable and other CUlTen! assets
. . , . . . . . . . . . . . . . . . . . . , . . .
Property, plant, equipment and intangible assets, . . . .
, . . . . , . . . . . . . . . , . . . . . .
Trade accounts payable, accrued expenses and other cment liabilities
. . . . . . . . .
~orityinterest ....................................................
Value of assets acquired
..............................................
$ 51 301
923
(44,487)
237
$ 42 500
The fair value of the Winstar assets acquired and liabilities assumed would have exceeded IDT's acquisition
cost Therefore, in accordance with SFAS No. 141, BusiDess CombiDations, the excess value over the acquisition
cost has been allocated as a pro rata reduction of-the amounts that otherwise would have been assigned to the
acquired assets, except with respect to the following:
Trade accounts receivable-present values of amounts to be received, less allowances for
ullcollectibility and collection costs.
Othel' current assets (principally assets to be sold)-fair valueless cost to sell.
Trade accow2ts pcryable, accrued eJ..-pe1'Lses and other current liabilities (principally relating tocontractual agreements assumed)-present values of amounts to be paid.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
On April 16, 2002, JDT. through a subsidiary, purchased the 5% of common equity interests in Winstar thatit did not own. Consideration consisted of 0.8 million shares of JDT Class B common stock, which were valued
at $13.3 million.
The following pro forma financial information presents the combined results of operations of IDT andWinBtaI, as if the Winstar acquisition had occurr&l as 'of the beginning of the periods presented, after giving
effect to certain adjustments, including depreciation expense, income taxes and the issuance of IDT Class Bcommon stock as part of the purchase price. The pro forma financial iDformation does not necessarily reflect the
results of operations that would have occurred had IDT and Winstar been a single entity during such periods.
Revenues
.................................................
Income (loss) before cumulative effect of accounting change
. . . . . . . .
Net income (loss)
...........................................
Earnings per share:
Income (loss) before cumulative effect of accounting change
. . . . . . . .
Basic................................................. $
Diluted ...............................................
Net income (loss)
Basic.....................................,........... $
Diluted .......,.......................................
Year Ended July 31,2000 2001 2002
(in thousands, except per share data)
$1,325,821 $ 1,451,912 $1,604,314
108,472 $(1,421,850) $ (205,083)
108,472 $(1,421 850) $ (352,066)
1.51 (20.29) $(2.70)
1.41 (18.57) $(2.70)
1.51 (20.29) $(4.63)
1.41 (18.57) $(4.63)
13. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
Numerator:
Netincome(loss) ...........................,....... $230 850 $532 359 $(303 349)
Year ended July 312000 2001 2002
(in thousands, except per share data)
Denominator:
Weighted-average number of shares used in calculation of
eamingspershare-Basic.................
:.........
Effect of stock options
...............................
Weighted-average number of shares used in calculation of
eamingspershare-Diluted .........................
Eamingspe.rshare-Basic .......................,........ $
Earningspe.rshare-Diluted............................... $
69,933 68,301 108
306 6,485
239 786 75.108
3.30 (4.04)
7.12 (4.04)
T CORPORATION
NOTES TO CONSOLIDATED FINANCIAL ~TA~NTS--(Continued)
The following s~curities have been excluded from the dilutive per share computation as they areantidilutive:
Year ended July 31
2000 2001 2002
(in thousands)
449 163 291
369
449 163 660
Stock options...........................................Contingentlyissuableshares...............................
Total. .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14. Net2Phone Subsidiary Stock Sales
During the years ended July 31, 2000 and 2001, the Company recogDized approximately $350.3 and$1,037.7 million, resp~tively, in gains on sales ofsubsidiary stockre1ated to Net2Phone stock sales, as follows:
On August 3, 1999, Net2Phone completed an mitial public offering of 6.2 million shares of its commonstock at an initial public offering price of $15.00 per share, resulting in net proceeds of $85.3 million. Uponcompletion of the initial public offering, 3.1 million shares of Net2Phone Series A prefen-ed stock wereconverted into 9.4 million shares of Net2Phone Class A common stock. AE a result of the initial public offeringand concurrent conversion of Series A preferred stock to Class A common stock, the Company s ownershippercentage in Net2Phone decreased from 90.0% to 56.2%. In connection with such offering, the Companyrecorded a gain of $65.5 million.
In December 1999, Net2Phone completed a secondary offering of 3.4 million shares of common stople at a:price of $55.00 per share. In connection with this offering, IDT alS0 sold 2.2 million shares of Net2Phonecommon stock at $55.00 per share. Total proceeds to the Company, after deducting underwriting discounts,commissions and offering expenses were $292.8 million. The Company s ownership interest in Net2Phonebefore and after these n-ansactions decreased from 56.2% to 45.0%. The Company recorded gains on sales ofstock of $182.6 million in connection with these offerings.
In March 2000, the Company acquli-ed 0.8 million shares of Yahoo! Inc. in exchange for 2.8 million sharesof Net2Phone common stock at a then equivalent market value of approximately $150.0 million. In connectionwith this transaction, the Company recorded a gain on sale of subsidiary stock of $1 02.2 million.
In August 2001, IDT sold 14.9 million shares of Net2Phone common stock at $75.00 per share. Netproceeds to the Company as a result of this sale were $1 042.1 million. The Company s oVil11ers.bip interest inNet2Phone before and after this transaction decreased from 45.0% to 16%. The Company recorded a total gain of
$1,037.7 million in conjunction with this transaction.
15. TyCom Ltd. Settlement
On October 10, 2000, IDY reached a full and final settlement with TyCom of all pencfutg claims broughtagainst one another and their respective affiliates. The settlement agreement is subject to a confidentialityagreement among the parties and only the following disclosure by IDT is permitted under the terms of thatagreement
Under the tenns of the settlement, TyCom granted to IDT Europe B. V.A. ("IDY Europe ), free of charge,certain exclusive rights to use capacity on the transatl3l1tic 3l1d transpacific segments of TyCom s global
IDT CORPORATION
NOTES TO CONSOLIDATED FlNANCIAL STATEMENTS-(Continned)
undersea fiber optic network (the "TyCom Global Network"), which TyCom is deploying. The settlementagreement provides for IDT Europe to obtain exclusive indefeasible rights to use (IRU) two 10 Gbls wavelengtb.son the transatlantic segment (which we have been
iDfoxmed has been deployed) and two 10 Gb/s wavelengths onthe transpacific segment (which be believe is still under development) for fifteen years from the applicableHandover Dates.
Operation, administration and maintenance for the wavelengths used by the Company will be provi~dbyTyCom for a :fifteen year period after the relevant Handover Date, free of charge. TyCom has also granted theCompany certain rights to resell any UJlUSed capacity on the wavelengths through TyCom as its sole and exclusiveagent. In addition, the Company will also have the option, exercisable at least annually" to convert the availablecapacity on its wavelengths to available equivalent capacity on another portion of
the TyCom Global Network. Inrecognition of the settlement, a gain of $313.5 million was included as a component of "investment and otherincome." The Company subsequently re-evaluated the recoverability of the can-ying value of its IRU in accordance
with SPAS No. 121 and, as a result, the Company has recorded an impairment loss of $193.4 million and $110.4million for the years ended July 31, 2001 and 2002. respectively, to write down the asset to its fair value.
16. Comprehensive Income (Loss)
The accumulated balances for each classification of comprehensive income (loss) consists of the following(in thousands):
Begimllng balance at July 31, 1999
.....................
Changeduringpenod ..............................
Balance at July 31, 2000
..............................
Changeduringtheperiod ......,......................
BalanceatJuly31,2001..............................
Change during the period
.............................
BalanceatJuly31 2002..............................
Unrealized Accumulated
gain (loss) in Foreign otheravailable-for-currency comprehensivesale securities translation loss
(94 044)391 (92 653)
(94 044)391 (92 653)
89,148 930 90,078
(4,896)321 575)
064)964 (100)
$ (5 960)285 $ (2 675)
17. Price Guarantee of Class B Common Stock
In March 2001, the Company exercised an option to sell to AT&T approximately 2.
0 million shares of itsClass B common stock for approximately $74.
8 million. In conjunction with the formation of the consortium,IDT guaranteed to AT&T the value of approximately 1.4 million shares of IDT Class B common stock still being
retained by AT&T. If the value of IDT Class B common stock is less than $27.5 million On October 19, 2002and AT&T or an affiliate retains all the shares through such date, then IDT will be obligated to pay AT&T thedifference with cash, additional shares of IDT Class B common stock or a combination of both, at the option of
IDT. In connection with this obligation, the Company recorded in "investment and other income (expense)" a
IDT, CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
charge of $5.3 million during the year ended July 31, 2002. The Company was subject to additional charges of$100 million through October 19, 2002 based on changes
in the market value of IDT Class B common stoCk. As aresult, the Company s total liability is $6.3 milliQn as of October 19, 2002.
18. Ertraordinary Loss
On May 10, 1999, the Company obtained a Senior Secured Credit Facility from a consortium of financialinstitutions. During the second quarter ended January 31, 2000, the Company repaid all of the outstandingprincipal balance together with . accrued interest The Company recorded a pre-tax extraordinary loss of$4.9 million in connection with the repayment during the
year ended July 31, 2000.
19. Selected Quarterly Financial Data (unaudited)
The table below presents selected quarterly financial data (unaudited) of the Company for the calendarquarters in the fiscal years ended July 31 2002 and2DD1:
Quarter Ended Revenues
Income (loss) before
cumulative effect of accounting change
PerLoss from Per Share Share Net IncomeOperations Amount -Basic -Di1nted (Loss) .(in thousand1;, except for per share data)2002:
October 31 fa!
................
339,209 $ (12 565)$ (11,332)$ (0.16)$(0.16)$(158,315)January31...................374 025 (27 774)(17,212)(0.23)(0.23)(17,212)April30.....................401,653 (42,829)(49,593)(0.64)(0,64)(49,593)July 31 fbf
...................
416 727 (141,124)(78 229)(0.99)(0.99)(78 229)Total. . . . . .
. . , . . . . . . . . . ..
$1,531,614 ,$(224 292)$(156,366)$(303 349)2001:
October 31 lei
""""""""
276 597 $ (60,070) $ 869,568 $12.43 $11.27 $ 869 568January31..,................287 597 (48,455)(117 104)(1. 77)(1. 77)(117 104)April30ldJ ...,...........,..335 722 (55 571)(48 277)(0.73)(0.73)(48 277)July 31 lei
..'................
331,034 (268,614)(171,828)(2.44)(2.44)(171 828)Total. . . . . . . . , . . . . . . . . . ..$1,230 950 $(432 710)$ 532 359 $ 532 359
Ia! Included in net loss is a $147.0 million cumulative effect of accounting change, net of $3.5 million ofincome taxes, due to the adoption of SF AS No. 142.
fbl Included in loss from operations was $110.4 million of impairment charges related to the JRU received aspart of the' Tyeom settlement
lei Included in net income is $1,037.7 million in gains on sales of subsidiary stock related to Net2Phone stock
sales.
Id/ Included in loss from operations was $193.4 million of impairment charges related to the IRU received aspart of the Tyeom settlement.
roT CORPORATION
NOTES TO CONSOLIDATED FJNANCIAL STATEMENTS-(Continued)
20. Subsequent Events
In August 2002, Net2Phone and its Adir subsidiary consummated the settlement of their lawsuit filed onMarch 19, 2002 in the United States District Court for the District of New Jersey against Cisco Systems
("'
Cisco ) and a. Cisco executive who had been a member of the Adir ,board of directors. The suit arose out of therelationships that had been created in connection with Cisco s and Net2Phone s oligjnal investments in Adir andout of Adir's subsequent purchase of NetSpeak, Inc. in August 2001. The parties settled the suit and all relatedclaims against Cisco and the Cisco executive in exchange for (i) the transfer, during the first quarter of fiscal2003, to Net2Phone of Cisco s and Softbank Asia fufrastructure Fund's respective'11.5% and 7.0% interests inAdir and, en) the payment by Cisco, during such quarter, of $19.5 million to Net2Phone and Adir. As a result of
this settlement, Net2Phone will recognize, for the qUllrter ended October 31, 2002, a gain of approximately$58.4 million. Net2Phone will be consolidated by IDT in Fiscal year 2003, which began on August I, 2002.
IDT CORPORATION
FJNANCIAL STATEMENT SCHEDULE-VALUATION AND QUALiFYING ACCOUNTS
2000
Reserves deducted from accounts receivable:
Allowance for doub1ful accounts. , ,. . , , . , .
. ,, . . . .
2001
Reserves deducted from accounts receivable:
Allowance for doub1ful accounts. . . . , . . , . , .
. . . . . .
2002
Reserves deducted from accounts receivable:
Allowance for doubtful accounts. . . . . . . . .
. , . . . . . .
(1) Uncollectible accounts written off, net of recove~s.
Adcl!tions
BalanCe at Charged toBegfnning of Costs and Ded.uetloDS Balance atPeriodExpenses' (1)End of Period
(Dollars, In tb.onssndB)
$ 7,643 $20,154 $(1,026)$26,771
, $26,771 $32,873 $(37,136)$22,508
$22,508 $19,203 $ (2,818)$38,893
IDT Corporation SEC Form 10-Q
- ~~~~Page 1 of 4
Outline
IDT CORP filed this 10-Q on 06/16/2003.
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Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM lO-Q
rEI Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the QuarterlyPeriod Ended April 30, 2003
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
(State or other jurisdiction of
incorporation or organization)
22-3415036
(I.S. Employer
Identification Number)
520 Broad Street, Newark, New Jersey
(Address of principal executive offices)07102
(Zip Code)
[phone]
(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 ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to me such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes IE) No 0
Indicate by check mark whether the registrant is an accelerated mer (as derIDed in Rule 12b-2 of the Exchange Act). Yes IE) No 0
Common Stock
, $.
01 par value - 25 074 860 shares outstanding as of June 11 2003 (excluding 5,419 963 treasury shares)Class A common stock
, $.
01 par value - 9 816 988 shares outstanding as of June 11 2003Class B common stock, $.01 par value - 55 239 832 shares outstanding as of June 11 , 2003 (excluding 4 019 163 treasury shares)
(Indicate the number of shares outstanding of each of the issuer s classes of common stock, as of the latest practicable date)
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Table of Contents
IDT CORPORATION
TABLE OF CONTENTS
Item 1.
PART 1. FINANCIAL INFORMATION
Item 2.
Item 3.
Item 4.
Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of April 30. 2003 and July 31. 2002
Condensed Consolidated Statements of Operations for the three and nine months ended Ap'lil30. 2003 and 2002
Condensed Consolidated Statements of Cash Flows for the nine months ended Ap)il 30. 2003 and 2002
Notes to Condensed Consolidated Financial Statements
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risks.
Controls and Procedures
PART ll. OTHER INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Legal Proceedings
Changes in Securities and Use of Proceeds
Defaults Up-on Senior SecUl1ties
Submission of Matters to a Vote of Security Holders
Other Information
Exhibits and Re
p.-
orts on Form 8-
SIGNATURES
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
CERTIFICATION OF THE CIDEF FINANCIAL OFFICER
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Table of Contents
PART I.FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
IDT CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Assets
Current assets:
Cash and cash equivalents
Marketable securities
Trade accounts receivable, net
Other current assets
Total current assets
Property, plant and equipment, net
Restricted cash
Goodwill
Licenses and other intangibles, net
Investments
Other assets
Total assets
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable
Accrued expenses
Deferred revenue
Capital lease obligations-cuITent portion
Other CUITen! liabilities
Total current liabilities
DefeITed tax liabilities, net
Capital lease obligations-long-term portion
Other liabilities
Total liabilities
Minority interests
Commitments and contingencies
Stockholders' equity:
PrefelTed stock, $,01 par value; authorized shares-IO,OOO,OOO; no shares issued
Common stock
, $,
01 par value; authorized shares-l 00,000 000; 25,147 360 and 24,988,597 shares issued at April 30, 2003 and July31,2002, respectively; 19,727 397 and 19 568,634 shares outstanding at April 30, 2003 and July 31 2002, respectivelyClass A common stock
, $.
0 I par value; authorized shares-000,000; 9 8 I 6,988 shares issued and outstanding at April 30, 2003 and
July 31, 2002
Class B common stock
, $.
01 par value; authorized shares-I 00,000 000; 55 044 832 and 54,009 844 shares issued at April 30, 2003and July 31, 2002, respectively; 51,025,669 and 49,990 681 shares outstanding at April 30, 2003 and July 31,2002, respectivelyAdditional paid-in capital
Defen-ed compensation
Treasury stock, at cost, consisting of5,419 963 shares of common stock and 4 019,J63 shares of Class B common stockAccumulated other comprehensive loss
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
See notes to condensed consolidated fmancial statements.
