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, 2015,
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 |
|
(I.R.S.
Employer |
incorporation
or organization) |
|
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 30, 2015 (the last business day of the registrant’s most recently completed second fiscal quarter) of the
Class B common stock of $21.36 per share, as reported on the New York Stock Exchange, was approximately $401.2 million.
As of
October 6, 2015, the registrant had outstanding 21,752,240 shares of Class B common stock and 1,574,326 shares of Class A
common stock. Excluded from these numbers are 3,522,835 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 14, 2015, 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 |
|
|
|
|
|
|
Item
1. |
Business. |
1 |
|
Item 1A. |
Risk
Factors. |
17 |
|
Item
1B. |
Unresolved
Staff Comments. |
24 |
|
Item
2. |
Properties. |
25 |
|
Item
3. |
Legal
Proceedings. |
25 |
|
Item
4. |
Mine
Safety Disclosures. |
25 |
|
|
|
|
Part
II |
|
|
|
|
|
|
|
Item
5. |
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
26 |
|
Item
6. |
Selected
Financial Data. |
28 |
|
Item
7. |
Management’s
Discussion and Analysis of Financial Condition and Results of Operations. |
28 |
|
Item
7A. |
Quantitative
and Qualitative Disclosures about Market Risks. |
45 |
|
Item
8. |
Financial
Statements and Supplementary Data. |
46 |
|
Item
9. |
Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure. |
46 |
|
Item
9A. |
Controls
and Procedures. |
46 |
|
Item
9B. |
Other
Information. |
46 |
|
|
|
|
Part
III |
|
|
|
|
|
|
Item
10. |
Directors,
Executive Officers and Corporate Governance. |
47 |
|
Item
11. |
Executive
Compensation. |
47 |
|
Item
12. |
Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
47 |
|
Item
13. |
Certain
Relationships and Related Transactions, and Director Independence. |
47 |
|
Item
14. |
Principal
Accounting Fees and Services. |
47 |
|
|
|
|
Part IV |
|
|
|
|
|
|
Item
15. |
Exhibits,
Financial Statement Schedules. |
48 |
|
|
|
|
Signatures |
50 |
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 2015 refers to the fiscal year
ended July 31, 2015).
Item
1. Business.
OVERVIEW
We are
a multinational holding company with operations primarily in the telecommunications and payment industries.
Since
our inception, we have derived the majority of our revenues and operating expenses from IDT Telecom’s businesses, with IDT
Telecom’s revenues representing 99.0% of our total revenues from continuing operations in fiscal 2015. IDT Telecom’s
primary businesses market and distribute multiple communications and payment services across four businesses:
| ● | Retail
Communications provides international long-distance calling products primarily to foreign-born
communities worldwide, with its core markets in the United States; |
| ● | Wholesale
Carrier 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 and domestic airtime top-up
and international money transfer sold over our Boss Revolution platform and other channels;
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 Retail
Communications and Payment Services businesses provide prepaid international long distance calling services and payment services
primarily to foreign-born and underbanked consumers in the United States, with smaller retail operations serving customers in
Europe, Asia, South America and Canada. These offerings are sold predominantly under our flagship ‘Boss Revolution’
brand and include a variety of international long distance calling services and plans, as well as synergistic payment services
including international and domestic airtime top-up, international money transfer, bill payment, virtual gift cards and other
payment services. The majority of our customers purchase our offerings through one of our authorized resellers’ more than
40,000 retail locations primarily serving foreign born communities in the United States, while a growing number of customers purchase
directly through our IVR (Interactive Voice Response) system, the Boss Revolution website, or the Boss Revolution
mobile app.
Our Wholesale
Carrier Services business terminates international long distance calls for our retail customers and for other telecommunications
companies, service providers, and resellers around the world. Our wholesale telecommunications service is comprised a global network
of interconnections that links virtually every country and virtually every significant carrier in the world.
Hosted
Platform Solutions’ revenue is generated primarily by voice over Internet protocol (VoIP) products and services sold under
the Net2Phone brand. Net2Phone’s offerings are delivered through several channels including cable operators (Net2Phone Cable
Telephony), value added resellers (VARs), and international service providers under the reseller vertical.
In addition,
IDT Telecom operates a Consumer Phone Services business that provides bundled local/long distance phone service in 11 states,
marketed under the brand name IDT America. IDT Telecom also manages a variety of smaller domestic and international telecommunications
businesses and offerings under various brand names, as well as a European prepaid debit card-issuing bank based in Gibraltar.
Outside
of our core telecommunications business, our holdings include a majority interest in Zedge Holdings, Inc., or Zedge, the popular
app and platform for mobile device personalization including ringtones, wallpapers, home screen icons and game recommendations.
We also hold commercial real estate including our headquarters building and associated garage in Newark, New Jersey and an operations
facility in Piscataway, New Jersey.
Our headquarters
are located at 520 Broad Street, Newark, New Jersey 07102. The main telephone number at our headquarters is (973) 438-1000 and
our corporate web site home page 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 (http://ir.idt.net/) 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 carrier 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 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.
–
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.
–
We sell our United Kingdom-based consumer phone service for approximately $46.3 million of cash and stock.
–
We purchase majority interests in Fabrix Systems Ltd., or Fabrix.
–
We purchase a majority stake in Zedge, which provides one of the most popular content platforms for mobile device personalization
including ringtones, wallpapers, home screen icons and game recommendations.
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.
–
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.
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”.
2011 – We spin-off our Genie Energy Ltd. subsidiary, which
holds retail energy and oil and gas exploration businesses, to stockholders. Genie Energy is listed on the NYSE with the ticker
symbols “GNE” and “GNE-PA”.
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”.
–
We introduce the Boss Revolution mobile app for Android and iOS.
–
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 $68 million as part of Ericsson’s
purchase of Fabrix for $95 million.
2015 – We become the first U.S. - based telecommunications
company to terminate international long distance voice traffic directly to Cuba.
DIVIDENDS
AND DISTRIBUTIONS
We have
made quarterly distributions to the holders of our Class A and Class B common stock since fiscal 2011. For each quarter of fiscal
2014, we distributed $0.17 per share to holders of our Class A common stock and Class B common stock. For each quarter of fiscal
2015, we distributed $0.18 per share and, in addition, on November 21, 2014 and January 23, 2015, we made two additional distributions
to return a portion of the proceeds from the sale of Fabrix to our stockholders. During fiscal 2015, we distributed a total of
$2.03 per share, or $47.6 million in total, to our stockholders as detailed below. In fiscal 2014, we distributed $0.59 per share,
or $13.6 million in total, to our stockholders.
| ● | On
October 3, 2014, we paid an ordinary cash dividend of $0.17 per share for the fourth
quarter of fiscal 2014; |
| ● | On
November 21, 2014, we made a special cash distribution of $0.68 per share; |
| ● | On
December 19, 2014, we made an ordinary cash dividend of $0.18 per share for the first
quarter of fiscal 2015; |
| ● | On
January 23, 2015, we made a special cash distribution of $0.64 per share; |
| ● | On
March 27, 2015, we paid an ordinary cash dividend of $0.18 per share for the second quarter
of fiscal 2015 |
| ● | On
June 23, 2015, we made an ordinary cash dividend of $0.18 per share for the third quarter
of fiscal 2015. |
On September
25, 2015, we declared a dividend of $0.18 per share for the fourth quarter of fiscal 2015 to holders of our
Class A common stock and Class B common stock. The dividend will be paid on or about October 15, 2015 to stockholders of record
as of the close of business on October 7, 2015.
We expect
to continue making regular quarterly distributions 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 businesses, we have sought to select and incubate promising early stage businesses
and, in some cases, have sold those business or spun them 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 right-sized corporate overhead, reduced network
costs at IDT Telecom, and streamlined our internal decision-making processes and subsequently sold or spun-off several our non-core
businesses and assets.
Simultaneous with, and following the successful implementation of
this initial restructuring program, we have focused on the growth and profitability of our core telecommunications businesses,
continued to right-size our corporate overhead and reduce our network costs at IDT Telecom and, in 2009, 2011 and 2013 spun off
non-core businesses, while initially retaining majority stakes in two promising non-core businesses, Fabrix and Zedge. In
October 2014, we completed the sale of our interest in Fabrix to Ericsson for $68 million in cash as part of Ericsson’s purchase
of Fabrix for $95 million. 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, cost-effective communications
and payment services primarily to foreign-born consumers. This is a rapidly growing demographic and often a historically underserved
market that includes significant numbers of unbanked and under-banked consumers.
As part
of our effort to meet the changing demands of our target demographic, in 2008, 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. We subsequently developed and introduced complementary payment services over the Boss Revolution platform, including
international and domestic airtime top-up, gift cards, domestic bill payment and 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 mobile 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 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 a significant
operator in the global wholesale telecommunications market, carrying and terminating international calling traffic on behalf of
other telecommunications companies 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.
Recent
Strategic Developments
In August
2015, our Board of Directors approved a plan to reorganize into three separate entities by spinning off two business units to
our stockholders. The three separate companies are expected to consist of (1) IDT Telecom, (2) Zedge and (3) other holdings. The
reorganization and the specific components are subject to change and both internal and third-party contingencies, and must receive
final approval from our Board of Directors and certain third-parties. We are targeting completion of the reorganization in calendar
year 2016.
The reorganization
would, among other things, result in each of these three entities having a management team focused on maximizing the long-term
value of their particular entity.
IDT
Telecom
We are
pursuing growth opportunities at IDT Telecom in both the retail and wholesale sides of our telecommunications business. Our Retail
Communications business continues to focus on the Boss Revolution platform by 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 Carrier Services business is focused on expanding the scope of services
we provide within its customers’ value chains.
IDT Telecom
is pursuing a multi-pronged growth strategy that includes:
| ● | Bringing
new communications and payment services to the Boss Revolution platform and mobile app to deepen market penetration in foreign-born
communities, create new sources of revenue, and further strengthen Boss Revolution's brand equity; |
| ● | Utilizing
our direct and indirect sales force to deepen market penetration in certain foreign-born
communities, focusing on geographies and ethnic communities where we have not traditionally
been a leading provider; |
| ● | Building
on the early success of our Net2Phone brand's enterprise offerings including Session
Initiation Protocol, or SIP, trunking and hosted private branch exchange, or PBX, services; |
| ● | Continuing
investment in our early stage international money transfer business with a focus on increasing
the number of originating agents in the United States; and |
| ● | Exploring
the commercial potential of certain merchant service offerings to reduce transactional
costs for Boss Revolution retailers, provide them with actionable market data, and cut
their inventory and supply costs. |
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 marketing programs. |
| ● | Usage
– Increasing user engagement, which we believe to be a strong proxy for revenue
expansion. To this end, in fiscal 2016, Zedge plans to release new product enhancements
focused on increasing engagement, introducing new products into the market, undertaking
marketing initiatives that will expand its social footprint and continued investment
in additional marketing automation capabilities. |
| ● | 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, Windows Mobile and Firefox. |
BUSINESS
DESCRIPTION
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 2015, IDT Telecom had revenues
of $1,581.4 million, representing 99.0% of our total consolidated revenues from continuing operations, and income from operations
of $28.2 million, as compared with revenues of $1,626.6 million and income from operations of $46.9 million in fiscal
2014.
TELECOM
PLATFORM SERVICES
Our Telecom
Platform Services segment, which represented 99.4% and 99.3% of IDT Telecom’s total revenues in fiscal 2015 and fiscal 2014,
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
Carrier 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 and domestic 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 2015, our Telecom Platform Services segment generated $1,572.7 million in revenues worldwide and income from operations
of $27.0 million, as compared with revenues of $1,615.6 million and income from operations of $45.1 million in fiscal
2014.
Retail
Communications
Retail
Communications’ revenue was $729.1 million in fiscal 2015 compared to $695.8 million in fiscal 2014 (46.4% and 43.1% of
Telecom Platform Services’ revenue in fiscal 2015 and fiscal 2014, 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 and point of sale activated calling cards sold to large retailers,
medium sized retail chains (e.g. supermarkets, drug stores), and smaller grocery stores and similar outlets, and (3) our PennyTalk
international calling service. Other revenues generated using our Boss Revolution platform 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
customers’ account balances are typically debited at a fixed rate per minute. In contrast to many competitors, Boss Revolution
does not charge connection, usage or breakage fees. Boss Revolution per minute rates can vary by the destination country, city,
and whether the destination is a landline or mobile phone. Rates are published on the Boss Revolution consumer website and within
the Boss Revolution mobile app. In addition to per minute prepaid plans, Boss Revolution offers unlimited calling plans for a
flat monthly fee to some destinations.
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. Also, 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 create accounts for new customers, add funds to existing customer balances and
execute sales transactions for the various products and services available on the portal. 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 can rapidly respond to changes in the business environment.
The Boss
Revolution platform allows us to target and promote services directly to customers and retailers, and to introduce and cross-sell
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 their large foreign born populations. In addition to these geographic areas, we continue
to grow distributor relationships and expand our retail network in other areas of the United States, including the Southwest and
West Coast, where we historically have not had as strong of a market presence.
Wholesale
Carrier Services
Wholesale
Carrier Services’ revenue was $596.8 million in fiscal 2015 compared to $672.3 million in fiscal 2014 (37.9% and 41.6% of
Telecom Platform Services’ revenue in fiscal 2015 and fiscal 2014, respectively).
Wholesale
Carrier 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, mobile network 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.
IDT Telecom
terminated 29.6 billion minutes in both fiscal 2015 and 2014, making us one of the largest carriers of international long distance
minutes worldwide. Wholesale Carrier Services accounted for 19.5 billion minutes and 19.2 billion minutes of the total IDT Telecom
minutes in fiscal 2015 and fiscal 2014, 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 of 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 Carrier 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, 2015, Wholesale Carrier
Services had more than 3,000 customers. IDT Telecom has over 800 carrier relationships globally.
Wholesale
Carrier Services’ revenue is generated by sales to both postpaid and prepaid customers. Postpaid customers typically include
Tier 1 carriers, mobile network operators and our most credit worthy customers. Prepaid customers are typically smaller telecommunication
companies as well as independent call aggregators.
Payment
Services
Payment
Services’ revenue was $208.3 million in fiscal 2015 compared to $202.3 million in fiscal 2014 (13.3% and 12.5% of Telecom
Platform Services’ revenue in fiscal 2015 and fiscal 2014, 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 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 Ltd. 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, mostly 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 platform and in hard card format. Our international airtime top-up offerings are focused on geographic
corridors, such as the United States to various Central American countries, 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.
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 2013.
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, mobile money platforms and other points of payment
overseas where beneficiaries can receive 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, we generally
charge the standard industry rates. Transaction costs include commissions paid to the retail agent, payment to the international
disbursing agent, banking, compliance, and foreign currency exchange costs.
Hosted
Platform Solutions
Hosted
Platform Solutions’ revenue was $38.5 million in fiscal 2015 compared to $45.2 million in fiscal 2014 (2.4% and 2.8% of
Telecom Platform Services’ revenue in fiscal 2015 and fiscal 2014, respectively).
Hosted
Platform Solutions’ revenue is generated primarily by voice over Internet protocol (VoIP) products and services sold under
the Net2Phone brand. Net2Phone’s offerings are delivered through several channels including cable operators, VARs, and international
service providers under the reseller vertical. VoIP enterprise solutions are the key focus across all channels for Net2Phone’s
cloud-based SIP trunking and hosted PBX solutions.
Net2Phone’s
cable telephony business renewed long-term agreements with most of its existing customer base in the second half of fiscal 2014,
but at lower rates, reflecting the long-term decline in the underlying costs of hosted telephony services. IDT continues to optimize
and improve its cable telephony platform to reduce the underlying costs of service and speed deployment of customized services.
International
Operations
Internationally,
we are a leading provider of prepaid calling cards including both private label and IDT-branded calling cards, which are sold
through an extensive network of thousands of independent retailers as well as through our own internal sales force. Additionally,
we sell Boss Revolution PIN-less international calling and domestic and international airtime top-up and payment services in select
global markets both through retailers and directly to consumers. Wholesale Termination and related wholesale services are marketed
and sold globally through our internal wholesale sales team.
In Europe,
we market our Retail Communications products in the United Kingdom, the Netherlands, Spain, Germany, Belgium, Ireland, Italy,
Luxembourg, Sweden, Switzerland, Denmark, Norway, Austria, France and Greece, 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. In addition,
we sell Boss Revolution platform products through retailers, our mobile app, and direct-to-consumer web sites in Germany, Spain
and the United Kingdom. In the United Kingdom, we sell the Prime Card, a leading prepaid MasterCard through select retailers and
online directly to consumers.
Our operations
in Europe also include Wholesale Carrier Services. We maintain our European corporate, Retail Communications and Wholesale Carrier
Services operations in London, England. We also operate satellite offices in Germany, Belgium, Spain and Greece.
Our European
operations, including Wholesale Carrier Services and Retail Communications, generated $359.4 million of revenues in fiscal 2015,
a slight decrease from the $360 million of revenues generated during fiscal 2014. Our European operations’ revenues
constituted 22.7% of IDT Telecom’s revenues from continuing operations in fiscal 2015, as compared to 22.1% in fiscal 2014.
In Asia,
we sell Retail Communications products in Hong Kong, Singapore, Australia, Japan, Korea, Malaysia and Taiwan. In Hong Kong, we
are one of the top providers of prepaid calling services to the Filipino, Indian and Indonesian populations, three of the largest
overseas worker segments there. 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. We also sell Boss Revolution
platform products through retailers, our mobile app, and direct-to-consumer web sites in Australia, Hong Kong, and Singapore.
In Asia, we also sell postpaid services direct to consumers and small businesses. In fiscal 2015, IDT Telecom generated $57.6 million
in revenues from our operations in the Asia Pacific region compared to $61.3 million in fiscal 2014. Our operations in Asia also
include Wholesale Carrier Services. We maintain our Asia Pacific headquarters in Hong Kong.
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 2015, IDT Telecom generated $18.7 million in revenues from the sale of Retail Communications products in Latin
America compared to $20.9 million in fiscal 2014.
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 private 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 (www.bossrevolution.com)
and mobile apps for iOS and Android.
Net2Phone,
our VoIP division, focuses on the VAR marketplace by partnering with service providers, distributors, system integrators, and
other resellers in both domestic and overseas markets. These partners utilize Net2Phone’s full suite of VoIP communication
solutions - SIP Trunking, Hosted PBX, Broadband Telephony, and Mobile VoIP calling apps - allowing their enterprise and residential
end users to capitalize on the growth, flexibility and cost advantages of IP-based calling.
