UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ Annual report pursuant to section 13 or
15(d) of the securities exchange act of 1934 for the fiscal year ended July 31, 2014, or
☐ Transition report
pursuant to section 13 or 15(d) of the securities exchange act of 1934.
Commission File Number: 1-16371
IDT Corporation
(Exact name of registrant as specified in its
charter)
Delaware |
|
22-3415036 |
(State or other jurisdiction of
incorporation or organization) |
|
(I.R.S. Employer
Identification No.) |
520 Broad Street, Newark, New Jersey 07102
(Address of principal executive offices, zip
code)
(973) 438-1000
(Registrant’s telephone number, including
area code)
Securities registered pursuant to Section 12(b)
of the Act:
Title of each class |
|
Name of each exchange on which registered |
|
|
|
Class B common stock, par value $.01
per share |
|
New York Stock Exchange |
Securities registered pursuant to section 12(g)
of the Act: None
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ |
Accelerated filer ☒ |
Non-accelerated filer ☐ |
Smaller reporting company ☐ |
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting stock held
by non-affiliates of the registrant, based on the adjusted closing price on January 31, 2014 (the last business day of
the registrant’s most recently completed second fiscal quarter) of the Class B common stock of $16.49 per share, as
reported on the New York Stock Exchange, was approximately $304.0 million.
As of October 6, 2014, the registrant had outstanding 21,663,733
shares of Class B common stock and 1,574,326 shares of Class A common stock. Excluded from these numbers are 2,933,795 shares
of Class B common stock and 1,698,000 shares of Class A common stock held in treasury by IDT Corporation.
DOCUMENTS INCORPORATED
BY REFERENCE
The definitive proxy statement relating to the registrant’s
Annual Meeting of Stockholders, to be held December 15, 2014, is incorporated by reference into Part III of this Form 10-K
to the extent described therein.
Index
IDT Corporation
Annual Report on Form 10-K
Part I
As used in this Annual Report, unless the context otherwise requires,
the terms the “Company,” “IDT,” “we,” “us,” and “our” refer to IDT
Corporation, a Delaware corporation, its predecessor, International Discount Telecommunications, Corp., a New York corporation,
and its subsidiaries, collectively. Each reference to a fiscal year in this Annual Report refers to the fiscal year ending in the
calendar year indicated (for example, fiscal 2014 refers to the fiscal year ended July 31, 2014).
Item 1. Business.
OVERVIEW
IDT is a multinational holding company with operations primarily
in the telecommunications and payments industries.
We have three reportable business segments, Telecom Platform Services,
Consumer Phone Services, and Zedge Holdings, Inc., or Zedge. Telecom Platform Services provides retail telecommunications and payment
offerings as well as wholesale international long distance traffic termination. Consumer Phone Services provides consumer local
and long distance services in certain U.S. states. Telecom Platform Services and Consumer Phone Services comprise our IDT Telecom
division. Zedge owns and operates a popular online platform for mobile phone consumers interested in obtaining free, high-quality
games, apps, and mobile phone customization including ringtones, wallpapers, and notification sounds. Operating segments not reportable
individually are included in All Other. All Other includes Fabrix Systems Ltd., or Fabrix, a software development company offering
a cloud-based scale-out storage and computing platform optimized for big data, virtualization and media storage, processing and
delivery. We sold Fabrix in October 2014. All Other also includes our real estate holdings and other, smaller businesses.
Financial information by segment is presented under the heading
“Business Segment Information” in the Notes to our Consolidated Financial Statements in this Annual Report.
Our headquarters are located at 520 Broad Street, Newark, New Jersey
07102. We lease space at 550 Broad Street, Newark, New Jersey and most of the Company’s employees work from this location.
The main telephone number at our headquarters is (973) 438-1000 and our web site is www.idt.net.
We make available free of charge our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports, and all beneficial ownership reports
on Forms 3, 4 and 5 filed by directors, officers and beneficial owners of more than 10% of our equity through the investor relations
page of our web site (www.idt.net/ir) as soon as reasonably practicable after such material is electronically filed with the Securities
and Exchange Commission. Our web site also contains information not incorporated into this Annual Report on Form 10-K or our other
filings with the Securities and Exchange Commission.
KEY EVENTS IN OUR HISTORY
1990 –Howard Jonas, our founder, launched International Discount
Telephone to provide international call re-originations services.
1995 – We begin selling wholesale termination services to
other long distance carriers by leveraging our access to favorable international telephone rates generated by our retail calling
traffic.
1996 – We successfully complete an initial public offering
of our common stock.
1997 – We began marketing prepaid calling cards to provide
convenient and affordable international long distance calls primarily to immigrant communities.
2000 – We complete the sale of a stake in our Net2Phone subsidiary,
a pioneer in the development and commercialization of voice over Internet protocol, or VoIP, technologies and services, to AT&T
for approximately $1.1 billion in cash.
2001 – Our common stock is listed on the New York Stock Exchange,
or NYSE.
2003 – We begin offering local and long distance calling services
to residential customers.
2004 – We launch a retail energy business to provide electricity
and natural gas to residential and small business customers in New York.
2006 – We sell our Russian telecom business, Corbina, for
$129.9 million in cash.
2006 – We launch a regulated issuing bank based in Gibraltar.
2007 – We complete the sale of IDT Entertainment to Liberty
Media for (i) 14.9 million shares of our Class B common stock, (ii) Liberty Media’s approximate 4.8% interest in
IDT Telecom, (iii) $220.0 million in cash, net of certain working capital adjustments, (iv) the repayment of $58.7 million
of IDT Entertainment’s intercompany indebtedness payable to us and (v) the assumption of all of IDT Entertainment’s
existing indebtedness.
2007 – We sell our United Kingdom-based consumer phone service
for approximately $46.3 million of cash and stock.
2007 – We purchase majority interests in both Fabrix and Zedge.
2008 – We enter the oil and gas exploration business with
acquisition of E.G.L. Oil Shale and are granted a license to explore for oil shale in Israel.
2009 – We spin-off our CTM Media Holdings subsidiary to stockholders.
CTM Media Holdings is traded on the over-the-counter market with the ticker symbol “CTMMA”.
2009 – We launch Boss Revolution PIN-less, a pay-as-you-go
international calling service. Boss Revolution has since become our flagship brand, and the Boss Revolution platform has been expanded
to include payment offerings.
2011 – We spin-off our Genie Energy Ltd. subsidiary, which
holds our retail energy and oil and gas exploration businesses, to stockholders. Genie Energy is listed on the NYSE with the ticker
symbol “GNE”.
2013 – We spin-off our Straight Path Communications, Inc.,
subsidiary to stockholders. Straight Path Communications is listed on the NYSE MKT with the ticker symbol “STRP”.
2013 – We introduce the Boss Revolution mobile app for Android
and iOS.
2013 – We launch an international money transfer service
on the Boss Revolution platform in select states. The service offers Boss Revolution customers a convenient, affordable means
to send cash from the United States to friends and family overseas.
2014- We sell our 78% stake in Fabrix to Telefonaktiebolget LM Ericsson
(publ), or Ericsson, for $73 million as part of Ericsson’s purchase of Fabrix for $95 million.
DIVIDENDS
We have paid dividends to the holders of our Class A and Class B
common stock since fiscal 2011. During fiscal 2014, we paid aggregate dividends of $0.59 per share, or $13.6 million, on our Class A
common stock and Class B common stock as detailed below. In fiscal 2013, we paid aggregate dividends of $0.75 per share on our
Class A common stock and Class B common stock, or $17.1 million in total.
| ● | On September 10, 2013, we paid a special cash dividend of $0.08 per share; |
| ● | On January 7, 2014, we paid an ordinary cash dividend of $0.17 per share for the first quarter of fiscal 2014; |
| ● | On March 28, 2014, we paid an ordinary cash dividend of $0.17 per share for the second quarter of fiscal 2014; and |
| ● | On June 27, 2014, we paid an ordinary cash dividend of $0.17 per share for the third quarter of fiscal 2014. |
On October 3, 2014, we paid a dividend of $0.17 per share for the
fourth quarter of fiscal 2014 to holders of record of our Class A common stock and Class B common stock as of the close of
business on September 29, 2014.
We expect to continue paying a regular quarterly dividend commensurate
with our cash generation and financial resources, business outlook and growth strategy.
OUR STRATEGY
History and Background
Since our founding, we have focused on value creation by leveraging
potentially disruptive telecommunications technologies to challenge entrenched business models. Outside of our core business, we
have sought to select and incubate promising early stage businesses for eventual sale or spin-off to our stockholders.
In 2007 and 2008, in response to a long-term, industry-wide
decline in the sale of prepaid, disposable calling cards, which was our dominant offering at the time, we initiated a fundamental
restructuring of our businesses. We subsequently sold or spun-off most of our non-core businesses and assets, right-sized
corporate overhead, reduced network costs at IDT Telecom, and streamlined our internal decision making processes.
Since the successful implementation of this restructuring program,
we have been intensely focused on the growth and profitability of our core telecommunications businesses while retaining majority
stakes in our two most promising non-core businesses, Fabrix and Zedge.
On October 8, 2014, we completed the sale of our interests in Fabrix
to Ericsson. The final sale price for 100% of the shares in Fabrix was $95 million in cash, excluding transaction costs and working
capital and other adjustments. We owned approximately 78% of Fabrix on a fully diluted basis. Our share of the sale price, net
of transaction costs, is expected to be approximately $73 million in cash. We and the other shareholders have placed $13 million
of our proceeds in escrow for the resolution of post-closing claims that may arise. Any unclaimed escrow balance will be released
in two tranches over a period of 18 months.
Within IDT Telecom, we have focused on reducing the cost
of our infrastructure and leveraging our VoIP expertise to develop new products and services. We also sharpened our retail focus
to provide high-quality and cost-effective communications and payment services to foreign-born consumers. This is a rapidly
growing demographic and a historically underserved market that includes significant numbers of unbanked and under-banked consumers.
In 2009, we launched Boss Revolution PIN-less, a pay-as-you-go
international long distance voice service. The service grew rapidly and eventually overtook sales of our traditional, disposable
prepaid calling cards. We believe that Boss Revolution PIN-less has become the nation’s leading pay-as-you-go international
calling service. More recently, we have begun to develop and introduce complementary payment services over the Boss Revolution
platform, including international and domestic airtime top-up, gift cards, domestic bill payment and, in 2013, an international
money transfer service. These additions represent significant milestones toward our goal of offering a comprehensive suite of voice
and payment products under a single, global brand and platform targeted to under-banked, foreign-born consumers.
To simplify the Boss Revolution PIN-less calling experience
and expand its reach, we introduced our Boss Revolution app in 2013. The app is free to the consumer and is distributed through
both the iTunes and Google Play stores. In 2014, we deployed the Boss Revolution app for retailers. The app for retailers
enables a qualified individual in the United States with an Android or iOS smartphone to become a potential Boss Revolution retailer
and to manage their Boss Revolution account virtually anywhere, anytime.
Leveraging the high volumes of traffic to certain overseas
destinations generated by our retail business, we have long been an important player in the global wholesale telecommunications
market, carrying and terminating international calling traffic on behalf of other telecoms and call aggregators. More recently,
we have maintained our leadership in the wholesale market by leveraging VoIP technology and broadening our offerings with different
levels of service quality.
We believe that the restructuring of our business combined
with a growth strategy at IDT Telecom that includes a tight focus on the needs of our target market and the successful introduction
of innovative products has resulted in significant revenue growth and improving profitability in recent years.
Current Strategy
In our core telecom and payments business, we seek to maintain
steady, positive cash flows to support our dividend policy and to fund growth initiatives. Outside of our core business, we sold
Fabrix in October 2014, and Zedge is pursuing market opportunities funded primarily from its current operations. We will opportunistically
seek to realize stockholder value from our interests in businesses through a sale, spin-off, or other strategic action as warranted
by market conditions.
IDT Telecom
We are pursuing growth opportunities at IDT Telecom in both
the retail and wholesale sides of our business. Our retail communications business continues to focus on the Boss Revolution platform
- expanding its network of retailers and its brand equity nationwide to grow our customer base, while developing and deploying
additional synergistic calling and payment services to meet the needs of our target market. Our wholesale termination services
business is focused on expanding the scope of services we provide within customers’ value chains.
IDT Telecom is pursuing a multi-pronged growth strategy
that includes:
| ● | utilizing our direct and indirect sales force to recruit additional retailers to deepen market penetration in foreign-born
communities, especially outside of IDT’s traditional geographic strongholds in the Northeastern United States and Florida; |
| ● | continuing to develop, deploy and promote new payment and value transfer services to broaden Boss Revolution’s portfolio
of offerings for foreign-born and under-banked populations; |
| ● | further expanding our platforms and leveraging mobile apps to enhance, deepen and improve the direct-to-consumer and retail
channel experiences; and |
| ● | leveraging carrier relationships and our portfolio of domestic retail offerings to drive white-label sales to carriers,
resellers and other telecommunications providers overseas. |
Zedge
Zedge’s growth initiatives are focused on three “U”s
- Users, Usage and Ubiquity.
| ● | Users - Driving organic user growth with the introduction of new features, localization / new market entry, app store optimization
and brand awareness. |
| ● | Usage - Increasing user engagement, which we believe to be a strong proxy for revenue expansion. To this end, in fiscal 2015,
Zedge plans on releasing several important product enhancements including social features and new content channels as well as utilize
marketing automation tools. |
| ● | Ubiquity - Entering new app stores and developing apps for new operating systems to achieve critical mass and drive customer
demand. Zedge’s app is currently available on Android, iOS and Windows Mobile. |
IDT TELECOM
IDT Telecom is comprised of two reportable segments, Telecom Platform
Services and Consumer Phone Service. Since our inception, we have derived the majority of our revenues and operating expenses from
IDT Telecom’s businesses. In fiscal 2014, IDT Telecom had revenues of $1,626.6 million, representing 98.5% of our total consolidated
revenues from continuing operations, and income from operations of $46.9 million, as compared with revenues of $1,602.6 million
and income from operations of $50.5 million in fiscal 2013.
TELECOM PLATFORM SERVICES
Our Telecom Platform Services segment, which represented 99.3% and
99.1% of IDT Telecom’s total revenues in fiscal 2014 and fiscal 2013, respectively, markets and distributes multiple communications
and payment services across four broad business verticals:
| ● | Retail Communications provides international long-distance calling products primarily to foreign-born communities worldwide,
with its core markets in the United States; |
| ● | Wholesale Termination Services is a global telecom carrier, terminating international long distance calls around the world
for Tier 1 fixed line and mobile network operators, as well as other service providers; |
| ● | Payment Services provides payment offerings, including international airtime top-up and international money transfer sold over
our Boss Revolution platform; and |
| ● | Hosted Platform Solutions provides customized communications services that leverage our proprietary networks, platforms and/or
technology to cable companies and other service providers. |
During fiscal 2014, our Telecom Platform Services segment generated
$1,615.6 million in revenues worldwide and income from operations of $45.1 million, as compared with revenues of $1,588.1 million
and income from operations of $48.7 million in fiscal 2013.
Retail Communications
Retail Communications’ revenue was $695.8 million in fiscal
2014 compared to $656.7 million in fiscal 2013 (43.1% and 41.3% of Telecom Platform Services’ revenue in fiscal 2014 and
fiscal 2013, respectively).
The majority of Retail Communications’ sales are generated
by the Boss Revolution PIN-less international calling service. Other smaller lines of business contribute to Retail Communications
sales including (1) traditional, disposable prepaid calling cards sold under a variety of brand names, (2) private label and IDT
branded prepaid calling cards sold to large retailers, medium sized retail chains (e.g. supermarkets, drug stores), and smaller
grocery stores and bodegas, and (3) our PennyTalk international calling service. Revenues generated by sales of Boss Revolution
payment offerings including airtime top-up and international money transfer are reflected in the Payment Services vertical discussed
below.
Boss Revolution PIN-less allows users to call their families and
friends overseas without the need to enter a personal identification number, or PIN. To place a call, a customer must first establish
a Boss Revolution prepaid account. Boss Revolution customers can access our network by first dialing a local access or toll-free
number. Our platform recognizes the user’s network-provided automatic number identification (ANI) and seamlessly links each
call to the corresponding Boss Revolution account. Callers then enter their destination phone numbers. The dialing process is automated
to provide one-touch dialing in the Boss Revolution mobile app. Boss Revolution debits customers’ account balances for completed
calls at a fixed rate per minute. In contrast to many competitors, Boss Revolution does not charge connection fees, other usage
or breakage fees, and consequently account balances never expire. Boss Revolution rates vary by the destination country that is
being called. Rates are published on the Boss Revolution consumer website and within the Boss Revolution mobile app.
Customers can add to, or top-up, their account balance at any Boss
Revolution retailer using cash or a credit card. Customers with a credit or debit card can also add to their account balance directly
by phone, online through the Boss Revolution consumer web site (www.bossrevolution.com), or through the Boss Revolution mobile
app.
In the United States, we distribute many of our retail products
through our network of distributors that, either directly or through sub-distributors, sells to retail locations. In addition,
our internal sales force sells Boss Revolution platform products directly to retailers. We also sell Boss Revolution online directly
to the consumer, while the Boss Revolution mobile app is available for download through both the iTunes and Google Play stores.
Distributors, our internal sales people and retailers typically receive commissions based on the revenue generated by each transaction.
The Boss Revolution retailer portal enables retailers to
sign up new customers and add funds to customer accounts. The Boss Revolution retailer portal also provides a direct, real-time
interface with our retailers, resulting in a cost-effective and adaptable distribution model that we believe can rapidly respond
to changes in the business environment.
The Boss Revolution platform allows us to target and promote
services to both customers and retailers, and to introduce and cross-sell new offerings. For example, the successful launches of
international and domestic airtime top-up over the Boss Revolution platform leveraged our existing capabilities and distribution
network to expand the scope of services we provide to our customers.
In the United States, the Boss Revolution brand is supported
by national, regional and local marketing programs that include television and radio advertising, online advertising, print media,
and grass roots marketing at community and sporting events. In addition, we work closely with distributors and retailers on in-store
promotional programs and events.
Retail Communications’ sales have traditionally been strongest
in the Northeastern United States and in Florida because of our extensive local distribution network and the large immigrant population.
In addition to these geographic areas, we continue to grow distributor relationships and sell directly to retailers in other areas
of the United States, including the Southwest and West Coast, where we historically did not have a strong market presence.
Outside of the United States, we are incrementally expanding the
geographic footprint of our Boss Revolution platform including retailer portals, mobile apps, and direct-to-consumer web sites.
In fiscal 2012, we launched Boss Revolution in the United Kingdom and Spain. During fiscal 2013, we expanded Boss Revolution’s
footprint to Germany and three markets in the Asia-Pacific region—Australia, Hong Kong and Singapore. In 2014, we launched
Boss Revolution in Canada. Nevertheless, the vast majority of Boss Revolution and Retail Communications’ other sales are
generated in the United States. We also sell other prepaid retail calling services in Europe, Latin America and Asia, as discussed
in detail in the International Operations section below.
Wholesale Termination Services
Wholesale Termination Services’ revenue was $672.3 million
in fiscal 2014 compared to $687.9 million in fiscal 2013 (41.6% and 43.3% of Telecom Platform Services’ revenue in fiscal
2014 and fiscal 2013, respectively).
Wholesale Termination Services terminates international telecommunications
traffic in more than 170 countries around the world. Our customers include IDT’s Retail Communications business, major and
niche carriers around the globe, operators, and other service providers such as call aggregators. For many of these customers,
particularly the major carriers, we engage in buy-sell relationships, terminating their customers’ traffic in exchange for
terminating our wholesale and retail traffic with their customers.
We offer competitively priced international termination rates at
several quality levels. We are able to offer competitively priced termination services in part because of the large volumes of
originating minutes generated by our retail communications business, our global platform powered by proprietary software, our team
of professional and experienced account managers, and an extensive network of interconnects around the globe.
During fiscal 2014, IDT Telecom terminated 29.6 billion minutes
compared to 32.7 billion minutes in fiscal 2013, making us one of the largest carriers of long distance minutes worldwide. Wholesale
Termination Services accounted for 19.2 billion minutes and 22.4 billion minutes of the total IDT Telecom minutes in fiscal 2014
and fiscal 2013, respectively.
IDT Telecom has a significant number of direct connections to Tier
1 providers outside the United States, particularly Tier 1 providers in Latin America, Asia, Africa, Europe and the Middle East.
Tier 1 providers are the largest recognized licensed carriers in a country. Direct connections improve the quality of the telephone
calls and reduce the cost, thereby enabling us to generate more traffic with higher margins to the associated foreign locales.
We also have direct relationships with mobile network operators, reflecting their growing share of the voice traffic market.
Termination rates charged by Tier 1 and other providers on
international long distance traffic have been declining for many years. Nevertheless, termination rates charged to us by
individual Tier 1 carriers and mobile operators can be volatile. Termination price volatility on heavily trafficked routes
can significantly impact our minutes of use and wholesale revenues. However, because of the small margins on these routes,
the resulting change in the Wholesale Termination Services business’s underlying profitability is often not material.
In addition to offering competitive rates to our carrier customers,
we emphasize our ability to offer the high-quality connections that these providers often require. To that end, we offer higher-priced
services in which we provide higher-quality connections, based upon a set of predetermined quality of service criteria. These services
meet a growing need for higher-quality connections for some of our customers who provide services to high-value, quality-conscious
retail customers. As of July 31, 2014, Wholesale Termination Services had more than 600 customers. IDT Telecom has over 550
carrier relationships globally.
Wholesale Termination Services’ revenue is generated by sales
to both postpaid and prepaid customers. Postpaid customers typically include Tier 1 carriers and our most credit worthy customers.
Prepaid customers are typically smaller telecommunication companies and mobile network operators, as well as independent call aggregators.
Payment Services
Payment Services’ revenue was $202.5 million in fiscal 2014
compared to $193.5 million in fiscal 2013 (12.5% and 12.2% of Telecom Platform Services’ revenue in fiscal 2014 and fiscal
2013, respectively).
The majority of Payment Services’ revenue is generated
by international airtime top-up. Other products and services in this vertical include domestic airtime top-up, gift cards sold
in the United States and Europe, domestic bill pay service and our recently launched international money transfer service. Payment
Services also includes reloadable prepaid debit cards marketed in Europe and Bank Identification Number (BIN) sponsorship services
offered by our Gibraltar-based bank, IDT Financial Services Limited. Payment Services’ offerings leverage our platform capabilities,
our distribution reach into foreign-born communities and our global reach to provide simple, convenient and affordable offerings,
many over the Boss Revolution platform.
Our international airtime top-up products enable customers to purchase
minutes for a prepaid mobile telephone in another country. They are sold both over our Boss Revolution payment platform and in
hard card format. Our international airtime top-up offerings are focused on geographic corridors, such as the United States to
Central America, that tend to generate high volumes of business, and are part of a comprehensive product offering that includes
product, marketing and distribution focused on those corridors.
We believe that international remittances are a significant economic
activity among our target market of foreign-born residents and other under-banked communities. To serve that market, we began to
roll-out an international money transfer service over our Boss Revolution platform in 2014. Prior to launch, we obtained the requisite
licenses including those required by nearly every state, formalized relationships with national and local banks in the United States,
developed a compliance operation to comply with applicable anti-money laundering laws and regulations, and assembled a disbursement
network of banks, retailers and other points of payment presence overseas where recipients can collect their transferred funds.
Our international money transfer service is offered over the Boss Revolution platform, and like other payment services, utilizes
our retail network and associated ability to serve unbanked customers. However, we expect that only a limited number of Boss Revolution
retailers in the United States will eventually qualify to process international money transfer transactions.
Revenues from international money transfer are derived from a per-transaction
fee charged to the customer and from foreign exchange differentials. Although we offer lower promotional rates from time to time,
including as an incentive for customers to try the service, the standard industry rates are eight to ten dollars per transaction,
which is what we generally charge. Transaction costs include commissions paid to the retailer or seller, payment to the disbursing
agent, banking, compliance, and foreign currency exchange costs.
Hosted Platform Solutions
Hosted Platform Solutions’ revenue was $45.0 million in fiscal
2014 compared to $50.0 million in fiscal 2013 (2.8% and 3.2% of Telecom Platform Services’ revenue in fiscal 2014 and fiscal
2013, respectively).
Hosted Platform Solutions provides customized communications services
that leverage our proprietary networks, platforms and/or technology to cable companies and other service providers. The majority
of Hosted Platform Solutions’ revenue is generated by our cable telephony business, which is in harvest mode.
International Operations
In Europe, we market our Retail Communications products in the United
Kingdom, the Netherlands, Spain, Germany, Belgium, Italy, Luxembourg, Sweden, Switzerland, Denmark, Norway, and Austria, seeking
to capitalize on the demographic opportunity presented by immigration from outside of Europe to these developed nations. Because
the immigrant market is fragmented, and due to the large number of markets in which we compete, we offer over 600 different prepaid
calling cards in Europe. We also market our Payment Services products in the United Kingdom.
We maintain our European corporate, Retail Communications and Wholesale
Termination Services operations in London, England. We also operate satellite offices in Germany, Belgium, Spain and Greece.
We also provide wholesale termination services to international
telecom companies, including foreign state-owned or state-sanctioned telephone companies and Tier-1 carriers, new and emerging
telephone companies, and value-added service providers.
Our European operations, including Wholesale Termination Services
and Retail Communications, generated $360 million of revenues in fiscal 2014, a 43.9% increase from the $250.3 million of
revenues generated during fiscal 2013. Our European operations’ revenues constituted 22.1% of IDT Telecom’s revenues
from continuing operations in fiscal 2014, as compared to 15.6% in fiscal 2013.
In Asia, we sell Retail Communications products in Hong Kong,
Singapore, Australia, Japan, Korea, Malaysia and Taiwan. Our operations in Asia also include Wholesale Termination Services. In
Hong Kong, we are one of the top providers of prepaid calling services to the Filipino and Indonesian populations, the two largest
overseas worker segments. In addition, in Singapore, our Retail Communications products are a market leader to the Indian populations,
which is the largest ethnic segment in Singapore, as well as the large Indonesian population. In fiscal 2014, IDT Telecom generated
$61.3 million in revenues from our operations in the Asia Pacific region compared to $93.7 million in fiscal 2013.
In Latin America, we market Retail Communications products in Argentina,
Brazil, Peru, Chile, and Uruguay. In addition, we offer post-paid phone services in Brazil to consumers and small businesses. We
maintain Latin American headquarters in Buenos Aires, Argentina. In fiscal 2014, IDT Telecom generated $22.6 million in revenues
from the sale of Retail Communications products in Latin America compared to $29.8 million in fiscal 2013.
Sales, Marketing and Distribution
In the United States, we distribute Retail Communications and Payment
Services products, including Boss Revolution PIN-less, domestic and international airtime top-up offerings, and prepaid calling
cards primarily to retail outlets through our network of distributors or through our internal sales force. In addition, our white
label calling cards as well as our IDT-branded calling cards are also marketed to retail chains and outlets through our internal
sales force, and from time to time we may utilize third-party agents or brokers to acquire accounts. We also market prepaid offerings,
including Boss Revolution PIN-less and domestic and international airtime top-up, direct to the consumer via online channels including
the Boss Revolution consumer website (bossrevolution.com) and mobile apps for Apple iOS and Android.
In
Europe and Asia, we sell our prepaid calling cards including both white label and IDT-branded calling cards through independent
distributors and our internal sales force. Additionally, we sell Boss Revolution PIN-less and domestic and international airtime
top-up in select European and Asia Pacific markets both through retail
distribution and directly to the consumer. In Asia, we sell postpaid services direct to consumers and small businesses. Wholesale
Termination Services are marketed and sold through our internal wholesale sales team.
Telecommunications Network Infrastructure
IDT Telecom operates a global voice and data network to provide
an array of telecommunications and payment services to our customers worldwide using a combination of proprietary and third-party
applications. Proprietary applications include call routing and rating, customer provisioning, call management,
product web pages, calling card features, and payment services features. Proprietary applications provide the flexibility to adapt
to evolving marketplace demands without waiting for third-party software releases, and often provide advantages in capability
or cost over commercially available alternatives.
The IDT Telecom core voice network utilizes Internet Protocol, or
IP, and is interconnected through gateways to time-division multiplexing, or TDM, networks worldwide. This hybrid IP/TDM capability
allows IDT Telecom to interface with carriers using the lowest cost technology protocol available. To support its global reach,
IDT Telecom operates voice switches and/or points of presence in the United States, Europe, South America, Asia and Australia.
IDT Telecom receives and terminates voice traffic from every country in the world, including cellular, landline and satellite calls
through direct interconnects. The network includes data centers located in the United States, United Kingdom and Hong Kong with
smaller points of presence in other countries. It is monitored and operated on a continual basis by our Network Operations Centers
in the United States.
CONSUMER PHONE SERVICES
Our Consumer Phone Services segment generated revenues of $11.0
million and income from operations of $1.8 million in fiscal 2014, as compared to revenues of $14.5 million and income from operations
of $1.8 million in fiscal 2013. Consumer Phone Services’ revenues declined 24.1% and 24.8% in fiscal 2014 and fiscal 2013,
respectively, when compared to the prior fiscal years. We continued to operate the business in harvest mode—maximizing revenue
from current customers while maintaining expenses at the minimum levels essential to operate the business. This strategy has been
in effect since calendar 2005 when the Federal Communications Commission, or FCC, decided to terminate the UNE-P pricing regime,
which resulted in significantly inferior economics in the operating model for this business. We expect the Consumer Phone Services’
customer base and revenues will continue to decline in fiscal 2015.
We currently provide our bundled local/long distance phone service
in 11 states, marketed under the brand name IDT America. Our bundled local/long distance service, offered predominantly to residential
customers, includes unlimited local, regional toll and domestic long distance calling and popular calling features. A second plan
is available, providing unlimited local service with our long distance included for as low as 3.9 cents per minute. With either
plan, competitive international rates and/or additional features can be added for additional monthly fees. We also offer stand-alone
long distance service throughout the United States.
As of July 31, 2014, we had approximately 6,200 active customers
for our bundled local/long distance plans and approximately 28,500 customers for our long distance-only plans, compared to 7,800
and 35,700 customers, respectively, on July 31, 2013. Our highest customer concentrations are in large urban areas, with the
greatest number of customers located in New York, New Jersey, Pennsylvania and Massachusetts.
ZEDGE
Zedge owns and operates a popular online platform for mobile phone
consumers interested in obtaining free, high-quality games, apps, and mobile phone customization including ringtones, wallpapers,
and notification sounds. We believe that Zedge’s popularity stems from its ability to select and present content in a customized
and personally relevant manner. To this end, we have invested heavily in developing a proprietary, machine-learning-based, behavioral
recommendation engine, tasked with discovering and packaging the content in an easy, fast, attractive and self-intuitive fashion.
As a result of Zedge’s large, active user base, it is able to offer advertisers, game developers, musicians and artists a
scalable, non-incentivized, user acquisition platform with global reach.
Users access Zedge through smartphone apps, which are available
in all of the Google Play, iTunes and the Windows Phone stores, or through feature phones or Zedge’s website. Zedge has grown
its user base without any material investment in marketing, user acquisition or advertising. We believe that consumer growth stems
from the demand for, and popularity of, the content offerings, the quality of the recommendations and the commitment to providing
an exceptional user experience. As of July 31, 2014, the Zedge smartphone app surpassed 110 million installations. The Android
app has averaged among the top 20 most popular apps in the Google Play store for the last four years and we believe it has been
installed on approximately 20% of all Android handsets in the United States.
Zedge’s app is primarily used by customers in
North America and Europe, typically in the 18 to 34 age bracket and represent an almost equal gender breakout. The web users
of Zedge are concentrated in the emerging markets are also young and skew male.
Zedge rolled out its Android app in late 2009 with content channels
dedicated to ringtones, wallpapers and notification sounds. In April 2012, Zedge expanded its Android offering by introducing two
new channels - mobile games and live-wallpapers. In late 2012, Zedge launched a limited version of its smartphone iOS app featuring
wallpapers and in late 2013 Zedge expanded it iOS offering by including ringtones. Zedge also maintains a web presence primarily
frequented by feature phone users. We expect that web traffic will continue to decline as smartphones’ market share increases
and users access Zedge via smartphone apps.
The ringtone and wallpaper content library is comprised of millions
of user-generated content submissions that are uploaded from our website while the mobile games catalogue is curated from the Google
Play store.
Zedge developed a proprietary technology platform that is
centered on content management and discovery, web and app development, data mining and analytics, machine learning, mobile content/device
compatibility, advertising and reporting. From an end user’s perspective, the platform minimizes response latency and maximizes
content relevancy. Zedge’s architecture contains a fully redundant production environment that can tolerate multiple server
failures with minimal end-user disruption. In addition, it utilizes a variety of hosted services including cloud computing and
outsourced datacenter management in order to scale efficiently and competitively. We believe that this technology mix optimizes
functionality, scalability, flexibility performance, cost and ease of use.
Zedge’s revenues are generated from offering direct
advertisers, advertising networks, game publishers and marketers exposure to the customer base via advertising inventory that is
sold on the smartphone app and website. We believe that advertisers are attracted to Zedge due to its growing user base, demographics,
non-incentivized, user acquisition platform focused on mobile games and personalization content discovery, ability in optimizing
ad inventory performance and direct distribution relationships with many leading mobile game publishers. During fiscal 2014, Zedge
generated revenues of $6.5 million compared to $5.8 million in fiscal year 2013. Approximately $6.0 million, or 92%, of fiscal
2014 revenues were generated from advertising inventory on mobile devices compared to $4.7 million, or 80%, in fiscal 2013. Zedge’s
income from operations in both fiscal 2014 and fiscal 2013 was $0.3 million.
We currently own approximately 83% (69% on a fully diluted
basis) of Zedge. We are considering strategic options for Zedge, including, amongst others, a spin-off as a separate company, a
sponsored spin-off, adding a strategic partner or a sale.
ALL OTHER
Operating segments that are not reportable individually are included
in All Other. All Other included Fabrix, a software development company offering a cloud-based scale-out storage and computing
platform optimized for big data, virtualization and media storage, processing and delivery. All Other also includes our real estate
holdings, and other, smaller businesses.
During fiscal 2014, All Other generated $18.4 million in revenues
and loss from operations of $2.0 million, as compared with revenues of $12.2 million and loss from operations of $7.4 million
in fiscal 2013.
Fabrix
Prior
to its sale in October 2014, Fabrix was our majority-owned venture that developed and licensed a proprietary video software platform
optimized for cost effective cloud-based video storage, high throughput streaming and intelligent content distribution. This software
was marketed to cable and telecommunications operators, Internet service providers and web-based video portals that require deep
video storage capabilities or offer unicast television applications including video-on-demand, multi-screen delivery, cloud storage,
time/place shifting and remote DVR storage capabilities. Fabrix’s grid-based solution runs on commercial off-the-shelf servers
enabling service providers to deploy the latest computing technology innovations. Fabrix leverages strategic partnerships with
leading equipment manufacturers and system integrators who resell the Fabrix platform to service providers worldwide.
Fabrix’s technology has been selected by over 15 leading North
American and European multi-system operators to power their video service offerings. In 2010, Fabrix successfully deployed its
software to empower a US tier-1 operator's cloud-based DVR. The operator has periodically purchased additional licenses as it continues
to roll out its offering system-wide. In 2011, a North American tier-1 operator licensed Fabrix software for its deep video storage
product. In the third quarter of fiscal 2013, Fabrix commenced software deliveries to a major European operator, and subsequently
made additional sales to cable and telecom operators in Europe.
Fabrix typically generated cash from the initial licensing of its
software, from maintenance during the life of the licensing agreement, and from any subsequent license renewals. Fabrix generally
recognized revenue for its software licenses and support from the date on which delivered orders were accepted by the customer
over the term of the related software support agreements.
During fiscal 2014, Fabrix generated $16.6 million in revenues and
a loss from operations of $0.7 million, as compared with revenues of $10.6 million and a loss from operations of $1.4 million
in fiscal 2013. In fiscal 2014 and fiscal 2013, Fabrix received cash from sales of $13.4 million and $16.0 million, respectively.
COMPETITION
IDT Telecom
Telecom Platform Services
Retail Communications
Within Retail Communications, the growth of Boss Revolution PIN-less
sales since its launch in 2009 has substantially replaced revenues from sales of our traditional disposable calling cards.
Like all international calling services, our Boss Revolution
PIN-less service is subject to fierce competition, and we do not expect to continue to grow revenues and margins without a successful
strategy and sound execution. While virtually any company offering retail voice services is a competitor of ours, we face particularly
strong competition from Tier 1 telecom operators who offer flat rate international calling plans, other PIN-less prepaid voice
offerings, prepaid calling card providers, mobile virtual network operators (or MVNOs) with aggressive international rate plans,
and VoIP and other “over the top” (or OTT) service providers. Outside the United States, we also compete with large
foreign state-owned or state sanctioned telephone companies.