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April 30, 2003 July 31,2002
(Unaudited)(Note 1)
243,415 351 248
794 259 658,731
133,127 126,153
199 65,291
259,000 201 423
288 070 250,631
290
424 702
310 25,503
39,471 58,903
928 38,758
721,493 607 920
760 121 529
173,601 132,892
120,836 112 183
25,318 22,960
412 866
450,927 401,430
191,436 233 518
502 45,398
299 088
695,164 683,434
162 184 956
197 196
510 500
636,445 606,387
(7,907)
(153,713)(153,713)
369)675)
392 884 418,737
864, J 45 869,530
721,493 607,920
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IDT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended April 30, Nine Months Ended April 30,
2003 2002 2003 2002Revenues$ 454 870 $ 401 653 348 808 114 887
Costs and expenses:
Direct cost of revenues (exclusive of items shown below)347 117 319 002 036 172 879 607Selling, general and administrative 104 967 106 409 316 863 266 501Depreciation and amortization 349 745 279 840Settlement by Net2Phone of litigation (58 034)Non-cash compensation 629 326 762 326Restructuring, severance and impainnent charges 707 033 781
Total costs and expenses 492 769 444 482 393 075 198 055
Loss from operations (37 899)(42 829)(44 267)(83 168)Interest income, net 721 947 345 496
Other income (expense):
Gain on sale of subsidiary stock 422 422Equity in loss of affiliates (25 125)811)(41 794)Investment and other income (expense), net (10 362)503)(15 365)315)
Loss before minority interests, income taxes and cumulative effect of
accounting change (19 118)(66 510)(19 676)(117 781)Minority interests (1,003)316)(46 953)(15 529)Benefit from income taxes 818 233 776 173
Loss before cumulative effect of accounting change 303)(49 593)(25 853)(78 137)Cumulative effect of accounting change, net of income taxes of $3 525 (146 983)
Net loss 303)$ (49 593)(25 853)$ (225 120)
Earnings per share:
Loss before cumulative effect of accounting change:
Basic
Diluted
Cumulative effect of accounting change, net of income taxes:
Basic
Diluted
Net loss:
Basic
Diluted
Weighted-average number of shares used in calculation of earnings per
share:
Basic
Diluted
(0.12)(0.64)
(0.12)(0.64)
(0.12)(0.64)
(0.12)(0.64)
262 938
262 938
See notes to condensed consolidated fmancial statements.
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(0.32)
(0.32)
(0.32)
(0.32)
808
808
(1.06)
(1.06)
(2.00)
(2.00)
(3.06)
(3.06)
592
592
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mT CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Net cash provided by operating activities
Investing activities
Purchases of property, plant and equipment
Issuance of notes receivable
Purchases of investments
Acquisitions
Increase in cash from consolidation ofNet2Phone
Purchases of marketable securities
Sales and maturities of marketable securities
Net cash used in investing activities
Financing activities
Proceeds from exercise of stock options
Repayments of capital lease obligations
Repurchases of common stock and Class B common stock
Proceeds from sales of subsidiaries stock
Distributions to minority shareholders of subsidiaries
Net cash (used in) provided by fmancing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental schedule of non-cash investing and financing activities
Purchases of property, plant and equipment through capital lease obligations
Issuance of Class B common stock for acquisitions
See notes to condensed consolidated financial statements.
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Nine Months Ended April 30,
2003 2002
845 249
(51,436)(28 286)
971)949)
(10 348)(44 974)
(33 465)
266
741 131)(529 351)
648 484 260 855
(120 136)(384 170)
046 471
(19 509)(15 305)
(15 639)
000 000
(16 079)(13 708)
(542)819
(107 833)(338 102)
351 248 091 071
243 415 $ 752 969
298 007
764
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IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note I-Basis of Presentation
The accompanying unaudited condensed consolidated financial statements ofIDT Corporation and its subsidiaries (the "Company" or "IDT"have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information andwith the instructions to Form 10-Q and Article 10 of Regulation SoX. Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certainreclassifications have been made to the prior year s condensed consolidated fmancial statements to conform to the current year s presentation.Operating results for the three-month and nine-month periods ended April 30, 2003 are not necessarily indicative of the results that may beexpected for the year ending July 31 2003. The balance sheet at July 31 2002 has been derived from the audited financial statements at thatdate but does not include all of the information and footnotes required by accounting principles generally accepted in the United States forcomplete financial statements. For further information, please refer to the consolidated fmancial statements and footnotes thereto included in
the Company s Annual Report on Form lOoK for the year ended July 31 2002, as filed with the United States Securities and Exchange
Commission.
The Company s fiscal year ends on July 31 of each calendar year. Each reference below to a Fiscal Year refers to the Fiscal Year ending in
the calendar year indicated (e.Fiscal 2003 refers to the Fiscal Year ending July 31 2003).
Note 2-Stock-Based Compensation
In December 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No,148 Accounting for Stock-Based Compensation-Transition and Disclosure, An Amendment ofF ASB Statement No. 123. This statementprovides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employeecompensation. In addition, SF AS No. 148 amends the disclosure requirements ofFASB Statement No. 123 to require more prominent and
more frequent disclosures in fmancial statements about the effects of stock-based compensation. During the third quarter ofFisca12003 , theCompany adopted the disclosure provisions of SFAS No. 148, effective as of the beginning of the fiscal year.
The Company continues to account for its employee stock options under the recognition and measurement principles of Accounting PrinciplesBoard ("APB") Opinion No. 25 Accountingfol' Stock Issued to Employees and related Interpretations. The following table illustrates theeffect on net loss and earnings per share if the Company had applied the fair value recognition provisions ofFASB Statement No. 123
Accountingfor Stock-Based Compensation to stock-based employee compensation.
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IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Net loss, as reported
Add: Stock-based employee compensation expense included in reported net loss
net of related tax effects and minority interests
Deduct: Total stock-based employee compensation expense determined under the
fair value based method of accounting for all awards, net of related tax effects
and minority interests
Pro forma net loss
Earnings per share:
Basic-as reported
Basic-pro forma
Diluted-as reported
Diluted-pro forn1a
Three Months Ended Nine Months Ended,
April 30,April 30,
2003 2002 2003 2002
(in thousands, except per share data)
$ (9 303)$(49,593)$(25 853)$(225 120)
397 396 974 396
(17 641)147)(31 510)(16 801)
$ (8 549)$(54 344)$(47 389)$(240 526)
(0.12)(0.64)(0.32)(3.06)
(0.23)(0.71)(0.59)(3.27)
(0.12)(0.64)(0.32)(3.06)
(0.23)(0.71)(0.59)(3.27)
Note 3-Consolidation of Net2Phone
Until August 2000, the Company provided Internet telephony services through its majority owned subsidiary Net2Phone, Inc. On August 112000, the Company completed the sale of 14.9 million shares ofNet2Phone s Class A common stock held by it, at a price of $75 per share; toAT&T Corporation. In addition, AT&T purchased four million newly-issued shares of Class A common stock from Net2Phone at a price
$75 per share. These transactions reduced the voting stake of IDT in Net2Phone from approximately 56% to 21 % and its economic stake inNet2Phone fi'om approximately 45% to 16%. In recognition of these transactions, the Company deconsolidated Net2Phone effective August
2000. Accordingly, the Company accounted for its investment in Net2Phone subsequent to the deconsolidation using the equity method of
accounting.
On October 23 2001, IDT, Liberty Media Corporation and AT&T formed a limited liability company ("LLC"), which through a series oftransactions among IDT, Liberty Media and AT&T held an aggregate of28.9 million shares ofNet2Phone s Class A common stock,representing approximately 48% ofNet2Phone s outstanding capital stock. Because the LLC holds Class A common stock with two votes per
share, the LLC has approximately 65% of the shareholder voting power in Net2Phone. IDT holds the controlling membership interest in the
LLC and is the managing member of the LLC. The operating agreement of the LLC provides unilateral liquidation rights to each of its
members whereby any member of the LLC may cause the LLC to liquidate and dissolve by providing written notice at any time on or after
January 1 , 2004 to the other LLC members of its desire to cause such liquidation and dissolution. Since the LLC can be liquidated and
dissolved at any time on or after January 1 2004, the Company s control of the LLC is deemed to be temporary. Accordingly, through July
, 2002, the Company continued to account for its investment in the LLC using the equity method.
In August 2001 , the FASB issued SFAS No. 144 Accountingfol" the Impairment or Disposal of Long-Lived Assets which addresses fmanciaI
accounting and reporting for the impairment or disposal oflong-lived assets and supersedes SFAS No. 121 Accountingfor the Impairment of
Long Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30 Reporting the Results of
Opemtions for a Disposal of a Segment of a Business, SF AS No, 144 also anlends Accounting Research Bulletins ("ARB") No. 51
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IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Consolidated Financial Statements as amended by SF AS No. 94 Consolidation of All Majority-Owned Subsidia1"ies to eliminate theexception to consolidation for a subsidiary for which control is likely to be temporary. IDT adopted SPAS No. 144 as of August 1 , 2002, andthus no longer accounts for its investment in Net2Phone under the equity method of accounting. Therefore, effective August 1 , 2002, IDTreconsolidated its investment in Net2Phone. The consolidation resulted in the inclusion by IDT ofNet2Phone s results of operations, financialposition and cash flows beginning August 1 , 2002. This change in accounting does not change the net income or loss that would have been
reported had the Company continued to account for its investment in Net2Phone under the equity method of accounting. On a pro forma basisthe combined revenues ofIDT and Net2Phone, as if the consolidation had occurred as of August 1 , 2001, after giving effect to the eliminationof intercompany transactions, would have been $419.4 million and $1 174.7 million, for the three and nine months ended April 30, 2002respectively.
Pursuant to the operating agreement of the LLC, AT&T received 29 Class A units of the LLC, and had the right to put 6 of these units to IDTand 23 of these units to Liberty Media after one year. On October 29 2002, AT&T exercised its put rights and sold all of its Class A units toIDT and Liberty Media for a nominal amount. As a result of this transaction, AT&T is no longer a member of the LLC. IDT continues to holdthe controlling membership interest in the LLC and is the managing member of the LLC. As of April 30, 2003 , IDT's effective equityinvestment in Net2Phone (through the LLC) was 18.6%. Accordingly, the Company recorded in minority interests the 81.4% ofNet2Phone
results attributable to the remaining shareholders ofNet2Phone.
Note 4-Business Segment Information
The Company has five reportable business segments: Wholesale Telecommunications Services, Retail Telecommunications Services, IDTSolutions, Internet Telephony, and Media. The operating results of these business segments are distinguishable and are regularly reviewed by
the Company s chief operating decision maker.
The Wholesale Telecommunications Services business segment consists of wholesale carrier services provided to other long distance carriers.The Retail Telecommunications Services business segment includes domestic and international prepaid, rechargeable and private label callingcards, and consumer long distance services to individuals and businesses. The IDT Solutions business segment, which commenced operationSin December 2001 upon the acquisition of assets from Wiristar Communications, Inc. and certain of its subsidiaries ("Old Winstar ), operatesthrough Winstar Holdings, LLC as a competitive local exchange carrier ("CLEC") using fIXed wireless technology to provide local and longdistance phone services, and high speed Internet and data communications solutions, The Internet Telephony business segment reflects the
results of the Company s reconsolidated subsidiary, Net2Phone, effective August 1 , 2002, which is a provider of voice over Internet Protocolor VoIP, telephony products and services. The Media business segment operates several media and entertainment-related businesses, most ofwhich are currently in the early stages of development.
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IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The Company evaluates the performance of its business segments based primarily on operating income (loss). All corporate overhead isallocated to the business segments based on time and usage studies, except for certain specific corporate costs, such as corporate managementcompensation, treasury management and public relations, and corporate legal, insurance and governance costs, which are not allocated to thebusiness segments. Operating results presented for the principal business segments of the Company are as follows (in thousands):
Wholesale
Telecommunications
Services
Retail
Telecommunications
Services
Three Months Ended
April 30, 2003
Revenues
Segment operating income (loss)
Three Months Ended
April 30, 2002
Revenues
Segment operating income (loss)
Nine Months Ended
April 30, 2003
Revenues
Segment operating income (loss)
Nine Months Ended
April 30, 2002Revenues 221,509 825,503 52.269 15,606 1,114 887Segment operating income (loss) (25 349) 42 001 (62,996) (17,234) (19,590) (83,168)(1) IDT acquired the assets currently held by Winstar (through which the IDT Solutions segment operates) in December 2001. Accordingly,results of operations for the nine months ended April 30, 2002 for the IDT Solutions segment reflect only the period that the Companyowned and operated the Winstar assets.
(2) For the three and nine months ended April 30, 2002, IDT reported its share of the net loss of its Internet Telephony segment, whichconsists of its investment in Net2Phone, under the equity method of accounting. Accordingly, IDT recorded $25.1 million and $41:8million for these periods, respectively, as equity in loss of affiliates within other income (expense). During the periods in which IDT
accounted for its investment in Net2Phone using the equity method, the Company s chief operating decision maker evaluated theperformance ofIDT's Internet Telephony segment based prin1arily on its cash, cash equivalents and marketable securities balances andon its net cash used in operating activities. As of April 30, 2002, the balance of cash, cash equivalents and marketable securities ofNet2Phone was $121.9 million. For the nine months ended April 30, 2002, net cash used in operating activities was $79.5 million.
Note 5-Earnings Per Share
The Company computes earnings per share under the provisions of SF AS No. 128 Earnings per Share. Under the provisions of SF AS No.128, basic earnings per share is computed by dividing net income (loss) applicable to common shareholders by the weighted average number
of shares of cornmon stock outstanding during the applicable period. Diluted earnings per share is determined in the same manner as basic
earnings per
IDT(I)
Solutions
Internet
Telephony(2)Media Corporate Total
109,156
(6,081)
299 865
761
$ 20,766
(19,625)
585
830)
5,498 $
(2,278)(21 846)
$ 454 870
(37 899)
78,963
(6,540)
285,436
19,079
33,095
(43,863)
159
003)(6,502)
401,653
(42 829)
288,178
(22 708)
914 870
66,060
$ 65,933
(67,493)
63,357
25,672
$ 16,470 $
(6,406)(39,392)
348,808
(44 267)
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share except that the number of shares is increased assuming exercise of potentially dilutive stock options and contingently issuable sharesusing the treasury stock method, unless the effect of such increase would be anti-dilutive. For the periods reported in the condensedconsolidated financial statements included in this report, the diluted earnings per share amounts equal basic earnings per share because theCompany had net losses and the impact of the assumed exercise of stock options and contingently issuable shares would have been anti-
dilutive.
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Note 6--Comprehensive Loss
The Company s comprehensive loss consists of the following (in thousands):
Comprehensive loss
Three Months Ended April 30,2003 2002
$ (9 303) $(49 593)(406) 3 977
(1,566 (489
$(11 275) $(46 105)
Nine Months Ended April 30, 2003 2002
$(25 853) $(225 120)(654) (1 470)
040 (923
$(27 547) $(227 513)
Net loss
Foreign currency translation adjustments
Unrealized losses in availab1e-for-sale securities
Note 7-Winstar Acquisition
On December 19 2001 , the Company, through a subsidia.J.Y, acquired the core domestic telecommunications assets of Old Winstar inconnection with Old Winstar's ban1cruptcy proceedings pending before the United States Banlcruptcy Court for the District of Delaware. Theacquiring subsidiary was subsequently renamed Wins tar Holdings, LLC. Winstar operates as a CLEC using fIXed wireless technology toprovide local and long distance phone services, and high speed Internet and data communications solutions. The Company currently offers the
Winstar services under the name IDT Solutions.
The purchase price for the Old Winstar assets consisted of $30.0 million in cash, $12.5 million in newly issued shares ofIDT Class Bcommon stock and 5% of the common equity interests in Winstar (the remaining 95% of the common equity interests as well as all of thepreferred equity interests in Winstar were owned by IDT). The acquisition was accounted for under the purchase method of accounting. Theresults of operations of Wins tar have been included in the Company s consolidated statements of operations since the date of acquisition,
On April 16, 2002, IDT, through a subsidiary, purchased the 5% of common equity interests in Winstar that it did not own. Consideration
consisted of 0.8 million shares ofIDT Class B common stock, which were valued at $13.3 million.
The following pro forma financial infonnation presents the combined results of operations of IDT and Wins tar, as if the Old Winstar assetacquisition had occurred as of August 1 2001, after giving effect to certain adjustments, including depreciation expense, income taxes and theissuance ofIDT Class B common stock as part of the purchase price. The pro fonna fmancial infonnation does not necessarily reflect the
results of operations that would have occurred had IDT and Winstar been a single entity during such periods.