In Europe,
Asia Pacific and Latin America, we are a leading provider of prepaid calling cards including both private label and IDT-branded
calling cards, which are sold through an extensive network of thousands of independent retailers as well as through our own internal
sales force. Additionally, we sell Boss Revolution PIN-less international calling and domestic and international airtime top-up
in select markets both through retailers and directly to consumers. In Asia, we also sell postpaid services direct to consumers
and small businesses. In the United Kingdom, we sell the Prime Card, a leading prepaid MasterCard through select retailers and
online directly to consumers. Wholesale Carrier Services are marketed and sold through our internal wholesale sales team. In Canada,
we sell Boss Revolution platform products through retailers, our mobile app, and direct-to-consumer web sites.
Telecommunications
Network Infrastructure
IDT Telecom
operates a global 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, e-commerce sites, 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 VoIP and is interconnected, where needed, 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, which house equipment used for both our voice and payment services,
with smaller points of presence in several other countries. It is monitored and operated on a continual basis by our Network Operations
Center in the United States.
CONSUMER
PHONE SERVICES
Our Consumer
Phone Services segment generated revenues of $8.6 million and income from operations of $1.3 million in fiscal 2015, as compared
to revenues of $11.0 million and income from operations of $1.8 million in fiscal 2014.
During
fiscal 2015, 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 2016.
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.
At July 31,
2015, we had approximately 5,100 active customers for our bundled local/long distance plans and approximately 22,700 customers
for our long distance-only plans, compared to approximately 6,200 and 28,500 customers, respectively, on July 31, 2014. Our
highest customer concentrations are in large urban areas, with the greatest number of customers located in New York, New Jersey,
Pennsylvania and Massachusetts.
ALL
OTHER
Operating
segments that are not reportable individually are included in All Other. Beginning in fiscal 2015, Zedge is included in All Other.
Comparative results have been reclassified and restated as if Zedge was included in All Other in all periods presented. All Other
also includes our real estate holdings, and other, smaller businesses. Prior to its sale in October 2014, All Other also 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. 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 was $68.1 million, after reflecting the impact of working capital and other adjustments.
At July 31, 2015, we had received cash of $59.7 million and had aggregate receivables of $8.5 million. We and the other shareholders
placed $13.0 million of the proceeds in escrow for the resolution of post-closing claims that may arise. Any unclaimed escrow
balance will be released in two tranches in October 2015 and April 2016. In fiscal 2015, we recorded gain on the sale of our interest
in Fabrix of $76.9 million.
Prior
to the sale, during fiscal 2015, Fabrix generated $4.2 million in revenues and income from operations of $0.9 million, as compared
with revenues of $16.6 million and a loss from operations of $0.7 million in fiscal 2014.
During
fiscal 2015, All Other generated $15.4 million in revenues and income from operations of $78.0 million including gain on the sale
of interest in Fabrix of $76.9 million, compared to revenues of $24.9 million and loss from operations of $1.7 million in
fiscal 2014.
Zedge
Zedge
provides one of the most popular content platforms for mobile device personalization including ringtones, wallpapers, home screen
icons and game recommendations. Its smartphone app, available in Google Play, iTunes and the Microsoft Store, has been installed
over 160 million times and has averaged among the top 20 most popular apps in the Google Play store in the U.S. for the past five
years. Zedge has grown its user base without material investment in marketing, user acquisition or advertising. We currently own
approximately 83% (69% on a fully diluted basis) of Zedge.
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 offers advertisers, marketers and content providers including 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 the Google Play, iTunes and the Microsoft stores, or through feature
phones or Zedge’s website. We believe that consumer growth stems from the demand for, and popularity of, the content offerings,
the relevance of the recommendations and the commitment to providing an exceptional user experience.
Zedge’s
app is primarily used by customers in North America and Europe, typically in the 18 to 34 age bracket and represents 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. During 2014 and 2015, Zedge introduced app icons, localization supporting Spanish, Portuguese, French, German and Norwegian,
social sharing features and marketing automation capabilities. Zedge also has a moderate web presence primarily frequented by
feature phone users.
The ringtone
and wallpaper content library is comprised of millions of user-generated content submissions that are uploaded by our users while
the app icons are fully created by or for Zedge. The mobile games catalog 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.
During
fiscal 2015, Zedge generated revenues of $9.1 million and income from operations of $0.1 million in fiscal year 2015 compared
to $6.5 million and $0.3 million, respectively, in fiscal year 2014.
During
fiscal 2015, Zedge generated approximately 91% of its revenue from the sale of advertising inventory in its apps and from offering
Android game publishers a non-incentivized user acquisition platform where Zedge was paid a fixed price for generating game installs.
Finally, Zedge sold advertising inventory on its web/mobile web properties as well as managed advertising operations for some
scaled publishers that benefit from Zedge’s size and experience in exchange for a share of their revenues. The overwhelming
majority of Zedge’s advertising revenues are generated in a programmatic, or automated, fashion originating from relationships
that Zedge has established with a host of advertising networks and exchanges. The only direct sales effort that Zedge currently
pursues relates to selling non-incentivized user acquisition campaigns to Android game publishers. We believe that Zedge’s
advertising inventory is typically sold for a premium compared to other publishers because of Zedge’s large and growing
customer base, geographic concentration (with close to 70% of its users being in North America and Europe) and its user demographics.
Future revenue growth is expected as a result of continued product development, new products and feature releases of products,
a focus on increasing user engagement and alternative monetization capabilities.
Zedge’s
growth has been organic, and we believe is a result from Zedge providing a user experience that is intuitive and free to use.
Zedge has not invested in user acquisition campaigns although this may change if cost-effective opportunities avail themselves.
COMPETITION
IDT
Telecom
Telecom
Platform Services
Retail
Communications
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 our Retail Communications offerings, we face particularly strong competition from Tier
1 mobile network 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
Carrier 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 Carrier Services business, we participate in a global market place with:
| ● | interexchange
carriers and other long distance resellers and providers, including large carriers such
as T Mobile, 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
Carrier 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’ 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.
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
competes against many companies and especially mobile app developers. There are numerous mobile apps that offer mobile customization
content, and a wide variety of smaller personalization content providers and app discovery services. In addition, ringtones, wallpapers
and mobile app icons are commodities and are easily acquired from many smaller players that offer this content for free or for
a fee. These competitors may impact user growth, customer engagement, advertising spend and talent acquisition and retention.
Furthermore the dynamic and fast-paced nature of the mobile app marketplace requires Zedge to consistently innovate by focusing
its resources and efforts on developing new features and products that scale, have mass-market appeal and are relevant to advertisers
and marketing partners.
We
believe that Zedge has a competitive advantage due to its large user base, modular approach to providing customization content,
large catalogue of content, technology stack, proprietary recommendation engine, app market ranking and 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. Continued investment in research and development centered on improving Zedge’s product portfolio
and technology stack is critical to Zedge’s ongoing success. Additionally, Zedge may acquire other companies that possess
products, talent and/or technology that can complement and expand its business.
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, Belgium, Brazil, Canada, Chile,
Denmark, France, Germany, Hong Kong, Italy, Japan, Mexico, the Netherlands, Peru, 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 include money transfer, which launched
in the first quarter of 2014, and various network branded (also called “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. At
July 31, 2015, we have received a money transmitter license in 45 of the 47 states that require such a license, as well as in Puerto
Rico and Washington, D.C., and we and have an application pending in one additional state.
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 12 issued patents and 6 patent applications in the United States and 14 patents issued abroad with 4 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 33 issued patents and has 3 pending patent applications
in the United States. Net2Phone has 5 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 two 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
$1.7 million, $10.0 million and $7.2 million on research and development during fiscal 2015, fiscal 2014 and fiscal 2013, respectively,
all related to Fabrix.
EMPLOYEES
As of
October 1, 2015, we had a total of approximately 1,250 employees, of which approximately 1,230 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 Boss Revolution and other retail products generate a significant portion of our revenue, our growth and our results of operations
are substantially dependent upon growth in these products.
We compete
in the international prepaid calling market with many of the established facilities-based carriers, such as AT&T, Verizon,
T-Mobile 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 calling (Over-The-Top) services has adversely affected the sales of Boss Revolution
and our other prepaid calling services. We expect popularity of IP-based services – many of which offer voice communications
for free provided the recipient has a broadband connection - to continue to increase, which may result in increased substitution
and pricing pressure on our Boss Revolution and other international prepaid calling service offerings.
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. These plans now include some of our most
popular international destinations. The growth of these “international unlimited” plans adversely affects our revenues
as these operators gain subscriber market share.
We
may be unable to achieve some, all or any of the benefits that we expect to achieve from our preliminary plan to separate our
businesses into three separate entities.
Under
our preliminary plan to separate our businesses into three separate entities, we expect to fund new business initiatives and retain
our commercial real estate. Our real estate includes our headquarters building and associated garage in Newark, New Jersey, an
operations facility in Piscataway, New Jersey, and a condominium interest in a building in Jerusalem, Israel. We believe that
as a stand-alone, independent public company, we will benefit by, among other things, allowing management to design and implement
corporate policies and strategies that are based solely on the characteristics of our business, focusing our financial resources
solely on our own operations, and implementing and maintaining a capital structure designed to meet our own specific needs. However,
we may not be able to achieve some or all of the benefits expected as a result of spinning-off IDT Telecom and Zedge.
Additionally,
by separating those entities from us, there is a risk that we may be more susceptible to stock market fluctuations and other adverse
events than we would have been were those entities still a part of us due to a reduction in market diversification.
Following
the spin-offs, we expect to have sufficient liquidity to support the development of our business for the medium term. In the future,
however, we may require additional financing for capital requirements and growth initiatives. Accordingly, we will depend on our
ability to generate cash flows from operations and to borrow funds and issue securities in the capital markets to maintain and
expand our business. We may need to incur debt on terms and at interest rates that may not be as favorable as those historically
enjoyed by us. If additional financing is not available when required or is not available on acceptable terms, we may be unable
to operate our business as planned or at all, fund our expansion, successfully promote our business, develop or enhance our products
and services, take advantage of business opportunities or respond to competitive pressures, any of which could have a material
adverse effect on our products and business, financial condition and results of operations.
We expect
that the aggregate market value of the three separate companies will exceed the market capitalization of all of the businesses
being operated by us because investors will be able to invest in a particular company that they are attracted to without having
to also invest in the other two companies. However, this expectation may be incorrect, and the aggregate value of the three separate
companies may be less than the market capitalization of the businesses being operated by us.
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 more
competitors offer international airtime top-up service, our ability to secure competitive direct or indirect, exclusive or non-exclusive,
agreements with international wireless operators could become more difficult or less attractive, thereby having an adverse effect
on our revenues and operations.
Our
customers, particularly our Wholesale Carrier 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. While our most significant customers, from a revenue perspective, vary from quarter to quarter,
our five largest Wholesale Carrier Services customers collectively accounted for 5.7% and 5.1% of total consolidated revenues
from continuing operations in fiscal 2015 and fiscal 2014, respectively. Our Wholesale Carrier Services customers with
the five largest receivables balances collectively accounted for 24.1% and 17.7% of the consolidated gross trade accounts receivable
at July 31, 2015 and 2014, 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 Boss Revolution products, our traditional disposable prepaid
calling card products, our international airtime top-up offerings and other payment services. We utilize a network of several
hundred sub-distributors that sell our Boss Revolution products, traditional disposable prepaid calling cards, 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 Boss Revolution products, prepaid calling card
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 loss of revenue, 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. If the services of any one of them were 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, with 47 states requiring a license. At July 31, 2015, we had obtained licenses to operate as
a money transmitter in 45 U.S. states, Washington, D.C. and Puerto Rico, and have an application 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 that 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.
At July 31,
2015, we had cash, cash equivalents and marketable securities of $150.6 million and short-term restricted cash and cash equivalents
of $91.0 million. At July 31, 2015, we also had $9.1 million in investments in hedge funds, of which less than $0.1 million
was included in “Other current assets” and $9.1 million was included in “Investments” in our consolidated
balance sheet. 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. At July 31, 2015, our accrued expenses included
$49.9 million for these regulatory fees for the years covered by the audit and subsequent years through fiscal 2015. 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 2,509,553shares 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
935,227 shares of our Class B common stock), representing approximately 69.9% of the combined voting power of our outstanding
capital stock, as of October 13, 2015. 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.
Our headquarters
is located in a building that we own in Newark, New Jersey. The building is approximately 500,000 square feet. We occupy approximately
20% of the building. We also own an 800-car parking garage located across the street from the building.
In addition,
we own a building in Piscataway, New Jersey that is used by IDT Telecom for certain of its operations and a 12,400 square foot
condominium interest in a building in Jerusalem, Israel.
We lease
space in New York, NY for corporate purposes as well as a number of other locations in metropolitan areas. These leased spaces
are utilized primarily to house telecommunications equipment and retail operations.
We maintain
our European headquarters in London, England. We also maintain other various international office locations and telecommunications
facilities in regions of Europe, South America, Central America, the Middle East, Asia and Africa where we conduct operations.
Item 3. |
Legal Proceedings. |
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) on a global undersea fiber optic network
that Tyco was deploying at that time. After extensive proceedings, including several decisions and appeals, the New York Court
of Appeals affirmed a lower court decision to dismiss our claim and denied our motion for re-argument of that decision. On June
23, 2015, we filed a new summons and complaint against Tyco in the Supreme Court of the State of New York, County of New York
alleging that Tyco breached the settlement agreement. In September 2015, Tyco filed a motion to dismiss the complaint. The parties
have stipulated to a briefing schedule.
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.
| |
High | | |
Low | |
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 | |
Fiscal year ended July 31, 2015 | |
| | | |
| | |
First Quarter | |
$ | 16.93 | | |
$ | 14.00 | |
Second Quarter | |
$ | 23.24 | | |
$ | 16.40 | |
Third Quarter | |
$ | 22.90 | | |
$ | 16.10 | |
Fourth Quarter | |
$ | 19.99 | | |
$ | 15.95 | |
On October
5, 2015, there were 400 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 5, 2015, the last sales price reported
on the New York Stock Exchange for the Class B common stock was $14.24 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 16 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, 2015, 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, 2015. The graph and table assume that $100 was invested on July 31, 2010 (the last day of trading for the fiscal
year ended July 31, 2010) in shares of our Class B common stock, 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, the NYSE Composite Index
and the S&P Telecommunication Services Index are based on our fiscal year.
| |
7/10 | | |
7/11 | | |
7/12 | | |
7/13 | | |
7/14 | | |
7/15 | |
| |
| | |
| | |
| | |
| | |
| | |
| |
IDT Corporation | |
| 100.00 | | |
| 134.07 | | |
| 105.89 | | |
| 232.59 | | |
| 214.68 | | |
| 261.35 | |
NYSE Composite | |
| 100.00 | | |
| 118.02 | | |
| 117.98 | | |
| 148.00 | | |
| 169.21 | | |
| 175.77 | |
S&P Telecommunication Services | |
| 100.00 | | |
| 119.85 | | |
| 156.58 | | |
| 165.31 | | |
| 179.83 | | |
| 176.71 | |
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 2015.
| |
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, 2015 | |
| — | | |
$ | — | | |
| — | | |
| 5,035,117 | |
June 1 – 30, 2015(2) | |
| 404,967 | | |
$ | 18.52 | | |
| — | | |
| 5,035,117 | |
July 1 – 31, 2015(3) | |
| 136,526 | | |
$ | 18.30 | | |
| — | | |
| 5,035,117 | |
Total | |
| 541,493 | | |
$ | 18.46 | | |
| — | | |
| | |
(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 purchased by us from Howard Jonas on June
25, 2015, based on the closing price on June 23, 2015. |
| |
(3) | 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, 2015 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 millions, except per share data) | |
2015 | | |
2014 | | |
2013 | | |
2012 | | |
2011 | |
STATEMENT OF OPERATIONS DATA: | |
| | |
| | |
| | |
| | |
| |
Revenues | |
$ | 1,596.8 | | |
$ | 1,651.5 | | |
$ | 1,620.6 | | |
$ | 1,506.3 | | |
$ | 1,351.4 | |
Income from continuing operations (a) | |
| 86.1 | | |
| 21.0 | | |
| 18.1 | | |
| 30.9 | | |
| 21.0 | |
Income from continuing operations per common share—basic | |
| 3.69 | | |
| 0.85 | | |
| 0.77 | | |
| 1.45 | | |
| 0.98 | |
Income from continuing operations per common share—diluted | |
| 3.63 | | |
| 0.82 | | |
| 0.72 | | |
| 1.36 | | |
| 0.90 | |
Cash dividends declared per common share (b) | |
| 2.03 | | |
| 0.51 | | |
| 0.83 | | |
| 0.66 | | |
| 0.67 | |
As of July 31, (in millions) | |
2015 | | |
2014 | | |
2013 | | |
2012 | | |
2011 | |
BALANCE SHEET DATA: | |
| | |
| | |
| | |
| | |
| |
Total assets | |
$ | 485.7 | | |
$ | 480.9 | | |
$ | 435.4 | | |
$ | 451.1 | | |
$ | 568.2 | |
Note payable—long term portion | |
| — | | |
| 6.4 | | |
| 6.6 | | |
| 29.7 | | |
| 29.6 | |
(a) | Included
in income from continuing operations in fiscal 2015 was gain on sale of interest in Fabrix
Systems Ltd. of $76.9 million. |
| |
(b) | Cash
dividends declared per common share in fiscal 2015 included special dividends of $0.68
per share and $0.64 per share paid in November 2014 and January 2015, respectively. |
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 two reportable
business segments, Telecom Platform Services and Consumer Phone Services. 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. Operating segments not reportable individually are included in All Other. All Other includes Zedge, which provides
a content platform for mobile device personalization including ringtones, wallpapers, home screen icons and game recommendations.
All Other also includes our real estate holdings and other, smaller, businesses. Until the sale of Fabrix in October 2014, All
Other also 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.
In August
2015, our Board of Directors approved a plan to reorganize into three separate entities by spinning off two business units to
our stockholders. The three separate companies are expected to consist of (1) IDT Telecom, (2) Zedge and (3) other holdings. The
reorganization and the specific components are subject to change and both internal and third party contingencies, and must receive
final approval from our Board of Directors and certain third parties. We are targeting completion of the reorganization in calendar
year 2016.
Discontinued
Operations
On July
31, 2013, we completed a pro rata distribution of the common stock of our subsidiary Straight Path 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.
