NET2PHONE INC - 10-Q Quarterly Report

NET2PHONE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The accompanying unaudited condensed consolidated financial statements of Net2Phone, Inc. and its subsidiaries (collectively “the Company” or “Net2Phone”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for annual financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation, including normal recurring accruals and other items, have been included. The results for the interim periods presented are not necessarily indicative of the results that may be expected for any future period. The balance sheet at July 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete audited financial statements. For further information, refer to the audited financial statements and notes thereto included in Net2Phone’s Annual Report on Form 10-K for the year ended July 31, 2003.

The Company’s fiscal year ends on July 31 of each year. Each reference below to a Fiscal Year refers to the Fiscal Year ending in the year indicated (e.g., fiscal 2003 refers to the Fiscal Year ended July 31, 2003).

We announced on June 9, 2003, a planned change in our corporate structure. This plan was approved by our Board of Directors and has now been implemented. We have created two wholly-owned operating subsidiaries, Net2Phone Global Services, LLC, and Net2Phone Cable Telephony, LLC. Net2Phone Global Services is comprised of three divisi

(Mark one)

	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended October 31, 2003

OR

	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


DELAWARE (State or Other Jurisdiction of Incorporation or Organization)	22-3559037 (I.R.S. Employer Identification No.)

520 Broad Street, Newark, New Jersey (Address of Principal Executive Offices)	07102 (Zip Code)

(973) 438-3111 (Registrant's Telephone Number, Including Area Code)

		Page No.

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets as of October 31, 2003 and July 31, 2003	3

	Condensed Consolidated Statements of Operations for the three months ended October 31, 2003 and 2002	4

	Condensed Consolidated Statement of Stockholders’ Equity for the three months ended October 31, 2003	5

	Condensed Consolidated Statements of Cash Flows for the three months ended October 31, 2003 and 2002	6

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4.	Controls and Procedures	22

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	22

Item 2.	Changes in Securities and Use of Proceeds	23

Item 3.	Defaults Upon Senior Securities	23

Item 4.	Submission of Matters to a Vote of Security Holders	23

Item 5.	Other Information	23

Item 6.	Exhibits and Reports on Form 8-K	23

Signatures		24

		October 31,			July 31,
		2003			2003
		(unaudited)			(note 1)

ASSETS		(In thousands, except per share data)
Current assets:
Cash and cash equivalents	$	13,036		$	9,350
Restricted cash – short term		452			719
Marketable securities – current		51,109			60,554
Notes receivable from employees – current		127			910
Assets held for sale		1,179			320
Other current assets		8,406			11,662

Total current assets		74,309			83,515
Property and equipment, net		22,233			24,172
Restricted cash, cash equivalents and marketable securities -long term		23,318			23,488
Notes receivable from employees – long term		1,700			4,990
Deferred compensation		—			3,763
Other assets		4,875			4,718

Total assets	$	126,435		$	144,646

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	2,491		$	2,502
Accrued expenses		10,333			15,438
Capital lease obligations – short term		4,085			3,079
Due to IDT		609			1,057
Other current liabilities		7,180			7,527

Total current liabilities		24,698			29,603
Other liabilities		1,695			1,825
Capital lease obligations – long term		—			708
Long-term obligations		15,830			16,170

Total liabilities		42,223			48,306
Minority interests		—			20,011
Stockholders' equity:
Common stock, $.01 par value; 200,000 shares authorized including redeemable
shares; 34,923 and 34,632 shares issued		349			346
Class A stock, $.01 par value; 37,924 shares authorized;
28,913 and 28,921 shares issued		289			289
Additional paid-in capital		876,458			874,077
Accumulated deficit		(756,053	)		(760,486	)
Accumulated other comprehensive income		52			226
Deferred compensation		(234	)		(456	)
Loans to stockholders		(1,330	)		(1,394	)
Treasury stock, at cost; 3,420 and 3,476 shares		(35,319	)		(36,273	)

Total stockholders' equity		84,212			76,329

Total liabilities and stockholders’ equity	$	126,435		$	144,646

		Three months ended October 31,

		2003			2002

		(In thousands, except per share data)
Revenue	$	20,405		$	23,948
Costs and expenses:
Direct cost of revenue (exclusive of items shown below)		10,948			13,942
Selling, general and administrative		12,573			13,660
Depreciation and amortization		2,488			2,480
Restructuring, severance, impairment and other items		195			5,172
Settlement of Cisco litigation		—			(58,429	)
Non-cash compensation		1,841			1,656

Total costs and expenses		28,045			(21,519	)

Income (loss) from operations		(7,640	)		45,467
Interest income, net		215			800
Other income, net		12,523			16

Income before minority interests		5,098			46,283
Minority interests		—			159

Net income available to common stockholders	$	5,098		$	46,124

Net income per common share-basic & diluted	$	0.08		$	0.77

Weighted average of number of common shares used in the calculation of
basic net income per common share		60,250			59,516

Weighted average of number of common shares used in the calculation of
diluted net income per common share		63,160			59,590

									Additional Paid-In Capital		Accumulated (Deficit)			Accumulated Other Comprehensive Income (Loss)			Deferred Compensation			Loans to Stockholders									Total Stockholders' Equity (Deficit)
	Common Stock				Class A Stock																		Treasury Stock

	Shares		Amount		Shares		Amount																Shares			Amount

	(in thousands)
Balance at July 31, 2003		34,632	$	346		28,921	$	289	$	874,077	$	(760,486	)	$	226		$	(456	)	$	(1,394	)		3,476		$	(36,273	)	$	76,329
Net income for the three months ended October 31, 2003												5,098																		5,098
Unrealized loss on equity securities, net															(8	)														(8	)
Foreign currency translation															(166	)														(166	)

Comprehensive income																														4,924
Treasury share funding of 401K Plan												(665	)											(56	)		954			289
Conversion of Class A stock to common stock		8				(8)																								—
Exercise of stock options		283		3						1,191																				1,194
Repayment of loans to stockholders																					64									64
Repricing of stock options										1,190								(1,190	)											—
Amortization of deferred compensation																		1,412												1,412

Balance at October 31, 2003		34,923	$	349		28,913	$	289	$	876,458	$	(756,053	)	$	52		$	(234	)	$	(1,330	)		3,420		$	(35,319	)	$	84,212