In our view, our ability to compete successfully against
these operators depends on several factors. Our interconnect and termination agreements, network infrastructure and least-cost-routing
system enable us to offer low-cost, high quality services. Our extensive distribution and retail networks provide us with a strong
presence in communities of foreign born residents, a significant portion of which purchase our services with cash. Our Boss Revolution
brand is often highly visible in these communities and has a reputation for quality service and competitive, transparent pricing.
Finally, we also offer synergistic payment services over the Boss Revolution platform that customers can conveniently access from
their accounts. In our view, these factors represent competitive advantages.
However, some of our competitors have significantly greater financial
resources and name recognition, and are capable of providing comparable service levels and pricing through established brands.
Consequently, our ability to maintain and/or to capture additional market share will remain dependent upon our ability to continue
to provide competitively priced services, expand our distribution and retail networks, improve our ability to reach and sell to
customers through mobile devices, develop successful new products and services to fit the evolving needs of our customers, and
continue to build the brand equity of Boss Revolution.
Wholesale Termination Services
The wholesale carrier industry has numerous entities competing for
the same customers, primarily based on price, products and quality of service.
In our Wholesale Termination Services business, we participate in
a global market place with:
| ● | interexchange carriers and other long distance resellers and providers, including large carriers such as AT&T and Verizon; |
| ● | historically state-owned or state-sanctioned telephone companies such as Telefonica, France Telecom and KDDI; |
| ● | on-line, spot-market trading exchanges for voice minutes; |
| ● | OTT internet telephony providers; |
| ● | other providers of international long distance services; and |
| ● | alliances between large multinational carriers that provide wholesale carrier services. |
Our Wholesale Termination Services business derives a competitive
advantage from several inter-related factors: our Retail Communications business generates large volumes of originating minutes,
which represents a desirable, tradable asset that helps us win return traffic and obtain beneficial pricing which we can offer
in the wholesale arena; the proprietary technologies powering our wholesale platform and in particular, the software that drives
voice over internet protocols enables us to scale up at a lower cost than many of our competitors; our professional and experienced
account management; and our extensive network of interconnects around the globe, with the ability to connect in whatever format
(IP or TDM) that is most feasible. In aggregate, these factors provide us with a competitive advantage over some participants on
certain routes.
Payment Services
The major competitors to Payment Services’ international airtime
top-up offerings include:
| ● | international mobile operators, who seek to control more of their own distribution channel or create their own products that
are directly competitive to international airtime top-up; |
| ● | other distributors, who develop a more comprehensive product offering than our international airtime top-up offerings or aggressively
discount their product offerings that are similar to our international airtime top-up offerings; and |
| ● | international money transfer services that target foreign born communities in the United States. |
Consumer Phone Services
We offer long distance phone services to residential and business
customers in the United States. We also offer local and long distance phone services bundled for a flat monthly rate in 11 states.
The U.S. consumer phone services industry is characterized by intense competition, with numerous providers competing for a declining
number of wireline customers, leading to a high churn rate because customers frequently change providers in response to offers
of lower rates or promotional incentives.
The regional bell operating companies, or RBOCs, remain our primary
competitors in the local exchange market. We are also competing with providers offering communications service over broadband connections
using VoIP technology, such as cable companies and independent VoIP providers. Companies also provide voice telephony services
over broadband Internet connections, allowing users of these Internet services, such as Vonage and Skype, to obtain communications
services without subscribing to a conventional telephone line. Mobile wireless companies are deploying wireless technology as a
substitute for traditional wireline local telephones. Electric utilities have existing assets (in the form of “last mile”
connections to the customer’s premises), very large back-office support organizations and access to low-cost capital that
could allow them to enter a telecommunications market rapidly and accelerate network development.
Due to changes in the U.S. regulatory environment that affected
our cost of provisioning bundled local/long distance phone services and increased competition, we ceased marketing activities for
this service, and as a result, our Consumer Phone Services business has declined significantly.
Zedge
Zedge faces competition in various forms. Ringtones and wallpapers
are a commodity and many smaller apps and websites offer both free and paid ringtones and wallpapers. Zedge faces competition from
apps that offer mobile customization content, a wide variety of smaller personalization content providers and app discovery services.
We believe that Zedge has a competitive advantage due to its large user base, modular approach to providing customization content,
large catalogue of content, its proprietary recommendation engine, its market ranking and its longevity. Zedge is unaware of any
service that maintains a content library as extensive as Zedge’s library, or curates the content in such a relevant and easy
to use fashion.
REGULATION
The following summary of regulatory developments and legislation
is intended to describe what we believe to be the most important, but not all, current and proposed international, federal, state
and local laws, regulations, orders and legislation that are likely to materially affect us.
Regulation of Telecom in the United States
Telecommunications services are subject to extensive government
regulation at both the federal and state levels in the United States. Any violations of the regulations may subject us to enforcement
actions, including interest and penalties. The FCC has jurisdiction over all telecommunications common carriers to the extent they
provide interstate or international communications services. Each state regulatory commission has jurisdiction over the same carriers
with respect to their provision of local and intrastate communications services. Local governments often indirectly regulate aspects
of our communications business by imposing zoning requirements, taxes, permit or right-of-way procedures or franchise fees. Significant
changes to the applicable laws or regulations imposed by any of these regulators could have a material adverse effect on our business,
operating results and financial condition.
Regulation of Telecom by the Federal Communications Commission
The FCC has jurisdiction over all U.S. telecommunications service
providers to the extent they provide interstate or international communications services, including the use of local networks to
originate or terminate such services.
Universal Service and Other Regulatory Fees and Charges
In 1997, the FCC issued an order, referred to as the Universal
Service Order that requires all telecommunications carriers providing interstate telecommunications services to contribute to universal
service support programs administered by the FCC (known as the Universal Service Fund). In addition, beginning in October 2006,
interconnected VoIP providers, such as our subsidiary Net2Phone, are required to contribute to the Universal Service Fund. These
periodic contributions are currently assessed based on a percentage of each contributor’s interstate and international end
user telecommunications revenues reported to the FCC. We also contribute to several other regulatory funds and programs, most notably
Telecommunications Relay Service, FCC Regulatory Fees, and Local Number Portability (collectively, the Other Funds). We and most
of our competitors pass through Universal Service Fund and Other Funds contributions as part of the price of our services,
either as part of the base rate or, to the extent allowed, as a separate surcharge on customer bills. Due to the manner in which
these contributions are calculated, we cannot be assured that we fully recover from our customers all of our contributions. In
addition, based on the nature of our current business, we receive certain exemptions from federal Universal Service Fund contributions.
Changes in our business could eliminate our ability to qualify for some or all of these exemptions. As a result, our ability to
pursue certain new business opportunities in the future may be constrained in order to maintain these exemptions, the elimination
of which could materially affect the rates we would need to charge for existing services. Changes in regulation may also have an
impact on the availability of some or all of these exemptions. If even some of these exemptions become unavailable, they could
materially increase our federal Universal Service Fund or Other Funds’ contributions and have a material adverse effect on
the cost of our operations and, therefore, on our ability to continue to operate profitably, and to develop and grow our business.
We cannot be certain of the stability of the contribution factors for the Other Funds. Significant increases in the contribution
factor for the Other Funds in general and the Telecommunications Relay Service Fund in particular can impact our profitability.
Whether these contribution factors will be stable in the future is unknown, but it is possible that we will be subject to significant
increases.
Interconnection and Unbundled Network Elements
FCC rule changes relating to unbundling have resulted in increased
costs to purchase services and increased uncertainty regarding the financial viability of providing service using unbundled network
elements. As a result, starting in 2006, we placed our Consumer Phone Services business in “harvest mode,” wherein
we seek to retain existing customers but do not actively market to new customers.
We continue to negotiate interconnection arrangements with Incumbent
Local Exchange Carriers, or ILECs, generally on a state-by-state basis, for our Consumer Phone Services business as well as other
businesses. These agreements typically have terms of two or three years and need to be periodically renewed and renegotiated. While
current FCC rules and regulations require the incumbent provider to provide certain network elements necessary for us to provision
end-user services on an individual and combined basis, we cannot assure that the ILECs will provide these components in a manner
and at a price that will support competitive operations.
Access Charges
As a provider of long distance services, we remit access fees directly
to local exchange carriers or indirectly to our underlying long distance carriers for the origination and termination of our long
distance telecommunications traffic. Generally, intrastate access charges are higher than interstate access charges. Therefore,
to the degree access charges increase or a greater percentage of our long distance traffic becomes intrastate, our costs of providing
long distance services will increase. Similarly, as a local exchange provider, we bill access charges to long distance providers
for the termination of those providers’ long distance calls. Accordingly, as opposed to our long distance business, our local
exchange business benefits from the receipt of intrastate and interstate long distance traffic. Under FCC rules, our interstate
access rates must be set at levels no higher than those of the ILEC in each area we serve, which limits our ability to seek increased
revenue from these services. Some, but not all, states have similar restrictions on our intrastate access charges.
For nearly a decade, the FCC has had open regulatory proceedings
in which it has considered reforming “intercarrier compensation,” which is a term that covers the payments that carriers
bill and remit to each other—access charges and reciprocal compensation, generally—for the use of telecommunications
networks to originate and terminate phone calls. On November 18, 2011, the FCC released a Report and Order and Further Notice
of Proposed Rulemaking wherein it set forth a schedule which, over a period of several years, substantially reduces terminating
access rates. Since we both make payments to and receive payments from other carriers for terminating long distance calls, the
FCC’s action has the effect of reducing payments we receive from other carriers while also reducing our costs to terminate
our long distance calls. The FCC has also raised the possibility – which it has yet to conclusively act upon – that
it will reduce originating access charges in a similar manner. Due to the nature of IDT’s business, IDT pays, but does not
bill originating access charges. At this time we cannot predict the effect future FCC actions may have upon our business.
Customer Proprietary Network Information
In 2007, the FCC increased its regulatory oversight of Customer
Proprietary Network Information, or CPNI. The FCC took this increased role in response to several high-profile cases of “pretexting,”
which occurs when an individual secures, through deception, from a communications provider the private phone records of another
person. We have a CPNI compliance policy in place and we believe we currently meet or exceed all FCC requirements for the protection
of CPNI. However, we cannot be assured that we are in full compliance and if the FCC were to conclude that we were not in compliance,
we could be subject to fines or other forms of sanction.
Regulation of Telecom by State Public Utility Commissions
Our telecommunications services that originate and terminate within
the same state, including both local and in-state long distance services are subject to the jurisdiction of that state’s
public utility commission. The Communications Act of 1934, as amended, generally preempts state statutes and regulations that prevent
the provision of competitive services, but permits state public utility commissions to regulate the rates, terms and conditions
of intrastate services, so long as such regulation is not inconsistent with the requirements of federal law. We are certified to
provide facilities-based and/or resold long distance service in all 50 states and facilities-based and resold local exchange service
in 45 states. In addition to requiring certification, state regulatory authorities may impose tariff and filing requirements, consumer
protection measures, and obligations to contribute to universal service and other funds. Rates for intrastate switched access services,
which we both pay to local exchange companies and collect from long-distance companies for terminating in-state toll calls, are
subject to the jurisdiction of the state commissions. State commissions also have jurisdiction to approve negotiated rates, or
establish rates through arbitration, for interconnection, including rates for unbundled network elements. Changes in those access
charges or rates for unbundled network elements could have a substantial and material impact on our business.
Regulation of Telecom—International
In connection with our international operations, we have obtained
licenses or are otherwise authorized to provide telecommunications services in various foreign countries. We have obtained licenses
or authorizations in Argentina, Australia, Austria, Belgium, Brazil, Canada, Chile, Denmark, France, Germany, Greece, Hong Kong,
Ireland, Italy, Japan, Mexico, the Netherlands, Peru, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, the United
Kingdom and Uruguay. In numerous countries where we operate or plan to operate, we are subject to many local laws and regulations
that, among other things, may restrict or limit the ability of telecommunications companies to provide telecommunications services
in competition with state-owned or state-sanctioned dominant carriers.
Regulation of Internet Telephony
The use of the Internet and private IP networks to provide voice
communications services is generally less regulated than traditional switch-based telephony within the United States and abroad
and, in many markets, is not subject to the imposition of certain taxes and fees that increase our costs. As a result, IDT is able,
in many markets, to offer VoIP communications services at rates that are more attractive than those applicable to traditional telephone
services. However, in the U.S. and abroad, there have been efforts by legislatures and regulators to harmonize the regulatory structures
between traditional switch-based telephony and VoIP. This could result in additional fees, charges, taxes and regulations on IP
communications services that could materially increase our costs and may limit or eliminate our competitive pricing advantages.
Additionally, several foreign governments have adopted laws and/or regulations that could restrict or prohibit the provision of
voice communications services over the Internet or private IP networks. These efforts could likewise harm our ability to offer
VoIP communications services.
Money Transmitter and Payment Instrument Laws and Regulations
We have further developed our business in the area of consumer
payment services. Our offerings now include money transfer, which launched in the first quarter of 2014, and various network branded
or “open loop” prepaid card offerings. These industries are heavily regulated. Accordingly, we, and the products and
services that we market in the area of consumer payment services, are subject to a variety of federal and state laws and regulations,
including:
| ● | Banking laws and regulations; |
| ● | Money transmitter and payment instrument laws and regulations; |
| ● | Anti-money laundering laws; |
| ● | Privacy and data security laws and regulations; |
| ● | Consumer protection laws and regulations; |
| ● | Unclaimed property laws; and |
| ● | Card association and network organization rules. |
In connection with the development of our money transmission
services and the expansion of our network branded prepaid card offerings, we have actively pursued our own money transmitter licenses.
As of July 31, 2014, we had money transmitter licenses in 45 of the 47 states where they are required as well as in Puerto Rico
and Washington, D.C.
Regulation of Other Businesses
We operate other smaller or early-stage initiatives and operations,
which may be subject to federal, state, local or foreign law and regulation.
Intellectual Property
We rely on a combination of patents, copyrights, trademarks,
domain name registrations and trade secret laws in the United States and other jurisdictions and contractual restrictions to protect
our intellectual property rights and our brand names. All of our employees sign confidentiality agreements. These agreements provide
that the employee may not use or disclose our confidential information except as expressly permitted in connection with the performance
of his or her duties for us, or in other limited circumstances. These agreements also state that, to the extent rights in any invention
conceived by the employee while employed by us do not vest in the Company automatically by operation of law, the employee is required
to assign his or her rights to us.
We own at least 290 trademark and service mark registrations and
pending applications in the United States and at least 390 pending applications and registrations abroad. We protect our brands
in the marketplace including the IDT, Boss Revolution and Net2Phone brands. Where deemed appropriate, we have filed trademark applications
throughout the world in an effort to protect our trademarks. Where deemed appropriate, we have also filed patent applications in
an effort to protect our patentable intellectual property. IDT Corporation owns 11 issued patents and 8 patent applications in
the United States and 10 patents issued abroad with 16 patent applications pending abroad.
We maintain a global telecommunications switching and transmission
infrastructure that enables us to provide an array of telecommunications, Internet access and Internet telephony services to our
customers worldwide. We have domestic and foreign patents and patent applications regarding our infrastructure and/or global telecommunication
network for our international telecommunications traffic and the international traffic of other telecommunications companies.
Circumstances outside our control could pose a threat to our intellectual
property rights. For example, effective intellectual property protection may not be available in every country in which our products
and services are distributed. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective.
Any significant impairment of our intellectual property rights could harm our business or our ability to compete. Also, protecting
our intellectual property rights is costly and time consuming. Any increase in the unauthorized use of our intellectual property
could make it more expensive to do business and harm our operating results.
Companies in the telecommunications industry and other industries
in which we compete own large numbers of patents, copyrights and trademarks and frequently enter into litigation based on allegations
of infringement or other violations of intellectual property rights. As we face increasing competition, the possibility of intellectual
property claims against us grows. Although we do not believe that we infringe upon the intellectual property rights of others,
our technologies may not be able to withstand any third-party claims or rights against their use.
IDT Telecom
In addition to IDT Corporation’s patents, our Net2Phone
subsidiary currently owns 38 issued patents and has 4 pending patent applications in the United States. Net2Phone has 8 foreign
issued patents, and no patent applications pending abroad.
Net2Phone owns at least 18 trademark and service mark registrations
and at least 2 pending applications in the United States. Net2Phone owns at least 113 trademark and service mark registrations
and at least 2 pending applications in various foreign countries. Net2Phone’s most important mark is “NET2PHONE.”
Net2Phone has made a significant investment in protecting this mark, and Net2Phone believes it has achieved recognition in the
United States and abroad. Net2Phone is currently engaged in an international filing program to file trademark applications for
trademark registrations of the mark NET2PHONE in a number of foreign countries.
Zedge
Zedge owns at least 7 trademark/service mark registrations and at
least 3 pending applications in the United States and in various foreign countries. Zedge’s most important mark is “ZEDGE.”
Zedge has made a significant investment in protecting this mark and the other marks it is seeking to protect. Zedge is currently
pursuing additional domestic and foreign trademark applications to expand protection for its “ZEDGE” trademark and
other trade names. While Zedge cannot insure that there will be no opposition to its current applications, no such opposition currently
exists.
Other
We also currently own three patents and three pending patent applications
and three registrations in the United States that relate to business operations we oversee or businesses-in-development. We also
own or license certain trademark and service mark registrations and pending applications in the United States and additional registrations
abroad.
RESEARCH AND DEVELOPMENT
We incurred $10.0 million, $7.2 million and $4.6 million on
research and development during fiscal 2014, fiscal 2013 and fiscal 2012, respectively, all related to Fabrix.
EMPLOYEES
As of October 1, 2014, we had a total of approximately 1,570
employees, of which approximately 1,560 are full-time employees.
Item 1A. Risk Factors.
RISK FACTORS
Our business, operating results or financial condition could
be materially adversely affected by any of the following risks as well as the other risks highlighted elsewhere in this document,
particularly the discussions about regulation, competition and intellectual property. The trading price of our Class B common stock
could decline due to any of these risks.
Risks Related to Our Businesses
Each of our telecommunications lines of business is highly
sensitive to declining prices, which may adversely affect our revenues and margins.
The worldwide telecommunications industry is characterized by intense
price competition, which has resulted in declines in both our average per-minute price realizations and our average per-minute
termination costs. Many of our competitors continue to aggressively price their services. The intense competition has led to continued
erosion in our pricing power, in both our retail and wholesale markets, and we have generally had to pass along all or some of
the savings we achieve on our per-minute costs to our customers in the form of lower prices. Any increase by us in pricing may
result in our prices not being as attractive, which may result in a reduction of revenue. If these trends in pricing continue or
increase, it could have a material adverse effect on the revenues generated by our telecommunications businesses and/or our gross
margins.
Because our prepaid products, including Boss Revolution
products, generate a significant portion of our revenue, our growth and our results of operations are substantially dependent upon
growth in these products and these products continue to face significant competition, which has adversely affected our profitability
in recent years and may continue to adversely affect our profitability.
Because of the significant percentage of our revenues generated
by our retail products, our results of operations and future growth significantly depend on the performance of these products.
We compete in the prepaid calling market with many of the established
facilities-based carriers, such as AT&T, Verizon and Sprint, and with providers of alternative telecommunications services
such as Mobile Virtual Network Operators and other prepaid wireless providers. These companies are substantially larger and have
greater financial, technical, engineering, personnel and marketing resources, longer operating histories, greater name recognition
and larger customer bases than we do. The use by these competitors of their resources in or affecting the international prepaid
calling market could significantly impact our ability to compete against them successfully. In addition to these larger competitors,
we face significant competition from smaller prepaid calling providers, who from time-to-time offer rates that are substantially
below our rates, and in some instances below what we believe to be the cost to provide the service, in order to gain market share.
This type of pricing by one or more competitors can adversely affect our revenues, as they gain market share at our expense, and
our gross margins, if we lower rates in order to better compete.
The continued growth of the use of Internet protocol-based
services has adversely affected the sales of our traditional prepaid calling cards as customers migrate from using calling cards
to using these alternative services. We expect pricing of IP-based services to continue to decrease, which may result in increased
substitution and increased pricing pressure on our international prepaid calling sales and margins.
Certain wireless operators have been rolling out unlimited
international long distance plans that include international destinations to which customers can place direct calls from their
mobile phones without time limitation. Currently, applicable destinations are limited. As more international destinations are added
to “international unlimited” plans, this can adversely affect our revenues, as these operators gain subscriber market
share.
In addition, like all international calling services, our Boss Revolution
products are subject to fierce competition. Whether it is direct competitors, who offer similar calling services, or indirect competitors
such as wireless service providers and VoIP carriers, which offer alternative international calling services, competitors that
offer alternatives to Boss Revolution try to attract their potential distributors and international callers with aggressive pricing
and promotion. This competition can adversely affect the revenues and profitability of our Boss Revolution products.
We may not be able to obtain sufficient or cost-effective
termination capacity to particular destinations.
Most of our telecommunications traffic is terminated through
third-party providers. In order to support our minutes-of-use demands and geographic footprint, we may need to obtain additional
termination capacity or destinations. We may not be able to obtain sufficient termination capacity from high-quality carriers to
particular destinations or may have to pay significant amounts to obtain such capacity. This could result in our not being able
to support our minutes-of-use demands or in higher cost-per-minute to particular destinations, which could adversely affect our
revenues and margins.
The 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, which
could reduce our revenues and profits.
We rely upon our carrier agreements with foreign partners in order
to provide our telecommunications services to our customers. These carrier agreements are for finite terms and, therefore, there
can be no guarantee that these agreements will be renewed at all or on favorable terms to us. Our ability to compete would be adversely
affected if our carrier agreements were terminated or we were unable to enter into carrier agreements in the future to provide
our telecommunications services to our customers, which could result in a reduction of our revenues and profits.
As our international airtime top-up business grows and more competitors
enter this space, our ability to secure competitive direct or indirect, exclusive or non-exclusive, agreements with international
wireless operators to have access and to resell their in-country airtime top-ups could become more difficult or less attractive,
thereby having an adverse effect on our revenues and operations.
Our customers, particularly our Wholesale Termination Services
customers, could experience financial difficulties, which could adversely affect our revenues and profitability if we experience
difficulties in collecting our receivables.
As a provider of international long distance services, we
depend upon sales of transmission and termination of traffic to other long distance providers and the collection of receivables
from these customers. The wholesale telecommunications market continues to feature many smaller, less financially stable companies.
If weakness in the telecommunications industry or the global economy reduces our ability to collect our accounts receivable from
our major customers, particularly our wholesale customers, our profitability may be substantially reduced. Moreover, the recent
economic recession both in the United States and elsewhere may affect our customers’ access to liquidity and impair our ability
to collect on receivables. While our most significant customers, from a revenue perspective, vary from quarter to quarter, our
five largest Wholesale Termination Services customers collectively accounted for 5.1% of total consolidated revenues from
continuing operations in both fiscal 2014 and fiscal 2013. Our Wholesale Termination Services customers with the five largest
receivables balances collectively accounted for 17.7% and 11.3% of the consolidated gross trade accounts receivable at July 31,
2014 and 2013, respectively. This concentration of revenues and receivables increases our exposure to non-payment by our larger
customers, and we may experience significant write-offs if any of our large customers fail to pay their outstanding balances, which
could adversely affect our revenues and profitability.
Our revenues will suffer if our distributors and sales representatives
fail to effectively market and distribute our Boss Revolution voice and payment services, as well as our traditional disposable
calling cards.
We rely on our distributors and representatives to market and distribute
our traditional disposable prepaid calling card products, our Boss Revolution products, and our international airtime top-up offerings
and other payment services. We utilize a network of several hundred sub-distributors that sell our traditional disposable prepaid
calling cards, Boss Revolution products, and international airtime top-up to retail outlets throughout most of the United States.
In foreign countries, we are dependent upon our distributors and
independent sales representatives, many of which sell services or products for other companies. As a result, we cannot control
whether these foreign distributors and sales representatives will devote sufficient efforts to selling our services. In addition,
we may not succeed in finding capable distributors, retailers and sales representatives in new markets that we may enter. If our
distributors or sales representatives fail to effectively market or distribute our prepaid calling card products, Boss Revolution
products, international airtime top-up offerings and other services, our ability to generate revenues and grow our customer base
could be substantially impaired.
Natural or man-made disasters could have an adverse effect
on our technological infrastructure.
Natural disasters, terrorist acts, acts of war, cyber-attacks or
other breaches of network or information technology security may cause equipment failures or disrupt our operations. Our
inability to operate our telecommunications networks as a result of such events, even for a limited period of time, may result
in significant expenses and/or loss of market share to other communications providers, which could have a material adverse effect
on our results of operations and financial condition.
Certain functions related to our business, particularly the
business of IDT Telecom, depend on a single supplier or small group of suppliers to carry out its business, and the inability to
do business with some or all of these suppliers could have a materially adverse effect on our business and financial results.
Certain functions related to our business, particularly the business
of IDT Telecom, depend on a single supplier or small group of suppliers to carry out its business. Were the services of any one
of them to become unavailable or available only in decreased capacity or at less advantageous terms, this could result in interruptions
to our ability to provide certain services, could cause reduction in service and/or quality as the function is transitioned to
an alternate provider, if any alternate provider is available, or could increase our cost, which in the current competitive environment,
we may not be able to pass along to customers. Accordingly, any of these events could materially and negatively impact our
business, our revenues, our margins, and our relationships with customers.
We could be harmed by network disruptions, security breaches,
or other significant disruptions or failures of our IT infrastructure and related systems or of those we operate for certain of
our customers.
To be successful, we need to continue to have available, for our
and our customers’ use, a high capacity, reliable and secure network. We face the risk, as does any company, of a security
breach, whether through cyber-attacks, malware, computer viruses, sabotage, or other significant disruption of our IT infrastructure
and related systems. As such, there is a risk of a security breach or disruption of the systems we operate, including possible
unauthorized access to our and our customers’ proprietary or classified information. We are also subject to breaches of our
network resulting in unauthorized utilization of our services or products, which subject us to the costs of providing those products
or services, which are likely not recoverable. The secure maintenance and transmission of our and our customer’s information
is a critical element of our operations. Our information technology and other systems that maintain and transmit customer information,
or those of service providers or business partners, may be compromised by a malicious third party penetration of our network security,
or that of a third party service provider or business partner, or impacted by advertent or inadvertent actions or inactions by
our employees, or those of a third party service provider or business partner. As a result, our or our customers’ information
may be lost, disclosed, accessed or taken without the customers’ consent, or our products and services may be used without
payment.
Although we make significant efforts to maintain the security
and integrity of these types of information and systems, there can be no assurance that our security efforts and measures will
be effective or that attempted security breaches or disruptions would not be successful or damaging, especially in light of the
growing sophistication of cyber-attacks and intrusions. We may be unable to anticipate all potential types of attacks or intrusions
or to implement adequate security barriers or other preventative measures. Certain of our business units have been the subject
of attempted and successful cyber-attacks in the past. We have researched the situations and do not believe any material
information, internal or customer, has been compromised.
Network disruptions, security breaches and other significant
failures of the above-described systems could (i) disrupt the proper functioning of our networks and systems and therefore
our operations or those of certain of our customers; (ii) result in the unauthorized use of our services or products without
payment, (iii) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary,
confidential, sensitive or otherwise valuable information of ours or our customers, including trade secrets, which others could
use to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes; (iv) require significant
management attention or financial resources to remedy the damages that result or to change our systems and processes; (v) subject
us to claims for contract breach, damages, credits, fines, penalties, termination or other remedies; or (vi) result in a loss
of business, damage our reputation among our customers and the public generally, subject us to additional regulatory scrutiny or
expose us to litigation. Any or all of which could have a negative impact on our results of operations, financial condition and
cash flows.
Our business is subject to a wide range of laws and regulations
intended to help detect and prevent illegal or illicit activity and our failure, or the failure of one of our disbursement partners
or payment processors to comply with those laws and regulations could harm our business, financial condition and results of operations.
Our money transfer and network branded prepaid card services
are subject to an increasingly strict set of legal and regulatory requirements intended to help detect and prevent money laundering,
terrorist financing, fraud and other illicit activity. The interpretation of those requirements by judges, regulatory bodies and
enforcement agencies is changing, often quickly and with little notice. Economic and trade sanctions programs that are administered
by the U.S. Treasury Department’s Office of Foreign Assets Control, or OFAC, prohibit or restrict transactions to or from
or dealings with specified countries, their governments, and in certain circumstances, with individuals and entities that are specially-designated
nationals of those countries, narcotics traffickers and terrorists or terrorist organizations. As federal, state and foreign legislative
regulatory scrutiny and enforcement action in these areas increase, we expect our costs to comply with these requirements will
increase, perhaps substantially. Failure to comply with any of these requirements by us, our regulated retailers or our disbursement
partners could result in the suspension or revocation of a money transmitter license, the limitation, suspension or termination
of our services, the seizure and/or forfeiture of our assets and/or the imposition of civil and criminal penalties, including fines.
The foregoing laws and regulations are constantly evolving, unclear
and inconsistent across various jurisdictions, making compliance challenging. If we fail to update our compliance system to reflect
legislative or regulatory developments, we could incur penalties. New legislation, changes in laws or regulations, implementing
rules and regulations, litigation, court rulings, changes in industry practices or standards, changes in systems rules or requirements
or other similar events could expose us to increased compliance costs, liability, reputational damage, and could reduce the market
value of our money transfer and network branded prepaid card services or render them less profitable or obsolete.
We provide communications services to consumers and are therefore
subject to various Federal and state laws and regulations.
As a provider of communications services to consumers, such as our
Boss Revolution international calling service or our prepaid calling card services, we are subject to various Federal and state
laws and regulations relating to the manner in which we advertise our services, describe and present the terms of our services,
and communicate with our consumers. Compliance with these laws requires us to be constantly vigilant as they often vary from state
to state. Failure to comply with these laws, could result in action being taken by Federal and state agencies or offices responsible
for consumer protection, like the Federal Trade Commission.
We are subject to licensing and other requirements imposed
by U.S. state regulators, and the U.S. federal government. If we were found to be subject to or in violation of any laws or regulations
governing money transmitters, we could lose our licenses, be subject to liability or be forced to change our business practices.
A number of states have enacted legislation regulating money transmitters.
As of July 31, 2014, we had obtained licenses to operate as a money transmitter in 45 U.S. states, Washington, D.C. and Puerto
Rico, and have applications pending in one additional state. We are also registered as money services businesses with the Financial
Crimes Enforcement Network of the U.S. Department of the Treasury, or FinCEN. As a licensed money transmitter, we are subject to
bonding requirements, liquidity requirements, restrictions on our investment of customer funds, reporting requirements and inspection
by state and foreign regulatory agencies. If we were found to be subject to and in violation of any banking or money services laws
or regulations, we could be subject to liability or additional restrictions, such as increased liquidity requirements. In addition,
our licenses could be revoked or we could be forced to cease doing business or change our practices in certain states or jurisdictions,
or be required to obtain additional licenses or regulatory approvals that could impose a substantial cost on us. Regulators could
also impose other regulatory orders and sanctions on us. Any change to our business practices that makes our service less attractive
to customers or prohibits use of our services by residents of a particular jurisdiction could decrease our transaction volume and
harm our business.
Our business is subject to strict regulation under federal
law regarding anti-money laundering and anti-terrorist financing. Failure to comply with such laws, or abuse of our programs for
purposes of money laundering or terrorist financing, could have a material adverse impact on our business.
Provisions of the USA PATRIOT Act, the Bank Secrecy Act and other
federal laws impose substantial regulations on financial institutions that are designed to prevent money laundering and the financing
of terrorist organizations. Increasing regulatory scrutiny of our industry with respect to money laundering and terrorist financing
matters could result in more aggressive enforcement of these laws or the enactment of more onerous regulation, which could have
a material adverse impact on our business. In addition, abuse of our money transfer services or prepaid card programs for purposes
of money laundering or terrorist financing, notwithstanding our efforts to prevent such abuse through our regulatory compliance
and risk management programs, could cause reputational or other harm that would have a material adverse impact on our business.
The Dodd-Frank Act, as well as the regulations required by
the Dodd-Frank Act, and the creation of the Consumer Financial Protection Bureau could harm us and the scope of our activities,
and could harm our operations, results of operations and financial condition.
The Dodd-Frank Act, which became law in the United States on July 21,
2010, calls for significant structural reforms and new substantive regulation across the financial services industry. In addition,
the Dodd-Frank Act created the Consumer Financial Protection Bureau, or CFPB, whose purpose is to issue and enforce consumer protection
initiatives governing financial products and services, including money transfer services.
We may be subject to examination by the CFPB, which has broad authority
to enforce consumer financial laws. In July 2011, many consumer financial protection functions formerly assigned to the federal
banking agency and other agencies were transferred to the CFPB. The CFPB has a large budget and staff and has broad authority with
respect to our money transfer service and related business. It is authorized to collect fines and provide consumer restitution
in the event of violations, engage in consumer financial education, track consumer complaints, request data and promote the availability
of financial services to underserved consumers and communities. In addition, the CFPB may adopt other regulations governing consumer
financial services, including regulations defining unfair, deceptive or abusive acts or practices, and new model disclosures. The
CFPB’s authority to change regulations adopted in the past by other regulators, or to rescind or alter past regulatory guidance,
could increase our compliance costs and litigation exposure.
The Dodd-Frank Act establishes a Financial Stability Oversight Counsel
that is authorized to designate as “systemically important” non-bank financial companies and payment systems. Companies
designated under either standard will become subject to new regulation and regulatory supervision. If we were designated under
either standard, the additional regulatory and supervisory requirements could result in costly new compliance burdens or may require
changes in the way we conduct business that could harm our business.
Our disbursement partners generally are regulated institutions
in their home jurisdiction, and money transfers are regulated by governments in both the United States and in the jurisdiction
of the recipient. If our disbursement partners fail to comply with applicable laws, it could harm our business.
Money transfers are regulated by state, federal and foreign governments.
Many of our disbursement partners are banks and are heavily regulated by their home jurisdictions. Our non-bank disbursement partners
are also subject to money transfer regulations. We require regulatory compliance as a condition to our continued relationship,
perform due diligence on our disbursement partners and monitor them periodically with the goal of meeting regulatory expectations.
However, there are limits to the extent to which we can monitor their regulatory compliance. Any determination that our disbursement
partners or their sub-disbursement partners have violated laws and regulations could seriously damage our reputation, resulting
in diminished revenue and profit and increased operating costs. While our services are not directly regulated by governments outside
the United States, except with respect to our Gibraltar bank as discussed below, it is possible that in some cases we could be
liable for the failure of our disbursement partners or their sub-disbursement partners to comply with laws, which also could harm
our business, financial condition and results of operations.
Our bank in Gibraltar is regulated by the Gibraltar Financial Services
Commission (the FSC), and, as such, is subject to Gibraltarian and European Union laws relating to financial institutions. As an
issuer of prepaid debit cards for programs operated by other entities, commonly known as program managers, the bank is responsible,
inter alia, for anti-money laundering laws oversight and compliance. If we were to fail to implement the requisite controls or
follow the rules and procedures mandated by the FSC and applicable law, we could be subject to regulatory fines, and even the loss
of our banking license.
We receive, store, process and use personal information and
other data, which subjects us to governmental regulation and other legal obligations related to privacy. Our actual or perceived
failure to comply with such obligations could harm our business.
We receive, store and process personal information and other customer
data, including bank account numbers, credit and debit card information, identification numbers and images of government identification
cards. As a result, we are required to comply with the privacy provisions of the Gramm-Leach-Bliley Act of 1999, or the Gramm-Leach-Bliley
Act, and the Payment Card Industry Data Security Standard. There are also numerous other federal, state and local laws around the
world regarding privacy and the storing, sharing, use, processing, disclosure and protection of personal information and other
customer data, the scope of which are changing, subject to differing interpretations, and may be inconsistent among different jurisdictions
or conflict with other applicable rules. It is possible that these obligations may be interpreted and applied in a manner that
is inconsistent from one jurisdiction to another and may conflict with other rules or our business practices.
Additionally, with advances in computer capabilities and data protection
requirements to address ongoing threats, we may be required to expend significant capital and other resources to protect against
potential security breaches or to alleviate problems caused by security breaches.