Revenues,
income before income taxes and net loss of Straight Path, which are included in discontinued operations, were as follows:
Year ended July 31 (in millions) | |
2015 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| |
REVENUES | |
$ | — | | |
$ | — | | |
$ | 1.1 | |
| |
| | | |
| | | |
| | |
LOSS BEFORE INCOME TAXES | |
$ | — | | |
$ | — | | |
$ | (4.6 | ) |
| |
| | | |
| | | |
| | |
NET LOSS | |
$ | — | | |
$ | — | | |
$ | (4.6 | ) |
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 99.0%, 98.5% and 98.9% of our total revenues from continuing operations in fiscal 2015, fiscal 2014 and fiscal
2013, respectively.
Telecom
Platform Services, which represented 99.4%, 99.3% and 99.1% of IDT Telecom’s total revenues in fiscal 2015, 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
Carrier 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 and domestic airtime top-up
and international money transfer sold over our Boss Revolution platform and other channels;
and |
| ● | Hosted
Platform Solutions provides customized communications services that leverage our proprietary
networks, platforms and/or technology to cable companies and other service providers. |
Boss Revolution
PIN-less, which allows our customers to call overseas without the need to enter a PIN, has largely replaced revenues from our
traditional disposable calling cards. 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. 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 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.
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 Carrier Services business.
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 11.2%, 12.0% and 10.0% of total consolidated revenues from continuing operations
in fiscal 2015, fiscal 2014 and fiscal 2013, respectively. Our customers with the five largest receivables balances collectively
accounted for 24.1% and 22.1% of the consolidated gross trade accounts receivable at July 31, 2015 and 2014, 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 $5.6 million and $11.5 million at July 31, 2015 and 2014, respectively.
The allowance for doubtful accounts as a percentage of gross trade accounts receivable decreased to 8.8% at July 31, 2015 from
14.2% at July 31, 2014 as a result of accounts receivable write-offs in fiscal 2015 that reduced the IDT Telecom allowance for
doubtful accounts and gross trade accounts receivable balances. 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 $14.4 million at July 31, 2015 was attributable to our Retail Communications reporting unit in our Telecom Platform
Services segment ($11.2 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. In fiscal 2014, we began renovations of the first four floors of our 520 Broad Street building in order to move our
personnel and offices located at 550 Broad Street, Newark, New Jersey to 520 Broad Street. In April and May 2015, we moved our
Newark operations back into our building at 520 Broad Street and vacated our leased office space at 550 Broad Street. At July
31, 2015 and 2014, the carrying value of the land, building and improvements at 520 Broad Street after the impairment charge was
$44.4 million and $37.7 million, respectively.
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 $154.7 million and $152.0 million at July 31, 2015 and 2014, respectively. 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 in fiscal 2014 from the full recognition of the IDT Global deferred tax assets.
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 $353 million at July 31, 2015. 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 IAD 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, 2015 and 2014, our accrued expenses included $49.9 million and $42.7 million, respectively, for
these regulatory fees for the years covered by the audit and subsequent years. Until a final decision is 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, 2015 and 2014, there
was $22.6 million and $19.8 million, respectively, in outstanding carrier payable disputes, for which we recorded direct cost
of revenues of $9.4 million and $7.9 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, 2018. 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.
RESULTS
OF OPERATIONS
Year
Ended July 31, 2015 compared to Years Ended July 31, 2014 and 2013
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, | |
2015 | | |
2014 | | |
2013 | |
REVENUES: | |
| | |
| | |
| |
IDT Telecom | |
| 99.0 | % | |
| 98.5 | % | |
| 98.9 | % |
All Other | |
| 1.0 | | |
| 1.5 | | |
| 1.1 | |
TOTAL REVENUES | |
| 100.0 | | |
| 100.0 | | |
| 100.0 | |
COSTS AND EXPENSES: | |
| | | |
| | | |
| | |
Direct cost of revenues (exclusive of depreciation and amortization) | |
| 83.2 | | |
| 82.8 | | |
| 83.7 | |
Selling, general and administrative | |
| 13.9 | | |
| 13.9 | | |
| 13.5 | |
Depreciation and amortization | |
| 1.2 | | |
| 1.0 | | |
| 0.9 | |
Research and development | |
| 0.1 | | |
| 0.6 | | |
| 0.4 | |
Severance | |
| 0.5 | | |
| — | | |
| — | |
Impairment of building and improvements | |
| — | | |
| — | | |
| 0.3 | |
TOTAL COSTS AND EXPENSES | |
| 98.9 | | |
| 98.3 | | |
| 98.8 | |
Gain on sale of interest in Fabrix Systems, Ltd | |
| 4.8 | | |
| — | | |
| — | |
Other operating (losses) gains, net | |
| (0.1 | ) | |
| 0.1 | | |
| 0.6 | |
INCOME FROM OPERATIONS | |
| 5.8 | | |
| 1.8 | | |
| 1.8 | |
Interest expense, net | |
| — | | |
| — | | |
| — | |
Other (expense) income, net | |
| — | | |
| (0.3 | | |
| 0.3 | |
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | |
| 5.8 | % | |
| 1.5 | % | |
| 2.1 | % |
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) | |
| | |
| | |
| | |
2015 change from 2014 | | |
2014 change from 2013 | |
Year ended July 31, | |
2015 | | |
2014 | | |
2013 | | |
$ | | |
% | | |
$ | | |
% | |
Revenues | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Telecom Platform Services | |
$ | 1,572.7 | | |
$ | 1,615.6 | | |
$ | 1,588.1 | | |
$ | (42.9 | ) | |
| (2.7 | )% | |
$ | 27.5 | | |
| 1.7 | % |
Consumer Phone Services | |
| 8.6 | | |
| 11.0 | | |
| 14.5 | | |
| (2.4 | ) | |
| (21.7 | ) | |
| (3.5 | ) | |
| (24.1 | ) |
Total revenues | |
$ | 1,581.3 | | |
$ | 1,626.6 | | |
$ | 1,602.6 | | |
$ | (45.3 | ) | |
| (2.8 | )% | |
$ | 24.0 | | |
| 1.5 | % |
Revenues.
IDT Telecom revenues decreased in fiscal 2015 compared to the prior fiscal year due to decreases in both Telecom Platform
Services’ and Consumer Phone Services’ revenues. IDT Telecom revenues increased in fiscal 2014 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. Telecom Platform Services’ revenues, minutes of use and average revenue per minute for fiscal
2015, fiscal 2014 and fiscal 2013 consisted of the following:
(in millions, except revenue per minute) | |
| | |
| | |
| | |
2015 change from 2014 | | |
2014 change from 2013 | |
Year ended July 31, | |
2015 | | |
2014 | | |
2013 | | |
$/# | | |
% | | |
$/# | | |
% | |
Telecom Platform Services Revenues | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Retail Communications | |
$ | 729.1 | | |
$ | 695.8 | | |
$ | 656.7 | | |
$ | 33.3 | | |
| 4.8 | % | |
$ | 39.1 | | |
| 5.9 | % |
Wholesale Telecommunications Services | |
| 596.8 | | |
| 672.3 | | |
| 687.9 | | |
| (75.5 | ) | |
| (11.2 | ) | |
| (15.6 | ) | |
| (2.3 | ) |
Payment Services | |
| 208.3 | | |
| 202.3 | | |
| 193.5 | | |
| 6.0 | | |
| 3.0 | | |
| 8.8 | | |
| 4.5 | |
Hosted Platform Solutions | |
| 38.5 | | |
| 45.2 | | |
| 50.0 | | |
| (6.7 | ) | |
| (14.9 | ) | |
| (4.8 | ) | |
| (9.6 | ) |
Total Telecom Platform Services revenues | |
$ | 1,572.7 | | |
$ | 1,615.6 | | |
$ | 1,588.1 | | |
$ | (42.9 | ) | |
| (2.7 | )% | |
$ | 27.5 | | |
| 1.7 | % |
Minutes of use | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Retail Communications | |
| 9,423 | | |
| 9,596 | | |
| 9,418 | | |
| (173 | ) | |
| (1.8 | )% | |
| 178 | | |
| 1.9 | % |
Wholesale Telecommunications Services | |
| 19,466 | | |
| 19,190 | | |
| 22,365 | | |
| 276 | | |
| 1.4 | | |
| (3,175 | ) | |
| (14.2 | ) |
Hosted Platform Solutions | |
| 737 | | |
| 802 | | |
| 888 | | |
| (65 | ) | |
| (8.0 | ) | |
| (86 | ) | |
| (9.7 | ) |
Total minutes of use | |
| 29,626 | | |
| 29,588 | | |
| 32,671 | | |
| 38 | | |
| 0.1 | % | |
| (3,083 | ) | |
| (9.4 | )% |
Average revenue per minute | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Retail Communications | |
$ | 0.0774 | | |
$ | 0.0725 | | |
$ | 0.0697 | | |
$ | 0.0049 | | |
| 6.7 | % | |
$ | 0.0028 | | |
| 4.0 | % |
Wholesale Telecommunications Services | |
| 0.0307 | | |
| 0.0350 | | |
| 0.0307 | | |
| (0.0043 | ) | |
| (12.5 | ) | |
| 0.0043 | | |
| 13.9 | |
Retail
Communications’ revenues grew 4.8% and 5.9% in fiscal 2015 and fiscal 2014, respectively, compared to the prior fiscal year
due to increased penetration of Boss Revolution within our U.S. retail distribution network, partially offset by continued declines
in sales of traditional disposable calling cards and retail sales in Europe and South America. We launched Boss Revolution in
Germany, Hong Kong, Singapore and Australia in the first half of fiscal 2013. In fiscal 2014, we launched Boss Revolution in Canada.
We expect to introduce instant messaging and free peer-to-peer voice calling within the Boss Revolution app in fiscal 2016. Retail
Communications minutes of use decreased 1.8% in fiscal 2015 compared to fiscal 2014 because the increase in Boss Revolution minutes
of use in the U.S. was more than offset by the decrease in traditional disposable calling cards’ minutes of use plus the
decrease in minutes of use in Europe and Asia. Retail Communications minutes of use increased 1.9% in fiscal 2014 compared to
fiscal 2013 led by increased penetration of Boss Revolution within our U.S. retail distribution network, partially offset by continued
declines in sales of traditional disposable calling cards and retail sales in Europe. Retail Communications revenue comprised
46.4%, 43.1% and 41.3% of Telecom Platform Services’ revenue in fiscal 2015, fiscal 2014 and fiscal 2013, respectively.
Wholesale
Carrier Services’ revenues declined 11.2% and 2.3% in fiscal 2015 and fiscal 2014, respectively, compared to the prior fiscal
year. In fiscal 2015 compared to fiscal 2014, the traffic mix shifted towards lower revenue per minute destinations and the exchange
rate driven arbitrage-pricing opportunities in Latin America declined. In fiscal 2014 compared to fiscal 2013, the industry-wide
increase in termination rates to certain key destinations in Southern Asia resulted in a decline in revenues, as well as direct
cost of revenues. Wholesale Carrier Services minutes of use increased 1.4% in fiscal 2015 compared to fiscal 2014 and decreased
14.2% in fiscal 2014 compared to fiscal 2013. The increase in fiscal 2015 minutes of use compared to fiscal 2014 was primarily
due to an increase in carrier sales as well as a slight increase in our web-based prepaid termination service. 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. Wholesale Carrier Services revenue comprised 37.9%, 41.6 % and 43.3% of Telecom Platform Services’ revenue in fiscal
2015, fiscal 2014 and fiscal 2013, respectively.
Payment Services’ revenues grew 3.0% and 4.5% in fiscal 2015
and fiscal 2014, respectively, compared to the prior fiscal year. The increase in fiscal 2015 compared to fiscal 2014 was due to
an increase in international and domestic airtime top-up revenue, as well as an increase in revenue from our international money
transfer service and from our Gibraltar-based bank. The increase in fiscal 2014 compared to fiscal 2013 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 platform.
In fiscal 2014, we initiated an international money transfer service on a limited basis over our Boss Revolution platform. At July
31, 2015, we have received a money transmitter license in 45 of the 47 states that require such a license, as well as in Puerto
Rico and Washington, D.C., and have an application pending in one additional state. We expect to begin offering a mobile/web based
money transfer service for Boss Revolution customers with access to credit cards or bank accounts before the end of calendar 2015.
Payment Services revenue comprised 13.3%, 12.5% and 12.2% of Telecom Platform Services’ revenue in fiscal 2015, fiscal 2014
and fiscal 2013, respectively.
Hosted
Platform Solutions’ revenues declined 14.9% and 9.6% in fiscal 2015 and fiscal 2014, respectively, compared to the prior
fiscal year. The decline in fiscal 2015 compared to fiscal 2014 was due to decreases in revenues from managed services and from
our cable telephony business. Within our cable telephony business, we renewed multi-year contracts with key cable telephony
customers in the second half of fiscal 2014, but at lower rates, reflecting the long-term decline in the underlying costs of hosted
telephony services. In addition, several of our other hosted managed services operators are continuing to experience attrition
in their customer base. 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. Hosted Platform Solutions revenue comprised 2.4%,
2.8% and 3.2% of Telecom Platform Services’ revenues in fiscal 2015, fiscal 2014 and fiscal 2013, respectively. Hosted Platform
Solutions minutes of use decreased 8.0% and 9.7% in fiscal 2015 and fiscal 2014, respectively, compared to the prior fiscal year.
In fiscal 2015 compared to fiscal 2014, the decrease was primarily a result of the decline in minutes of use from managed services
and cable telephony customers. In fiscal 2014 compared to fiscal 2013, the decrease was primarily a result of the decline in minutes
of use from managed services 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 meaningful metric for evaluating that business’
performance.
Consumer
Phone Services’ revenues declined 21.7% and 24.1% in fiscal 2015 and fiscal 2014, 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 5,100 at July
31, 2015 compared to 6,200 at July 31, 2014 and 7,800 at July 31, 2013. 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 22,700 at July 31, 2015 compared to 28,500
at July 31, 2014 and 35,700 at July 31, 2013. 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) | |
| | |
| | |
| | |
2015 change from 2014 | | |
2014 change from 2013 | |
Year ended July 31, | |
2015 | | |
2014 | | |
2013 | | |
$ | | |
% | | |
$ | | |
% | |
Direct cost of revenues | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Telecom Platform Services | |
$ | 1,322.3 | | |
$ | 1,358.6 | | |
$ | 1,347.0 | | |
$ | (36.3 | ) | |
| (2.7 | )% | |
$ | 11.6 | | |
| 0.9 | % |
Consumer Phone Services | |
| 4.0 | | |
| 4.9 | | |
| 6.3 | | |
| (0.9 | ) | |
| (17.9 | ) | |
| (1.4 | ) | |
| (21.7 | ) |
Total direct cost of revenues | |
$ | 1,326.3 | | |
$ | 1,363.5 | | |
$ | 1,353.3 | | |
$ | (37.2 | ) | |
| (2.7 | )% | |
$ | 10.2 | | |
| 0.8 | % |
Year ended July 31, | |
2015 | | |
2014 | | |
2013 | | |
2015 change from 2014 | | |
2014 change from 2013 | |
Direct cost of revenues as a percentage of revenues | |
| | |
| | |
| | |
| | |
| |
Telecom Platform Services | |
| 84.1 | % | |
| 84.1 | % | |
| 84.8 | % | |
| —% | | |
| (0.7 | )% |
Consumer Phone Services | |
| 46.8 | | |
| 44.6 | | |
| 43.3 | | |
| 2.2 | | |
| 1.3 | |
Total | |
| 83.9 | % | |
| 83.8 | % | |
| 84.4 | % | |
| 0.1 | % | |
| (0.6 | )% |
Direct
Cost of Revenues. Direct cost of revenues in Telecom Platform Services decreased in fiscal 2015 compared to fiscal 2014, which
reflects the declines in Telecom Platform Services’ 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 as a percentage of revenues in Telecom Platform Services was unchanged in fiscal 2015 compared to fiscal 2014.
The loss of revenue from the relatively high margin exchange-rate driven arbitrage pricing opportunities in Latin American, the
decline in margin contribution from the cable telephony business, and pricing pressure on airtime top-up offerings in fiscal 2015
compared to fiscal 2014 were offset by an increase in Retail Communications’ average revenue per minute. Direct cost of
revenues as a percentage of revenues in Telecom Platform Services decreased 70 basis points in fiscal 2014 compared to fiscal
2013 as a result of the increase in average revenue per minute in both Retail Communications and Wholesale Carrier Services in
fiscal 2014 compared to fiscal 2013. In addition, the decrease reflected 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 Carrier 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 because of the declining customer base.
(in millions) | |
| | |
| | |
| | |
2015 change from 2014 | | |
2014 change from 2013 | |
Year ended July 31, | |
2015 | | |
2014 | | |
2013 | | |
$ | | |
% | | |
$ | | |
% | |
Selling, general and administrative expenses | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Telecom Platform Services | |
$ | 199.6 | | |
$ | 198.8 | | |
$ | 189.3 | | |
$ | 0.8 | | |
| 0.4 | % | |
$ | 9.5 | | |
| 5.0 | % |
Consumer Phone Services | |
| 3.3 | | |
| 4.3 | | |
| 6.4 | | |
| (1.0 | ) | |
| (22.6 | ) | |
| (2.1 | ) | |
| (32.8 | ) |
Total selling, general and administrative expenses | |
$ | 202.9 | | |
$ | 203.1 | | |
$ | 195.7 | | |
$ | (0.2 | ) | |
| (0.1 | )% | |
$ | 7.4 | | |
| 3.8 | % |
Selling,
General and Administrative. Selling, general and administrative expenses in our Telecom Platform Services segment increased
slightly in fiscal 2015 compared to fiscal 2014 primarily due to increases in marketing, advertising and internal commission costs
partially offset by a decrease in employee compensation. The employee compensation decrease was the result of the workforce reduction
in February and March 2015 that was partially offset by annual payroll increases. The increase in selling, general and administrative
expenses in our Telecom Platform Services segment in fiscal 2014 compared to fiscal 2013 was due to increases in employee compensation,
mostly from the expansion of our retail direct sales force in the U.S., as well as an increase in third-party transaction processing
costs. External legal fees significantly decreased in fiscal 2014 compared to fiscal 2013 since certain legal matters were resolved.
As a percentage of Telecom Platform Services’ revenues, Telecom Platform Services’ selling, general and administrative
expenses were 12.7%, 12.3% and 11.9% in fiscal 2015, fiscal 2014 and fiscal 2013, respectively.
