-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V+pkO6YnI7mZqlOQV9oYniiM8bgG9ayjBf96keRm68Ixf77+Ea/aZmuwq1CgUsLC 53mSb/FQ0078wDrTHDPcyA== /in/edgar/work/20000614/0000940180-00-000722/0000940180-00-000722.txt : 20000919 0000940180-00-000722.hdr.sgml : 20000919 ACCESSION NUMBER: 0000940180-00-000722 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000430 FILED AS OF DATE: 20000614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDT CORP CENTRAL INDEX KEY: 0001005731 STANDARD INDUSTRIAL CLASSIFICATION: [7373 ] IRS NUMBER: 223415036 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27898 FILM NUMBER: 655267 BUSINESS ADDRESS: STREET 1: 190 MAIN ST CITY: HACKENSACK STATE: NJ ZIP: 07601 BUSINESS PHONE: 2019281000 MAIL ADDRESS: STREET 1: 294 STATE STREET CITY: HACKENSACK STATE: NJ ZIP: 07601 10-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended April 30, 2000 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number: 0-27898 IDT CORPORATION (Exact Name of Registrant as Specified in its Charter) Delaware 22-3415036 -------- ---------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 520 Broad Street, Newark, New Jersey 07102 ------------------------------------ ----- (Address of Principal Executive Office) (Zip Code) (201) 928-1000 -------------- (Registrant's Telephone Number, Including Area Code) (Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ Common Stock, $.01 par value - 26,905,041 shares as of June 13, 2000 Class A Common Stock, $.01 par value - 9,969,733 shares as of June 13, 2000 (Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date) IDT CORPORATION Table Of Contents
PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited)...........................................................................3 Condensed Consolidated Balance Sheets as of April 30, 2000 and July 31, 1999......................................................................................3 Condensed Consolidated Statements of Income for the nine months and three months ended April 30, 2000 and 1999.........................................................4 Condensed Consolidated Statements of Comprehensive Income for the nine months and three months ended April 30, 2000 and 1999.........................................................5 Condensed Consolidated Statements of Cash Flows for the nine months ended April 30, 2000 and 1999..............................................................6 Notes to Condensed Consolidated Financial Statements......................................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................12 Item 3. Quantitative and Qualitative Disclosures About Market Risk...............................................22 PART II. OTHER INFORMATION........................................................................................23 Item 1. Legal Proceedings........................................................................................23 Item 2. Changes in Securities....................................................................................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.........................................................................24 SIGNATURES.........................................................................................................27
2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) IDT CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands)
April 30, 2000 July 31, 1999 -------------- ------------- (Unaudited) (Note 1) Assets Current assets: Cash and cash equivalents $ 100,113 $ 52,903 Marketable securities 64,656 29,435 Accounts receivable, net 164,064 106,146 Investments - short term 181,152 -- Investment in Terra Networks 232,042 -- Notes receivable - current portion 1,700 18,968 Other current assets 75,615 36,311 ----------- ----------- Total current assets 819,342 243,763 Property, plant and equipment, at cost, net 185,708 114,123 Trademark, net 4,696 4,792 Notes receivable - long-term portion 8,496 2,187 Goodwill, net 72,939 74,880 Marketable securities - long term 72,961 48,435 Investments - long term 32,058 10,766 Deferred tax assets, net -- 1,309 Other assets 11,003 15,081 ----------- ----------- Total assets $ 1,207,203 $ 515,336 =========== =========== Liabilities and stockholders' equity Current liabilities: Trade accounts payable $ 86,958 $ 79,475 Accrued expenses 7,813 6,920 Deferred revenue 2,973 4,753 Notes payable -- current portion 11,501 6,029 Capital lease obligations -- current portion 59,765 2,397 ----------- ----------- Total current liabilities 187,425 112,784 Deferred tax liabilities, net 128,200 -- Notes payable -- long-term portion 3,407 112,973 Capital lease obligation -- long-term portion 43,397 15,742 ----------- ----------- Total liabilities 362,429 241,499 Minority interests 324,125 20,432 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; 24,759,070 and 23,982,854 shares issued and outstanding at April 30, 2000 and July 31, 1999, respectively 248 240 Class A stock, $.01 par value; authorized shares - 35,000,000; 9,969,733 and 10,029,758 shares issued and outstanding at April 30, 2000 and July 31, 1999, respectively 100 100 Loans to stockholders (251) (251) Additional paid-in capital 286,670 278,744 Accumulated other comprehensive income consisting of unrealized appreciation of investments, net of deferred taxes 7,196 -- Accumulated earnings (deficit) 226,686 (25,428) ----------- ----------- Total stockholders' equity 520,649 253,405 ----------- ----------- Total liabilities and stockholders' equity $ 1,207,203 $ 515,336 =========== ===========
See notes to condensed consolidated financial statements 3 IDT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited)
Nine Months Ended April 30, Three Months Ended April 30, ---------------------------- ---------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Revenue ........................................ $ 822,050 $ 485,770 $ 263,110 $ 191,751 Costs and expenses: Direct cost of revenue ..................... 661,617 377,849 210,634 150,183 Selling, general and administrative ........ 176,683 70,772 71,345 29,966 Depreciation and amortization .............. 24,420 18,637 9,098 6,902 ---------- ---------- ---------- ---------- Total costs and expenses ....................... 862,720 467,258 291,077 187,051 ---------- ---------- ---------- ---------- Income (loss) from operations .................. (40,670) 18,512 (27,967) 4,700 Interest and other, net ........................ 463,613 (9) 236,946 (153) ---------- ---------- ---------- ---------- Income before income taxes, minority interests and extraordinary item .......................... 422,943 18,503 208,979 4,547 Provision for income taxes ..................... 183,845 6,897 89,202 2,071 Minority interests ............................. (15,992) 2,605 (7,879) 420 ---------- ---------- ---------- ---------- Income before extraordinary item ............... 255,090 9,001 127,656 2,056 Extraordinary loss on retirement of debt, net of income taxes ................................ 2,976 -- -- -- ---------- ---------- ---------- ---------- Net income ..................................... $ 252,114 $ 9,001 $ 127,656 $ 2,056 ========== ========== ========== ========== Income per share: Income before extraordinary item: Basic ...................................... $ 7.43 $ 0.27 $ 3.70 $ 0.06 Diluted .................................... $ 6.87 $ 0.25 $ 3.36 $ 0.06 Extraordinary loss on retirement of debt, net of income taxes: Basic ...................................... $ (0.09) $ -- $ -- $ -- Diluted .................................... $ (0.08) $ -- $ -- $ -- Net income: Basic ...................................... $ 7.34 $ 0.27 $ 3.70 $ 0.06 ========== ========== ========== ========== Diluted .................................... $ 6.79 $ 0.25 $ 3.36 $ 0.06 ========== ========== ========== ========== Weighted average number of shares used in calculation of earnings per share - basic ................. 34,334,185 33,431,628 34,540,247 33,648,800 ========== ========== ========== ========== Weighted average number of shares used in calculation of earnings per share - diluted ............. 37,117,425 35,404,696 37,996,026 35,730,964 ========== ========== ========== ==========
See notes to condensed consolidated financial statements 4 IDT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited)
Nine Months Ended April 30, Three Months Ended April 30, --------------------------- ---------------------------- 2000 1999 2000 1999 Net income $252,114 $ 9,001 $127,656 $ 2,056 Other comprehensive income: Change in unrealized appreciation of investments, net of deferred taxes 7,196 -- 7,196 -- -------- ------- -------- -------- Other comprehensive income 7,196 -- 7,196 -- -------- ------- -------- -------- Comprehensive income $259,310 $ 9,001 $134,852 $ 2,056 ======== ======== ======== ========
See notes to condensed consolidated financial statements 5 IDT CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Nine Months Ended April 30, --------------------------- 2000 1999 Net cash used in operating activities ............... $ (85,234) $ (22,882) Investing activities Net proceeds from sale of Net2Phone common stock .... 115,434 -- Net collection (issuance) of notes receivable ....... 10,959 (11,848) Purchases of investments, net ....................... (40,881) (22,613) Purchases of property, plant and equipment .......... (55,510) (31,836) Net purchases of marketable securities .............. (59,748) -- --------- --------- Net cash used in investing activities ............... (29,746) (66,297) Financing activities Proceeds from offerings of common stock by Net2Phone 261,189 -- Proceeds from exercise of stock options for Net2Phone 8,781 -- Proceeds from exercise of stock options ............. 5,632 3,124 Proceeds from minority investment in subsidiary ..... 5,000 -- Proceeds from exercise of warrants .................. -- 738 Distributions to minority shareholder ............... (2,518) (4,831) Repayment of capital lease obligations .............. (4,549) (3,742) Repayment of borrowings ............................. (111,345) (1,374) --------- --------- Net cash provided by (used in) financing activities . 162,190 (6,085) --------- --------- Net increase (decrease) in cash and cash equivalents 47,210 (95,264) Cash and cash equivalents, beginning of period ...... 52,903 115,283 --------- --------- Cash and cash equivalents, end of period ............ $ 100,113 $ 20,019 ========= ========= Supplemental disclosures of cash flow information Interest paid ....................................... $ 8,719 $ 10,419 Income taxes paid ................................... $ 1,050 $ --
See notes to condensed consolidated financial statements 6 IDT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1--Basis of Presentation The accompanying unaudited condensed consolidated financial statements of IDT Corporation and subsidiaries (collectively "the Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The condensed consolidated financial statements include the accounts of IDT and all companies in which IDT has a controlling voting interest including Union Telecard Alliance, LLC ("Union") and Net2Phone, Inc. ("Net2Phone"), as if IDT and its subsidiaries were a single company. Significant intercompany accounts and transactions between the consolidated companies have been eliminated. Operating results for the three and nine month periods ended April 30, 2000 are not necessarily indicative of the results that may be expected for the year ending July 31, 2000. The balance sheet at July 31, 1999 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by 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, 1999, as filed with the Securities and Exchange Commission. Note 2 - Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in fiscal years beginning after June 15, 2000. The Company believes that the adoption of this standard will not have a material effect on the Company's consolidated results of operations or financial position due to its limited use of derivative instruments. Note 3--Business Segment Information Operating results and other financial data presented for the principal business segments of the Company are as follows ($ in thousands):
Wholesale Retail Telecommunications Telecommunications Internet Internet Services Services Services Telephony Ventures Total Three months ended April 30, 2000 Total segment revenue ........... $ 127,880 $ 124,583 $ 3,448 $ 18,870 6 $ 274,787 Less: revenues between segments . 6,099 445 150 4,983 -- 11,677 Total unaffiliated revenue ...... 121,781 124,138 3,298 13,887 6 263,110 Income (loss) from operations ... 8,717 (5,667) (3,971) (18,108) (8,938) (27,967) ========= ========= ========= ========= ======== ========= Three months ended April 30, 1999 Total segment revenue ........... $ 75,381 $ 103,809 $ 4,367 $ 9,037 $-- $ 192,594 Less: revenues between segments . -- -- 150 693 -- 843 Total unaffiliated revenue ...... 75,381 103,809 4,217 8,344 -- 191,751 Income (loss) from operations ... 4,285 3,554 (2,111) (1,028) -- 4,700 ========= ========= ========= ========= ======== =========