Any failure or perceived failure by us to comply with our privacy
policies, our privacy-related obligations to customers or other third parties, or our privacy-related legal obligations, or any
compromise of security that results in the unauthorized release or transfer of personally identifiable information or other customer
data, may result in governmental enforcement actions, fines or litigation. If there is a breach of credit or debit card information
that we store, we could also be liable to the issuing banks for their cost of issuing new cards and related expenses. In addition,
a significant breach could result in our being prohibited from processing transactions for any of the relevant network organizations,
such as Visa or MasterCard, which would harm our business. If any third parties with whom we work, such as marketing partners,
vendors or developers, violate applicable laws or our policies, such violations may put our customers’ information at risk
and could harm our business. Any negative publicity arising out of a data breach or failure to comply with applicable privacy requirements
could damage our reputation and cause our customers to lose trust in us, which could harm our business, results of operations,
financial position and potential for growth.
We could fail to comply with requirements imposed on us by
certain third parties, including regulators.
An increasingly significant portion of our telecom transactions
are processed using credit cards and similar payment methods. As we shift from sales through our traditional distribution channels
to newer platforms, including Boss Revolution and platforms utilized by our payment services business, that portion is expected
to increase and that growth is dependent on utilizing such payment methods. The banks, credit card companies and other relevant
parties are imposing strict system and other requirements in order to participate in such parties’ payment systems. We are
required to comply with the privacy provisions of various federal and state privacy statutes and regulations, and the Payment Card
Industry Data Security Standard, each of which is subject to change at any time. Compliance with these requirements is often difficult
and costly, and our failure, or our distributors’ failure, to comply may result in significant fines or civil penalties,
regulatory enforcement action, liability under or termination of necessary agreements related to our payment services business,
each of which could have a material adverse effect on our financial position and/or operations and that of our distributors who
could be liable as well. Further, as we move into more payment services in addition to services and products that are solely telecommunications
related, those operations may be subject to different and more stringent requirements by regulators and trade organizations in
various jurisdictions. Our payment services unit is subject to federal and state banking regulations and we are also subject to
further regulation by those states in which we are licensed as a money transmitter. We may not be able to comply with all such
requirements in a timely manner or remain in compliance. If we are not in compliance, we could be subject to penalties or the termination
of our rights to participate in such payment systems or provide such services, which could have a material negative impact on our
ability to carry on and grow our Retail Communications and Payment Services operations.
Risks Related to Our Financial Condition
We hold significant cash, cash equivalents, marketable securities
and investments that are subject to various market risks.
As of July 31, 2014, we had cash, cash equivalents and marketable
securities of $166.7 million and aggregate short-term and long-term restricted cash and cash equivalents of $68.5 million. As
of July 31, 2014, we also had $9.5 million in investments in hedge funds, of which $0.1 million was included in “Other
current assets” and $9.4 million was included in “Investments” in our consolidated balance sheet. We liquidated
most of our investment in hedge funds in recent years. Much of the remaining balances in these funds are subject to time restrictions.
We may consider liquidating such remaining balances when their restrictions lapse. Investments in marketable securities and hedge
funds carry a degree of risk, as there can be no assurance that we can redeem the hedge fund investments at any time and that
our investment managers will be able to accurately predict the course of price movements of securities and other instruments and,
in general, the securities markets have in recent years been characterized by great volatility and unpredictability. As a result
of these different market risks, our holdings of cash, cash equivalents, marketable securities and investments could be materially
and adversely affected.
Intellectual Property, Tax, Regulatory and Litigation Risks
We may be adversely affected if we fail to protect our proprietary
technology.
We depend on proprietary technology and other intellectual property
rights in conducting our various business operations. We rely on a combination of patents, copyrights, trademarks and trade secret
protection and contractual rights to establish and protect our proprietary rights. Failure of our patents, copyrights, trademarks
and trade secret protection, non-disclosure agreements and other measures to provide protection of our technology and our intellectual
property rights could enable our competitors to more effectively compete with us and have an adverse effect on our business, financial
condition and results of operations.
In addition, we may be required to litigate in the future to enforce
our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of
others, or to defend against claims of infringement or invalidity. Any such litigation could result in substantial costs and diversion
of resources and could have a material adverse effect on our business, financial condition or results of operations, and there
can be no assurances that we will be successful in any such litigation.
We may be subject to claims of infringement of intellectual
property rights of others.
From time to time we may be subject to claims and legal proceedings
from third parties regarding alleged infringement by us of trademarks, copyrights, patents and other intellectual property rights.
Such suits can be expensive and time consuming and could distract us and our management from focusing on our businesses. Further,
loss of such suits could result in financial burdens and the requirement to modify our modes of operation, which could materially
adversely affect our business.
We are subject to tax and regulatory audits which could result
in the imposition of liabilities that may or may not have been reserved.
We are subject to audits by taxing and regulatory authorities with
respect to certain of our income and operations. These audits can cover periods for several years prior to the date the audit is
undertaken and could result in the imposition of liabilities, interest and penalties if our positions are not accepted by the auditing
entity.
Our FCC Form 499-A filings for calendar years 2000 through 2006
related to payments to the Universal Service Fund have been audited by the Internal Audit Division, or IAD, of the Universal Service
Administrative Company, or USAC, which concluded that we incorrectly reported certain revenues on Forms 499-A. USAC’s revisions
to our filing methodology resulted in additional regulatory payments for the years covered by the audits. While we believe in the
accuracy of our filing methodology and our Request for Review remains pending, we have implemented some of the revisions set forth
in the IAD’s filings beginning with our calendar year 2010 Form 499-A. We have accrued for all regulatory fees we believe
may be incurred under IAD’s methodology from 2002 through the present, in the event our Request for Review is denied and/or
our methodology is not upheld on appeal, and we have made certain payments on amounts that have been invoiced to us by USAC and/or
other agencies. As of July 31, 2014, our accrued expenses included $42.7 million for these regulatory fees for the years covered
by the audit and subsequent years through fiscal 2014. Until a final decision has been reached in our disputes, we will continue
to accrue in accordance with IAD’s methodology. If we do not properly calculate, or have not properly calculated, the amount
payable by us to the Universal Service Fund, we may be subject to interest and penalties.
We are subject to value added tax, or VAT, audits from time-to-time
in various jurisdictions. In the conduct of such audits, we may be required to disclose information of a sensitive nature and,
in general, to modify the way we have conducted business with our distributors until the present, which may affect our business
in an adverse manner.
We are also subject to audits in various jurisdictions for various
other taxes, including utility excise tax, sales and use tax, communications services tax, gross receipts tax and property tax.
Federal and state regulations may be passed that could harm
our business.
Our ability to provide VoIP communications services at attractive
rates arises in large part from the fact that VoIP services are not currently subject to the same level of regulation as traditional,
switch-based telephony. The use of the Internet and private IP networks to provide voice communications services is largely unregulated
within the United States, although several foreign governments have adopted laws and/or regulations that could restrict or prohibit
the provision of voice communications services over the Internet or private IP networks. If interconnected VoIP services become
subject to state regulation and/or additional regulation by the FCC, such regulation will likely lead to higher costs and reduce
or eliminate the competitive advantage interconnected VoIP holds, by virtue of its lesser regulatory oversight, over traditional
telecommunications services. More aggressive regulation of the Internet in general, and Internet telephony providers and services
specifically, may materially and adversely affect our business, financial condition and results of operations.
Our ability to offer services outside of the United States
is subject to the local regulatory environment, which may be unfavorable, complicated and often uncertain.
Regulatory treatment outside the United States varies from country
to country. We distribute our products and services through resellers that may be subject to telecommunications regulations in
their home countries. The failure of these resellers to comply with these laws and regulations could reduce our revenue and profitability,
or expose us to audits and other regulatory proceedings. Regulatory developments such as these could have a material adverse effect
on our operating results.
In many countries in which we operate or our services are sold,
the status of the laws that may relate to our services is unclear. We cannot be certain that our customers, resellers, or other
affiliates are currently in compliance with regulatory or other legal requirements in their respective countries, that they or
we will be able to comply with existing or future requirements, and/or that they or we will continue in compliance with any requirements.
Our failure or the failure of those with whom we transact business to comply with these requirements could materially adversely
affect our business, financial condition and results of operations.
While we expect additional regulation of our industry in some or
all of these areas, and we expect continuing changes in the regulatory environment as new and proposed regulations are reviewed,
revised and amended, we cannot predict with certainty what impact new laws in these areas will have on us, if any. For a complete
discussion of what we believe are the most material regulations impacting our business, see Item 1 to Part I “Business—Regulation”
included elsewhere in this Annual Report.
We are subject to legal proceedings in the ordinary course
of business that may have a material adverse effect on our business, results of operations, cash flows or financial condition.
Various legal proceedings that have arisen or may arise in the ordinary
course of business have not been finally adjudicated, which may have a material adverse effect on our results of operations, cash
flows or financial condition.
Risks Related to Our Capital Structure
Holders of our Class B common stock have significantly less
voting power than holders of our Class A common stock.
Holders of our Class B common stock are entitled to one-tenth of
a vote per share on all matters on which our stockholders are entitled to vote, while holders of our Class A common stock
are entitled to three votes per share. As a result, the ability of holders of our Class B common stock to influence our management
is limited.
We are controlled by our principal stockholder, which limits
the ability of other stockholders to affect our management.
Howard S. Jonas, our Chairman of the Board and founder, has voting
power over 4,377,888 shares of our common stock (which includes 1,574,326 shares of our Class A common stock, which are convertible
into shares of our Class B common stock on a 1-for-1 basis, and 2,803,562 shares of our Class B common stock), representing
approximately 72.6% of the combined voting power of our outstanding capital stock, as of October 6, 2014. Mr. Jonas is
able to control matters requiring approval by our stockholders, including the election of all of the directors and the approval
of significant corporate matters, including any merger, consolidation or sale of all or substantially all of our assets. As a result,
the ability of any of our other stockholders to influence our management is limited.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our headquarters are located in Newark, New Jersey. We own a building
that contains approximately 500,000 square feet, along with an 800 car parking garage. We also lease a 75,000 square foot space
in Newark, New Jersey, as well as a space in New York, New York. Collectively, these three buildings currently serve as the base
for each of our operating segments.
We own a building in Piscataway, New Jersey, which is subject to
a mortgage that is used by IDT Telecom for certain of its operations. We also lease space in a number of other locations in metropolitan
areas primarily to house telecommunications equipment and for our retail communications operations.
We maintain our European headquarters in London, England and we
own a 12,400 square foot condominium interest in a building in Jerusalem, Israel. We also maintain various international office
locations and telecommunications facilities in portions of Europe, South America, Central America, the Middle East, Asia and Africa
where we conduct operations.
Item 3. Legal Proceedings.
On October 17, 2013, we and Alexsam, Inc., or 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, we paid Alexsam the settlement amount.
In connection with an arbitration hearing with Aerotel, Ltd., or
Aerotel, 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, we 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.
Our 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. We 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 us in connection with the
infringement proceedings, which are based on applicable statutes (for which we have accrued $1.1 million at July 31, 2014), the
outcome of this matter is uncertain, and, as such, we are not able to make an assessment of the final result and its impact on
us. We 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, we were required to transfer security deposits to the Court. While the security deposit for the
Lycatel case was subsequently released to us, at this time the relevant courts have declined to release the security deposit for
the Mox case. Mox recently filed for bankruptcy. We are examining our options with respect to the release of this deposit.
On May 5, 2004, we 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.
We alleged that Tyco breached a settlement agreement that it had entered into with us to resolve certain disputes and civil actions
among the parties. We alleged that Tyco did not provide us, as required under the settlement agreement, free of charge and for
our exclusive use, a 15-year indefeasible right to use four Wavelengths in Ring Configuration (as defined in the settlement agreement),
or Wavelengths, on a global undersea fiber optic network that Tyco was deploying at that time. In June 2004, Tyco asserted several
counterclaims against us, alleging that we breached the settlement agreement and are 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 us 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 our appeal and affirming
the Appellate Division’s order. On or about November 17, 2009, we 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, we 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 us 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, we 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 that granted Tyco’s motion to dismiss our complaint. On April 30, 2013,
Tyco filed a motion for reargument or, in the alternative, leave to appeal to the Court of Appeals, which we 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, we filed
our 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. On July 7, 2014, we filed a motion for reargument with the Court of Appeals, which
Tyco opposed. On September 11, 2014, the Court denied our motion. We are evaluating our options going forward.
In addition to the foregoing, we are 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 we are a party will have a material adverse effect on our results of
operations, cash flows or financial condition.
Item 4. Mine Safety Disclosures.
Not applicable.
Part II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities.
PRICE RANGE OF COMMON STOCK
Our Class B common stock trades on the New York Stock Exchange under
the symbol “IDT”.
The table below sets forth the high and low sales prices for our
Class B common stock as reported by the New York Stock Exchange for the fiscal periods indicated. On July 31, 2013, we completed
the Straight Path Spin-Off, in which each of our stockholders received one share of Straight Path Class A common stock for every
two shares of our Class A common stock and one share of Straight Path Class B common stock for every two shares of our Class B
common stock held of record as of the close of business on July 25, 2013.
| |
High | | |
Low | |
Fiscal year ended July 31, 2013 | |
| | |
| |
First Quarter | |
$ | 11.00 | | |
$ | 9.61 | |
Second Quarter | |
$ | 10.57 | | |
$ | 8.86 | |
Third Quarter | |
$ | 14.94 | | |
$ | 9.81 | |
Fourth Quarter | |
$ | 21.24 | | |
$ | 13.77 | |
Fiscal year ended July 31, 2014 | |
| | | |
| | |
First Quarter | |
$ | 22.73 | | |
$ | 15.92 | |
Second Quarter | |
$ | 22.92 | | |
$ | 16.60 | |
Third Quarter | |
$ | 19.32 | | |
$ | 15.51 | |
Fourth Quarter | |
$ | 18.14 | | |
$ | 15.14 | |
On October 6, 2014, there were 510 holders of record of our Class
B common stock and 2 holders of record of our Class A common stock. All shares of Class A common stock are beneficially owned by
Howard Jonas. These numbers do not include the number of persons whose shares are in nominee or in “street name” accounts
through brokers. On October 6, 2014, the last sales price reported on the New York Stock Exchange for the Class B common stock
was $15.90 per share.
Additional information regarding dividends required by this item
is incorporated by reference from the Management’s Discussion and Analysis section found in Item 7 and from Note 13 to the
Consolidated Financial Statements.
The information required by Item 201(d) of Regulation S-K will be
contained in our Proxy Statement for our Annual Stockholders Meeting, which we will file with the Securities and Exchange Commission
within 120 days after July 31, 2014, and which is incorporated by reference herein.
Performance Graph of Stock
The line graph below compares the cumulative total stockholder return
on our Class B common stock with the cumulative total return of the New York Stock Exchange Composite Index and the Standard &
Poor’s Telecommunication Services Index for the five years ended July 31, 2014. The graph and table assume that $100 was
invested on July 31, 2009 (the last day of trading for the fiscal year ended July 31, 2009) in each of Class B common stock with
the cumulative total return of the NYSE Composite Index and the S&P Telecommunication Services Index, and that all dividends
were reinvested. Cumulative total return for our Class B common stock includes the value of spin-offs consummated by IDT (i.e.,
pro rata distributions of the common stock of a subsidiary to our stockholders). Cumulative total stockholder returns for our Class
B common stock, NYSE Composite Index and the S&P Telecommunication Services Index are based on our fiscal year.
Issuer Purchases of Equity Securities
The following table provides information with respect to purchases
by us of our shares during the fourth quarter of fiscal 2014.
| |
Total Number of Shares Purchased | | |
Average Price per Share | | |
Total Number of Shares Purchased as part of Publicly Announced Plans or Programs | | |
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1) | |
May 1 – 31, 2014 | |
| — | | |
$ | — | | |
| — | | |
| 5,064,792 | |
June 1 – 30, 2014 | |
| — | | |
$ | — | | |
| — | | |
| 5,064,792 | |
July 1 – 31, 2014(2) | |
| 3,024 | | |
$ | 16.75 | | |
| — | | |
| 5,064,792 | |
Total | |
| 3,024 | | |
$ | 16.75 | | |
| — | | |
| | |
(1) | Under our existing stock repurchase program, approved by our Board of Directors on June 13, 2006, we were authorized to repurchase
up to an aggregate of 8.3 million shares of our Class B common stock and, until April 2011, our common stock, without regard to
class. On December 17, 2008, our Board of Directors (i) approved a one-for-three reverse stock split of all classes of our common
stock which was effective on February 24, 2009, and (ii) amended the stock repurchase program to increase the aggregate number
of shares of our Class B common stock and common stock, without regard to class, that we are authorized to repurchase from the
3.3 million shares that remained available for repurchase to 8.3 million shares. |
| |
(2) | Consists of shares of Class B common stock that were tendered by employees of ours to satisfy the employees’ tax withholding
obligations in connection with the lapsing of restrictions on awards of restricted stock. Such shares were repurchased by us based
on their fair market value on the trading day immediately prior to the vesting date and the proceeds utilized to pay the taxes
due upon such vesting event. |
Item 6. Selected Financial Data.
The selected consolidated financial data presented below for each
of the fiscal years in the five-year period ended July 31, 2014 has been derived from our Consolidated Financial Statements, which
have been audited by Grant Thornton LLP, independent registered public accounting firm. The selected consolidated financial data
should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and other financial information
appearing elsewhere in this Annual Report.
Year Ended July 31, (in thousands, except per share data) | |
2014 | | |
2013 | | |
2012 | | |
2011 | | |
2010 | |
STATEMENT OF OPERATIONS DATA: | |
| | |
| | |
| | |
| | |
| |
Revenues | |
$ | 1,651,541 | | |
$ | 1,620,617 | | |
$ | 1,506,283 | | |
$ | 1,351,416 | | |
$ | 1,193,131 | |
Income from continuing operations | |
| 21,010 | | |
| 18,078 | | |
| 30,934 | | |
| 20,987 | | |
| 6,988 | |
Income from continuing operations per common share—basic | |
| 0.85 | | |
| 0.77 | | |
| 1.45 | | |
| 0.98 | | |
| 0.31 | |
Income from continuing operations per common share—diluted | |
| 0.82 | | |
| 0.72 | | |
| 1.36 | | |
| 0.90 | | |
| 0.30 | |
Cash dividends declared per common share | |
| 0.51 | | |
| 0.83 | | |
| 0.66 | | |
| 0.67 | | |
| — | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
As of July 31, (in thousands) | |
| 2014 | | |
| 2013 | | |
| 2012 | | |
| 2011 | | |
| 2010 | |
BALANCE SHEET DATA: | |
| | | |
| | | |
| | | |
| | | |
| | |
Total assets | |
$ | 480,931 | | |
$ | 435,407 | | |
$ | 451,114 | | |
$ | 568,166 | | |
$ | 517,795 | |
Capital lease obligations—long-term portion | |
| — | | |
| — | | |
| — | | |
| — | | |
| 407 | |
Notes payable—long term portion | |
| 6,353 | | |
| 6,624 | | |
| 29,716 | | |
| 29,564 | | |
| 33,640 | |
Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
This Annual Report 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,” “plans,” “intends”
and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual
results to differ materially from the results projected in any forward-looking statement. In addition to the factors specifically
noted in the forward-looking statements, other important factors, risks and uncertainties that could result in those differences
include, but are not limited to, those discussed under Item 1A to Part I “Risk Factors” in this Annual Report. The
forward-looking statements are made as of the date of this Annual Report, and we assume 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 in this report and the other information set forth from time to time in our reports
filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934,
including our reports on Forms 10-Q and 8-K.
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report.
OVERVIEW
We are a multinational holding company with operations primarily
in the telecommunications and payment industries. We have three reportable business segments, Telecom Platform Services, Consumer
Phone Services and Zedge. Telecom Platform Services provides retail telecommunications and payment offerings as well as wholesale
international long distance traffic termination. Consumer Phone Services provides consumer local and long distance services in
certain U.S. states. Telecom Platform Services and Consumer Phone Services comprise our IDT Telecom division. Zedge owns and operates
an online platform for mobile phone consumers interested in obtaining free, high-quality games, apps, and mobile phone customization
including ringtones, wallpapers, and notification sounds. Operating segments not reportable individually are included in All Other.
All Other includes Fabrix, a software development company offering a cloud-based scale-out storage and computing platform optimized
for big data, virtualization and media storage, processing and delivery. We sold Fabrix in October 2014. All Other also includes
our real estate holdings, and other, smaller, businesses.
Discontinued Operations
Straight Path Communications, Inc.
On July 31, 2013, we completed a pro rata distribution of the common
stock of our subsidiary Straight Path Communications Inc. to our stockholders of record as of the close of business on July 25,
2013. 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 our stockholders received one share of Straight Path Class A common stock for every two shares of our Class
A common stock and one share of Straight Path Class B common stock for every two shares of our 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.
We believe the Straight Path Spin-Off was tax-free for us and our
stockholders for U.S. federal income tax purposes under Section 355 of the Internal Revenue Code of 1986. We 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 Internal Revenue 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 Internal Revenue Code.
In connection with the Straight Path Spin-Off, we funded Straight
Path with a total of $15.0 million in aggregate cash and cash equivalents.
We 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
our relationship with Straight Path after the spin-off, (2) a Tax Separation Agreement, which sets forth our 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 us to facilitate
Straight Path’s transition into a separate publicly-traded company. These agreements provide for, among other things, the
allocation between us 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 us to Straight Path following the spin-off, including services relating
to human resources and employee benefits administration, treasury, accounting, tax, external reporting, and legal. Straight Path
transitioned accounting and external reporting services from us to a third party in the first quarter of fiscal 2015. In addition,
we and Straight Path have entered into a license agreement whereby each of us, Straight Path and our subsidiaries granted and will
grant a license to the other to utilize patents held by each entity.
Genie Energy Ltd.
On October 28, 2011, we completed a pro rata distribution of the
common stock of our subsidiary, Genie Energy Ltd., to our stockholders of record as of the close of business on October 21, 2011.
At the time of the Genie Spin-Off, Genie owned 99.3% of Genie Energy International Corporation, which owned 100% of IDT Energy
and 92% of Genie Oil and Gas, Inc. As of October 28, 2011, each of our stockholders received one share of Genie Class A common
stock for every share of our Class A common stock and one share of Genie Class B common stock for every share of our Class B common
stock held of record as of the close of business on October 21, 2011. Genie 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.
We received a ruling from the Internal Revenue Service, or IRS,
substantially to the effect that, for U.S. federal income tax purposes, the distribution of shares of Genie common stock will qualify
as tax-free for Genie, us and our stockholders under Section 355 of the Internal Revenue Code of 1986. In addition to obtaining
the IRS ruling, we received an opinion from PricewaterhouseCoopers LLP on the three requirements for a tax-free distribution that
are not addressed in the IRS ruling. Specifically, the opinion concludes that the distribution (i) should satisfy the business
purpose requirement of the Internal Revenue 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 Internal Revenue Code.
In connection with the Genie Spin-Off, we funded Genie with a total
of $106.0 million in aggregate cash and cash equivalents, including restricted cash.
We entered into various agreements with Genie prior to the Genie
Spin-Off including a Separation and Distribution Agreement to effect the separation and provide a framework for our relationship
with Genie after the spin-off, and a Transition Services Agreement, which provides for certain services to be performed by us and
Genie to facilitate Genie’s transition into a separate publicly-traded company. These agreements provide for, among other
things, (1) the allocation between us and Genie of employee benefits, taxes and other liabilities and obligations attributable
to periods prior to the spin-off, (2) transitional services to be provided by us relating to human resources and employee benefits
administration, (3) the allocation of responsibilities relating to employee compensation and benefit plans and programs and other
related matters, (4) finance, accounting, tax, internal audit, facilities, external reporting, investor relations and legal services
to be provided by us to Genie following the spin-off and (5) specified administrative services to be provided by Genie to certain
of our foreign subsidiaries. In addition, we entered into a Tax Separation Agreement with Genie, which sets forth the responsibilities
of us and Genie 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.
IDT Entertainment
In connection with the sale of IDT Entertainment to Liberty Media
Corporation in the first quarter of fiscal 2007, we were eligible to receive additional consideration from Liberty Media based
upon any appreciation in the value of IDT Entertainment over the five-year period that ended in August 2011, however, we may have
been required to pay Liberty Media up to $3.5 million if the value of IDT Entertainment did not exceed a certain amount by August
2011. In September 2011, we and Liberty Media executed an agreement to settle and resolve all claims related to the additional
consideration and certain other disputes and claims. Liberty Media paid us $2.0 million in September 2011 in consideration for
the settlement and related releases, which is included in “Income on sale of discontinued operations” in fiscal 2012
in the accompanying consolidated statement of income.
Summary Financial Data of Discontinued Operations
Revenues, income before income taxes and net income (loss) of Straight
Path and Genie, which are included in discontinued operations, were as follows:
Year ended July 31 (in millions) | |
2014 | | |
2013 | | |
2012 | |
REVENUES | |
| | |
| | |
| |
Straight Path and subsidiaries | |
$ | — | | |
$ | 1.1 | | |
$ | 0.5 | |
Genie and subsidiaries | |
| — | | |
| — | | |
| 45.8 | |
TOTAL | |
$ | — | | |
$ | 1.1 | | |
$ | 46.3 | |
(LOSS) INCOME BEFORE INCOME TAXES | |
| | | |
| | | |
| | |
Straight Path and subsidiaries | |
$ | — | | |
$ | (4.6 | ) | |
$ | 4.9 | |
Genie and subsidiaries | |
| — | | |
| — | | |
| 2.6 | |
TOTAL | |
$ | — | | |
$ | (4.6 | ) | |
$ | 7.5 | |
NET (LOSS) INCOME | |
| | | |
| | | |
| | |
Straight Path and subsidiaries | |
$ | — | | |
$ | (4.6 | ) | |
$ | 4.9 | |
Genie and subsidiaries | |
| — | | |
| — | | |
| 1.0 | |
TOTAL | |
$ | — | | |
$ | (4.6 | ) | |
$ | 5.9 | |
IDT Telecom
Since our inception, we have derived the majority of our revenues
and operating expenses from IDT Telecom’s businesses. IDT Telecom’s revenues represented 98.5%, 98.9% and 99.3% of
our total revenues from continuing operations in fiscal 2014, fiscal 2013 and fiscal 2012, respectively.
Telecom Platform Services, which represented 99.3%, 99.1% and 98.7%
of IDT Telecom’s total revenues in fiscal 2014, fiscal 2013 and fiscal 2012, respectively, markets and distributes multiple
communications and payment services across four broad business verticals:
| ● | Retail Communications provides international long-distance calling products primarily to foreign-born communities worldwide,
with its core markets in the United States; |
| ● | Wholesale Termination Services is a global telecom carrier, terminating international long distance calls around the world
for Tier 1 fixed line and mobile network operators, as well as other service providers; |
| ● | Payment Services provides payment offerings, including international airtime top-up and international money transfer sold over
our Boss Revolution payment platform; and |
| ● | Hosted Platform Solutions provides customized communications services that leverage our proprietary networks, platforms and/or
technology to cable companies and other service providers. |
Our Consumer Phone Services segment provides consumer local and
long distance services in the United States. Since calendar 2005, this business has been in harvest mode, wherein we seek to retain
existing customers but do not actively market to new customers, and we attempt to maximize profits by optimally managing both the
life-cycle of our customer base as well as the costs associated with operating this business.
Our international prepaid calling business worldwide sells the great
majority of its products to distributors at a discount to their face value, and records the sales as deferred revenues. These deferred
revenues are recognized as revenues when telecommunications services are provided and/or administrative fees are imposed. International
prepaid calling revenues tend to be somewhat seasonal, with the second fiscal quarter (which contains Christmas and New Year’s
Day) and the fourth fiscal quarter (which contains Mother’s Day and Father’s Day) typically showing higher minute volumes.
Direct costs related to our telecom businesses consist primarily
of three major categories: termination and origination costs, toll-free costs and network costs.
Termination costs represent costs associated with the transmission
and termination of international and domestic long distance services. We terminate our traffic via the arbitrage market or through
direct interconnections with other carriers. This cost is primarily variable, with a price paid on a per-minute basis. Origination
costs relating to our Consumer Phone Services segment consists primarily of leased lines from the RBOCs, which are billed to us
as a monthly fee. Toll-free costs are variable costs paid to providers of toll-free services.
Network costs, which are also called connectivity costs, are fixed
for a range of minutes of use, and include customer/carrier interconnect charges and leased fiber circuit charges. Local circuits
are generally leased for a 12 to 24 month term, while long haul circuits generally are leased for longer terms. Although these
are not purely variable costs, where the cost increases for each additional minute carried on our suppliers’ networks, increases
in minutes will likely result in incrementally higher network costs.
Direct costs related to our telecom business include an estimate
of charges for which invoices have not yet been received, and estimated amounts for pending disputes with other carriers. Subsequent
adjustments to these estimates may occur after the invoices are received for the actual costs incurred, but these adjustments generally
are not material to our results of operations.
Selling expenses in IDT Telecom consist primarily of sales
commissions paid to internal salespersons and independent agents, and advertising costs, which are the primary costs associated
with the acquisition of customers. General and administrative expenses include employee compensation, benefits, professional fees,
rent and other administrative costs. IDT Telecom’s Retail Communications offerings generally have higher selling, general
and administrative expenses than the Wholesale Termination Services business.
Telecom Competition
Over the past few years, the telecommunications industry
has experienced a continued shift in demand away from traditional calling cards and into wireless and IP-based products, which,
among other things, has, and continues to contribute to the gradual erosion of our pricing power. The continued growth of these
wireless and IP-based services has adversely affected the sales of our traditional disposable prepaid calling card products as
customers migrate from using cards to using these alternative services. We expect pricing of wireless and IP-based services to
continue to decrease, which may result in increased substitution and increased pricing pressure on our prepaid calling products’
sales and margins.
To combat this trend, we have introduced in recent years
new products and services, such as Boss Revolution PIN-less and international airtime top-up that have now largely replaced revenues
from our traditional disposable calling cards. Boss Revolution PIN-less allows our customers to call overseas without the need
to enter a PIN. International airtime top-up, which enables customers to purchase airtime for a prepaid mobile telephone in another
country, appeals to residents of developed countries such as the United States who regularly communicate with or financially support
friends or family members in a developing country. The addition of Boss Revolution PIN-less and international airtime top-up represent
successful efforts to leverage our existing capabilities and distribution. Although Boss Revolution PIN-less and international
airtime top-up generally have lower gross margins than our traditional disposable calling cards, we believe that customers tend
to continue using these products over a longer period of time thereby allowing us to generate higher revenues and longer lifetime
value per user. The Boss Revolution payment platform provides us with a direct, real-time relationship with all of our participating
retailers, resulting in a cost-effective and adaptable distribution model that can rapidly respond to changes in the business environment.
There can be no assurance that we will continue to grow our Boss Revolution PIN-less and international airtime top-up sales, or
that we will be able to continue to generate new sources of revenue to offset the continuing decline in our traditional disposable
calling card revenues or possible future declines in Boss Revolution PIN-less or other sources of revenue.
The wholesale carrier industry has numerous players competing for
the same customers, primarily on the basis of price, products and quality of service. In our Wholesale Termination Services business,
we have historically had to pass along all or most of our per-minute cost savings to our customers in the form of lower prices.
Concentration of Customers
Our most significant customers typically include telecom
carriers to whom IDT Telecom provides wholesale telecommunications services and distributors of IDT Telecom’s international
prepaid calling products. While they may vary from quarter to quarter, our five largest customers collectively accounted for 12.0%,
10.0% and 8.1% of total consolidated revenues from continuing operations in fiscal 2014, fiscal 2013 and fiscal 2012, respectively.
Our customers with the five largest receivables balances collectively accounted for 22.1% and 16.6% of the consolidated gross trade
accounts receivable at July 31, 2014 and 2013, respectively. This concentration of customers increases our risk associated with
nonpayment by those customers. In an effort to reduce our risk, we perform ongoing credit evaluations of our significant retail,
wholesale and cable telephony customers, and in some cases, do not offer credit terms to customers, choosing instead to demand
prepayment. Historically, when we have issued credit, we have not required collateral to support trade accounts receivables from
our customers. However, when necessary, IDT Telecom has imposed stricter credit restrictions on its customers. In some cases, this
has resulted in IDT Telecom sharply curtailing, or ceasing completely, sales to certain customers. IDT Telecom attempts to mitigate
its credit risk related to specific wholesale termination customers by also buying services from the customer, in order to create
an opportunity to offset its payables and receivables with the customer. In this way, IDT Telecom can continue to sell services
to these customers while reducing its receivable exposure risk. When it is practical to do so, IDT Telecom will increase its purchases
from wholesale termination customers with receivable balances that exceed IDT Telecom’s applicable payables in order to maximize
the offset and reduce its credit risk.
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of financial
statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue
and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require
application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain
and may change in subsequent periods. Our critical accounting policies include those related to the allowance for doubtful accounts,
goodwill, valuation of long-lived and intangible assets, income taxes and regulatory agency fees, and IDT Telecom direct cost of
revenues—disputed amounts. Management bases its estimates and judgments on historical experience and other factors that are
believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or
conditions. See Note 1 to the Consolidated Financial Statements in this Annual Report for a complete discussion of our significant
accounting policies.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses
that result from the inability or unwillingness of our customers to make required payments. The allowance for doubtful accounts
was $11.5 million and $13.1 million at July 31, 2014 and 2013, respectively. The allowance for doubtful accounts as a percentage
of gross trade accounts receivable decreased to 14.2% at July 31, 2014 from 16.7% at July 31, 2013 as a result of a decline in
the allowance for doubtful accounts at IDT Telecom and an increase in the gross trade accounts receivable balance at Fabrix. Our
allowance is determined based on known troubled accounts, historical experience and other currently available evidence. Our estimates
of recoverability of customer accounts may change due to new developments, changes in assumptions or changes in our strategy, which
may impact our allowance for doubtful accounts balance. We continually assess the likelihood of potential amounts or ranges of
recoverability and adjust our allowance accordingly; however, actual collections and write-offs of trade accounts receivables may
materially differ from our estimates.
Goodwill
Our goodwill balance of $14.8 million at July 31, 2014 was attributable
to our Retail Communications reporting unit in our Telecom Platform Services segment ($11.6 million) and Zedge ($3.2 million).
Goodwill and other intangible assets deemed to have indefinite lives are not amortized. These assets are reviewed annually (or
more frequently under various conditions) for impairment using a fair value approach. Intangible assets with finite useful lives
are amortized over their estimated useful lives.
The goodwill impairment assessment involves estimating the fair
value of the reporting unit and comparing it to its carrying amount, which is known as Step 1. If the carrying value of the reporting
unit exceeds its estimated fair value, Step 2 is performed to determine if an impairment of goodwill is required. We estimate the
fair value of our reporting units using discounted cash flow methodologies, as well as considering third party market value indicators.
Goodwill impairment is measured by the excess of the carrying amount of the reporting unit’s goodwill over its implied fair
value.
We have the option to perform a qualitative assessment to determine
whether it is necessary to perform the two-step quantitative goodwill impairment test. However, we may elect to perform the two-step
quantitative goodwill impairment test even if no indications of a potential impairment exist.
For our Retail Communications reporting unit with a negative carrying
amount, we perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining
whether it is more likely than not that goodwill impairment exists, we consider whether there are any adverse qualitative factors
indicating that impairment may exist.
For Retail Communications’ annual impairment tests, we qualitatively
assessed whether it was more likely than not that a goodwill impairment existed and concluded that a goodwill impairment did not
exist. For Zedge, its estimated fair value substantially exceeded its carrying value in Step 1 of our annual impairment tests,
therefore it was not necessary to perform Step 2. In addition, we do not believe our reporting units are currently at risk of failing
Step 1. Calculating the fair value of the reporting units, and allocating the estimated fair value to all of the tangible assets,
intangible assets and liabilities, requires significant estimates and assumptions by management. Should our estimates or assumptions
regarding the fair value of our reporting units prove to be incorrect, we may be required to record impairments of goodwill in
future periods and such impairments could be material.
Valuation of Long-Lived Assets including Intangible Assets
with Finite Useful Lives
We test the recoverability of our long-lived assets including identifiable
intangible assets with finite useful lives whenever events or changes in circumstances indicate that the carrying value of any
such asset may not be recoverable. Such events or changes in circumstances include:
| ● | significant actual underperformance relative to expected performance or projected future operating results; |
| ● | significant changes in the manner or use of the asset or the strategy of our overall business; |
| ● | significant adverse changes in the business climate in which we operate; and |
| ● | loss of a significant contract. |
If we determine that the carrying value of certain long-lived assets
may not be recoverable, we test for impairment based on the projected undiscounted cash flows to be derived from such asset. If
the projected undiscounted future cash flows are less than the carrying value of the asset, we will record an impairment loss based
on the difference between the estimated fair value and the carrying value of the asset. We generally measure fair value by considering
sale prices for similar assets or by discounting estimated future cash flows from the asset using an appropriate discount rate.