Selling,
general and administrative expenses in our Consumer Phone Services segment decreased in fiscal 2015 and fiscal 2014 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) | |
| | |
| | |
| | |
2015 change from 2014 | | |
2014 change from 2013 | |
Year ended July 31, | |
2015 | | |
2014 | | |
2013 | | |
$ | | |
% | | |
$ | | |
% | |
Depreciation and amortization | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Telecom Platform Services | |
$ | 16.2 | | |
$ | 13.8 | | |
$ | 12.3 | | |
$ | 2.4 | | |
| 17.4 | % | |
$ | 1.5 | | |
| 11.6 | % |
Consumer Phone Services | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total depreciation and amortization | |
$ | 16.2 | | |
$ | 13.8 | | |
$ | 12.3 | | |
$ | 2.4 | | |
| 17.4 | % | |
$ | 1.5 | | |
| 11.6 | % |
Depreciation
and Amortization. The increase in depreciation and amortization expense in fiscal 2015 and fiscal 2014 compared to the prior
fiscal year was due to increases in depreciation of capitalized costs of consultants and employees developing internal use software.
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 because of an audit.
(in millions) | |
| | |
| | |
| | |
2015 change from 2014 | | |
2014 change from 2013 | |
Year ended July 31, | |
2015 | | |
2014 | | |
2013 | | |
$ | | |
% | | |
$ | | |
% | |
Severance expense | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Telecom Platform Services | |
$ | 7.7 | | |
$ | — | | |
$ | — | | |
$ | 7.7 | | |
| nm | | |
$ | — | | |
| —% | |
Consumer Phone Services | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Total severance expense | |
$ | 7.7 | | |
$ | — | | |
$ | — | | |
$ | 7.7 | | |
| nm | | |
$ | — | | |
| —% | |
nm—not
meaningful
Severance
Expense. In February and March 2015, we completed a reduction of our workforce. As a result, IDT Telecom incurred severance
expense of $5.8 million in fiscal 2015. In addition, severance expense in fiscal 2015 included $1.9 million due to a downsizing
of certain Telecom Platform Services’ sales and administrative functions in Europe and the U.S.
(in millions) Year ended July 31, | |
2015 | | |
2014 | | |
2013 | |
Telecom Platform Services-Other operating gains, net | |
| | |
| | |
| |
Gains related to legal matters, net | |
$ | — | | |
$ | 0.7 | | |
$ | 9.3 | |
Other
Operating Gain, nets. The Telecom Platform Services segment’s income from operations in fiscal 2014 and fiscal 2013
included gains related to legal matters.
(in millions) | |
| | |
| | |
| | |
2015 change from 2014 | | |
2014 change from 2013 | |
Year ended July 31, | |
2015 | | |
2014 | | |
2013 | | |
$ | | |
% | | |
$ | | |
% | |
Income from operations | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
Telecom Platform Services | |
$ | 27.0 | | |
$ | 45.1 | | |
$ | 48.7 | | |
$ | (18.1 | ) | |
| (40.2 | )% | |
$ | (3.6 | ) | |
| (7.4 | )% |
Consumer Phone Services | |
| 1.3 | | |
| 1.8 | | |
| 1.8 | | |
| (0.5 | ) | |
| (30.0 | ) | |
| — | | |
| (1.5 | ) |
Total income from operations | |
$ | 28.3 | | |
$ | 46.9 | | |
$ | 50.5 | | |
$ | (18.6 | ) | |
| (39.8 | )% | |
$ | (3.6 | ) | |
| (7.2 | )% |
All
Other
Currently,
we report aggregate results for all of our operating businesses other than IDT Telecom in All Other. Beginning in fiscal 2015,
Zedge is included in All Other. Comparative results have been reclassified and restated as if Zedge was included in All Other
in all periods presented. In addition, Fabrix was included in All Other until it was sold in October 2014. Therefore, only two
months of Fabrix’ results of operations is included in fiscal 2015 compared to twelve months in fiscal 2014 and fiscal 2013.
(in millions) | |
| | |
| | |
| | |
2015 change from 2014 | | |
2014 change from 2013 | |
Year ended July 31, | |
2015 | | |
2014 | | |
2013 | | |
$ | | |
% | | |
$ | | |
% | |
Revenues | |
$ | 15.4 | | |
$ | 24.9 | | |
$ | 18.0 | | |
$ | (9.5 | ) | |
| (38.3 | )% | |
$ | 6.9 | | |
| 38.4 | % |
Direct cost of revenues | |
| (2.0 | ) | |
| (3.7 | ) | |
| (2.3 | ) | |
| 1.7 | | |
| 45.8 | | |
| (1.4 | ) | |
| (65.2 | ) |
Selling, general and administrative | |
| (8.3 | ) | |
| (11.0 | ) | |
| (8.8 | ) | |
| 2.7 | | |
| 24.6 | | |
| (2.2 | ) | |
| (24.7 | ) |
Depreciation | |
| (2.3 | ) | |
| (2.5 | ) | |
| (2.4 | ) | |
| 0.2 | | |
| 10.7 | | |
| (0.1 | ) | |
| (1.6 | ) |
Research and development | |
| (1.7 | ) | |
| (10.0 | ) | |
| (7.2 | ) | |
| 8.3 | | |
| 83.5 | | |
| (2.8 | ) | |
| (39.8 | ) |
Gain on sale of interest in Fabrix Systems Ltd. | |
| 76.9 | | |
| — | | |
| — | | |
| 76.9 | | |
| nm | | |
| — | | |
| — | |
Impairment of building and improvements | |
| — | | |
| — | | |
| (4.4 | ) | |
| — | | |
| — | | |
| 4.4 | | |
| 100.0 | |
Other operating gain | |
| — | | |
| 0.6 | | |
| — | | |
| (0.6 | ) | |
| (100.0 | ) | |
| 0.6 | | |
| nm | |
Income (loss) from operations | |
$ | 78.0 | | |
$ | (1.7 | ) | |
$ | (7.1 | ) | |
$ | 79.7 | | |
| nm | | |
$ | 5.4 | | |
| 75.5 | % |
nm—not
meaningful
Gain
on Sale of Interest in Fabrix Systems Ltd. On October 8, 2014, we completed the sale of our interest 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 was $68.1 million,
after reflecting the impact of working capital and other adjustments. We and the other shareholders placed $13.0 million of the
proceeds in escrow for the resolution of post-closing claims that may arise. Any unclaimed escrow balance will be released in
two tranches in October 2015 and April 2016. In fiscal 2015, we recorded a gain on the sale of our interest in Fabrix of $76.9
million.
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. In fiscal 2014, we began renovations of the first four floors of our 520
Broad Street building in order to move our personnel and offices located at 550 Broad Street, Newark, New Jersey to 520 Broad
Street. In April and May 2015, we moved our Newark operations back into our building at 520 Broad Street and vacated our leased
office space at 550 Broad Street. At July 31, 2015 and 2014, the carrying value of the land, building and improvements at 520
Broad Street after the impairment charge was $44.4 million and $37.7 million, respectively.
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.
Following
is the results of operations in fiscal 2015, fiscal 2014 and fiscal 2013 of Fabrix, which was included in All Other until it was
sold in October 2014:
Fabrix
(in millions) | |
| | |
| | |
| | |
2015 change from 2014 | | |
2014 change from 2013 | |
Year ended July 31, | |
2015 | | |
2014 | | |
2013 | | |
$ | | |
% | | |
$ | | |
% | |
Revenues | |
$ | 4.2 | | |
$ | 16.6 | | |
$ | 10.6 | | |
$ | (12.4 | ) | |
| (74.9 | )% | |
$ | 6.0 | | |
| 57.4 | % |
Direct cost of revenues | |
| 0.9 | | |
| 2.8 | | |
| 1.4 | | |
| (1.9 | ) | |
| (67.2 | ) | |
| 1.4 | | |
| 97.8 | |
Selling, general and administrative | |
| 0.6 | | |
| 4.1 | | |
| 3.1 | | |
| (3.5 | ) | |
| (86.1 | ) | |
| 1.0 | | |
| 36.9 | |
Depreciation | |
| 0.1 | | |
| 0.4 | | |
| 0.3 | | |
| (0.3 | ) | |
| (81.7 | ) | |
| 0.1 | | |
| 18.3 | |
Research and development | |
| 1.7 | | |
| 10.0 | | |
| 7.2 | | |
| (8.3 | ) | |
| (83.5 | ) | |
| 2.8 | | |
| 39.8 | |
Income (loss) from operations | |
$ | 0.9 | | |
$ | (0.7 | ) | |
$ | (1.4 | ) | |
$ | 1.6 | | |
| 228.3 | % | |
$ | 0.7 | | |
| 46.8 | % |
Corporate
(in millions) | |
| | |
| | |
| | |
2015 change from 2014 | | |
2014 change from 2013 | |
Year ended July 31, | |
2015 | | |
2014 | | |
2013 | | |
$ | | |
% | | |
$ | | |
% | |
General and administrative expenses | |
$ | 10.9 | | |
$ | 14.8 | | |
$ | 13.9 | | |
$ | (3.9 | ) | |
| (26.1 | )% | |
$ | 0.9 | | |
| 6.4 | % |
Depreciation and amortization | |
| — | | |
| — | | |
| 0.1 | | |
| — | | |
| — | | |
| (0.1 | ) | |
| (68.6 | ) |
Severance expense | |
| 0.6 | | |
| — | | |
| — | | |
| 0.6 | | |
| nm | | |
| — | | |
| — | |
Other operating loss | |
| 1.6 | | |
| 0.5 | | |
| — | | |
| 1.1 | | |
| 242.0 | | |
| 0.5 | | |
| nm | |
Loss from operations | |
$ | 13.1 | | |
$ | 15.3 | | |
$ | 14.0 | | |
$ | (2.2 | ) | |
| (14.1 | )% | |
$ | 1.3 | | |
| 9.2 | % |
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 decrease in Corporate general and administrative expenses in fiscal 2015 compared to fiscal 2014 was
primarily due to decreases in stock-based compensation, legal and consulting fees, and the charitable contributions accrual. 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 2015, fiscal 2014 and fiscal 2013, we accrued $1.1 million, $1.4
million and $0.9 million, respectively, for contributions to the IDT Charitable Foundation. As a percentage of our total consolidated
revenues from continuing operations, Corporate general and administrative expenses was 0.7%, 0.9% and 0.9% in fiscal 2015, fiscal
2014 and fiscal 2013, respectively.
Severance
expense. In February and March 2015, we completed a reduction of our workforce. As a result, Corporate incurred severance
expense of $0.6 million in fiscal 2015.
Other
Operating Loss. Corporate’s loss from operations in fiscal 2015 included a loss of $1.5 million related to legal matters.
Consolidated
In February
and March 2015, we completed a reduction of our workforce and incurred severance expense of $6.2 million in fiscal 2015. In addition,
severance expense in fiscal 2015 included $1.9 million due to a downsizing of certain IDT Telecom sales and administrative functions
in Europe and the U.S. in the first quarter of fiscal 2015, and an additional $0.2 million in the fourth quarter of fiscal 2015.
The following
is a discussion of our consolidated stock-based compensation expense, and our consolidated income and expense line items below
income from operations.
Stock-Based
Compensation Expense. Stock-based compensation expense included in consolidated selling, general and administrative expenses
was $5.2 million, $5.4 million and $5.9 million in fiscal 2015, fiscal 2014 and fiscal 2013, respectively. At July 31, 2015, unrecognized
compensation cost related to non-vested stock-based compensation, including stock options and restricted stock, was an aggregate
of $7.8 million. The unrecognized compensation cost is expected to be recognized over the remaining vesting period that ends in
2020.
(in millions) | |
| | |
| | |
| | |
2015 change from 2014 | | |
2014 change from 2013 | |
Year ended July 31, | |
2015 | | |
2014 | | |
2013 | | |
$ | | |
% | | |
$ | | |
% | |
Income from operations | |
$ | 93.1 | | |
$ | 29.8 | | |
$ | 29.4 | | |
$ | 63.3 | | |
| 211.8 | % | |
$ | 0.4 | | |
| 1.5 | % |
Interest expense, net | |
| (0.2 | ) | |
| (0.1 | ) | |
| (0.8 | ) | |
| (0.1 | ) | |
| (7.4 | ) | |
| 0.7 | | |
| 82.0 | |
Other (expense) income, net | |
| (0.7 | ) | |
| (4.7 | ) | |
| 5.4 | | |
| 4.0 | | |
| 85.4 | | |
| (10.1 | ) | |
| (187.3 | ) |
Provision for income taxes | |
| (6.1 | ) | |
| (4.0 | ) | |
| (15.9 | ) | |
| (2.1 | ) | |
| (52.9 | ) | |
| 11.9 | | |
| 74.9 | |
Income from continuing operations | |
| 86.1 | | |
| 21.0 | | |
| 18.1 | | |
| 65.1 | | |
| 309.9 | | |
| 2.9 | | |
| 16.2 | |
Loss from discontinued operations, net of tax | |
| — | | |
| — | | |
| (4.7 | ) | |
| — | | |
| — | | |
| 4.7 | | |
| 100.0 | |
Net income | |
| 86.1 | | |
| 21.0 | | |
| 13.4 | | |
| 65.1 | | |
| 309.9 | | |
| 7.6 | | |
| 56.3 | |
Net income attributable to noncontrolling interests | |
| (1.6 | ) | |
| (2.2 | ) | |
| (1.8 | ) | |
| 0.6 | | |
| 27.0 | | |
| (0.4 | ) | |
| (21.2 | ) |
Net income attributable to IDT Corporation | |
$ | 84.5 | | |
$ | 18.8 | | |
$ | 11.6 | | |
$ | 65.7 | | |
| 349.8 | % | |
$ | 7.2 | | |
| 61.8 | % |
Other
(Expense) Income, net. Other (expense) income, net consists of the following:
(in millions) Year ended July 31, | |
2015 | | |
2014 | | |
2013 | |
Foreign currency transaction (losses) gains | |
$ | (1.7 | ) | |
$ | (5.9 | ) | |
$ | 2.5 | |
Gain on investments | |
| 1.4 | | |
| 1.2 | | |
| 2.7 | |
Gain on modification and early termination of note payable | |
| — | | |
| — | | |
| 0.2 | |
Other | |
| (0.4 | ) | |
| — | | |
| — | |
TOTAL | |
$ | (0.7 | ) | |
$ | (4.7 | ) | |
$ | 5.4 | |
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 2013, we recognized a gain of $0.2 million
on the modification and early termination of the note payable.
Income
Taxes. The $76.9 million gain on the sale of our interest in Fabrix in fiscal 2015 was recorded by a wholly-owned non-U.S.
subsidiary. The gain is not taxable in the subsidiary’s tax domicile and is not subject to U.S. tax until repatriated. There
are no current plans to repatriate the proceeds of the sale. The increase in income tax expense in fiscal 2015 compared to fiscal
2014 was primarily due to an increase in foreign income tax expense, partially offset by a decrease in federal income tax expense.
Foreign income tax expense increased in fiscal 2015 compared to fiscal 2014 primarily due to a benefit from income taxes of $4.1
million recorded in fiscal 2014 from the full recognition of the IDT Global deferred tax assets. In fiscal 2014, we determined
that our valuation allowance on the losses of IDT Global were no longer required due to an internal reorganization that generated
income and a projection that the income would continue. Federal income tax expense decreased due to the decrease in domestic income
before income taxes in fiscal 2015 compared to fiscal 2014. 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.
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. These changes will apply to our taxable year beginning on August
1, 2015. We do not expect these new regulations to have a material impact on our results of operations, financial position or
cash flows.
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.
Net
Income Attributable to Noncontrolling Interests. The decrease in the net income attributable to noncontrolling interests in
fiscal 2015 compared to fiscal 2014 was due to the decrease in net income of certain IDT Telecom subsidiaries, the increase in
Fabrix’ net loss and the change in Zedge’s results of operations from net income to net loss. 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
of 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 in Fabrix.
LIQUIDITY
AND CAPITAL RESOURCES
General
We currently
expect our cash from operations in fiscal 2016 and the balance of cash, cash equivalents and marketable securities that we held
on July 31, 2015 to be sufficient to meet our currently anticipated working capital and capital expenditure requirements during
fiscal 2016.
At July
31, 2015, we had cash, cash equivalents and marketable securities of $150.6 million and a deficit in working capital (current
liabilities in excess of current assets) of $7.7 million. At July 31, 2015, we also had $9.1 million in investments in hedge funds,
of which less than $0.1 million was included in “Other current assets” and $9.1 million was included in “Investments”
in our consolidated balance sheet.
We treat
unrestricted cash and cash equivalents held by IDT Financial Services Ltd., our Gibraltar-based bank, and IDT Payment Services
as substantially restricted and unavailable for other purposes. At July 31, 2015, “Cash and cash equivalents” in our
consolidated balance sheet included an aggregate of $7.5 million held by IDT Financial Services Ltd. and IDT Payment Services
that was unavailable for other purposes.
At July
31, 2015, we had restricted cash and cash equivalents of $91.0 million, all of which was included in “Restricted cash and
cash equivalents-short-term” in our consolidated balance sheet. Our restricted cash and cash equivalents primarily include
restricted balances pursuant to banking regulatory and other requirements and customer deposits related to IDT Financial Services
Ltd.
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 $353 million at July 31, 2015. 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, | |
2015 | | |
2014 | | |
2013 | |
Cash flows provided by (used in) | |
| | |
| | |
| |
Operating activities | |
$ | 30.5 | | |
$ | 45.7 | | |
$ | 57.2 | |
Investing activities | |
| 2.9 | | |
| (18.9 | ) | |
| (25.6 | ) |
Financing activities | |
| (70.2 | ) | |
| (25.4 | ) | |
| (36.4 | ) |
Effect of exchange rate changes on cash and cash equivalents | |
| (6.7 | ) | |
| 0.8 | | |
| 1.2 | |
(Decrease) increase in cash and cash equivalents from continuing operations | |
| (43.5 | ) | |
| 2.2 | | |
| (3.6 | ) |
Discontinued operations | |
| — | | |
| — | | |
| (3.0 | ) |
(Decrease) increase in cash and cash equivalents | |
$ | (43.5 | ) | |
$ | 2.2 | | |
$ | (6.6 | ) |
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
2015, fiscal 2014 and fiscal 2013, Fabrix received $2.0 million, $13.4 million and $16.0 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 2015
and fiscal 2014, we paid $2.8 million and $1.0 million, respectively, in connection with this obligation. At July 31, 2015, our
estimated liability for this obligation was $0.3 million.
