NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Basis of Presentation
The accompanying unaudited consolidated financial statements of IDT Corporation and its subsidiaries (the “Company” or “IDT”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP 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. Operating results for the three and nine months ended April 30, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending July 31, 2014. The balance sheet at July 31, 2013 has been derived from the Company’s audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP 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 fiscal year ended July 31, 2013, as filed with the U.S. Securities and Exchange Commission (“SEC”).
The Company’s fiscal year ends on July 31 of each calendar year. Each reference below to a fiscal year refers to the fiscal year ending in the calendar year indicated (e.g., fiscal 2014 refers to the fiscal year ending July 31, 2014).
The Company records Universal Service Fund (“USF”) charges that are billed to customers on a gross basis in its results of operations, and records other taxes and surcharges on a net basis. USF charges in the amount of $0.2 million in each of the three months ended April 30, 2014 and 2013, and $0.5 million and $0.7 million in the nine months ended April 30, 2014 and 2013, respectively, were recorded on a gross basis and included in “Revenues” and “Direct cost of revenues” in the accompanying consolidated statements of income.
Note 2— Discontinued Operations
On July 31, 2013, the Company completed a pro rata distribution of the common stock of the Company’s subsidiary, Straight Path Communications Inc. (“Straight Path”), to the Company’s stockholders of record as of the close of business on July 25, 2013 (the “Straight Path Spin-Off”). At the time of the Straight Path Spin-Off, Straight Path owned 100% of Straight Path Spectrum, Inc., which holds, leases and markets fixed wireless spectrum licenses, and 84.5% of Straight Path IP Group, Inc., which holds intellectual property primarily related to communications over the Internet and the licensing and other businesses related to this intellectual property. As of July 31, 2013, each of the Company’s stockholders received one share of Straight Path Class A common stock for every two shares of the Company’s Class A common stock and one share of Straight Path Class B common stock for every two shares of the Company’s Class B common stock held of record as of the close of business on July 25, 2013. Straight Path and its subsidiaries met the criteria to be reported as discontinued operations and accordingly, their assets, liabilities, results of operations and cash flows are classified as discontinued operations for all periods presented.
The Company believes that the Straight Path Spin-Off was tax-free for the Company and the Company’s stockholders for U.S. federal income tax purposes under Section 355 of the Internal Revenue Code of 1986 (the “Code”). The Company received an opinion from Pryor Cashman LLP on the requirements for a tax-free distribution. Specifically, the opinion concluded that the distribution (i) should satisfy the business purpose requirement of the Code for a tax-free distribution, (ii) should not be viewed as being used principally as a device for the distribution of earnings and profits of the distributing corporation or the controlled corporation or both, and (iii) should not be viewed as part of a plan (or series of related transactions) pursuant to which one or more persons will acquire directly or indirectly stock representing a 50 percent or greater interest in the distributing corporation or controlled corporation within the meaning of the relevant section of the Code.
In connection with the Straight Path Spin-Off, the Company funded Straight Path with a total of $15.0 million in aggregate cash and cash equivalents.
The Company entered into various agreements with Straight Path prior to the Straight Path Spin-Off including (1) a Separation and Distribution Agreement to effect the separation and provide a framework for the Company’s relationship with Straight Path after the spin-off, (2) a Tax Separation Agreement, which sets forth the Company’s and Straight Path’s responsibilities with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before and including the spin-off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods, and (3) a Transition Services Agreement, which provides for certain services to be performed by the Company to facilitate Straight Path’s transition into a separate publicly-traded company. These agreements provide for, among other things, the allocation between the Company and Straight Path of employee benefits, taxes and other liabilities and obligations attributable to periods prior to the spin-off, and provision of certain services by the Company to Straight Path following the spin-off, including services relating to human resources and employee benefits administration, finance, treasury, accounting, tax, internal audit, facilities, external reporting, investor relations and legal. In addition, the Company and Straight Path entered into a license agreement whereby each of the Company, Straight Path and the Company’s subsidiaries granted and will grant a license to the other to utilize patents held by each entity.