7 IDT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Wholesale Retail Telecommunications Telecommunications Internet Internet Services Services Services Telephony Ventures Total Nine months ended April 30, 2000 Total segment revenue ........... $ 401,649 $ 391,311 $ 10,296 $ 47,479 $ 6 $ 850,741 Less: revenues between segments . 14,386 3,582 450 10,273 -- 28,690 Total unaffiliated revenue ...... 387,263 387,729 9,846 37,206 6 822,050 Income (loss) from operations ... 19,784 3,729 (11,156) (41,107) (11,921) (40,670) ========= ========= ========= ========= ========= ========= Nine months ended April 30, 1999 Total segment revenue ........... $ 178,632 $ 273,505 $ 13,247 $ 22,303 -- $ 487,587 Less: revenues between segments -- -- 450 1,367 -- 1,817 Total unaffiliated revenue ...... 178,632 273,505 12,797 20,836 -- 485,770 Income (loss) from operations ... 15,087 14,380 (6,225) (4,728) -- 18,512 ========= ========= ========= ========= ========= =========
Note 4 - Property, Plant and Equipment Property, plant and equipment consists of the following ($ in thousands):
April 30, 2000 July 31, 1999 Equipment .......................................... $ 195,171 $ 117,547 Computer software .................................. 27,903 21,515 Leasehold improvements ............................. 9,217 3,651 Furniture and fixtures ............................. 6,040 2,447 Land and building .................................. 6,327 6,312 --------- --------- 244,658 151,472 Less: Accumulated depreciation and amortization..... (58,950) (37,349) --------- --------- $ 185,708 $ 114,123 ========= =========
8 IDT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 5--Legal Proceedings and Contingencies In October 1999, Union commenced an action against DigiTEC 2000, Inc. ("DigiTEC") and TecNet, Inc. ("TecNet") in the Supreme Court of the State of New York, County of New York, alleging damages of approximately $725,000 based upon, among other things, non-payment for prepaid calling cards. DigiTEC and TecNET have answered the complaint and DigiTEC has asserted a third-party claim against the Company seeking damages of $2.5 million dollars based upon the Company's alleged breach of a settlement agreement between the Company and DigiTEC which had resolved a prior litigation between those parties. The court adjourned the return date without assigning a specific return date for IDT to answer the Third-Party Complaint, subject to DigiTEC's right to make a written thirty day demand for an Answer. In February 2000, IDT Europe B.V.B.A., a subsidiary of the Company, filed a Complaint against Tyco Group S.A.R.L. ("Tyco") and Tyco Submarine Systems, Ltd. ("TSSL") in the United States District Court, Newark, New Jersey, alleging breach of implied covenant of good faith and fair dealing and breach of contract for breaching a Memorandum of Understanding and Instruction to Proceed entered into on November 9, 1999. The Company is seeking to enjoin and restrain Tyco and TSSL from undertaking contrary business activity inconsistent with the Memorandum of Understanding and Instruction to Proceed and is seeking compensatory, consequential and punitive damages. On March 24, 2000, Tyco filed an answer and a motion to dismiss the action for lack of subject matter jurisdiction and Tyco, TSSL, Tyco International Ltd., Tyco International (US) Inc., and Tycom Ltd. filed suit against IDT Europe B.V.B.A. and the Company in the Supreme Court for New York county. The suit alleges breach of contract and tortious interference with prospective business relations and seeks declaratory and/or injunctive relief. The plaintiffs are seeking compensatory damages in an undefined amount and punitive damages in the amount of $3 billion. On April 13, 2000, the Company filed a motion to dismiss the action for lack of personal jurisdiction and failure to state a claim, on which a hearing has been scheduled for June 19, 2000. On June 7, 1999, the United States District Court in Newark, New Jersey dismissed the Company's complaint for lack of federal court jurisdiction. On June 14, 2000, the Company filed a substantially similar action in the New Jersey state court. In February 2000, Multi-Tech Systems, Inc. ("Multi-Tech") filed suit against Net2Phone and other companies in the United States Federal District Court in Minneapolis, Minnesota. In its press release, Multi-Tech stated that "the defendant companies are infringing because they are providing the end users with the software necessary to simultaneously transmit voice and data on their computers in the form of making a phone call over the Internet." Net2Phone intends to defend the lawsuit vigorously. Net2Phone believes that the Multi-Tech claims are without merit. However, should a judge issue an injunction against Net2Phone requiring that Net2Phone cease distributing its software or providing its software-based services, such an injunction could have an adverse effect on Net2Phone's business. Net2Phone has filed an answer and a scheduling conference is planned for June 26, 2000. In January 1997, six former employees alleging employment discrimination commenced a suit in New Jersey Superior Court, Bergen County. Howard S. Jonas, the Chairman and Chief Executive Officer of the Company, was also named as a defendant in the action. The action claimed that the Company made hiring and promotion decisions based upon the religious backgrounds of the relevant individuals, in violation of federal and state law. The complaint sought compensatory and punitive damages in an unspecified amount and also sought statutory multiples of damages. All of the claims arising under federal law were dismissed by the Court in New Jersey Superior Court, Bergen County, leaving the plaintiffs with only the remedies available under state law. Further, the Court granted the Company permission to file counterclaims against all plaintiffs for the alleged unlawful taking of business records. The Company filed such counterclaims in October 1998. This suit has been resolved and a Stipulation of Dismissal with prejudice was filed on June 7, 2000. 9 IDT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company is subject to other legal proceedings and claims, which have arisen in the ordinary course of its business and have not been finally adjudicated. Although there can be no assurances in this regard, in the opinion of the Company's management, such proceedings, as well as the aforementioned actions, will not have a material adverse effect on results of operations or the financial condition of the Company. Note 6--Significant Events AT&T transaction On March 28, 2000, IDT entered into an agreement with AT&T Corporation ("AT&T") pursuant to which IDT will sell, and a consortium led by AT&T through a newly formed business entity ("Holdco") will purchase, 14.9 million shares of Class A Common Stock, par value $0.01 per share, of Net2Phone ("Class A Stock"), at a price of $75 per share. In addition, Holdco will purchase four million newly-issued shares of Class A Stock from Net2Phone at a price of $75 per share. Following these transactions, Holdco will have a 39% voting stake and a 32% economic stake in Net2Phone for a total cash investment of approximately $1.4 billion. These transactions will reduce IDT's voting stake in Net2Phone from its current 56% to 21% and its economic stake in Net2Phone from its current 45% to 17%. In addition, Holdco and IDT have reached an agreement that gives Holdco the right of first refusal to purchase IDT's remaining stake of 10 million shares of Class A Stock. If this right is exercised, Holdco will have a 60% voting interest and a 49% economic interest in Net2Phone. Holdco will also receive the option to convert IDT's remaining 10 million shares of Class A Stock into shares of Common Stock, par value $0.01 per share, of Net2Phone ("Common Stock"). Shares of Class A Stock have two votes per share, while shares of Common Stock have one vote per share. On March 3, 2000, AT&T entered into an agreement with IDT granting IDT an option, for a period of 180 days, to cause AT&T to purchase 2,040,817 shares of Class B Common Stock of IDT, at a price of $36.75 per share for an aggregate purchase price of approximately $75,000,000. The option is exercisable from April 2, 2000 until the earlier of (i) 180 days following March 3, 2000 and (ii) the date IDT sells at least 12,500,000 shares of Class A Stock, $0.01 par value, of Net2Phone to a current holder of shares of such Class A Stock of Net2Phone. The Class B Common Stock will carry 1/10 of a vote per share. For a period of 18 months, if Holdco buys shares of Class A Stock from another holder of shares of Class A Stock, IDT will have the option to cause Holdco to purchase up to 5 million additional shares of its Class A Stock on the same terms and conditions. AT&T and IDT have agreed to enter into various definitive commercial arrangements for a period of three years. Holdco shall have the right to nominate three members to the Board of Directors of Net2Phone. Until August 1, 2003 Holdco and IDT will agree to vote their shares in favor of mutually acceptable nominees to the Board of Directors of Net2Phone. Net2Phone will also grant each of AT&T and IDT a license to use Net2Phone's technologies in their own communications services. The transaction has been approved by the board of directors of AT&T, IDT and Net2Phone and is expected to close in August 2000. A special meeting of stockholders must approve amendments to the certificate of incorporation of Net2Phone authorizing an increase in the number of authorized shares of Class A Stock and an increase to the size of the Board of Directors. The transaction is also subject to the receipt of regulatory approvals and certain other conditions. Liberty Media Group transaction IDT announced on March 27, 2000 that Liberty Media Group had agreed to purchase approximately 9.9% of the equity of IDT, equal to approximately 3,775,000 shares of IDT's common stock exchangeable for shares of Class B Common Stock. On June 6, 2000, Liberty Media Group completed the purchase of 3,728,949 shares of IDT's Common Stock at a price of $34.50 per share, resulting in total cash consideration of approximately $128.6 million. Liberty Media also has the right to nominate a director for election to the IDT Board of Directors. 10 IDT CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) Terra Networks transaction In October 1999, IDT entered into a joint venture agreement with Terra Networks, S.A. ("Terra") pursuant to which the two parties formed two limited liability companies to provide Internet services and products to customers in the United States. One company was formed to provide internet access to customers and the other company was formed to develop and manage an internet portal that will provide content-based Internet services. IDT's 49% interest in the Internet access company was accounted for using the equity method of accounting. The equity method was used since IDT had significant influence, but less than a controlling voting interest. IDT's 10% interest in the Internet portal company was accounted for at cost. The cost method was used since IDT did not have a controlling voting interest, or an ownership or voting interest so large as to exert significant influence, and the venture was not publicly traded. On April 30, 2000, the Company sold its interests in the two joint ventures for the right to receive 3,750,000 shares of Terra common stock. The Company recognized a pre-tax gain of approximately $231.3 million in connection with this transaction for the quarter ended April 30, 2000. Stock buyback program On May 17, 2000 the Company announced that its Board of Directors had authorized the repurchase of up to five million shares of the Company's common stock. As of June 13, 2000, the Company had repurchased 1,431,773 shares of common stock under the program for aggregate consideration of $43.5 million. Net2Phone subsidiary stock sales During the course of the nine months ended April 30, 2000, the company recognized approximately $226.5 million in gains related to Net2Phone subsidiary stock sales as follows: . A $43.9 million pre-tax gain was recognized in August 1999 (first quarter of fiscal 2000) in connection with Net2Phone's intial public offering of 6.2 million shares of its common stock, at a price of $15.00 per share for net proceeds to Net2Phone of approximately $83.8 million, in accordance with the provisions of Staff Accounting Bulletin No. 51. Deferred taxes have been provided for this gain. IDT's ownership interest before and after the initial public offering was 85.14% and 56.24%, respectively. . A $76.8 million pre-tax gain was recognized in December 1999 (second quarter of fiscal 2000) in connection with Net2Phone's secondary offering of 6.3 million shares of its common stock, at a price of $55.00 per share for net proceeds to Net2Phone of approximately $177.4 million, in accordance with the provisions of Staff Accounting Bulletin No. 51. Deferred taxes have been provided for this gain. . A $105.8 million pre-tax gain was recognized in December 1999 (second quarter of fiscal 2000) in connection with IDT's sale of 2,200,000 shares of common stock of Net2Phone in Net2Phone's secondary, at a price of $55.00 per share for net proceeds of approximately $115.4 million. Current taxes have been provided for this gain. IDT's ownership interest before and after this transaction and the secondary (which occurred at the same time) was 56.24% and 47.97%, respectively. 