Back to GetFilings.com



Click Here for Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark one)

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

For the quarterly period ended April 30, 2004

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  Commission file number 000-26763

NET2PHONE, INC.
(Exact Name of Registrant as Specified in Its Charter)

       
DELAWARE   22-3559037  
(State or Other Jurisdiction of Incorporation or Organization )   (I.R.S. Employer Identification No.)  
       
       
520 Broad Street, Newark, New Jersey   07102  
(Address of Principal Executive Offices)   (Zip Code)  

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)      Yes      No

     As of June 4, 2004, the registrant had outstanding 46,708,589 shares of common stock, $.01 par value, and 28,913,250 shares of Class A common stock, $.01 par value.

     (The number of outstanding shares of Class A common stock does not include 6.9 million shares to be issued the date a definitive agreement is executed between Net2Phone, Inc. and IDT Corporation as described in more detail in Note 5 to the Condensed Consolidated Financial Statements included herein.)

NET2PHONE, INC.

TABLE OF CONTENTS

  Page No.  
PART I. FINANCIAL INFORMATION      
       
Item 1. Financial Statements:      
       
  3  
       
  4  
       
  5  
       
  6  
       
  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   27  
       
Item 4. Controls and Procedures   27  
       
PART II. OTHER INFORMATION      
       
Item 1. Legal Proceedings   28  
       
Item 2. Changes in Securities and Use of Proceeds   28  
       
Item 3. Defaults Upon Senior Securities   28  
       
Item 4. Submission of Matters to a Vote of Security Holders   28  
       
Item 5. Other Information   28  
       
Item 6. Exhibits and Reports on Form 8-K   29  
       
Signatures   30  
       

2

Back to Contents

PART I–FINANCIAL INFORMATION

Item 1. Financial Statements

NET2PHONE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)     April 30, 2004     July 31, 2003   
   
 
 
      (unaudited)     (note 1)  
ASSETS:            
Current assets:              
Cash and cash equivalents
   $ 10,336   $ 9,350  
Restricted cash – short term
     700     719  
Marketable securities – current
     104,185     60,554  
Notes receivable from employees – current
     —     910  
Assets held for sale
    573     320  
Other current assets
     11,124     11,662  
   
 
 
Total current assets
     126,918     83,515  
Property and equipment, net     20,029     24,172  
Restricted cash, cash equivalents and marketable securities – long term     21,535     23,488  
Notes receivable from employees – long term     1,100     4,990  
Deferred compensation     —     3,763  
Other assets     4,186     4,718  
   
 
 
Total assets
   $ 173,768   $ 144,646  
   
 
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY:              
Current liabilities:              
Accounts payable
   $ 1,219   $ 2,502  
Accrued expenses
     11,125     15,438  
Capital lease obligations – short term
     310     3,079  
Due to IDT
     1,144     1,057  
Other current liabilities
     6,872     7,527  
   
 
 
               Total current liabilities          20,670     29,603  
Other liabilities     1,089     1,825  
Capital lease obligations – long term     —     708  
Long-term obligations     16,954     16,170  
   
 
 
Total liabilities
     38,713     48,306  
               
Minority interests     —     20,011  
Stockholders' equity:              
Common stock, $.01 par value; 200,000 shares authorized including redeemable shares; 50,070 and 34,632 shares issued.
     500     346  
Class A stock, $.01 par value; 37,924 shares authorized; 29,614 and 28,921 shares issued
     296     289  
Additional paid-in capital
     938,632     874,077  
Accumulated deficit
     (766,846 )   (760,486 )
Accumulated other comprehensive income (loss)
     (624 )   226  
Deferred compensation
     (1,405 )   (456 )
Loans to stockholders
     (1,259 )   (1,394 )
Treasury stock, at cost; 3,363 and 3,476 shares
     (34,239 )   (36,273 )
   
 
 
Total stockholders’ equity
     135,055     76,329  
   
 
 
Total liabilities and stockholders’ equity
   $ 173,768   $ 144,646  
   
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

3

Back to Contents

NET2PHONE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(In thousands, except per share data)

    Nine months ended
April 30,		   Three months ended
April 30,		  
   
 
 
      2004     2003     2004     2003  
   
 
 
 
 
Revenue   $ 61,667   $ 70,787   $ 21,451   $ 23,788  
Costs and expenses:                          
Direct cost of revenue (exclusive of depreciation and amortization)
     34,981     40,386     12,790     14,158  
Selling, general and administrative
     35,949     40,961     11,787     12,739  
Depreciation and amortization
     7,815     7,161     2,668     2,305  
Non-cash services provided by IDT (attributable to direct cost of revenue and selling, general and administrative)
     2,706     —     452     —  
Non-cash compensation (attributable to selling, general and administrative)
     (3,063 )   7,058     (7,059 )   2,709  
Restructuring, severance, impairment and other items
     1,449     7,584     421     1,708  
Settlement of Cisco litigation
     —     (58,034 )   —     —  
   
 
 
 
 
Total costs and expenses
     79,837     45,116     21,059     33,619  
   
 
 
 
 
Income (loss) from operations     (18,170 )   25,671     392     (9,831 )
Interest income, net     1,466     1,930     591     531  
Other (loss) income, net     11,817     (67 )   (1,445 )   (73 )
   
 
 
 
 
Income (loss) before minority interests     (4,887 ) $ 27,534     (462 ) $ (9,373 )
Minority interests     —     (60 )   —     (84 )
   
 
 
 
 
Net income (loss) available to common stockholders     (4,887 ) $ 27,594     (462 ) $ (9,289 )
   
 
 
 
 
Net income (loss) per common share–basic & diluted   $ (0.07 ) $ 0.46   $ (0.01 ) $ (0.16 )
   
 
 
 
 
Weighted average number of common shares used in the calculation of basic net income (loss) per common share
     69,058     59,634     76,031     59,758  
   
 
 
 
 
                           
Weighted average number of common shares used in the calculation of dilutive net income (loss) per common share
     69,058     59,711     76,031     59,758  
   
 
 
 
 

 

 The accompanying notes are an integral part of these condensed consolidated financial statements.

4

Back to Contents

Net2Phone, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
Nine months ended April 30, 2004

(in thousands)                                                                                            
    Common Stock
    Class A Stock
     Additional
Paid-In
Capital		      Accumulated
Deficit)		     Accumulated
Other
Comprehensive
Income (Loss)		      Deferred
Compensation		      Loans to
Stockholders		       Treasury Stock
     Total
Stockholders’
Equity (Deficit)		  
    Shares     Amount     Shares     Amount                           Shares     Amount      
   
   
   
   
   
   
   
   
   
     
   
   
 
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 nine months ended April 30, 2004
                                         (4,887 )                                             (4,887 )
Foreign currency translation
                                                 (36 )                                     (36 )
Unrealized loss on marketable securities, net
                                                 (814 )                                     (814 )
                                                                                       
 
Comprehensive income
                                                                                         (5,737 )
Issuance of Common Stock in follow-on public offering
   14,000       140                     58,504                                                       58,644  
Treasury share funding of 401K Plan
                                         (1,473 )                             (113 )     2,034       561  
Conversion of Class A stock to common stock
   8       —     (8 )     —                                                               —  
Exercise of stock options
   1,270       13                     5,424                                                       5,437  
Issuance of stock bonuses to employees
   160       1                     2,586                       (1,496 )                             1,091  
Shares which may be released to IDT per memorandum of understanding
                 701       7       2,699                                                       2,706  
Repayment of loan by stockholder