The Separation and Distribution Agreement also includes that the Company is obligated to reimburse Straight Path for the payment of any liabilities of Straight Path arising or related to the period prior to the Straight Path Spin-Off. The following table summarizes the change in the balance of the Company’s estimated liability to Straight Path, which is included in “Other current liabilities” in the accompanying consolidated balance sheet:
|
|
Nine Months Ended
April 30, 2014
|
|
|
|
(in thousands)
|
|
Balance, beginning of period
|
|
$
|
931
|
|
Additional liability
|
|
|
1,700
|
|
Payments
|
|
|
(842
|
)
|
Balance, end of period
|
|
$
|
1,789
|
|
The Company’s selling, general and administrative expenses were reduced by $0.2 million and nil in the three months ended April 30, 2014 and 2013, respectively, and $0.7 million and nil in the nine months ended April 30, 2014 and 2013, respectively, as a result of the fees the Company charged to Straight Path for services provided pursuant to the Transition Services Agreement. At April 30, 2014 and July 31, 2013, other current assets reported in the Company’s consolidated balance sheet included receivables from Straight Path of $0.2 million and nil, respectively.
Revenues, loss before income taxes and net loss of Straight Path, which is included in discontinued operations, were as follows:
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(in thousands)
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
285
|
|
|
$
|
—
|
|
|
$
|
982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
$
|
—
|
|
|
$
|
(958
|
)
|
|
$
|
—
|
|
|
$
|
(2,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
—
|
|
|
$
|
(958
|
)
|
|
$
|
—
|
|
|
$
|
(2,822
|
)
|
Note 3—Marketable Securities
The following is a summary of marketable securities:
|
|
Amortized Cost
|
|
|
Gross Unrealized Gains
|
|
|
Gross Unrealized Losses
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit*
|
|
$
|
8,400
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,400
|
|
Municipal bonds
|
|
|
3,962
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,962
|
|
Total
|
|
$
|
12,362
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit*
|
|
$
|
8,786
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,786
|
|
Municipal bonds
|
|
|
898
|
|
|
|
—
|
|
|
|
—
|
|
|
|
898
|
|
Total
|
|
$
|
9,684
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,684
|
|
* Each of the Company’s certificates of deposit has a CUSIP, was purchased in the secondary market through a broker and may be sold in the secondary market.
Proceeds from maturities and sales of available-for-sale securities were $2.9 million and $13.0 million in the three and nine months ended April 30, 2014, respectively, and $3.3 million and $3.3 million in the three and nine months ended April 30, 2013, respectively. There were no realized gains or losses from sales of available-for-sale securities in the three and nine months ended April 30, 2014 and 2013. The Company uses the specific identification method in computing the gross realized gains and gross realized losses on the sales of marketable securities.
The contractual maturities of the Company’s available-for-sale securities at April 30, 2014 were as follows:
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
Within one year
|
|
$
|
12,114
|
|
After one year through five years
|
|
|
248
|
|
After five years through ten years
|
|
|
—
|
|
After ten years
|
|
|
—
|
|
Total
|
|
$
|
12,362
|
|
Note 4—Fair Value Measurements
The following tables present the balance of assets measured at fair value on a recurring basis:
|
|
Level 1 (1)
|
|
|
Level 2 (2)
|
|
|
Level 3 (3)
|
|
|
Total
|
|
|
|
(in thousands)
|
|
April 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
—
|
|
|
$
|
12,362
|
|
|
$
|
—
|
|
|
$
|
12,362
|
|
July 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities
|
|
$
|
—
|
|
|
$
|
9,684
|
|
|
$
|
—
|
|
|
$
|
9,684
|
|
(1) – quoted prices in active markets for identical assets or liabilities
(2) – observable inputs other than quoted prices in active markets for identical assets and liabilities
(3) – no observable pricing inputs in the market
At April 30, 2014 and July 31, 2013, the Company did not have any liabilities measured at fair value on a recurring basis.
At April 30, 2014 and July 31, 2013, the Company had $9.7 million and $8.3 million, respectively, in investments in hedge funds, of which $0.1 million and $0.1 million, respectively, were included in “Other current assets” and $9.6 million and $8.2 million, respectively, were included in “Investments” in the accompanying consolidated balance sheets. The Company’s investments in hedge funds are accounted for using the equity method or the cost method; therefore investments in hedge funds are not measured at fair value.
Fair Value of Other Financial Instruments
The estimated fair value of the Company’s other financial instruments was determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting these data to develop estimates of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.
Cash and cash equivalents, restricted cash and cash equivalents—short-term, other current assets, revolving credit loan payable, customer deposits, dividends payable, notes payable—current portion and other current liabilities.