Cash flow projections and fair value estimates require significant estimates and assumptions by management. Should our estimates
and assumptions prove to be incorrect, we may be required to record impairments in future periods and such impairments could be
material.
In fiscal 2013, we recorded an impairment charge of $4.4 million
for the building and improvements that we own at 520 Broad Street, Newark, New Jersey. At both July 31, 2014 and 2013, the carrying
value of the land, building and improvements at 520 Broad Street after the impairment charge was $37.7 million.
Income Taxes and Regulatory Agency Fees
Our current and deferred income taxes and associated valuation allowance,
as well as telecom regulatory agency fee accruals, are impacted by events and transactions arising in the normal course of business
as well as in connection with special and non-routine items. Assessment of the appropriate amount and classification of income
taxes and certain regulatory agency fees is dependent on several factors, including estimates of the timing and realization of
deferred income tax assets, the results of regulatory fee-related audits, changes in tax laws or regulatory agency rules and regulations,
as well as unanticipated future actions impacting related accruals of regulatory agency fees.
The valuation allowance on our deferred income tax assets was $152.0
million and $167.3 million at July 31, 2014 and 2013, respectively. In fiscal 2012, we determined that it was more likely than
not that a portion of our deferred income tax assets would be realized, therefore we reversed $36.9 million of the valuation allowance
related to those assets. We based our determination on a projection of future U.S. income and took into consideration the historical
U.S. performance and decided a release of the U.S. valuation that relates to the core businesses was warranted in that period.
Assumptions regarding future taxable income require significant analysis and judgment. This analysis included financial forecasts
based on historical performance of the core business and continuance of doing business in a jurisdiction in which losses are incurred.
Based on our projections, we expected that we would generate future taxable income over the next five years in the U.S. jurisdiction
and will begin utilizing our net operating loss carryover through this period. Accordingly, we concluded that a portion of our
U.S. jurisdiction core business assets did not require a full valuation allowance. In fiscal 2013 and fiscal 2014, we updated the
analysis and concluded that the valuation allowance related to our core U.S. business should be maintained at the current level
and will be reevaluated as warranted. In addition, in fiscal 2014, we determined that our valuation allowance on the losses of
IDT Global, a U.K. subsidiary, were no longer required due to an internal reorganization that generated income and a projection
that the income would continue. We recorded a benefit from income taxes of $4.1 million from the full recognition of the IDT Global
deferred tax assets.
We did not release any of the valuation allowances that related
to our former Straight Path Spectrum business since it was not part of the main tax consolidated group and the portion of the Net2Phone
acquired net operating loss that is subject to Internal Revenue Code Section 382 limitations. We did not release any of the valuation
allowances related to our foreign operations in fiscal 2013 or fiscal 2012 as it is not more likely than not that the assets will
be utilized based upon the earnings history and the current profitability projections.
We have not recorded U.S. income tax expense for foreign earnings,
as such earnings are permanently reinvested outside the United States. The cumulative undistributed foreign earnings are included
in accumulated deficit in our consolidated balance sheets, and consisted of approximately $270 million at July 31, 2014. Upon distribution
of these foreign earnings to our domestic entities, we may be subject to U.S. income taxes and withholding of foreign taxes, however,
it is not practicable to determine the amount, if any, which would be paid.
Our FCC Form 499-A filings for calendar years 2000 through 2006
related to payments to the Universal Service Fund have been audited by the Internal Audit Division of USAC, which concluded that
we incorrectly reported certain revenues on Forms 499-A. USAC’s revisions to our filing methodology resulted in additional
regulatory payments for the years covered by the audits. While we believe in the accuracy of our filing methodology and our Request
for Review remains pending, we have implemented some of the revisions set forth in the IAD’s filings beginning with our calendar
year 2010 Form 499-A. We have accrued for all regulatory fees we believe may be incurred under IAD’s methodology from 2002
through the present, in the event our Request for Review is denied and/or our methodology is not upheld on appeal, and we have
made certain payments on amounts that have been invoiced to us by USAC and/or other agencies. As of July 31, 2014, our accrued
expenses included $42.7 million for these regulatory fees for the years covered by the audit and subsequent years through fiscal
2014. Until a final decision has been reached in our disputes, we will continue to accrue in accordance with IAD’s methodology.
If we do not properly calculate, or have not properly calculated, the amount payable by us to the Universal Service Fund, we may
be subject to interest and penalties.
IDT Telecom Direct Cost of Revenues—Disputed Amounts
IDT Telecom’s direct cost of revenues includes estimated amounts
for pending disputes with other carriers. The billing disputes typically arise from differences in minutes of use and/or rates
charged by carriers that provide service to us. At July 31, 2014 and 2013, there was $19.8 million and $18.0 million, respectively,
in outstanding carrier payable disputes, for which we recorded direct cost of revenues of $7.9 million and $6.8 million, respectively.
We consider various factors to determine the amount to accrue for pending disputes, including (1) our historical experience in
dispute resolution, (2) the basis of disputes, (3) the financial status and our current relationship with vendors and (4) our aging
of prior disputes. Subsequent adjustments to our estimates may occur when disputes are resolved or abandoned, but these adjustments
are generally not material to our results of operations. However, there can be no assurance that revisions to our estimates will
not be material to our results of operations in the future.
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, or 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. We 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. We are evaluating
the impact that the standard will have on our consolidated financial statements.
RECENTLY ADOPTED ACCOUNTING STANDARD
In April 2014, an accounting standard update was issued that changed
the criteria for reporting discontinued operations and enhanced 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.
Early adoption is permitted but only for disposals (or classifications as held for sale) that have not been reported in previously
issued financial statements. We adopted this standard update as of August 1, 2014. In accordance with this standard update, we
do not expect the sale of Fabrix in October 2014 to qualify as a discontinued operation. We are unable to determine at this time
whether the adoption of this standard update will have further effect on our financial position, results of operations or cash
flows in the future for other disposals.
RESULTS OF OPERATIONS
Year Ended July 31, 2014 compared to Years Ended July 31,
2013 and 2012
The following table sets forth certain items in our statements of
income as a percentage of our total revenues from continuing operations:
Year ended July 31, | |
2014 | | |
2013 | | |
2012 | |
REVENUES: | |
| | |
| | |
| |
IDT Telecom | |
| 98.5 | % | |
| 98.9 | % | |
| 99.3 | % |
Zedge | |
| 0.4 | | |
| 0.4 | | |
| 0.3 | |
All Other | |
| 1.1 | | |
| 0.7 | | |
| 0.4 | |
TOTAL REVENUES | |
| 100.0 | | |
| 100.0 | | |
| 100.0 | |
COSTS AND EXPENSES: | |
| | | |
| | | |
| | |
Direct cost of revenues (exclusive of depreciation and amortization) | |
| 82.8 | | |
| 83.7 | | |
| 84.3 | |
Selling, general and administrative | |
| 13.9 | | |
| 13.5 | | |
| 13.7 | |
Depreciation and amortization | |
| 1.0 | | |
| 0.9 | | |
| 1.1 | |
Research and development | |
| 0.6 | | |
| 0.4 | | |
| 0.3 | |
Impairment of building and improvements | |
| — | | |
| 0.3 | | |
| — | |
TOTAL COSTS AND EXPENSES | |
| 98.3 | | |
| 98.8 | | |
| 99.4 | |
Other operating gains (losses), net | |
| 0.1 | | |
| 0.6 | | |
| (1.1 | ) |
INCOME (LOSS) FROM OPERATIONS | |
| 1.8 | | |
| 1.8 | | |
| (0.5 | ) |
Interest expense, net | |
| — | | |
| — | | |
| (0.2 | ) |
Other (expense) income, net | |
| (0.3 | ) | |
| 0.3 | | |
| (0.1 | ) |
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | |
| 1.5 | % | |
| 2.1 | % | |
| (0.8 | )% |
We evaluate the performance of our operating business segments based
primarily on income (loss) from operations. Accordingly, the income and expense line items below income (loss) from operations
are only included in our discussion of the consolidated results of operations.
IDT Telecom—Telecom Platform Services and Consumer Phone
Services Segments
(in millions) | |
| | |
| | |
| | |
2014 change from 2013 | | |
2013 change from 2012 | |
Year ended July 31, | |
2014 | | |
2013 | | |
2012 | | |
$ | | |
% | | |
$ | | |
% | |
Revenues | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Telecom Platform Services | |
$ | 1,615.6 | | |
$ | 1,588.1 | | |
$ | 1,477.8 | | |
$ | 27.5 | | |
| 1.7 | % | |
$ | 110.3 | | |
| 7.5 | % |
Consumer Phone Services | |
| 11.0 | | |
| 14.5 | | |
| 19.3 | | |
| (3.5 | ) | |
| (24.1 | ) | |
| (4.8 | ) | |
| (24.8 | ) |
Total revenues | |
$ | 1,626.6 | | |
$ | 1,602.6 | | |
$ | 1,497.1 | | |
$ | 24.0 | | |
| 1.5 | % | |
$ | 105.5 | | |
| 7.0 | % |
Revenues. IDT Telecom revenues increased in fiscal 2014 and
fiscal 2013 compared to the prior fiscal year due to an increase in Telecom Platform Services’ revenues, which more than
offset a decline in Consumer Phone Services’ revenues. As a percentage of IDT Telecom’s total revenues, Telecom Platform
Services’ revenues increased from 98.7% in fiscal 2012 to 99.1% in fiscal 2013 and 99.3% in fiscal 2014, and Consumer Phone
Services’ revenues decreased from 1.3% in fiscal 2012 to 0.9% in fiscal 2013and 0.7% in fiscal 2014.
Telecom Platform Services’ revenues, minutes of use and average
revenue per minute for fiscal 2014, fiscal 2013 and fiscal 2012 consisted of the following:
(in millions, except revenue per minute) | |
| | |
| | |
| | |
2014 change from 2013 | | |
2013 change from 2012 | |
Year ended July 31, | |
2014 | | |
2013 | | |
2012 | | |
$/# | | |
% | | |
$/# | | |
% | |
Telecom Platform Services Revenues | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Retail Communications | |
$ | 695.8 | | |
$ | 656.7 | | |
$ | 549.9 | | |
$ | 39.1 | | |
| 5.9 | % | |
$ | 106.8 | | |
| 19.4 | % |
Wholesale Telecommunications Services | |
| 672.3 | | |
| 687.9 | | |
| 716.4 | | |
| (15.6 | ) | |
| (2.3 | ) | |
| (28.5 | ) | |
| (4.0 | ) |
Payment Services | |
| 202.5 | | |
| 193.5 | | |
| 154.7 | | |
| 9.0 | | |
| 4.6 | | |
| 38.8 | | |
| 25.2 | |
Hosted Platform Solutions | |
| 45.0 | | |
| 50.0 | | |
| 56.8 | | |
| (5.0 | ) | |
| (10.0 | ) | |
| (6.8 | ) | |
| (11.9 | ) |
Total Telecom Platform Services revenues | |
$ | 1,615.6 | | |
$ | 1,588.1 | | |
$ | 1,477.8 | | |
$ | 27.5 | | |
| 1.7 | % | |
$ | 110.3 | | |
| 7.5 | % |
Minutes of use | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Retail Communications | |
| 9,596 | | |
| 9,418 | | |
| 8,385 | | |
| 178 | | |
| 1.9 | % | |
| 1,033 | | |
| 12.3 | % |
Wholesale Telecommunications Services | |
| 19,190 | | |
| 22,365 | | |
| 21,370 | | |
| (3,175 | ) | |
| (14.2 | ) | |
| 995 | | |
| 4.7 | |
Hosted Platform Solutions | |
| 802 | | |
| 888 | | |
| 1,032 | | |
| (86 | ) | |
| (9.7 | ) | |
| (144 | ) | |
| (13.9 | ) |
Total minutes of use | |
| 29,588 | | |
| 32,671 | | |
| 30,787 | | |
| (3,083 | ) | |
| (9.4 | )% | |
| 1,884 | | |
| 6.1 | % |
Average revenue per minute | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Retail Communications | |
$ | 0.0725 | | |
$ | 0.0697 | | |
$ | 0.0656 | | |
$ | 0.0028 | | |
| 4.0 | % | |
$ | 0.0041 | | |
| 6.3 | % |
Wholesale Telecommunications Services | |
| 0.0350 | | |
| 0.0307 | | |
| 0.0335 | | |
| 0.0043 | | |
| 13.9 | | |
| (0.0028 | ) | |
| (8.2 | ) |
Retail Communications minutes of use increased 1.9% and 12.3%
in fiscal 2014 and fiscal 2013, respectively, compared to the prior fiscal year. In fiscal 2014 and fiscal 2013, the increases
were driven by the volume growth in the U.S., which more than offset the decrease in minutes of use in Europe and South America.
Minutes of use in Asia also decreased in fiscal 2014 compared to fiscal 2013, and increased in fiscal 2013 compared to fiscal 2012.
Retail Communications’ revenues grew 5.9% and 19.4% in fiscal 2014 and fiscal 2013, respectively, compared to the prior fiscal
year. The revenue and minutes of use growth was led by penetration and acceptance of Boss Revolution within our U.S. retail distribution
network as the number of active Boss Revolution retailers and customers increased, partially offset by continued declines in sales
of traditional disposable calling cards and retail sales in Europe. We launched Boss Revolution in the United Kingdom and Spain
during fiscal 2012 and in Germany, Hong Kong, Singapore and Australia in the first half of fiscal 2013. In fiscal 2014, we launched
Boss Revolution in Canada. Boss Revolution continues to attract new customers, and we are working to sustain that momentum by increasing
our sales and marketing efforts in fiscal 2015. In fiscal 2014, we acquired the assets of an over-the-top messaging provider, and
we have begun integrating its messaging service into our Boss Revolution calling app. We expect to introduce messaging within the
app in the first half of calendar 2015. Retail Communications revenue comprised 43.1%, 41.3% and 37.2% of Telecom Platform Services’
revenue in fiscal 2014, fiscal 2013 and fiscal 2012, respectively.
Wholesale Termination Services minutes of use decreased 14.2% and
increased 4.7% in fiscal 2014 and fiscal 2013, respectively, compared to the prior fiscal year. The decrease in fiscal 2014 compared
to fiscal 2013 was primarily due to a significant decrease in minutes of use from our web-based prepaid termination service. The
increase in fiscal 2013 compared to fiscal 2012 was the result of significant increases in the first half of fiscal 2013 from our
web-based prepaid termination service as well as from wholesale carriers. Wholesale Termination Services’ revenues declined
2.3% and 4.0% in fiscal 2014 and fiscal 2013, respectively, compared to the prior fiscal year as a result of an industry-wide increase
in termination rates to certain key destinations in Southern Asia which resulted in a decline in revenues as well as direct cost
of revenues. Wholesale Termination Services revenue comprised 41.6%, 43.3% and 48.5% of Telecom Platform Services’ revenue
in fiscal 2014, fiscal 2013 and fiscal 2012, respectively.
Payment Services’ revenues grew 4.6% and 25.2% in fiscal
2014 and fiscal 2013, respectively, compared to the prior fiscal year. The increase was driven by growth in sales of our international
airtime top-up offerings. Future growth will be, in large part, contingent upon our ability to enter into new international airtime
top-up partnerships with wireless providers, as well as continued growth of international airtime top-up volume within existing
relationships and the introduction of new payment offerings through the Boss Revolution payment platform. In the third quarter
of fiscal 2013, we launched our domestic bill payment services in partnership with a licensed domestic bill pay provider. In addition,
in fiscal 2014, we initiated an international money transfer service on a limited basis over our Boss Revolution payment platform.
As of July 31, 2014, we had money transmitter licenses in 45 of the 47 states where they are required as well as in Puerto Rico
and Washington, D.C. Payment Services revenue comprised 12.5%, 12.2% and 10.5% of Telecom Platform Services’ revenue in
fiscal 2014, fiscal 2013 and fiscal 2012, respectively.
Hosted Platform Solutions’ revenues declined 10.0% and 11.9%
in fiscal 2014 and fiscal 2013, respectively, compared to the prior fiscal year. The decline in fiscal 2014 compared to fiscal
2013 was mostly due to a decrease in revenue from managed services, as well as a decrease in revenues from our cable telephony
business, which is in harvest mode. The decline in fiscal 2013 compared to fiscal 2012 was due to a decrease in revenue from our
cable telephony business and from call shops outside the U.S., which decreased due to price competition and migration to alternative
wireless and IP-based services. Hosted Platform Solutions revenue comprised 2.8%, 3.2% and 3.8% of Telecom Platform Services’
revenues in fiscal 2014, fiscal 2013 and fiscal 2012, respectively. Hosted Platform Solutions minutes of use decreased 9.7% and
13.9% in fiscal 2014 and fiscal 2013, respectively, compared to the prior fiscal year. In fiscal 2014 compared to fiscal 2013,
the decrease was primarily a result of the decline in minutes of use from managed services, and in fiscal 2013 compared to fiscal
2012, the decrease was due to a decline in minutes of use from call shops, managed services and cable telephony customers. In general,
since our Hosted Platform Solutions business’ revenues and cash flows are driven far more by the number of existing subscribers
in the form of a per-subscriber fee rather than by subscriber minutes of use, we do not view Hosted Platform Solutions minutes
of use as a very significant metric.
Consumer Phone Services’ revenues declined 24.1% and 24.8%
in fiscal 2014 and fiscal 2013, respectively, compared to the prior fiscal year, as we continued to operate the business in harvest
mode. This strategy has been in effect since calendar 2005 when the FCC decided to terminate the UNE-P pricing regime, which resulted
in significantly inferior economics in the operating model for this business. The customer base for our bundled, unlimited local
and long distance services business was approximately 6,200 as of July 31, 2014 compared to 7,800 as of July 31, 2013 and 10,500
as of July 31, 2012. We currently offer local service in the following 11 states: New York, New Jersey, Pennsylvania, Maryland,
Delaware, Massachusetts, New Hampshire, West Virginia, Maine, Rhode Island and California. In addition, the customer base for our
long distance-only services was approximately 28,500 as of July 31, 2014 compared to 35,700 as of July 31, 2013 and 45,200 as of
July 31, 2012. We anticipate that Consumer Phone Services’ customer base and revenues will continue to decline. Minutes of
use relating to our Consumer Phone Services segment is not tracked as a meaningful business metric as the domestic traffic generated
by this segment is not carried on our network, and the international traffic generated by this segment, though carried on our own
network, is insignificant.
(in millions) | |
| | |
| | |
| | |
2014 change from 2013 | | |
2013 change from 2012 | |
Year ended July 31, | |
2014 | | |
2013 | | |
2012 | | |
$ | | |
% | | |
$ | | |
% | |
Direct cost of revenues | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Telecom Platform Services | |
$ | 1,358.6 | | |
$ | 1,347.0 | | |
$ | 1,259.1 | | |
$ | 11.6 | | |
| 0.9 | % | |
$ | 87.9 | | |
| 7.0 | % |
Consumer Phone Services | |
| 4.9 | | |
| 6.3 | | |
| 8.6 | | |
| (1.4 | ) | |
| (21.7 | ) | |
| (2.3 | ) | |
| (27.0 | ) |
Total direct cost of revenues | |
$ | 1,363.5 | | |
$ | 1,353.3 | | |
$ | 1,267.7 | | |
$ | 10.2 | | |
| 0.8 | % | |
$ | 85.6 | | |
| 6.8 | % |
Year ended July 31, | |
2014 | | |
2013 | | |
2012 | | |
2014 change from 2013 | | |
2013 change from 2012 | |
Direct cost of revenues as a percentage of revenues | |
| | |
| | |
| | |
| | |
| |
Telecom Platform Services | |
| 84.1 | % | |
| 84.8 | % | |
| 85.2 | % | |
| (0.7 | )% | |
| (0.4 | )% |
Consumer Phone Services | |
| 44.6 | | |
| 43.3 | | |
| 44.6 | | |
| 1.3 | | |
| (1.3 | ) |
Total | |
| 83.8 | % | |
| 84.4 | % | |
| 84.7 | % | |
| (0.6 | )% | |
| (0.3 | )% |
Direct Cost of Revenues. Direct cost of revenues in Telecom
Platform Services increased in fiscal 2014 compared to fiscal 2013 mainly due to the similar trends in Telecom Platform Services’
revenues. Direct cost of revenues in Telecom Platform Services increased in fiscal 2013 compared to fiscal 2012 primarily as a
result of increases in the direct cost of revenues in Retail Communications and Payment Services, partially offset by a decrease
in Wholesale Termination Services direct cost of revenues.
Direct cost of revenues as a percentage of revenues in Telecom Platform
Services decreased 70 basis points and 40 basis points in fiscal 2014 and fiscal 2013, respectively, compared to the prior fiscal
year, as a result of the increases in average revenue per minute in both Retail Communications and Wholesale Termination Services
in fiscal 2014 compared to fiscal 2013, and in Retail Communications’ average revenue per minute in fiscal 2013 compared
to fiscal 2012. In addition, the decreases reflect the positive effect of the overall revenue mix, as the relatively higher-margin
Retail Communications business comprised a larger share of Telecom Platform Services total revenue compared to Wholesale Termination
Services.
Direct cost of revenues in our Consumer Phone Services segment decreased
in fiscal 2014 and fiscal 2013 compared to the prior fiscal year primarily as a result of the declining customer base.
(in millions) | |
| | |
| | |
| | |
2014 change from 2013 | |
2013 change from 2012 |
Year ended July 31, | |
2014 | | |
2013 | | |
2012 | | |
$ | | |
% | | |
$ | | |
% | |
Selling, general and administrative expenses | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Telecom Platform Services | |
$ | 198.8 | | |
$ | 189.3 | | |
$ | 182.6 | | |
$ | 9.5 | | |
| 5.0 | % | |
$ | 6.7 | | |
| 3.7 | % |
Consumer Phone Services | |
| 4.3 | | |
| 6.4 | | |
| 6.6 | | |
| (2.1 | ) | |
| (32.8 | ) | |
| (0.2 | ) | |
| (3.3 | ) |
Total selling, general and administrative expenses | |
$ | 203.1 | | |
$ | 195.7 | | |
$ | 189.2 | | |
$ | 7.4 | | |
| 3.8 | % | |
$ | 6.5 | | |
| 3.4 | % |
Selling, General and Administrative. The increase in selling,
general and administrative expenses in our Telecom Platform Services segment in fiscal 2014 and fiscal 2013 compared to the prior
fiscal year was partially due to increases in employee compensation. We expanded our retail direct sales force in the U.S., which
results in more control over our product distribution and enhances our relationships with retailers. The increases in employee
compensation were also due to annual payroll increases for a larger workforce. The increase in selling, general and administrative
expenses in our Telecom Platform Services segment was also due to the increase in third-party transaction processing costs and
internal sales commissions, which are variable costs that closely track revenue performance. Third-party transaction processing
costs increased in direct proportion to the rapid growth of sales on the Boss Revolution payment platform since many of the retailers
on the Boss Revolution payment platform use credit cards to pay us for their purchases. Internal sales commissions grew as a direct
result of our effort to grow and strengthen our retail direct sales force in the U.S. External legal fees significantly decreased
in fiscal 2014 compared to fiscal 2013 since certain legal matters were resolved. Telecom Platform Services’ marketing and
advertising costs increased in fiscal 2014 compared to fiscal 2013, and decreased in fiscal 2013 compared to fiscal 2012, primarily
due to changes in costs incurred in the U.S. for our Retail Communications offerings. As a percentage of Telecom Platform Services’
revenues, Telecom Platform Services’ selling, general and administrative expenses was 12.3%, 11.9% and 12.4% in fiscal 2014,
fiscal 2013 and fiscal 2012, respectively.
Selling, general and administrative expenses in our Consumer Phone
Services segment decreased in fiscal 2014 and fiscal 2013 compared to the prior fiscal year as the cost structure for this segment
continued to be right-sized to the needs of its declining revenue base.
(in millions) | |
| | |
| | |
| | |
2014 change from 2013 | | |
2013 change from 2012 | |
Year ended July 31, | |
2014 | | |
2013 | | |
2012 | | |
$ | | |
% | | |
$ | | |
% | |
Depreciation and amortization | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Telecom Platform Services | |
$ | 13.8 | | |
$ | 12.3 | | |
$ | 14.2 | | |
$ | 1.5 | | |
| 11.6 | % | |
$ | (1.9 | ) | |
| (13.2 | )% |
Consumer Phone Services | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total depreciation and amortization | |
$ | 13.8 | | |
$ | 12.3 | | |
$ | 14.2 | | |
$ | 1.5 | | |
| 11.6 | % | |
$ | (1.9 | ) | |
| (13.2 | )% |
Depreciation and Amortization. The increase in depreciation
and amortization expense in fiscal 2014 compared to fiscal 2013 was due to increases in depreciation of capitalized costs of consultants
and employees developing internal use software. The decrease in depreciation and amortization expense in fiscal 2013 compared to
fiscal 2012 was due to lower levels of capital expenditures and more of our property, plant and equipment becoming fully depreciated.
In addition, depreciation expense in fiscal 2013 was reduced by $0.7 million due to an adjustment in our estimate of capital expenditures
subject to sales and use tax as a result of an audit.
(in millions) Year ended July 31, | |
2014 | | |
2013 | | |
2012 | |
Telecom Platform Services-Other operating gains (losses), net | |
| | |
| | |
| |
Gains (losses) related to legal matters, net | |
$ | 0.7 | | |
$ | 9.3 | | |
$ | (6.8 | ) |
Loss on settlement of litigation (a) | |
| — | | |
| — | | |
| (11.0 | ) |
Gain on settlement of claim (b) | |
| — | | |
| — | | |
| 1.8 | |
Total other operating gains (losses), net | |
$ | 0.7 | | |
$ | 9.3 | | |
$ | (16.0 | ) |
Other Operating Gains (Losses), net. Our Telecom Platform
Services segment’s income from operations in fiscal 2012 included other operating (losses) gains, net as follows:
(a) | On October 12, 2011, we entered into a binding term sheet with T-Mobile USA, Inc. to settle litigation related to an alleged
breach of a wholesale supply agreement. In consideration of the settlement of all disputes between the parties, on October 13,
2011, we paid T-Mobile $10 million. We incurred legal fees of $1.0 million in fiscal 2012 in connection with this matter. |
| |
(b) | On January 17, 2012, we received $1.8 million from Broadstripe, LLC in settlement of our claim stemming from Broadstripe, LLC’s
rejection of its telephony services agreements with us upon the confirmation of Broadstripe, LLC’s bankruptcy plan and closing
of its bankruptcy sale. |
(in millions) | |
| | |
| | |
| | |
2014 change from 2013 | | |
2013 change from 2012 | |
Year ended July 31, | |
2014 | | |
2013 | | |
2012 | | |
$ | | |
% | | |
$ | | |
% | |
Income from operations | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Telecom Platform Services | |
$ | 45.1 | | |
$ | 48.7 | | |
$ | 5.9 | | |
$ | (3.6 | ) | |
| (7.4 | )% | |
$ | 42.8 | | |
| 723.3 | % |
Consumer Phone Services | |
| 1.8 | | |
| 1.8 | | |
| 4.1 | | |
| — | | |
| (1.5 | ) | |
| (2.3 | ) | |
| (55.1 | ) |
Total income from operations | |
$ | 46.9 | | |
$ | 50.5 | | |
$ | 10.0 | | |
$ | (3.6 | ) | |
| (7.2 | )% | |
$ | 40.5 | | |
| 406.3 | % |
Zedge
(in millions) | |
| | |
| | |
| | |
2014 change from 2013 | | |
2013 change from 2012 | |
Year ended July 31, | |
2014 | | |
2013 | | |
2012 | | |
$ | | |
% | | |
$ | | |
% | |
Revenues | |
$ | 6.5 | | |
$ | 5.8 | | |
$ | 3.8 | | |
$ | 0.7 | | |
| 12.5 | % | |
$ | 2.0 | | |
| 53.2 | % |
Direct cost of revenues | |
| 0.9 | | |
| 0.9 | | |
| 0.7 | | |
| — | | |
| 11.4 | | |
| 0.2 | | |
| 15.3 | |
Selling, general and administrative | |
| 4.3 | | |
| 3.8 | | |
| 2.6 | | |
| 0.5 | | |
| 12.7 | | |
| 1.2 | | |
| 44.2 | |
Depreciation | |
| 1.0 | | |
| 0.8 | | |
| 0.7 | | |
| 0.2 | | |
| 21.2 | | |
| 0.1 | | |
| 22.3 | |
Income (loss) from operations | |
$ | 0.3 | | |
$ | 0.3 | | |
$ | (0.2 | ) | |
$ | — | | |
| (7.7 | )% | |
$ | 0.5 | | |
| 237.4 | % |
Revenues. Zedge’s revenues are entirely derived from
selling its advertising inventory across its Android and iOS apps and websites. Zedge launched its Android app in fiscal 2010
and its iOS app in fiscal 2013. Zedge’s revenues increased in fiscal 2014 compared to fiscal 2013 as a result of higher
app usage and higher value ad units on its Android app as well as the introduction of advertising on its iOS app. In fiscal 2014,
Zedge’s revenues were primarily from the Android and iOS apps, which totaled 84% of Zedge’s revenues in fiscal 2014
compared to 64% in fiscal 2013. Revenue from desktop and mobile websites, as expected, declined compared to prior fiscal years.
Zedge’s revenues increased in fiscal 2013 compared to fiscal 2012 due to user base growth, its ability to optimize ad inventory
performance and its direct distribution relationships with a number of premium game publishers. The growth in Total Installs and
Active Installs for the Zedge Android and iOS apps are presented in the table below. “Total Installs” is the number
of times the app has been downloaded. “Active Installs” is the number of unique active devices on which the application
is currently installed and excludes any devices where the application was uninstalled or any devices that are no longer active.
This increase in users was a primary driver of advertising revenue growth.
(in millions) July 31, | |
2014 | | |
2013 | | |
2012 | |
Total Installs (Android and iOS) | |
| 111 | | |
| 72 | | |
| 38 | |
Active Installs (Android and iOS) | |
| 49 | | |
| 31 | | |
| 19 | |
Direct Cost of Revenues. Direct cost of revenues increased
in fiscal 2014 and fiscal 2013 compared to the prior fiscal year primarily as a result of the increases in users. The increase
in direct cost of revenues in fiscal 2014 compared to fiscal 2013 was lessened by a reduction in the rate of increase of certain
direct costs as a result of renegotiated hosting and ad serving contracts. Direct cost of revenues as a percentage of revenues
was 14.5%, 14.7% and 19.5% in fiscal 2014, fiscal 2013 and fiscal 2012, respectively.
Selling, General and Administrative. The increase in selling,
general and administrative expenses in fiscal 2014 compared to fiscal 2013 was due to increases in consulting expense related to
business development, non-routine audit fees, and employee recruiting expense. The increase in selling, general and administrative
expenses in fiscal 2013 compared to fiscal 2012 was primarily due to increases in developer headcount, which increased employee
payroll. In addition, bonus expense increased in fiscal 2013 compared to fiscal 2012.
Depreciation. The increase in depreciation expense in fiscal
2014 and fiscal 2013 compared to the prior fiscal year was due to increases in depreciation of capitalized payroll costs of employees
working on internal use software related to the iOS app and the Android app.
All Other
(in millions) | |
| | |
| | |
| | |
2014 change from 2013 | | |
2013 change from 2012 | |
Year ended July 31, | |
2014 | | |
2013 | | |
2012 | | |
$ | | |
% | | |
$ | | |
% | |
Revenues | |
$ | 18.4 | | |
$ | 12.2 | | |
$ | 5.4 | | |
$ | 6.2 | | |
| 50.7 | % | |
$ | 6.8 | | |
| 125.5 | % |
Direct cost of revenues | |
| (2.8 | ) | |
| (1.4 | ) | |
| (0.9 | ) | |
| (1.4 | ) | |
| (97.8 | ) | |
| (0.5 | ) | |
| (52.4 | ) |
Selling, general and administrative | |
| (6.7 | ) | |
| (5.0 | ) | |
| (2.1 | ) | |
| (1.7 | ) | |
| (33.8 | ) | |
| (2.9 | ) | |
| (142.1 | ) |
Depreciation | |
| (1.5 | ) | |
| (1.6 | ) | |
| (1.5 | ) | |
| 0.1 | | |
| 7.7 | | |
| (0.1 | ) | |
| (10.7 | ) |
Research and development | |
| (10.0 | ) | |
| (7.2 | ) | |
| (4.6 | ) | |
| (2.8 | ) | |
| (39.8 | ) | |
| (2.6 | ) | |
| (56.8 | ) |
Impairment of building and improvements | |
| — | | |
| (4.4 | ) | |
| — | | |
| 4.4 | | |
| 100.0 | | |
| (4.4 | ) | |
| nm | |
Other operating gain | |
| 0.6 | | |
| — | | |
| — | | |
| 0.6 | | |
| nm | | |
| — | | |
| — | |
Loss from operations | |
$ | (2.0 | ) | |
$ | (7.4 | ) | |
$ | (3.7 | ) | |
$ | 5.4 | | |
| 72.4 | % | |
$ | (3.7 | ) | |
| (102.6 | )% |
nm—not
meaningful
Impairment of Building and Improvements. In fiscal 2013,
we recorded an impairment charge of $4.4 million for the building and improvements that we own at 520 Broad Street, Newark, New
Jersey. The following facts and circumstances indicated that the fair value of the building and improvements may be less than
their carrying value at that time: (1) the building was not occupied and, at the time, we did not expect to occupy it, (2) economic
uncertainty and sluggish leasing activity stalled a recovery of the real estate market in Newark, (3) there were no potential
tenants, (4) no sale of the building had been completed and there were no other likely buyers, (5) the building would be expensive
to redevelop and (6) the building was expected to remain vacant for the foreseeable future. We determined the fair value of the
building and improvements based on estimates of an owner/user’s market rental rate net of costs of improvements and tenant
work as well as the estimated value to an investor/developer after deducting costs of improvements and costs to achieve full occupancy.
At both July 31, 2014 and 2013, the carrying value of the land, building and improvements at 520 Broad Street after the impairment
charge was $37.7 million.
Other Operating Gain. In fiscal 2014, we received proceeds
from insurance of $0.6 million related to water damage to portions of our building and improvements at 520 Broad Street, Newark,
New Jersey. The damage occurred in a prior period. We recorded a gain of $0.6 million from this insurance claim.
Currently, we report aggregate results for all of our operating
businesses other than IDT Telecom and Zedge in All Other. Following is the results of operations in fiscal 2014, fiscal 2013 and
fiscal 2012 of Fabrix, which was included in All Other until it was sold in October 2014:
Fabrix
(in millions) | |
| | |
| | |
| | |
2014 change from 2013 | | |
2013 change from 2012 | |
Year ended July 31, | |
2014 | | |
2013 | | |
2012 | | |
$ | | |
% | | |
$ | | |
% | |
Revenues | |
$ | 16.6 | | |
$ | 10.6 | | |
$ | 3.6 | | |
$ | 6.0 | | |
| 57.4 | % | |
$ | 7.0 | | |
| 192.8 | % |
Direct cost of revenues | |
| 2.8 | | |
| 1.4 | | |
| 0.9 | | |
| 1.4 | | |
| 97.8 | | |
| 0.5 | | |
| 52.4 | |
Selling, general and administrative | |
| 4.1 | | |
| 3.1 | | |
| 0.9 | | |
| 1.0 | | |
| 36.9 | | |
| 2.2 | | |
| 234.8 | |
Depreciation | |
| 0.4 | | |
| 0.3 | | |
| 0.2 | | |
| 0.1 | | |
| 18.3 | | |
| 0.1 | | |
| 102.5 | |
Research and development | |
| 10.0 | | |
| 7.2 | | |
| 4.6 | | |
| 2.8 | | |
| 39.8 | | |
| 2.6 | | |
| 56.8 | |
Loss from operations | |
$ | (0.7 | ) | |
$ | (1.4 | ) | |
$ | (3.0 | ) | |
$ | 0.7 | | |
| 46.8 | % | |
$ | 1.6 | | |
| 53.1 | % |
Revenue. Fabrix was our majority-owned venture that developed
and licensed a proprietary video software platform optimized for cost effective cloud-based video storage, high throughput streaming
and intelligent content distribution. This software was marketed to cable and telecommunications operators, Internet service providers
and web based video portals that require deep video storage capabilities or offer unicast television applications including video-on-demand,
multi-screen delivery, cloud storage, time/place shifting and remote DVR storage capabilities. In the first quarter of fiscal 2011,
Fabrix successfully deployed its deep video storage product with a North American tier-1 operator. In addition, the major American
cable operator that licensed the Fabrix software in August 2010 to empower its cloud-based DVR offering continued to purchase additional
product. Finally, in the third quarter of fiscal 2013, Fabrix commenced software deliveries to a major European operator. In fiscal
2014, fiscal 2013 and fiscal 2012, Fabrix received cash from these sales of $13.4 million, $16.0 million and $8.0 million, respectively.