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IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Revenues
Loss before cumulative effect of accounting change
Net loss
Earnings per share:
Loss before cumulative effect of accounting change
Basic
Diluted
Net loss
Basic
Diluted
Weighted-average number of shares used in calculation of earnings per share:
Basic
Three Months Ended Nine Months Ended
April 30,2002 April 30, 2002
(in thousands, except per share data)
401 653 $ 1 187 587
(49 593) $ (126 424)
(49,593) $ (273 407)
Diluted
(0.64)(1.69)
(0.64)(1.69)
(0.64)(3.66)
(0.64)(3.66)
334 747
334 747
Note 8-Amendment of Stock Options
On April 25 , 2003, all then outstanding stock options exercisable for shares of the Company s common stock (which were exercisable for anaggregate of 1.9 million shares) were amended to instead be exercisable for an equal number of shares of the Company s Class B commonstock. Because these options were originally recorded under APB No. 25, a new measurement date was 1riggered and the options wererequired to be accounted for under the intrinsic value method of accounting. As a result, the Company recorded a non-cash compensationcharge for the three and nine months ended April 30, 2003 of$13.7 million for the modification of the options.
On April 25, 2003, the Board of Directors also authorized that shares of Class B common stock held as 1reasury stock be allocated forissuance in connection with the above stock option amendments.
Note 9-Recently Issued Accounting Pronouncements
In April 2003, the FASB issued SPAS No. 149 Amendment of Statement J 33 on Derivative Instruments Hedging Activities. This statementamends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other con1racts, and forhedging activities under SF AS No. 133. The new guidance amends SF AS No, 133 for decisions made: as part of the DerivativesImplementation Group process that effectively required amendments to SF AS No. 133; in connection with other F ASB projects dealing withfmancial instruments; and regarding implementation issues raised in relation to the application of the defInition of a derivative, particularlyregarding the meaning of an "underlying" and the characteristics of a derivative that contains financing components.
SF AS No. 149 clarifies under what circumstances a con1ract with an initial net investment meets the characteristic of a derivative as discussed
in SF AS No. 133. In addition, it clarifies when a derivative contains a financing component that warrants special reporting in the statement
cash flows. SF AS No. 149 amends certain other existing pronouncements. These changes will result in more consistent reporting of con1ractsthat are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting.
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IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provisions of this standard are effective for contracts entered into or modified after June 30, 2003 , and for hedging relationshipsdesignated after June 30, 2003. The provisions of this statement that relate to SF AS No. 133 implementation issues that have been effectivefor fiscal quarters that began prior to June 15, 2003 should continue to be applied in accordance with their respective effective dates. Inaddition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist should beapplied to existing contracts as well as new contracts entered into after June 30, 2003. The Company believes that the adoption of thisstandard will not have a material impact on the Company s results of operations or financial position.
In May 2003, the FASB issued SPAS No. 150 Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity. SPAS No. 150 affects the issuer s accounting for three types of freestanding financial instruments. One type is mandatorilyredeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type
, which includesput options and forward purchase contracts, involves instruments that do or may require the issuer to buy back some of its shares in exchangefor cash or other assets. The third type of instruments consists of obligations that can be settled with shares, the monetary value of which isfIXed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers' shares. SF AS No.150 does not apply to features embedded in a financial instrument that is not a derivative in its
entirety.
In addition to requirements for classification and measurement of financial instruments, SPAS No. 150 also requires disclosures aboutalternative ways of settling the instruments and the capital Structure of entities, whose shares are mandatorily redeemable. Most of theguidance in SF AS No. 150 is effective for all financial instruments entered into or modified after May 31 2003, and otherwise is effectivefrom the start of the first interim period beginning after June 15 2003. The Company believes that the adoption of this standard will not have
a material impact on the Company s results of operations or fmancial position.
Note lO-Legal Proceedings
Certain legal proceedings in which the Company is involved are described in the Company s Quarterly Report on Fonn 10-Q for the quarterended January 31 2003. The following discussion is limited to recent developments concerning the Company s legal proceedings and shouldbe read in conjunction with such earlier Quarterly Report. Unless otherwise indicated, all legal proceedings discussed in the Company
earlier Quarterly Report remain outstanding.
With respect to the Company s complaint against Telefonica S., Terra Networks, S., Terra Networks, U., Inc. and Lycos, Inc., theCompany filed a motion on May 16, 2003 to compel the defendants to produce documents under the crime-fraud exception of the attorney-client and work product privilege. Oral argument on this motion is scheduled for August 7 2003.
With respect to the Company s statement of c1ain1 with the American Arbitration Association naming Telefonica Internacional, SA. as theRespondent, the parties filed post-hearing briefs on April 4, 2003 and reply briefs were filed on May 8, 2003.
With respect to the summons and complaint filed on or about July 25 2002 by PT-l Communications against the Company, the parties held astatus conference before the judge on April 3, 2003. The Company filed a motion for a stay to enjoin this proceeding based upon a filing by
The Continuing Creditors ' Committee of Star Telecommunications , Inc. of a near-identical adversary proceeding against the Company in theUnited States Banlcruptcy Court for the District of Delaware. The motion was denied on May 15, 2003.
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IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
With respect to the complaint fIled by Mark B. Aronson in the Court of Common
Pleas of Allegheny County, Pennsylvania, seekingcertification of a class consisting of consumers who were charged a fee when illT switched
underlying carriers from Global Crossing Ltd. toAT&T, the Court denied the plaintiff's motion to remand the case to the State court and granted the Company
s motion to transfer the case tothe Federal Communications Commission (the "FCC"). The Company filed a petition with the FCC on April 30, 2003.With respect to the Morris Arosel and the Ana Cardoso and Maria Calado matters relating
to the Company s calling cards, on May 19, 2003the Company fIled an application with the Multi-District Litigation Panel seeking to consolidate these matters.
With respect to the suit filed by Winstar against Superior Logistics Management Services
, Inc. in the U.S. District Court for the EasternDistrict of Virginia, the parties entered into a settlement agreement that entities Winstar to receive 10% of the sales price of any sales of
certain equipment by Superior, and provides Winstar with purchase options at 6 and 9 months from May 7, 2003 for various equipment thatwas the subject of the suit and stored by Superior, at the Plice of $0.035 per $1.00 of the original cost to Superior or its entities that are now in
Chapter 7 bankruptcy.
With respect to the Univance Telecommunications, Inc. and Univance Marketing Group, Inc. (collectively the "
Univance Debtorsbankruptcy matter, the parties resolved this matter and the Univance Debtors and Winstar entered into an agreement dated March 19
2003pursuant to which the Univance Debtors will continue to provide services to Winstar. The parties will seek Bankruptcy Court approval of the
agreement.
On or about February 5, 2002, a complaint was filed by Solomon Bitton against the Company in the Superior Court of the State of New
Jersey, Bergen County, seeking certification of a class consisting ofN ew Jersey residents who allegedly purchased the Company s pre-paid calling cards and were charged any fee that was not specifically disclosed on the card packaging prior to purchase. The damages sought havenot yet been quantified. The Company served answers to the complaint on April 3, 2003 and are in the process of providing initial discovery
responses.
On or about March 12 2003, a complaint was fIled by the Continuing Creditors' Committee of Star Telecommunications , Inc. for itself andon behalf of the Star Creditors ' Liquidating Trust ("Star") against the Company in the United States Bankruptcy Court for the District ofDelaware. Star seeks (a) to void and recover damages for certain fraudulent transfers of property of Star s bankruptcy estate pursuant to thepre-petition sale of certain assets to the Company, and (b) to recover damages for unjust enrichment pursuant to said sale. The Company hasnot been served with the complaint and Star has not taken any action to prosecute the claims against
the Company. The Company f1led amotion for a stay or to enjoin this proceeding based upon the fact that this proceeding is nearly-identical to the adversary proceedingpreviously filed by PT -1 Communications against the Company in the United States BanIa-uptcy Court for the Eastern District of New Yorkwhich motion was denied.
On April 15, 2003 , Network Communications ofIndiana ("NCI") filed a four-count complaint in the Superior Court in Marion County,Indiana, against the Company, seeking $8.7 million in damages. NCI signed a Non-Exclusive High Volume Independent Agent MarketingAgreement with Winstar Wireless, Inc., on February I , 1999. On April 18, 2001, Winstar Wireless, Inc., and various other affiliatesDebtors) f1led for Chapter 11 bankruptcy in the United States Bankruptcy Court for the District of Delaware. On December 19
2001, anaffiliate of the Company purchased various assets of the Debtors. NCI alleges that the Company, as a result of allegedly acquiring certain
assets of the Debtor including alleged network customer lists: (a) misappropriated NCI's customer lists , (b) unlawfully converted NCI'scustomer lists, (c) unfairly competed with NCI's business
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IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
and (d) tortiously interfered with contracts between NCI and NCI's customers. The case has been removed to the United States District Courtfor the Southern District of Indiana, Indianapolis Division, and the Company has an extension to answer or otherwise plead until June 23
2003.
On or about April 26, 2003, the Company was served with a petition filed by Powell Palmares in the District Court ofNueces County, Texas
105th Judicial District. The Company is not the only defendant in this action. In his petition, the plaintiff names numerous additional
defendants, including Oblio Telecom, Northern California Telecommunications, Locus Telecommunications, Star Telecom Network, AstralCommunications, Pacific Telecard, and Advanced Telecom Solutions. The plaintiff is seeking certification of a class consisting of all persons
in Texas who allegedly purchased and used IDT's pre-paid calling cards and made calls to, or from, cellular telephone equipment. Thedamages sought have not yet been quantified. The Company filed its answer on June 2, 2003.
The Company is subject to other legal proceedings and claims which arise in the ordinary course of our business and have not been finallyadjudicated. Although there can be no assurances in this regard, in the opinion of the Company s management, such proceedings, as well asthe aforementioned actions, will not have a material adverse effect on the Company s results of operations, cash flows or fmancial condition.
Note ll-Settlement by Net2Phone of Litigation
On March 19 2002, Net2Phone and its ADIR Technologies, Inc. subsidiary filed suit in the United States District Court for the District ofNew Jersey against Cisco Systems, Inc. and a Cisco executive who had been a member of ADIR's board of directors. The suit arose out of therelationships that had been created in connection with Cisco s and Net2Phone s original investments in ADIR and out of ADIR.'s subsequentpurchase of NetS peak, Inc. in August 2001. Net2Phone and ADIR settled the suit and all related claims against Cisco and the Cisco executive
in exchange for: (i) the transfer, during the fIrSt quarter of Fiscal 2003, to Net2Phone of Cisco s and Softbank Asia Infrastructure Fund'respective 11.5% and 7.0% interests in ADIR, and (ii) the payment by Cisco, during such quarter, of$19.5 million to Net2Phone and ADIR.As a result of this settlement, Net2Phone recognized for the quarter ended October 31 2002, a gain of$58.4 million consisting of (i) a $38.million reduction in minority interests as a result of the transfer of the ADIR shares and (ii) the receipt of settlement proceeds of$19.
million. During the second quarter of Fiscal 2003 ,. Net2Phone approved and therefore recorded an additional $0.4 million in executivecompensation expense directly related to the Cisco settlement.
Note 12-Gain on Sale of Subsidiary Stock
On April 17, 2003 , a subsidiary of Liberty Media purchased ITom IDT Media 88.235 newly-issued shares ofIDT Media s Class A commonstock, at a price of $283 334 per share, representing an aggregate cash purchase price of $25.0 million. IDT Media operates several media andentertainment-related businesses, most of which are currently in the early stages of development. As a result of this sale of subsidiary stock,
the Company s ownership percentage in IDT Media decreased from 100% to 94.4%.
The Company has historically accounted for sales of stock of its subsidiaries in accordance with Staff Accounting Bulletin No. 51
Accountingfor Sales of Stock by a SubsidiGlY, wInch pennits the Company to record the excess of its carrying value in the equity of its
subsidiaries as a gain. Accordingly, in connection with this sale, the Company recognized a gain of $22.4 million. Deferred taxes of$9.
million have been provided on the gain.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following information should be read in conjunction with the accompanying condensed consolidated financial statements and theassociated notes thereto of this Quarterly Report, and the audited consolidated financial statements and the notes thereto and ourManagement's Discussion and Analysis of Financial Condition and Results of Operations contained in our
Annual Report on Form 10-K forthe year ended July 31 2002, as filed with the United States Securities and Exchange Commission.
As used below, unless the context otherwise requires, the terms "the Company,
" "
IDT
" "" "
" and "our" refer to IDT Corporation, aDelaware corporation, its predecessor, International Discount Telecommunications, Corp., a New York corporation, and their subsidiariescollectively.
Forward-Looking Statements
This Quarterly Report on Form 10-Q, including the notes to the condensed consolidated financial statements, contains forward-lookingstatements within the meaning of Section 27 A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934including statements that contain the words "believes
" "
anticipates
" "
expects
" "
plans
" "
intends " and similar words and phrases. Suchforward-looking statements include, among other things, our plans to implement our growth strategy, improve our fmancial performanceexpand our infrastructure, develop new products and services, expand our sales force, expand our customer base and enter internationalmarkets, and the possible outcome of our litigation. Such forward-looking statements also include our expectations concerning factorsaffecting the markets for our products and services, such as changes in the U.S. and the international regulatory environment and the demandfor long-distance telecommunications. These forward-looking statements are subject to risks and uncertainties that could cause actual resultsto differ materially from the results projected in any forward-looking statements. These risks and uncertainties include, but are not limited tothose risks discussed in this report. In addition to the factors specifically noted in the forward-
looking statements, other important factors thatcould result in those differences include: potential declines in prices for our products and services; our ability to maintain and grow our retailtelecommunications services, particularly our prepaid calling card business; availability of termination capacity; fmancial stability of our
customers; our ability to maintain carrier agreements with foreign carriers; effectiveness of our marketing and distribution efforts; increasedcompetition, particularly from regional bell operating companies; our ability to manage our
growth; competitiveness of our Winstarsubsidiary; impact of government regulation; our ability to obtain telecommunications products or services required for our products andservices; general economic conditions, particularly in the telecommunications markets; and the other factors set forth in our Annual Report onForm 10-K for Fiscal 2002. 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 withthe United States Securities and Exchange Commission pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934
including our Annual Report on FoIm 10-K for Fiscal 2002.
Overview
General
IDT Corporation, through our IDT Telecom segment, provides telecommunications services and products to retail and wholesale customersworldwide, including prepaid, private label and rechargeable calling cards, wholesale carrier services and consumer long distance services.We deliver our telecommunications services over a network consisting of more than 200 switches in the United States, Europe and SouthAmerica. We also own and lease capacity on 16 undersea fiber-optic cables that connect our U.S. facilities with our international facilities andwith third-party facilities in Europe, Latin America and Asia. We derive a majority of our revenues from IDT Telecom
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Our Winstar segment, which operates under the name IDT Solutions, offers broadband and telephony services to commercial andgovernmental customers through its fixed-wireless and fiber infrastructure. We also operate, through our IDT Media segment, several mediaand entertainment-related businesses, most of which are currently in the early stages of development. IDT Media primarily comprises fivebusiness lines: radio, animation, brochure distribution, video-to-desktop delivery, and call center services. Effective August 1 , 2002, wereconsolidated Net2Phone, which is a provider of voice over Internet Protocol, or VoIP, telephony products and services.
Outlook
In recent years, we have derived the majority of our revenues from IDT Telecom s businesses, consisting primarily of our RetailTelecommunications Services segment, which markets prepaid, private label and rechargeable calling cards and consumer long distanceservices, and our Wholesale Telecommunications Services segment, which markets wholesale carrier services. These businesses haveaccounted for the bulk of our operating expenses as well (excluding impairment charges).
Throughout the remainder of Fiscal 2003, we anticipate increased growth in our wholesale carrier revenues. We anticipate growth in IDTTelecoms Retail Telecommunications Services revenues as well, and we expect Retail Telecommunications Services revenues to continue toaccount for approximately 70%-75% ofIDT Telecom s total revenues in the coming quarters.
The worldwide telecommunications industry has been characterized in recent years by intense price competition, which has resulted in asignificant decline in both our average per-minute price realizations and our average per-minute termination costs. Therefore, although IDTTelecoms minutes of use have been increasing strongly, IDT Telecom s revenues have increased at a much slower rate. We expect to seesome further price declines throughout the remainder of Fiscal 2003, as the markets in which we compete have generally remained
competitive.
Since our acquisition of the Winstar assets in December 2001 , the IDT Solutions segment has experienced working capital deficits. We haverestructured Winstar s operations by undertaking significant cost saving measures, including the downsizing of the Winstar network and asignificant reduction in headcount, aimed at reducing the working capital deficit. However, at this time, we expect IDT Solutions to continueto generate operating losses and to require funding for its capital expenditure needs for the foreseeable future. We expect IDT Solutions tocontinue to reduce its operating losses throughout the remainder of Fiscal 2003 , aided by a combination of increased revenues and continued
cost saving measures.
We have also been developing various new businesses within our Media segment. We anticipate that Media will continue to incur significantcosts related to its existing and other new businesses. The timing and magnitude of further revenues and/or operating profits from these newbusinesses remains uncertain. In May 2003, Media s Digital Production Solutions unit (which operates Media s animation business line)acquired a controlling interest in Film Roman, Inc., an independent animation company, through the purchase of newly-issued shares of FilmRoman common stock. For the year ended December 31 2002, Film Roman reported revenues of$43.3 million and a net loss of$8.6 million.In the upcoming quarters, the results of operations of our IDT Media segment will include the consolidation of Film Roman.
