UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 2004
or
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number: 1-16371
IDT CORPORATION
(Exact Name of Registrant as Specified in its Charter)
| Delaware | 22-3415036 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) | |
| 520 Broad Street, Newark, New Jersey | 07102 | |
| (Address of principal executive offices) | (Zip Code) | |
(973) 438-1000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨
As of December 3, 2004, the registrant had the following shares outstanding:
| Common Stock, $.01 par value: | 18,845,933 shares outstanding (excluding 6,228,927 treasury shares) | |
| Class A common stock, $.01 par value: | 9,816,988 shares outstanding | |
| Class B common stock, $.01 par value: | 67,772,726 shares outstanding (excluding 1,608,290 treasury shares) |
TABLE OF CONTENTS
| PART I. |
FINANCIAL INFORMATION | 3 | ||
| Item 1. |
3 | |||
| Condensed Consolidated Balance Sheets as of October 31, 2004 and July 31, 2004 |
3 | |||
| Condensed Consolidated Statements of Operations for the three months ended October 31, 2004 and 2003 |
4 | |||
| Condensed Consolidated Statements of Cash Flows for the three months ended October 31, 2004 and 2003 |
5 | |||
| 6 | ||||
| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results Of Operations |
12 | ||
| Item 3. |
28 | |||
| Item 4. |
28 | |||
| PART II. |
OTHER INFORMATION | 29 | ||
| Item 1. |
29 | |||
| Item 2. |
29 | |||
| Item 3. |
29 | |||
| Item 4. |
29 | |||
| Item 5. |
29 | |||
| Item 6. |
30 | |||
| 31 | ||||
2
Item 1. Financial Statements (Unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS
| October 31, 2004 |
July 31, 2004 |
|||||||
| (Unaudited) | (Note 1) | |||||||
| (in thousands, except share data) | ||||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 144,433 | $ | 142,177 | ||||
| Marketable securities |
835,132 | 897,130 | ||||||
| Trade accounts receivable, net |
198,174 | 184,125 | ||||||
| Other current assets |
100,883 | 106,976 | ||||||
| Total current assets |
1,278,622 | 1,330,408 | ||||||
| Property, plant and equipment, net |
266,798 | 261,760 | ||||||
| Goodwill |
92,215 | 89,534 | ||||||
| Licenses and other intangibles, net |
28,633 | 32,928 | ||||||
| Investments |
100,711 | 66,870 | ||||||
| Restricted cash and marketable securities |
20,052 | 22,620 | ||||||
| Other assets |
77,530 | 70,237 | ||||||
| Total assets |
$ | 1,864,561 | $ | 1,874,357 | ||||
| Liabilities and stockholders’ equity |
||||||||
| Current liabilities: |
||||||||
| Trade accounts payable |
$ | 135,260 | $ | 140,296 | ||||
| Accrued expenses |
214,141 | 213,116 | ||||||
| Deferred revenue |
130,573 | 140,755 | ||||||
| Capital lease obligations—current portion |
17,166 | 21,793 | ||||||
| Other current liabilities |
10,319 | 9,404 | ||||||
| Total current liabilities |
507,459 | 525,364 | ||||||
| Deferred tax liabilities, net |
145,021 | 145,037 | ||||||
| Capital lease obligations—long-term portion |
33,567 | 31,810 | ||||||
| Other liabilities |
48,341 | 48,218 | ||||||
| Total liabilities |
734,388 | 750,429 | ||||||
| Minority interests |
132,663 | 132,695 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Preferred stock, $.01 par value; authorized shares—10,000,000; no shares issued |
— | — | ||||||
| Common stock, $.01 par value; authorized shares—100,000,000; 25,074,860 shares issued at October 31, 2004 and July 31, 2004; 18,845,933 and 19,140,933 shares outstanding at October 31, 2004 and July 31, 2004, respectively |
188 | 192 | ||||||
| Class A common stock, $.01 par value; authorized shares—35,000,000; 9,816,988 shares issued and outstanding at October 31, 2004 and July 31, 2004 |
98 | 98 | ||||||