Fabrix generally recognized revenue for its software licenses and support from the date on which delivered orders were accepted
by the customer over the term of the related software support agreements.
Corporate
(in millions) | |
| | |
| | |
| | |
2014 change from 2013 | | |
2013 change from 2012 | |
Year ended July 31, | |
2014 | | |
2013 | | |
2012 | | |
$ | | |
% | | |
$ | | |
% | |
General and administrative expenses | |
$ | 14.8 | | |
$ | 13.9 | | |
$ | 13.0 | | |
$ | 0.9 | | |
| 6.4 | % | |
$ | 0.9 | | |
| 7.0 | % |
Depreciation and amortization | |
| — | | |
| 0.1 | | |
| 0.3 | | |
| (0.1 | ) | |
| (68.6 | ) | |
| (0.2 | ) | |
| (63.0 | ) |
Other operating loss (gain) | |
| 0.5 | | |
| — | | |
| (0.1 | ) | |
| 0.5 | | |
| nm | | |
| 0.1 | | |
| 100.0 | |
Loss from operations | |
$ | 15.3 | | |
$ | 14.0 | | |
$ | 13.2 | | |
$ | 1.3 | | |
| 9.2 | % | |
$ | 0.8 | | |
| 6.4 | % |
nm—not meaningful
Corporate costs include 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.
General and Administrative. The increase in Corporate general
and administrative expenses in fiscal 2014 compared to fiscal 2013 was primarily due to increases in accrued charitable contributions
and legal fees. In fiscal 2014 and fiscal 2013, we accrued $1.4 million and $0.9 million, respectively, for contributions to the
IDT Charitable Foundation. The increase in Corporate general and administrative expenses in fiscal 2013 compared to fiscal 2012
was primarily due to an increase in charitable contributions, as well as increases in payroll and related expenses and stock-based
compensation expense. Corporate general and administrative expenses in fiscal 2014, fiscal 2013 and fiscal 2012 are net of amounts
billed pursuant to the Transition Services Agreement to our former subsidiary Genie, and Corporate general and administrative expenses
in fiscal 2014 are net of fees charged to Straight Path pursuant to its Transition Services Agreement. The fees charged to Genie,
net of amounts charged by Genie to us, were $2.9 million, $3.3 million and $2.0 million in fiscal 2014, fiscal 2013 and fiscal
2012, respectively. The fees charged to Straight Path were $0.8 million in fiscal 2014. As a percentage of our total consolidated
revenues from continuing operations, Corporate general and administrative expenses was unchanged at 0.9% in each of fiscal 2014,
fiscal 2013 and fiscal 2012.
Consolidated
The following is a discussion of our consolidated stock-based compensation
expense, and our consolidated income and expense line items below income (loss) from operations.
Stock-Based Compensation Expense. Stock-based compensation
expense included in consolidated selling, general and administrative expenses was $5.4 million, $5.9 million and $3.3 million
in fiscal 2014, fiscal 2013 and fiscal 2012, respectively.
At July 31, 2014, unrecognized compensation cost related to non-vested
stock-based compensation, including stock options and restricted stock, was an aggregate of $5.0 million. The unrecognized compensation
cost is expected to be recognized over the remaining vesting period, of which $3.1 million is expected to be recognized in fiscal
2015, $1.1 million is expected to be recognized in fiscal 2016, $0.4 million is expected to be recognized in fiscal 2017, $0.2
million is expected to be recognized in fiscal 2018, and $0.2 million is expected to be recognized in fiscal 2019.
(in millions) | |
| | |
| | |
| | |
2014 change from 2013 | | |
2013 change from 2012 | |
Year ended July 31, | |
2014 | | |
2013 | | |
2012 | | |
$ | | |
% | | |
$ | | |
% | |
Income (loss) from operations | |
$ | 29.8 | | |
$ | 29.4 | | |
$ | (7.1 | ) | |
$ | 0.4 | | |
| 1.5 | % | |
$ | 36.5 | | |
| 514.2 | % |
Interest expense, net | |
| (0.2 | ) | |
| (0.8 | ) | |
| (3.0 | ) | |
| 0.6 | | |
| 82.0 | | |
| 2.2 | | |
| 72.4 | |
Other (expense) income, net | |
| (4.7 | ) | |
| 5.4 | | |
| (1.8 | ) | |
| (10.1 | ) | |
| (187.3 | ) | |
| 7.2 | | |
| 404.6 | |
(Provision for) benefit from income taxes | |
| (4.0 | ) | |
| (15.9 | ) | |
| 42.8 | | |
| 11.9 | | |
| 74.9 | | |
| (58.7 | ) | |
| (137.1 | ) |
Income from continuing operations | |
| 21.0 | | |
| 18.1 | | |
| 30.9 | | |
| 2.9 | | |
| 16.2 | | |
| (12.8 | ) | |
| (41.6 | ) |
Discontinued operations, net of tax | |
| — | | |
| (4.7 | ) | |
| 7.8 | | |
| 4.7 | | |
| 100.0 | | |
| (12.5 | ) | |
| (159.0 | ) |
Net income | |
| 21.0 | | |
| 13.4 | | |
| 38.7 | | |
| 7.6 | | |
| 56.3 | | |
| (25.3 | ) | |
| (65.3 | ) |
Net income attributable to noncontrolling interests | |
| (2.2 | ) | |
| (1.8 | ) | |
| (0.1 | ) | |
| (0.4 | ) | |
| (21.2 | ) | |
| (1.7 | ) | |
| nm | |
Net income attributable to IDT Corporation | |
$ | 18.8 | | |
$ | 11.6 | | |
$ | 38.6 | | |
$ | 7.2 | | |
| 61.8 | % | |
$ | (27.0 | ) | |
| (70.0 | )% |
nm—not meaningful
Interest Expense, net. The decrease in interest expense,
net in fiscal 2014 compared to fiscal 2013 was due to a decrease in interest expense and an increase in interest income. The decrease
in interest expense, net in fiscal 2013 compared to fiscal 2012 was due to a decrease in interest expense, partially offset by
a decrease in interest income.
Other (Expense) Income, net.
Other (expense) income, net consists of the following:
(in millions) Year ended July 31, | |
2014 | | |
2013 | | |
2012 | |
Foreign currency transaction (losses) gains | |
$ | (5.9 | ) | |
$ | 2.5 | | |
$ | (2.9 | ) |
Gain on investments | |
| 1.2 | | |
| 2.7 | | |
| 1.2 | |
Gain on modification and early termination of loan payable | |
| — | | |
| 0.2 | | |
| — | |
Other | |
| — | | |
| — | | |
| (0.1 | ) |
TOTAL | |
$ | (4.7 | ) | |
$ | 5.4 | | |
$ | (1.8 | ) |
On April 30, 2013, the holder of the note payable secured by the
mortgage on our building located at 520 Broad Street, Newark, New Jersey entered into an agreement with us to settle all of our
disputes. In connection with this agreement, on May 1, 2013, we paid them $21.1 million and they released us from the note and
discharged the mortgage. In the fourth quarter of fiscal 2013, we recognized a gain of $0.2 million on the modification and early
termination of the note payable.
Income Taxes. The decline in income tax expense in fiscal
2014 compared to fiscal 2013 was primarily due to the decrease in income from continuing operations before income taxes in fiscal
2014 compared to fiscal 2013.
The benefit from income taxes in fiscal 2012 was primarily due to
the $36.9 million reversal of a portion of our valuation allowance in the United States. In fiscal 2012, we determined that it
was more likely than not that a portion of our deferred income tax assets would be realized, therefore the valuation allowance
related to those assets was reversed. We based our determination on a projection of future U.S. income and took into consideration
the historical U.S. performance and decided a partial release of the U.S. valuation that relates to the core businesses was warranted
in that period. Assumptions regarding future taxable income require significant analysis and judgment. This analysis included financial
forecasts based on historical performance of the core business and continuance of doing business in a jurisdiction in which losses
are incurred. Based on our projections, we expected that we would generate future taxable income over the next five years in the
U.S. jurisdiction and will begin utilizing our net operating loss carryover through this period. Accordingly, we concluded that
a portion of our U.S. jurisdiction core business assets did not require a full valuation allowance. In fiscal 2013 and fiscal 2014,
we updated the analysis and concluded that the valuation allowance related to our core U.S. business should be maintained at the
current level and will be reevaluated as warranted. In addition, in fiscal 2014, we determined that our valuation allowance on
the losses of IDT Global, a U.K. subsidiary, were no longer required due to an internal reorganization that generated income and
a projection that the income would continue. We recorded a benefit from income taxes of $4.1 million from the full recognition
of the IDT Global deferred tax assets.
We did not release any of the valuation allowances that related
to our former Straight Path Spectrum business since it was not part of the main tax consolidated group and the portion of the Net2Phone
acquired net operating loss that is subject to Internal Revenue Code Section 382 limitations. We did not release any of the valuation
allowances related to our foreign operations in fiscal 2013 or fiscal 2012 as it was not more likely than not that the assets will
be utilized based upon the earnings history and the profitability projections.
In September 2013, the IRS and the Department of the Treasury issued
final regulations regarding when costs incurred to acquire, produce or improve tangible property must be capitalized or may be
deducted. The IRS and the Department of the Treasury have also separately proposed regulations about disposal of depreciable property.
The changes will apply to taxable years beginning on or after January 1, 2014. A taxpayer may choose to apply the regulations to
taxable years beginning on or after January 1, 2012. We are still analyzing the effect of these new regulations and no decision
has been made as to an early adoption. We do not expect a material impact to our results of operations, financial position or cash
flows if we adopt these regulations early.
Discontinued Operations, net of tax. The loss from discontinued
operations, net of tax in fiscal 2013 was due to Straight Path’s net loss of $4.6 million.
Discontinued operations, net of tax in fiscal 2012 included Genie’s
net income of $1.0 million for the period from August 1, 2011 through October 28, 2011, the date that we completed the
Genie Spin-Off, plus Straight Path’s net income of $4.8 million in fiscal 2012. In addition, discontinued operations, net
of tax in fiscal 2012 included a gain of $2.0 million related to the sale of IDT Entertainment to Liberty Media in the first quarter
of fiscal 2007. In September 2011, we and Liberty Media executed an agreement to settle and resolve all claims related to the
additional consideration that we were eligible to receive for IDT Entertainment based upon any appreciation in its value over
the five-year period that ended in August 2011, as well as certain other disputes and claims. Liberty Media paid us $2.0 million
in September 2011 in consideration for the settlement and related releases.
Net Income Attributable to Noncontrolling Interests. The
increase in the net income attributable to noncontrolling interests in fiscal 2014 compared to fiscal 2013 was due to an increase
in the net income attributable to noncontrolling interests in certain IDT Telecom subsidiaries, the Straight Path Spin-Off which
reduced the net loss attributable to noncontrolling interests, and a decrease in the net loss attributable to noncontrolling interests
in Fabrix. The increase in the net income attributable to noncontrolling interests in fiscal 2013 compared to fiscal 2012 was primarily
due to the deconsolidation of Genie on October 28, 2011, as well as the increase in the net income attributable to noncontrolling
interests in certain IDT Telecom subsidiaries and the decrease in the net loss attributable to noncontrolling interests in Fabrix,
partially offset by the increase in the net loss attributable to noncontrolling interests in Straight Path IP Group.
LIQUIDITY AND CAPITAL RESOURCES
General
We currently expect our cash from operations in fiscal 2015 and
the balance of cash, cash equivalents and marketable securities that we held as of July 31, 2014 to be sufficient to meet our currently
anticipated working capital and capital expenditure requirements during fiscal 2015.
As of July 31, 2014, we had cash, cash equivalents and marketable
securities of $166.7 million and a deficit in working capital (current liabilities in excess of current assets) of $29.1 million.
As of July 31, 2014, we also had $9.5 million in investments in hedge funds, of which $0.1 million was included in “Other
current assets” and $9.4 million was included in “Investments” in our consolidated balance sheet.
On October 8, 2014, we completed the sale of our interests in Fabrix
to Ericsson. The final sale price for 100% of the shares in Fabrix was $95 million in cash, excluding transaction costs and working
capital and other adjustments. We owned approximately 78% of Fabrix on a fully diluted basis. Our share of the sale price, net
of transaction costs, is expected to be approximately $73 million in cash. We and the other shareholders have placed $13 million
of our proceeds in escrow for the resolution of post-closing claims that may arise. Any unclaimed escrow balance will be released
in two tranches over a period of 18 months.
As of July 31, 2014, we had aggregate restricted cash and cash equivalents
of $68.5 million, of which $65.7 million was included in “Restricted cash and cash equivalents-short-term” and $2.8
million was included in “Restricted cash and cash equivalents-long-term” in our consolidated balance sheet. Our restricted
cash and cash equivalents include, among other amounts, restricted balances pursuant to banking regulatory and other requirements
and customer deposits related to IDT Financial Services, our Gibraltar-based bank. We expect customer deposits and the offsetting
restricted cash and cash equivalents will continue to increase in fiscal 2015.
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 we treat these balances as substantially restricted and unavailable for other purposes. At July 31,
2014, “Cash and cash equivalents” in our consolidated balance sheet included an aggregate of $12.9 million set aside
by IDT Payment Services and IDT Financial Services that was unavailable for other purposes.
We have not recorded U.S. income tax expense for foreign earnings,
as such earnings are permanently reinvested outside the United States. The cumulative undistributed foreign earnings are included
in accumulated deficit in our consolidated balance sheets, and consisted of approximately $270 million at July 31, 2014. Upon distribution
of these foreign earnings to our domestic entities, we may be subject to U.S. income taxes and withholding of foreign taxes, however,
it is not practicable to determine the amount, if any, which would be paid.
(in millions) Year ended July 31, | |
2014 | | |
2013 | | |
2012 | |
Cash flows provided by (used in) | |
| | |
| | |
| |
Operating activities | |
$ | 45.7 | | |
$ | 57.2 | | |
$ | 34.5 | |
Investing activities | |
| (18.9 | ) | |
| (25.6 | ) | |
| (4.4 | ) |
Financing activities | |
| (25.4 | ) | |
| (36.4 | ) | |
| (125.6 | ) |
Effect of exchange rate changes on cash and cash equivalents | |
| 0.8 | | |
| 1.2 | | |
| (2.3 | ) |
Increase (decrease) in cash and cash equivalents from continuing operations | |
| 2.2 | | |
| (3.6 | ) | |
| (97.8 | ) |
Discontinued operations | |
| — | | |
| (3.0 | ) | |
| 3.0 | |
Increase (decrease) in cash and cash equivalents | |
$ | 2.2 | | |
$ | (6.6 | ) | |
$ | (94.8 | ) |
Operating Activities
Our cash flow from operations varies significantly from quarter
to quarter and from year to year, depending on our operating results and the timing of operating cash receipts and payments, specifically
trade accounts receivable and trade accounts payable.
In fiscal 2014, fiscal 2013 and fiscal 2012, Fabrix received $13.4
million, $16.0 million and $8.0 million, respectively, in cash from sales of software licenses and support services.
Our Separation and Distribution Agreement with Straight Path includes,
among other things, our obligation 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. In fiscal 2014, we paid $1.0 million in connection with this obligation. At
July 31, 2014, our estimated liability for this obligation was $1.9 million.
On October 12, 2011, we entered into a binding term sheet with T-Mobile
to settle litigation related to an alleged breach of a wholesale supply agreement. In consideration of the settlement of all disputes
between the parties, on October 13, 2011, we paid T-Mobile $10 million. We incurred legal fees of $1.0 million in fiscal 2012 in
connection with this matter.
Investing Activities
Our capital expenditures were $17.0 million in fiscal 2014 compared
to $14.5 million in fiscal 2013 and $10.8 million in fiscal 2012. We currently anticipate that total capital expenditures in fiscal
2015 will be approximately $26.5 million, which includes expenditures for the renovations of the first four floors of our building
located at 520 Broad Street, Newark, New Jersey. We expect to fund our capital expenditures with our net cash provided by operating
activities and cash, cash equivalents and marketable securities on hand.
In fiscal 2013, we made a deposit of $1.0 million for the purchase
of a leasehold interest in an office building in New Jersey.
In fiscal 2014, fiscal 2013 and fiscal 2012, we used cash of $0.2
million, $1.2 million and nil, respectively, for an acquisition and additional investments. In fiscal 2014, we acquired the assets
of an over-the-top messaging provider, and we have begun integrating its messaging service into our wholesale and retail offerings.
We received $1.0 million, $0.1 million and $3.2 million in fiscal
2014, fiscal 2013 and fiscal 2012, respectively, from the redemption of certain of our investments, including investments in hedge
funds.
Proceeds from insurance of $0.6 million in fiscal 2014 related to
water damage in our building located at 520 Broad Street, Newark, New Jersey, that occurred in a prior period. We recorded a gain
of $0.6 million from this insurance claim in fiscal 2014.
In fiscal 2014 and fiscal 2013, we used cash of $20.7 million and
$11.4 million, respectively, to purchase marketable securities. We did not purchase any marketable securities in fiscal 2012.
Proceeds from maturities and sales of marketable securities were
$17.3 million and $1.7 million in fiscal 2014 and fiscal 2013, respectively. There were no maturities or sales of marketable securities
in fiscal 2012.
We received cash of $3.3 million in fiscal 2012 from the maturity
of certificates of deposit.
Financing Activities
In July 2013, cash and cash equivalents held by Straight Path and
its subsidiaries of $15.0 million were deconsolidated as a result of the Straight Path Spin-Off. In October 2011, cash and cash
equivalents held by Genie and its subsidiaries of $92.4 million were deconsolidated as a result of the Genie Spin-Off. Subsequent
to the Genie Spin-Off, in November and December 2011, we funded Genie with the remaining $11.9 million of our commitment.
In fiscal 2014, we paid aggregate cash dividends of $0.59 per share
on our Class A common stock and Class B common stock, or $13.6 million in total. In fiscal 2013, we paid aggregate cash dividends
of $0.75 per share on our Class A common stock and Class B common stock, or $17.1 million in total. In fiscal 2012, we paid aggregate
cash dividends of $0.66 per share on our Class A common stock and Class B common stock, or $15.0 million in total. On October 3,
2014, we paid a dividend of $0.17 per share for the fourth quarter of fiscal 2014 to holders of record of our Class A common stock
and Class B common stock as of the close of business on September 29, 2014.
We distributed cash of $1.9 million, $2.2 million and $1.6 million
in fiscal 2014, fiscal 2013 and fiscal 2012, respectively, to the noncontrolling interests in certain of our subsidiaries.
In August 2013, both Fabrix and a wholly-owned subsidiary of ours
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 our ownership in Fabrix to 88.4%. In December 2012, a wholly-owned
subsidiary of ours purchased shares of Fabrix for cash of $1.8 million. The shares were purchased from holders of noncontrolling
interests in Fabrix representing 4.5% of the equity in Fabrix.
On November 21, 2012, our subsidiary, Zedge, sold shares to Shaman
II, L.P. for cash of $0.1 million, which increased Shaman II, L.P.’s ownership in Zedge to 11.17% from 11.1%. On November
15, 2011, Zedge sold shares to Shaman II, L.P. for cash of $0.1 million, which increased Shaman II, L.P.’s ownership in Zedge
to 11.1% from 11%. One of the limited partners in Shaman II, L.P. is a former employee of ours.
We received proceeds from the exercise of our stock options of $0.6
million in fiscal 2014 and $0.9 million in fiscal 2013. No options were exercised in fiscal 2012.
We repaid capital lease obligations of $1.8 million in fiscal 2012.
We had no capital lease obligations in fiscal 2014 or fiscal 2013.
Our 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 July 31, 2014, there was $13.0 million outstanding
under the facility at an interest rate of 1.65% per annum. In August 2014, we repaid the $13.0 million loan payable. In fiscal
2014 and fiscal 2013, we borrowed $56.0 million and $21.9 million, respectively, under the facility, and we repaid $64.1 million
and $8.0 million, respectively. We intend 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 July 31, 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 $73.7 million.
Repayments of other borrowings were $0.3 million, $21.3 million
and $0.3 million in fiscal 2014, fiscal 2013 and fiscal 2012, respectively. On April 30, 2013, the holder of the note payable secured
by the mortgage on our building located at 520 Broad Street, Newark, New Jersey entered into an agreement with us to settle all
of our disputes. In connection with this agreement, on May 1, 2013, we paid them $21.1 million and they released us from the note
and discharged the mortgage.
In fiscal 2014, fiscal 2013 and fiscal 2012, we paid $1.0 million,
$0.3 million and $0.2 million, respectively to repurchase shares of Class B common stock that were tendered by employees of ours
to satisfy the employees’ tax withholding obligations in connection with the lapsing of restrictions on awards of restricted
stock. Such shares are repurchased by us based on their fair market value on the trading day immediately prior to the vesting date.
We have a stock repurchase program for the repurchase of up to an
aggregate of 8.3 million shares of our Class B common stock. There were no repurchases in fiscal 2014. In fiscal 2013, we repurchased
77,843 shares of our Class B common stock for an aggregate purchase price of $0.8 million. In fiscal 2012, we repurchased 0.3 million
shares of our Class B common stock for an aggregate purchase price of $2.6 million. As of July 31, 2014, 5.1 million shares remained
available for repurchase under the stock repurchase program.
Changes in Trade Accounts Receivable, Allowance For Doubtful
Accounts and Deferred Revenue
Gross trade accounts receivable increased to $80.8 million at July
31, 2014 from $78.2 million at July 31, 2013 primarily due to a $2.2 million increase in Fabrix’ gross trade accounts receivable
balance from sales in June and July 2014.
The allowance for doubtful accounts as a percentage of gross trade
accounts receivable was 14.2% at July 31, 2014 and 16.7% at July 31, 2013 as a result of the decline in the allowance for doubtful
accounts at IDT Telecom and an increase in the gross trade accounts receivable balance at Fabrix.
Deferred revenue as a percentage of total revenues varies from period
to period depending on the mix and the timing of revenues. Deferred revenue arises from IDT Telecom’s sales of calling cards
and other prepaid products and from Fabrix’s sales of software licenses. Deferred revenue increased to $101.2 million at
July 31, 2014 from $91.2 million at July 31, 2013 primarily as a result of a $8.4 million increase in IDT Telecom’s deferred
revenues, primarily in the U.S., and a $1.5 million increase in deferred revenues from sales of Fabrix’s software licenses
and support services.
CONTRACTUAL OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The following tables quantify our future contractual obligations
and commercial commitments as of July 31, 2014:
CONTRACTUAL OBLIGATIONS
Payments Due by Period
(in millions) | |
Total | | |
Less than 1 year | | |
1—3 years | | |
4—5 years | | |
After 5 years | |
Operating leases | |
$ | 7.3 | | |
$ | 2.8 | | |
$ | 2.5 | | |
$ | 1.8 | | |
$ | 0.2 | |
Purchase commitments | |
| 2.3 | | |
| 2.3 | | |
| — | | |
| — | | |
| — | |
Revolving credit loan and notes payable (including interest) | |
| 20.1 | | |
| 13.7 | | |
| 6.4 | | |
| — | | |
| — | |
TOTAL CONTRACTUAL OBLIGATIONS | |
$ | 29.7 | | |
$ | 18.8 | | |
$ | 8.9 | | |
$ | 1.8 | | |
$ | 0.2 | |
OTHER COMMERCIAL COMMITMENTS
Payments Due by Period
(in millions) | |
Total | | |
Less than 1 year | | |
1—3 years | | |
4—5 years | | |
After 5 years | |
Standby letters of credit (1) | |
$ | 3.7 | | |
$ | 0.9 | | |
$ | 2.8 | | |
$ | — | | |
$ | — | |
(1) | The above table does not include an aggregate of $10.0 million in performance bonds due to the uncertainty of the amount and/or
timing of any such payments. |
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any “off-balance sheet arrangements,”
as defined in relevant SEC regulations that are reasonably likely to have a current or future effect on our financial condition,
results of operations, liquidity, capital expenditures or capital resources, other than the following.
In connection with our spin-off of CTM Media Holdings, Inc., or
CTM, in September 2009, we and CTM entered into a Tax Separation Agreement, dated as of September 14, 2009, to provide for certain
tax matters including the assignment of responsibility for the preparation and filing of tax returns, the payment of and indemnification
for taxes, entitlement to tax refunds and the prosecution and defense of any tax controversies. Pursuant to this agreement, among
other things, we indemnify CTM from all liability for taxes of CTM and its subsidiaries for periods ending on or before September
14, 2009, and CTM indemnifies us from all liability for taxes of CTM and its subsidiaries accruing after September 14, 2009.
In connection with the Genie Spin-Off in October 2011, we and Genie
entered into various agreements prior to the Genie Spin-Off including a Separation and Distribution Agreement to effect the separation
and provide a framework for our relationship with Genie after the Genie Spin-Off, and a Tax Separation Agreement, which sets forth
the responsibilities of us and Genie with respect to, among other things, liabilities for federal, state, local and foreign taxes
for periods before and including the Genie Spin-Off, the preparation and filing of tax returns for such periods and disputes with
taxing authorities regarding taxes for such periods. Pursuant to the Separation and Distribution Agreement, among other things,
we indemnify Genie and Genie indemnifies us for losses related to the failure of the other to pay, perform or otherwise discharge,
any of the liabilities and obligations set forth in the agreement. Pursuant to the Tax Separation Agreement, among other things,
we indemnify Genie from all liability for taxes of ours with respect to any taxable period, and Genie indemnifies us from all liability
for taxes of Genie and its subsidiaries with respect to any taxable period, including, without limitation, the ongoing tax audits
related to Genie’s business.
In connection with the Straight Path Spin-Off in July 2013, we and
Straight Path entered into various agreements prior to the Straight Path Spin-Off including a Separation and Distribution Agreement
to effect the separation and provide a framework for our relationship with Straight Path after the Straight Path Spin-Off, and
a Tax Separation Agreement, which sets forth the responsibilities of us and Straight Path with respect to, among other things,
liabilities for federal, state, local and foreign taxes for periods before and including the Straight Path Spin-Off, the preparation
and filing of tax returns for such periods and disputes with taxing authorities regarding taxes for such periods. Pursuant to the
Separation and Distribution Agreement, the Company indemnifies Straight Path and Straight Path indemnifies the Company for losses
related to the failure of the other to pay, perform or otherwise discharge, any of the liabilities and obligations set forth in
the agreement. Pursuant to the Tax Separation Agreement, the Company indemnifies Straight Path from all liability for taxes of
Straight Path or any of its subsidiaries or relating to the Straight Path business with respect to taxable periods ending on or
before the Straight Path Spin-Off, from all liability for taxes of the Company, other than Straight Path and its subsidiaries,
for any taxable period, and from all liability for taxes due to the Straight Path Spin-Off.
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 July 31, 2014, we had aggregate performance bonds of $10.0
million outstanding.
Item 7A. Quantitative and Qualitative
Disclosures about Market Risks.
FOREIGN CURRENCY RISK
Revenues from our international operations represented 30%, 23%
and 29% of our consolidated revenues from continuing operations in fiscal 2014, fiscal 2013 and fiscal 2012, respectively. A significant
portion of these revenues is in currencies other than the U.S. Dollar. Our foreign currency exchange risk is somewhat mitigated
by our ability to offset a portion of these non U.S. Dollar-denominated revenues with operating expenses that are paid in the
same currencies. While the impact from fluctuations in foreign exchange rates affects our revenues and expenses denominated in
foreign currencies, the net amount of our exposure to foreign currency exchange rate changes at the end of each reporting period
is generally not material.
INVESTMENT RISK
In addition to, but separate from our primary business, we hold
a portion of our assets in marketable securities and hedge funds for strategic and speculative purposes. As of July 31, 2014,
the carrying value of our marketable securities and investments in hedge funds were $12.9 million and $9.5 million, respectively.
We liquidated most of our investment in hedge funds in recent years. Much of the remaining balances in these funds are subject
to time restrictions. We may consider liquidating such remaining balances when their restrictions lapse. Investments in marketable
securities and hedge funds carry a degree of risk, and depend to a great extent on correct assessments of the future course of
price movements of securities and other instruments. There can be no assurance that our investment managers will be able to accurately
predict these price movements. The securities markets have in recent years been characterized by great volatility and unpredictability.
Accordingly, the value of our investments may go down as well as up and we may not receive the amounts originally invested upon
redemption.
Item 8. Financial Statements
and Supplementary Data.
The Consolidated Financial Statements of the Company and
the report of the independent registered public accounting firm thereon starting on page F-1 are included herein.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our
Chief Executive Officer and Principal Financial Officer have evaluated the effectiveness of our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended), as of the end of the period
covered by this Annual Report on Form 10-K. Management based this assessment on criteria for effective internal control over financial
reporting described in the 1992 Internal Control–Integrated
Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. Based on this evaluation, our Chief Executive Officer and Principal Financial Officer have concluded
that our disclosure controls and procedures were effective as of July 31, 2014.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting
during the fourth quarter of fiscal 2014 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
Management’s report on internal control over financial
reporting and the attestation report of our independent registered public accounting firm are included in this Annual Report on
Form 10-K on pages 46 and 47.
Item 9B. Other Information.
None.
Part III
Item 10. Directors, Executive Officers and Corporate
Governance.
The following is a list of our directors and executive officers
along with the specific information required by Rule 14a-3 of the Securities Exchange Act of 1934:
Executive Officers
Howard S. Jonas—Chairman of the Board
Shmuel Jonas—Chief Executive Officer
Marcelo Fischer—Senior Vice President—Finance
Mitch Silberman—Chief Accounting Officer and Controller
Joyce J. Mason—Executive Vice President, General Counsel
and Corporate Secretary
Menachem Ash—Executive Vice President of Strategy and Legal
Affairs
Bill Pereira—Chief Executive Officer, President and Co-Chairman
of IDT Telecom
Directors
Howard S. Jonas—Chairman of the Board
Bill Pereira—Chief Executive Officer, President and Co-Chairman
of IDT Telecom
Michael Chenkin - Certified Public Accountant; previously worked
in the Audit Department of Coopers and Lybrand and as a consultant to the securities industry
Eric F. Cosentino—Former Rector of the Episcopal Church of
the Divine Love, Montrose, New York
Judah Schorr—Founder of Judah Schorr MD PC, an anesthesia
provider to hospitals, ambulatory surgery centers and medical offices, and has been its President and owner since its inception
The remaining information required by this Item will be contained
in our Proxy Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within
120 days after July 31, 2014, and which is incorporated by reference herein.
Corporate Governance
We
have included as exhibits to this Annual Report on Form 10-K certificates of our Chief Executive Officer and Principal Financial
Officer certifying the quality of our public disclosure. In December 2013, our Chief Executive Officer submitted to the New York
Stock Exchange a certificate certifying that he was not aware of any violations by us of the New York Stock Exchange corporate
governance listing standards.
We make available free of charge through the investor relations
page of our web site (www.idt.net/ir) our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on
Form 8-K and all amendments to those reports, and all beneficial ownership reports on Forms 3, 4 and 5 filed by directors, officers
and beneficial owners of more than 10% of our equity, as soon as reasonably practicable after such reports are electronically filed
with the Securities and Exchange Commission. We have adopted codes of business conduct and ethics for all of our employees, including
our principal executive officer, principal financial officer and principal accounting officer. Copies of the codes of business
conduct and ethics are available on our web site.
Our web site and the information contained therein or incorporated
therein are not intended to be incorporated into this Annual Report on Form 10-K or our other filings with the Securities and Exchange
Commission.
Item 11. Executive Compensation.
The information required by this Item will be contained in our Proxy
Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days
after July 31, 2014, and which is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters.
The information required by this Item will be contained in our Proxy
Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days
after July 31, 2014, and which is incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions,
and Director Independence.
The information required by this Item will be contained in our Proxy
Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days
after July 31, 2014, and which is incorporated by reference herein.
Item 14. Principal Accounting Fees and Services.
The information required by this Item will be contained in our Proxy
Statement for our Annual Stockholders Meeting, which will be filed with the Securities and Exchange Commission within 120 days
after July 31, 2014, and which is incorporated by reference herein.
Part IV
Item 15. Exhibits, Financial
Statement Schedules.
(a) The following documents are filed as part of this Report:
| 1. | Report of Management on Internal Control Over Financial Reporting |
| | Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting |
| | Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements |
| | Consolidated Financial Statements covered by Report of Independent Registered Public Accounting Firm |
| 2. | Financial Statement Schedule. |
| | All schedules have been omitted since they are either included in the Notes to Consolidated Financial Statements or not required
or not applicable. |
| 3. | The exhibits listed in paragraph (b) of this item. Exhibit Numbers 10.01 10.02, 10.03, 10.04, 10.05, 10.06 and 10.08 are
management contracts or compensatory plans or arrangements. |
(b) Exhibits.
Exhibit
Number |
|
Description of Exhibits |
3.01(1) |
|
Third Restated Certificate of Incorporation of the Registrant. |
|
|
|
3.02(2) |
|
Fourth Amended and Restated By-laws of the Registrant. |
|
|
|
10.01(3) |
|
Agreement, entered into as of October 21, 2009 between the Registrant and James A. Courter. |
|
|
|
10.02(3) |
|
Warrant to Purchase Common Stock, entered into as of October 21, 2009 between the Registrant and James A. Courter. |
|
|
|
10.03(4) |
|
Third Amended and Restated Employment Agreement, dated December 20, 2013, between the Registrant and Howard S. Jonas. |
|
|
|
10.04(5) |
|
1996 Stock Option and Incentive Plan, as amended and restated, of IDT Corporation. |
|
|
|
10.05(6) |
|
2005 Stock Option and Incentive Plan of IDT Corporation, as amended. |
|
|
|
10.06(7) |
|
Employment Agreement, dated November 22, 2011, between IDT Corporation and Bill Pereira. |
|
|
|
10.7(8) |
|
Credit Agreement, dated July 12, 2012, between IDT Telecom, Inc. and TD Bank, N.A. |
|
|
|
10.8(9) |
|
Stock Grant Agreement between the Registrant and Howard Jonas, dated December 27, 2012. |
|
|
|
21.01* |
|
Subsidiaries of the Registrant. |
|
|
|
23.01* |
|
Consent of Grant Thornton LLP. |
|
|
|
31.01* |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.02* |
|
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.01* |
|
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.02* |
|
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
101.INS* |
|
XBRL Instance Document |
|
|
|
101.SCH* |
|
XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL* |
|
XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.DEF* |
|
XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
101.LAB* |
|
XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE* |
|
XBRL Taxonomy Extension Presentation Linkbase Document |
| (1) | Incorporated by reference to Form 8-K, filed April 5, 2011. |
| (2) | Incorporated by reference to Form 8-K, filed September 23, 2009. |
| (3) | Incorporated by reference to Form 10-K for the fiscal year ended July 31, 2006, filed October 16, 2006. |
| (4) | Incorporated by reference to Form 8-K/A, filed December 27, 2013. |
| (5) | Incorporated by reference to Schedule 14A, filed November 3, 2004. |
| (6) | Incorporated by reference to Schedule 14A, filed November 7, 2011. |
| (7) | Incorporated by reference to Form 8-K, filed November 29, 2011. |
| (8) | Incorporated by reference to Form 10-K for the fiscal year ended July 31, 2012, filed October 15, 2012 |
| (9) | Incorporated by reference to Form 8-K, filed December 31, 2012. |
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
IDT
CORPORATION |
|
|
|
By: |
/s/
Shmuel Jonas |
|
|
Shmuel
Jonas
Chief Executive Officer |
Date: October 14, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
Signature |
|
Titles |
|
Date |
|
|
|
|
|
/s/
Shmuel Jonas |
|
Chief
Executive Officer (Principal Executive Officer) |
|
October
14, 2014 |
Shmuel
Jonas |
|
|
|
|
|
|
|
|
|
/s/
Howard S. Jonas |
|
Chairman
of the Board |
|
October
14, 2014 |
Howard
S. Jonas |
|
|
|
|
|
|
|
|
|
/s/
Marcelo Fischer |
|
Senior
Vice President—Finance (Principal Financial Officer) |
|
October
14, 2014 |
Marcelo
Fischer |
|
|
|
|
|
|
|
|
|
/s/
Mitch Silberman |
|
Chief
Accounting Officer and Controller |
|
October
14, 2014 |
Mitch
Silberman |
|
(Principal Accounting Officer) |
|
|
|
|
|
|
|
/s/
Bill Pereira |
|
Director |
|
October
14, 2014 |
Bill
Pereira |
|
|
|
|
|
|
|
|
|
/s/
Michael Chenkin |
|
Director |
|
October
14, 2014 |
Michael
Chenkin |
|
|
|
|
|
|
|
|
|
/s/
Eric F. Cosentino |
|
Director |
|
October
14, 2014 |
Eric
F. Cosentino |
|
|
|
|
|
|
|
|
|
/s/
Judah Schorr |
|
Director |
|
October
14, 2014 |
Judah
Schorr |
|
|
|
|
REPORT OF MANAGEMENT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
We, the management of IDT Corporation and subsidiaries (the “Company”),
are responsible for establishing and maintaining adequate internal control over financial reporting of the Company.