11 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the accompanying condensed consolidated financial statements and the associated notes thereto of this Quarterly Report, and the audited consolidated financial statements and the notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company contained in the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1999, as filed with the Securities and Exchange Commission. Overview The Company is a leading facilities-based multinational telecommunications carrier that provides its wholesale and retail customers with integrated and competitively priced international and domestic long distance telecommunications service, Internet access and, through its Net2Phone subsidiary's products and services, Internet telephony services. The Company delivers these services over a high-quality network consisting of 70 Company owned switches in the U.S. and Europe, owned and leased capacity on 23 undersea fiber optic cables and capacity on 7 dedicated satellite transponders. In addition, the Company obtains additional transmission capacity from other carriers. The Company delivers its international traffic worldwide pursuant to its agreements with U.S.-based carriers, foreign carriers, and 23 of the companies that are primarily responsible for providing telecommunications services in particular countries (many of which are commonly referred to as "PTTs"). In addition, the Company maintains a high-speed network that carries Internet traffic in order to support both its Internet access services and Net2Phone's Internet telephony services. In recent years, the Company has derived the majority of its revenues from its core telecommunications businesses, consisting primarily of wholesale carrier services and retail pre-paid calling cards. These businesses have also accounted for the bulk of the Company's operating expenses as well. Since the fourth quarter of Fiscal 1998, the Company has conducted wholesale carrier and pre-paid calling card operations in Europe. As the Company builds its European telecommunications operations, the Company expects to experience weaker gross margins and to incur significant sales and marketing expenses, which will have a negative impact on overall profitability over the next two to four quarters. The Company is also developing various new telecom and Internet related businesses. During the nine months ended April 30, 2000, the Company incurred approximately $11.9 million in development costs for these business ventures, which did not have any significant revenues. The Company anticipates that it will continue to incur significant costs related to these and other new ventures. The timing, and magnitude, of any revenues and/or operating profits to be realized from these new businesses remains uncertain. Within the wholesale carrier and pre-paid calling card business segments, the Company has experienced intense competition, which has served, over time, to reduce the average revenue per minute realized by the Company. In addition, this environment has led some of the Company's competitors to de-emphasize their wholesale carrier and/or pre-paid calling card operations, in order to focus on higher margin telecommunications businesses. The Company remains strongly committed to its wholesale carrier and pre-paid calling card businesses. However, the Company has experienced pricing and margin pressure in recent quarters. In addition, the Company's overall minutes of use began trending lower in August 1999, although overall minutes of use has begun to trend upward again since March 2000. The Company anticipates that it will continue to experience pricing and margin pressure in both its wholesale and retail businesses for at least the next few quarters. Nine Months Ended April 30, 2000 Compared to Nine Months Ended April 30, 1999 Results of Operations Revenue. Revenue increased 69.2%, from approximately $485.8 million for the nine months ended April 30, 1999 to approximately $822.1 million for the nine months ended April 30, 2000. 12 Telecommunications revenues increased 71.4%, from approximately $452.1 million for the nine months ended April 30, 1999 to approximately $774.9 million for the nine months ended April 30, 2000. Internet services revenues decreased 23.1%, from approximately $12.8 million for the nine months ended April 30, 1999 to approximately $9.8 million for the nine months ended April 30, 2000. Internet telephony revenues increased 78.6%, from approximately $20.8 million for the nine months ended April 30, 1999 to approximately $37.2 million for the nine months ended April 30, 2000. Telecommunications revenue increased primarily as a result of a 64.0% increase in minutes of use from approximately 1.86 billion for the nine months ended April 30, 1999 to approximately 3.04 billion for the nine months ended April 30, 2000. The increase in minutes was primarily due to the addition of wholesale carrier service clients, increased usage by existing clients, and increased marketing of the Company's prepaid calling cards. The addition of wholesale carrier services clients, increased use by existing clients and the inclusion of $20 million in revenue for the quarter ended October 31, 1999 related to a one-time tariff opportunity resulted in an increase in wholesale telecommunications revenues of 116.7%, from approximately $178.6 million for the nine months ended April 30, 1999 to approximately $387.3 million for the nine months ended April 30, 2000. As a percentage of telecommunications revenue, wholesale telecommunications revenue increased from approximately 39.5% in the nine months ended April 30, 1999 to approximately 50.0% in the nine months ended April 30, 2000. Revenue from retail telecommunications services increased 43.1%, from approximately $273.5 million for the nine months ended April 30, 1999 to approximately $387.7 million for the nine months ended April 30, 2000 as a result of increased marketing efforts for the Company's prepaid calling cards. Prepaid calling card sales as a percentage of retail telecommunications services revenue increased from 91.2% for the nine months ended April 30, 1999 to 94.1% for the nine months ended April 30, 2000. As a percentage of overall telecommunications revenue, retail telecommunications revenue decreased from approximately 60.5% in the nine months ended April 30, 1999 to approximately 50.0% in the nine months ended April 30, 2000. As a percentage of total revenue, Internet services revenue decreased from approximately 2.6% for the nine months ended April 30, 1999 to approximately 1.2% for the nine months ended April 30, 2000. This was due primarily to decreased revenue caused by the contribution of the majority of the Company's dial-up subscribers to the joint venture formed with Terra Networks, S.A. during the quarter ended October 31, 1999 as well as the substantial increase in telecommunications revenue during the same period. Internet telephony revenue as a percentage of total revenue was 4.5% for the nine months ended April 30, 2000, representing a slight increase from 4.3% for the nine months ended April 30, 1999. The increase in Internet telephony revenue, in dollar terms, was due to an increase in billed minutes of use resulting from increased marketing of Net2Phone's Internet telephony products and services. Direct Cost of Revenue. The Company's direct cost of revenue increased by 75.1%, from approximately $377.8 million for the nine months ended April 30, 1999 to approximately $661.6 million for the nine months ended April 30, 2000. As a percentage of total revenue, these costs increased from 77.8% for the nine months ended April 30, 1999 to 80.5% for the nine months ended April 30, 2000. The dollar increase is due primarily to increases in underlying carrier and connectivity costs, as the Company's telecommunications minutes of use, and associated revenues, grew substantially. As a percentage of total revenue, the increase in direct costs reflects a change in revenue mix, in which the Company experiences lower gross margins associated with wholesale telecommunications services as compared to retail telecommunications services as well as lower gross margins related to telecommunications revenue as compared with Internet access services. Selling, General and Administrative. Selling, general and administrative costs increased 149.7%, from approximately $70.8 million for the nine months ended April 30, 1999 to approximately $176.7 million for the nine months ended April 30, 2000. As a percentage of total revenue, these costs increased from 14.6% for the nine months ended April 30, 1999 to 21.5% for the nine months ended April 30, 2000. This increase is due to increased international debit card distribution costs, increased sales and marketing efforts for retail services, including prepaid calling cards and domestic and international long distance and for Net2Phone, as well as increased salaries, facilities costs and professional fees related to the expansion of the Company's infrastructure to facilitate its rapid sales growth, including expenditures related to expansion of the Company's telecommunications operations in Europe. Also included in selling, general and administrative costs for the nine months ended April 30, 2000 is approximately $11.9 million in costs associated with the Company's ventures division, which has several innovative telecommunications 13 and Internet related businesses under various stages of development, and approximately $8.2 million of non-cash compensation as a result of option grants made by our Net2Phone subsidiary. Depreciation and Amortization. Depreciation and amortization increased 31.0%, from approximately $18.6 million for the nine months ended April 30, 1999 to approximately $24.4 million for the nine months ended April 30, 2000. As a percentage of revenue, these costs decreased from 3.8% for the nine months ended April 30, 1999 to 3.0% for the nine months ended April 30, 2000. These costs increased, in dollar terms, primarily as a result of the Company's higher fixed asset base during the nine months ended April 30, 2000 as compared with the nine months ended April 30, 1999, reflecting the Company's efforts to expand its telecommunications network infrastructure and other facilities, both in the U.S. and abroad. The Company anticipates that depreciation and amortization costs will continue to increase as the Company continues to add to its asset base, both in the U.S. and abroad, allowing it to implement its global growth strategy. Income from Operations. The Company recorded a loss from operations of approximately $40.7 million for the nine months ended April 30, 2000, compared to income from operations of approximately $18.5 million for the nine months ended April 30, 1999. Income from operations for the Company's telecommunications business declined to approximately $23.5 million for the nine months ended April 30, 2000 from approximately $29.5 million for the nine months ended April 30, 1999. As a percentage of telecommunications revenue, income from operations for the telecommunications business decreased to 3.0% for the nine months ended April 30, 2000 from 6.5% for the nine months ended April 30, 1999 due primarily to decreased margins in the carrier wholesale and retail telecommunications businesses; a higher proportion of relatively lower margin wholesale revenues; and an increase in sales and marketing costs for retail telecommunications services, relating primarily to the expansion of the Company's European operations. Loss from operations for the Company's Internet services business increased to approximately $11.2 million for the nine months ended April 30, 2000 from approximately $6.2 million for the nine months ended April 30, 1999. The increased loss is primarily due to the decrease in revenue caused by the contribution of the majority of the Company's dial-up subscribers to the joint venture formed with Terra Networks, S.A. during the quarter ended October 31, 1999, lower gross margins and an increase in marketing expenses. Loss from operations from the Company's Ventures division, which is developing several new telecom and Internet-related businesses, was approximately $11.9 million for the nine months ended April 30, 2000, reflecting start-up and development costs. Loss from operations of the Net2Phone subsidiary increased to approximately $41.1 million for the nine months ended April 30, 2000, compared to a loss of approximately $4.7 million for the nine months ended April 30, 1999. This increase is due primarily to a substantial increase in selling, general and administrative expenses incurred as Net2Phone expanded distribution relationships, corporate infrastructure and human resources