Critical Accounting Policies
Our condensed consolidated fmancial statements and accompanying notes are prepared in accordance with accounting principles generally
accepted in the United States. Preparing condensed consolidated fmancial statements requires us to make estimates and assumptions thataffect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our
accounting policies. Our significant accounting policies are described in Note 1 to the July 31 , 2002 consolidated fmancial statementsincluded in our Form 10-K. Critical accounting policies are those that require application of management's most difficult, subjective orcomplex judgments, often as a result of matters that are inherently
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uncertain and may change in subsequent periods. Critical accounting policies for us include revenue recognition
, allowance for doubtfulaccounts, goodwill, and valuation of long-lived and intangible assets. For additional discussion of our critical accounting policies, see ourManagement's Discussion & Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K for Fiscal 2002.
In order to enable a straightforward comparison between the three and nine months of Fiscal Year
2003 and the three and nine months ofFiscal Year 2002, and to provide a better understanding of IDT' s core operating results for the three and nine months of Fiscal Year 2003this Form 10-Q presents, as additional information, some financial figures excluding the IDT Solutions segment and Net2Phone. The Winstarassets, through which our IDT Solutions segment operates, were acquired during the second quarter of Fiscal Year 2002, and contributed torevenues for only part of that quarter, and Net2Phone was not consolidated during Fiscal Year 2002.
Three Months Ended April 30, 2003 Compared to Three Months Ended April 30, 2002
Results of Operations
We evaluate the performance of our operating business segments based primarily on income (loss) from operations. Accordingly, certainadjustments are properly not reflected in the operating business segments discussions, but are only reflected in our Consolidated discussion.
Consolidated
Revenues, Our revenues increased 13 ., from $401.7 million in the three months ended April 30, 2002 to $454.9 million in the threemonths ended April 30, 2003. The increase is due primarily to the significant growth in our telecommunications minutes of use and thereconsolidation of Net2Phone. Excluding revenues from our Internet Telephony segment, consisting ofNet2Phone, which was reconsolidatedeffective August 1, 2002, our revenues increased 8.4%, to $435.3 million in the three months ended April 30, 2003. The increase in ourconsolidated revenues (excluding Internet Telephony) is mainly attributable to a 12.2% increase in IDT Telecom s revenues. The growth inIDT Telecom s revenues primarily resulted from a 43.3% growth in minutes of use (excluding minutes related to our consumer long distancebusiness, which are not canied through our own network) from 3.0 billion in the three months ended April 30, 2002 to 4.3 billion in the threemonths ended April 30, 2003.
Direct Cost of Revenues. Direct cost of revenues increased by 8., from $319.0 million in the three months ended April 30 2002 to$347.1 million in the three months, ended April 30, 2003. The increase is due primarily to the growth in our telecommunications minutes ofuse arid the reconsolidation ofNet2Phcine; Excluding direct cost ofrevenues from oUr Internet Telephony segment, direct cost of revenuesincreased 5.7% to $337.2 million in the three months ended April 30, 2003. As a percentage of total revenues, direct costs decreased from79.4% in the three months ended April 30, 2002 to 76.3% in the three months ended April 30, 2003 (and decreased to 77.5% excluding ourInternet Telephony segment). The decline in direct costs as a percentage of revenues is attributable to overall higher revenues due to the
growth of minutes- of-use and because of continued operating efficiency gains and lower prices from suppliers.
Selling, General and Administrative. Selling, general and administrative expenses decreased 1.3%, from $106.4 million in the three monthsended April 30, 2002 to $105.0 million in the three months ended April 30, 2003. Excluding selling, general and administrative expensesfrom our Internet Telephony segment, selling, general and administrative expenses decreased 13.3% to $92.2 million in the three monthsended April 30, 2003. AB a percentage of total revenues, selling, general and administrative expenses decreased from 26.5% in the threemonths ended April 30, 2002 to 23.1 % in the three months ended April 30, 2003 (and decreased to 21.2% excluding our Internet Telephonysegment). Selling, general and administrative expense declined as a percentage of revenues due primarily to the significant growth in our
revenues for the three months ended April 30, 2003.
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We anticipate that selling, general and administrative expenses will increase in dollar tenDS in the future, and will continue to be a significantpercentage of total revenues, as we expand both IDT Telecom s businesses and our Media businesses.
Dep1"eciation and Amortization. Depreciation and amortization expense increased 33.5%, from $16.7 million in the three months endedApril 30, 2002 to $22.3 million in the three months ended April 30, 2003. Excluding depreciation and amortization expense from our InternetTelephony segment, depreciation and amortization expense increased 19.7%, to $20.0 million in the three months ended Apri130, 2003primarily as a result of our higher fixed asset base during the three months ended April 30, 2003, reflecting the expansion of ourtelecommunications network infrastructure and facilities. As a percentage of revenues, depreciation and amortization expense increased from2% in the three months ended April 30, 2002 to 4.9% in the three months ended April 30, 2003 (and to 4.6% excluding our InternetTelephony segment). Depreciation and amortization expense increased, as a percentage of revenues, due primarily to the expansion of ourtelecommunications network infrastructure and facilities. We anticipate that depreciation expense will continue to increase in absolute dollarsas we continue to add to our asset base, particularly in IDT Telecom s businesses, as we implement our growth strategy.
Non-cash Compensation. Non-cash compensation charges were $2.3 million in the three months ended April 30, 2002, compared to $16.million in the three months ended April 30, 2003. Refer to the respective sections of the IDT Telecom, IDT Solutions, Internet Telephony andCorporate segments for a full discussion on non-cash compensation charges.
Restructuring, Severance and Impairment Charges, Restructuring, severance and impairment charges were $1.7 million in the three monthsended April 30, 2003. Refer to the respective section of the Internet Telephony segment for a full discussion on restructuring, severance and
impairment charges.
Lossfrom Operations. Our loss from operations was $42.8 million in the three months ended April 30, 2002, compared to $37.9 million inthe three months ended April 30, 2003. Excluding $9.8 million ofloss ITom operations from our Internet Telephony segment, our loss fromoperations was $28.1 million for the three months ended April 30, 2003. The reduction in our loss from operations (excluding our InternetTelephony segment) was due primarily to IDT Telecom s increased revenues and gross margins, partially offset by one-time non-cashcompensation charges.
Interest.Net interest income was $3.9 million in the three months ended April 30, 2002, compared to net interest income of$6.7 million inthe three months ended April 30, 2003.
Othe1" Income (Expense). Other income (expense) amounted to an expense of$27.6 million in the three months ended April 30, 2002compared to income of$12.0 million in the three months ended April 30, 2003. Included in other income (expense) in the three months endedApril 30, 2003, was a charge of$1.6 million related to an obligation to guarantee to AT&T the value of 1.4 million shares ofIDT Class Bcommon stock owned by AT&T, and net losses ITom other investments totaling $8.8 million.
On April 17, 2003 , a subsidiary of Liberty Media purchased from IDT Media 88.235 newly-issued shares ofIDT Media s Class A commonstock, at a price of $283 334 per share, representing an aggregate cash purchase price of $25.0 million. As a result of this sale of subsidiarystock, our ownership percentage in IDT Media decreased from 100% to 94.4%. In connection with this sale, we recognized a gain of $22.4
million during the three months ended April 30, 2003.
Included in other expense in the three months ended April 30, 2002 were losses of $25.1 million associated with recording our pro-rata shareofNet2Phones net losses through the equity method ofaccounting, a $2.2 million charge related to an obligation to guarantee to AT&T thevalue of 1.4 million shares ofIDT Class B common stock owned by AT&T, and net losses from other investments totaling $0.3 million.
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Minority Interests. Minority interests were $4.3 million and $1.0 million for the three months ended April 30, 2002 and 2003, respectively.The $3.3 million decrease in minOlity interest income was primarily attributable to the reconsolidation ofNet2Phone
, of which we own 18.as of April 30, 2003. Accordingly, we recorded in minority interests the 81.4% ofNet2Phone s results attributable to the remainingshareholders ofNet2Phone.
Income Taxes. We recorded an income tax benefit of$21.2 million in the three months ended April 30, 2002, compared to an income taxbenefit of $10.8 million in the three months ended April 30, 2003.
Revenues.
Net Loss. Our consolidated net loss was $49.6 million in the three months ended April 30, 2002 compared to a consolidated net loss of $9.3million in the three months ended April 30, 2003. The recording ora net loss in the three months ended April 30, 2003 and 2002 was a resultof the combined factors for each of the segments discussed below, as well as those items detailed above.
IDT Telecom-Retail Telecommunications Services and Wholesale Telecommunications Services Segments
IDT Telecom s revenues increased 12., from $364.4 million in the three months ended April 30, 2002 to $409.0 million in thethree months ended April 30, 2003.
IDT Telecom s revenues increased primarily as a result of a 43.3% growth in minutes of use (excluding minutes related to our consumer longdistance business, which are not carried through our own network) from 3.0 billion in the three months ended April 30, 2002 to 4.3 billion inthe three months ended April 30, 2003. IDT Telecom experienced growth in minutes of use in both its Retail Telecommunications Servicesand Wholesale Telecommunications Services segments, in both the U.S. and international operations. IDT Telecom s minutes of use grew at afaster rate than did its revenues, reflecting a decline in its average revenue-per-minute, from $0.110 during the three months ended April 302002 to $0.084 in the three months ended April 30, 2003. IDT Telecom s decrease in its average revenue-per-minute is due to a number offactors, including (i) continued competition in both retail and wholesale markets, and (ii) introduction of new calling cards.
Revenues from IDT Telecom s Retail Telecommunications Services segment increased 5.1 %, from $285.4 million in the three months endedApril 30, 2002 to $299.9 million in the three months ended April 30, 2003. Of this total growth of5.1%, 2.1% came as a result of increasedsales of cards and 3.0% came as a result of higher consumer long distance revenues. As a percentage ofIDT Telecom s overall revenueRetail Telecommunications Services ' revenues decrea~ed from 78.3% in the three months ended April 30, 2002 to 73.3% in the three monthsended April 30, 2003 , as revenues from our Wholesale Telecommunications Services segment grew at a faster rate than did our retail
businesses revenues. IDT Telecom s calling card sales increased 2.1 %, from $255.3 million in the three months ended April 30, 2002 to$260.7 million in the three months ended April 30, 2003. This increase was primarily generated by the in1roduction of several new calling
cards. A new card is generally introduced with attractive low per-minute pricing, which is gradually increased as the card gains acceptanceand builds market share. The increase in new card introductions was part ofIDT's plan to aggressively seek market share in both its1raditional Northeast U.S. markets, as well as in several other key areas, such as California, Florida and Texas. In addition, the growth in ourcalling card revenues resulted from the expansion of our distribution network beyond our traditional Northeastern U.S. territory, as well as thecontinued strong growth of European operations, both in our U.K. market as well as in other markets such as Spain, Gennany and theNetherlands. Throughout the quarter, several of the recently-launched cards entered the higher-margin, more profitable stages of theirlifecycles, resulting in higher overall calling card margins in the United States, when compared to the second quarter of Fiscal 2003.
Calling card sales as a percentage ofIDT Telecom s Retail Telecommunications Services revenues decreased from 89.5% in the three monthsended April 30, 2002 to 86.9% in the three months ended April 30, 2003 , as revenues from consumer long distance services grew at a fasterrate than did calling card revenues. Revenues from consumer long distance services, in which we act as a switchless reseller of anothercompanys network, experienced significant growth in the three months ended April 30, 2003, with revenues increasing 31.3%, from $29.million in the three months ended April 30, 2002 to $39.0 million in the three months ended
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April 30, 2003. The consumer long distance revenue increase is attributable to the continued growth of our flat-rate, $0.05 a minute longdistance calling plan, which has been driven by increased marketing expenditures, resulting in a significant increase in the number ofconsumer long distance customers. At April 30, 2003, we had approximately 622 000 active customers for our consumer long distanceservices, compared to approximately 409 000 customers at April 30, 2002. Beginning in early Fiscal 2003, we significantly increased themarketing and advertising expenditures of our consumer long distance business, in an attempt to accelerate the growth of our customer base.
These expenditures, while reducing consumer long distance operating profits in the near tertn, are expected to lead to a rise in the number ofactive customers, revenues and profits over the longer term. In addition, as our customer base has grown, we have begun to place an increasedemphasis on customer retention initiatives. Accordingly, our marketing efforts for our consumer long distance business is now focused on
customer retention and increasing the average revenue per customer, in addition to attracting new customers.
Revenues from IDT Telecom s other Retail Telecommunications Services businesses, consisting primarily of call reorigination services
amounted to $0.5 million in the three months ended April 30, 2002, versus $0.2 million in the three months ended April 30, 2003.
!DT Telecom s Wholesale Telecommunications Services revenues increased 38., from $79.0 million in the three months ended April 302002 to $109.2 million in the three months ended April 30, 2003. As a percentage ofIDT Telecom s total revenues, WholesaleTelecommunications Services revenues increased from 21.7% in the three months ended April 30, 2002 to 26.7% in the three months endedApril 30, 2003. The increase in revenues resulted from the growth in wholesale caITier minutes, despite a significant decline in the averagerevenue-per-minute. In recent years, IDT Telecom s wholesale carrier business has curtailed or ceased completely its sales to financially
unstable carriers. DuriIig the three months ended April 30, 2003, IDT Telecom continued to rebuild its customer base through the addition
new customers and by increasing sales to its larger, more fInancially stable customers. Increased sales to international telecom carriers
accounted for the bulk of the growth in revenues and gross profits during the quarter.
Direct Cost of Revenues. Direct cost of revenues for IDT Telecom increased 14.4%, from $276.2 million in the three months ended April
, 2002 to $316.1 million in the three months ended April 30, 2003, due to the higher revenue and minutes base. As a percentage of totalIDT Telecom s revenues, direct costs increased to 77.3% in the three months ended April 30, 2003 , from 75.8% in the three months endedApril 30, 2002. The increase in direct costs as a percentage of total revenues is attributable to the competitive pricing environment within thetelecommunications industry, which resulted in lower revenue per minute price realizations.
Selling, General and Administrative. IDT Telecom s selling, general and administrative expenses decreased 1.9%, from $62.6 million in thethree months ended April 30, 2002 to $61.4 million in the three months ended April 30, 2003. As a percentage ofIDT Telecom s totalrevenues, selling, general and administrative expenses were 17.2% in the three months ended April 30, 2002, compared to 15.0% in the threemonths ended Apri130, 2003. illT anticipates that selling, general and administrative expenses will remain steady, in absolute dollar tenDS
over the next few quarters, and should therefore represent a smaller percentage of revenues, as overall revenues increase.
Dep,"eciation and Amortization. IDT Telecom s depreciation and amortization expense rose 20.0%, from $13.0 million in the three monthsended April 30, 2002, to $15.6 mi1lion in the three months ended April 30, 2003, reflecting the continued expansion of our fixed asset base
as we invest to accommodate our CUlTent and anticipated future growth. As a percentage ofIDT Telecom s total revenues, depreciation andamortization expensewas 3.8% in the three months ended Aplil30, 2003 compared to 3.6% in the three months ended April 30, 2002.
Non-cash Compensation. IDT Telecom recorded non-cash compensation of $0.2 million in the three months ended April 30, 2003 , relatingto stock options granted to certain non-employee consultants.
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Income from Operations. IDT Telecom recorded income from operations of $12.5 million in the three months ended April 30, 2002compared to income from operations of $15.7 million in the three months ended April 30, 2003. The increase in income from operations
resulted primarily from the revenue growth and improved gross margins.
IDT Solutions Segment
Revenues, Revenues from IDT Solutions decreased 37.2%, from $33.1 million in the three months ended April 30, 2002 to $20.8 million inthe three months ended April 30, 2003. The third fiscal quarter of 2002 marked the first full quarter of IDT's ownership of IDT Solutions,Since the acquisition of the Winstar assets in December 2001 , IDT has significantly restructured and downsized the acquired business
including the discontinuation of certain product lines and the exiting of certain geographic locations. These decisions accounted in large part
for the decline in revenues versus the prior year.
Throughout the remainder of Fiscal 2003, IDT Solutions will continue to focus its sales force towards targeting small and medium sized
businesses which are concentrated within IDT Solutions' footprint of 3 000 provision-ready buildings (i., buildings in which IDT Solutionstechnology is currently deployed). IDT Solutions will also continue to target Fortune 500 companies, as well as the various civilian anddefense agencies of the U.S. government. IDT Solutions will also be developing an agent channel to support its existing sales force initiatives.