The Company’s internal control over financial reporting is
defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under
the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s
board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting
principles in the United States and includes those policies and procedures that:
| 1. | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions
of assets of the Company; |
| 2. | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance
with authorizations of management and directors of the Company; and |
| 3. | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the
Company’s assets that could have a material effect on the financial statements. |
Management has assessed the effectiveness of the Company’s
internal control over financial reporting as of July 31, 2014. In making this assessment, the Company’s management used
the criteria established in the 1992 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we conducted an evaluation of our internal control over
financial reporting, as prescribed above, for the period covered by this report. Based on our evaluation, our principal executive
officer and principal financial officer concluded that the Company’s internal control over financial reporting as of July 31,
2014 was effective in all material respects.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Grant Thornton LLP has provided an attestation report on the Company’s
internal control over financial reporting as of July 31, 2014.
|
|
/s/ Shmuel Jonas |
|
Shmuel Jonas |
|
Chief Executive Officer |
|
|
|
/s/ Marcelo Fischer |
|
Marcelo Fischer |
|
Senior Vice President—Finance
(Principal Financial Officer) |
|
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Board of Directors
and Stockholders
IDT Corporation
We have audited the internal control over financial reporting
of IDT Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of July 31, 2014, based on criteria
established in the 1992 Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of July 31, 2014, based on the criteria established in the 1992 Internal
Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year
ended July 31, 2014, and our report dated October 14, 2014 expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
New York, New York
October 14, 2014
IDT Corporation
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm |
F-2 |
|
|
Consolidated Balance Sheets as of July 31, 2014 and 2013 |
F-3 |
|
|
Consolidated Statements of Income for the years ended July 31, 2014, 2013 and 2012 |
F-4 |
|
|
Consolidated Statements of Comprehensive Income for the years ended July 31, 2014, 2013 and 2012 |
F-5 |
|
|
Consolidated Statements of Equity for the years ended July 31, 2014, 2013 and 2012 |
F-6 |
|
|
Consolidated Statements of Cash Flows for the years ended July 31, 2014, 2013 and 2012 |
F-9 |
|
|
Notes to Consolidated Financial Statements |
F-10 |
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
IDT Corporation
We have audited the accompanying consolidated balance sheets of
IDT Corporation (a Delaware corporation) and subsidiaries (the “Company”) as of July 31, 2014 and 2013, and the
related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period
ended July 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of IDT Corporation and subsidiaries as of July 31,
2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended July 31,
2014 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of
the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting
as of July 31, 2014, based on criteria established in the 1992 Internal Control–Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated October 14, 2014 expressed
an unqualified opinion.
/s/ GRANT THORNTON LLP
New York, New York
October 14, 2014
IDT CORPORATION
CONSOLIDATED BALANCE SHEETS
July 31 (in thousands) | |
2014 | | |
2013 | |
ASSETS | |
| | |
| |
CURRENT ASSETS: | |
| | |
| |
Cash and cash equivalents | |
$ | 153,823 | | |
$ | 151,600 | |
Restricted cash and cash equivalents—short-term | |
| 65,706 | | |
| 34,988 | |
Marketable securities | |
| 12,873 | | |
| 9,684 | |
Trade accounts receivable, net of allowance for doubtful accounts of $11,507 and $13,079 at July 31, 2014 and 2013, respectively | |
| 69,330 | | |
| 65,078 | |
Prepaid expenses | |
| 21,799 | | |
| 19,175 | |
Deferred income tax assets, net—current portion | |
| 2,953 | | |
| 1,689 | |
Other current assets | |
| 12,381 | | |
| 12,730 | |
TOTAL CURRENT ASSETS | |
| 338,865 | | |
| 294,944 | |
Property, plant and equipment, net | |
| 81,760 | | |
| 80,742 | |
Goodwill | |
| 14,830 | | |
| 14,807 | |
Other intangibles, net | |
| 1,742 | | |
| 1,390 | |
Investments | |
| 10,008 | | |
| 9,605 | |
Restricted cash and cash equivalents—long-term | |
| 2,763 | | |
| 2,767 | |
Deferred income tax assets, net—long-term portion | |
| 16,248 | | |
| 20,000 | |
Other assets | |
| 14,715 | | |
| 11,152 | |
TOTAL ASSETS | |
$ | 480,931 | | |
$ | 435,407 | |
LIABILITIES AND EQUITY | |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Revolving credit loan payable | |
$ | 13,000 | | |
$ | 21,062 | |
Trade accounts payable | |
| 42,135 | | |
| 39,323 | |
Accrued expenses | |
| 142,528 | | |
| 145,432 | |
Deferred revenue | |
| 101,165 | | |
| 91,227 | |
Customer deposits | |
| 62,685 | | |
| 28,663 | |
Income taxes payable | |
| 732 | | |
| 761 | |
Dividends payable | |
| — | | |
| 1,837 | |
Notes payable—current portion | |
| 271 | | |
| 535 | |
Other current liabilities | |
| 5,468 | | |
| 4,829 | |
TOTAL CURRENT LIABILITIES | |
| 367,984 | | |
| 333,669 | |
Notes payable—long-term portion | |
| 6,353 | | |
| 6,624 | |
Other liabilities | |
| 5,430 | | |
| 5,978 | |
TOTAL LIABILITIES | |
| 379,767 | | |
| 346,271 | |
Commitments and contingencies | |
| | | |
| | |
EQUITY: | |
| | | |
| | |
IDT Corporation stockholders’ equity: | |
| | | |
| | |
Preferred stock, $.01 par value; authorized shares—10,000; no shares issued | |
| — | | |
| — | |
Class A common stock, $.01 par value; authorized shares—35,000; 3,272 shares issued and 1,574 shares outstanding at July 31, 2014 and 2013 | |
| 33 | | |
| 33 | |
Class B common stock, $.01 par value; authorized shares—200,000; 24,587 and 24,275 shares issued and 21,653 and 21,397 shares outstanding at July 31, 2014 and 2013, respectively | |
| 246 | | |
| 243 | |
Additional paid-in capital | |
| 392,858 | | |
| 388,533 | |
Treasury stock, at cost, consisting of 1,698 and 1,698 shares of Class A common stock and 2,934 and 2,878 shares of Class B common stock at July 31, 2014 and 2013, respectively | |
| (99,841 | ) | |
| (98,836 | ) |
Accumulated other comprehensive income | |
| 3,668 | | |
| 2,341 | |
Accumulated deficit | |
| (196,725 | ) | |
| (203,711 | ) |
Total IDT Corporation stockholders’ equity | |
| 100,239 | | |
| 88,603 | |
Noncontrolling interests | |
| 925 | | |
| 533 | |
TOTAL EQUITY | |
| 101,164 | | |
| 89,136 | |
TOTAL LIABILITIES AND EQUITY | |
$ | 480,931 | | |
$ | 435,407 | |
See accompanying notes to consolidated financial statements.
IDT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year ended July 31 (in thousands, except per share data) | |
2014 | | |
2013 | | |
2012 | |
REVENUES | |
$ | 1,651,541 | | |
$ | 1,620,617 | | |
$ | 1,506,283 | |
COSTS AND EXPENSES: | |
| | | |
| | | |
| | |
Direct cost of revenues (exclusive of depreciation and amortization) | |
| 1,367,266 | | |
| 1,355,573 | | |
| 1,269,386 | |
Selling, general and administrative (i) | |
| 228,934 | | |
| 218,469 | | |
| 206,906 | |
Depreciation and amortization | |
| 16,318 | | |
| 14,910 | | |
| 16,648 | |
Research and development | |
| 10,018 | | |
| 7,166 | | |
| 4,569 | |
Impairment of building and improvements | |
| — | | |
| 4,359 | | |
| — | |
TOTAL COSTS AND EXPENSES | |
| 1,622,536 | | |
| 1,600,477 | | |
| 1,497,509 | |
Other operating gains (losses), net | |
| 835 | | |
| 9,251 | | |
| (15,870 | ) |
Income (loss) from operations | |
| 29,840 | | |
| 29,391 | | |
| (7,096 | ) |
Interest expense, net | |
| (148 | ) | |
| (824 | ) | |
| (2,985 | ) |
Other (expense) income, net | |
| (4,700 | ) | |
| 5,383 | | |
| (1,767 | ) |
Income (loss) from continuing operations before income taxes | |
| 24,992 | | |
| 33,950 | | |
| (11,848 | ) |
(Provision for) benefit from income taxes | |
| (3,982 | ) | |
| (15,872 | ) | |
| 42,782 | |
Income from continuing operations | |
| 21,010 | | |
| 18,078 | | |
| 30,934 | |
Discontinued operations, net of tax: | |
| | | |
| | | |
| | |
(Loss) income from discontinued operations | |
| — | | |
| (4,634 | ) | |
| 5,851 | |
Income on sale of discontinued operations | |
| — | | |
| — | | |
| 2,000 | |
Total discontinued operations | |
| — | | |
| (4,634 | ) | |
| 7,851 | |
NET INCOME | |
| 21,010 | | |
| 13,444 | | |
| 38,785 | |
Net income attributable to noncontrolling interests | |
| (2,226 | ) | |
| (1,837 | ) | |
| (137 | ) |
NET INCOME ATTRIBUTABLE TO IDT CORPORATION | |
$ | 18,784 | | |
$ | 11,607 | | |
$ | 38,648 | |
Amounts attributable to IDT Corporation common stockholders: | |
| | | |
| | | |
| | |
Income from continuing operations | |
$ | 18,784 | | |
$ | 16,048 | | |
$ | 29,901 | |
(Loss) income from discontinued operations | |
| — | | |
| (4,441 | ) | |
| 8,747 | |
Net income | |
$ | 18,784 | | |
$ | 11,607 | | |
$ | 38,648 | |
Earnings per share attributable to IDT Corporation common stockholders: | |
| | | |
| | | |
| | |
Basic: | |
| | | |
| | | |
| | |
Income from continuing operations | |
$ | 0.85 | | |
$ | 0.77 | | |
$ | 1.45 | |
(Loss) income from discontinued operations | |
| — | | |
| (0.21 | ) | |
| 0.42 | |
Net income | |
$ | 0.85 | | |
$ | 0.56 | | |
$ | 1.87 | |
Weighted-average number of shares used in calculation of basic earnings per share | |
| 22,009 | | |
| 20,876 | | |
| 20,717 | |
Diluted: | |
| | | |
| | | |
| | |
Income from continuing operations | |
$ | 0.82 | | |
$ | 0.72 | | |
$ | 1.36 | |
(Loss) income from discontinued operations | |
| — | | |
| (0.20 | ) | |
| 0.39 | |
Net income | |
$ | 0.82 | | |
$ | 0.52 | | |
$ | 1.75 | |
Weighted-average number of shares used in calculation of diluted earnings per share | |
| 22,937 | | |
| 22,315 | | |
| 22,060 | |
(i) Stock-based compensation included in selling, general and administrative expenses | |
$ | 5,382 | | |
$ | 5,875 | | |
$ | 3,325 | |
See accompanying notes
to consolidated financial statements.
IDT CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended July 31 (in thousands) | |
2014 | | |
2013 | | |
2012 | |
NET INCOME | |
$ | 21,010 | | |
$ | 13,444 | | |
$ | 38,785 | |
Other comprehensive income (loss): | |
| | | |
| | | |
| | |
Change in unrealized (loss) gain on available-for-sale securities | |
| (8 | ) | |
| (1 | ) | |
| 4 | |
Foreign currency translation adjustments | |
| 1,335 | | |
| 2,092 | | |
| (2,272 | ) |
Other comprehensive income (loss) | |
| 1,327 | | |
| 2,091 | | |
| (2,268 | ) |
COMPREHENSIVE INCOME | |
| 22,337 | | |
| 15,535 | | |
| 36,517 | |
Comprehensive income attributable to noncontrolling interests | |
| (2,226 | ) | |
| (1,789 | ) | |
| (256 | ) |
COMPREHENSIVE INCOME ATTRIBUTABLE TO IDT CORPORATION | |
$ | 20,111 | | |
$ | 13,746 | | |
$ | 36,261 | |
See accompanying notes to consolidated
financial statements.
IDT CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (in thousands)
| |
| IDT
Corporation Stockholders
| | |
| Noncontrolling
Interests
| | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| Accumulated | | |
| | | |
| | | |
| | | |
| | |
| |
| Class
A
| | |
| Class
B | | |
| Additional
| | |
| | | |
| Other
| | |
| | | |
| | | |
| Receivable for
| | |
| | |
| |
| Common
Stock
| | |
| Common
Stock
| | |
| Paid-In
| | |
| Treasury
| | |
| Comprehensive
| | |
| Accumulated
| | |
| Noncontrolling
| | |
| issuance
of
| | |
| Total
| |
| |
| Shares
| | |
| Amount
| | |
| Shares
| | |
| Amount
| | |
| Capital
| | |
| Stock
| | |
| Income | | |
| Deficit
| | |
| Interests
| | |
| equity
| | |
| Equity
| |
BALANCE
AT JULY 31, 2011 | |
| 3,272 | | |
$ | 33 | | |
| 23,586 | | |
$ | 236 | | |
$ | 520,732 | | |
$ | (94,941 | ) | |
$ | 3,027 | | |
$ | (219,992 | ) | |
$ | (4,305 | ) | |
$ | (1,000 | ) | |
$ | 203,790 | |
Dividends
declared ($0.66 per share) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (15,014 | ) | |
| — | | |
| — | | |
| (15,014 | ) |
Restricted
Class B common stock purchased from employee | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (210 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| (210 | ) |
Repurchases
of Class B common stock through repurchase program | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (2,606 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| (2,606 | ) |
Stock-based
compensation | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,605 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,605 | |
Restricted
stock issued to employees and directors | |
| — | | |
| — | | |
| 433 | | |
| 4 | | |
| (4 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Stock
issued for matching contributions to the 401(k) Plan | |
| — | | |
| — | | |
| 93 | | |
| 1 | | |
| 910 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 911 | |
Sale
of stock of subsidiary | |
| — | | |
| — | | |
| — | | |
| — | | |
| (78 | ) | |
| — | | |
| — | | |
| — | | |
| 211 | | |
| — | | |
| 133 | |
Distributions
to noncontrolling interests | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,580 | ) | |
| — | | |
| (1,580 | ) |
Other | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 225 | | |
| — | | |
| 225 | |
Genie
Spin-Off | |
| — | | |
| — | | |
| — | | |
| — | | |
| (129,296 | ) | |
| — | | |
| (438 | ) | |
| — | | |
| 5,688 | | |
| 1,000 | | |
| (123,046 | ) |
Other
comprehensive (loss) income | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (2,387 | ) | |
| — | | |
| 119 | | |
| — | | |
| (2,268 | ) |
Net
income for the year ended July 31, 2012 | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 38,648 | | |
| 137 | | |
| — | | |
| 38,785 | |
BALANCE
AT JULY 31, 2012 | |
| 3,272 | | |
| 33 | | |
| 24,112 | | |
| 241 | | |
| 395,869 | | |
| (97,757 | ) | |
| 202 | | |
| (196,358 | ) | |
| 495 | | |
| — | | |
| 102,725 | |
IDT CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (in thousands)—(Continued)
| |
| IDT
Corporation Stockholders
| | |
| Noncontrolling
Interests
| | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| Accumulated | | |
| | | |
| | | |
| | | |
| | |
| |
| Class
A
| | |
| Class
B | | |
| Additional
| | |
| | | |
| Other
| | |
| | | |
| | | |
| Receivable for
| | |
| | |
| |
| Common
Stock
| | |
| Common
Stock
| | |
| Paid-In
| | |
| Treasury
| | |
| Comprehensive
| | |
| Accumulated
| | |
| Noncontrolling
| | |
| issuance
of
| | |
| Total
| |
| |
| Shares
| | |
| Amount
| | |
| Shares
| | |
| Amount
| | |
| Capital
| | |
| Stock
| | |
| Income | | |
| Deficit
| | |
| Interests
| | |
| equity
| | |
| Equity
| |
Dividends
declared ($0.83 per share) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (18,960 | ) | |
| — | | |
| — | | |
| (18,960 | ) |
Restricted
Class B common stock purchased from employees | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (301 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| (301 | ) |
Repurchases
of Class B common stock through repurchase program | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (778 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| (778 | ) |
Exercise
of stock options | |
| — | | |
| — | | |
| 62 | | |
| 1 | | |
| 920 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 921 | |
Stock-based
compensation | |
| — | | |
| — | | |
| — | | |
| — | | |
| 6,412 | | |
| — | | |
| — | | |
| — | | |
| 204 | | |
| — | | |
| 6,616 | |
Restricted
stock issued to employees and directors | |
| — | | |
| — | | |
| 49 | | |
| 1 | | |
| (1 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Stock
issued for matching contributions to the 401(k) Plan | |
| — | | |
| — | | |
| 52 | | |
| — | | |
| 932 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 932 | |
Purchases
of stock of subsidiary | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,795 | ) | |
| — | | |
| — | | |
| — | | |
| (9 | ) | |
| — | | |
| (1,804 | ) |
Sale
of stock of subsidiary | |
| — | | |
| — | | |
| — | | |
| — | | |
| (58 | ) | |
| — | | |
| — | | |
| — | | |
| 203 | | |
| — | | |
| 145 | |
Distributions
to noncontrolling interests | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (2,245 | ) | |
| — | | |
| (2,245 | ) |
Exercise
of stock options in subsidiary | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3 | | |
| — | | |
| — | | |
| — | | |
| 6 | | |
| — | | |
| 9 | |
Straight
Path Spin-Off | |
| — | | |
| — | | |
| — | | |
| — | | |
| (13,749 | ) | |
| — | | |
| — | | |
| — | | |
| 90 | | |
| — | | |
| (13,659 | ) |
Other
comprehensive income (loss) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 2,139 | | |
| — | | |
| (48 | ) | |
| — | | |
| 2,091 | |
Net
income for the year ended July 31, 2013 | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 11,607 | | |
| 1,837 | | |
| — | | |
| 13,444 | |
BALANCE
AT JULY 31, 2013 | |
| 3,272 | | |
| 33 | | |
| 24,275 | | |
| 243 | | |
| 388,533 | | |
| (98,836 | ) | |
| 2,341 | | |
| (203,711 | ) | |
| 533 | | |
| — | | |
| 89,136 | |
IDT CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (in thousands)—(Continued)
| |
| IDT
Corporation Stockholders
| | |
| Noncontrolling
Interests
| | |
| | |
| |
| | | |
| | | |
| | | |
| | | |
| Accumulated | | |
| | | |
| | | |
| | | |
| | |
| |
| Class
A
| | |
| Class
B | | |
| Additional
| | |
| | | |
| Other
| | |
| | | |
| | | |
| Receivable for
| | |
| | |
| |
| Common
Stock
| | |
| Common
Stock
| | |
| Paid-In
| | |
| Treasury
| | |
| Comprehensive
| | |
| Accumulated
| | |
| Noncontrolling
| | |
| issuance
of
| | |
| Total
| |
| |
| Shares
| | |
| Amount
| | |
| Shares
| | |
| Amount
| | |
| Capital
| | |
| Stock
| | |
| Income | | |
| Deficit
| | |
| Interests
| | |
| equity
| | |
| Equity
| |
Dividends
declared ($0.51 per share) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (11,798 | ) | |
| — | | |
| — | | |
| (11,798 | ) |
Restricted
Class B common stock purchased from employees | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,005 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,005 | ) |
Exercise
of stock options | |
| — | | |
| — | | |
| 46 | | |
| — | | |
| 606 | | |
| — | | |
| — | | |
| — | | |
| 3 | | |
| — | | |
| 609 | |
Stock-based
compensation | |
| — | | |
| — | | |
| — | | |
| — | | |
| 5,332 | | |
| — | | |
| — | | |
| — | | |
| 30 | | |
| — | | |
| 5,362 | |
Restricted
stock issued to employees and directors | |
| — | | |
| — | | |
| 194 | | |
| 2 | | |
| (2 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Stock
issued for matching contributions to the 401(k) Plan | |
| — | | |
| — | | |
| 72 | | |
| 1 | | |
| 1,167 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,168 | |
Purchases
of stock of subsidiary | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,154 | ) | |
| — | | |
| — | | |
| — | | |
| 21 | | |
| — | | |
| (1,133 | ) |
Distributions
to noncontrolling interests | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,888 | ) | |
| — | | |
| (1,888 | ) |
Adjustment
to liabilities in connection with the Straight Path Spin-Off | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,624 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (1,624 | ) |
Other
comprehensive income | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,327 | | |
| — | | |
| — | | |
| — | | |
| 1,327 | |
Net
income for the year ended July 31, 2014 | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 18,784 | | |
| 2,226 | | |
| — | | |
| 21,010 | |
BALANCE
AT JULY 31, 2014 | |
| 3,272 | | |
$ | 33 | | |
| 24,587 | | |
$ | 246 | | |
$ | 392,858 | | |
$ | (99,841 | ) | |
$ | 3,668 | | |
$ | (196,725 | ) | |
$ | 925 | | |
$ | — | | |
$ | 101,164 | |
See accompanying notes to consolidated
financial statements.
IDT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended
July 31 (in thousands) | |
2014 | | |
2013 | | |
2012 | |
OPERATING ACTIVITIES | |
| | |
| | |
| |
Net
income | |
$ | 21,010 | | |
$ | 13,444 | | |
$ | 38,785 | |
Adjustments
to reconcile net income to net cash provided by operating activities: | |
| | | |
| | | |
| | |
Net loss
(income) from discontinued operations | |
| — | | |
| 4,634 | | |
| (7,851 | ) |
Depreciation
and amortization | |
| 16,318 | | |
| 14,910 | | |
| 16,648 | |
Impairment
of building and improvements | |
| — | | |
| 4,359 | | |
| — | |
Deferred
income taxes | |
| 2,487 | | |
| 15,198 | | |
| (37,925 | ) |
Provision
for doubtful accounts receivable | |
| 500 | | |
| 2,743 | | |
| 2,098 | |
Net realized
gains from investments | |
| — | | |
| (586 | ) | |
| — | |
Gain on
proceeds from insurance | |
| (571 | ) | |
| — | | |
| — | |
Interest
in the equity of investments | |
| (1,282 | ) | |
| (1,968 | ) | |
| (1,157 | ) |
Stock-based compensation | |
| 5,382 | | |
| 5,875 | | |
| 3,325 | |
Change
in assets and liabilities: | |
| | | |
| | | |
| | |
Restricted
cash and cash equivalents | |
| (25,292 | ) | |
| (23,006 | ) | |
| (7,733 | ) |
Trade accounts
receivable | |
| (1,363 | ) | |
| 17,606 | | |
| 8,728 | |
Prepaid
expenses, other current assets and other assets | |
| (4,628 | ) | |
| 2,890 | | |
| (2,100 | ) |
Trade accounts
payable, accrued expenses, other current liabilities and other liabilities | |
| (5,914 | ) | |
| (22,578 | ) | |
| 10,703 | |
Customer
deposits | |
| 30,186 | | |
| 17,998 | | |
| 9,057 | |
Income
taxes payable | |
| (29 | ) | |
| (576 | ) | |
| (4,721 | ) |
Deferred
revenue | |
| 8,917 | | |
| 6,253 | | |
| 6,666 | |
Net cash
provided by operating activities | |
| 45,721 | | |
| 57,196 | | |
| 34,523 | |
INVESTING
ACTIVITIES | |
| | | |
| | | |
| | |
Capital
expenditures | |
| (17,021 | ) | |
| (14,537 | ) | |
| (10,830 | ) |
Deposit
on purchase of leasehold interest in building | |
| — | | |
| (950 | ) | |
| — | |
Collection
of notes receivable, net | |
| — | | |
| 750 | | |
| — | |
Cash used
for acquisition and purchase of investments | |
| (175 | ) | |
| (1,219 | ) | |
| — | |
Proceeds
from sales and redemptions of investments | |
| 1,038 | | |
| 114 | | |
| 3,169 | |
Purchases
of other intangibles | |
| (250 | ) | |
| (93 | ) | |
| — | |
Proceeds
from sale of building | |
| 250 | | |
| — | | |
| — | |
Proceeds
from insurance | |
| 571 | | |
| — | | |
| — | |
Purchases
of marketable securities | |
| (20,658 | ) | |
| (11,414 | ) | |
| — | |
Proceeds
from maturities and sales of marketable securities | |
| 17,323 | | |
| 1,712 | | |
| — | |
Proceeds
from maturities of certificates of deposit | |
| — | | |
| — | | |
| 3,300 | |
Net cash
used in investing activities | |
| (18,922 | ) | |
| (25,637 | ) | |
| (4,361 | ) |
FINANCING
ACTIVITIES | |
| | | |
| | | |
| | |
Cash of
subsidiaries deconsolidated as a result of spin-offs | |
| — | | |
| (15,000 | ) | |
| (104,243 | ) |
Dividends
paid | |
| (13,635 | ) | |
| (17,123 | ) | |
| (15,014 | ) |
Distributions
to noncontrolling interests | |
| (1,888 | ) | |
| (2,245 | ) | |
| (1,580 | ) |
Purchases of stock of subsidiary | |
| (1,133 | ) | |
| (1,804 | ) | |
| — | |
Proceeds
from sales of stock and exercise of stock options of subsidiary | |
| — | | |
| 154 | | |
| 133 | |
Proceeds
from exercise of stock options | |
| 609 | | |
| 921 | | |
| — | |
Repayments
of capital lease obligations | |
| — | | |
| — | | |
| (1,781 | ) |
Proceeds
from revolving credit loan payable | |
| 56,000 | | |
| 21,062 | | |
| — | |
Repayments
of revolving credit loan payable and other borrowings | |
| (64,318 | ) | |
| (21,304 | ) | |
| (332 | ) |
Repurchases
of Class B common stock | |
| (1,005 | ) | |
| (1,079 | ) | |
| (2,816 | ) |
Net cash
used in financing activities | |
| (25,370 | ) | |
| (36,418 | ) | |
| (125,633 | ) |
DISCONTINUED
OPERATIONS | |
| | | |
| | | |
| | |
Net cash
used in operating activities | |
| — | | |
| (2,638 | ) | |
| (1,984 | ) |
Net
cash (used in) provided by investing activities | |
| — | | |
| (350 | ) | |
| 4,992 | |
Net cash
(used in) provided by discontinued operations | |
| — | | |
| (2,988 | ) | |
| 3,008 | |
Effect
of exchange rate changes on cash and cash equivalents | |
| 794 | | |
| 1,241 | | |
| (2,335 | ) |
Net increase
(decrease) in cash and cash equivalents | |
| 2,223 | | |
| (6,606 | ) | |
| (94,798 | ) |
Cash
and cash equivalents (including discontinued operations) at beginning of year | |
| 151,600 | | |
| 158,206 | | |
| 253,004 | |
Cash and
cash equivalents (including discontinued operations) at end of year | |
| 153,823 | | |
| 151,600 | | |
| 158,206 | |
Less
cash and cash equivalents of discontinued operations at end of year | |
| — | | |
| — | | |
| (2,598 | ) |
Cash
and cash equivalents (excluding discontinued operations) at end of year | |
$ | 153,823 | | |
$ | 151,600 | | |
$ | 155,608 | |
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION | |
| | | |
| | | |
| | |
Cash
payments made for interest | |
$ | 743 | | |
$ | 1,286 | | |
$ | 3,621 | |
Cash
payments made for income taxes | |
$ | 1,115 | | |
$ | 483 | | |
$ | 1,049 | |
SUPPLEMENTAL
SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES | |
| | | |
| | | |
| | |
Adjustment
to liabilities in connection with the Straight Path Spin-Off | |
$ | 1,624 | | |
| — | | |
$ | — | |
Escrow
account balances included in other current assets used to reduce notes payable | |
$ | — | | |
$ | 1,976 | | |
$ | — | |
Net
liabilities (assets) excluding cash and cash equivalents of subsidiaries deconsolidated as a result of spin-offs | |
$ | — | | |
$ | 1,341 | | |
$ | (18,803 | ) |
See accompanying notes to consolidated financial statements.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Description of Business and Summary of Significant
Accounting Policies
Description of Business
IDT Corporation (“IDT” or the “Company”)
is a multinational holding company with operations primarily in the telecommunications and payment industries. The Company has
three reportable business segments, Telecom Platform Services, Consumer Phone Services and Zedge Holdings, Inc. (“Zedge”).
Telecom Platform Services provides retail telecommunications and payment offerings as well as wholesale international long distance
traffic termination. Consumer Phone Services provides consumer local and long distance services in certain U.S. states. Telecom
Platform Services and Consumer Phone Services comprise the IDT Telecom division. Zedge owns and operates an online platform for
mobile phone consumers interested in obtaining free, high-quality games, apps, and mobile phone customization including ringtones,
wallpapers, and notification sounds. Operating segments not reportable individually are included in All Other. All Other includes
Fabrix Systems Ltd. (“Fabrix”), a software development company offering a cloud-based scale-out storage and computing
platform optimized for big data, virtualization and media storage, processing and delivery. The Company sold Fabrix in October
2014 (see Note 22). All Other also includes the Company’s real estate holdings and other, smaller, businesses.
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”)
(see Note 2). On October 28, 2011, the Company completed a pro rata distribution of the common stock of the Company’s subsidiary,
Genie Energy Ltd. (“Genie”), to the Company’s stockholders of record as of the close of business on October 21,
2011 (the “Genie Spin-Off”) (see Note 2). Straight Path and Genie 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.
Basis of Consolidation and Accounting for Investments
The method of accounting applied to long-term investments,
whether consolidated, equity or cost, involves an evaluation of the significant terms of each investment that explicitly grant
or suggest evidence of control or influence over the operations of the investee and also includes the identification of any variable
interests in which the Company is the primary beneficiary. The consolidated financial statements include the Company’s controlled
subsidiaries. In addition, the Company has not identified any variable interests in which the Company is the primary beneficiary.
All significant intercompany accounts and transactions between the consolidated subsidiaries are eliminated.
Investments in businesses that the Company does not control,
but in which the Company has the ability to exercise significant influence over operating and financial matters, are accounted
for using the equity method. Investments in which the Company does not have the ability to exercise significant influence over
operating and financial matters are accounted for using the cost method. Investments in hedge funds are accounted for using the
equity method unless the Company’s interest is so minor that it has virtually no influence over operating and financial policies,
in which case these investments are accounted for using the cost method. At July 31, 2014 and 2013, the Company had $9.4 million
and $8.1 million, respectively, in investments accounted for using the equity method, and $1.8 million and $1.5 million, respectively,
in investments accounted for using the cost method. Equity and cost method investments are included in “Other current assets”
or “Investments” in the accompanying consolidated balance sheets. The Company periodically evaluates its equity and
cost method investments for impairment due to declines considered to be other than temporary. If the Company determines that a
decline in fair value is other than temporary, then a charge to earnings is recorded in “Other (expense) income, net”
in the accompanying consolidated statements of income, and a new basis in the investment is established.
Reclassifications
Certain prior year amounts were reclassified to conform to
the current year’s presentation:
|
● |
In the consolidated balance sheet, $4.6 million previously included in “Restricted cash and cash equivalents—long-term” at July 31, 2013 was reclassified to “Cash and cash equivalents”; |
|
|
|
|
● |
In the consolidated statements of cash flows, cash used for “Restricted cash and cash equivalents” in the years ended July 31, 2013 and 2012 of $2.1 million and $2.0 million, respectively, was reclassified to “Cash and cash equivalents”; and |
|
|
|
|
● |
In the consolidated statement of cash flows, $8.7 million previously included in “Restricted cash and cash equivalents” at July 31, 2011 was reclassified to “Cash and cash equivalents”. |
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may
differ from those estimates.
Revenue Recognition
Telephone service, which includes domestic and international
long distance, local service, and wholesale carrier telephony services is recognized as revenue when services are provided, primarily
based on usage and/or the assessment of fees. Revenue from Boss Revolution PIN-less international calling service and from sales
of calling cards, net of customer discounts, is deferred until the service or the cards are used or, calling card administrative
fees are imposed, thereby reducing the Company’s outstanding obligation to the customer, at which time revenue is recognized.
Domestic and international airtime top-up revenue is recognized upon redemption. International airtime top-up enables customers
to purchase airtime for a prepaid mobile telephone in another country.
IDT Telecom enters into reciprocal transactions pursuant
to which IDT Telecom is committed to purchase a specific number of minutes to specific destinations at specified rates, and the
counterparty is committed to purchase from IDT Telecom a specific number of minutes to specific destinations at specified rates.
The number of minutes purchased and sold in a reciprocal transaction is not necessarily equal. The rates in these reciprocal transactions
are generally greater than prevailing market rates. In addition, IDT Telecom enters into transactions in which it swaps minutes
with another carrier. The Company recognizes revenue and the related direct cost of revenue for these reciprocal and swap transactions
based on the fair value of the minutes.
Zedge revenues from traditional web/mobile web and Android/iOS
applications are recognized based on blocks of impressions or ad views. Revenues from mobile games are recognized upon download
by the end user.
Revenue from Fabrix for software licenses and maintenance
support was deferred and recognized on a straight-line basis from the date on which delivered orders were accepted by the customer
over the period that the support was expected to be provided since sufficient vendor-specific objective evidence of fair value
to allocate revenues to the various deliverables did not exist in fiscal 2014, fiscal 2013 or fiscal 2012.
Direct Cost of Revenues
Direct cost of revenues for IDT Telecom consists primarily
of termination and origination costs, toll-free costs, and network costs—including customer/carrier interconnect charges
and leased fiber circuit charges. These costs include an estimate of charges for which invoices have not yet been received, and
estimated amounts for pending disputes with other carriers. Subsequent adjustments to these estimates may occur after the invoices
are received for the actual costs incurred, but these adjustments generally are not material to the Company’s results of
operations. Direct cost of revenues for IDT Telecom also includes the cost of airtime top-up minutes.
Direct cost of revenues for Zedge consists of ad server costs,
web hosting charges, and copyright/infringement prevention costs.
Direct cost of revenues for Fabrix consisted primarily of
customer support expenses.
Direct cost of revenues excludes depreciation and amortization
expense.
Cash and Cash Equivalents
The Company considers all highly liquid investments with
an original maturity of three months or less when purchased to be cash equivalents.
Restricted Cash and Cash Equivalents
The Company classifies the change in its restricted cash
and cash equivalents as an operating activity in the accompanying consolidated statements of cash flows because the restrictions
are directly related to the operations of IDT Financial Services, the Company’s Gibraltar-based bank, and IDT Telecom.
Substantially Restricted Cash and Cash Equivalents
IDT Payment Services, which provides the Company’s
international money transfer services in the United States, and IDT Financial Services set aside certain cash balances in accordance
with banking regulations, credit card issuer requirements or license compliance. These balances are included in “Cash and
cash equivalents” in the Company’s consolidated balance sheet. The balances are not legally restricted, however the
Company treats these balances as substantially restricted and unavailable for other purposes.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Marketable Securities
The Company’s investments in marketable securities
are classified as “available-for-sale.” Available-for-sale securities are required to be carried at their fair value,
with unrealized gains and losses (net of income taxes) that are considered temporary in nature recorded in “Accumulated other
comprehensive income” in the accompanying consolidated balance sheets. The Company uses the specific identification method
in computing the gross realized gains and gross realized losses on the sales of marketable securities. The Company periodically
evaluates its investments in marketable securities for impairment due to declines in market value considered to be other than temporary.
Such impairment evaluations include, in addition to persistent, declining market prices, general economic and Company-specific
evaluations. If the Company determines that a decline in market value is other than temporary, then a charge to operations is recorded
in “Other (expense) income, net” in the accompanying consolidated statements of income and a new cost basis in the
investment is established.
Long-Lived Assets
Equipment, buildings, computer software and furniture and
fixtures are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives, which range as follows:
equipment—5, 7 or 20 years; buildings—40 years; computer software—2, 3 or 5 years and furniture and fixtures—5,
7 or 10 years. Leasehold improvements are recorded at cost and are depreciated on a straight-line basis over the term of their
lease or their estimated useful lives, whichever is shorter.