as well as the non-cash compensation charge of $8.2 million described above. Other income. Included in other income for the nine months ended April 30, 2000 is $120.7 million in gains recognized by the Company under Staff Accounting Bulletin No. 51 in conjunction with Net2Phone's sale of shares in its Initial Public Offering and Secondary Offering in August 1999 and December 1999, respectively, and a realized gain of $105.8 million on the Company's sale of 2.2 million Net2Phone shares as part of Net2Phone's Secondary Offering. Also included in other income for the period was a gain of approximately $231.3 million, recorded in the three months ended April 30, 2000, related to the sale of the Company's interests in two Internet joint ventures with Terra Networks. Income Taxes. The Company recorded income tax expense of approximately $183.8 million for the nine months ended April 30, 2000, compared to approximately $6.9 million for the nine months ended April 30, 1999. Three Months Ended April 30, 2000 Compared to Three Months Ended April 30, 1999 Results of Operations 14 Revenue. Revenue increased 37.2%, from approximately $191.8 million for the three months ended April 30, 1999 to approximately $263.1 million for the three months ended April 30, 2000. Telecommunications revenue increased 37.2%, from approximately $179.2 million for the three months ended April 30, 1999 to approximately $245.9 million for the three months ended April 30, 2000. Internet services revenue decreased 21.8%, from approximately $4.2 million for the three months ended April 30, 1999 to approximately $3.3 million for the three months ended April 30, 2000. Internet telephony revenue increased 66.4%, from approximately $8.3 million for the three months ended April 30, 1999 to approximately $13.9 million for the three months ended April 30, 2000. Telecommunications revenue increased as a result of a 34.5% increase in minutes of use from approximately 746.6 million for the three months ended April 30, 1999 to approximately 1.00 billion for the three months ended April 30, 2000. The increase in minutes was due to the addition of wholesale carrier service clients, increased usage by existing clients, and increased marketing of the Company's prepaid calling cards. The addition of wholesale carrier services clients and increased use by existing clients resulted in an increase in wholesale telecommunications revenues of 61.6%, from approximately $75.4 million for the three months ended April 30, 1999 to approximately $121.8 million for the three months ended April 30, 2000. As a percentage of telecommunications revenue, wholesale telecommunications revenue increased from approximately 42.1% in the three months ended April 30, 1999 to approximately 49.5% in the three months ended April 30, 2000. Revenue from retail telecommunications services increased 19.6%, from approximately $103.8 million for the three months ended April 30, 1999 to approximately $124.1 million for the three months ended April 30, 2000 as a result of increased marketing efforts for the Company's prepaid calling cards. Prepaid calling card sales as a percentage of retail telecommunications services revenue increased from 92.5% for the three months ended April 30, 1999 to 94.2% for the three months ended April 30, 2000. As a percentage of overall telecommunications revenue, retail telecommunications revenue decreased from approximately 57.9% for the three months ended April 30, 1999 to approximately 50.5% for the three months ended April 30, 2000. As a percentage of total revenue, Internet services revenue decreased from approximately 2.2% for the three months ended April 30, 1999 to approximately 1.3% for the three months ended April 30, 2000. This was due primarily to decreased revenue caused by the contribution of the majority of the Company's dial-up subscribers to the joint venture formed with Terra Networks, S.A. during the quarter ended October 31, 1999 as well as the substantial increase in telecommunications revenues during the same period. Internet telephony revenue as a percentage of total revenue amounted to 5.3% for the three months ended April 30, 2000, up from 4.4% for the three months ended April 30, 1999. The increase in Internet telephony revenue, in both dollar and percentage terms, was primarily due to an increase in billed minutes of use resulting from increased marketing of Net2Phone's Internet telephony products and services. Direct Cost of Revenue. The Company's direct cost of revenue increased by 40.3%, from approximately $150.2 million for the three months ended April 30, 1999 to approximately $210.6 million for the three months ended April 30, 2000. As a percentage of total revenue, these costs increased from 78.3% for the three months ended April 30, 1999 to 80.1% for the three months ended April 30, 2000. The dollar increase is due primarily to increases in underlying carrier and connectivity costs, as the Company's telecommunications minutes of use, and associated revenues, grew substantially. As a percentage of total revenue, the increase in direct costs reflects a change in revenue mix, in which the Company experiences lower gross margins associated with wholesale telecommunications services as compared to retail telecommunications services as well as lower gross margins related to telecommunications revenue as compared with Internet access service. Selling, General and Administrative. Selling, general and administrative costs increased 138.1%, from approximately $30.0 million for the three months ended April 30, 1999 to approximately $71.3 million for the three months ended April 30, 2000. As a percentage of total revenue, these costs increased from 15.6% for the three months ended April 30, 1999 to 27.1% for the three months ended April 30, 2000. This increase is due primarily to increased international debit card distribution costs, increased sales and marketing efforts for retail services, including prepaid calling cards and domestic and international long distance and for Net2Phone, as well as increased salaries, facilities costs and professional fees related to the expansion of the Company's infrastructure to facilitate its rapid sales growth, including expenditures related to expansion of the Company's telecommunications operations in Europe. Also included in selling, general 15 and administrative costs for the three months ended April 30, 2000 is approximately $8.7 million in costs associated with the Company's ventures division, which has several innovative telecommunications and internet related businesses under various stages of development, and $3.1 million of non-cash compensation as a result of option grants made by our Net2Phone subsidiary. Depreciation and Amortization. Depreciation and amortization increased 31.8%, from approximately $6.9 million for the three months ended April 30, 1999 to approximately $9.1 million for the three months ended April 30, 2000. As a percentage of revenue, these costs decreased slightly from 3.6% for the three months ended April 30, 1999 to 3.5% for the three months ended April 30, 2000. These costs increased, in dollar terms, primarily as a result of the Company's higher fixed asset base during the three months ended April 30, 2000 as compared with the three months ended April 30, 1999, reflecting the Company's efforts to expand its telecommunications network infrastructure and other facilities, both in the U.S. and abroad. The Company anticipates that depreciation and amortization costs will continue to increase as the Company continues to add to its asset base, both in the U.S. and abroad, allowing it to implement its global growth strategy. Income from Operations. The Company recorded a loss from operations (prior to the effects of minority interests) of approximately $28.0 million for the three months ended April 30, 2000, compared to income from operations of approximately $4.7 million for the three months ended April 30, 1999. Income from operations for the Company's telecommunications business (after the effect of minority interests) decreased from approximately $7.8 million for the three months ended April 30, 1999 to approximately $3.0 million for the three months ended April 30, 2000. As a percentage of telecommunications revenue, income from operations for the telecommunications business decreased to 1.1% for the three months ended April 30, 2000 from 4.1% for the three months ended April 30, 1999, due primarily to decreased margins in the carrier wholesale business, and an increase in sales and marketing costs for retail telecommunications services. Specifically, gross margins for European telecommunications operations were hampered by capacity constraints, which caused the Company's per-minute direct cost of revenues to rise. In addition, increased spending for marketing, salaries and facilities costs related to the Company's European operations contributed significantly to the rise in selling, general and administrative expenses. Loss from operations for the Company's Internet services business increased to approximately $4.0 million for the three months ended April 30, 2000 from approximately $2.1 million for the three months ended April 30, 1999. The increased loss is primarily due to the decrease in revenue caused by the contribution of the majority of the Company's dial-up subscribers to the joint venture formed with Terra Networks, S.A. during the quarter ended October 31, 1999, combined with lower gross margins and increased selling, general and administrative expenses. Loss from operations from the Company's Ventures division, which is developing several new telecom and Internet-related businesses, was approximately $8.9 million for the three months ended April 30, 2000, reflecting start-up and development costs. Loss from operations of the Net2Phone subsidiary increased to approximately $18.1 million for the three months ended April 30, 2000, compared to a loss of approximately $1.0 million for the three months ended April 30, 1999. This increase is due primarily to a substantial increase in selling, general and administrative expenses incurred as Net2Phone expanded distribution relationships, corporate infrastructure and human resources as well as the non-cash compensation charge of $3.1 million described above. Other income. Included in other income for the three months ended April 30, 2000 is a gain of approximately $231.3 million, recorded in the three months ended April 30, 2000, related to the sale of the Company's interests in two Internet joint ventures with Terra Networks in exchange for Terra Networks stock. Income Taxes. The Company recorded income tax expense of approximately $89.2 million for the three months ended April 30, 2000, compared to approximately $2.1 million for the three months ended April 30, 1999. Liquidity and Capital Resources General 16 Historically, the Company has satisfied its cash requirements through a combination of cash flow from operating activities, sales of equity and debt securities and borrowings from third parties. Additionally, the Company, including Net2Phone, received approximately $14.4 million upon the exercise of stock options in the nine months ended April 30, 2000. In May 1999, the Company entered into a credit agreement with a syndicate of lenders whereby these institutions committed to provide a $160 million credit facility. The Company used the proceeds from the initial borrowings under the credit facility of $108.1 million to purchase more than 99% of its outstanding 8.75% Senior Notes due 2006, together with accrued and unpaid interest. During the quarter ended January 31, 2000, the Company paid off the outstanding indebtedness under the facility of $108.1 million, plus fees and accrued and unpaid interest, using the proceeds from the sale of Net2Phone shares as part of Net2Phone's December 1999 Secondary Offering and the facility terminated. As of April 30, 2000, the Company had cash, cash equivalents and marketable securities of approximately $237.7 million and working capital of approximately $631.9 million. The Company generated negative cash flow from operating activities of approximately $85.2 million during the nine months ended April 30, 2000, compared with negative cash flow from operating activities of approximately $22.9 million during the nine months ended April 30, 1999. The Company's cash flow from operations varies significantly from quarter to quarter, depending upon the timing of operating cash receipts and payments, especially accounts receivable and accounts payable. Accounts receivable, accounts payable and accrued expenses have increased from period to period as the Company's businesses have grown. The Company's capital expenditures were approximately $55.5 million for the nine months ended April 30, 2000, compared to approximately $31.8 million for the nine months ended April 30, 1999, as the Company expanded its international and domestic telecommunications network infrastructure. The Company financed a portion of its capital expenditures through capital leases and notes payable. The Company experiences intense competition in its