Investing
Activities
Our capital
expenditures were $28.6 million in fiscal 2015 compared to $17.0 million in fiscal 2014 and $14.5 million in fiscal 2013. The
increase was primarily due to expenditures for the renovations of the first four floors of our building located at 520 Broad Street,
Newark, New Jersey. We currently anticipate that total capital expenditures in fiscal 2016 will be approximately $19 million to
$21 million, which includes the remaining expected expenditures for the renovations of 520 Broad Street. In April and May 2015,
we moved our Newark operations back into our building at 520 Broad Street and vacated our leased office space at 550 Broad Street.
We expect to fund our capital expenditures with our net cash provided by operating activities and cash, cash equivalents and marketable
securities on hand.
On October
8, 2014, we completed the sale of our interest 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 was $68.1 million, after reflecting the impact of working capital and other
adjustments. At July 31, 2015, we had received cash of $59.7 million and had aggregate receivables of $8.5 million, which was
classified as “Receivable from sale of interest in Fabrix Systems Ltd.” in our consolidated balance sheet. We and
the other shareholders placed $13.0 million of the proceeds in escrow for the resolution of post-closing claims that may arise.
Any unclaimed escrow balance will be released in two tranches in October 2015 and April 2016. In fiscal 2015, we recorded a gain
on the sale of our interest in Fabrix of $76.9 million.
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
2015, fiscal 2014 and fiscal 2013, we used cash of $0.1 million, $0.2 million and $1.2 million, 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
$0.1 million, $1.0 million and $0.1 million in fiscal 2015, fiscal 2014 and fiscal 2013, 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
2015, fiscal 2014 and fiscal 2013, we used cash of $52.4 million, $20.7 million and $11.4 million, respectively, to purchase marketable
securities.
Proceeds
from maturities and sales of marketable securities were $24.1 million, $17.3 million and $1.7 million in fiscal 2015, fiscal 2014
and fiscal 2013, respectively.
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 fiscal
2015, we paid aggregate cash dividends of $2.03 per share on our Class A common stock and Class B common stock, or $47.6 million
in total. The aggregate cash dividends included special dividends of $0.68 per share and $0.64 per share paid in November 2014
and January 2015, respectively. 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. On September 25, 2015, our Board of Directors declared
a dividend of $0.18 per share for the fourth quarter of fiscal 2015 to holders of our Class A common stock and Class B common
stock. The dividend will be paid on or about October 15, 2015 to stockholders of record as of the close of business on October
7, 2015.
We distributed
cash of $2.1 million, $1.9 million and $2.2 million in fiscal 2015, fiscal 2014 and fiscal 2013, 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%. 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 $3.4 million in fiscal 2015, $0.6 million in fiscal 2014 and $0.9 million in
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, 2017. 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 2015, fiscal 2014 and fiscal 2013, we borrowed nil, $56.0 million and $21.9
million, respectively, under the facility, and we repaid $13.0 million $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 $110.0 million. At July 31, 2015 and 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 $90.1 and $73.7 million, respectively.
Repayments
of other borrowings were $0.3 million, $0.3 million and $21.3 million in fiscal 2015, fiscal 2014 and fiscal 2013, 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 $21.1 million and they released us from the note and discharged the mortgage. In addition, we paid the outstanding principal
of $6.4 million on the mortgage on our building in Piscataway, New Jersey on the maturity date of September 1, 2015.
In fiscal
2015, fiscal 2014 and fiscal 2013, we paid $2.8 million, $1.0 million and $0.3 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.
On June
25, 2015, we purchased 404,967 shares of our Class B common stock from Howard S. Jonas, our Chairman of the Board and former Chief
Executive Officer. The purchase price was $18.52 per share, the share price at the close of business on June 23, 2015. The aggregate
purchase price was $7.5 million.
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. In fiscal
2015, we repurchased 29,675 shares of our Class B common stock for an aggregate purchase price of $0.4 million. 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. At July 31, 2015, 5.0 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 decreased to $64.2 million at July 31, 2015 from $80.8 million at July 31, 2014 primarily due to a $12.2
million decrease in IDT Telecom’s gross trade accounts receivable balance and due to the sale of our interest in Fabrix.
At July 31, 2014, Fabrix’ gross trade accounts receivable balance was $4.8 million. The decrease in IDT Telecom’s
gross trade accounts receivable balance was primarily due to collections in fiscal 2015 in excess of amounts billed during the
period, accounts receivable written-off and the effect of changes in foreign currency exchange rates.
The allowance
for doubtful accounts as a percentage of gross trade accounts receivable decreased to 8.8% at July 31, 2015 from 14.2% at July
31, 2014 as a result of accounts receivable write-offs in fiscal 2015 that reduced the IDT Telecom allowance for doubtful accounts
and gross trade accounts receivable balances.
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. In addition, we recorded deferred revenue
from Fabrix’s sales of software licenses. Deferred revenue decreased to $86.3 million at July 31, 2015 from $101.2 million
at July 31, 2014 primarily due to the sale of our interest in Fabrix and a $1.9 million decrease in IDT Telecom’s deferred
revenue balance. At July 31, 2014, Fabrix’ deferred revenue balance was $12.9 million. The decrease in IDT Telecom’s
deferred revenue balance was due to a decrease in the U.S. balance, partially offset by an increase in Europe’s balance.
CONTRACTUAL
OBLIGATIONS AND OTHER COMMERCIAL COMMITMENTS
The following
tables quantify our future contractual obligations and commercial commitments at July 31, 2015:
CONTRACTUAL
OBLIGATIONS
Payments
Due by Period
(in millions) | |
Total | | |
Less than 1 year | | |
1—3 years | | |
4—5 years | | |
After 5 years | |
| |
| | |
| | |
| | |
| | |
| |
Operating leases | |
$ | 9.0 | | |
$ | 3.4 | | |
$ | 4.0 | | |
$ | 1.5 | | |
$ | 0.1 | |
Purchase commitments | |
| 2.8 | | |
| 2.8 | | |
| — | | |
| — | | |
| — | |
Notes payable (including interest) | |
| 6.4 | | |
| 6.4 | | |
| — | | |
| — | | |
| — | |
TOTAL CONTRACTUAL OBLIGATIONS | |
$ | 18.2 | | |
$ | 12.6 | | |
$ | 4.0 | | |
$ | 1.5 | | |
$ | 0.1 | |
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) | |
$ | 3.2 | | |
$ | 3.2 | | |
$ | — | | |
$ | — | | |
$ | — | |
(1) |
The above table does not include an aggregate of $11.3 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 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, 2015, we had aggregate performance bonds of $11.3 million outstanding.
Item
7A. Quantitative and Qualitative Disclosures about Market Risks.
FOREIGN
CURRENCY RISK
Revenues
from our international operations represented 30%, 30% and 23% of our consolidated revenues from continuing operations in fiscal
2015, fiscal 2014 and fiscal 2013, 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.
We enter
into foreign exchange forward contracts as hedges against unfavorable fluctuations in the U.S. dollar – Norwegian krone,
or NOK, exchange rate. Zedge is based in Norway and much of its operations are located in Norway. While this limits the downside
risk of adverse foreign exchange movements, it also limits future gains from favorable movements. We do not apply hedge accounting
to these contracts, therefore the changes in fair value are recorded in earnings. By using derivative instruments to mitigate
exposures to changes in foreign exchange rates, we are exposed to credit risk from the failure of the counterparty to perform
under the terms of the contract. We minimize the credit or repayment risk by entering into transactions with high-quality counterparties.
Our outstanding
contracts at July 31, 2015 were as follows:
Settlement Date | |
U.S. Dollar Amount | | |
NOK Amount | |
September 2015 | |
| 750,000 | | |
| 6,163,000 | |
November 2015 | |
| 2,729,000 | | |
| 22,169,000 | |
January 2016 | |
| 3,000,000 | | |
| 24,257,000 | |
May 2016 | |
| 1,000,000 | | |
| 8,239,000 | |
July 2016 | |
| 1,000,000 | | |
| 8,200,000 | |
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, 2015, the carrying value of our marketable securities and investments in hedge funds
were $40.3 million and $9.1 million, respectively. 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. 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, 2015.
Changes
in Internal Control over Financial Reporting
There
were no changes in our internal control over financial reporting during the fourth quarter of fiscal 2015 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 51 and 52.
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
Anthony
S. Davidson—Senior Vice President—Technology
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, 2015, 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, 2015, 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, 2015, 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, 2015, 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, 2015, 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. | Exhibits.
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. |
The
exhibits listed in paragraph (b) of this item are filed, furnished, or incorporated by reference as part of this Form 10-K.
Certain
of the agreements filed as exhibits to this Form 10-K contain representations and warranties by the parties to the agreements
that have been made solely for the benefit of the parties to the agreement. These representations and warranties:
| ● | may
have been qualified by disclosures that were made to the other parties in connection
with the negotiation of the agreements, which disclosures are not necessarily reflected
in the agreements; |
| ● | may
apply standards of materiality that differ from those of a reasonable investor; and |
| ● | were
made only as of specified dates contained in the agreements and are subject to subsequent
developments and changed circumstances. |
Accordingly,
these representations and warranties may not describe the actual state of affairs as of the date that these representations and
warranties were made or at any other time. Investors should not rely on them as statements of fact.
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. |
|
|
|
10.03(3) |
|
Third Amended and Restated Employment Agreement, dated December
20, 2013, between the Registrant and Howard S. Jonas. |
|
|
|
10.04(4) |
|
1996 Stock Option and Incentive Plan, as amended and restated,
of IDT Corporation. |
|
|
|
10.05(5) |
|
2005
Stock Option and Incentive Plan, as amended and restated, of IDT Corporation.
|
Exhibit
Number |
|
Description
of Exhibits |
|
|
|
10.06(6) |
|
2015
Stock Option and Incentive Plan of IDT Corporation. |
|
|
|
10.06(7) |
|
Employment Agreement, dated January 12, 2015, between IDT Telecom
and Bill Pereira. |
|
|
|
10.07(8) |
|
Credit Agreement, dated July 12, 2012, between IDT Telecom, Inc.
and TD Bank, N.A. |
|
|
|
10.08(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 8-K/A, filed December 27, 2013. |
| (4) | Incorporated
by reference to Schedule 14A, filed November 3, 2004. |
| (5) | Incorporated
by reference to Schedule 14A, filed November 5, 2013. |
| (6) | Incorporated
by reference to Schedule 14A, filed October 31, 2015. |
| (7) | Incorporated
by reference to Form 8-K, filed January 14, 2015. |
| (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, 2015
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, 2015 |
Shmuel Jonas |
|
|
|
|
|
|
|
|
|
/s/ Howard S. Jonas |
|
Chairman of the Board |
|
October 14, 2015 |
Howard S. Jonas |
|
|
|
|
|
|
|
|
|
/s/ Marcelo Fischer |
|
Senior Vice President—Finance (Principal Financial Officer) |
|
October 14, 2015 |
Marcelo Fischer |
|
|
|
|
|
|
|
|
|
/s/ Mitch Silberman |
|
Chief Accounting Officer and Controller |
|
October 14, 2015 |
Mitch Silberman |
|
(Principal Accounting Officer) |
|
|
|
|
|
|
|
/s/ Bill Pereira |
|
Director |
|
October 14, 2015 |
Bill Pereira |
|
|
|
|
|
|
|
|
|
/s/ Michael Chenkin |
|
Director
|
|
October 14, 2015 |
Michael Chenkin |
|
|
|
|
|
|
|
|
|
/s/ Eric F. Cosentino |
|
Director
|
|
October 14, 2015 |
Eric F. Cosentino |
|
|
|
|
|
|
|
|
|
/s/ Judah Schorr |
|
Director |
|
October 14, 2015 |
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, 2015. In making
this assessment, the Company’s management used the criteria established in the 2013 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, 2015 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, 2015.
|
|
/s/ Shmuel Jonas |
|
Shmuel Jonas |
|
Chief Executive Officer |
|
(Principal
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, 2015, based on criteria established in the 2013 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, 2015,
based on the criteria established in the 2013 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, 2015, and our report dated October 14, 2015
expressed an unqualified opinion on those financial statements.
/s/ GRANT
THORNTON LLP
New
York, New York
October 14,
2015
IDT Corporation
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm |
F-2 |
|
|
Consolidated Balance Sheets as of July 31, 2015 and 2014 |
F-3 |
|
|
Consolidated Statements of Income for the years
ended July 31, 2015, 2014 and 2013 |
F-4 |
|
|
Consolidated Statements of Comprehensive Income
for the years ended July 31, 2015, 2014 and 2013 |
F-5 |
|
|
Consolidated Statements of Equity for the years
ended July 31, 2015, 2014 and 2013 |
F-6 |
|
|
Consolidated Statements of Cash Flows for the
years ended July 31, 2015, 2014 and 2013 |
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, 2015 and 2014, 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, 2015. 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,
2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended July 31,
2015 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, 2015, based on criteria established in the 2013 Internal Control–Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated October 14, 2015 expressed
an unqualified opinion.
/s/ GRANT THORNTON LLP
New York, New York
October 14, 2015
IDT
CORPORATION
CONSOLIDATED BALANCE SHEETS
July 31 (in thousands) | |
2015 | | |
2014 | |
ASSETS | |
| | | |
| | |
CURRENT ASSETS: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 110,361 | | |
$ | 153,823 | |
Restricted cash and cash equivalents—short-term | |
| 91,035 | | |
| 65,706 | |
Marketable securities | |
| 40,287 | | |
| 12,873 | |
Trade accounts receivable, net of allowance for doubtful accounts of $5,645 and $11,507 at July 31, 2015 and 2014, respectively | |
| 58,543 | | |
| 69,330 | |
Receivable from sale of interest in Fabrix Systems, Ltd. | |
| 8,471 | | |
| — | |
Prepaid expenses | |
| 17,304 | | |
| 21,799 | |
Deferred income tax assets, net—current portion | |
| 843 | | |
| 2,953 | |
Other current assets | |
| 14,344 | | |
| 12,381 | |
TOTAL CURRENT ASSETS | |
| 341,188 | | |
| 338,865 | |
Property, plant and equipment, net | |
| 91,316 | | |
| 81,760 | |
Goodwill | |
| 14,388 | | |
| 14,830 | |
Other intangibles, net | |
| 1,277 | | |
| 1,742 | |
Investments | |
| 12,344 | | |
| 10,008 | |
Restricted cash and cash equivalents—long-term | |
| — | | |
| 2,763 | |
Deferred income tax assets, net—long-term portion | |
| 12,481 | | |
| 16,248 | |
Other assets | |
| 12,688 | | |
| 14,715 | |
TOTAL ASSETS | |
$ | 485,682 | | |
$ | 480,931 | |
LIABILITIES AND EQUITY | |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Revolving credit loan payable | |
$ | — | | |
$ | 13,000 | |
Trade accounts payable | |
| 29,140 | | |
| 42,135 | |
Accrued expenses | |
| 139,272 | | |
| 142,528 | |
Deferred revenue | |
| 86,302 | | |
| 101,165 | |
Customer deposits | |
| 84,454 | | |
| 62,685 | |
Income taxes payable | |
| 391 | | |
| 732 | |
Note payable—current portion | |
| 6,353 | | |
| 271 | |
Other current liabilities | |
| 3,000 | | |
| 5,468 | |
TOTAL CURRENT LIABILITIES | |
| 348,912 | | |
| 367,984 | |
Note payable—long-term portion | |
| — | | |
| 6,353 | |
Other liabilities | |
| 1,830 | | |
| 5,430 | |
TOTAL LIABILITIES | |
| 350,742 | | |
| 379,767 | |
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, 2015 and 2014 | |
| 33 | | |
| 33 | |
Class B common stock, $.01 par value; authorized shares—200,000; 25,276 and 24,587 shares issued and 21,755 and 21,653 shares outstanding at July 31, 2015 and 2014, respectively | |
| 253 | | |
| 246 | |
Additional paid-in capital | |
| 403,146 | | |
| 392,858 | |
Treasury stock, at cost, consisting of 1,698 and 1,698 shares of Class A common stock and 3,521 and 2,934 shares of Class B common stock at July 31, 2015 and 2014, respectively | |
| (110,543 | ) | |
| (99,841 | ) |
Accumulated other comprehensive income | |
| 771 | | |
| 3,668 | |
Accumulated deficit | |
| (159,829 | ) | |
| (196,725 | ) |
Total IDT Corporation stockholders’ equity | |
| 133,831 | | |
| 100,239 | |
Noncontrolling interests | |
| 1,109 | | |
| 925 | |
TOTAL EQUITY | |
| 134,940 | | |
| 101,164 | |
TOTAL LIABILITIES AND EQUITY | |
$ | 485,682 | | |
$ | 480,931 | |
See
accompanying notes to consolidated financial statements.