At April 30, 2014 and July 31, 2013, the carrying amount of these assets and liabilities approximated fair value because of the short period of time to maturity. The fair value estimates for cash, cash equivalents and restricted cash and cash equivalents—short-term were classified as Level 1 and other current assets, revolving credit loan payable, customer deposits, dividends payable, notes payable—current portion and other current liabilities were classified as Level 2 of the fair value hierarchy.
Restricted cash and cash equivalents—long-term.
At April 30, 2014 and July 31, 2013, the carrying amount of restricted cash and cash equivalents—long-term approximated fair value. The fair value was estimated based on the anticipated cash flows once the restrictions are removed, which was classified as Level 2 of the fair value hierarchy.
Notes payable—long-term portion and other liabilities.
At April 30, 2014 and July 31, 2013, the carrying amount of these liabilities approximated fair value. The fair values were estimated based on the Company’s assumptions, which were classified as Level 3 of the fair value hierarchy.
The Company’s investments at April 30, 2014 and July 31, 2013 included investments in the equity of certain privately held entities and other investments that are accounted for at cost. It is not practicable to estimate the fair value of these investments because of the lack of a quoted market price for the shares of these entities, and the inability to estimate their fair value without incurring excessive cost. The carrying value of these investments was $0.7 million and $1.5 million at April 30, 2014 and July 31, 2013, which the Company believes was not impaired.
Note 5—Equity
Changes in the components of equity were as follows:
|
|
Nine Months Ended
April 30, 2014
|
|
|
|
Attributable to IDT Corporation
|
|
|
Noncontrolling Interests
|
|
|
Total
|
|
|
|
(in thousands)
|
|
Balance, July 31, 2013
|
|
$
|
88,603
|
|
|
$
|
533
|
|
|
$
|
89,136
|
|
Dividends declared ($0.34 per share)
|
|
|
(7,850
|
)
|
|
|
—
|
|
|
|
(7,850
|
)
|
Restricted Class B common stock purchased from employees
|
|
|
(955
|
)
|
|
|
—
|
|
|
|
(955
|
)
|
Exercise of stock options
|
|
|
606
|
|
|
|
3
|
|
|
|
609
|
|
Stock issued for matching contributions to the 401(k) Plan
|
|
|
1,168
|
|
|
|
—
|
|
|
|
1,168
|
|
Purchases of stock of subsidiary
|
|
|
(1,154
|
)
|
|
|
21
|
|
|
|
(1,133
|
)
|
Adjustment to liabilities in connection with the Straight Path Spin-Off
|
|
|
(1,624
|
)
|
|
|
—
|
|
|
|
(1,624
|
)
|
Distributions to noncontrolling interests
|
|
|
—
|
|
|
|
(1,287
|
)
|
|
|
(1,287
|
)
|
Stock-based compensation
|
|
|
4,890
|
|
|
|
30
|
|
|
|
4,920
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
11,074
|
|
|
|
1,548
|
|
|
|
12,622
|
|
Foreign currency translation adjustments
|
|
|
1,713
|
|
|
|
—
|
|
|
|
1,713
|
|
Comprehensive income
|
|
|
12,787
|
|
|
|
1,548
|
|
|
|
14,335
|
|
Balance, April 30, 2014
|
|
$
|
96,471
|
|
|
$
|
848
|
|
|
$
|
97,319
|
|
Dividend Payments
In July 2013, the Company’s Board of Directors declared a special dividend of $0.08 per share to holders of the Company’s Class A common stock and Class B common stock. At July 31, 2013, dividends payable were $1.8 million. The special dividend was paid on September 10, 2013 to stockholders of record as of the close of business on August 30, 2013.
On January 7, 2014 and March 28, 2014, the Company paid cash dividends of $0.17 per share for the first and second quarters of fiscal 2014, respectively, to stockholders of record of the Company’s Class A common stock and Class B common stock at the close of business on December 16, 2013 and March 21, 2014, respectively. The aggregate dividends paid were $7.9 million.
In June 2014, the Company’s Board of Directors declared a dividend of $0.17 per share for the third quarter of fiscal 2014 to holders of the Company’s Class A common stock and Class B common stock. The dividend will be paid on or about June 27, 2014 to stockholders of record as of the close of business on June 20, 2014.
Purchases of Stock of Subsidiary
In August 2013, Fabrix Systems Ltd., (“Fabrix”), a subsidiary of the Company, and another wholly-owned subsidiary of the Company purchased shares of Fabrix for aggregate cash of $1.1 million. The shares were purchased from holders of noncontrolling interests in Fabrix representing 2.8% of the equity in Fabrix, which increased the Company’s ownership in Fabrix to 88.4%.