| Class B common stock, $.01 par value; authorized shares—100,000,000; 69,365,266 and 68,727,201 shares issued at October 31, 2004 and July 31, 2004, respectively; 67,756,976 and 67,118,911 shares outstanding at October 31, 2004 and July 31, 2004, respectively |
678 | 671 | ||||||
| Additional paid-in capital |
807,828 | 800,618 | ||||||
| Treasury stock, at cost, consisting of 6,228,927 and 5,933,927 shares of common stock and 1,608,290 shares of Class B common stock at October 31, 2004 and July 31, 2004, respectively |
(126,243 | ) | (121,969 | ) | ||||
| Deferred compensation |
(10,301 | ) | (13,795 | ) | ||||
| Accumulated other comprehensive income |
31,486 | 19,909 | ||||||
| Retained earnings |
293,776 | 305,509 | ||||||
| Total stockholders’ equity |
997,510 | 991,233 | ||||||
| Total liabilities and stockholders’ equity |
$ | 1,864,561 | $ | 1,874,357 | ||||
See accompanying notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended October 31, |
||||||||
| 2004 |
2003 |
|||||||
| (In thousands, except per share data) |
||||||||
| Revenues |
$ | 629,719 | $ | 513,055 | ||||
| Costs and expenses: |
||||||||
| Direct cost of revenues (exclusive of depreciation and amortization) |
469,937 | 394,208 | ||||||
| Selling, general and administrative |
139,851 | 106,603 | ||||||
| Depreciation and amortization |
24,379 | 22,723 | ||||||
| Non-cash compensation (all of which is attributable to selling, general and administrative) |
4,833 | 3,591 | ||||||
| Restructuring and impairment charges |
2,635 | 4,371 | ||||||
| Total costs and expenses |
641,635 | 531,496 | ||||||
| Loss from operations |
(11,916 | ) | (18,441 | ) | ||||
| Interest income, net |
5,488 | 6,658 | ||||||
| Investment and other income, net |
1,344 | 15,583 | ||||||
| (Loss) income before minority interests and income taxes |
(5,084 | ) | 3,800 | |||||
| Minority interests |
(2,683 | ) | (13,035 | ) | ||||
| Provision for income taxes |
(3,966 | ) | (4,731 | ) | ||||
| Net loss |
$ | (11,733 | ) | $ | (13,966 | ) | ||
| Earnings per share: |
||||||||
| Net loss: |
||||||||
| Basic |
$ | (0.12 | ) | $ | (0.17 | ) | ||
| Diluted |
$ | (0.12 | ) | $ | (0.17 | ) | ||
| Weighted-average number of shares used in calculation of earnings per share: |
||||||||
| Basic |
95,208 | 82,627 | ||||||
| Diluted |
95,208 | 82,627 | ||||||
See accompanying notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended October 31, |
||||||||
| 2004 |
2003 |
|||||||
| (In thousands) | ||||||||
| Net cash used in operating activities |
$ | (5,956 | ) | $ | (8,884 | ) | ||
| Investing activities |
||||||||
| Capital expenditures |
(23,194 | ) | (14,898 | ) | ||||
| (Issuance) collection of notes receivable |
(3,499 | ) | 15,481 | |||||
| Investments and acquisitions, net of cash acquired |
(27,834 | ) | (13,049 | ) | ||||
| Sales and maturities of marketable securities |
1,482,123 | 293,536 | ||||||
| Purchases of marketable securities |
(1,410,076 | ) | (227,241 | ) | ||||
| Net cash provided by investing activities |
17,520 | 53,829 | ||||||
| Financing activities |
||||||||
| Proceeds from exercise of stock options |
156 | 9,249 | ||||||
| Proceeds from exercise of stock options of Net2Phone |
— | 1,193 | ||||||
| Cash and marketable securities restricted against letters of credit |
2,568 | (421 | ) | |||||
| Repayment of capital lease obligations |
(5,692 | ) | (6,222 | ) | ||||
| Distributions to minority shareholders of subsidiaries |
(9,175 | ) | (7,250 | ) | ||||
| Net cash used in financing activities |
(12,143 | ) | (3,451 | ) | ||||
| Effect of exchange rate changes on cash and cash equivalents |
2,835 | 925 | ||||||
| Net increase in cash and cash equivalents |
2,256 | 42,419 | ||||||
| Cash and cash equivalents, beginning of period |
142,177 | 99,046 | ||||||
| Cash and cash equivalents, end of period |