Direct Cost of Revenues. Direct cost of revenues for IDT Solutions decreased 50., from $42.1 million in the three months ended April2002 to $20.7 million in the three months ended April 30, 2003. The decrease in direct cost of revenues is due to the restructuring and
downsizing efforts noted above, as well as IDT's efforts to groom the Winstar network to better reflect the needs of its CUlTent customer base.Direct cost of revenues consist primarily of two components, connectivity for the network backbone and lease payments for the network
provision-ready buildings. Network backbone costs for the three months ended April 30, 2003 totaled $13.5 million, accounting for 65.2% oftotal direct cost of revenues. Direct cost of revenues for the three months ended April 30, 2003 associated with lease payments for the
building network were $7.2 million.
Selling, General and Administrative. Selling, general and adrrrinistrative expenses ofIDT Solutions decreased 45.3%, from $29.6 million inthe three months ended April 30, 2002 to $16.2 million in the three months ended April 30, 2003. The decrease is primarily due to thesignificant cost saving measures undertaken by IDT subsequent to the acquisition of the Winstar assets, which included a significant reductionin headcount. The main component of selling, general and administrative expenses for the three months ended April 30, 2003 was employeecompensation and benefits, accounting for $11.9 million, or 73.5% of total selling, general and administrative expenses. Since the acquisition
of the Winstar assets in December 2001, the number of employees of Wins tar has been reduced from approximately 750 to approximately 520
as of April 30, 2003.
Depl'eciation and Amortization. Depreciation and amortization was $2.9 million in the three months ended April 30, 2002 compared to $3.million in the three months ended April 30, 2003. As a percentage ofIDT Solutions' revenues, depreciation and amortization increased from
8% in the three months ended April 31 , 2002 to 17.3% in the three months ended April 30, 2003, primarily due to the lower revenue base as
discussed above.
Non-cash Compensation. IDT Solutions recorded non-cash compensation of $2.3 million in the three months ended April 30, 2002, as a
result of modifications to stock option agreements of certain tenninated employees.
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Lossfrom Operations. IDT Solutions' loss from operatioDB ill the three months ended April 30, 2002 was $43.9 million, compared to $19.million ill the three months ended April 30, 2003. The decrease ill loss from operations is due to the significant cost saving measures
undertaken by IDT subsequent to the acquisition of the Winstar assets, which illcluded the downsizing of the Winstar network and a
significant reduction in headcount, as described above.
Media Segment
In May 2003, Media s Digital Production SolutioDB unit (which operates Media s animation business lille) acquired a controlling interest in
Film Roman, Inc., an independent animation company, through the purchase of newly-issued shares of Film Roman common stock. For theyear ended December 31 2002, Film Roman reported revenues of$43.3 million and a net loss of $8.6 million. In the upcoming quarters, ourresults from operatioDB will include the consolidation of Film Roman.
Revenues. Revenues from Media s businesses increased 31.0%, from $4.2 million in the three months ended April 30, 2002 to $5.5 millionin the three months ended April 30, 2003. In Fiscal 2002, Media gradually exited its Digital Subscriber Line ("DSL") business. Currently,
Media s revenues are primarily comprised of revenues from its CTM Brochure Display, Inc. business, a brochure distribution company.
Direct Cost of Revenues. Direct cost ofrevenues decreased from $0.7 million in the three months ended April 30, 2002 to $0.4 million illthe three months ended April 30, 2003. As a percentage of Media s revenues, these costs decreased from 16.7% for the three months ended
April 30, 2002 to 7.3% for the three months ended April 30, 2003. Most of Media s businesses remain in the early stages of their
development. As such, we anticipate that direct costs will continue to account for a relatively small percentage of Media s revenues, with mostof the expenses associated with these businesses to be incurred in the form of selling, general, administrative and development costs.
Selling, General and Administrative. Selling, general and administrative expeDBes decreased 16., from $8.3 million in the three months
ended April 30, 2002 to $6.9 million in the three months ended April 30, 2003. The decrease in selling, general and administrative expenses
reflect the exit from the DSL Internet access business and from the video-streaming business, as well as the general refocusing of the portfolio
of businesses towards media related businesses. In addition, during Fiscal 2002, Media implemented stricter management controls over
operating expenses. Partially offsetting the general reduction in costs were additional expenses incUlTed with the startup of a newly created
customer service outsourcing operation.
Depreciation and Amortization, Depreciation and amortization expense was $0.1 million in the three months ended April 30, 2002, versus
$0.6 million in the three months ended April 30, 2003. As a percentage of revenues, depreciation and amortization expeDBe increased to
10.9% in the three months ended April 30, 2003, from 2.4% in the three months ended April 30, 2002.
Loss from Operations. Loss from operatioDB in the three months ended April 30, 2002 was $5.0 million, compared to a loss from operations
of$2.3 million in the three months ended April 30, 2003 , reflecting primarily the lower level of selling, general and administrative expenses
resulting from stricter management controls over operating expenses, as well as the refocusillg of the segment's business portfolio towards
media related businesses.
IDT Internet Telephony Segment
The Internet Telephony business segment reflects the results ofNet2Phone, which we reconsolidated effective August 1 2002. Accordingly,
the results of operations for the Internet Telephony segment, which will be detailed below, will contain only references to the three months
ended April 30, 2003. We will not make reference to the three months ended April 30, 2002, as Net2Phone was not consolidated during that
period. As of April 30, 2003, IDT's ownership interest in Net2Phone was approxiinately 18.6%. Accordingly, IDT recorded approximately
81.4% ofNet2Phone s results attributable to the remaining shareholders in the minority interests line of the condensed consolidated
statements of operations. Prior to August 1 , 2002, we accounted for our investment in Net2Phone under the equity method of accounting and
accordingly, such results were included in the equity in loss of affiliates lille of the condensed consolidated statements of operations, For the
three and nine months ended April 30, 2002, our equity in the loss ofNet2Phone was $25.1 million and $41.8 million, respectively.
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Revenues, Net2Phone s revenues are primarily derived from per-minute charges billed to its customers on a prepaid basis and from the saleof Internet telephony equipment and services to resellers and other carriers. Revenues were $19.6 million for the three months ended April 30
2003.
Direct Cost of Revenues. Net2Phone s direct cost of revenues consists primarily of network costs associated with carrying customer traffic
on its network, wholesale costs of Internet telephony devices, ad serving costs and e-mail box hosting fees. It also includes the cost purchasing, storing and shipping Internet telephony equipment. Total direct cost ofrevenues, excluding depreciation and amortization, was$10.0 million in the three months ended April 30, 2003. As a percentage of total revenues, total direct costs was 51.0% in the three months
ended April 30, 2003.
Selling, GeneT"a! and Administrative. Selling, general and administrative expenses consist of employee salaries and benefits, the expensesassociated with acquiring customers, including commissions paid to sales partners, advertising costs, refeITal fees and amounts paid tostrategic partners in connection with revenue-sharing arrangements, and the costs of insurance, legal services, rent, utilities, shipping,consulting and other items. Selling, general and administrative expenses were $12.7 million in the three months ended April 30, 2003. As apercentage of total revenues, these costs were 64.8% in the three months ended April 30, 2003. Net2Phone anticipates that selling, generaland administrative expenses (excluding restructuring, severance and impairment charges) will decrease for the remainder of Fiscal 2003 , as itbenefits from the effects of the restructuring of its operations.
Depreciation and Amortization, Depreciation and amortization expense was $2.3 million in the three months ended April 30, 2003. As apercentage of total revenues, depreciation and amortization expense was 11.7% in the three months ended April 30, 2003.
Non-cash Compensation, Non-cash compensation was $2.7 million in the three months ended April 30, 2003. Net2Phone s non-cashcompensation was primarily attributable to a $1.3 million charge for the amortization of the discount of ADIR shares sold to Net2Phone andADIR employees in Fiscal 2001. The total discount ofapproximately $17.9 million is being amortized over the vesting period of such shares.
Restructuring, Severance and Impairment Charges, Restructuring, severance and impairment charges were $1.7 million in the three months
ended April 30, 2003, resulting primarily from severance incurred for certain former executives ofNet2Phone.
Lossfrom Operations. Net2Phone s loss from operations was $9.8 million in the three months ended April 30, 2003.
Corporate
Our Corporate costs consist of corporate services, such as treasury management costs, corporate governance costs, public relations, corporatemanagement and legal costs, corporate insurance, and other general corporate expenses, as well as depreciation expense on corporate assets.
Such corporate services are shared generally by our other operating segments, and are not allocable to any specific segment. Corporate does
not generate any revenues, nor does it incur any direct cost of revenues.
Selling, General and Administrative. We inculTed $5.9 million in corporate selling, general and administrative expenses in the three months
ended April 30, 2002, compared to $7.8 million incurred in the three months ended Apri130, 2003. The increase is due largely to increasedcosts of litigation against Telefonica and TeITa Networks, S.A. As a percentage of our total consolidated revenues, corporate selling, generaland administrative expenses were 1.5% in the three months ended April 30, 2002, compared to 1.7% in the three months ended April 30
2003.
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Depreciation and Amortization. Depreciation expense decreased :ITom $0.6 million for the three months ended April 30, 2002 to $0.4million for the three months ended April 30, 2003.
Non-cash Compensation, Non-cash compensation charges were $13.7 million in the three months ended April 30, 2003, On April 25, 2003all then outstanding stock options exercisable for shares of our common stock (which were exercisable for an aggregate of 1.9 million shares)were amended to instead be exercisable for an equal nwnber of shares of our Class B common stock. Because these options were originallyrecorded under APB No. 25, a new measurement date was triggered and the options were required to be accounted for under the intrinsic
value method of accounting. Accordingly, we recorded a non-cash compensation charge for the three months ended April 30, 2003 of $13.million for the modification of the options.
Lossfrom Operations. Loss from operations was $6.5 million in the three months ended April 30, 2002, compared to $21.8 million in thethree months ended April 30, 2003, as a result of the higher selling, general and administrative expenses and non-cash compensation noted
above.
Nine Months Ended April 30, 2003 Compared to Nine Months Ended April 30, 2002
Results of Operations
We evaluate the performance of our operating business segments based primarily on income (loss) from operations. Accordingly, certainadjustments are properly not reflected in the operating business segments discussions, but are only reflected in our Consolidated discussion.
Consolidated
Revenues. Our revenues increased 21.0%, from $1 114.9 million in the nine months ended April 30, 2002 to $1 348.8 million in the ninemonths ended April 30, 2003. Excluding revenues :ITom our IDT Solutions segment, which was acquired in December 2001, and our InternetTelephony segment, consisting ofNet2Phone, which was reconsolidated effective August 1 , 2002, our revenues increased 14., from062.6 million in the nine months ended April 30, 2002 to $1 219.5 million in the nine months ended April 30, 2003. The increase in ourconsolidated revenues (excluding our IDT Solutions and Internet Telephony segments) is mainly attributable to a 14.9% increase in IDTTelecoms revenues. The growth in IDT Telecom s revenues primarily resulted from a 47.0% growth in minutes of use (excluding minutesrelated to our consumer long distance business, which are not carried through our own network), from 8.3 billion in the nine months endedApril 30, 2002 to 12.2 billion in the nine months ended April 30, 2003.
Direct Cost of Revenues. Direct cost of revenues increased by 17., from $879.6 million in the nine months ended April 30, 2002 to036.2 million in the nine months ended April 30, 2003. Excluding direct costs of revenues from our IDT solutions and Internet Telephony
segments, direct cost of revenues increased 13.8%, :ITom $817.1 million in the nine months ended April 30, 2002 to $929.7 million in the ninemonths ended April 30, 2003. As a percentage of total revenues, direct costs decreased from 78.9% in the nine months ended April 30, 2002to 76.8% in the nine months ended April 30, 2003 (and decreased from 76.9% to 76.2% excluding our IDT Solutions and Internet Telephonysegments). The decline in direct costs as a percentage of revenues is attributable to overall higher revenues due to the growth of minutes- of-
use and because of continued operating efficiency gains and lower prices from suppliers.
Selling, GenaaZ and Administrative. Selling, general and administrative expenses increased 18., from $266.5 million in the nine monthsended April 30, 2002 to $316.9 million in the nine months ended April 30, 2003. Excluding selling, general and administrative expenses fromour IDT Solutions and Internet Telephony segments, selling, general and administrative expenses increased 2., from $219.4 million in thenine months ended April 30, 2002 to $225.8 million in the nine months ended April 30, 2003, due primarily to the increased sales andmarketing efforts of IDT Telecom as well as increased salaries, facilities costs and professional fees related to the expansion of our
infrastructure and bases of operation to facilitate our current and anticipated future
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growth. As a percentage of total revenues, selling, general and administrative expenses decreased from 23.9% in the nine months ended April, 2002 to 23.5% in the nine months ended April 30, 2003 (and from 20.6% to 18.5% excluding our IDT Solutions and Internet Telephony
segments). Selling, general and administrative expense declined as a percentage of revenues (excluding IDT Solutions and InternetTelephony) due primarily to the significant growth in our revenues for the nine months ended April 30, 2003.
DepI"eciation and Amortization. Depreciation and amortization expense increased 39., from $46.8 million in the nine months endedApril 30, 2002 to $65.3 million in the nine months ended April 30, 2003. Excluding depreciation and amortization expense from our IDTSolutions and Internet Telephony segments, depreciation and amortization expense increased 10., from $43.6 million in the nine monthsended April 30, 2002 to $48.3 million in the nine months ended April 30, 2003, primarily as a result of our higher fixed asset base during thenine months ended April 30, 2003, reflecting the expansion of our telecommunications network infrastructure and facilities. As a percentage
of revenues, depreciation and amortization expense increased from 4.2% in the nine months ended April 30, 2002 to 4.8% in the nine monthsended April 30, 2003 (and decreased from 4.1 % to 4.0% excluding our IDT Solutions and Internet Telephony segments).
Settlement by Net2Phone of Litigation. Gain on settlement by Net2Phone of litigation was $58.0 million for the nine months ended April 302003. Refer to the respective section of the Internet Telephony segment for a full discussion on the gain on settlement by Net2Phone of
litigation.
Non-cash Compensation, Non-cash compensation charges were $23.8 million in the nine months ended April 30, 2003 compared to $2.million in the nine months ended April 30, 2002. Refer to the respective sections of the Telecom, IDT Solutions, Corporate and InternetTelephony segments for a discussion on non-cash compensation charges.
Restructuring, Severance and Impairment Charges. Restructuring, severance and impainnent charges increased from $2.8 million in thenine months ended April 30, 2002 to $9.0 million in the nine months ended April 30, 2003. Refer to the respective sections of the InternetTeleph~ny and IDT Telecom segments for a full discussion on restructuring, severance and impairment charges.
Loss from Operations. Our loss from operations was $83.2 million in the nine months ended April 30, 2002 compared to a loss fromoperations of $44.3 million in the nine months ended April 30, 2003. Excluding the loss from operations of our IDT Solutions and Internet
Telephony segments, our loss from operations was $20.2 million in the nine months ended April 30, 2002, compared to $2.5 million in thenine months ended April 30, 2003. The reduction ill our loss from operations (excluding our IDT Solutions and Internet Telephony segments)
was due primarily to IDT Telecom s increased revenues, gross margins and operating income, partially offset by one-time non-cashcompensation charges.
Interest, Net interest income was $15.5 million in the nine months ended April 30, 2002, compared to net interest income of$21.3 millionin the nine months ended April 30, 2003.
Other Income (Expense). Other income (expense) amounted to an expense of $50.1 million in the nine months ended April 30, 2002compared to income of $3.3 million in the nine months ended April 30, 2003. Included in other income in the nine months ended April 302003, were losses of $3.8 million associated with recording our pro-rata share of an affiliate s losses, through the equity method ofaccounting, a charge of$4.7 million related to an obligation to guarantee to AT&T the value of 1.4 million shares ofIDT Class B commonstock owned by AT&T, and net losses from other investments totaling $10.4 million.
On April 17, 2003 , a subsidiary of Liberty Media purchased from IDT Media 88.235 newly-issued shares ofIDT Media s Class A commonstock, at a price of $283 334 per share, representing an aggregate cash purchase price of $25.0 million. In connection with this sale, werecognized a gain of $22.4 million during the nine months ended April 30, 2003.
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Included in other expense in the nine months ended April 30, 2002 were losses of $41.8 million associated with recording our pro-rata shareofNet2Phones net losses through the equity method of accounting, a charge of$3.7 million related to an obligation to guarantee to AT&Tthe value of 1.4 million shares of IDT Class B common stock owned by AT&T, and net losses from other investments totaling $4.6 million.
Minority Interests. Minority interests were $15.5 million and $47.0 million for the nine months ended April 30, 2002 and 2003respectively. The $31.5 million increase in minority interests was primarily attributable to the reconsolidation ofNet2Phone, ofwbich we own18.6% as of April 30, 2003. Accordingly, we recorded in minority interests the percentage ofNet2Phone s results attributable to theremaining shareholders ofNet2Phone (81.4% as of April 30, 2003).