Adjustment to Liabilities in connection with the Straight Path Spin-Off
The Company’s Separation and Distribution Agreement with Straight Path includes, among other things, that the Company is obligated to reimburse Straight Path for the payment of any liabilities of Straight Path arising or related to the period prior to the Straight Path Spin-Off (see Note 2). In the nine months ended April 30, 2014, the Company increased its estimated liability for this obligation by $1.7 million, of which $1.6 million was recorded as a reduction of additional paid-in capital.
Stock-Based Compensation
In August 2013, in connection with the Straight Path Spin-Off, the exercise price of each outstanding option to purchase the Company’s Class B common stock was reduced by 15.29% of the exercise price based on the change in the trading price of the Company’s Class B common stock following the Straight Path Spin-Off. Further, each holder of options to purchase the Company’s Class B common stock shared ratably in a pool of options to purchase 32,155 shares of Straight Path Class B common stock. The Company accounted for the August 2013 reduction in the exercise price of the Company’s outstanding stock options and the grant of new options in Straight Path as a modification. The Company determined that there was no incremental value from the modification, and therefore, the Company was not required to record a stock-based compensation charge.
Stock Repurchase Program
The Company has a stock repurchase program for the repurchase of up to an aggregate of 8.3 million shares of the Company’s Class B common stock. There were no repurchases under the program in the nine months ended April 30, 2014. In the nine months ended April 30, 2013, the Company repurchased 77,843 shares of Class B common stock for an aggregate purchase price of $0.8 million. As of April 30, 2014, 5.1 million shares remained available for repurchase under the stock repurchase program.
Note 6—Earnings Per Share
Basic earnings per share is computed by dividing net income attributable to all classes of common stockholders of the Company by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings per share is computed in the same manner as basic earnings per share, except that the number of shares is increased to include restricted stock still subject to risk of forfeiture and to assume exercise of potentially dilutive stock options using the treasury stock method, unless the effect of such increase is anti-dilutive.
The weighted-average number of shares used in the calculation of basic and diluted earnings per share attributable to the Company’s common stockholders consists of the following:
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(in thousands)
|
|
Basic weighted-average number of shares
|
|
|
22,680
|
|
|
|
20,905
|
|
|
|
21,763
|
|
|
|
20,847
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
105
|
|
|
|
—
|
|
|
|
108
|
|
|
|
—
|
|
Non-vested restricted Class B common stock
|
|
|
238
|
|
|
|
1,455
|
|
|
|
1,022
|
|
|
|
1,331
|
|
Diluted weighted-average number of shares
|
|
|
23,023
|
|
|
|
22,360
|
|
|
|
22,893
|
|
|
|
22,178
|
|
The following outstanding stock options were excluded from the calculation of diluted earnings per share because the exercise price of the stock option was greater than the average market price of the Company’s stock during the period:
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(in thousands)
|
|
Shares excluded from the calculation of diluted earnings per share
|
|
|
98
|
|
|
|
703
|
|
|
|
61
|
|
|
|
703
|
|
Note 7—Revolving Credit Loan Payable
The Company’s subsidiary, IDT Telecom, Inc., entered into a credit agreement, dated July 12, 2012, with TD Bank, N.A. for a line of credit facility for up to a maximum principal amount of $25.0 million. IDT Telecom may use the proceeds to finance working capital requirements, acquisitions and for other general corporate purposes. The line of credit facility is secured by primarily all of IDT Telecom’s assets. The principal outstanding bears interest per annum, at the option of IDT Telecom, at either (a) the U.S. Prime Rate less 125 basis points, or (b) the LIBOR rate adjusted by the Regulation D maximum reserve requirement plus 150 basis points. Interest is payable monthly and all outstanding principal and any accrued and unpaid interest is due on the maturity date of January 31, 2015. At April 30, 2014 and July 31, 2013, there was $13.0 million and $21.1 million, respectively, outstanding under the facility. The principal outstanding at April 30, 2014 and July 31, 2013 incurred interest at a rate of 1.65% and 1.69%, respectively, per annum. On August 30, 2013, IDT Telecom repaid the entire $21.1 million loan payable. In October 2013, IDT Telecom borrowed an aggregate of $15.0 million, which was repaid on November 12, 2013. In January 2014, IDT Telecom borrowed an aggregate of $15.0 million, which was repaid on February 14, 2014. In April 2014, IDT Telecom borrowed an aggregate of $13.0 million, which was repaid on May 28, 2014. The Company intends to continue to borrow under the facility from time to time. IDT Telecom pays a quarterly unused commitment fee of 0.375% per annum on the average daily balance of the unused portion of the $25.0 million commitment. IDT Telecom is required to comply with various affirmative and negative covenants as well as maintain certain financial targets and ratios during the term of the line of credit, including IDT Telecom may not pay any dividend on its capital stock and IDT Telecom’s aggregate loans and advances to affiliates or subsidiaries may not exceed $90.0 million. At April 30, 2014, there were no amounts utilized for letters of credit under the line of credit, IDT Telecom was in compliance with all of the covenants, and IDT Telecom’s aggregate loans and advances to affiliates and subsidiaries was $29.7 million.