IDT
CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year ended July 31 (in thousands, except per share data) | |
2015 | | |
2014 | | |
2013 | |
REVENUES | |
$ | 1,596,777 | | |
$ | 1,651,541 | | |
$ | 1,620,617 | |
COSTS AND EXPENSES: | |
| | | |
| | | |
| | |
Direct cost of revenues (exclusive of depreciation and amortization) | |
| 1,328,363 | | |
| 1,367,266 | | |
| 1,355,573 | |
Selling, general and administrative (i) | |
| 222,239 | | |
| 228,934 | | |
| 218,469 | |
Depreciation and amortization | |
| 18,418 | | |
| 16,318 | | |
| 14,910 | |
Research and development | |
| 1,656 | | |
| 10,018 | | |
| 7,166 | |
Severance | |
| 8,363 | | |
| — | | |
| — | |
Impairment of building and improvements | |
| — | | |
| — | | |
| 4,359 | |
TOTAL COSTS AND EXPENSES | |
| 1,579,039 | | |
| 1,622,536 | | |
| 1,600,477 | |
Gain on sale of interest in Fabrix Systems, Ltd. | |
| 76,864 | | |
| — | | |
| — | |
Other operating (losses) gains, net | |
| (1,552 | ) | |
| 835 | | |
| 9,251 | |
Income from operations | |
| 93,050 | | |
| 29,840 | | |
| 29,391 | |
Interest expense, net | |
| (159 | ) | |
| (148 | ) | |
| (824 | ) |
Other (expense) income, net | |
| (688 | ) | |
| (4,700 | ) | |
| 5,383 | |
Income from continuing operations before income taxes | |
| 92,203 | | |
| 24,992 | | |
| 33,950 | |
Provision for income taxes | |
| (6,088 | ) | |
| (3,982 | ) | |
| (15,872 | ) |
Income from continuing operations | |
| 86,115 | | |
| 21,010 | | |
| 18,078 | |
Loss from discontinued operations, net of tax | |
| — | | |
| — | | |
| (4,634 | ) |
NET INCOME | |
| 86,115 | | |
| 21,010 | | |
| 13,444 | |
Net income attributable to noncontrolling interests | |
| (1,625 | ) | |
| (2,226 | ) | |
| (1,837 | ) |
NET
INCOME ATTRIBUTABLE TO IDT CORPORATION | |
$ | 84,490 | | |
$ | 18,784 | | |
$ | 11,607 | |
Amounts attributable to IDT Corporation common stockholders: | |
| | | |
| | | |
| | |
Income from continuing operations | |
$ | 84,490 | | |
$ | 18,784 | | |
$ | 16,048 | |
Loss from discontinued operations | |
| — | | |
| — | | |
| (4,441 | ) |
Net
income attributable to IDT Corporation | |
$ | 84,490 | | |
$ | 18,784 | | |
$ | 11,607 | |
Earnings per share attributable to IDT Corporation common stockholders: | |
| | | |
| | | |
| | |
Basic: | |
| | | |
| | | |
| | |
Income from continuing operations | |
$ | 3.69 | | |
$ | 0.85 | | |
$ | 0.77 | |
Loss from discontinued operations | |
| — | | |
| — | | |
| (0.21 | ) |
Net income attributable to IDT Corporation | |
$ | 3.69 | | |
$ | 0.85 | | |
$ | 0.56 | |
Weighted-average number of shares used in calculation of basic earnings per share | |
| 22,903 | | |
| 22,009 | | |
| 20,876 | |
Diluted: | |
| | | |
| | | |
| | |
Income from continuing operations | |
$ | 3.63 | | |
$ | 0.82 | | |
$ | 0.72 | |
Loss from discontinued operations | |
| — | | |
| — | | |
| (0.20 | ) |
Net income attributable to IDT Corporation | |
$ | 3.63 | | |
$ | 0.82 | | |
$ | 0.52 | |
Weighted-average number of shares used in calculation of diluted earnings per share | |
| 23,247 | | |
| 22,937 | | |
| 22,315 | |
(i) Stock-based compensation included in selling, general and administrative expenses | |
$ | 5,185 | | |
$ | 5,382 | | |
$ | 5,875 | |
See
accompanying notes to consolidated financial statements.
IDT
CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended July 31 (in thousands) | |
2015 | | |
2014 | | |
2013 | |
NET INCOME | |
$ | 86,115 | | |
$ | 21,010 | | |
$ | 13,444 | |
Other comprehensive (loss) income: | |
| | | |
| | | |
| | |
Change in unrealized loss on available-for-sale securities | |
| (567 | ) | |
| (8 | ) | |
| (1 | ) |
Foreign currency translation adjustments | |
| (2,432 | ) | |
| 1,335 | | |
| 2,092 | |
Other comprehensive (loss) income | |
| (2,999 | ) | |
| 1,327 | | |
| 2,091 | |
COMPREHENSIVE INCOME | |
| 83,116 | | |
| 22,337 | | |
| 15,535 | |
Comprehensive income attributable to noncontrolling interests | |
| (1,625 | ) | |
| (2,226 | ) | |
| (1,789 | ) |
COMPREHENSIVE INCOME ATTRIBUTABLE TO IDT CORPORATION | |
$ | 81,491 | | |
$ | 20,111 | | |
$ | 13,746 | |
See
accompanying notes to consolidated financial statements.
IDT
CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (in thousands)
| |
IDT Corporation Stockholders | | |
| | |
| |
| |
Class A | | |
Class B | | |
Additional | | |
| | |
Accumulated Other | | |
| | |
| | |
| |
| |
Common Stock | | |
Common Stock | | |
Paid-In | | |
Treasury | | |
Comprehensive | | |
Accumulated | | |
Noncontrolling | | |
Total | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Stock | | |
Income | | |
Deficit | | |
Interests | | |
Equity | |
BALANCE AT JULY 31, 2012 | |
| 3,272 | | |
$ | 33 | | |
| 24,112 | | |
$ | 241 | | |
$ | 395,869 | | |
$ | (97,757 | ) | |
$ | 202 | | |
$ | (196,358 | ) | |
$ | 495 | | |
$ | 102,725 | |
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 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 | | |
| | |
| |
| |
Class A | | |
Class B | | |
Additional | | |
| | |
Accumulated Other | | |
| | |
| | |
| |
| |
Common Stock | | |
Common Stock | | |
Paid-In | | |
Treasury | | |
Comprehensive | | |
Accumulated | | |
Noncontrolling | | |
Total | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Stock | | |
Income | | |
Deficit | | |
Interests | | |
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 | |
IDT CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY (in thousands)—(Continued)
| |
IDT Corporation Stockholders | | |
| | |
| |
| |
Class A | | |
Class B | | |
Additional | | |
| | |
Accumulated Other | | |
| | |
| | |
| |
| |
Common Stock | | |
Common Stock | | |
Paid-In | | |
Treasury | | |
Comprehensive | | |
Accumulated | | |
Noncontrolling | | |
Total | |
| |
Shares | | |
Amount | | |
Shares | | |
Amount | | |
Capital | | |
Stock | | |
Income | | |
Deficit | | |
Interests | | |
Equity | |
Dividends declared ($2.03 per share) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (47,594 | ) | |
| — | | |
| (47,594 | ) |
Restricted Class B common stock purchased from employees | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (2,777 | ) | |
| — | | |
| — | | |
| — | | |
| (2,777 | ) |
Repurchases of Class B common stock through repurchase program | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (425 | ) | |
| — | | |
| — | | |
| — | | |
| (425 | ) |
Exercise of stock options | |
| — | | |
| — | | |
| 245 | | |
| 2 | | |
| 3,422 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 3,424 | |
Stock-based compensation | |
| — | | |
| — | | |
| — | | |
| — | | |
| 5,604 | | |
| — | | |
| — | | |
| — | | |
| 62 | | |
| 5,666 | |
Restricted stock issued to employees and directors | |
| — | | |
| — | | |
| 373 | | |
| 4 | | |
| (4 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | |
Stock issued for matching contributions to the 401(k) Plan | |
| — | | |
| — | | |
| 71 | | |
| 1 | | |
| 1,266 | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 1,267 | |
Purchase of Class B common stock from Howard S. Jonas | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (7,500 | ) | |
| — | | |
| — | | |
| — | | |
| (7,500 | ) |
Other | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 9 | | |
| 9 | |
Distributions to noncontrolling interests | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (2,050 | ) | |
| (2,050 | ) |
Sale of interest in Fabrix Systems Ltd. | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 102 | | |
| — | | |
| 538 | | |
| 640 | |
Other comprehensive loss | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| (2,999 | ) | |
| — | | |
| — | | |
| (2,999 | ) |
Net income for the year ended July 31, 2015 | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 84,490 | | |
| 1,625 | | |
| 86,115 | |
BALANCE AT JULY 31, 2015 | |
| 3,272 | | |
$ | 33 | | |
| 25,276 | | |
$ | 253 | | |
$ | 403,146 | | |
$ | (110,543 | ) | |
$ | 771 | | |
$ | (159,829 | ) | |
$ | 1,109 | | |
$ | 134,940 | |
See accompanying notes to consolidated financial
statements.
IDT
CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended July 31 (in thousands) | |
2015 | | |
2014 | | |
2013 | |
OPERATING ACTIVITIES | |
| | |
| | |
| |
Net income | |
$ | 86,115 | | |
$ | 21,010 | | |
$ | 13,444 | |
Adjustments to reconcile net income to net cash provided by operating
activities: | |
| | | |
| | | |
| | |
Net loss from discontinued operations | |
| — | | |
| — | | |
| 4,634 | |
Depreciation and amortization | |
| 18,418 | | |
| 16,318 | | |
| 14,910 | |
Impairment of building and improvements | |
| — | | |
| — | | |
| 4,359 | |
Deferred income taxes | |
| 5,877 | | |
| 2,487 | | |
| 15,198 | |
Provision for doubtful accounts receivable | |
| 97 | | |
| 500 | | |
| 2,743 | |
Gain on sale of interest in Fabrix Systems
Ltd. | |
| (76,864 | ) | |
| — | | |
| — | |
Net realized loss (gains) from marketable
securities and investments | |
| 54 | | |
| — | | |
| (586 | ) |
Gain on proceeds from insurance | |
| — | | |
| (571 | ) | |
| — | |
Interest in the equity of investments | |
| (1,699 | ) | |
| (1,282 | ) | |
| (1,968 | ) |
Stock-based compensation | |
| 5,185 | | |
| 5,382 | | |
| 5,875 | |
Change in assets and liabilities: | |
| | | |
| | | |
| | |
Restricted cash and cash equivalents | |
| (28,286 | ) | |
| (25,292 | ) | |
| (23,006 | ) |
Trade accounts receivable | |
| 640 | | |
| (1,363 | ) | |
| 17,606 | |
Prepaid expenses, other current assets and
other assets | |
| 2,122 | | |
| (4,628 | ) | |
| 2,890 | |
Trade accounts payable, accrued expenses,
other current liabilities and other liabilities | |
| (3,824 | ) | |
| (5,914 | ) | |
| (22,578 | ) |
Customer deposits | |
| 25,939 | | |
| 30,186 | | |
| 17,998 | |
Income taxes payable | |
| (301 | ) | |
| (29 | ) | |
| (576 | ) |
Deferred
revenue | |
| (2,939 | ) | |
| 8,917 | | |
| 6,253 | |
Net cash provided by operating activities | |
| 30,534 | | |
| 45,721 | | |
| 57,196 | |
INVESTING ACTIVITIES | |
| | | |
| | | |
| | |
Capital expenditures | |
| (28,556 | ) | |
| (17,021 | ) | |
| (14,537 | ) |
Proceeds from sale of interest in Fabrix Systems Ltd., net of cash
and cash equivalents sold | |
| 59,678 | | |
| — | | |
| — | |
Deposit on purchase of leasehold interest in building | |
| — | | |
| — | | |
| (950 | ) |
Collection of notes receivable, net | |
| — | | |
| — | | |
| 750 | |
Cash used for acquisition and purchase of investments | |
| (125 | ) | |
| (175 | ) | |
| (1,219 | ) |
Proceeds from sales and redemptions of investments | |
| 119 | | |
| 1,038 | | |
| 114 | |
Purchases of other intangibles | |
| — | | |
| (250 | ) | |
| (93 | ) |
Proceeds from sale of building | |
| — | | |
| 250 | | |
| — | |
Proceeds from insurance | |
| — | | |
| 571 | | |
| — | |
Purchases of marketable securities | |
| (52,360 | ) | |
| (20,658 | ) | |
| (11,414 | ) |
Proceeds from maturities and sales
of marketable securities | |
| 24,126 | | |
| 17,323 | | |
| 1,712 | |
Net cash provided by (used in) investing activities | |
| 2,882 | | |
| (18,922 | ) | |
| (25,637 | ) |
FINANCING ACTIVITIES | |
| | | |
| | | |
| | |
Cash of Straight Path Communications, Inc. deconsolidated as a result
of spin-off | |
| — | | |
| — | | |
| (15,000 | ) |
Dividends paid | |
| (47,594 | ) | |
| (13,635 | ) | |
| (17,123 | ) |
Distributions to noncontrolling interests | |
| (2,050 | ) | |
| (1,888 | ) | |
| (2,245 | ) |
Purchases of stock of subsidiary | |
| — | | |
| (1,133 | ) | |
| (1,804 | ) |
Proceeds from sales of stock and exercise of stock options of subsidiary | |
| — | | |
| — | | |
| 154 | |
Proceeds from exercise of stock options | |
| 3,424 | | |
| 609 | | |
| 921 | |
Proceeds from revolving credit loan payable | |
| — | | |
| 56,000 | | |
| 21,062 | |
Repayments of revolving credit loan payable and other borrowings | |
| (13,271 | ) | |
| (64,318 | ) | |
| (21,304 | ) |
Purchase of Class B common stock from Howard S. Jonas | |
| (7,500 | ) | |
| — | | |
| — | |
Repurchases of Class B common
stock | |
| (3,202 | ) | |
| (1,005 | ) | |
| (1,079 | ) |
Net cash used in financing activities | |
| (70,193 | ) | |
| (25,370 | ) | |
| (36,418 | ) |
DISCONTINUED OPERATIONS | |
| | | |
| | | |
| | |
Net cash used in operating activities | |
| — | | |
| — | | |
| (2,638 | ) |
Net cash used in investing activities | |
| — | | |
| — | | |
| (350 | ) |
Net cash used in discontinued operations | |
| — | | |
| — | | |
| (2,988 | ) |
Effect of exchange rate changes
on cash and cash equivalents | |
| (6,685 | ) | |
| 794 | | |
| 1,241 | |
Net (decrease) increase in cash and cash equivalents | |
| (43,462 | ) | |
| 2,223 | | |
| (6,606 | ) |
Cash and cash equivalents at beginning
of year | |
| 153,823 | | |
| 151,600 | | |
| 158,206 | |
Cash and cash
equivalents at end of year | |
$ | 110,361 | | |
$ | 153,823 | | |
$ | 151,600 | |
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |
| | | |
| | | |
| | |
Cash payments
made for interest | |
$ | 745 | | |
$ | 743 | | |
$ | 1,286 | |
Cash payments
made for income taxes | |
$ | 320 | | |
$ | 1,115 | | |
$ | 483 | |
SUPPLEMENTAL
SCHEDULE OF NON-CASH FINANCING AND INVESTING ACTIVITIES | |
| | | |
| | | |
| | |
Net liabilities
excluding cash and cash equivalents of Fabrix Systems Ltd. sold | |
$ | 14,333 | | |
$ | — | | |
$ | — | |
Adjustment
to liabilities in connection with the Straight Path Communications, Inc. spin-off | |
$ | — | | |
$ | 1,624 | | |
$ | — | |
Escrow account
balances included in other current assets used to reduce notes payable | |
$ | — | | |
$ | — | | |
$ | 1,976 | |
Net liabilities
excluding cash and cash equivalents of Straight Path Communications, Inc. deconsolidated as a result of spin-off | |
$ | — | | |
$ | — | | |
$ | 1,341 | |
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 two reportable business segments, Telecom Platform Services and Consumer
Phone Services. 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. Operating segments not reportable
individually are included in All Other. Beginning in the second quarter of fiscal 2015, All Other includes Zedge Holdings, Inc.
(“Zedge”), which provides a content platform for mobile device personalization including ringtones, wallpapers, home
screen icons and game recommendations. All Other also includes the Company’s real estate holdings and other, smaller, businesses.
Until the sale of Fabrix Systems Ltd. (“Fabrix”) in October 2014, All Other also 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.
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 3). 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”).
In
August 2015, the Company’s Board of Directors approved a plan to reorganize the Company into three separate entities by
spinning off two business units to its stockholders. The three separate companies are expected to consist of (1) IDT Telecom,
(2) Zedge and (3) other holdings. The reorganization and the specific components are subject to change and both internal and third
party contingencies, and must receive final approval from the Company’s Board of Directors and certain third parties. The
Company is targeting completion of the reorganization in calendar year 2016.
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, 2015 and 2014, the Company had $9.0 million and $9.4 million, respectively, in investments accounted for using the equity
method, and $3.4 million and $1.8 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.
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.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
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. 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, marketing automation and content filtering 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
The
Company treats unrestricted cash and cash equivalents held by IDT Payment Services, which provides the Company’s international
money transfer services in the United States and IDT Financial Services as substantially restricted and unavailable for other
purposes. These balances are included in “Cash and cash equivalents” in the Company’s consolidated balance sheet
(see Note 19).
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 estimated useful lives of 3 or 4
years; 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.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Derivative
Instruments and Hedging Activities
The
Company records its derivatives instruments at their respective fair values. The accounting for changes in the fair value (that
is, gains or losses) of a derivative instrument is dependent upon whether the derivative has been designated and qualifies as
part of a hedging relationship and further, on the type of hedging relationship. The Company does not designate its derivative
instruments to qualify for hedge accounting, accordingly the instruments are recorded at fair value as a current asset or liability
and any changes in fair value are recorded in the consolidated statements of income.
Advertising
Expense
Cost
of advertising is charged to selling, general and administrative expenses in the period in which it is incurred. In fiscal 2015,
fiscal 2014 and fiscal 2013, advertising expense was $16.5 million, $17.2 million and $13.1 million, respectively.
Research
and Development Costs
Costs
for research and development are charged to expense as incurred. Research and development costs were 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 2015, fiscal 2014
and fiscal 2013 was $11.4 million, $8.8 million and $7.3 million, respectively. Unamortized capitalized internal use software costs
at July 31, 2015 and 2014 were $18.8 million and $15.1 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.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
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) | |
2015 | | |
2014 | | |
2013 | |
Basic
weighted-average number of shares | |
| 22,903 | | |
| 22,009 | | |
| 20,876 | |
Effect
of dilutive securities: | |
| | | |
| | | |
| | |
Stock
options | |
| 23 | | |
| 92 | | |
| 9 | |
Non-vested
restricted Class B common stock | |
| 321 | | |
| 836 | | |
| 1,430 | |
Diluted
weighted-average number of shares | |
| 23,247 | | |
| 22,937 | | |
| 22,315 | |
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) | |
2015 | | |
2014 | | |
2013 | |
Shares
excluded from the calculation of diluted earnings per share | |
| 136 | | |
| 70 | | |
| 611 | |
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.
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.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 2015, fiscal 2014 or fiscal 2013. However, the Company’s five largest customers collectively
accounted for 11.2%, 12.0% and 10.0% of its consolidated revenues from continuing operations in fiscal 2015, fiscal 2014 and fiscal
2013, respectively. The Company’s customers with the five largest receivables balances collectively accounted for 24.1%
and 22.1% of the consolidated gross trade accounts receivable at July 31, 2015 and 2014, 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.
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 | |
2015 | |
| | |
| | |
| | |
| |
Reserves
deducted from accounts receivable: | |
| | |
| | |
| | |
| |
Allowance
for doubtful accounts | |
$ | 11,507 | | |
$ | 97 | | |
$ | (5,959 | ) | |
$ | 5,645 | |
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 | |
(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.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, 2018. 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.
Note
2—Sale of Interest in Fabrix Systems Ltd.