telecommunications business. The long distance telecommunications industry has been characterized by declines in both per-minute revenues and per-minute costs. In the past, these factors have tended to generally offset each other. However, as per-minute pricing continues to erode, gross margins have come under increasing pressure. The Company's long term strategy involves terminating a larger proportion of minutes on the Company's own network, thereby lowering costs and preserving margins even in a weaker price environment. However, in the short term, the demand for usage might outpace the rate of deployment of additional network capacity. In fact, it has become commonplace within the industry for companies to experience delays in network build-out programs. As such, there can be no assurance that the Company will be able to maintain its gross margins at the current level, in the face of lower per-minute revenues. IDT's European telecommunications operations account for an increasing proportion of overall telecommunications revenue. Recognizing the significant opportunities offered by the rapidly evolving European telecommunications market, the Company intends to expand its network in Europe to further develop its operations in that region. Such expansion may have a negative impact on the Company's gross margins over the next two to four quarters. In addition, the Company is entering several new markets within Europe. Such market entries are likely to result in significantly increased selling, general and administrative expenses, as the Company incurs overhead, promotional and human resource-related expenses for each country it enters. The Company will need to make significant capital expenditures in order to expand its network capacity. If the Company is unable to raise sufficient capital to meet its spending requirements, the Company's network expansion, and the anticipated margin improvement, would be delayed. Changes in Other Assets, Accounts Receivable, Allowance for Doubtful Accounts and Deferred Revenue Other current assets increased from $36.3 million at July 31, 1999 to $75.6 million at April 30, 2000, due primarily to increases in contract deposits and prepaid expenses at Net2Phone. The average age of the Company's accounts receivable, as measured by number of days sales outstanding, has been increasing due to a significant increase in sales to relatively more credit-worthy carriers and distributors of prepaid calling cards. These customers tend to demand, and the Company is willing to grant, extended payment terms. 17 Due to the wide range of collection terms, future trends with respect to days sales outstanding are generally dependent upon the proportion of total sales made to carriers, who are often offered extended payment terms of up to 90 days, and prepaid calling card distributors, who generally receive terms of up to 30 days. Therefore, the trends in days sales outstanding will depend, in large part, on the mix of wholesale (carrier) versus retail (debit card distributor) customers. In addition, as the Company is willing to extend longer payment terms to more credit-worthy customers, an increase in customers belonging to the highest credit classes, as a percentage of total customers, could also lead to an increase in days sales outstanding. However, as the foregoing is difficult to predict, it is not possible at this time to determine whether or not the recent upward trend in days sales outstanding will continue. The allowance for doubtful accounts as a percentage of accounts receivable decreased marginally, from 6.7% at July 31, 1999, to 6.5% at April 30, 2000. Deferred revenue as a percentage of total revenue varies from period to period dependent upon the mix and the timing of revenue. Net2Phone Financings In May 1999, a group of strategic investors purchased from Net2Phone, in the aggregate, 3,140,000 shares of Net2Phone Series A Preferred Stock convertible into 9,420,000 shares of common stock and warrants to purchase up to 180,000 shares of Net2Phone common stock, for a net aggregate purchase price of $29.9 million. Additionally, Net2Phone issued a warrant to purchase 92,400 shares of its common stock to Hambrecht & Quist as part of its fee as placement agent with respect to this transaction. In August 1999, Net2Phone completed its Initial Public Offering of 6.2 million shares, receiving approximately $83.8 million in net proceeds. At that time, the Series A Preferred Stock was converted into Class A Common Stock. The Company recognized a pre-tax gain of approximately $43.9 million as a result of this transaction. In December 1999, Net2Phone completed a Secondary Offering of 6.3 million shares, receiving approximately $177.4 million in net proceeds. As part of the Secondary Offering, the Company sold 2.2 million Net2Phone shares, yielding approximately $115.4 million in net proceeds. Subsequent to the sale of these shares, the Company used approximately $108.1 million of the proceeds to pay off the outstanding balance of its bank credit facility. In connection with Net2Phone's distribution and marketing agreement with ICQ, a subsidiary of America Online, Net2Phone issued to America Online a warrant to purchase up to 3% of Net2Phone's outstanding capital stock on a fully-diluted basis. This warrant will vest in 1% increments upon the achievement of each of three incremental thresholds of revenue generated under the agreement during the first four years that the warrant is outstanding. The exercise price under the terms of the warrant will be equal to the lesser of $12.00 per share or $450 million divided by the number of Net2Phone's fully- diluted shares on the initial exercise date. The warrants are accounted for in accordance with the provisions of EITF 96-18, "Accounting for Equity Investments that are Issued to Other than Employees for Acquiring or in Conjunction with Selling Goods or Services." Due to the uncertainty of reaching the performance measures stipulated in the warrant agreement, the Company has not recorded any expense relating to the issuance of the warrant. Upon determination that the achievement of the revenue thresholds is probable, the Company will value the warrant and expense it over the remaining period until the performance criteria is met. The three revenue thresholds are $10 million, $50 million and $75 million and the term of the distribution and marketing agreement is four years. If the three incremental thresholds had been met on April 30, 2000, the Company would have expensed approximately $77 million. In November 1999, the warrant was amended to include the right to purchase an additional 0.5% of Net2Phone's outstanding capital stock on a fully-diluted basis at an exercise price of $60.46 per share upon the achievement of $100 million in revenue. Significant Transactions In March 2000, the Company announced that a consortium led by AT&T Corporation had agreed to purchase 14.9 million of the Company's approximately 24.9 million shares of Net2Phone Class A Common Stock, for a purchase price 18 of $75 per share. In addition, Net2Phone will sell four million of its shares to AT&T for a purchase price of $75 per share. The Company anticipates that this transaction will close during the first quarter of Fiscal 2001. In addition, the Company received the right, at its option, to sell to AT&T 2,040,817 shares of its Class B Common Stock for total cash consideration of $75.0 million. In June 2000, Liberty Media Group completed the purchase of approximately 9.9% of the equity of IDT. Under the terms of the agreement, IDT issued and sold to Liberty Media 3,728,949 shares of IDT's Common Stock, exchangeable for shares of Class B Common Stock, at a price of $34.50 per share, resulting in total cash consideration of approximately $128.6 million. On April 30, 2000, the Company sold its interests in two joint ventures with Terra Networks for the right to receive 3,750,000 Terra ordinary shares. The Company recognized a pre-tax gain of approximately $231.3 million in connection with this transaction for the quarter ended April 30, 2000. On May 17, 2000 the Company announced that its Board of Directors had authorized the repurchase of up to five million shares of the Company's common stock. As of June 14, 2000 the Company had repurchased 1,431,773 shares of common stock under the program for aggregate consideration of approximately $43.5 million. Acquisitions of In-Process Research & Development The Company's purchase of InterExchange, Inc. in April 1998 involved the acquisition of two significant in-process research and development projects relating to switch technology. Neither one of these projects has been successfully completed at this time, and both projects have been terminated. Currently, the Company is not contemplating any additional acquisitions of in- process research and development. Other Sources and Uses of Resources The Company intends to, where appropriate, make strategic acquisitions to increase its telecommunications customer base. The Company may also make strategic acquisitions related to its Internet telephony business, or any of its new venture businesses. From time to time, the Company evaluates potential acquisitions of companies, technologies, products and customer accounts that complement its businesses. The Company believes that, based upon its present business plan, the Company's existing cash resources will be sufficient to meet its currently anticipated working capital and capital expenditure requirements and to fund any potential operating cash flow deficits for at least the next twelve months. If the Company's growth exceeds current expectations or if the Company acquires the business or assets of another company, or if the Company's operating cash flow deficit exceeds the Company's expectations to the point that the Company cannot meet its working capital and capital expenditure requirements, the Company will need to raise additional capital from equity or debt sources. There can be no assurance that the Company will be able to raise such capital on favorable terms or at all. If the Company is unable to obtain such additional capital, the Company may be required to reduce the scope of its anticipated expansion, which could have a material adverse effect on the Company's business, financial condition or results of operations. Year 2000 Prior to January 1, 2000, the Company reviewed and evaluated the possible effects of the Year 2000 issue upon its installed computer systems, network systems and software applications. The Year 2000 issue involved the fact that many computers and applications define dates by the last two digits of the year and "00" would possibly not be properly recognized by such programs as the year 2000. The Company dedicated the time and resources it deemed appropriate to address and correct potential Year 2000 problems. In response to the Year 2000 issue, the Company established a Year 2000 compliance committee (the "Committee") to eliminate any possible disruptions in services and operations due to the date change in the Year 2000. The Committee developed a plan to identify and repair any systems that may be affected by the Year 2000. The plan consisted of (1) identifying and inventorying all systems; (2) assessing and testing 19 the systems for Year 2000 compliance; (3) modifying, upgrading or replacing any non-compliant systems; and (4) testing the corrected systems to ensure compliance. The Committee implemented this plan throughout the company and, in addition to reviewing its own systems, the Company initiated inquiries and submitted requests to its third-party vendors and service providers to obtain information regarding their compliance with the Year 2000. Furthermore, as a result of the Company's focus on the testing and remediation of its switching facilities, its network operations through which it provides communications services to its customers, were not disrupted by the Year 2000 issue. Inventory, assessment, remediation and testing of software applications and hardware systems, including network systems, was substantially completed. The Company completed the modification, updating or replacement of any systems that to its knowledge were not Year 2000 compliant in November 1999. Testing of the corrected systems has been implemented and will continue on an ongoing basis through October 2000 due to the date October 10, 2000, being the first occurrence of a date requiring the use of eight digits to define the date. The Company is confident that its own network systems are Year 2000 compliant due to the nature and extent of the testing the Company conducted and continues to implement on such systems. European Currency Conversion In January 1999, a new currency called the "euro" was introduced in certain Economic and Monetary Union ("EMU") countries. The EMU countries adopted the euro as their common legal currency, and through January 1, 2002, both the existing national currency of the respective EMU country and the euro will be accepted as legal currency. Beginning in 2002, all EMU countries are expected to operate with the euro as their single