Note 8—Business Segment Information
The Company has three reportable business segments, Telecom Platform Services and Consumer Phone Services, which comprise the IDT Telecom division, and Zedge Holdings, Inc. (“Zedge”). All other operating segments that are not reportable individually are included in All Other. The Company’s reportable segments are distinguished by types of service, customers and methods used to provide their services. The operating results of these business segments are regularly reviewed by the Company’s chief operating decision maker.
The Telecom Platform Services segment provides telecommunications services, including prepaid and rechargeable calling products and international long distance traffic termination, as well as various payment services. The Consumer Phone Services segment provides consumer local and long distance services in the United States. Zedge owns and operates an on-line platform for mobile phone consumers interested in obtaining free and relevant, high quality games, apps, and personalization content such as ringtones, wallpapers, and alerts. All Other includes Fabrix, a software development company specializing in highly efficient cloud-based video processing, storage and delivery, the Company’s real estate holdings, and other smaller businesses. Corporate costs include certain services, such as compensation, consulting fees, treasury and accounts payable, tax and accounting services, human resources and payroll, corporate purchasing, corporate governance including Board of Directors’ fees, internal and external audit, investor relations, corporate insurance, corporate legal, business development, and other corporate-related general and administrative expenses including, among others, facilities costs, charitable contributions and travel, as well as depreciation expense on corporate assets. Corporate does not generate any revenues, nor does it incur any direct cost of revenues.
The accounting policies of the segments are the same as the accounting policies of the Company as a whole. The Company evaluates the performance of its business segments based primarily on income (loss) from operations. IDT Telecom depreciation and amortization are allocated to Telecom Platform Services and Consumer Phone Services because the related assets are not tracked separately by segment. There are no other significant asymmetrical allocations to segments.
Operating results for the business segments of the Company are as follows:
(in thousands)
|
|
Telecom
Platform
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
394,568
|
|
|
$
|
2,625
|
|
|
$
|
$1,630
|
|
|
$
|
4,938
|
|
|
$
|
—
|
|
|
$
|
403,761
|
|
Income (loss) from operations
|
|
|
12,378
|
|
|
|
517
|
|
|
|
(76
|
)
|
|
|
(367
|
)
|
|
|
(3,282
|
)
|
|
|
9,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended April 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
389,048
|
|
|
$
|
3,427
|
|
|
$
|
$1,413
|
|
|
$
|
3,047
|
|
|
$
|
—
|
|
|
$
|
396,935
|
|
Income (loss) from operations
|
|
|
19,593
|
|
|
|
341
|
|
|
|
68
|
|
|
|
(941
|
)
|
|
|
(3,374
|
)
|
|
|
15,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended April 30, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,205,490
|
|
|
$
|
8,491
|
|
|
$
|
$4,795
|
|
|
$
|
12,079
|
|
|
$
|
—
|
|
|
$
|
1,230,855
|
|
Income (loss) from operations
|
|
|
36,676
|
|
|
|
1,358
|
|
|
|
238
|
|
|
|
(2,480
|
)
|
|
|
(11,765
|
)
|
|
|
24,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended April 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
1,184,079
|
|
|
$
|
11,156
|
|
|
$
|
$4,193
|
|
|
$
|
9,081
|
|
|
$
|
—
|
|
|
$
|
1,208,509
|
|
Income (loss) from operations
|
|
|
38,542
|
|
|
|
1,377
|
|
|
|
185
|
|
|
|
(1,498
|
)
|
|
|
(10,581
|
)
|
|
|
28,025
|
|
Note 9—Legal Proceedings
On October 17, 2013, the Company and Alexsam, Inc. (“Alexsam”) entered into a confidential Settlement Agreement pursuant to which the parties agreed to fully compromise, settle and release any and all claims and counterclaims related to Alexsam’s action in the United States District Court, Eastern District of Texas alleging infringement of two patents related to the activation of phone and gift cards (incorporating bank identification numbers approved by the American Banking Association for use in a banking network) over a point-of-sale terminal. In a judgment issued in August 2011, Alexsam was awarded an aggregate of $10.1 million including damages and interest. The Settlement Agreement included a prospective royalty free license. On November 4, 2013, the Company paid Alexsam the settlement amount.