Income Taxes.We recorded an income tax benefit of$55.2 million in the nine months ended April 30, 2002, compared to an income tax
benefit of $40.8 million in the nine months ended April 30, 2003.
Cumulative Effect of Accounting Change. In accordance with our adoption of SF AS No. 142, as of August 1 2001, we perfonned therequired impairment tests of goodwill and recorded an impairment charge of$147.0 million, net of income taxes of$3.5 million, for the ninemonths ended April 30, 2002. The impairment charge was recorded as a cumulative effect adjustment of a change in accounting principle. No
such charges were recorded during the nine months ended April 30, 2003.
Net Loss. Our consolidated net loss, after the cumulative effect adjus1ment of a change in accounting principle detailed above, was $225.million in the nine months ended April 30, 2002 compared to consolidated net loss of $25.9 million in the nine months ended April 30, 2003.The recording of a net loss in the nine months ended April 30, 2002 and 2003, was a result of the combined factors for each of the segmentsdiscussed below, as well as those items detailed above.
Revenues,
IDT Telecom-Retail Telecommunications Services and Wholesale Telecommunications Services Segments
IDT Telecom s revenues increased 14., from $1 047.0 million in the nine months ended April 30, 2002 to $1 203.0 million inthe nine months ended April 30, 2003.
IDT Telecom s revenues increased primarily as a result of a 47.0% growth in minutes of use (excluding minutes related to our consumer longdistance business, which are not carried through our own network) from 8.3 billion in the nine months ended April 30, 2002 to 12.2 billion inthe nine months ended April 30, 2003. IDT Telecom experienced growth in minutes of use in both its.Retail Telecommunications Servicesand Wholesale Telecommunications Services segments, in both the U.S. and international operations. IDT Telecom s minutes of use grew at afaster rate than did its revenues, reflecting a decline in its average revenue-per-minute, from $0.116 during the nine months ended April 302002 to $0.088 in the nine months ended April 30, 2003. IDT Telecom s decrease in its average revenue-per-minute is due to a number offactors, including (i) continued competition in both retail and wholesale markets, and (ii) introduction of new calling cards.
Revenues from IDT Telecom s Retail Telecommunications Services segment increased $89.4 million, or 10., from $825.5 million in thenine months ended April 30, 2002 to $914.9 million in the nine months ended April 30, 2003. This growth was largely the result ofa $54.5million increase in sales ofIDT-branded calling cards and a $34.7 million increase in consumer long distance revenues. A1:. a percentage ofIDT Telecom s overall revenue, Retail Telecommunications Services' revenues decreased from 78.8% in the nine months ended April 302002 to 76.1 % in the nine months ended April 30, 2003, as revenues from our Wholesale Telecommunications Services segment grew at a
faster rate than did our retail businesses revenues. IDT Telecom s calling card sales increased 7., from $745.5 million in the nine monthsended April 30, 2002 to $800.0 million in the nine months ended April 30, 2003, fueled by the introduction of several new calling cards.
Calling card sales as a percentage ofIDT Telecom s Retail Telecommunications Services revenues decreased from 90.3% in the nine monthsended April 30, 2002 to 87.4% in the nine months ended April 30
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2003, as revenues from consumer long distance services grew at a faster rate than did calling card revenues. Revenues from consumer long
distance services, in which we act as a switchless reseller of another company s network, experienced significant growth in minutes of use inthe nine months ended April 30, 2003 , with revenues increasing 45., from $78.2 million in the nine months ended April 30, 2002 to $113.million in the nine months ended April 30, 2003. The consumer long distance revenue increase is attributable to the continued growth of our
flat-rate, $0.05 a minute long distance calling plan, which has been driven by increased marketing expenditures, resulting in a significantincrease in the number of consumer long distance customers.
Revenues from IDT Telecom s other Retail Telecommunications Services businesses, consisting primarily of call reorigination servicesamounted to $1.9 million in the nine months ended April 30, 2002, versus $1.0 mi11ion in the nine months ended April 30, 2003.
illT Telecom s Wholesale Telecommunications Services revenues increased 30.1 %, from $221.5 million in the nine months ended April 302002 to $288.2 million in the nine months ended April 30, 2003. As a percentage ofIDT Telecom s total revenues, WholesaleTelecommunications Services revenues increased from 21.2% in the nine months ended April 30, 2002 to 24.0% in the nine months endedApril 30, 2003. The increase in revenues occurred as a result of an increase in wholesale carrier minutes, despite a significant decline in theaverage revenue-per-minute.
Direct Cost of Revenues, Direct cost of revenues for IDT Telecom increased 13., from $815.3 million in the nine months ended April 302002 to $928.3 million in the nine months ended April 30, 2003, due to the higher revenue and minutes base. As a percentage oftatal IDTTelecoms revenues, direct costs declined to 77.2% in the nine months ended April 30, 2003, from 77.9% in the nine months ended April 302002. The decrease in direct costs as a percentage of total revenues is attributable to overa11 higher revenues due to the strong
growth ofminutes-of-use and because of continued operating efficiency gains and lower prices from suppliers. The decrease in direct costs as apercentage of total revenues occurred despite the lower revenue per minute price realization and despite
increases in our costs for to11-free800" traffic, and network related costs, due to our strong growth of minutes- of-use.
Selling, General and Administrative. illT Telecom s selling, general and administrative expenses increased 5.1 %, from $172.9 million inthe nine months ended April 30, 2002 to $181.7 million in the nine months ended April 30, 2003. The increase in selling, general andadministrative expenses for IDT Telecom s operations is due to several factors, including increased sales and marketing efforts for our RetailTelecommunications Services segment, such as calling cards and consumer long distance, as well as increased salaries, facilities costs andprofessional fees related to the expansion of our infrastructure and bases of operation to facilitate our current and anticipated future sales
growth. As a percentage ofIDT Telecom s total revenues, se11ing, general and administrative expenses were 16.5% in the nine months ended
April 30, 2002, compared to 15.1 % in the nine months ended Apri130, 2003.
Depreciation and Amortization. IDT Telecom s depreciation and amortization expense rose 16., from $39.4 million in the nine monthsended April 30, 2002, to $45.8 million in the nine months ended April 30, 20Q3, reflecting the continued expansion of our fixed asset base, aswe invest to accommodate our current and anticipated future growth. As a percentage ofIDT Telecom s total revenues, depreciation andamortization expense was 3.8% in the nine months ended April 30, 2002 and 2003.
Non-cash Compensation. IDT Telecom recorded non-cash compensation of $2.5 million in the nine months ended April 30, 2003, primarilyattributable to the modification of stock option agreements of certain terminated employees.
RestructU7-ing, Severance, and Impairment Charges. Impairment charges of $2.8 million and $1.5 mi11ion were recorded by IDT Telecomduring the nine months ended April 30, 2002 and 2003, respectively, resulting primarily from the write down of certain decommissioned
European telecommunications switch equipment, and the write-off of a discontinued Indefeasible Right of Use ("IRU"), respectively.
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lncomefrom Operations. IDT Telecom recorded income from operations of$16.7 million in the nine months ended April 30, 2002compared to income from operations of$43.4 million in the nine months ended April 30, 2003. The increase in income from operationsresulted primarily from the revenue growth and improved gross margins.
IDT Solutions Segment
We acquired the assets currently held by Winstar on December 19, 2001. Accordingly, the results of operations for our IDT Solutionssegment, which operates through Winstar, for the nine months ended April 30, 2002, reflect only the results of operations during such period
that we owned and operated Winstar.
Revenues, Revenues from IDT Solutions increased 26., from $52.3 million in the nine months ended April 30, 2002 to $65.9 million inthe nine months ended April 30, 2003. The increase in revenues is due to the fact that the Winstar assets were acquired in December 2001and therefore generated revenues for only a portion of the nine months ended April 30, 2002.
Direct Cost of Revenues. Direct cost of revenues for IDT Solutions increased 17., from $62.5 million in the nine months ended April 302002 to $73.5 million in the nine months ended April 30, 2003. The increase in direct cost of revenues is due to the fact that the Winstarassets were acquired in December 2001 and therefore generated revenues and costs for only a portion of the nine months ended April 302002. Direct cost of revenues consist primarily of tWo components, connectivity for the network backbone and lease payments for the networkof provision-ready buildings. Network backbone costs for the nine months ended April 30, 2003 totaled $51.0 million, accounting for 69.4%of total direct cost of revenues. Direct cost of revenues for the nine months April 30, 2003 associated with lease payments for the building
network were $22.0 million.
Selling, General and Administrative. Selling, general and administrative expenses of IDT Solutions increased 6.4%, from $47.1 million in. the nine months ended April 30, 2002 to $50.1 million in the nine months ended April 30, 2003. The increase is due to the fact that theWins tar assets were acquired in December 2001 and therefore generated revenues and expenses for only a portion of the nine months ended
April 30, 2002. The main component of selling, general and administrative expenses for the nine months ended April 30, 2003 was employeecompensation and benefits, accounting for $35.6 million, or about 71.1 % of total selling, general and administrative expenses.
Depreciation and Amortization. Depreciation and amortization expense increased 197., from $3.3 million in the nine months endedApril 30, 2002 to $9.8 million in the nine months ended April 30, 2003. The increase is due to the fact that the Winstar assets were acquiredin December 2001 , and therefore depreciation on such assets was only recorded for a portion of the nine months ended April 30
2002. As apercentage ofIDT Solutions revenues, depreciation and amortization was 6.3% in the nine months ended April 30, 2002 compared to 14.in the nine months ended April 30, 2003.
Non-cash Compensation. IDT Solutions recorded non-cash compensation of $2.3 million in the nine months ended April 30, 2002attributable to the modification of stock option agreements of certain terminated employees.
Lossfrom Operations. IDT Solutions' loss from operations in the nine months ended April 30 , 2002 was $63.0 rmllion, compared to $67.million in the nine months ended April 30, 2003. The increase in loss from operations is primarily attributable to the increase in selling,
general and administrative expenses and in depreciation and amortization, as the nine months ended April 30, 2002 reflect only the results ofoperations during such period that we owned and operated Winstar.
Media Segment
Revenues. Revenues from the Media segment increased 5., from $15.6 million in the nine months ended April 30, 2002 to $16.5 millionin the nine months ended April 30, 2003. In Fiscal 2002, Media gradually exited its DSL business. Cun-endy, Media s revenues are primarilycomprised of revenues from CTM.
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Db'eet Cost of Revenues. Direct cost of revenues decreased from $1.8 million in the nine months ended April 30, 2002 to $1.5 million in thenine months ended April 30, 2003. As a percentage of Media s revenues, direct cost of revenues decreased from 11.5% in the nine monthsended April 30, 2002 to 9.1 % in the nine months ended April 30, 2003. Most of Media s businesses remain in the early stages of theirdevelopment. As such, we anticipate that direct costs will continue to account for a relatively small percentage of Media s revenues, with mostof the expenses associated with these businesses to be incurred in the form of selling, general, administrative and development costs.
Selling, General and Administrative. Selling, general and administrative expenses decreased 30.1 %, from $28.9 million in the nine monthsended April 30, 2002 to $20.2 million in the nine months ended April 30, 2003. The decrease in selling, general, and administrative expensesreflect the exit from the DSL Internet access business and from the video-streaming business, as well as the general refocusing of the portfolioof businesses towards media related businesses. In addition, during Fiscal 2002, Media implemented stricter management controls overoperating expenses. Partially offsetting the general reduction in costs were additional expenses incurred with the startup of a newly created
customer service operation.
Depreciation and Amortization. Depreciation and amortization expense was $2.2 million in the nine months ended April 30, 2002, versus$1.2 million in the nine months ended April 30, 2003. This decrease is due to the reduced fixed asset base resulting from our sale of ourformer DSL business. As a percentage of revenues, depreciation and amortization expense fell to 7.3% in the nine months ended April 302003, from 14.1 % in the nine months ended April 30, 2002.
Loss from OpeT"ations. Loss from operations in the nine months ended April 30, 2002 was $17.2 million, compared to a loss from operationsof$6.4 million in the nine months ended April 30, 2003, reflecting the lower level of selling, general and administrative expenses resultingfrom stricter management controls over operating expenses, as well as the refocusing of the segment's business portfolio towards media
related businesses.
IDT Internet Telephony Segment
The Internet Telephony business segment reflects the results ofNet2Phone, which was reconsolidated effective August 1 , 2002. Accordingly,the results of operations for our Internet Telephony segment, consisting ofNet2Phone, will contain only references to the nine months endedApril 30, 2003, during which we reconsolidated Net2Phone. We will not make reference to the results for the nine months ended April 30
2002, as Net2Phone was not consolidated during that period.
Revenues. Revenues were $63.4 million for the nine months ended April 30, 2003. During the nine months ended Apri130, 2003Net2Phone has concentrated its marketing and sales efforts towards building up activities to generate revenues in relatively high-marginservices, such as international communications services, during the upcoming periods.
Direct Cost of Revenues. Total direct cost of revenues, excluding depreciation and amortization, was $33.0 million in the nine months endedApri130, 2003. As a percentage of total revenues, total direct costs was 52.1 % in the nine months ended April 30, 2003.
Selling, General and Administrative. Selling, general and administrative expenses were $41.0 million in the nine months ended April 30
2003. As a percentage of total revenues, these costs were 64.7% in the nine months ended April 30, 2003.
Depreciation and Amortization. Depreciation and amortization expense was $7.2 million in the nine months ended April 30, 2003. As apercentage of total revenues, depreciation and amortization expense was 11.4% in the nine months ended April 30, 2003.
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Settlement by Net2Phone of Litigation. Gain on settlement by Net2Phone of litigation was $58.0 million in the nine months ended April 302003. On March 19 2002 Net2Phone and its ADIR Technologies, Inc. subsidiary filed suit in the United States District Court for the Districtof New Jersey against Cisco Systems, Inc. and a Cisco executive who had been a member of ADIR's board of directors. The suit arose out ofthe relationships that had been created in connection with Cisco s and Net2Phone s original investments in ADIR and out of ADIR'subsequent purchase of NetS peak, Inc. in August 2001. The parties settled the suit and all related claims against Cisco and the Cisco
executive in exchange for: (i) the transfer, during the first quarter of Fiscal 2003, to Net2Phone of Cisco s and Softbank Asia InfrastructureFund's respective 11.5% and 7.0% interests in ADIR, and (ii) the payment by Cisco, during such quarter, of$19.5 million to Net2Phone andADIR. As a result of this settlement, Net2Phone recognized for the quarter ended October 31 , 2002, a gain of $58.4 million consisting of (i) a$38.9 million reduction in Net2Phone s minority interests in ADIR as a result of the transfer of the ADIR shares and (ii) the receipt
settlement proceeds of $19.5 million. During the second quarter of Fiscal 2003, Net2Phone recorded an additional $0.4 million in executive
compensation expense directly related to the Cisco settlement.
Non-cash Compensation. Non-cash compensation was $7.1 million in the nine months ended April 30, 2003. Net2Phone s non-cashcompensation primarily resulted from a charge of $1.0 million relating to repriced options which are subject to variable accounting treatment
and therefore must be marked-to-market each quarter, and a charge of $3.8 million for the amortization of the discount of ADIR shares sold to
Net2Phone and ADIR employees in Fiscal 2001.
Restructuring, Severance and Impairment Charges. Restructuring, severance and impairment charges were $7.6 million in the nine monthsended April 30, 2003 , resulting primarily from severance of $3.2 million, relating to the consolidation in the fIrst quarter of Fiscal 2003 Net2Phone s development and support organizations. In addition, Net2Phone recorded $3.0 million ofseverance costs for certain formerexecutives, $1.9 million of asset impairment charges, and $1.8 million of costs to exit various locations and eliminate network buildouts.These costs were partially offset by Net2Phone s reversal of a reserve related to successful settlement negotiations with vendors regarding
cancellation charges.
The following table summarizes the charges included in restructuring, severance and impairment charges in the condensed consolidated
statements of operations:
Incomefrom Ope7'ations. Income from Net2Phone s operations was $25.7 million in the nine months ended April 30, 2003. Excluding $7.million ofrestructuring, severance and impairment charges and a $58.0 million gain from the settlement by Net2Phone of litigation
Net2Phone s loss from operations in the nine months ended April 30, 2003 was $24.7 million.
Corporate
Our Corporate costs consist of corporate services, such as treasury management costs, corporate governance costs, public relations, corporatemanagement and legal costs, corporate insurance, and other general corporate expenses, as well as depreciation expense on corporate assets.Such corporate services are shared generally by our other operating segments, and are not allocable to any specific segment. Corporate does
not generate any revenues, nor does it incur any direct cost of revenues.
Selling, General and Administrative. We incurred $17.6 million in corporate selling, general and administrative expenses in the nine months
ended April 30, 2002, compared to $23.9 million incurred in the nine months ended April 30, 2003. The increase is due largely to increasedcosts of litigation against Telefonica and Terra Networks, S.A. As a percentage of our total consolidated revenues, corporate selling, generaland administrative expenses were 1.6% in the nine months ended April 30, 2002 , compared to 1.8% in the nine months ended April 30, 2003.