currency. The final rules and regulations have not yet been defined and finalized by the European Commission with regard to the euro currency. IDT's management does not anticipate, based on information currently available, that the euro will have a material adverse impact on the Company's operations and sales. CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words "believes," "anticipates," "expects," and similar words and phrases. Such forward-looking statements include, among other things, the Company's plans to implement its growth strategy, improve its financial performance, expand its infrastructure, develop new products and services, expand its customer base and enter international markets, and the possible outcome of litigation relating to the Company. Such forward-looking statements also include the Company's expectations concerning factors affecting the markets for its products, such as changes in the U.S. and the international regulatory environment and the demand for long-distance telecommunications, Internet access and Internet telephony services. Actual results could differ from those projected in any forward-looking statements. Forward-looking statements are based on management's current views and assumptions and involve known and unknown risks that could cause actual results, performance or events to differ materially from those expressed or implied in those statements. These risks include but are not limited to the following risks: each of our business lines is highly sensitive to declining prices; competition in our core businesses could substantially reduce our revenues and our profits; we may not be able to grow our operations in the future if we cannot raise enough capital; our revenues and profits will not increase if we are unable to continue to expand our telecommunications business; our expenses will increase substantially if we expand our network at a rate that is faster or slower than the growth of our telecommunications traffic; 20 our operations would be impaired if we are unable to obtain the products and services of the telecommunications companies that we are dependent upon; termination of our carrier agreements with foreign partners or our inability to enter into carrier agreements in the future could materially and adversely affect our ability to compete in foreign countries; our revenues and our growth will suffer if our retailers and sales representatives fail to effectively market and distribute our products and services; we may not be able to integrate our joint ventures, direct investments and acquisitions successfully with our existing business; rapid technological change and frequent new product introductions in our markets could render our products and services obsolete; our growth may be limited if we cannot effectively manage our international operations; our business will not grow without increased use of the Internet; our revenues will be impaired if we experience difficulties in collecting our receivables; we will not be profitable if we do not receive attractive rates from other carriers for our long distance traffic; federal, state, and international government regulation may reduce our ability to provide services, or make our business less profitable and we may become subject to increased costs of operations due to uncertainty over the amount of payphone surcharges and Federal Universal Service Fund obligations; we may become subject to increased price competition from other carriers due to federal regulatory changes in determining international settlement rates; European regulation of telecommunications services may not continue to evolve towards streamlined regulation; telecommunications regulations of other countries may restrict our operations; government regulation of Internet access may increase our costs of operations and we may become subject to Internet access charges; we may be subject to liability for information disseminated over our Internet network; the infringement or duplication of our proprietary technology could increase our competition and we could incur substantial costs in defending or pursuing any claims relating to proprietary rights; network construction delays and system disruptions or failures could prevent us from providing our services, cause us to lose customers and adversely affect our business; our quarterly operating results are subject to variation, which could cause us not to meet the expectations of securities analysts, and should not be relied upon as an accurate indicator of our overall performance; if we are unable to attract and retain qualified management and technical personnel, we may not remain profitable; and IDT is controlled by its principal stockholder, which limits the ability of other stockholders to affect the management of IDT. The forward-looking statements are made as of the date of this Report, and the Company assumes no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth herein and the other information set forth from time to time in the Company's reports 21 filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including the Company's Annual Report on Form 10-K, for the year ended July 31, 1999. Item 3. Quantitative and Qualitative Disclosures About Market Risk None 22 PART II. OTHER INFORMATION Item 1. Legal Proceedings Incorporated by reference from Part I, Item I, Financial Statements, Note 5 captioned "Legal Proceedings and Contingencies." Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders On March 14, 2000, March 26, 2000 and April 18, 2000, the Board of Directors of the Company adopted resolutions authorizing amendments to the Company's restated certificate of incorporation and recommending that the stockholders of the Company adopt the following amendments: 1. Increase the authorized capital stock of the Company from 145,000,000 shares to 245,000,000 shares. 2. Create and authorize a new class of common stock, Class B Common Stock, par value $0.01 per share. 3. Increase the number of directors on the Company's Board of Directors from fifteen (15) to seventeen (17). On April 28, 2000, Mr. Howard S. Jonas executed a written consent approving the amendments to the Company's restated certificate of incorporation. Mr. Jonas executed the written consent as the beneficial owner of 951,605 shares of the Company's Common Stock, par value $0.01 per share, and 9,969,733 shares of the Company's Class A Common Stock, par value $0.01 per share, representing approximately 56.6% of the combined voting power of the Company as of April 28, 2000. Item 5. Other Information None 23 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit Number Description 3.01(1) Restated Certificate of Incorporation of the Registrant. 3.02(1) By-laws of the Registrant. 3.03(3) Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant. 10.29(2) Option Agreement, dated as of March 3, 2000, between IDT Corporation and AT&T Corp. 10.30(3) Amendment to Option Agreement, dated as of April 5, 2000 between IDT Corporation and AT&T Corp. 10.31(2) Subscription Agreement, dated as of March 24, 2000, between IDT Corporation and Liberty Media Corporation. 10.32(3) Amendment to Subscription Agreement, dated as of May 26, 2000, between IDT Corporation and Liberty Media Corporation. 10.33(2) Letter Agreement, dated as of March 28, 2000, between IDT Corporation, AT&T Corp. and Net2Phone, Inc. 10.34(2) Letter Agreement, dated as of March 30, 2000, between IDT Corporation, AT&T Corp. and Net2Phone, Inc. 10.35* Conversion, Termination and Release Agreement, dated as of April 30, 2000, between IDT Corporation, Terra Networks, S.A., Terra Networks USA, Inc., Terra Networks Access Services USA LLC and Terra Networks Interactive Services USA LLC. 27.01* Financial Data Schedule. -------------- * filed herewith (1) Incorporated by reference to Form S-1 filed February 21, 1996 file no. 333-00204. (2) Incorporated by reference to Form 8-K filed March 31, 2000. (3) Incorporated by reference to Schedule 14C filed June 12, 2000. 24 (b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K on March 31, 2000, announcing that on March 28, 2000, the Company entered into an agreement with AT&T, whereby AT&T, through a newly formed business entity, would purchase 14.9 million shares of Class A Common Stock, par value $0.01 per share, of Net2Phone, Inc. at a price of $75 per share. The Company also announced that on March 3, 2000 it entered into an agreement with AT&T in which the Company granted an option to AT&T, for a period of 180 days, to purchase 2,040,817 shares of Class B Common Stock of the Company for an aggregate purchase price of approximately $75,000,000. The Company also announced that on March 24, 2000 it entered into an agreement with Liberty Media Corporation pursuant to which Liberty Media Corporation agreed to purchase approximately 9.9% of the Company's Common Stock for an aggregate purchase price of approximately $130,000,000. 25 IDT CORPORATION FORM 10-Q April 30, 2000 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. IDT CORPORATION June 14, 2000 By: /s/ HOWARD S. JONAS ------------- --------------------- Date Howard S. Jonas Chairman of the Board and Chief Executive Officer (Principal Executive Officer) June 14, 2000 By: /s/ STEPHEN R. BROWN ------------- ---------------------- Date Stephen R. Brown Chief Financial Officer (Principal Financial and Accounting Officer) 26 EX-10.35 2 0002.txt TERMINATION AND RELEASE AGREEMENT EXHIBIT 10.35 CONVERSION, TERMINATION AND RELEASE AGREEMENT This CONVERSION, TERMINATION AND RELEASE AGREEMENT ("Agreement') is made and entered into as of April 30, 2000, by and between IDT Corporation ("IDT"); Terra Networks, S.A. ("TI"); Terra Networks USA, Inc. ("US-TI"), Terra Networks Access Services USA LLC ("TI USA ISP"); and Terra Networks Interactive Services USA LLC ("TI USA Portal"). Each of the foregoing shall be referred to herein as a "Party" and collectively shall be referred to herein as "Parties." RECITALS -------- WHEREAS, On October 5, 1999, TI entered into three related contracts with IDT: (a) the Joint Venture Agreement ("JVA") between TI and IDT; (b) the Limited Liability Company Agreement concerning TI USA Portal between Telefonica Interactiva USA, Inc., now US-TI, and IDT; and (c) the Limited Liability Company Agreement concerning TI USA ISP between Telefonica Interactiva USA, Inc., now US-TI, and IDT; WHEREAS, pursuant to the Limited Liability Company Agreements identified in the foregoing recital, both IDT and US-TI acquired equity ownership interests in TI USA Portal and TI USA ISP; WHEREAS, on October 5, 1999, IDT entered into the following additional agreements: (a) the Internet Service Provisioning and Marketing Agreement between IDT and TI USA ISP (the "Internet Service Provisioning and Marketing Agreement"); and (b) the Internet Colocation Services Agreement between IDT and TI USA Portal (the "Internet Colocation Services Agreement"); WHEREAS, on or about the time that TI completed its initial public offering, IDT purchased 1,156,682 shares of TI shares (the "IPO Shares"); and the IPO Shares are subject to various restrictions concerning their re-sale; WHEREAS, IDT and TI wish to terminate the JVA; WHEREAS, IDT and US-TI wish to terminate the Limited Liability Company Agreement for the TI USA Portal and the Limited Liability Company Agreement for the TI USA ISP, and to convert IDT's equity interest in the TI USA Portal and TI USA ISP into shares of TI; WHEREAS, as more fully described below, the Parties wish to terminate the Internet Service Provisioning and Marketing Agreement and the Internet Colocation Services Agreement; and WHEREAS, as more fully described below, the Parties wish to release each other from any and all claims that each may have against one another. AGREEMENT --------- NOW, THEREFORE, in consideration of the covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows: 1. Incorporation of Recitals. The above recitals are true and correct and ------------------------- are incorporated herein by reference as if set forth herein at length and shall survive the execution of this Agreement. 2. Termination of Joint Venture Agreement. -------------------------------------- (a) The JVA is hereby terminated on and as of the date hereof, and both TI and IDT are hereby relieved from any further obligation or duty to each other under the JVA. (b) TI and IDT hereby release each other, including their respective parents, subsidiaries, affiliates, shareholders, directors, officers, employees, advisors and agents, from any and all claims that either one may have against the other, whether known or unknown, up to the date hereof with regard to the JVA or any matter that is related to the JVA. Both TI and IDT represent and warrant to the other that neither they, nor any of their affiliates, have assigned or transferred, nor purported to assign or transfer, any claim or right that either may have under the JVA. Notwithstanding the generality of the foregoing, this Section 2 shall be applicable to this Agreement. 