On
October 8, 2014, the Company completed the sale of its interest 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 was $68.1 million, after reflecting the impact of working capital and other adjustments. At July 31, 2015, the Company
had received cash of $59.7 million and had aggregate receivables of $8.5 million, which was classified as “Receivable from
sale of interest in Fabrix Systems Ltd.” in the accompanying consolidated balance sheet. The Company and the other shareholders
placed $13.0 million of the proceeds in escrow for the resolution of post-closing claims that may arise. Any unclaimed escrow
balance will be released in two tranches in October 2015 and April 2016. In fiscal 2015, the Company recorded gain on the sale
of its interest in Fabrix of $76.9 million.
Fabrix’
income (loss) before income taxes and income (loss) before income taxes attributable to the Company, which is included in the
accompanying consolidated statements of income, were as follows:
Year
ended July 31 (in thousands) | |
2015 | | |
2014 | | |
2013 | |
INCOME
(LOSS) BEFORE INCOME TAXES | |
$ | 917 | | |
$ | (57 | ) | |
$ | (945 | ) |
| |
| | | |
| | | |
| | |
INCOME
(LOSS) BEFORE INCOME TAXES ATTRIBUTABLE TO IDT CORPORATION | |
$ | 1,325 | | |
$ | 3 | | |
$ | (811 | ) |
Note
3—Discontinued Operations
On
July 31, 2013, the Company completed a pro rata distribution of the common stock of the Company’s subsidiary Straight Path
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.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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.
Revenues,
income before income taxes and net loss of Straight Path, which are included in discontinued operations, were as follows:
Year
ended July 31 (in thousands) | |
2015 | | |
2014 | | |
2013 | |
| |
| | |
| | |
| |
REVENUES | |
$ | — | | |
$ | — | | |
$ | 1,130 | |
| |
| | | |
| | | |
| | |
LOSS
BEFORE INCOME TAXES | |
$ | — | | |
$ | — | | |
$ | (4,621 | ) |
| |
| | | |
| | | |
| | |
NET
LOSS | |
$ | — | | |
$ | — | | |
$ | (4,634 | ) |
Note
4—Marketable Securities
The
following is a summary of marketable securities:
(in
thousands) | |
Amortized
Cost | | |
Gross
Unrealized Gains | | |
Gross
Unrealized Losses | | |
Fair
Value | |
July 31, 2015 | |
| | |
| | |
| | |
| |
Available-for-sale
securities: | |
| | |
| | |
| | |
| |
Certificates
of deposit* | |
$ | 22,736 | | |
$ | 3 | | |
$ | (2 | ) | |
$ | 22,737 | |
Federal
Home Loan Bank bonds | |
| 795 | | |
| — | | |
| — | | |
| 795 | |
International
agency notes | |
| 1,120 | | |
| — | | |
| (1 | ) | |
| 1,119 | |
Mutual
funds | |
| 5,000 | | |
| — | | |
| (18 | ) | |
| 4,982 | |
Straight
Path Communications Inc. common stock | |
| 2,086 | | |
| — | | |
| (563 | ) | |
| 1,523 | |
Municipal
bonds | |
| 9,125 | | |
| 9 | | |
| (3 | ) | |
| 9,131 | |
TOTAL | |
$ | 40,862 | | |
$ | 12 | | |
$ | (587 | ) | |
$ | 40,287 | |
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 | |
* |
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. |
In
July 2015, the Company received 64,624 shares of Straight Path Class B common stock in connection with the lapsing of restrictions
on awards of restricted stock (see Note 20).
Proceeds
from maturities and sales of available-for-sale securities were $24.1 million, $17.3 million and $1.7 million in fiscal 2015,
fiscal 2014 and fiscal 2013, respectively. Realized losses from sales of available-for-sale securities were $0.1 million, nil
and nil in fiscal 2015, fiscal 2014 and fiscal 2013, respectively. There were no realized gains from sales of available-for-sale
securities in fiscal 2015, fiscal 2014 and fiscal 2013. 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.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
contractual maturities of the Company’s available-for-sale debt securities at July 31, 2015 were as follows:
(in thousands) | |
Fair
Value | |
Within one year | |
$ | 21,551 | |
After one year through five years | |
| 10,784 | |
After five years through ten years | |
| 1,008 | |
After
ten years | |
| 439 | |
TOTAL | |
$ | 33,782 | |
The
following available-for-sale securities were in an unrealized loss position for which other-than-temporary impairments have not
been recognized:
(in
thousands) | |
Unrealized
Losses | | |
Fair
Value | |
| |
| | |
| |
July 31, 2015 | |
| | |
| |
Certificates
of deposit | |
$ | 2 | | |
$ | 2,194 | |
International
agency notes | |
| 1 | | |
| 1,119 | |
Mutual
funds | |
| 18 | | |
| 4,982 | |
Straight
Path Communications Inc. common stock | |
| 563 | | |
| 1,523 | |
Municipal
bonds | |
| 3 | | |
| 3,466 | |
TOTAL | |
$ | 587 | | |
$ | 13,284 | |
July 31, 2014 | |
| | | |
| | |
Equity
securities | |
$ | 9 | | |
$ | 22 | |
At
July 31, 2015 and 2014, there were no securities in a continuous unrealized loss position for 12 months or longer.
Note
5—Fair Value Measurements
The
following table presents the balance of assets and liabilities measured at fair value on a recurring basis:
(in
thousands) | |
Level
1 | | |
Level
2 | | |
Level
3 | | |
Total | |
July 31, 2015 | |
| | |
| | |
| | |
| |
Assets: | |
| | |
| | |
| | |
| |
Available-for-sale
securities | |
$ | 6,505 | | |
$ | 33,782 | | |
$ | — | | |
$ | 40,287 | |
Foreign
exchange forwards | |
| — | | |
| 38 | | |
| — | | |
| 38 | |
Total | |
$ | 6,505 | | |
$ | 33,820 | | |
$ | — | | |
$ | 40,325 | |
Liabilities: | |
| | | |
| | | |
| | | |
| | |
Foreign
exchange forwards | |
$ | — | | |
$ | 39 | | |
$ | — | | |
$ | 39 | |
| |
| | | |
| | | |
| | | |
| | |
July 31, 2014 | |
| | | |
| | | |
| | | |
| | |
Assets: | |
| | | |
| | | |
| | | |
| | |
Available-for-sale
securities | |
$ | — | | |
$ | 12,873 | | |
$ | — | | |
$ | 12,873 | |
At
July 31, 2014, the Company did not have any liabilities measured at fair value on a recurring basis.
At
July 31, 2015 and 2014, the Company had $9.1 million and $9.5 million, respectively, in investments in hedge funds, of which less
than $0.1 million and $0.1 million, respectively, were included in “Other current assets” and $9.1 million and $9.4
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.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Cash
and cash equivalents, restricted cash and cash equivalents—short-term, other current assets, revolving credit loan payable,
customer deposits, note payable—current portion and other current liabilities. At July 31, 2015 and 2014, 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, note 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, 2015 and 2014, 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.
Other
assets, note payable—long-term portion and other liabilities. At July 31, 2015 and 2014, the carrying amount of these
liabilities approximated fair value. The fair values were estimated based on the Company’s assumptions. The fair value estimate
for note payable—long-term was classified as Level 2 and other assets and other liabilities were classified as Level 3 of
the fair value hierarchy.
The
Company’s investments at July 31, 2015 and 2014 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 $3.4 million and $1.8 million at July 31, 2015 and 2014,
respectively, which the Company believes was not impaired.
Note
6—Derivative Instruments
The
primary risk managed by the Company using derivative instruments is foreign exchange risk. Foreign exchange forward contracts
are entered into as hedges against unfavorable fluctuations in the U.S. dollar – Norwegian krone (“NOK”) exchange
rate. Zedge is based in Norway and much of its operations are located in Norway. The Company does not apply hedge accounting to
these contracts, therefore the changes in fair value are recorded in earnings. By using derivative instruments to mitigate exposures
to changes in foreign exchange rates, the Company is exposed to credit risk from the failure of the counterparty to perform under
the terms of the contract. The Company minimizes the credit or repayment risk by entering into transactions with high-quality
counterparties.
The
Company’s outstanding contracts at July 31, 2015 were as follows:
Settlement
Date | |
U.S.
Dollar Amount | | |
NOK
Amount | |
September
2015 | |
| 750,000 | | |
| 6,163,000 | |
November 2015 | |
| 2,729,000 | | |
| 22,169,000 | |
January 2016 | |
| 3,000,000 | | |
| 24,257,000 | |
May 2016 | |
| 1,000,000 | | |
| 8,239,000 | |
July 2016 | |
| 1,000,000 | | |
| 8,200,000 | |
The
fair value of outstanding derivative instruments recorded as assets in the accompanying consolidated balance sheets were as follows:
July
31 (in thousands) | |
| |
2015 | | |
2014 | |
Asset
Derivatives | |
Balance
Sheet Location | |
| | |
| |
Derivatives
not designated or not qualifying as hedging instruments: | |
| |
| | |
| |
Foreign
exchange forwards | |
Other
current assets | |
$ | 38 | | |
$ | — | |
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
fair value of outstanding derivative instruments recorded as liabilities in the accompanying consolidated balance sheets were
as follows:
July
31 (in thousands) | |
| |
2015 | | |
2014 | |
Liability
Derivatives | |
Balance
Sheet Location | |
| | |
| |
Derivatives
not designated or not qualifying as hedging instruments: | |
| |
| | |
| |
Foreign
exchange forwards | |
Other
current liabilities | |
$ | 39 | | |
$ | — | |
The
effects of derivative instruments on the consolidated statements of operations were as follows:
| |
| |
Amount
of Gain (Loss) Recognized on Derivatives | |
| |
| |
Year
ended July 31, | |
(in
thousands) | |
2015 | | |
2014 | | |
2013 | |
Derivatives
not designated or not qualifying as hedging instruments | |
Location
of Gain (Loss) Recognized on Derivatives | |
| | |
| | |
| |
Foreign
exchange forwards | |
Other
(expense) income, net | |
$ | (58 | ) | |
$ | — | | |
$ | — | |
Note
7—Property, Plant and Equipment
Property,
plant and equipment consist of the following:
July
31 (in thousands) | |
2015 | | |
2014 | |
Equipment | |
$ | 438,430 | | |
$ | 438,899 | |
Land
and buildings | |
| 61,449 | | |
| 53,895 | |
Computer
software | |
| 130,340 | | |
| 116,775 | |
Leasehold
improvements | |
| 42,260 | | |
| 42,190 | |
Furniture
and fixtures | |
| 7,184 | | |
| 6,249 | |
| |
| 679,663 | | |
| 658,008 | |
Less
accumulated depreciation and amortization | |
| (588,347 | ) | |
| (576,248 | ) |
Property,
plant and equipment, net | |
$ | 91,316 | | |
$ | 81,760 | |
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 located at 550 Broad Street, Newark, New Jersey to 520 Broad Street. In April and May 2015, the Company moved its
Newark operations back into its building at 520 Broad Street and vacated its leased office space at 550 Broad Street. At July
31, 2015 and 2014, the carrying value of the land, building and improvements at 520 Broad Street after the impairment charge was
$44.4 million and $37.7 million, respectively.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Depreciation
and amortization expense of property, plant and equipment was $18.0 million, $15.7 million and $14.3 million in fiscal 2015, fiscal
2014 and fiscal 2013, respectively.
Note
8—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, 2013 to
July 31, 2015:
(in thousands) | |
Telecom
Platform Services | | |
Zedge | | |
Total | |
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 | |
Foreign
currency translation adjustments | |
| (442 | ) | |
| — | | |
| (442 | ) |
Balance as of July
31, 2015 | |
$ | 11,181 | | |
$ | 3,207 | | |
$ | 14,388 | |
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, 2015 | |
| | | |
| | | |
| | | |
| | |
Amortized
intangible assets: | |
| | | |
| | | |
| | | |
| | |
Trademarks
and patents | |
| 4.8
years | | |
$ | 414 | | |
$ | (144 | ) | |
$ | 270 | |
Technology
and domain names | |
| 3.1
years | | |
| 789 | | |
| (378 | ) | |
| 411 | |
Customer
lists | |
| 6.2
years | | |
| 3,154 | | |
| (2,558 | ) | |
| 596 | |
TOTAL | |
| 5.5
years | | |
$ | 4,357 | | |
$ | (3,080 | ) | |
$ | 1,277 | |
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 | |
Amortization
expense of intangible assets was $0.4 million, $0.6 million and $0.6 million in fiscal 2015, fiscal 2014 and fiscal 2013, respectively.
The Company estimates that amortization expense of intangible assets with finite lives will be $0.4 million, $0.3 million, $0.1
million, $0.1 million and $0.1 million in fiscal 2016, fiscal 2017, fiscal 2018, fiscal 2019 and fiscal 2020, respectively.
Note
9—Other Operating (Losses) Gains, Net
The
following table summarizes the other operating (losses) gains, net by business segment:
Year ended July 31
(in thousands) | |
2015 | | |
2014 | | |
2013 | |
Telecom
Platform Services—gains related to legal matters, net | |
$ | — | | |
$ | 650 | | |
$ | 9,251 | |
Corporate—losses
related to legal matters | |
| (1,552 | ) | |
| (79 | ) | |
| — | |
Corporate—other | |
| — | | |
| (374 | ) | |
| — | |
All
Other—gain on insurance claim (a) | |
| — | | |
| 571 | | |
| — | |
All
Other—other | |
| — | | |
| 67 | | |
| — | |
TOTAL | |
$ | (1,552 | ) | |
$ | 835 | | |
$ | 9,251 | |
(a) |
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. |
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
10—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, 2017. At July 31, 2015 and 2014, there was nil and $13.0 million, respectively, outstanding under
the facility. The principal outstanding at July 31, 2014 incurred interest at a rate of 1.65% per annum. In August 2014, IDT Telecom
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 $110.0 million. At July 31,
2015 and 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 $90.1 million and
$73.7 million, respectively.
Note
11—Note Payable
The
Company’s note payable consisted of the following:
July
31 (in thousands) | |
2015 | | |
2014 | |
$11.0
million secured term loan due September 2015 | |
$ | 6,353 | | |
$ | 6,624 | |
Less
current portion | |
| (6,353 | ) | |
| (271 | ) |
Notes
payable—long term portion | |
$ | — | | |
$ | 6,353 | |
The
future principal payments for the note payable at July 31, 2015 were as follows:
(in
thousands) | |
| |
Year
ending July 31: | |
| |
2016 | |
$ | 6,353 | |
2017 | |
| — | |
2018 | |
| — | |
2019 | |
| — | |
2020 | |
| — | |
Thereafter | |
| — | |
Total
notes payable | |
$ | 6,353 | |
Interest
on the loan was 5.6% per annum. The outstanding principal of $6.4 million was paid on the maturity date of September 1, 2015.
The loan was secured by a mortgage on a building in Piscataway, New Jersey.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
12—Accrued Expenses
Accrued
expenses consist of the following:
July 31 (in thousands) | |
2015 | | |
2014 | |
Carrier minutes termination | |
$ | 47,317 | | |
$ | 53,280 | |
Carrier network connectivity, toll-free
and 800 services | |
| 7,071 | | |
| 7,896 | |
Regulatory fees and taxes | |
| 50,797 | | |
| 43,293 | |
Legal settlements | |
| 2,059 | | |
| 1,615 | |
Compensation costs | |
| 14,138 | | |
| 15,612 | |
Legal and professional fees | |
| 4,938 | | |
| 4,708 | |
Other | |
| 12,952 | | |
| 16,124 | |
TOTAL | |
$ | 139,272 | | |
$ | 142,528 | |
Note
13—Severance Expense
In
February and March 2015, the Company completed a reduction of its workforce and incurred severance expense of $6.2 million in
fiscal 2015. Severance expense in fiscal 2015 also included $1.9 million due to a downsizing of certain IDT Telecom sales and
administrative functions in Europe and the U.S in the first quarter of fiscal 2015, and an additional $0.2 million in the fourth
quarter of fiscal 2015. At July 31, 2015, there was accrued severance of $3.7 million included in “Accrued Expenses”
in the accompanying consolidated balance sheet for the February and March 2015 headcount reductions.
Note
14—Other (Expense) Income, Net
Other
(expense) income, net consists of the following:
Year ended July 31
(in thousands) | |
2015 | | |
2014 | | |
2013 | |
Foreign currency transaction
(losses) gains | |
$ | (1,704 | ) | |
$ | (5,883 | ) | |
$ | 2,538 | |
Gain on investments | |
| 1,447 | | |
| 1,218 | | |
| 2,664 | |
Gain on modification and early termination
of note payable | |
| — | | |
| — | | |
| 238 | |
Other | |
| (431 | ) | |
| (35 | ) | |
| (57 | ) |
TOTAL | |
$ | (688 | ) | |
$ | (4,700 | ) | |
$ | 5,383 | |
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.
Note
15—Income Taxes
The
components of income from continuing operations before income taxes are as follows:
Year ended July 31
(in thousands) | |
2015 | | |
2014 | | |
2013 | |
Domestic | |
$ | 7,538 | | |
$ | 21,624 | | |
$ | 44,355 | |
Foreign | |
| 84,665 | | |
| 3,368 | | |
| (10,405 | ) |
INCOME
FROM CONTINUING OPERATIONS BEFORE INCOME TAXES | |
$ | 92,203 | | |
$ | 24,992 | | |
$ | 33,950 | |
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Significant
components of the Company’s deferred income tax assets consist of the following:
July
31 (in thousands) | |
2015 | | |
2014 | |
Deferred income
tax assets: | |
| | |
| |
Bad
debt reserve | |
$ | 550 | | |
$ | 2,188 | |
Accrued
expenses | |
| 4,629 | | |
| 2,937 | |
Stock
options and restricted stock | |
| 1,030 | | |
| 2,131 | |
Charitable
contributions | |
| 1,277 | | |
| 1,230 | |
Impairment | |
| 25,746 | | |
| 25,745 | |
Depreciation | |
| 7,232 | | |
| 7,566 | |
Unrealized
gain | |
| 138 | | |
| 163 | |
Net
operating loss | |
| 125,223 | | |
| 126,093 | |
Credits | |
| 2,892 | | |
| 3,123 | |
Total
deferred income tax assets | |
| 168,717 | | |
| 171,176 | |
Valuation
allowance | |
| (155,393 | ) | |
| (151,975 | ) |
DEFERRED
INCOME TAX ASSETS, NET | |
$ | 13,324 | | |
$ | 19,201 | |
The
provision for income taxes consists of the following:
Year
ended July 31 (in thousands) | |
2015 | | |
2014 | | |
2013 | |
Current: | |
| | |
| | |
| |
Federal | |
$ | — | | |
$ | (279 | ) | |
$ | 671 | |
State
and local | |
| — | | |
| — | | |
| 148 | |
Foreign | |
| (311 | ) | |
| (1,177 | ) | |
| (1,431 | ) |
| |
| (311 | ) | |
| (1,456 | ) | |
| (612 | ) |
Deferred: | |
| | | |
| | | |
| | |
Federal | |
| (1,967 | ) | |
| (6,461 | ) | |
| (14,181 | ) |
State
and local | |
| (245 | ) | |
| (175 | ) | |
| (1,079 | ) |
Foreign | |
| (3,565 | ) | |
| 4,110 | | |
| — | |
| |
| (5,777 | ) | |
| (2,526 | ) | |
| (15,260 | ) |
PROVISION
FOR INCOME TAXES | |
$ | (6,088 | ) | |
$ | (3,982 | ) | |
$ | (15,872 | ) |
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 in fiscal 2014 from the full recognition of the IDT Global deferred tax assets.