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Depreciation and Amortization. Depreciation expense decreased from $2.0 million for the nine months ended April 30, 2002 to $1.3 millionfor the nine months ended April 30, 2003.
Non-cash Compensation. Non-cash compensation charges were $14.2 million ill the nine months ended April 30, 2003. On April 25 , 2003all then outstanding options exercisable for shares of our common stock (which were exercisable for an aggregate of 1.9 million shares) wereamended to instead be exercisable for an equal number of shares of our Class B common stock. Because these options were originallyrecorded under APB No. 25, a new measurement date was triggered and the options were required to be accounted for under the illtrinsic
value method of accounting. Accordingly, we recorded a non-cash compensation charge for the nine months ended April 30, 2003 of $13.million for the modification of the options. In addition, we recorded $0.5 million of non-cash compensation attributable to shares of Class B
common stock that we issued to an outside consultant.
Loss from Operations. Loss from operations was $19.6 million in the nine months ended April 30, 2002, compared to $39.4 million ill thenine months ended April 30, 2003, as a result of the higher selling, general and administrative expenses and non-cash compensation noted
above.
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 debtsecurities and bolTowings fi:om third parties. Additionally, we received approximately $1.0 billion from the sale ofNet2Phone Class Acommon stock to AT&T in August 2000. Since that time, our cash requirements have been satisfied for the most part through our existing
cash, cash equivalents and marketable securities balances.
As of April 30, 2003, we had cash, restricted cash, cash equivalents, and marketable securities of $1.1 billion, which includes $102.0 millionheld by Net2Phone, and working capital of$808.l million. We generated cash flow from operating activities of$12.8 million during the ninemonths ended April 30, 2003 , compared with cash flow from operating activities of $16.2 million during the nine months ended April 30
2002. Our cash flow from operations varies significantly from quarter to quarter and from year to year, depending on the timing of operatingcash receipts and payments, especially trade accounts receivable and trade accounts payable. Gross trade accounts receivable, accruedexpenses and defelTed revenue have generally increased from period to period as our businesses have grown.
We used $120.1 million ill cash to fund investing activities during the nine months ended April 30, 2003. This compares to net cash flowsused in investing activities of $384.2 million during the nine months ended April 30, 2002. The primary use of cash for investing activitiesduring the nine months ended April 30, 2003 was for the net purchases of $92.6 million of marketable securities (primarily V.S. GovernmentAgency Obligations). Our capital expenditure investments were approximately $51.4 million in the nine months ended April 30, 2003compared to approximately $28.3 million in the nine months ended April 30, 2002, as we have continued to expand IDT Telecominternational and domestic telecommunications network infrastructure. The future minimum payments of principal and interest on our capital
lease obligations are $8.3 million, $26.4 million, $16.6 million, $13.0 million, $3.1 million, and $2.4 million for the remainder of Fiscal 2003Fiscal 2004, Fiscal 2005, Fiscal 2006, Fiscal 2007, and thereafter, respectively. Throughout Fiscal 2003 to date, we have made considerableexpenditures designed to expand our global telecommunications network. Key elements of our network expansion plan for Fiscal 2003 to date
included the addition of a second international gateway switch in the UK and another international gateway switch in the V.S. We nowoperate a total of nine international gateway switches, broken down as follows: five in the V., two in the UK and one each in Argentina andPeru. Over the remainder of Fiscal 2003, IDT anticipates making additional expenditures to expand our calling card platfonn in the u.S. andto upgrade our network in South America. For the full 2003 fiscal year, we anticipate capital expenditures in the $60 million to $70 million
range. We anticipate further expansion of our worldwide
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switching network in Fiscal 2004, with the addition of at least one international gateway switch in each of the U.S. and UK. portions of ournetwork. In addition, we anticipate making further expenditures to bolster our network infrastructure in South America and Asia. We currently
anticipate that capital expenditures for Fiscal 2004 will be in the $50 million to $75 million range. These estimates are contingent uponseveral factors , including, but not limited to, market prices for telecommunications equipment, the availability of such equipment in thedistressed asset market and the specific timing of our network expansion projects. We have generally adopted a strategy of investing innetwork expansion only as the need arises, as dictated by our telecommunications traffic volumes. Therefore, the timing of our networkexpansion, and the coincident purchases of property, plant and equipment, are highly dependent upon the timing and magnitude of the growthin our telecommunications minutes-of-use. We expect to fund our purchases of property, plant and equipment from our operating cash flows
and our cash, cash equivalents and marketable securities balances. From time to time, we will also finance a portion of our capitalexpenditures through capital leases, with the cost of such financing the primary consideration in determining our fmancing activity.
Our Board of Directors has authorized the repurchase of up to 45 million shares of our common stock and Class B common stock. We haverepurchased a total of 15.6 million shares under the share repurchase program through Fiscal 2002, of which 6.2 million shares were retired as
of July 31 , 2002. No additional shares were purchased or retired during the nine months ended April 30, 2003.
We used $0.5 million in cash to fund our fmancing activities during the nine months ended April 30, 2003, compared to $29.8 million in cashflow that was provided by our fInancing activities during the nine months ended April 30, 2002. We received approximately $10.0 million inproceeds from the exercise of stock options during the nine months ended April 30, 2003, compared to $44.5 million received during the ninemonths ended April 30, 2002. In addition, we received proceeds of $25.0 million during the nine months ended April 30, 2003 from the saleof shares of our IDT Media subsidiary stock, compared to $30.0 million received during the nine months ended April 30, 2002 from the saleof shares of our IDT Telecom subsidiary stock. We also paid $15.6 million to repurchase IDT shares during the nine months ended April 30
2002, through our stock buyback program, mentioned above.
We experience intense price competition in our telecommunications businesses. The long distance telecommunications industry has beencharacterized by significant declines in both per-minute revenues and per-minute costs, as evidenced by IDT Telecom s experience duringFiscal 2002 and the nine months ended April 30, 2003. During the nine months ended April 30, 2003, IDT Telecom s average revenue-per-minute was $0.088 per minute, down 24.1 % from $0.116 per minute for the nine months ended April 30, 2002. However, IDT Telecomaverage termination cost per-minute dropped approximately 21., to $0.075 in the nine months ended April 30, 2003 , from $0.096 in thenine months ended April 30, 2002.
In the past, and over time, we believe that these factors tend to offset each other, with prices and costs moving in the same general direction.However, over a shOlier term, such as one quarter or one year, the drop in pricing could outpace the drop in costs, or vice versa. In additiondue to continued pricing pressure in most of the retail and wholesale markets in which we compete, we might be compelled to pass along mostor all of our per-minute cost savings to our customers in the form of lower rates, We might also be unable, in the event that some of our per-minute costs rise, to immediately pass along the additional costs to our customers in the form of higher rates. Consequently, over any givenperiod, gross margins could expand or nan-ow, based solely on the timing of changes in revenue-per-minute and cost-per-minute. Our long-term strategy involves terminating a larger proportion of minutes on our own network, thereby lowering costs and preserving margins even ina weaker price environment, as we become less subject to the prices charged by third-parties for terminating our minutes over their networks.In addition, as our minutes-of-use have steadily grown, we have attempted to leverage our buying power and our strong balance sheet to
negotiate more favorable rates with our suppliers. However, in the short term, the incremental demand for usage might outpace the rate of
deployment of additional network capacity, particularly in light of our expectation for continued growth in our minutes volume. As such, therecan be no assurance that we will be able to maintain our gross margins at the current level, in the face oflower per-minute revenues.
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We continued to fund our IDT Media segment throughout the first nine months of Fiscal 2003, incurring significant start-up, developmentmarketing and promotional costs. Due to the start-up nature of many of the IDT Media businesses, the exact timing and magnitude of futurerevenues remains difficult to predict. As such, we anticipate that IDr Media will continue to rely on us to fund its cash needs, includingoperating expenses, capital expenditures and potential acquisitions. Currently, IDr Media is aggressively pursuing acquisitions and/or other
investments, primarily in its radio and animation business lines.
On April 17, 2003 , a subsidiary of Liberty Media purchased uom IDr Media 88.235 newly-issued shares of IDr Media s Class A commonstock, at a price of $283 334 per share, representing an aggregate cash purchase price of$25.0 million. We may continue to look to outsideinvestors to fund IDT Media s ongoing expansion, which may include similar transactions occuning in future years.
Since our acquisition of the Wins tar assets in December 2001, the IDT Solutions segment has experienced working capital deficits. We haveundertaken significant cost saving measures and restructured IDr Solution s operations, which included the downsizing of the Winstarnetwork and a significant reduction in headcount, aimed at reducing the working capital deficit. However, at this time, IDT foresees that itwill be required to continue funding IDT Solution s operating losses and capital expenditure needs for the foreseeable future.
Changes in Other Current Assets, Trade Accounts Receivable, Allowancefor Doubtful Accounts and Deferred Revenue
Our other CUlTent assets increased from $65.3 million at July 31 2002 to $88.2 million at April 30, 2003, due primarily to our reconsolidationofNet2Phone, as well as increases in inventories, and other receivables. Gross trade accounts receivable increased from $165.0 million atJuly 31 2002 to $172.1 million at April 30, 2003, reflecting primarily the increase in revenues and our reconsolidation ofNet2Phone. Theaverage age of our gross accounts receivable, as measured by number of days sales outstanding, has remained constant during the fIrst nine
months of Fiscal 2003.
Due to the wide range of collection terms, future trends with respect to days sales outstanding generally depends on the proportion of totalsales made to carriers, who are often offered payment terms of 30 days or more, and prepaid calling card distributors, who generally receivepayment terms ofless than 30 days. As such, the trends in days sales outstanding will depend, in large part, on the mix of wholesale (carrier)versus retail (prepaid calling card distributor) customers. As we anticipate that in the near term we will attempt to continue to secure shorterpayment terms from some of our customers, we could experience declines in the average age of our trade accounts receivable throughout the
remainder of Fiscal 2003. Conversely, as we are willing to extend longer payment terms to more credit-worthy customers, an increase incustomers belonging to the highest credit classes, as a percentage of total customers, could lead to an increase in days sales outstanding. Inaddition, if we restricted sales to financially unstable customers, regardless of the credit terms, the proportion of higher-credit class customerswill increase further, potentially leading to an increase in the average days sales outstanding. In addition, days sales outstanding for ourconsumer long distance customers is usually longer than 30 days, given the timing of the billing cycle. As the consumer long distance businesscontinues to grow and to represent a larger portion of our retail telecomm1.1I1ications services revenues and receivables, we expect that totalretail days sales outstanding should increase accordingly. Therefore, due to the conflicting nature of the above factors, future trends in dayssales outstanding remain difficult to predict, and it is not possible at this time to deternrine whether recent trends in days sales outstanding will
continue.
The allowance for doubtful accounts as a percentage of gross trade accounts receivable decreased uom 23.6% at July 31 2002, to 22.6% atApril 30, 2003, primarily as a result of our writing-off, against the allowance for doubtful accounts, certain uncollectible trade accountsreceivable uom our consumer long distance business.
DefeITed revenue as a percentage of total revenues vary uom period to period, depending on the mix and the timing ofrevenues. During thefIrst nine months of Fiscal 2003, we experienced a steady increase in sales of our
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calling cards due to increased marketing efforts for existing IDT calling cards and the continued strong growth of our European calling cardoperations. This resulted in a continued increase in deferred revenue. Deferred revenue also increased as a result of our reconsolidation ofNet2Phone. We expect to experience increases in our deferred revenue throughout the remainder of Fiscal 2003, owing to a continuedincrease in calling card sales.
Significant Transactions
On October'23 , 2001 , IDT, Liberty Media and AT&T formed a limited liability company ("LLC"), which through a series of transactionsamong IDT, Liberty Media and AT&T held an aggregate of28.9 million shares ofNet2Phone s Class A common stock, representingapproximately 48% ofNet2Phone s outstanding capital stock. Because the LLC holds Class A common stock with two votes per share, theLLC has approximately 65% of the shareholder voting power in Net2Phone. IDT holds the controlling membership interest in the LLC and isthe managing member of the LLc. The operating agreement of the LLC provides unilateral liquidation rights to each of its members wherebyany member of the LLC may cause the LLC to liquidate and dissolve by providing written notice at any time on or after January 1, 2004 to theother LLC members of its desire to cause such liquidation and dissolution. Since the LLC can be liquidated and dissolved at any time on or
after January 1 2004, our control of the LLC is deemed to be temporary. Accordingly, through July 31 2002, we accounted for ourinvestment in the LLC using the equity method.
Pursuant to the operating agreement of the LLC, AT&T received 29 Class A units of the LLC, and had the right to put 6 of these units to IDTand 23 of these units to Liberty Media after one year. On October 29, 2002, AT&T exercised its put rights and sold all of its Class A units toIDT and Liberty Media for a nominal amount. As a result of this transaction, AT&T is no longer a member of the LLC. IDT continues to hold
the controlling membership interest in the LLC and is the managing member of the LLC. As of April 30, 2003, IDT's effective equityinvestment in Net2Phone (through the LLC) was 18.6%. Accordingly, we recorded in minority interests the 81.4% ofNet2Phone s resultsattributable to the remaining shareholders ofNet2Phone.
On April 17, 2003, a subsidiary of Liberty Media purchased from IDT Media 88.235 newly-issued shares ofIDT Media s Class A commonstock, at a price of $283 334 per share, representing an aggregate cash purchase price of $25.0 million. As a result of this sale of subsidiarystock, our ownership percentage in IDT Media decreased from 100% to 94.4%. We have historically accounted for sales of stock of oursubsidiaries in accordance with Staff Accounting Bulletin No. 51 Accountingfor Sales of Stock by a SubsidialY, which pennits us to recordthe excess of our carrying value in the equity of our subsidiaries as a gain. Accordingly, in connection with this sale, we recognized a gain of
$22.4 million.
On April 25, 2003, all then outstanding stock options exercisable for shares of our common stock (which were exercisable for an aggregate of
9 million shares) were amended to instead be exercisable for an equal number of shares of our Class B common stock. Because theseoptions were originally recorded under APB No. 25, a new measurement date was triggered and the options were required to be accounted forunder the intrinsic value method of accounting. As a result, we recorded a non-cash compensation charge for the three and nine months endedApri130, 2003 of$13.7 million for the modification of the options. In addition, on April 25 , 2003, the Board of Directors also authorized thatall shares of Class B cornmon stock held as treasury stock be allocated for issuance in connection with the above transaction.
Other Sources and Uses of Resources
We intend to, where appropriate, make strategic acquisitions to expand our telecommunications businesses. These acquisitions could include
but are not limited to, acquisitions of telecommunications equipment, telecommunications network capacity, customer bases or other assets.From time to time, we evaluate potential acquisitions of companies, technologies, products and customer accounts that complement ourbusinesses, particularly in light of the fmancial distress currently being encountered by many telecommunications finns. These conditions
have resulted in the availability for sale of numerous strategic assets and businesses. We will
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also consider making appropriate acquisitions that would complement our Media segment's portfolio of businesses. Consequently, we usedapproximately $10.3 million of our cash during the nine months ended April 30, 2003, to acquire various investments in other companiescompared to $78.4 used during the nine months ended April 30, 2002. We will continue to evaluate acquisition opportunities as they are madeavailable to us. In considering acquisitions, we will search for opportunities to profitably grow our existing businf;:sses, to add qualitatively tothe range of businesses in the IDT portfolio, and to supplement our existing network expansion plans through the timely purchase from thirdparties of necessary equipment. At this time, we cannot guarantee that we will be presented with acquisition opportunities that meet our return
on investment (ROT) criteria, or that our efforts to acquire such companies that meet our criteria will be successful.
We believe that, based upon our present business plan, and due to the large balance of cash, restricted cash, cash equivalents and marketablesecurities we held as of April 30, 2003, our existing cash resources will be sufficient to meet our cUITently anticipated working capital andcapital expenditure requirements and to fund any potential operating cash flow deficits within any of our divisions for at least the next twelvemonths. If our growth exceeds CUITent expectations or if we acquire the business or assets of another company, we might need to raiseadditional capital from equity or debt sources. There can be no assurance that we will be able to raise such capital on favorable tenus or at all.If we are unable to obtain such additional capital, we may be required to reduce the scope of our anticipated expansion, which could have a
material adverse effect on our business, financial condition and/or results of operations.
The following tables quantify our future contractual obligations and other commercial commitments, which consist primaJ.ily of capital andoperating leases and standby letters of credit as of April 30, 2003 (in millions):
Capital lease obligations
Operating leases
Other long-term ob1igations(1)
Total contractual cash obligations
Contractual Obligations
Payments Due by Period
Less than After 5Total1 year 3 years 5 years
$ 69.27.$ 30.$ 10.1.2442.87.108.90.156.
22.17.
$535.$ 120.$138.$118.$157.