3. Termination of Limited Liability Company Agreements. --------------------------------------------------- (a) The Limited Liability Company Agreement concerning TI USA Portal as well as the Limited Liability Company Agreement concerning TI USA ISP are hereby terminated on and as of the date hereof, and both US-TI and IDT are hereby relieved from any further obligation or duty to each other under the same. (b) Any right or interest that IDT had or may have had in TI USA Portal and in TI USA ISP under the respective Limited Liability Company Agreements, or otherwise, is hereby converted entirely into ordinary shares of TI (the "Conversion Shares"). From and after the date hereof, IDT shall no longer hold or own any right or interest in TI USA ISP or in TI USA Portal. The Conversion Shares shall be delivered to IDT, free and clear of all encumbrances except as otherwise contemplated in this Agreement, as follows: TI shall either deliver to IDT 3,750,000 ordinary shares of TI on or before July 31, 2000, or shall deliver to IDT 4,000,000 ordinary shares of TI at any time between August 1, 2000 and September 30, 2000. TI shall take all necessary action to issue and deliver the Conversion Shares as soon as commercially practicable. In any event, the Conversion Shares shall have Madrid Stock Exchange ticker symbol "TRR." At the time of delivery of the Conversion Shares to IDT, TI shall furnish a reasonably satisfactory legal opinion from independent counsel to TI stating that the Conversion Shares have been registered for sale in accordance with all applicable laws and 2 are freely transferable by IDT, subject only to the restrictions set forth in this Section 3(c) of this Agreement. (c) IDT shall be permitted to sell the Conversion Shares freely at any time, provided that, on or prior to December 31, 2000, IDT shall not sell the Conversion Shares to any person (natural or otherwise, including, without limitation, on any stock exchange) who is not a subsidiary of IDT (i) if the aggregate number of Conversion Shares sold on any business day will exceed 75,000, or (ii) if the aggregate number of Conversion Shares sold during any calendar month will exceed the result produced by dividing 3,750,000 by the number of calendar months (treating any partial calendar month as a fraction of a month) occurring during the period from the date of delivery of the Conversion Shares through December 31, 2000. After December 31, 2000, the foregoing restrictions shall terminate, however, from that point forward, IDT shall limit its sale of Conversion Shares during any given day to a number that shall not exceed 15% of the total trading volume of TI shares during the immediately preceding trading day. (d) US-TI and IDT hereby release each other, including their respective parents, subsidiaries, affiliates, shareholders, directors, officers, employees, advisors and agents, from any and all claims that either one may have against the other, whether known or unknown, up to the date hereof with regard to the Liability Company Agreement concerning TI USA Portal, as well as the Limited Liability Company Agreement concerning TI USA ISP, or any matter related to the same. Both US-TI and IDT represent and warrant to the other that neither they, nor any of their affiliates, have assigned or transferred, nor purported to assign or transfer, any claim or right that either may have under either one of the Limited Liability Company Agreements. 4. Release of IPO Shares. TI hereby releases the IPO Shares from the --------------------- existing lockup agreement and restrictions. IDT acknowledges that the decision of whether to release IPO Shares from lockup agreements and restrictions resting with other parties ("Third Party Lockups") is not controlled by TI; however, TI, ------------------- within a commercially reasonable time not to exceed five (5) business days from the date hereof and upon IDT's request, agrees to (i) communicate TI's approval of the release of the Third Party Lockups and (ii) use diligence and expedition in requesting and providing any appropriate information with respect to the release of the Third Party Lockups. In this regard, IDT shall provide such documentation and assistance during IDT's normal business hours in connection with TI's efforts to obtain the release of the IPO Shares from any Third Party Lockups. Upon the release of the IPO Shares by TI hereunder and from any applicable Third Party Lockups, any sale by IDT of such IPO Shares shall be counted against IDT's restrictions on the sale of Conversion Shares pursuant to Section 3(a), above. Additionally, IDT shall be not be permitted to sell the IPO Shares after release from any Third Party Lockups until the date of delivery of the Conversion Shares (i) if the aggregate number of IPO Shares sold on any business day will exceed 75,000, or (ii) if the aggregate number of IPO Shares sold during any calendar month will exceed 500,000. 3 5. Termination of ISP and Marketing Agreement. ------------------------------------------ (a) The Internet Service Provisioning and Marketing Agreement shall be terminated on the date hereof and both IDT and TI USA ISP are hereby relieved from any further obligation or duty to each other under the same except as provided for herein; provided that with respect to the 25,000 customers retained by Terra pursuant to Section 5(b), below, IDT shall provide the types and quality of services required under the Internet Service Provisioning and Marketing Agreement for a period of 90 days from the date hereof. Terra shall be responsible to provide all equipment additional to that presently being used and that is necessary for the services provided herein by IDT, and IDT shall provide all necessary, including additional, manpower to meet the current and future service levels required herein. On the 90th day, TI USA ISP shall pay to IDT in immediately available funds all amounts that would be due under the Internet Service Provisioning and Marketing Agreement (as if it were still in effect) for IDT's services during the 90 day period. Anything to the contrary notwithstanding, IDT's failure to provide the types and quality of services required under the Internet Service Provisioning and Marketing Agreement shall constitute a default hereunder, provided that such default will not affect (i) the conversion of IDT's interest in the TI USA Portal and the TI USA ISP into Conversion Shares pursuant to Section 3, above, or (ii) the release of the IPO Shares from the lockup agreements and restrictions pursuant to Section 4, above. In no event will IDT be liable to TERRA for any special, indirect, incidental, exemplary, punitive or consequential damages in any manner in connection with or arising out of this provision, regardless of the form of action or the basis of the claim or whether or not the party has been advised of the possibility of such damages; provided, however, that there will be no limitation of liability as set forth herein in such cases where IDT willfully or intentionally damages Terra. (b) Within three days following the execution of this Agreement and receipt of board approval (as contemplated by Section 16 hereof), TI USA ISP shall deliver to IDT, free and clear of all liens and other encumbrances, the ownership of all customers of TI USA ISP which are in excess of 25,000. TI USA ISP is free to select the 25,000 customers that it shall retain, and the parties understand that such 25,000 customers shall include the best paying customers of TI USA ISP and/or those of Hispanic origin. IDT shall provide TI USA ISP a listing of, as well as relevant account information regarding the existing ISP customers (including, without limitation, the amounts billed per customer per billing period, accounts receivable aging reports, a list of non-performing accounts and the name, address and method of payment for each customer), from which TI USA ISP shall select the customers to be retained by it. (c) IDT and TI USA ISP hereby release each other, including their respective parents, subsidiaries, affiliates, shareholders, directors, officers, employees, advisors and agents, from any and all claims that either one may have against the other, whether known or unknown, up to the date hereof with regard to the Internet Provisioning and Marketing Agreement, or any matters related to the same. Both IDT and TI USA ISP represent and warrant to the other that neither they, nor any of their affiliates, have assigned or transferred, nor purported to assign or 4 transfer, any claim or right that either may have under the Internet Service Provisioning and Marketing Agreement. 6. Payment of Amounts Due TI, TI USA ISP and TI USA Portal by IDT. On or -------------------------------------------------------------- prior to the earlier of (a) the first anniversary of the date hereof and (b) the first date upon which IDT and its subsidiaries cease to own any of the Conversion Shares, IDT shall pay to TI $3,000,000 in full satisfaction of any and all amounts due to TI pursuant to the various Agreements described in the recitals hereto (the "Operative Agreements"). Anything to the contrary notwithstanding, the Parties acknowledge and agree that IDT's payment of said amount to TI contemplates a final net settlement of all amounts owed to IDT and TI (inclusive of any and all set-offs, deductions and other adjustments with respect to any sums due and owing to IDT by TI as of the date hereof) under the Operative Agreements. 7. Termination of Internet Colocation and Services Agreement. --------------------------------------------------------- (a) The Internet Colocation Services Agreement shall be terminated on the date hereof and both IDT and TI USA Portal are hereby relieved from any further obligation or duty to each other under the same except as provided for herein; provided that IDT shall provide the types and quality of services required under the Internet Colocation and Services Agreement for a period of 90 days from the date hereof. Terra shall be responsible to provide all equipment additional to that presently being used and that is necessary for the services provided herein by IDT, and IDT shall provide all necessary, including additional, manpower to meet the current and future service levels required herein. On the 90th day, TI USA Portal shall pay to IDT in immediately available funds all amounts that would be due under the Internet Colocation and Services Agreement (as if it were still in effect) for IDT's services during the 90 day period. Anything to the contrary notwithstanding, IDT's failure to provide the types and quality of services required under the Internet Colocation and Services Agreement shall constitute a default hereunder, provided that such default will not affect (i) the conversion of IDT's interest in the TI USA Portal and the TI USA ISP into Conversion Shares pursuant to Section 3, above, or (ii) the release of the IPO Shares from the lockup agreements and restrictions pursuant to Section 4, above. In no event will IDT be liable to TERRA for any special, indirect, incidental, exemplary, punitive or consequential damages in any manner in connection with or arising out of this provision, regardless of the form of action or the basis of the claim or whether or not the party has been advised of the possibility of such damages; provided, however, that there will be no limitation of liability as set forth herein in such cases where IDT willfully or intentionally damages Terra. (b) IDT and TI USA Portal hereby release each other, including their respective parents, subsidiaries, affiliates, shareholders, directors, officers, employees, advisors and agents, from any and all claims that either one may have against the other, whether known or unknown, up to the date hereof with regard to the Internet Colocation and Services Agreement, or any matters related to the same. Both IDT and TI USA Portal represent and warrant to the other that neither they, nor any of their affiliates, have assigned or transferred, nor purported to 5 assign or transfer, any claim or right that either may have under the Internet Colocation and Services Agreement. 