In connection with the Aerotel, Ltd. (“Aerotel”) arbitration that was held in June 2012, on March 15, 2013, the arbitration panel issued its Final Award, and determined that Aerotel sustained damages, inclusive of interest at 9% per annum through March 15, 2013, in the total amount of approximately $5.4 million. On April 8, 2013, Aerotel filed a Petition for Judgment Vacating the Arbitration Awards in the United States District Court, Southern District of New York along with a Motion supporting its Petition to Vacate the Arbitration Awards. After briefing, on July 18, 2013, the Court confirmed the award, and as a result, in July 2013, the Company paid Aerotel $5.4 million, including interest. On August 14, 2013, Aerotel filed a Notice of Appeal with the Court of Appeals, 2nd Circuit. After briefing, oral argument was held on May 21, 2014 and on June 3, 2014, the Court of Appeals affirmed the decision of the District Court.
The Company’s subsidiary Prepaid Cards BVBA was the exclusive licensee of a patent related to a method and process used in prepaid calling cards that was invented by Shmuel Fromer, which has now expired. The Company had been attempting to enforce this patent in Germany, and had succeeded, prevailing in infringement cases against certain calling card providers, including Lycatel (Ireland) Limited and Lycatel Services Limited, and Mox Telecom AG. On February 21, 2012, a nullity hearing (effectively judging the validity of the patent) with respect to the patent, took place before the German Federal Court of Justice in Karlsruhe, between Lycatel Services Limited as claimant, Mox Telecom AG as intervenor on the side of claimant, and Mr. Fromer, as defendant. During this hearing, the court nullified claims 1, 2, 3, 5 and 6 of the patent. The Court also ordered the defendant to pay costs and fees in respect of all of the nullity proceedings involving Lycatel and Mox. Except for the amount of fees and costs which may be claimed against the Company in connection with the infringement proceedings, which are based on applicable statutes (for which the Company has accrued $1.2 million at April 30, 2014), the outcome of this matter is uncertain, and, as such, the Company is not able to make an assessment of the final result and its impact on the Company. The Company paid the court fees in connection with the infringement proceedings, and in March 2014, paid Lycatel for its own fees and costs. Mox’s costs and fees in connection with the infringement proceedings have not been determined. Upon enforcement of the judgments in these cases, the Company was required to transfer security deposits to the Court. While the security deposit for the Lycatel case was subsequently released to the Company, at this time the relevant courts have declined to release the security deposit for the Mox case. The Company is examining its options with respect to the release of this deposit.