$ | 144,433 | $ | 141,465 | ||||
| Supplemental schedule of non-cash investing and financing activities |
||||||||
| Purchases of property, plant and equipment through capital lease obligations |
$ | 2,277 | $ | 547 | ||||
| Issuance of Class B common stock for acquisitions |
$ | — | $ | 2,534 | ||||
See accompanying notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of IDT Corporation and its subsidiaries (the “Company” or “IDT”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain reclassifications have been made to the prior year’s condensed consolidated financial statements to conform to the current year’s presentation. Operating results for the three-month period ended October 31, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2005. The balance sheet at July 31, 2004 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2004, 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.g., fiscal 2005 refers to the fiscal year ending July 31, 2005).
Note 2—Stock-Based Compensation
As permitted under Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended, the Company applies Accounting Policy Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for its stock option plans and, accordingly, compensation cost is recognized for repriced options that are subject to variable accounting treatment and therefore must be marked-to-market each quarter. In addition, compensation cost is recognized for stock options if it relates to non-qualified stock options for which the exercise price was less than the fair market value of the Company’s stock as of the date of grant. The compensation cost for these grants is amortized to expense on a straight-line basis over their vesting periods.
6
IDT CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table illustrates the effect on net loss and earnings per share if the Company had applied the fair value based method of accounting provisions of SFAS No. 123 to stock-based employee compensation for the three months ended October 31, 2004 and 2003:
| Three Months Ended October 31, |
||||||||
| 2004 |
2003 |
|||||||
| (in thousands, except per share data) |
||||||||
| Net loss, as reported |
$ | (11,733 | ) | $ | (13,966 | ) | ||
| Add: Stock-based employee compensation expense included in reported net loss, net of related tax effects and minority interests |
3,947 | 308 | ||||||
| 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 |
(9,367 | ) | (7,079 | ) | ||||
| Pro forma net loss |
$ | (17,153 | ) | $ | (20,737 | ) | ||
| Earnings per share: |
||||||||
| Basic—as reported |
$ | (0.12 | ) | $ | (0.17 | ) | ||
| Basic—pro forma |
$ | (0.18 | ) | $ | (0.25 | ) | ||
| Diluted—as reported |
$ | (0.12 | ) | $ | (0.17 | ) | ||
| Diluted—pro forma |
$ | (0.18 | ) | $ | (0.25 | ) | ||
Note 3—Investment in Net2Phone
On October 23, 2001, NTOP Holdings, LLC was formed and the Company and AT&T each contributed their minority stakes in Net2Phone into NTOP Holdings. Liberty Media then acquired a substantial portion of NTOP Holdings’ units from AT&T. The Net2Phone shares held by NTOP Holdings represent a majority voting stake in Net2Phone. The Company has the right to appoint the entire board of managers (including one nominee of Liberty Media) of NTOP Holdings. The board of managers direct the voting of all Net2Phone shares held by NTOP Holdings, thereby giving the Company effective control over the voting of the Net2Phone shares (but not their disposition, which requires consent of the members) held by NTOP Holdings. Accordingly, the Company consolidated Net2Phone effective October 23, 2001.
On October 29, 2002, AT&T sold all of its remaining NTOP Holdings’ units to IDT and Liberty Media. Thereafter, each owner of NTOP Holdings was granted the unilateral right, effect