(1) Consists of (i) our $5.3 million obligation to guarantee to AT&T the value of 1.4 million shares ofIDT Class B common stock ownedby AT&T and (ii) Net2Phone s $17.2 million obligation to guarantee the value of 0.6 million shares ofNet2Phone s common stock tocertain former shareholders of Ap1io.
Other Commercial Commitments
Payments Due by Period
Total commercial commitments
Less than
Total 1 year
$31.
$34.2.4
3 years
$ 7.
5 years
$ 20.
After 5
1.2
Standby letters of credit
Guarantees
$ 7.$ 20.$ 4.
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Foreign CU7-rency Risk
Revenues from our international operations accounted for approximately 20% of our consolidated revenues for the nine months ended April2003. A significant portion of these revenues are in denominations other than the U.S. Dollar. AI1y foreign cUlTency exchange risk that weare subject to is mitigated by our ability to offset the majority of these non dollar-denominated revenues with operating expenses that are paidin the same currencies. As such, the net amount of our exposure to foreign cUlTency exchange rate changes is not material.
Recently Issued Accounting Pronouncements
In April 2003, the FASB issued SPAS No. 149 Amendment of Statement 133 on De/7.vative Instruments Hedging Activities. This statementamends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and forhedging activities under SF AS No. 133. The new guidance amends SF AS No. 133 for decisions made: as part of the Derivatives
Implementation Group process that effectively required amendments to SF AS No. 133; in connection with other FASB projects dealing withfinancial instruments; and regarding implementation issues raised in relation to the application of the defInition of a derivative, particularlyregarding the meaning of an "underlying" and the characteristics of a derivative that contains financing components.
SPAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussedin SPAS No. 133. In addition, it clmifies when a derivative contains a fmancing component that warrants special reporting in the statement of
cash flows. SF AS No. 149 amends certain other existing pronouncements. These changes will result in more consistent reporting of contractsthat are derivatives in their entirety or that contain embedded derivatives that warrant separate accounting.
The provisions of this standard are effective for contracts entered into or modified after June 30 2003, and for hedging relationshipsdesignated after June 30, 2003. The provisions of this statement that relate to SF AS No. 133 implementation issues that have been effectivefor fiscal quarters that began prior to June 15 2003 should continue to be applied in accordance with their respective effective dates. In
addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist should beapplied to existing contracts as well as new contracts entered into afterJune 30, 2003. We believe that the adoption of this standard will not
have a material impact on our results of operations or financial position.
In May 2003, the FASB issued SF AS No. 150 Accountingfor Certain Financial Instruments with Characteristics of both Liabilities and
Equity. SPAS No. 150 affects the issuer s accounting for three types of freestanding fmancial instruments. One type is mandatorily
redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type, which mcludesput options and forward purchase contracts, involves instruments that do or may require the issuer to buy back some of its shares in exchange
for cash or other assets. The third type of instruments consist of obligations that can be settled with shares, the monetary value of which isfIXed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuers ' shares. SF AS No.150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety.
In addition to requirements for classification and measurement of financial instruments, SPAS No. 150 also requires disclosures aboutalternative ways of settling the instruments and the capital structure of entities, whose shares are mandatorily redeemable. Most of the
guidance in Statement 150 is effective for all fInancial instruments entered into or modified after May 31 2003, and otherwise is effectivefrom the start ofthe first interim period beginning after June 15 2003. We believe that the adoption ofthis standard will not have a material
impact on ow- results of operations or fmancial position.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
The Secw-ities and Exchange Commission s rule related to market risk disclosure requires that we describe and quantify our potential losses
from market risk sensitive instruments attributable to reasonably possible
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market changes. Market risk sensitive instruments include all financial or commodity instruments and other fInancial instruments (such asinvestments and debt) that are sensitive to future changes in interest rates, currency exchange rates, commodity prices or other market factors.Weare not exposed to market risks from changes in commodity prices. Weare exposed to changes in interest rates primarily from our
investments in cash equivalents and marketable securities. Under our current policies, we do not use interest rate derivative instruments tomanage our exposure to interest rate changes. We do not consider our market risk exposure relating to foreign currency exchange to bematerial, as we generally have sufficient cash outflows based in these currencies to largely offset the cash inflows based in these currenciesthereby creating a natural hedge. In order to mitigate the risk associated with the small amounts of remaining net foreign exchange exposurewhich we experience from time to time, we have, on occasion, entered into foreign exchange hedges. In addition to but separate from our
primary business, we hold a small portion of our total asset portfolio in hedge funds for speculative and strategic purposes. As of April 302003, our investments in such hedge funds was approximately $23.9 million. Investments in hedge funds caIT)' a significant degree of riskwhich will depend to a great extent on correct assessments of the future course of price movements of securities and other instruments. Therecan be no assurance that hedge fund managers will be able to accurately predict these price movements. The securities markets have in recentyears been characterized by great volatility and unpredictability. Accordingly, the value of our interests in these funds may go down as well as
up and we may not receive, upon redemption, the amounts originally invested.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have evaluated theeffectiveness of disclosure controls and procedures (as such tenn is defmed in Rules 13a-14(c) and 15d-14(c) under the Securities ExchangeAct of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the filing date of this quarterly report (the "EvaluationDate). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures areeffective at recording, processing, summarizing and reporting, within the time periods specified in the SEC's rules and fonDS, the informationit is required to disclose in its periodic reports filed or submitted under the Exchange Act.
Changes in Internal Controls,Since the Evaluation Date, there have not been any significant changes in our internal controls or in other
factors that could significantly affect such controls.
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PART ll. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Certain legal proceedings in which we are involved are described in our Quarterly Report on Fonn lO-Q for the quarter ended January 312003. The following discussion is limited to recent developments concerning our legal proceedings and should be read in conjunction withsuch earlier Quarterly Report, Unless otherwise indicated, all legal proceedings discussed in our earlier Quarterly Report remain outstanding.
With respect to our complaint against Telefonica SA., TeITa Networks, SA., Terra Networks, U., Inc. and Lycos, Inc., we filed a motionon May 16 2003 to compel the defendants to produce documents under the crime-fraud exception of the attorney-client and work productprivilege. Oral argument on this motion is scheduled for August 7, 2003.
With respect to our statement of claim with the American Arbitration Association naming Telefonica Internacional, SA as the Respondentthe parties filed post-hearing briefs on April 4, 2003 and reply briefs were filed on May 8, 2003.
With respect to the summons and complaint filed on or about July 25 2002 by PT-I Communications against mT, the parties held a statusconference before the judge on April 3, 2003. IDT filed a motion for a stay to enjoin this proceeding based upon a filing by The Continuing
Creditors ' Committee of Star Telecommunications , Inc. of a near-identical adversary proceeding against us in the United States Ban!cruptcy
Court for the District of Delaware. The motion was denied on May 15, 2003.
With respect to the complaint filed by Mark B. Aronson in the Court of Common Pleas of Allegheny County, Pennsylvania, seekingcertification of a class consisting of consumers who were charged a fee when IDT switched underlying carriers from Global Crossing Ltd, toAT&T, the Court denied the plaintiffs motion to remand the case to the State court and granted our motion to transfer the case to the Federal
Communications Commission (the "FCC"). We filed a petition with the FCC on Apri130, 2003.
With respect to the Morris Amsel and the Ana Cardoso and Maria Calado matters relating to mT's calling cards, on May 19 2003 we filedan application with the Multi-District Litigation Panel seeking to consolidate these matters.
With respect to the suit filed by Winstar against Superior Logistics Management Services, Inc. in the u.S. District Court for the EasternDistrict of Virginia, the parties entered into a settlement agreement that entitles Winstar to receive 10% of the sales price of any sales ofcertain equipment by Superior, and providesWinstar with purchase options at 6 and 9 months from May 7, 2003 for various equipment thatwas the subject of the suit and stored by Superior, at the price of $0.035 per $1.00 of the original cost to Superior or its entities that are now in
Chapter 7 bankruptcy.
With respect to the Univance Telecommunications, Inc. and Univance Marketing Group, Inc. (collectively the "Univance Debtorsbanlcruptcy matter, the paIiies resolved this matter and the Univance Debtors and Winstar entered into an agreement dated March 19
2003pursuant to which the Univance Debtors will continue to provide services to Winstar. The parties will seek Ban!cruptcy Court approval of the
agreement.
On or about February 5, 2002, a complaint was filed by Solomon Bitton against IDT in the Superior Court of the State of New Jersey, Bergen
County, seeking certification of a class consisting of New Jersey residents who allegedly purchased mT's pre-paid calling cards and werecharged any fee that was not specifically disclosed on the card packaging prior to purchase. The damages sought have not yet been quantified.
We served answers to the complaint on April 3, 2003 and are in the process of providing initial discovery responses.
On or about March 12, 2003 , a complaint was filed by the Continuing Creditors ' Committee of Star Telecommunications , Inc. for itself andon behalf of the Star Creditors' Liquidating Trust ("Star ) against IDT in
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the United States Banlcruptcy Court for the District of Delaware. Star seeks (a) to void and recover damages for certain fraudulent transfers property of Star's banlcruptcy estate pursuant to the pre-petition sale of certain assets to IDT, and (b) to recover damages for unjustenrichment pursuant to said sale. We have not been served with the complaint and Star has not taken any action to prosecute the claimsagainst us. We filed a motion for a stay or to enjoin this proceeding based upon the fact that this proceeding is nearly-identical to theadversary proceeding previously filed by PT -1 Communications against IDT in the United States Ban1cruptcy Court for the Eastern District ofNew York, which motion was denied.
On April 15, 2003, Network Communications of Indiana C"NCI") flIed a four-count complaint in the Superior Court in Marion County,Indiana, against us, seeking $8.7 million in damages. NCI signed a Non-Exclusive High Volume Independent Agent Marketing Agreement
with Winstar Wireless, Inc., on February 1, 1999. On April 18, 2001 , Winstar Wireless, Inc., and various other affiliates ("Debtors ) flIed forChapter 11 bankruptcy in the United States Bankruptcy Court for the District of Delaware. On December 19 2001, an affiliate of ourspurchased various assets of the Debtors. NCI alleges that IDT, as a result of allegedly acquiring certain assets of the Debtor including allegednetwork customer lists: (a) misappropriated NCI's customer lists , (b) unlawfully converted NCI's customer lists , (c) unfairly competed withNCI's business , and (d) tortiously interfered with contracts between NCI and NCI's customers. The case has been removed to the UnitedStates District Court for the Southern District of Indiana, Indianapolis Division, and we have an extension to answer or otherwise plead until
June 23, 2003.
On or about April 26, 2003, we were served with a petition filed by Powell Palmares in the District Court of Nueces County, Texas, 105thJudicial District. We are not the only defendant in this action. In his petition, the plaintiff names numerous additional defendants, includingOblio Telecom, Northern California Telecommunications, Locus Telecommunications, Star Telecom Network, Astral CommunicationsPacific Telecard, and Advanced Telecom Solutions. The plaintiff is seeking certification of a class consisting of all persons in Texas who
allegedly purchased and used IDT's pre-paid calling cards and made calls to, or from, cellular telephone equipment. The damages sought
have not yet been quantified. We filed our answer on June 2, 2003.
Weare subj ect to other legal proceedings and claims which arise in the ordinary course of our business and have not been finally adjudicated,
Although there can be no assurances in this regard, in the opinion of our management, such proceedings, as well as the aforementionedactions, will not have a material adverse effect on our results of operations, cash flows or fmancial condition.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the third quarter of Fiscal 2003 , Morris Lichtenstein, Executive Vice President of Business Development ofIDT, Marc E. KnollerSenior Vice President and a director ofIDT, and Avi Stokar, Executive Vice President of MIS of our IDT Telecom subsidiary, exchanged
000 000 and 11 500 shares of our common stock, respectively, for an equal number of shares of our Class B common stock. These
exchanges were made under the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Item 5. OTHER INFORMATION
None
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Exhibit
Number
10.
10.65*
10.66*
10.67*
10.68*
10.69*
Item 6. EXHIBITS AND REPORTS ON FORM 8-
(a) Exhibits:
Description
1996 Stock Option and Incentive Plan, as amended and restated, ofIDT Corporation (incorporated by reference to Form S-filed June 5, 2003 file no. 333-105865)
Amendment to Stock Option Agreement under the Employee Stock Option Program between IDT Corporation and Joyce J.Mason
Amendment to Stock Option Agreement under the Employee Stock Option Program between IDT Corporation and Marc E.
Knoller
Exchange Agreement, dated March 21 , 2003 , between IDT Corporation and Monis Lichtenstein
Exchange Agreement, dated April 8 , 2003, between IDT Corporation and Marc E. Knoller
Settlement Agreement, dated October 10 2000, between Tyco Group S.r.l., TyCom (US) Inc., Tyco Internaional Ltd.Tyco International (US) Inc. and TyCom Ltd., on the one hand, and IDT Europe B.B.A. and IDT Corporation, on theother hand
99.1(a)* Certification of Chief Executive Officer
99.1(b)*Certification of Chief Financial Officer
* Filed herewith.
(b) Reports on Form 8-
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.
IDT CORPORATION
June 16 2003 By:/s/ JAMES A. COURTER
James A. Courter
Chief Executive Officer and Vice-Chairman
(Principal Executive Officer)
June 16 2003 By:/S/ STEPHEN R. BROWN
Stephen R. Brown
Chief Financial Officer and Treasurer
(principal Financial Officer)
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CERTIFICATION
of the Chief Executive Officer
, James A. Courter, Chief Executive Officer ofIDT Corporation (the "Company ), hereby certify that:(1) I have reviewed the report of the Company on Fonn 10-Q for the quarterly period ended Apri130, 2003 , as filed with theSecurities and Exchange Commission (the "Report"
(2) Based on my knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading withrespect to the period covered by the Report;
(3) Based on my lmowledge, the fmancial statements and other fmancial infonnation included in the Report fairly present in all
material respects the financial condition, results of operations and cash flows of the Company as of, and for, the period presentedin the Report;
(4) I, together with the other certifying officers, am responsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act rules 13a-14 and 15d-14) for the Company and have:
(i) Designed such disclosure controls and procedures to ensure that material infonnation relating to the Company, including its
consolidated subsidiaries, is made lmOWD to me by others within those entities, particularly during the period in which theReport was being prepared;
(ii) Evaluated the effectiveness of the Company s disclosure controls and procedures as of a date within 90 days prior to thefiling date of the Report (the "Evaluation Date ); and
(iii) Presented in the Report our conclusions about the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;
(5) I, together with the other certifying officers, have disclosed, based on our most recent evaluation, to the Company s auditors andaudit committee of the board of directors:
(i) All significant deficiencies in the design or operation of internal controls which could adversely affect the Company s abilityto record, process, summarize and report fmancialdata and have identified for the Company s auditors any materialweaknesses in internal controls; and
(ii) any fraud, whether or not material, that involves management or other employees who have a significant role in the
Company s internal controls; and
(6) I, together with the other certifying officers, have indicated in the Report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluationincluding any conective actions with regard to significant deficiencies and material weaknesses.
Date: June 16 2003
/s/ JAMES A. COURTER
James A. Courter
Chief Executive Officer
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CERTIFICATION
of the Chief Financial Officer
(1)
, Stephen R. Brown, Chief Financial Officer ofIDT Corporation (the "Company ), hereby certify that:I have reviewed the report of the Company on Form 10-Q for the quarterly period ended April 30, 2003, as fIled with theSecurities and Exchange Commission (the "Report"
Based on my knowledge, the Report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading withrespect to the period covered by the Report;
Based on my knowledge, the fmancial statements and other financial information included in the Report fairly present in all
material respects the financial condition, results of operations and cash flows of the Company as of, and for, the period presentedin the Report;
, together with the other certifying officers, am responsible for establishing and maintaining disclosure controls and procedures(as derIDed in Exchange Act roles 13a-14 and l5d-14) for the Company and have:(i) Designed such disclosure controls and procedures to ensure that material information relating to the Company, including itsconsolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which theReport was being prepared;
(ii) Evaluated the effectiveness of the Company s disclosure controls and procedures as of a date within 90 days prior to thefiling date of the Report (the "Evaluation Date ); and
(iii) Presented in the Report our conclusions about the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
, together with the other certifying officers, have disclosed, based on our most recent evaluation, to the Company s auditors andaudit committee of the board of directors:
(i) All significant deficiencies in the design or operation of internal controls which could adversely affect the Company s abilityto record, process, summarize and report fmancial data and have identified for the Company s auditors any materialweaknesses in internal controls; and
(ii) any fraud, whether or not material, that involves management or other employees who have a significant role in theCompanys internal controls; and
, together with the other certifying officers, have indicated in the Report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation
including any COlTective actions with regard to significant deficiencies and material weaknesses.
(2)
(3)
(4)
(5)
(6)
Date: June 16 2003
/s/ STEPHEN R. BROWN
Stephen R. Brown
Chief Financial Officer
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