On May 5, 2004, the Company filed a complaint in the Supreme Court of the State of New York, County of New York, seeking injunctive relief and damages against Tyco Group, S.A.R.L., Tyco Telecommunications (US) Inc. (f/k/a TyCom (US) Inc.), Tyco International, Ltd., Tyco International (US) Inc., and TyCom Ltd. (collectively “Tyco”). The Company alleged that Tyco breached a settlement agreement that it had entered into with the Company to resolve certain disputes and civil actions among the parties. The Company alleged that Tyco did not provide the Company, as required under the settlement agreement, free of charge and for the Company’s exclusive use, a 15-year indefeasible right to use four Wavelengths in Ring Configuration (as defined in the settlement agreement) (“Wavelengths”) on a global undersea fiber optic network that Tyco was deploying at that time. In June 2004, Tyco asserted several counterclaims against the Company, alleging that the Company breached the settlement agreement and is liable for damages for allegedly refusing to accept Tyco’s offer regarding the Wavelengths referenced in the settlement agreement and for making a public statement that Tyco failed to provide the Company with the use of its Wavelengths. On August 19, 2008, the Appellate Division of the State of New York, First Department, granted summary judgment in favor of Tyco dismissing the complaint and remanded the matter to the Supreme Court for further proceedings. On October 22, 2009, the New York Court of Appeals issued an Order denying the Company’s appeal and affirming the Appellate Division’s order. On or about November 17, 2009, the Company demanded that Tyco comply with its obligations under the settlement agreement. After further discussions and meetings between the parties regarding Tyco’s obligations under the settlement agreement, including its obligation to provide the use of the Wavelengths for fifteen years in a manner fully consistent with that described in the settlement agreement, the Company filed a complaint on November 24, 2010 in the Supreme Court of the State of New York, County of New York, against Tyco based upon the failure to comply with the obligations under the settlement agreement, to negotiate the terms of an indefeasible right to use the Wavelengths in good faith, and to provide the Company with the Wavelengths. The complaint alleges causes of action for breach of contract and breach of duty to negotiate in good faith. On January 6, 2011, Tyco filed a motion to dismiss the complaint, which was granted. On July 22, 2011, the Company filed a notice of appeal. After briefing was completed, oral argument was held on April 2, 2012. On December 27, 2012, the Appellate Division issued an opinion and order reversing the order of the Supreme Court which granted Tyco’s motion to dismiss the Company’s complaint. On April 30, 2013, Tyco filed a motion for reargument or, in the alternative, leave to appeal to the Court of Appeals, which the Company opposed. On February 8, 2013, Tyco filed an answer with a counterclaim. On May 21, 2013, the Appellate Division denied Tyco’s request for reargument but granted its request for leave to appeal to the Court of Appeals. On July 30, 2013, Tyco filed its opening brief, the Company filed its response brief on September 16, 2013, and Tyco filed its reply on October 11, 2013. Oral argument was held on April 29, 2014. On June 5, 2014, the Court issued its decision, and reversed the order of the Appellate Division, and ordered that the order of the Supreme Court should be reinstated. The Company is evaluating its options going forward.
In addition to the foregoing, the Company is subject to other legal proceedings that have arisen in the ordinary course of business and have not been finally adjudicated. Although there can be no assurance in this regard, none of the other legal proceedings to which the Company is a party will have a material adverse effect on the Company’s results of operations, cash flows or financial condition.
Note 10—Commitments and Contingencies
Purchase Commitments
The Company had purchase commitments of $1.0 million as of April 30, 2014.
Letters of Credit
As of April 30, 2014, the Company had letters of credit outstanding totaling $3.8 million primarily for collateral to secure mortgage repayments and for IDT Telecom’s business. The letters of credit outstanding as of April 30, 2014 expire as follows: $1.0 million in the twelve month period ending April 30, 2015 and $2.8 million in August 2015.
Performance Bonds
IDT Payment Services and IDT Telecom have performance bonds issued through third parties for the benefit of various states in order to comply with the states’ financial requirements for money remittance licenses and telecommunications resellers, respectively. At April 30, 2014, the Company had aggregate performance bonds of $9.9 million outstanding.
Customer Deposits
As of April 30, 2014 and July 31, 2013, “Customer deposits” in the Company’s consolidated balance sheets included refundable customer deposits of $48.5 million and $28.7 million, respectively, related to IDT Financial Services, the Company’s Gibraltar-based bank.
Substantially Restricted Cash and Cash Equivalents
IDT Payment Services and IDT Financial Services set aside certain cash balances in accordance with banking regulations, credit card issuer requirements or license compliance. The balances are not legally restricted, however the Company treats these balances as substantially restricted and unavailable for other purposes. At April 30, 2014 and July 31, 2013, “Cash and cash equivalents” in the Company’s consolidated balance sheet included an aggregate of $9.6 million and $7.8 million, respectively, set aside by IDT Payment Services and IDT Financial Services that was unavailable for other purposes.
Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents consist of the following:
|
|
April 30,
2014
|
|
|
July 31,
2013
|
|
|
|
(in thousands)
|
|
Restricted cash and cash equivalents-short-term
|
|
|
|
|
|
|
Letters of credit related
|
|
$
|
734
|
|
|
$
|
3,189
|
|
IDT Financial Services customer deposits
|
|
|
50,452
|
|
|
|
31,076
|
|
Other
|
|
|
2,112
|
|
|
|
723
|
|
Total short-term
|
|
|
53,298
|
|
|
|
34,988
|
|
Restricted cash and cash equivalents-long-term
|
|
|
|
|
|
|
|
|
Letters of credit related
|
|
|
2,763
|
|
|
|
2,767
|
|
Total restricted cash and cash equivalents
|
|
$
|
56,061
|
|
|
$
|
37,755
|
|
Note 11—Other Operating Gains, Net
The following table summarizes the other operating gains, net by business segment:
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(in thousands)
|
|
Telecom Platform Services-gains related to legal matters, net
|
|
$
|
—
|
|
|
$
|
9,601
|
|
|
$
|
650
|
|
|
$
|
9,251
|
|
All Other-gain on insurance claim (a)
|
|
|
—
|
|
|
|
—
|
|
|
|
571
|
|
|
|
—
|
|
All Other-other
|
|
|
—
|
|
|
|
—
|
|
|
|
67
|
|
|
|
—
|
|
Corporate-loss related to settlement (b)
|
|
|
—
|
|
|
|
—
|
|
|
|
(79
|
)
|
|
|
—
|
|
Total other operating gains, net
|
|
$
|
—
|
|
|
$
|
9,601
|
|
|
$
|
1,209
|
|
|
$
|
9,251
|
|
(a) In the nine months ended April 30, 2014, the Company received proceeds from insurance of $0.6 million related to water damage to portions of the Company’s building and improvements at 520 Broad Street, Newark, New Jersey. The damage occurred in a prior period. The Company recorded a gain of $0.6 million from this insurance claim.
(b) In the nine months ended April 30, 2014, the Company incurred a loss of $0.1 million in connection with the June 2013 settlement of outstanding claims and disputes with the former Chief Executive Officer of Straight Path Spectrum, Inc. and his related parties.
Note 12—Other Income (Expense), Net
Other income (expense), net consists of the following:
|
|
Three Months Ended
April 30,
|
|
|
Nine Months Ended
April 30,
|
|
|
|
2014
|
|
|
2013
|
|
|
2014
|
|
|
2013
|
|
|
|
(in thousands)
|
|
Foreign currency transaction (losses) gains
|
|
$
|
(478
|
)
|
|
$
|
1,521
|
|
|
$
|
(4,840
|
)
|
|
$
|
3,566
|
|
Gain on investments
|
|
|
581
|
|
|
|
960
|
|
|
|
1,434
|
|
|
|
1,565
|
|
Other
|
|
|
56
|
|
|
|
(48
|
)
|
|
|
(49
|
)
|
|
|
2
|
|
Total other income (expense), net
|
|
$
|
159
|
|
|
$
|
2,433
|
|
|
$
|
(3,455
|
)
|
|
$
|
5,133
|
|
Note 13—520 Broad Street Building
At April 30, 2014, the carrying value of the land, building and improvements that the Company owns at 520 Broad Street, Newark, New Jersey, after the impairment charge that was recorded in fiscal 2013, was $37.3 million. The Company is considering a range of options as to the future use or disposition of 520 Broad Street, some of which could result in an additional loss from a further reduction in the carrying value of the land, building and improvements and such loss could be material.
Note 14—Recently Issued Accounting Standard Not Yet Adopted
In May 2014, the Financial Accounting Standards Board and the International Accounting Standards Board jointly issued a comprehensive new revenue recognition standard that will supersede most of the current revenue recognition guidance under U.S. GAAP and International Financial Reporting Standards (“IFRS”). The goals of the revenue recognition project were to clarify and converge the revenue recognition principles under U.S. GAAP and IFRS and to develop guidance that would streamline and enhance revenue recognition requirements. The Company will adopt this standard on August 1, 2017. Entities have the option of using either a full retrospective or modified retrospective approach for the adoption of the standard. The Company is evaluating the impact that the standard will have on its consolidated financial statements.
In April 2014, an accounting standard update was issued that changes the criteria for reporting discontinued operations and enhances convergence of U.S. GAAP and IFRS reporting requirements for discontinued operations. The amendments in the update raise the threshold for a disposal to qualify as a discontinued operation and require new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The adoption of this standard update will be applied prospectively to (a) all disposals (or classifications as held for sale) of components of the Company, and (b) all businesses that, on acquisition, are classified as held for sale, that occur within a fiscal year beginning on or after August 1, 2015. Early adoption is permitted but only for disposals (or classifications as held for sale) that have not been reported in previously issued financial statements. The Company does not expect the adoption of this standard update to impact its financial position, results of operations or cash flows.