Costs associated with obtaining the right to use trademark
and patents owned by third parties are capitalized and amortized on a straight-line basis over the term of the relevant trademark
and patent licenses. The fair value of technology and domain names, customer lists, and trademark acquired in a business combination
accounted for under the purchase method are amortized over their estimated useful lives as follows: technology and domain names
are amortized on a straight-line basis over the 3 year estimated useful lives; customer lists are amortized ratably over the approximately
15 year period of expected cash flows; and trademark is amortized on a straight-line basis over the 5 year period of expected cash
flows.
The Company tests the recoverability of its long-lived assets
with finite useful lives whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.
The Company tests for recoverability based on the projected undiscounted cash flows to be derived from such asset. If the projected
undiscounted future cash flows are less than the carrying value of the asset, the Company will record an impairment loss, if any,
based on the difference between the estimated fair value and the carrying value of the asset. The Company generally measures fair
value by considering sale prices for similar assets or by discounting estimated future cash flows from such asset using an appropriate
discount rate. Cash flow projections and fair value estimates require significant estimates and assumptions by management. Should
the estimates and assumptions prove to be incorrect, the Company may be required to record impairments in future periods and such
impairments could be material.
Goodwill
Goodwill is the excess of the acquisition cost of businesses
over the fair value of the identifiable net assets acquired. Goodwill and other indefinite lived intangible assets are not amortized.
These assets are reviewed annually (or more frequently under various conditions) for impairment using a fair value approach. The
goodwill impairment assessment involves estimating the fair value of the reporting unit and comparing it to its carrying amount,
which is known as Step 1. If the carrying value of the reporting unit exceeds its estimated fair value, Step 2 is performed to
determine if an impairment of goodwill is required. The fair value of the reporting units is estimated using discounted cash flow
methodologies, as well as considering third party market value indicators. Goodwill impairment is measured by the excess of the
carrying amount of the reporting unit’s goodwill over its implied fair value. Calculating the fair value of the reporting
units, and allocating the estimated fair value to all of the tangible assets, intangible assets and liabilities, requires significant
estimates and assumptions by management. Should the estimates and assumptions regarding the fair value of the reporting units prove
to be incorrect, the Company may be required to record impairments to its goodwill in future periods and such impairments could
be material.
The Company has the option to perform a qualitative assessment
to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. However, the Company may elect
to perform the two-step quantitative goodwill impairment test even if no indications of a potential impairment exist.
For its reporting unit with zero or negative carrying amount,
the Company performs Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In
determining whether it is more likely than not that goodwill impairment exists, the Company considers whether there are any adverse
qualitative factors indicating that impairment may exist.
Advertising Expense
Cost of advertising is charged to selling, general and administrative
expenses in the period in which it is incurred. In fiscal 2014, fiscal 2013 and fiscal 2012, advertising expense was $17.2 million,
$13.1 million and $17.0 million, respectively.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Research and Development Costs
Costs for research and development are charged to expense
as incurred. Research and development costs were primarily incurred by Fabrix.
Capitalized Internal Use Software Costs
The Company capitalizes the cost of internal-use software
that has a useful life in excess of one year. These costs consist of payments made to third parties and the salaries of employees
working on such software development. Subsequent additions, modifications or upgrades to internal-use software are capitalized
only to the extent that they allow the software to perform a task it previously did not perform. Software maintenance and training
costs are expensed in the period in which they are incurred. Capitalized internal use software costs are amortized on a straight-line
basis over their estimated useful lives. Amortization expense related to such capitalized software in fiscal 2014, fiscal 2013
and fiscal 2012 was $7.6 million, $6.3 million and $5.8 million, respectively. Unamortized capitalized internal use software costs
at July 31, 2014 and 2013 were $13.2 million and $10.2 million, respectively.
Repairs and Maintenance
The Company charges the cost of repairs and maintenance,
including the cost of replacing minor items not constituting substantial betterment, to selling, general and administrative expenses
as these costs are incurred.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries denominated
in foreign currencies are translated to U.S. Dollars at end-of-period rates of exchange, and their monthly results of operations
are translated to U.S. Dollars at the average rates of exchange for that month. Gains or losses resulting from such foreign currency
translations are recorded in “Accumulated other comprehensive income” in the accompanying consolidated balance sheets.
Foreign currency transaction gains and losses are reported in “Other (expense) income, net” in the accompanying consolidated
statements of income.
Income Taxes
The Company recognizes deferred tax assets and liabilities
for the future tax consequences attributable to temporary differences between the financial statements carrying amounts of existing
assets and liabilities and their respective tax bases. A valuation allowance is provided when it is more likely than not that some
portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets depends on the generation
of future taxable income during the period in which related temporary differences become deductible. The Company considers the
scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in its assessment of
a valuation allowance. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date of such change.
The Company uses a two-step approach for recognizing and
measuring tax benefits taken or expected to be taken in a tax return. The Company determines whether it is more-likely-than-not
that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based
on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold,
the Company presumes that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant
information. Tax positions that meet the more-likely-than-not recognition threshold are measured to determine the amount of tax
benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater
than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and
amounts recognized in the financial statements will generally result in one or more of the following: an increase in a liability
for income taxes payable, a reduction of an income tax refund receivable, a reduction in a deferred tax asset, or an increase in
a deferred tax liability.
The Company classifies interest and penalties on income taxes
as a component of income tax expense.
Contingencies
The Company accrues for loss contingencies when both (a)
information available prior to issuance of the financial statements indicates that it is probable that a liability had been incurred
at the date of the financial statements and (b) the amount of loss can reasonably be estimated. When the Company accrues for loss
contingencies and the reasonable estimate of the loss is within a range, the Company records its best estimate within the range.
When no amount within the range is a better estimate than any other amount, the Company accrues the minimum amount in the range.
The Company discloses an estimated possible loss or a range of loss when it is at least reasonably possible that a loss may have
been incurred.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 determined 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:
Year ended July 31 (in thousands) | |
2014 | | |
2013 | | |
2012 | |
Basic weighted-average number of shares | |
| 22,009 | | |
| 20,876 | | |
| 20,717 | |
Effect of dilutive securities: | |
| | | |
| | | |
| | |
Stock options | |
| 92 | | |
| 9 | | |
| — | |
Non-vested restricted Class B common stock | |
| 836 | | |
| 1,430 | | |
| 1,343 | |
Diluted weighted-average number of shares | |
| 22,937 | | |
| 22,315 | | |
| 22,060 | |
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:
Year ended July 31 (in thousands) | |
2014 | | |
2013 | | |
2012 | |
Shares excluded from the calculation of diluted earnings per share | |
| 70 | | |
| 611 | | |
| 619 | |
Stock-Based Compensation
The Company recognizes compensation expense for all of its
grants of stock-based awards based on the estimated fair value on the grant date. Compensation cost for awards is recognized using
the straight-line method over the vesting period. Stock-based compensation is included in selling, general and administrative expense.
Taxes Collected from Customers and Remitted to Governmental
Authorities
The Company collects taxes from its customers that are remitted
to governmental authorities in the normal course of its operations. These taxes, which are imposed on or are concurrent with specific
revenue-producing transactions, include Universal Service Fund (“USF”) charges, sales, use, value added and certain
excise taxes. The Company currently records USF charges that are billed to customers on a gross basis in its results of operations,
and records other taxes on a net basis. USF charges in the amount of $0.6 million, $0.8 million and $1.1 million in fiscal 2014,
fiscal 2013 and fiscal 2012, respectively, were recorded on a gross basis and included in “Revenues” and “Direct
cost of revenues” in the accompanying consolidated statements of income.
Vulnerability Due to Certain Concentrations
Financial instruments that potentially subject the Company
to concentration of credit risk consist principally of cash, cash equivalents, restricted cash and cash equivalents, marketable
securities, investments in hedge funds and trade accounts receivable. The Company holds cash and cash equivalents at several major
financial institutions, which often exceed FDIC insurance limits. Historically, the Company has not experienced any losses due
to such concentration of credit risk. The Company’s temporary cash investments policy is to limit the dollar amount of investments
with any one financial institution and monitor the credit ratings of those institutions. While the Company may be exposed to credit
losses due to the nonperformance of the holders of its deposits, the Company does not expect the settlement of these transactions
to have a material effect on its results of operations, cash flows or financial condition.
Concentration of credit risk with respect to trade accounts
receivable is limited due to the large number of customers in various geographic regions and industry segments comprising the Company’s
customer base. No single customer accounted for more than 10% of consolidated revenues in fiscal 2014, fiscal 2013 or fiscal 2012.
However, the Company’s five largest customers collectively accounted for 12.0%, 10.0% and 8.1% of its consolidated revenues
from continuing operations in fiscal 2014, fiscal 2013 and fiscal 2012, respectively. The Company’s customers with the five
largest receivables balances collectively accounted for 22.1% and 16.6% of the consolidated gross trade accounts receivable at
July 31, 2014 and 2013, respectively. This concentration of customers increases the Company’s risk associated with nonpayment
by those customers. In an effort to reduce such risk, the Company performs ongoing credit evaluations of its significant retail,
wholesale and cable telephony customers. In addition, the Company attempts to mitigate the credit risk related to specific wholesale
termination customers by also buying services from the customer, in order to create an opportunity to offset its payables and receivables
and reduce its net trade receivable exposure risk. When it is practical to do so, the Company will increase its purchases from
wholesale termination customers with receivable balances that exceed the Company’s applicable payables in order to maximize
the offset and reduce its credit risk.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Allowance for Doubtful Accounts
The allowance for doubtful accounts reflects the Company’s
best estimate of probable losses inherent in the accounts receivable balance. The allowance is determined based on known troubled
accounts, historical experience and other currently available evidence. Doubtful accounts are written-off upon final determination
that the trade accounts will not be collected. The change in the allowance for doubtful accounts is as follows:
Year ended July 31 (in thousands) | |
Balance at beginning of year | | |
Additions charged to costs and expenses | | |
Deductions(1) | | |
Balance at end of year | |
2014 | |
| | |
| | |
| | |
| |
Reserves deducted from accounts receivable: | |
| | |
| | |
| | |
| |
Allowance for doubtful accounts | |
$ | 13,079 | | |
$ | 500 | | |
$ | (2,072 | ) | |
$ | 11,507 | |
2013 | |
| | | |
| | | |
| | | |
| | |
Reserves deducted from accounts receivable: | |
| | | |
| | | |
| | | |
| | |
Allowance for doubtful accounts | |
$ | 13,044 | | |
$ | 2,743 | | |
$ | (2,708 | ) | |
$ | 13,079 | |
2012 | |
| | | |
| | | |
| | | |
| | |
Reserves deducted from accounts receivable: | |
| | | |
| | | |
| | | |
| | |
Allowance for doubtful accounts | |
$ | 15,364 | | |
$ | 2,098 | | |
$ | (4,418 | ) | |
$ | 13,044 | |
(1) |
Primarily uncollectible accounts written off, net of recoveries. |
Fair Value Measurements
Fair value of financial and non-financial assets and liabilities
is defined as an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The three-tier hierarchy for inputs used to measure fair value,
which prioritizes the inputs to valuation techniques used to measure fair value, is as follows:
Level 1 – |
quoted prices (unadjusted) in active markets for identical assets or liabilities. |
Level 2 – |
quoted
prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly
or indirectly through market corroboration, for substantially the full term of the financial instrument. |
Level 3 – |
unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. |
A financial asset or liability’s classification within
the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. The assessment of
the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the assets
and liabilities being measured and their placement within the fair value hierarchy.
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.
Recently Adopted Accounting Standard
In April 2014, an accounting standard update was issued
that changed the criteria for reporting discontinued operations and enhanced 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. 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 adopted this standard update as of August 1, 2014. In accordance with this
standard update, the Company does not expect the sale of Fabrix in October 2014 to qualify as a discontinued operation. The Company
is unable to determine at this time whether the adoption of this standard update will have further effect on its financial position,
results of operations or cash flows in the future for other disposals.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 2—Discontinued Operations
Straight Path Communications, Inc.
On July 31, 2013, the Company completed a pro rata distribution
of the common stock of the Company’s subsidiary, Straight Path Communications Inc., to the Company’s stockholders of
record as of the close of business on July 25, 2013. 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.
Genie Energy Ltd.
On October 28, 2011, the Company completed a pro rata distribution
of the common stock of the Company’s subsidiary, Genie Energy Ltd., to the Company’s stockholders of record as of the
close of business on October 21, 2011. At the time of the Genie Spin-Off, Genie owned 99.3% of Genie Energy International Corporation,
which owned 100% of IDT Energy and 92% of Genie Oil and Gas, Inc. As of October 28, 2011, each of the Company’s stockholders
received one share of Genie Class A common stock for every share of the Company’s Class A common stock and one share of Genie
Class B common stock for every share of the Company’s Class B common stock held of record as of the close of business on
October 21, 2011. Genie and 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 received a ruling from the Internal Revenue Service
(“IRS”) substantially to the effect that, for U.S. federal income tax purposes, the distribution of shares of Genie
common stock will qualify as tax-free for Genie, the Company and the Company’s stockholders under Section 355 of the Code.
In addition to obtaining the IRS ruling, the Company received an opinion from PricewaterhouseCoopers LLP on the three requirements
for a tax-free distribution that are not addressed in the IRS ruling. Specifically, the opinion concludes 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 Genie Spin-Off, the Company funded
Genie with a total of $106.0 million in aggregate cash and cash equivalents, including restricted cash.
IDT Entertainment
In connection with the sale of IDT Entertainment to Liberty
Media Corporation in the first quarter of fiscal 2007, the Company was eligible to receive additional consideration from Liberty
Media based upon any appreciation in the value of IDT Entertainment over the five-year period that ended in August 2011, however,
the Company may have been required to pay Liberty Media up to $3.5 million if the value of IDT Entertainment did not exceed a certain
amount by August 2011. In September 2011, the Company and Liberty Media executed an agreement to settle and resolve all claims
related to the additional consideration and certain other disputes and claims. Liberty Media paid the Company $2.0 million in September
2011 in consideration for the settlement and related releases, which is included in “Income on sale of discontinued operations”
in fiscal 2012 in the accompanying consolidated statement of income.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Summary Financial Data of Discontinued Operations
Revenues, income before income taxes and net income (loss)
of Straight Path and Genie, which are included in discontinued operations, were as follows:
Year ended July 31 (in thousands) | |
2014 | | |
2013 | | |
2012 | |
REVENUES | |
| | |
| | |
| |
Straight Path | |
$ | — | | |
$ | 1,130 | | |
$ | 553 | |
Genie | |
| — | | |
| — | | |
| 45,796 | |
TOTAL | |
$ | — | | |
$ | 1,130 | | |
$ | 46,349 | |
(LOSS) INCOME BEFORE INCOME TAXES | |
| | | |
| | | |
| | |
Straight Path | |
$ | — | | |
$ | (4,621 | ) | |
$ | 4,862 | |
Genie | |
| — | | |
| — | | |
| 2,609 | |
TOTAL | |
$ | — | | |
$ | (4,621 | ) | |
$ | 7,471 | |
NET (LOSS) INCOME | |
| | | |
| | | |
| | |
Straight Path | |
$ | — | | |
$ | (4,634 | ) | |
$ | 4,836 | |
Genie | |
| — | | |
| — | | |
| 1,015 | |
TOTAL | |
$ | — | | |
$ | (4,634 | ) | |
$ | 5,851 | |
Note 3—Marketable Securities
The following is a summary of marketable securities:
(in thousands) | |
Amortized Cost | | |
Gross Unrealized Gains | | |
Gross Unrealized Losses | | |
Fair Value | |
July 31, 2014 | |
| | |
| | |
| | |
| |
Available-for-sale securities: | |
| | |
| | |
| | |
| |
Certificates of deposit* | |
$ | 10,375 | | |
$ | — | | |
$ | — | | |
$ | 10,375 | |
Equity securities | |
| 31 | | |
| — | | |
| (9 | ) | |
| 22 | |
Municipal bonds | |
| 2,475 | | |
| 1 | | |
| — | | |
| 2,476 | |
TOTAL | |
$ | 12,881 | | |
$ | 1 | | |
$ | (9 | ) | |
$ | 12,873 | |
July 31, 2013 | |
| | | |
| | | |
| | | |
| | |
Available-for-sale securities: | |
| | | |
| | | |
| | | |
| | |
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 $17.3 million, $1.7 million and nil in fiscal 2014, fiscal 2013 and fiscal 2012, respectively. There were no realized
gains or losses from sales of available-for-sale securities in fiscal 2014, fiscal 2013 and fiscal 2012. In fiscal 2014, the Company
recorded a loss of $0.1 million for the other than temporary decline in market value of its equity securities.
The contractual maturities of the Company’s available-for-sale
securities at July 31, 2014 were as follows:
(in thousands) | |
Fair Value | |
Within one year | |
$ | 12,851 | |
After one year through five years | |
| — | |
After five years through ten years | |
| — | |
After ten years | |
| — | |
TOTAL | |
$ | 12,851 | |
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 4—Fair Value Measurements
The following table presents the balance of assets measured
at fair value on a recurring basis:
(in thousands) | |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
July 31, 2014 | |
| | |
| | |
| | |
| |
Available-for-sale securities | |
$ | — | | |
$ | 12,873 | | |
$ | — | | |
$ | 12,873 | |
July 31, 2013 | |
| | | |
| | | |
| | | |
| | |
Available-for-sale securities | |
$ | — | | |
$ | 9,684 | | |
$ | — | | |
$ | 9,684 | |
At July 31, 2014 and 2013, the Company did not have any liabilities
measured at fair value on a recurring basis. At July 31, 2014 and 2013, the Company had $9.5 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 $9.4 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, dividend payable, notes payable—current portion and
other current liabilities. At July 31, 2014 and 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, dividend 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 July 31, 2014 and 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 July 31, 2014 and 2013, the carrying amount of these liabilities approximated fair value. The fair values were estimated based
on the Company’s assumptions, which was classified as Level 3 of the fair value hierarchy.
The Company’s investments at July 31, 2014 and 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 $1.8 million and $1.5 million at July 31, 2014 and 2013, respectively, which the Company believes was not impaired.
Note 5—Property, Plant and Equipment
Property, plant and equipment consist of the following:
July 31 (in thousands) | |
2014 | | |
2013 | |
Equipment | |
$ | 438,899 | | |
$ | 436,127 | |
Land and buildings | |
| 53,895 | | |
| 51,294 | |
Computer software | |
| 116,775 | | |
| 105,449 | |
Leasehold improvements | |
| 42,190 | | |
| 45,141 | |
Furniture and fixtures | |
| 6,249 | | |
| 6,187 | |
| |
| 658,008 | | |
| 644,198 | |
Less accumulated depreciation and amortization | |
| (576,248 | ) | |
| (563,456 | ) |
Property, plant and equipment, net | |
$ | 81,760 | | |
$ | 80,742 | |
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In fiscal 2013, the Company recorded an impairment charge
of $4.4 million for the building and improvements that it owns at 520 Broad Street, Newark, New Jersey. The following facts and
circumstances indicated that the fair value of the building and improvements may be less than their carrying value at that time:
(1) the building was not occupied and, at the time, the Company did not expect to occupy it, (2) economic uncertainty and sluggish
leasing activity stalled a recovery of the real estate market in Newark, (3) there were no potential tenants, (4) no sale of the
building had been completed and there were no other likely buyers, (5) the building would be expensive to redevelop and (6) the
building was expected to remain vacant for the foreseeable future. The Company determined the fair value of the building and improvements
based on estimates of an owner/user’s market rental rate net of costs of improvements and tenant work as well as the estimated
value to an investor/developer after deducting costs of improvements and costs to achieve full occupancy. This fair value measurement
was classified as Level 2 of the fair value hierarchy.
In fiscal 2014, the Company began renovations of the first
four floors of its 520 Broad Street building in order to move its personnel and offices currently located at 550 Broad Street,
Newark, New Jersey to 520 Broad Street. The move is expected to occur during fiscal 2015. The Company also plans to lease or sell
the office space on the other floors, although there are no potential tenants or buyers at this time. At both July 31, 2014 and
2013, the carrying value of the land, building and improvements at 520 Broad Street after the impairment charge was $37.7 million.
Depreciation and amortization expense of property, plant
and equipment was $15.7 million, $14.3 million and $15.9 million in fiscal 2014, fiscal 2013 and fiscal 2012, respectively.
Note 6—Goodwill and Other Intangibles
The table below reconciles the change in the carrying amount
of goodwill by operating segment for the period from July 31, 2012 to July 31, 2014:
(in thousands) | |
Telecom Platform Services | | |
Zedge | | |
Total | |
Balance as of July 31, 2012 | |
$ | 11,407 | | |
$ | 3,207 | | |
$ | 14,614 | |
Foreign currency translation adjustments | |
| 193 | | |
| — | | |
| 193 | |
Balance as of July 31, 2013 | |
| 11,600 | | |
| 3,207 | | |
| 14,807 | |
Foreign currency translation adjustments | |
| 23 | | |
| — | | |
| 23 | |
Balance as of July 31, 2014 | |
$ | 11,623 | | |
$ | 3,207 | | |
$ | 14,830 | |
The table below presents information on the Company’s
other intangible assets:
(in thousands) | |
Weighted Average Amortization Period | | |
Gross Carrying Amount | | |
Accumulated Amortization | | |
Net Balance | |
July 31, 2014 | |
| | |
| | |
| | |
| |
Amortized intangible assets: | |
| | |
| | |
| | |
| |
Trademarks and patents | |
| 4.7 years | | |
$ | 670 | | |
$ | (335 | ) | |
$ | 335 | |
Technology and domain names | |
| 3.0 years | | |
| 708 | | |
| (68 | ) | |
| 640 | |
Customer lists | |
| 6.5 years | | |
| 3,154 | | |
| (2,387 | ) | |
| 767 | |
TOTAL | |
| 5.7 years | | |
$ | 4,532 | | |
$ | (2,790 | ) | |
$ | 1,742 | |
July 31, 2013 | |
| | | |
| | | |
| | | |
| | |
Amortized intangible assets: | |
| | | |
| | | |
| | | |
| | |
Trademarks and patents | |
| 4.7 years | | |
$ | 2,119 | | |
$ | (1,715 | ) | |
$ | 404 | |
Customer lists | |
| 6.8 years | | |
| 3,154 | | |
| (2,168 | ) | |
| 986 | |
TOTAL | |
| 6.0 years | | |
$ | 5,273 | | |
$ | (3,883 | ) | |
$ | 1,390 | |
Amortization expense of intangible assets was $0.6 million,
$0.6 million and $0.7 million in fiscal 2014, fiscal 2013 and fiscal 2012, respectively. The Company estimates that amortization
expense of intangible assets with finite lives will be $0.5 million, $0.4 million, $0.3 million, $0.1 million and $0.1 million
in fiscal 2015, fiscal 2016, fiscal 2017, fiscal 2018 and fiscal 2019, respectively.
Note 7—Other Operating Gains (Losses), Net
The following table summarizes the other operating gains
(losses), net by business segment:
Year ended July 31 (in thousands) | |
2014 | | |
2013 | | |
2012 | |
Telecom Platform Services—gains (losses) related to legal matters, net | |
$ | 650 | | |
$ | 9,251 | | |
$ | (6,698 | ) |
Telecom Platform Services—loss on settlement of litigation (a) | |
| — | | |
| — | | |
| (11,022 | ) |
Telecom Platform Services—gain on settlement of claim (b) | |
| — | | |
| — | | |
| 1,750 | |
Corporate—loss related to settlement (c) | |
| (79 | ) | |
| — | | |
| — | |
Corporate—other | |
| (374 | ) | |
| — | | |
| 100 | |
All Other—gain on insurance claim (d) | |
| 571 | | |
| — | | |
| — | |
All Other—other | |
| 67 | | |
| — | | |
| — | |
TOTAL | |
$ | 835 | | |
$ | 9,251 | | |
$ | (15,870 | ) |
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Telecom Platform Services
(a) |
On October 12, 2011, the Company entered into a binding term sheet with T-Mobile USA, Inc. (“T-Mobile”) to settle litigation related to an alleged breach of a wholesale supply agreement. In consideration of the settlement of all disputes between the parties, on October 13, 2011, the Company paid T-Mobile $10 million. The Company incurred legal fees of $1.0 million in fiscal 2012 in connection with this matter. |
|
|
(b) |
On January 17, 2012, the Company received $1.8 million from Broadstripe, LLC in settlement of the Company’s claim stemming from Broadstripe, LLC’s rejection of its telephony services agreements with the Company upon the confirmation of Broadstripe, LLC’s bankruptcy plan and closing of its bankruptcy sale. |
Corporate
(c) |
In fiscal 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. |
All Other
(d) |
In fiscal 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. |
Note 8—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 July 31, 2014 and 2013, there
was $13.0 million and $21.1 million, respectively, outstanding under the facility. The principal outstanding at July 31, 2014 and
2013 incurred interest at a rate of 1.65% and 1.69%, respectively, per annum. In August 2014, the Company repaid the $13.0 million
loan payable. 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 July 31, 2014 and 2013, 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 $73.7 million and $46.4 million, respectively.
Note 9—Notes Payable
The Company’s notes payable consist of the following:
July 31 (in thousands) | |
2014 | | |
2013 | |
$11.0 million secured term loan due September 2015 (a) | |
$ | 6,624 | | |
$ | 6,880 | |
$1.2 million note due June 2012 (b) | |
| — | | |
| 279 | |
Total notes payable | |
| 6,624 | | |
| 7,159 | |
Less current portion | |
| (271 | ) | |
| (535 | ) |
Notes payable—long term portion | |
$ | 6,353 | | |
$ | 6,624 | |
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The future principal payments for the note payable as of
July 31, 2014 are as follows:
(in thousands) | |
| |
Year ending July 31: | |
| | |
2015 | |
$ | 271 | |
2016 | |
| 6353 | |
2017 | |
| — | |
2018 | |
| — | |
2019 | |
| — | |
Thereafter | |
| — | |
Total notes payable | |
$ | 6,624 | |
(a) |
The loan bears interest at the rate of 5.6% per annum and is payable in monthly installments of principal and interest of $0.1 million, with the last installment of $6.4 million payable on September 1, 2015. The loan is secured by a mortgage on a building in Piscataway, New Jersey. |
|
|
(b) |
On June 24, 2009, the Company issued a promissory note in the principal amount of $1.2 million in connection with the acquisition of the 49% interest in Union Telecard Alliance, LLC that it did not own. The note incurred interest at 0.76% per annum. The principal and interest were payable in thirty six equal, monthly installments that began on July 24, 2009 with the last payment scheduled for June 24, 2012. The Company had not made any payments since November 2011 due to disputes with the seller. In fiscal 2014, in accordance with an arbitration award, the Company paid the remaining principal and accrued interest to the seller. |
Note 10—Accrued Expenses
Accrued expenses consist of the following:
July 31 (in thousands) | |
2014 | | |
2013 | |
Carrier minutes termination | |
$ | 53,280 | | |
$ | 50,687 | |
Carrier network connectivity, toll-free and 800 services | |
| 7,896 | | |
| 11,462 | |
Regulatory fees and taxes | |
| 43,293 | | |
| 38,602 | |
Legal settlements | |
| 1,615 | | |
| 11,784 | |
Compensation costs | |
| 15,612 | | |
| 12,836 | |
Legal and professional fees | |
| 4,708 | | |
| 6,026 | |
Other | |
| 16,124 | | |
| 14,035 | |
TOTAL | |
$ | 142,528 | | |
$ | 145,432 | |
Note 11—Other (Expense) Income, Net
Other (expense) income, net consists of the following:
Year ended July 31 (in thousands) | |
2014 | | |
2013 | | |
2012 | |
Foreign currency transaction (losses) gains | |
$ | (5,883 | ) | |
$ | 2,538 | | |
$ | (2,859 | ) |
Gain on investments | |
| 1,218 | | |
| 2,664 | | |
| 1,172 | |
Gain on modification and early termination of note payable | |
| — | | |
| 238 | | |
| — | |
Gain on sales of buildings and other assets | |
| — | | |
| 11 | | |
| 197 | |
Other | |
| (35 | ) | |
| (68 | ) | |
| (277 | ) |
TOTAL | |
$ | (4,700 | ) | |
$ | 5,383 | | |
$ | (1,767 | ) |
On April 30, 2013, the Company and the holder of the note
payable secured by the mortgage on the building located at 520 Broad Street, Newark, New Jersey (the “Lender”) entered
into an agreement to settle all disputes between the Company and Lender. In connection with this agreement, on May 1, 2013, the
Company paid the Lender $21.1 million and the Lender released the Company from the note and discharged the mortgage. In fiscal
2013, the Company recognized a gain of $0.2 million on the modification and early termination of the note payable.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 12—Income Taxes
The components of income (loss) from continuing operations
before income taxes are as follows:
Year ended July 31 (in thousands) | |
2014 | | |
2013 | | |
2012 | |
Domestic | |
$ | 21,624 | | |
$ | 44,355 | | |
$ | 9,573 | |
Foreign | |
| 3,368 | | |
| (10,405 | ) | |
| (21,421 | ) |
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | |
$ | 24,992 | | |
$ | 33,950 | | |
$ | (11,848 | ) |
Significant components of the Company’s deferred income
tax assets consist of the following:
July 31 (in thousands) | |
2014 | | |
2013 | |
Deferred income tax assets: | |
| | | |
| | |
Bad debt reserve | |
$ | 2,188 | | |
$ | 2,812 | |
Accrued expenses | |
| 2,937 | | |
| 7,096 | |
Stock options and restricted stock | |
| 2,131 | | |
| 2,786 | |
Charitable contributions | |
| 1,230 | | |
| 2,415 | |
Impairment | |
| 25,745 | | |
| 25,566 | |
Depreciation | |
| 7,566 | | |
| 989 | |
Unrealized gain | |
| 163 | | |
| 507 | |
Net operating loss | |
| 126,093 | | |
| 144,001 | |
Credits | |
| 3,123 | | |
| 2,845 | |
Total deferred income tax assets | |
| 171,176 | | |
| 189,017 | |
Valuation allowance | |
| (151,975 | ) | |
| (167,328 | ) |
DEFERRED INCOME TAX ASSETS, NET | |
$ | 19,201 | | |
$ | 21,689 | |
The (provision for) benefit from income taxes consists of
the following:
Year ended July 31 (in thousands) | |
2014 | | |
2013 | | |
2012 | |
Current: | |
| | | |
| | | |
| | |
Federal | |
$ | (279 | ) | |
$ | 671 | | |
$ | 1,652 | |
State and local | |
| — | | |
| 148 | | |
| 2,503 | |
Foreign | |
| (1,177 | ) | |
| (1,431 | ) | |
| 1,741 | |
| |
| (1,456 | ) | |
| (612 | ) | |
| 5,896 | |
Deferred: | |
| | | |
| | | |
| | |
Federal | |
| (6,461 | ) | |
| (14,181 | ) | |
| 36,166 | |
State and local | |
| (175 | ) | |
| (1,079 | ) | |
| 764 | |
Foreign | |
| 4,110 | | |
| — | | |
| (44 | ) |
| |
| (2,526 | ) | |
| (15,260 | ) | |
| 36,886 | |
(PROVISION FOR) BENEFIT FROM INCOME TAXES | |
$ | (3,982 | ) | |
$ | (15,872 | ) | |
$ | 42,782 | |
The benefit from income taxes in fiscal 2012 was primarily
due to the $36.9 million reversal of a portion of the Company’s valuation allowance in the United States. In fiscal 2012,
the Company determined that it was more likely than not that a portion of its deferred income tax assets would be realized, therefore
the valuation allowance related to those assets was reversed. The Company based its determination on a projection of future U.S.
income and took into consideration the historical U.S. performance and decided a partial release of the U.S. valuation that relates
to the core businesses was warranted in that period. Assumptions regarding future taxable income require significant analysis and
judgment. This analysis included financial forecasts based on historical performance of the core business and continuance of doing
business in a jurisdiction in which losses were incurred. Based on its projections, the Company expected that it would generate
future taxable income over the next five years in the U.S. jurisdiction and will begin utilizing its net operating loss carryover
through this period. Accordingly, the Company concluded that a portion of its U.S. jurisdiction core business assets did not require
a full valuation allowance. In fiscal 2013 and fiscal 2014, the Company updated the analysis and concluded that the valuation allowance
related to its core U.S. business should be maintained at the current level and will be reevaluated as warranted. In addition,
in fiscal 2014, the Company determined that its valuation allowance on the losses of IDT Global, a U.K. subsidiary, were no longer
required due to an internal reorganization that generated income and a projection that the income would continue. The Company recorded
a benefit from income taxes of $4.1 million from the full recognition of the IDT Global deferred tax assets.
The Company did not release any of the valuation allowances
that related to its former Straight Path Spectrum business since it was not part of the main tax consolidated group and the portion
of the Net2Phone acquired net operating loss that is subject to Internal Revenue Code Section 382 limitations (see below). The
Company did not release any of the valuation allowances related to its foreign operations in fiscal 2013 or fiscal 2012 as it was
not more likely than not that the assets will be utilized based upon the earnings history and the profitability projections. Both
the loss and valuation allowance that were part of the Straight Path Spin-Off are reflected as reductions in the total amounts
in the deferred income tax assets, net table above.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The differences between income taxes expected at the U.S.
federal statutory income tax rate and income taxes provided are as follows:
Year ended July 31 (in thousands) | |
2014 | | |
2013 | | |
2012 | |
U.S. federal income tax at statutory rate | |
$ | (8,747 | ) | |
$ | (11,883 | ) | |
$ | 4,147 | |
Valuation allowance | |
| 4,110 | | |
| — | | |
| 41,961 | |
Foreign tax rate differential | |
| 961 | | |
| (5,073 | ) | |
| (5,800 | ) |
Nondeductible expenses | |
| 761 | | |
| 714 | | |
| (26 | ) |
Other | |
| 7 | | |
| 50 | | |
| — | |
Prior year tax (expense) benefit | |
| (960 | ) | |
| 921 | | |
| 2,500 | |
State and local income tax, net of federal benefit | |
| (114 | ) | |
| (601 | ) | |
| — | |
(PROVISION FOR) BENEFIT FROM INCOME TAXES | |
$ | (3,982 | ) | |
$ | (15,872 | ) | |
$ | 42,782 | |
At July 31, 2014, the Company had federal and state net operating
loss carryforwards of approximately $168 million. This carry-forward loss is available to offset future U.S. federal and state
taxable income. The net operating loss carryforwards will start to expire in fiscal 2014, with fiscal 2009’s loss expiring
in fiscal 2030. The Company has foreign net operating losses of approximately $200 million, of which approximately $143 million
does not expire and approximately $57 million expires in two to ten years. These foreign net operating losses are available to
offset future taxable income in the countries in which the losses were incurred. The Company’s subsidiary, Net2Phone, which
provides voice over Internet protocol communications services, has additional federal net operating losses of approximately $84
million, which will expire through fiscal 2027. With the reacquisition of Net2Phone by the Company in March 2006, its losses were
limited under Internal Revenue Code Section 382 to approximately $7 million per year. The net operating losses do not include any
excess benefits related to stock options or restricted stock.
The Company has not recorded U.S. income tax expense for
foreign earnings, as such earnings are permanently reinvested outside the United States. The cumulative undistributed foreign earnings
are included in accumulated deficit in the Company’s consolidated balance sheets, and consisted of approximately $270 million
at July 31, 2014. Upon distribution of these foreign earnings to the Company’s domestic entities, the Company may be subject
to U.S. income taxes and withholding of foreign taxes, however, it is not practicable to determine the amount, if any, which would
be paid.
The change in the valuation allowance is as follows:
Year ended July 31 (in thousands) | |
Balance at beginning of year | | |
Additions charged to costs and expenses | | |
Deductions | | |
Balance at end of year | |
2014 | |
| | |
| | |
| | |
| |
Reserves deducted from deferred income taxes, net: | |
| | | |
| | | |
| | | |
| | |
Valuation allowance | |
$ | 167,328 | | |
$ | — | | |
$ | (15,353 | ) | |
$ | 151,975 | |
2013 | |
| | | |
| | | |
| | | |
| | |
Reserves deducted from deferred income taxes, net: | |
| | | |
| | | |
| | | |
| | |
Valuation allowance | |
$ | 204,977 | | |
$ | 462 | | |
$ | (38,111 | ) | |
$ | 167,328 | |
2012 | |
| | | |
| | | |
| | | |
| | |
Reserves deducted from deferred income taxes, net: | |
| | | |
| | | |
| | | |
| | |
Valuation allowance | |
$ | 206,669 | | |
$ | 41,925 | | |
$ | (43,617 | ) | |
$ | 204,977 | |
The table below summarizes the change in the balance of unrecognized
income tax benefits:
Year ended July 31 (in thousands) | |
2014 | | |
2013 | | |
2012 | |
Balance at beginning of year | |
$ | 356 | | |
$ | — | | |
$ | 3,754 | |
Additions based on tax positions related to the current year | |
| — | | |
| — | | |
| — | |
Additions for tax positions of prior years | |
| — | | |
| 356 | | |
| — | |
Reductions for tax positions of prior years | |
| — | | |
| — | | |
| — | |
Settlements | |
| (356 | ) | |
| — | | |
| (3,754 | ) |
Lapses of statutes of limitations | |
| — | | |
| — | | |
| — | |
Balance at end of year | |
$ | — | | |
$ | 356 | | |
$ | — | |
Settlements of $3.8 million in fiscal 2012 were primarily
due to an agreement on certain state tax positions and the related payment of the taxes due, as well as the settlement of a foreign
audit.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In fiscal 2014, fiscal 2013 and fiscal 2012, the Company
did not record any interest and penalties on income taxes. As of July 31, 2014 and 2013, there was no accrued interest included
in current income taxes payable.