8. No Solicitation; Non-Compete. The Parties will continue to be ---------------------------- restricted from soliciting for employment any key personnel from each other for a period of twelve (12) months after the execution of this Agreement. For a period of twelve (12) months after the execution of this Agreement, IDT shall not directly compete with TI USA ISP by providing services primarily targeted to the Target Markets (as hereinafter defined). For a period of fifteen (15) months after the execution of this Agreement, IDT shall not directly compete with TI USA Portal by providing services primarily targeted to the Target Markets. For purposes of this Section 8, the term "Target Markets" shall have the meaning assigned thereto in the JVA (as in effect immediately prior to the JVA's termination pursuant to this Agreement). As used herein, IDT includes IDT and its affiliates, including subsidiaries and any other entity controlled, directly or indirectly, by IDT. 9. Confidentiality. The Parties shall hold in confidence, and shall use --------------- only for the purposes of this Agreement, any and all Proprietary Information disclosed to each other for a period of two (2) years after the execution of this Agreement (the "Confidentiality Period"). The term "Proprietary Information" shall mean all information, which one Party, directly or indirectly, acquires, from any other Party, excluding information falling into any of the following categories: (a) Information that, at the time of disclosure hereunder, is in the public domain; (b) Information that, after disclosure hereunder, enters the public domain other than by breach of this Agreement; (c) Information that, prior to disclosure hereunder, was already in the recipient's possession, either without limitation on disclosure to others or subsequently becoming free of such limitation; (d) Information obtained by the recipient from a third party which the relevant Party reasonably believes has an independent right to disclose this information; and (e) Information that is available through discovery by independent research without use of or access to the Proprietary Information acquired from another Party. A Party shall be deemed to have complied with its obligation to maintain Proprietary Information in confidence if such Party observes (and continues to observe during the entire duration of the Confidentiality Period) with respect thereto, the same safeguards and precautions, which such Party observes with respect to its own proprietary information of the same or similar kind. It shall not be deemed to be a breach of the obligation to maintain Proprietary Information in confidence if Proprietary Information is disclosed upon the order of a court or other 6 governmental entity provided, however, that the Party served with such order shall notify the other Party so as to enable such other Party to apply to a court of law for a protective order. Without limiting the validity or effect of Section 13, below, the parties agree that a breach of this Section 9 by any of them could cause irreparable harm to the others for which an action at law may not provide an adequate remedy. The parties, therefore, waive any and all defenses for a claim by the non-breaching parties, or any of them, for injunctive relief from any court of competent jurisdiction in the event that one of the parties hereto breaches this Section 9. 10. Fees. Unless otherwise mutually agreed in writing, the Parties shall ---- each bear their own fees, costs and expenses incurred by them in connection with the preparation of this Agreement, including, without limitation, attorneys', consultants' and accountants' fees. 11. Legal Requirement. Each Party shall comply with all legal ----------------- requirements applicable to each Party, and those required by any applicable jurisdiction, in the performance of its obligations hereunder. 12. Share Offer. ----------- (a) During the period from the date hereof through December 31, 2000 (and subject to the provisions of Section 3(c) with respect to the Conversion Shares), if IDT desires to sell any of the IPO Shares or the Conversion Shares (collectively hereinafter referred to as the "TI Shares") other than to a subsidiary of IDT, or receives an offer to purchase any of its TI Shares, IDT will first offer such TI Shares to TI for purchase by TI or its designee (the "Offer") prior to offering or selling such TI Shares to any third party. IDT shall make the Offer to TI by telephone or in writing no later than 12:00 p.m., Eastern Standard Time (U.S.) on the day of the Offer; provided that the provisions of this Section 12 shall not apply with respect to any sale of less than 50,000 TI Shares. (b) Option. TI shall have the irrevocable and exclusive option, but ------ not the obligation (the "Option"), to purchase all, but not less than all, of the TI Shares at the Closing referred to in Section 12(c), below, and for the purchase price and on the terms set forth below. TI shall exercise the Option by notifying IDT by telephone or in writing on the date of the Offer no later than two (2) hours prior to the market closing as to whether TI accepts or declines the Offer. Upon exercise of the Option, TI shall have the obligation to purchase the TI Shares described in the Offer on and subject to the terms and conditions hereof. Failure by TI to exercise the Option by providing the notice specified in this Section 12 shall be deemed an election by it not to exercise the Option; and IDT may thereafter transfer its TI Shares at any time or from time to time free and clear of any restrictions imposed by this Section 12. (c) Closing; Right to Transfer. If TI elects to purchase any TI -------------------------- Shares pursuant to the Option, then such purchases shall, unless the parties thereto otherwise agree, be completed at a closing (the "Closing") to be held at the principal office of IDT at 10:00 a.m. local time on the third (3rd) business day following the exercise of the Option or as otherwise closed by broker's settlement so long as such settlement takes place within such 3-day period. TI may 7 assign its rights and obligations under this Section 12 to another person upon written notification to IDT. (d) Purchase Price. The purchase price for any TI Shares sold -------------- pursuant to the Option shall be an amount equal to the average of the high and low trading prices for the TI Shares on the NASDAQ National Market (or the national stock exchange on which the TI Shares are then traded) on the date of the Offer. The full amount of the purchase price for any TI Shares purchased by TI pursuant to this Section 12 shall be paid in full in cash by wire transfer of immediately available funds on the date of Closing. 13. Arbitration. All claims, disputes and other matters in question ----------- arising out of, or relating to, this Agreement shall be submitted to arbitration in accordance with the Rules of the American Arbitration Association (the "AAA") then in effect, unless the parties mutually agree otherwise, and pursuant to the following procedures: (a) Notice of the demand for arbitration shall be filed in writing with the other Party to this Agreement and with the AAA. Three arbitrators shall be chosen. Each Party shall select one arbitrator, and the American Arbitration Association shall select the third arbitrator. A determination by a majority of the panel shall be binding on the Parties. (b) Reasonable discovery, as determined in the sole discretion of the arbitrators, shall be allowed. (c) All arbitration proceedings shall be held in Miami, Florida. (d) The Parties agree that the issues being resolved hereunder shall be determined by arbitration pursuant to the provisions set forth herein and pursuant to the applicable rules of the American Arbitration Association then in effect insofar as such rules are not inconsistent with the provisions set forth herein. (e) The costs and fees of the arbitration shall be allocated by the arbitrators. The Party or Parties prevailing in the arbitration will be entitled, in addition to such other relief as may be granted, to reasonable attorneys' fees, if any, as shall be awarded by the arbitrators. (f) The award rendered by the arbitrators shall be final and in writing, and judgment may be entered in accordance with applicable law and in any court having jurisdiction thereof. 14. Notices. Except for those notices required pursuant to Section 12, ------- above, all notices to be otherwise given herein shall be effective upon receipt and shall be in writing and delivered personally or by recognized delivery service or mailed, first class mail, postage prepaid or given by telegram, telecopy or other similar means (followed with a confirmation by mail) to the parties, as the case may be, at the following address or such other address as may hereafter be designated, in writing, by the respective Party in accordance with this section: 8 Name Address TI, US-TI,: Terra Networks, S.A. TI USA ISP, and Via de las dos Castillas, 33 TI USA Portal to: Complejo Atica Edif. 1-1/a/ planta 28224 Pozuelos de Alarcon Madrid, Spain Attention: Cristina Lamana Fax: +34-91-452-3147 With a copy to: Greenberg Traurig, P.A. 1221 Brickell Avenue Miami, Florida 33131 Attention: Jose A. Santos, Jr. Fax: (305) 579-0717 IDT: IDT Corporation 520 Broad Street Newark, New Jersey 07102 Attention: Ira Greenstein Fax: (201) 928-2885 15. Entire Agreement. This Agreement constitutes the entire agreement ---------------- between the Parties, and supersedes all negotiations, prior discussions, agreements, preliminary agreements or understandings between the Parties, whether written or oral. Only the rights or obligations of the Parties that are reflected in this Agreement shall survive after its execution. There are no representations and warranties of the Parties except as specifically stated herein. This Agreement may not be amended, supplemented or otherwise modified except by an instrument in writing signed by the Parties. 16. Binding Effect and Benefit of Agreement. This Agreement shall be --------------------------------------- binding upon, and shall insure to the benefit of, the Parties hereto and their respective successors in interest and permitted assigns. This Agreement (other than Section 4 hereof, which shall be binding without any such board approval) is subject to the approval of the board of directors of each Party. 17. Severability. If any term or provision hereof or the application ------------ thereof to any circumstance shall be held invalid or unenforceable, such term or provision shall be ineffective but shall not affect in any respect whatsoever the validity of the remainder of this Agreement; and the Parties shall immediately renegotiate such term or provision to eliminate such invalidity or unenforceability, maintaining to the greatest extent permissible the spirit of the Agreement as originally written. 9 18. No Waiver. No consent or waiver, express or implied, by a Party in the --------- performance by the other Party to or of any breach or default by the other Party of its obligations hereunder shall be deemed or construed to be a consent or waiver to or of any other breach or default in the performance by such other Party of the same or any other obligations of such other Party hereunder. The giving of consent by a Party in any one instance shall not limit or waive the necessity to obtain such Party's consent in any future instance. No waiver of any rights under this Agreement shall be binding unless it is in writing signed by the Party waiving such rights. 19. Further Assurances. The Parties hereby agree to execute and deliver ------------------ all such further instruments, documents and/or agreements, as well as to take any further action, which may be necessary to carry out the transactions contemplated under this Agreement and the intent of the Parties hereunder. 20. Governing Law; Interpretation. This Agreement shall be governed by ----------------------------- and construed in accordance with the laws of the State of New York, without regard to the conflicts of laws principles thereof. As used in this Agreement, the masculine gender shall include the feminine or neuter gender, and the plural shall include the singular wherever appropriate. The titles of Sections herein have been inserted as a matter of convenience of reference only and shall not control or affect the meaning or construction of any of the terms or provisions hereof. [THE REMAINDER OF THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY] 10 IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on the date and year first above written.
IDT Corporation Terra Networks, S.A. By: /s/ Morris Lichtenstein By: /s/ Abel Linares ----------------------------------------- ----------------------------------------- Its: Executive V.P.of Business Development Its: CEO ---------------------------------------- Terra Networks Access Terra Networks Interactive Services USA LLC Services USA LLC By:_________________________________________ By:_________________________________________ As an authorized officer of IDT Corporation, As an authorized officer of IDT Corporation, a member of Terra Networks Access Services a member of Terra Networks Interactive USA LLC Services USA LLC By: /s/ Alfredo Villalobos By: /s/ Alfredo Villalobos ----------------------------------------- ----------------------------------------- As an authorized officer of Terra Networks As an authorized officer of Terra Networks USA, Inc., a member of Terra Networks USA, Inc., a member of Terra Networks Access Services USA LLC Interactive Services USA LLC Terra Networks USA, Inc. By: /s/ Alfredo Villalobos ----------------------------------------- Its: President ----------------------------------------
11 EX-27 3 0003.txt FINANCIAL DATA SCHEDULE
5 9-MOS JUL-31-2000 AUG-01-1999 APR-30-2000 100,112,686 64,656,371 175,491,986 11,427,512 0 819,341,742 244,657,457 58,949,834 1,207,202,689 187,425,050 0 0 0 247,591 520,401,182 1,207,202,689 822,050,046 822,050,046 661,617,561 862,720,125 0 4,922,574 7,275,830 422,942,985 183,845,370 255,089,885 0 2,975,846 0 252,114,039 7.34 6.79
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