The Company currently remains subject to examinations of
its tax returns as follows: U.S. federal tax returns for fiscal 2011 to fiscal 2014, state and local tax returns generally for
fiscal 2010 to fiscal 2014 and foreign tax returns generally for fiscal 2010 to fiscal 2014.
Note 13—Equity
Class A Common Stock and Class B Common Stock
The rights of holders of Class A common stock and Class B
common stock are identical except for certain voting and conversion rights and restrictions on transferability. The holders of
Class A common stock and Class B common stock receive identical dividends per share when and if declared by the Company’s
Board of Directors. In addition, the holders of Class A common stock and Class B common stock have identical and equal priority
rights per share in liquidation. The Class A common stock and Class B common stock do not have any other contractual participation
rights. The holders of Class A common stock are entitled to three votes per share and the holders of Class B common stock are entitled
to one-tenth of a vote per share. Each share of Class A common stock may be converted into one share of Class B common stock, at
any time, at the option of the holder. Shares of Class A common stock are subject to certain limitations on transferability that
do not apply to shares of Class B common stock.
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.
In fiscal 2014, the Company paid aggregate cash dividends
of $0.59 per share on its Class A common stock and Class B common stock, or $13.6 million in total. In fiscal 2013, the Company
paid aggregate cash dividends of $0.75 per share on its Class A common stock and Class B common stock, or $17.1 million in total.
In fiscal 2012, the Company paid aggregate cash dividends of $0.66 per share on its Class A common stock and Class B common stock,
or $15.0 million in total.
On October 3, 2014, the Company paid a dividend of $0.17
per share for the fourth quarter of fiscal 2014 to holders of record of the Company’s Class A common stock and Class B common
stock as of the close of business on September 29, 2014.
Stock Repurchases
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 fiscal 2014. In fiscal 2013, the Company repurchased 77,843 shares of Class B common stock for an aggregate purchase price of
$0.8 million. In fiscal 2012, the Company repurchased 0.3 million shares of Class B common stock for an aggregate purchase price
of $2.6 million. As of July 31, 2014, 5.1 million shares remained available for repurchase under the stock repurchase program.
Purchases of Stock of Subsidiary
In August 2013, Fabrix 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%.
In December 2012, a wholly-owned subsidiary of the Company
purchased Fabrix shares for cash of $1.8 million. The shares were purchased from holders of noncontrolling interests in Fabrix
representing 4.5% of the equity in Fabrix.
Sales of Stock of Subsidiaries
On November 21, 2012, the Company’s subsidiary, Zedge,
sold shares to Shaman II, L.P. for cash of $0.1 million, which increased Shaman II, L.P.’s ownership in Zedge to 11.17% from
11.1%. On November 15, 2011, Zedge sold shares to Shaman II, L.P. for cash of $0.1 million, which increased Shaman II, L.P.’s
ownership in Zedge to 11.1% from 11%. One of the limited partners in Shaman II, L.P. is a former employee of the Company.
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 18). In fiscal 2014,
the Company increased its estimated liability for this obligation by $1.9 million, of which $1.6 million was recorded as a reduction
of additional paid-in capital.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 14—Stock-Based Compensation
Stock-Based Compensation Plans
The Company’s 2005 Stock Option and Incentive Plan,
as amended and restated, is intended to provide incentives to executives, employees, directors and consultants of the Company.
Incentives available under the 2005 Stock Option and Incentive Plan may include stock options, stock appreciation rights, limited
rights, deferred stock units, and restricted stock. In December 2011, the Company’s stockholders approved an amendment to
the 2005 Stock Option and Incentive Plan to increase the number of shares of the Company’s Class B common stock available
for the grant of awards by an additional 1.1 million shares. At July 31, 2014, the Company had 5.3 million shares of Class B common
stock reserved for award under its 2005 Stock Option and Incentive Plan and 0.3 million shares were available for future grants.
In September 2014, the Company’s Board of Directors
adopted the 2014 Stock Option and Incentive Plan, which is subject to ratification by the Company’s stockholders. It is expected
that the 2014 Stock Option and Incentive Plan will become effective on January 1, 2015. Shares available for future grants under
the 2005 Stock Option and Incentive Plan will no longer be available once the 2014 Stock Option and Incentive Plan is effective.
The 2014 Stock Option and Incentive Plan is intended to provide incentives to officers, employees, directors and consultants of
the Company, including stock options, stock appreciation rights, limited rights, deferred stock units, and restricted stock. There
will be 0.5 million shares of the Company’s Class B common stock authorized for award under the 2014 Stock Option and Incentive
Plan.
No income tax benefits were recognized in the consolidated
statements of income for stock-based compensation arrangements during fiscal 2014, fiscal 2013 or fiscal 2012. In fiscal 2014 and
fiscal 2013, there was no tax benefit resulting from tax deductions in excess of the compensation cost recognized for the Company’s
stock-based compensation. In fiscal 2012, the Company did not recognize the tax benefits because the deferred tax benefit was fully
reserved for due to the uncertainty of future taxable income.
Stock Options
Option awards are generally granted with an exercise price
equal to the market price of the Company’s stock on the date of grant. Option awards generally vest on a graded basis over
three years of service and have ten-year contractual terms. The fair value of stock options was estimated on the date of the grant
using a Black-Scholes valuation model and the assumptions in the following table. No option awards were granted in fiscal 2014
and fiscal 2013. Expected volatility is based on historical volatility of the Company’s Class B common stock and other factors.
The Company uses historical data on exercise of stock options, post vesting forfeitures and other factors to estimate the expected
term of the stock-based payments granted. The risk free rate is based on the U.S. Treasury yield curve in effect at the time of
grant.
Year ended July 31 | |
2012 | |
ASSUMPTIONS | |
| |
Average risk-free interest rate | |
| 1.46 | % |
Expected dividend yield | |
| 4.6 | % |
Expected volatility | |
| 66.8 | % |
Expected term | |
| 6.6 years | |
A summary of stock option activity for the Company is as
follows:
| |
Number of Options (in thousands) | | |
Weighted- Average Exercise Price | | |
Weighted- Average Remaining Contractual Term
(in years) | | |
Aggregate Intrinsic Value (in thousands) | |
Outstanding at July 31, 2013 | |
| 642 | | |
$ | 14.22 | | |
| | | |
| | |
Granted | |
| — | | |
| — | | |
| | | |
| | |
Exercised | |
| (29 | ) | |
| 13.45 | | |
| | | |
| | |
Cancelled / Forfeited | |
| (2 | ) | |
| 21.38 | | |
| | | |
| | |
OUTSTANDING AT JULY 31, 2014 | |
| 611 | | |
$ | 14.24 | | |
| 6.6 | | |
$ | 1,285 | |
EXERCISABLE AT JULY 31, 2014 | |
| 438 | | |
$ | 15.63 | | |
| 5.2 | | |
$ | 444 | |
The weighted-average grant date fair value of options granted
by the Company during fiscal 2012 was $4.97. The total intrinsic value of options exercised during fiscal 2014 and fiscal 2013
was $0.2 million and $0.2 million, respectively. As of July 31, 2014, there was $1.4 million of total unrecognized compensation
cost related to non-vested stock options, which is expected to be recognized over a weighted-average period of 2.2 years.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
On March 26, 2012, the Compensation Committee of the Company’s
Board of Directors approved an extension of the expiration dates of all outstanding stock options held by current employees and
consultants of the Company. The expiration date of every stock option was extended for three years from the prior scheduled expiration
date. The Compensation Committee also approved the issuance of new options in replacement of certain stock options that had recently
expired, setting the expiration date of the newly issued stock options three years from the date of the new grant. All newly issued
options were fully vested and the exercise prices were unchanged. This extension or replacement applied to options to purchase
an aggregate of 0.6 million shares of the Company’s Class B common stock. The Company recorded stock-based compensation expense
of $0.3 million in March 2012 for the modification or issuance of the options based on the estimated fair values on March 26, 2012.
On November 22, 2011, there were fully vested outstanding
options to purchase 0.5 million shares of the Company’s Class B common stock, with various exercise prices and expiration
dates. The exercise prices of all of such options were above the market price for the Company’s Class B common stock on such
date. On November 22, 2011, in connection with the Genie Spin-Off, the exercise price of each outstanding option to purchase the
Company’s Class B common stock was reduced by 43.8% of the exercise price based on the change in the trading price of the
Company’s Class B common stock following the Genie Spin-Off. Further, each option holder shared ratably in a pool of options
to purchase 50,000 shares of Genie Class B common stock. The Company accounted for the November 2011 reduction in the exercise
price of the Company’s outstanding stock options and the grant of new options in Genie as a modification. The Company determined
that there was no incremental value from the modification, therefore, the Company did not record a stock-based compensation charge.
Restricted Stock
The fair value of restricted shares of the Company’s
Class B common stock is determined based on the closing price of the Company’s Class B common stock on the grant date. Share
awards generally vest on a graded basis over three years of service.
A summary of the status of the Company’s grants of
restricted shares of Class B common stock is presented below:
(in thousands) | |
Number of Non-vested Shares | | |
Weighted- Average Grant- Date Fair Value | |
Non-vested shares at July 31, 2013 | |
| 2,013 | | |
$ | 6.11 | |
Granted | |
| 183 | | |
| 19.71 | |
Vested | |
| (1,649 | ) | |
| 5.29 | |
Forfeited | |
| (7 | ) | |
| 10.17 | |
NON-VESTED SHARES AT JULY 31, 2014 | |
| 540 | | |
$ | 13.00 | |
As of July 31, 2014, there was $3.5 million of total unrecognized
compensation cost related to non-vested stock-based compensation arrangements, which is expected to be recognized over a weighted-average
period of 0.9 years. The total grant date fair value of shares vested in fiscal 2014, fiscal 2013 and fiscal 2012 was $8.7 million,
$3.5 million and $5.7 million, respectively.
Straight Path IP Group Stock
On September 24, 2012, the Company’s Board of Directors
approved a grant of 10% of the equity of the Company’s former subsidiary, Straight Path IP Group, to Mr. Howard S. Jonas,
the Company’s Chairman of the Board and former Chief Executive Officer. These Straight Path IP Group shares vested immediately.
The Company recorded stock-based compensation expense of $0.7 million in fiscal 2013 for the grant of these shares, based on the
estimated fair value of the shares on the grant date.
Note 15—Accumulated Other Comprehensive Income
The accumulated balances for each classification of other
comprehensive income (loss) were as follows:
(in thousands) | |
Unrealized
gain (loss) on available-for- sale securities | | |
Foreign currency translation | | |
Accumulated other comprehensive income (loss) | |
Balance at July 31, 2011 | |
$ | (4 | ) | |
$ | 3,031 | | |
$ | 3,027 | |
Genie Spin-Off | |
| — | | |
| (438 | ) | |
| (438 | ) |
Other comprehensive loss attributable to IDT Corporation | |
| 4 | | |
| (2,391 | ) | |
| (2,387 | ) |
Balance at July 31, 2012 | |
| — | | |
| 202 | | |
| 202 | |
Other comprehensive income attributable to IDT Corporation | |
| — | | |
| 2,139 | | |
| 2,139 | |
Balance at July 31, 2013 | |
| — | | |
| 2,341 | | |
| 2,341 | |
Other comprehensive income attributable to IDT Corporation | |
| (8 | ) | |
| 1,335 | | |
| 1,327 | |
BALANCE AT JULY 31, 2014 | |
$ | (8 | ) | |
$ | 3,676 | | |
$ | 3,668 | |
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 16—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 an arbitration hearing with Aerotel, Ltd.
(“Aerotel”) 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 $1.1 million at July 31, 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. Mox recently filed for bankruptcy. 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 that 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. On July 7, 2014, the Company filed a motion for reargument with the Court of Appeals,
which Tyco opposed. On September 11, 2014, the Court denied the Company’s motion. The Company is evaluating its options going
forward.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 17—Commitments and Contingencies
Purchase Commitments
The Company had purchase commitments of $2.3 million as of
July 31, 2014.
Lease Commitments
The future minimum payments for operating leases as of July
31, 2014 are as follows:
(in thousands) | |
| |
Year ending July 31: | |
| |
2015 | |
$ | 2,801 | |
2016 | |
| 1,383 | |
2017 | |
| 1,146 | |
2018 | |
| 934 | |
2019 | |
| 812 | |
Thereafter | |
| 235 | |
Total payments | |
$ | 7,311 | |
Rental expense under operating leases was $6.4 million, $5.9
million and $4.1 million in fiscal 2014, fiscal 2013 and fiscal 2012, respectively. In addition, connectivity charges under operating
leases were $10.4 million, $11.8 million and $16.3 million in fiscal 2014, fiscal 2013 and fiscal 2012, respectively.
Letters of Credit
As of July 31, 2014, the Company had letters of credit outstanding
totaling $3.7 million primarily for collateral to secure mortgage repayments and for IDT Telecom’s business. The letters
of credit outstanding as of July 31, 2014 expire as follows: $0.9 million in the year ending July 31, 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 July 31, 2014, the Company had aggregate performance
bonds of $10.0 million outstanding.
Customer Deposits
As of July 31, 2014 and 2013, “Customer deposits”
in the Company’s consolidated balance sheets included refundable customer deposits of $62.7 million and $28.7 million, respectively,
related to IDT Financial Services, the Company’s Gibraltar-based bank.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Substantially Restricted Cash and Cash Equivalents
At July 31, 2014 and 2013, “Cash and cash equivalents”
in the Company’s consolidated balance sheet included an aggregate of $12.9 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:
July 31 (in thousands) | |
2014 | | |
2013 | |
Restricted cash and cash equivalents—short-term | |
| | |
| |
Letters of credit related | |
$ | 665 | | |
$ | 3,189 | |
IDT Financial Services customer deposits | |
| 64,415 | | |
| 31,076 | |
Other | |
| 626 | | |
| 723 | |
Total short-term | |
| 65,706 | | |
| 34,988 | |
Restricted cash and cash equivalents—long-term | |
| | | |
| | |
Letters of credit related | |
| 2,763 | | |
| 2,767 | |
Total restricted cash and cash equivalents | |
$ | 68,469 | | |
$ | 37,755 | |
Note 18—Related Party Transactions
See Note 13 for a description of the Zedge transactions under
“Sales of Stock of Subsidiaries.”
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 responsibilities of the Company and Straight Path 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,
treasury, accounting, tax, external reporting, and legal. Straight Path transitioned accounting and external reporting services
from the Company to a third party in the first quarter of fiscal 2015. In addition, the Company and Straight Path have entered
into a license agreement whereby each of the Company, Straight Path and their 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:
Year ended July 31 (in thousands) | |
2014 | |
Balance at beginning of year | |
$ | 931 | |
Additional liability | |
| 1,930 | |
Payments | |
| (1,001 | ) |
Balance at end of year | |
$ | 1,860 | |
Pursuant to the Separation and Distribution Agreement, the
Company indemnifies Straight Path and Straight Path indemnifies the Company for losses related to the failure of the other to pay,
perform or otherwise discharge, any of the liabilities and obligations set forth in the agreement. Pursuant to the Tax Separation
Agreement, the Company indemnifies Straight Path from all liability for taxes of Straight Path or any of its subsidiaries or relating
to the Straight Path business with respect to taxable periods ending on or before the Straight Path Spin-Off, from all liability
for taxes of the Company, other than Straight Path and its subsidiaries, for any taxable period, and from all liability for taxes
due to the Straight Path Spin-Off.
The Company’s selling, general and administrative expenses
were reduced by $0.8 million in fiscal 2014 as a result of the fees the Company charged to Straight Path for services provided
pursuant to the Transition Services Agreement. At July 31, 2014, other current assets reported in the Company’s consolidated
balance sheet included receivables from Straight Path of $29,000.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company entered into various agreements with Genie prior
to the Genie Spin-Off including a Separation and Distribution Agreement to effect the separation and provide a framework for the
Company’s relationship with Genie after the spin-off, and a Transition Services Agreement, which provides for certain services
to be performed by the Company and Genie to facilitate Genie’s transition into a separate publicly-traded company. These
agreements provide for, among other things, (1) the allocation between the Company and Genie of employee benefits, taxes and other
liabilities and obligations attributable to periods prior to the spin-off, (2) transitional services to be provided by the Company
relating to human resources and employee benefits administration, (3) the allocation of responsibilities relating to employee compensation
and benefit plans and programs and other related matters, (4) finance, accounting, tax, internal audit, facilities, external reporting,
investor relations and legal services to be provided by the Company to Genie following the spin-off and (5) specified administrative
services to be provided by Genie to certain of the Company’s foreign subsidiaries. In addition, the Company entered into
a Tax Separation Agreement with Genie, which sets forth the responsibilities of the Company and Genie 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.
Pursuant to the Separation and Distribution Agreement, the
Company indemnifies Genie and Genie indemnifies the Company for losses related to the failure of the other to pay, perform or otherwise
discharge, any of the liabilities and obligations set forth in the agreement. Pursuant to the Tax Separation Agreement, the Company
indemnifies Genie from all liability for the Company’s taxes with respect to any taxable period, and Genie indemnifies the
Company from all liability for taxes of Genie and its subsidiaries with respect to any taxable period, including, without limitation,
the ongoing tax audits related to Genie’s business.
The Company’s Chairman of the Board and former Chief
Executive Officer, Howard S. Jonas, is the controlling stockholder and Chairman of the Board of Genie. The Company’s selling,
general and administrative expenses were reduced by $3.1 million, $3.8 million and $2.7 million in fiscal 2014, fiscal 2013 and
fiscal 2012, respectively, as a result of the fees the Company charged to Genie for services provided pursuant to the Transition
Services Agreement, net of the amounts charged by Genie to the Company. At July 31, 2014 and 2013, other current assets reported
in the Company’s consolidated balance sheet included receivables from Genie of $0.5 million and $0.6 million, respectively.
IDT Energy, Inc., a subsidiary of Genie, supplied electricity
to the Company’s facilities in Piscataway, New Jersey, and Newark, New Jersey through January 2013. IDT Energy also supplied
natural gas to the Company’s Newark, New Jersey building until April 2013, and IDT Energy supplies natural gas to the Company’s
facility in Piscataway, New Jersey. In fiscal 2014, fiscal 2013 and fiscal 2012, IDT Energy, Inc. billed the Company $16,000, $21,000
and $0.5 million, respectively.
The Company provides office space, certain connectivity and
other services to Jonas Media Group, a publishing firm owned by Howard Jonas. Billings for such services were $18,000, $27,000
and $29,000 in fiscal 2014, fiscal 2013 and fiscal 2012, respectively. The balance owed to the Company by Jonas Media Group was
$4,000 and $6,000 as of July 31, 2014 and 2013, respectively.
The Company obtains insurance policies from several insurance
brokers, one of which is IGM Brokerage Corp. (“IGM”). IGM was, until his death in October 2009, owned by Irwin Jonas,
father of Howard Jonas, and the Company’s General Counsel, Joyce J. Mason. IGM is currently owned by Irwin Jonas’ widow—the
mother of Howard Jonas and Joyce Mason. Jonathan Mason, husband of Joyce Mason and brother-in-law of Howard Jonas, provides insurance
brokerage services via IGM. Based on information the Company received from IGM, the Company believes that (1) IGM received commissions
and fees from payments made by the Company (including payments from third party brokers) in the aggregate amounts of $20,000 in
fiscal 2014, $15,000 in fiscal 2013 and $19,000 in fiscal 2012, which fees and commissions inured to the benefit of Mr. Mason,
and (2) the total payments made by the Company to IGM for various insurance policies were nil in fiscal 2014 and fiscal 2013, and
$0.2 million in fiscal 2012. Neither Howard Jonas nor Joyce Mason has any ownership or other interest in IGM or the commissions
paid to IGM other than via the familial relationships with their mother and Jonathan Mason.
Mason and Company Consulting, LLC (“Mason and Co.”),
a company owned solely by Jonathan Mason, receives an annual fee for the insurance brokerage referral and placement of the Company’s
health benefit plan with Brown & Brown Metro, Inc. Based on information the Company received from Jonathan Mason, the Company
believes that Mason and Co. received from Brown & Brown Metro, Inc. commissions and fees from payments made by the Company
in the amount of $18,000 in fiscal 2014, $24,000 in fiscal 2013 and $20,000 in fiscal 2012. Neither Howard Jonas nor Joyce Mason
has any ownership or other interest in Mason and Co. or the commissions paid to Mason and Co., other than via the familial relationships
with Jonathan Mason.
Since August 2009, IDT Domestic Telecom, Inc., a subsidiary
of the Company, has leased space in a building in the Bronx, New York. Howard Jonas and Shmuel Jonas, the Company’s Chief
Executive Officer, and the son of Howard Jonas, are members of the limited liability company that owns the building. IDT Domestic
Telecom rented office, storage and parking space for two years for $0.1 million per year and incurred costs of $0.1 million to
build-out the space. In August 2009, the limited liability company was paid an aggregate of $0.3 million for the lease and the
build-out costs. The initial lease expired at the end of April 2012. For the six month period from May 1, 2012 to October 31, 2012,
IDT Domestic Telecom was charged aggregate rent of $34,512. The parties entered into a new lease, which became effective November
1, 2012 and has a one-year term, with a one-year renewal option for IDT Domestic Telecom with the same terms. Aggregate annual
rent under the new lease is $69,025.
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company had net loans receivable outstanding from employees
aggregating $0.2 million as of July 31, 2014 and 2013, which are included in “Other current assets” in the accompanying
consolidated balance sheets.
Note 19—Defined Contribution Plans
The Company maintains a 401(k) Plan available to all employees
meeting certain eligibility criteria. The Plan permits participants to contribute up to 20% of their salary, not to exceed the
limits established by the Internal Revenue Code. The Plan provides for discretionary matching contributions of 50%, up to the first
6% of compensation. The discretionary matching contributions vest over the first five years of employment. The Plan permits the
discretionary matching contributions to be granted as of December 31 of each year. All contributions made by participants vest
immediately into the participant’s account. In fiscal 2014, fiscal 2013 and fiscal 2012, the Company’s cost for contributions
to the Plan was $1.1 million, $1.1 million and $0.9 million, respectively. In fiscal 2014, fiscal 2013 and fiscal 2012, the Company
contributed 72,281 shares, 51,861 shares and 92,843 shares, respectively, of the Company’s Class B common stock to the Plan
for matching contributions. The Company’s Class A common stock and Class B common stock are not investment options for the
Plan’s participants.
Note 20—Business Segment Information
The Company has three reportable business segments, Telecom
Platform Services, Consumer Phone Services and Zedge. Telecom Platform Services and Consumer Phone Services comprise the IDT Telecom
division. Operating segments 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 retail telecommunications
and payment offerings as well as wholesale international long distance traffic termination. The Consumer Phone Services segment
provides consumer local and long distance services in certain U.S. states. Zedge owns and operates an online platform for mobile
phone consumers interested in obtaining free, high-quality games, apps, and mobile phone customization including ringtones, wallpapers,
and notification sounds. All Other includes Fabrix, a software development company offering a cloud-based scale-out storage and
computing platform optimized for big data, virtualization and media storage, processing and delivery. The Company sold Fabrix in
October 2014 (see Note 22). All Other also includes 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 | | |
Consumer Phone Services | | |
Zedge | | |
All Other | | |
Corporate | | |
Total | |
Year ended July 31, 2014 | |
| | |
| | |
| | |
| | |
| | |
| |
Revenues | |
$ | 1,615,570 | | |
$ | 11,023 | | |
$ | 6,535 | | |
$ | 18,413 | | |
$ | — | | |
$ | 1,651,541 | |
Income (loss) from operations | |
| 45,062 | | |
| 1,797 | | |
| 314 | | |
| (2,049 | ) | |
| (15,284 | ) | |
| 29,840 | |
Depreciation and amortization | |
| 13,776 | | |
| — | | |
| 967 | | |
| 1,545 | | |
| 30 | | |
| 16,318 | |
Year ended July 31, 2013 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenues | |
$ | 1,588,071 | | |
$ | 14,514 | | |
$ | 5,811 | | |
$ | 12,221 | | |
$ | — | | |
$ | 1,620,617 | |
Income (loss) from operations | |
| 48,661 | | |
| 1,824 | | |
| 340 | | |
| (7,433 | ) | |
| (14,001 | ) | |
| 29,391 | |
Depreciation and amortization | |
| 12,342 | | |
| 1 | | |
| 798 | | |
| 1,673 | | |
| 96 | | |
| 14,910 | |
Impairment of building and improvements | |
| — | | |
| — | | |
| — | | |
| 4,359 | | |
| — | | |
| 4,359 | |
Year ended July 31, 2012 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenues | |
$ | 1,477,762 | | |
$ | 19,307 | | |
$ | 3,793 | | |
$ | 5,421 | | |
$ | — | | |
$ | 1,506,283 | |
Income (loss) from operations | |
| 5,910 | | |
| 4,062 | | |
| (248 | ) | |
| (3,668 | ) | |
| (13,152 | ) | |
| (7,096 | ) |
Depreciation and amortization | |
| 14,215 | | |
| 9 | | |
| 652 | | |
| 1,512 | | |
| 260 | | |
| 16,648 | |
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Telecom Platform Services’ income from operations in
fiscal 2013 included net gains of $9.3 million related to legal matters.
Telecom Platform Services’ income from operations in
fiscal 2012 included other operating losses, net of $15.9 million comprised of $6.5 million for estimated losses from pending litigation,
a loss of $11.0 million from the settlement of litigation with T-Mobile (see Note 7) and a $0.2 million loss on the settlement
of an unrelated claim, net of a gain of $1.8 million for cash received from Broadstripe, LLC in settlement of the Company’s
claim stemming from Broadstripe, LLC’s rejection of its telephony services agreements with the Company (see Note 7).
Total assets for the reportable segments are not provided
because a significant portion of the Company’s assets are servicing multiple segments and the Company does not track such
assets separately by segment.
Geographic Information
Revenue from customers located outside of the United States
as a percentage of total revenues from continuing operations and revenue from customers located in the United Kingdom as a percentage
of total revenues from continuing operations were as follows. Revenues by country are determined based on selling location.
Year ended July 31 | |
2014 | | |
2013 | | |
2012 | |
Revenue from customers located outside of the United States | |
| 30 | % | |
| 23 | % | |
| 29 | % |
Revenue from customers located in the United Kingdom | |
| 19 | % | |
| 13 | % | |
| 14 | % |
Net long-lived assets and total assets held outside of the
United States, which are located primarily in Western Europe, were as follows:
(in thousands) | |
United States | | |
Foreign Countries | | |
Total | |
July 31, 2014 | |
| | |
| | |
| |
Long-lived assets, net | |
$ | 79,281 | | |
$ | 2,479 | | |
$ | 81,760 | |
Total assets | |
| 284,249 | | |
| 196,682 | | |
| 480,931 | |
July 31, 2013 | |
| | | |
| | | |
| | |
Long-lived assets, net | |
$ | 77,580 | | |
$ | 3,162 | | |
$ | 80,742 | |
Total assets | |
| 294,337 | | |
| 141,070 | | |
| 435,407 | |
July 31, 2012 | |
| | | |
| | | |
| | |
Long-lived assets, net | |
$ | 81,668 | | |
$ | 3,899 | | |
$ | 85,567 | |
Total assets | |
| 310,209 | | |
| 140,905 | | |
| 451,114 | |
Note 21—Selected Quarterly Financial Data (Unaudited)
The table below presents selected quarterly financial data
of the Company for its fiscal quarters in fiscal 2013 and fiscal 2012:
Quarter Ended | |
| | |
| | |
| | |
Income (loss) | | |
Net income (loss) | | |
Income (loss) per share —basic | | |
Income (loss) per share —diluted | |
(in thousands, except per share
data) | |
Revenues | | |
Direct cost of revenues | | |
Income from operations | | |
from continuing operations | | |
attributable to IDT Corporation | | |
From continuing operations | | |
Net income (loss) | | |
From continuing operations | | |
Net income (loss) | |
2014: | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
October 31 | |
$ | 420,670 | | |
$ | 350,319 | | |
$ | 7,283 | | |
$ | 4,050 | | |
$ | 3,523 | | |
$ | 0.17 | | |
$ | 0.17 | | |
$ | 0.15 | | |
$ | 0.15 | |
January 31 | |
| 406,423 | | |
| 335,258 | | |
| 7,574 | | |
| 2,973 | | |
| 2,535 | | |
| 0.12 | | |
| 0.12 | | |
| 0.11 | | |
| 0.11 | |
April 30 | |
| 403,761 | | |
| 332,376 | | |
| 9,170 | | |
| 5,599 | | |
| 5,017 | | |
| 0.22 | | |
| 0.22 | | |
| 0.22 | | |
| 0.22 | |
July 31 | |
| 420,687 | | |
| 349,313 | | |
| 5,813 | | |
| 8,388 | | |
| 7,709 | | |
| 0.34 | | |
| 0.34 | | |
| 0.33 | | |
| 0.33 | |
TOTAL | |
$ | 1,651,541 | | |
$ | 1,367,266 | | |
$ | 29,840 | | |
$ | 21,010 | | |
$ | 18,784 | | |
$ | 0.85 | | |
$ | 0.85 | | |
$ | 0.82 | | |
$ | 0.82 | |
2013: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
October 31 | |
$ | 400,117 | | |
$ | 335,251 | | |
$ | 6,684 | | |
$ | 5,620 | | |
$ | 3,614 | | |
$ | 0.24 | | |
$ | 0.17 | | |
$ | 0.23 | | |
$ | 0.16 | |
January 31 | |
| 411,456 | | |
| 344,486 | | |
| 5,655 | | |
| 3,908 | | |
| 2,953 | | |
| 0.16 | | |
| 0.14 | | |
| 0.15 | | |
| 0.13 | |
April 30(a) | |
| 396,935 | | |
| 331,163 | | |
| 15,687 | | |
| 10,082 | | |
| 8,691 | | |
| 0.46 | | |
| 0.42 | | |
| 0.43 | | |
| 0.39 | |
July 31(b) | |
| 412,109 | | |
| 344,673 | | |
| 1,365 | | |
| (1,532 | ) | |
| (3,651 | ) | |
| (0.09 | ) | |
| (0.17 | ) | |
| (0.09 | ) | |
| (0.17 | ) |
TOTAL | |
$ | 1,620,617 | | |
$ | 1,355,573 | | |
$ | 29,391 | | |
$ | 18,078 | | |
$ | 11,607 | | |
$ | 0.77 | | |
$ | 0.56 | | |
$ | 0.72 | | |
$ | 0.52 | |
(a) |
Included in income from operations was other operating gains of $9.6 million related to legal matters. |
|
|
(b) |
Included in income from operations was a charge for impairment of building and improvements of $4.4 million. |
IDT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 22—Subsequent Event
On October 8, 2014, the Company completed the sale of its
interests in Fabrix to Telefonaktiebolget LM Ericsson (publ) (“Ericsson”). The final sale price for 100% of the shares
in Fabrix was $95 million in cash, excluding transaction costs and working capital and other adjustments. The Company owned approximately
78% of Fabrix on a fully diluted basis. The Company’s share of the sale price, net of transaction costs, is expected to be
approximately $73 million in cash. The Company and the other shareholders have placed $13 million of their proceeds in escrow for
the resolution of post-closing claims that may arise. Any unclaimed escrow balance will be released in two tranches over a period
of 18 months.
F-33
Exhibit 21.01
DOMESTIC SUBSIDIARIES
IDT America, Corp. (NJ) |
IDT Payment Services, Inc. (DE) |
IDT Domestic Telecom, Inc. (DE) |
IDT Telecom, Inc. (DE) |
IDT Domestic-Union, LLC (DE) |
Net2Phone, Inc. (DE) |
IDT Financial Services, LLC (DE) |
Net2Phone Global Services, LLC (DE) |
IDT Payment Services of New York, LLC (DE) |
|
FOREIGN SUBSIDIARIES
Name
|
|
Country of Formation
|
IDT Corporation de Argentina S.A. |
|
Argentina |
IDT Telecom Asia Pacific (Australia) PTY. LTD. |
|
Australia |
Expercom S.A. |
|
Belgium |
IDT Europe B.V.B.A. |
|
Belgium |
IDT Brasil Telecomunicações Ltda |
|
Brazil |
IDT Brazil Limitada |
|
Brazil |
IDT Telecom Canada Corp. |
|
Canada |
IDT Germany GmbH |
|
Germany |
IDT Financial Services Limited |
|
Gibraltar |
IDT Telecom Asia Pacific Limited |
|
Hong Kong |
IDT Italia S.R.L. |
|
Italy |
DirectTel Dutch Holdings B.V. |
|
Netherlands |
DYP C.V. |
|
Netherlands |
IDT Dutch Holdings B.V. |
|
Netherlands |
IDT Netherlands B.V. |
|
Netherlands |
MJP C.V. |
|
Netherlands |
Pryd Dutch Holdings B.V. |
|
Netherlands |
STA Dutch Holdings B.V. |
|
Netherlands |
Strategic Dutch Holdings B.V. |
|
Netherlands |
Zedge Europe AS |
|
Norway |
IDT Spain S.L. |
|
Spain |
IDT Global Limited |
|
United Kingdom |
IDT Retail Europe Limited |
|
United Kingdom |
Exhibit 23.01
CONSENT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
We have issued our reports dated October 14, 2014, with respect
to the consolidated financial statements and internal control over financial reporting included in the Annual Report of IDT Corporation
on Form 10-K for the year ended July 31, 2014. We hereby consent to the incorporation by reference of said reports in the Registration
Statements of IDT Corporation on Forms S-3 (File No. 333-53719, File No. 333-61565, File No. 333-71991, File No. 333-77395, File No. 333-80133, File No. 333-86261, File No. 333-104286, File No. 333-115403,
and File No. 333-119190) and Forms S-8 (File No. 333-73167, File No. 333-100424, File No. 333-105865, File No. 333-116266, File No. 333-130287, File No. 333-130288, File No. 333-130562,
File No. 333-146718, File No. 333-154257, and
File No. 333-177247).
/s/ GRANT THORNTON LLP |
|
New York, New York |
|
October 14, 2014 |
|
Exhibit 31.01
Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
I, Shmuel Jonas, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of IDT Corporation; |
| 2. | Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date: October 14, 2014
/s/ Shmuel Jonas |
|
Shmuel Jonas |
|
Chief Executive Officer |
|
Exhibit 31.02
Certification of Principal Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
I, Marcelo Fischer, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of IDT Corporation; |
| 2. | Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report; |
| 4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined
in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and |
| 5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors
(or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial
information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting. |
Date: October 14, 2014
/s/ Marcelo Fischer |
|
Marcelo Fischer |
|
Senior Vice President—Finance |
|
(Principal Financial Officer) |
|
Exhibit 32.01
IDT CORPORATION
Certification Pursuant to
18 U.S.C. Section 1350
(as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act Of 2002)
In connection with the Annual Report of IDT Corporation (the “Company”)
on Form 10-K for fiscal 2014 as filed with the Securities and Exchange Commission (the “Report”), I, Shmuel Jonas,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to my knowledge:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company. |
Date: October 14, 2014
/s/ Shmuel Jonas |
|
Shmuel Jonas |
|
Chief Executive Officer |
|
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging,
or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required
by Section 906, has been provided to IDT Corporation and will be retained by IDT Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
Exhibit 32.02
IDT CORPORATION
Certification Pursuant to
18 U.S.C. Section 1350
(as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act Of 2002)
In connection with the Annual Report of IDT Corporation (the “Company”)
on Form 10-K for fiscal 2014 as filed with the Securities and Exchange Commission (the “Report”), I, Marcelo Fischer,
Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to my knowledge:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company. |
Date: October 14, 2014
/s/ Marcelo Fischer |
|
Marcelo Fischer |
|
Senior Vice President—Finance |
|
(Principal Financial Officer) |
|
A signed original of this written statement required by Section
906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the
electronic version of this written statement required by Section 906, has been provided to IDT Corporation and will be retained
by IDT Corporation and furnished to the Securities and Exchange Commission or its staff upon request.
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