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) | |
2015 | | |
2014 | | |
2013 | |
U.S. federal income tax
at statutory rate | |
$ | (32,271 | ) | |
$ | (8,747 | ) | |
$ | (11,883 | ) |
Valuation allowance | |
| — | | |
| 4,110 | | |
| — | |
Foreign tax rate differential | |
| 25,757 | | |
| 961 | | |
| (5,073 | ) |
Nondeductible expenses | |
| 659 | | |
| 761 | | |
| 714 | |
Other | |
| (73 | ) | |
| 7 | | |
| 50 | |
Prior year tax (expense) benefit | |
| — | | |
| (960 | ) | |
| 921 | |
State and local
income tax, net of federal benefit | |
| (160 | ) | |
| (114 | ) | |
| (601 | ) |
PROVISION FOR
INCOME TAXES | |
$ | (6,088 | ) | |
$ | (3,982 | ) | |
$ | (15,872 | ) |
At
July 31, 2015, the Company had federal and state net operating loss carryforwards of approximately $170 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 2016, with fiscal 2015’s loss expiring in fiscal 2036. The Company has foreign net operating losses of approximately
$173 million, of which approximately $117 million does not expire and approximately $56 million expires in two to nine 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.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 $353 million at July 31, 2015. 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 | |
2015 | |
| | |
| | |
| | |
| |
Reserves
deducted from deferred income taxes, net: | |
| | |
| | |
| | |
| |
Valuation
allowance | |
$ | 151,975 | | |
$ | 3,418 | | |
$ | — | | |
$ | 155,393 | |
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 | |
The
table below summarizes the change in the balance of unrecognized income tax benefits:
Year ended July 31
(in thousands) | |
2015 | | |
2014 | | |
2013 | |
Balance at beginning of
year | |
$ | — | | |
$ | 356 | | |
$ | — | |
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 | ) | |
| — | |
Lapses of statutes of limitations | |
| — | | |
| — | | |
| — | |
Balance at end
of year | |
$ | — | | |
$ | — | | |
$ | 356 | |
At
July 31, 2015, the Company did not have any unrecognized income tax benefits and did not expect any changes in the next twelve
months. If the Company recognized any unrecognized income tax benefits, it would affect the effective tax rate. In fiscal 2015,
fiscal 2014 and fiscal 2013, the Company did not record any interest and penalties on income taxes. As of July 31, 2015 and 2014,
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 2012 to fiscal
2015, state and local tax returns generally for fiscal 2011 to fiscal 2015 and foreign tax returns generally for fiscal 2011 to
fiscal 2015.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
16—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
fiscal 2015, the Company paid aggregate cash dividends of $2.03 per share on its Class A common stock and Class B common stock,
or $47.6 million in total. The aggregate cash dividends included special dividends of $0.68 per share and $0.64 per share paid
in November 2014 and January 2015, respectively. 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.
On
September 25, 2015, the Company’s Board of Directors declared a dividend of $0.18 per share for the fourth quarter of fiscal
2015 to holders of the Company’s Class A common stock and Class B common stock. The dividend will be paid on or about October
15, 2015 to stockholders of record as of the close of business on October 7, 2015.
Purchase
of Shares from Howard S. Jonas
On
June 25, 2015, the Company purchased 404,967 shares of its Class B common stock from Mr. Howard S. Jonas, the Company’s
Chairman of the Board and former Chief Executive Officer. The purchase price was $18.52 per share, the share price at the close
of business on June 23, 2015. The aggregate purchase price was $7.5 million.
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. In fiscal 2015, the Company repurchased 29,675 shares of Class B common stock for an aggregate purchase price
of $0.4 million. 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. At July 31, 2015, 5.0 million shares remained available
for repurchase under the stock repurchase program.
In
fiscal 2015, fiscal 2014 and fiscal 2013, the Company paid $2.8 million, $1.0 million and $0.3 million, respectively, to repurchase
shares of Class B common stock that were tendered by employees of the Company to satisfy the employees’ tax withholding
obligations in connection with the lapsing of restrictions on awards of restricted stock. Such shares are repurchased by the Company
based on their fair market value on the trading day immediately prior to the vesting date. In fiscal 2015, fiscal 2014 and fiscal
2013, the Company repurchased 152,856; 34,206 and 30,998 shares of Class B common stock, respectively, from employees.
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.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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%. 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 20). 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.
Note
17—Stock-Based Compensation
Stock-Based
Compensation Plans
On December 15, 2014, the Company’s stockholders ratified the
2015 Stock Option and Incentive Plan, which became effective on January 1, 2015. Shares available for future grants under the Company’s
2005 Stock Option and Incentive Plan are no longer available. The 2015 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. At July 31, 2015, the Company had 0.5 million shares of Class B common stock reserved
for award under its 2015 Stock Option and Incentive Plan and 0.1 million shares were available for future grants.
In
fiscal 2015, fiscal 2014 and fiscal 2013, there was no income tax benefit resulting from tax deductions in excess of the compensation
cost recognized for the Company’s stock-based compensation.
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 | |
2015 | |
ASSUMPTIONS | |
| |
Average
risk-free interest rate | |
| 1.63 | % |
Expected
dividend yield | |
| — | |
Expected
volatility | |
| 51.4 | % |
Expected
term | |
| 6.0
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, 2014 | |
| 611 | | |
$ | 14.24 | | |
| | | |
| | |
Granted | |
| 135 | | |
| 15.97 | | |
| | | |
| | |
Exercised | |
| (245 | ) | |
| 13.98 | | |
| | | |
| | |
Cancelled
/ Forfeited | |
| (77 | ) | |
| 16.22 | | |
| | | |
| | |
OUTSTANDING
AT JULY 31, 2015 | |
| 424 | | |
$ | 14.58 | | |
| 7.4 | | |
$ | 1,167 | |
EXERCISABLE
AT JULY 31, 2015 | |
| 147 | | |
$ | 17.02 | | |
| 4.1 | | |
$ | 132 | |
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The
weighted-average grant date fair value of options granted by the Company during fiscal 2015 was $7.94. The total intrinsic value
of options exercised during fiscal 2015, fiscal 2014 and fiscal 2013 was $1.3 million, $0.2 million and $0.2 million, respectively.
At July 31, 2015, there was $1.7 million of total unrecognized compensation cost related to non-vested stock options, which is
expected to be recognized over a weighted-average period of 1.8 years.
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 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, 2014 | |
| 540 | | |
$ | 13.00 | |
Granted | |
| 366 | | |
| 17.36 | |
Vested | |
| (454 | ) | |
| 12.34 | |
Forfeited | |
| (32 | ) | |
| 13.04 | |
NON-VESTED SHARES AT
JULY 31, 2015 | |
| 420 | | |
$ | 17.50 | |
At
July 31, 2015, there was $6.1 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 1.5 years. The total grant date fair value of shares vested
in fiscal 2015, fiscal 2014 and fiscal 2013 was $5.6 million, $8.7 million and $3.5 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 Howard Jonas. 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
18—Accumulated Other Comprehensive Income
The
accumulated balances for each classification of other comprehensive income (loss) were as follows:
(in thousands) | |
Unrealized
loss on available-for- sale securities | | |
Foreign
currency translation | | |
Accumulated
other comprehensive income | |
Balance at July 31, 2012 | |
$ | — | | |
$ | 202 | | |
$ | 202 | |
Other
comprehensive loss 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 | |
Sale of interest in Fabrix Systems Ltd. | |
| — | | |
| 102 | | |
| 102 | |
Other
comprehensive income attributable to IDT Corporation | |
| (567 | ) | |
| (2,432 | ) | |
| (2,999 | ) |
BALANCE AT JULY 31,
2015 | |
$ | (575 | ) | |
$ | 1,346 | | |
$ | 771 | |
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note
19— Commitments and Contingencies
Legal
Proceedings
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) on a global undersea fiber optic network that Tyco was deploying at that time. After extensive proceedings,
including several decisions and appeals, the New York Court of Appeals affirmed a lower court decision to dismiss the Company’s
claim and denied the Company’s motion for re-argument of that decision. On June 23, 2015, the Company filed a new summons
and complaint against Tyco in the Supreme Court of the State of New York, County of New York alleging that Tyco breached the settlement
agreement. In September 2015, Tyco filed a motion to dismiss the complaint. The parties have stipulated to a briefing schedule.
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, the Company believes that 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.
Purchase
Commitments
The
Company had purchase commitments of $2.8 million as of July 31, 2015, which includes commitments related to the renovations of
the first four floors of the Company’s building located at 520 Broad Street, Newark, New Jersey.
Lease
Commitments
The
future minimum payments for operating leases as of July 31, 2015 are as follows:
(in
thousands) | |
| |
Year
ending July 31: | |
| |
2016 | |
$ | 3,439 | |
2017 | |
| 2,653 | |
2018 | |
| 1,307 | |
2019 | |
| 780 | |
2020 | |
| 654 | |
Thereafter | |
| 128 | |
Total
payments | |
$ | 8,961 | |
Rental
expense under operating leases was $6.1 million, $6.4 million and $5.9 million in fiscal 2015, fiscal 2014 and fiscal 2013, respectively.
In addition, connectivity charges under operating leases were $8.4 million, $10.4 million and $11.8 million in fiscal 2015, fiscal
2014 and fiscal 2013, respectively.
Letters
of Credit
At
July 31, 2015, the Company had letters of credit outstanding totaling $3.2 million for collateral to secure mortgage repayments
and for IDT Telecom’s business. The letters of credit outstanding at July 31, 2015 expire in the fiscal year ending July
31, 2016.
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, 2015, the Company had aggregate performance bonds of $11.3 million outstanding.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Customer
Deposits
At
July 31, 2015 and 2014, “Customer deposits” in the Company’s consolidated balance sheets included refundable
customer deposits of $84.4 million and $62.7 million, respectively, related to IDT Financial Services, the Company’s Gibraltar-based
bank.
Substantially
Restricted Cash and Cash Equivalents
The
Company treats unrestricted cash and cash equivalents held by IDT Payment Services and IDT Financial Services Ltd. as substantially
restricted and unavailable for other purposes. At July 31, 2015 and 2014, “Cash and cash equivalents” in the Company’s
consolidated balance sheets included an aggregate of $7.5 million and $12.9 million, respectively, held 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) | |
2015 | | |
2014 | |
Restricted
cash and cash equivalents—short-term | |
| | |
| |
Letters
of credit related | |
$ | 3,163 | | |
$ | 665 | |
IDT
Financial Services customer deposits | |
| 87,613 | | |
| 64,415 | |
Other | |
| 259 | | |
| 626 | |
Total
short-term | |
| 91,035 | | |
| 65,706 | |
Restricted
cash and cash equivalents—long-term | |
| | | |
| | |
Letters
of credit related | |
| — | | |
| 2,763 | |
Total
restricted cash and cash equivalents | |
$ | 91,035 | | |
$ | 68,469 | |
Note
20—Related Party Transactions
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) | |
2015 | | |
2014 | |
Balance
at beginning of year | |
$ | 1,860 | | |
$ | 931 | |
Additional
liability | |
| 1,793 | | |
| 1,930 | |
Adjustments | |
| (556 | ) | |
| — | |
Payments | |
| (2,811 | ) | |
| (1,001 | ) |
Balance
at end of year | |
$ | 286 | | |
$ | 1,860 | |
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 charged Straight Path $1.1 million and $0.8 million in fiscal 2015 and fiscal 2014, respectively, for services provided
pursuant to the Transition Services Agreement and other items. At July 31, 2015 and 2014, other current assets reported in the
Company’s consolidated balance sheet included receivables from Straight Path of nil and $29,000, respectively.
In
July 2015, the Company received 64,624 shares of Straight Path Class B common stock in connection with the lapsing of restrictions
on awards of Straight Path restricted stock to certain of the Company’s employees (see Note 4). As part of the Straight
Path Spin-Off, holders of the Company’s restricted Class B common stock received, in respect of those restricted shares,
one share of Straight Path’s Class B common stock for every two restricted shares of the Company that they held as of the
record date for the Straight Path Spin-Off. The Company received the Straight Path shares in exchange for the payment of an aggregate
of $2.1 million for the employees’ tax withholding obligations upon the vesting event. The number of shares was determined
based on their fair market value on the trading day immediately prior to the vesting date.
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 charged Genie $3.6 million, $3.1 million and $3.8 million in fiscal 2015, fiscal 2014
and fiscal 2013, respectively, for services provided pursuant to the Transition Services Agreement and other items, net of the
amounts charged by Genie to the Company. At July 31, 2015 and 2014, other current assets reported in the Company’s consolidated
balance sheet included receivables from Genie of $0.5 million.
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 and
fiscal 2013, IDT Energy, Inc. billed the Company $16,000 and $21,000, respectively.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 $21,000, $18,000 and $27,000 in fiscal 2015, fiscal 2014 and fiscal 2013, respectively.
The balance owed to the Company by Jonas Media Group was $7,000 and $4,000 as of July 31, 2015 and 2014, 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 IGM received commissions and fees from payments made by the Company to
third party brokers in the aggregate amounts of $20,000 in fiscal 2015, $20,000 in fiscal 2014 and $15,000 in fiscal 2013, which
fees and commissions inured to the benefit of Mr. Mason. 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 2015, $18,000 in fiscal
2014 and $24,000 in fiscal 2013. 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. 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 had 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 was $69,025.
The
Company had net loans receivable outstanding from employees aggregating $0.3 million and $0.2 million at July 31, 2015 and 2014,
respectively, which are included in “Other current assets” in the accompanying consolidated balance sheets.
Note
21—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 2015,
fiscal 2014 and fiscal 2013, the Company’s cost for contributions to the Plan was $1.3 million, $1.1 million and $1.1 million,
respectively. In fiscal 2015, fiscal 2014 and fiscal 2013, the Company contributed 70,843 shares, 72,281 shares and 51,861 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
22—Business Segment Information
The
Company has two reportable business segments, Telecom Platform Services and Consumer Phone Services. Operating segments that are
not reportable individually are included in All Other. The Company’s reportable segments are distinguished by types of service,
customers and methods used to provide their services. The operating results of these business segments are regularly reviewed
by the Company’s chief operating decision maker.
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. Telecom Platform Services and Consumer Phone Services comprise the IDT Telecom division. Beginning in the second
quarter of fiscal 2015, All Other includes Zedge, which provides a content platform for mobile device personalization including
ringtones, wallpapers, home screen icons and game recommendations. Comparative results have been reclassified and restated as
if Zedge was included in All Other in all periods presented. All Other also includes the Company’s real estate holdings
and other, smaller, businesses. Until the sale of Fabrix in October 2014, All Other also 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. 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 | | |
All
Other | | |
Corporate | | |
Total | |
Year ended
July 31, 2015 | |
| | |
| | |
| | |
| | |
| |
Revenues | |
$ | 1,572,744 | | |
$ | 8,629 | | |
$ | 15,404 | | |
$ | — | | |
$ | 1,596,777 | |
Income
(loss) from operations | |
| 26,951 | | |
| 1,259 | | |
| 77,969 | | |
| (13,129 | ) | |
| 93,050 | |
Depreciation
and amortization | |
| 16,169 | | |
| — | | |
| 2,243 | | |
| 6 | | |
| 18,418 | |
Severance | |
| 7,696 | | |
| — | | |
| 35 | | |
| 632 | | |
| 8,363 | |
Gain
on sale of interest in Fabrix Systems Ltd. | |
| — | | |
| — | | |
| 76,864 | | |
| — | | |
| 76,864 | |
Other
operating loss | |
| — | | |
| — | | |
| — | | |
| (1,552 | ) | |
| (1,552 | ) |
Year
ended July 31, 2014 | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenues | |
$ | 1,615,570 | | |
$ | 11,023 | | |
$ | 24,948 | | |
$ | — | | |
$ | 1,651,541 | |
Income
(loss) from operations | |
| 45,062 | | |
| 1,797 | | |
| (1,735 | ) | |
| (15,284 | ) | |
| 29,840 | |
Depreciation
and amortization | |
| 13,776 | | |
| — | | |
| 2,512 | | |
| 30 | | |
| 16,318 | |
Other
operating gains (losses), net | |
| 650 | | |
| — | | |
| 638 | | |
| (453 | ) | |
| 835 | |
Year
ended July 31, 2013 | |
| | | |
| | | |
| | | |
| | | |
| | |
Revenues | |
$ | 1,588,071 | | |
$ | 14,514 | | |
$ | 18,032 | | |
$ | — | | |
$ | 1,620,617 | |
Income
(loss) from operations | |
| 48,661 | | |
| 1,824 | | |
| (7,093 | ) | |
| (14,001 | ) | |
| 29,391 | |
Depreciation
and amortization | |
| 12,342 | | |
| 1 | | |
| 2,471 | | |
| 96 | | |
| 14,910 | |
Impairment
of building and improvements | |
| — | | |
| — | | |
| 4,359 | | |
| — | | |
| 4,359 | |
Other
operating gains | |
| 9,251 | | |
| — | | |
| — | | |
| — | | |
| 9,251 | |
Telecom
Platform Services’ income from operations in fiscal 2013 included net gains of $9.3 million related to legal matters.
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 | |
2015 | | |
2014 | | |
2013 | |
Revenue
from customers located outside of the United States | |
| 30 | % | |
| 30 | % | |
| 23 | % |
Revenue
from customers located in the United Kingdom | |
| 20 | % | |
| 19 | % | |
| 13 | % |
IDT
CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, 2015 | |
| | |
| | |
| |
Long-lived
assets, net | |
$ | 89,340 | | |
$ | 1,976 | | |
$ | 91,316 | |
Total
assets | |
| 281,625 | | |
| 204,057 | | |
| 485,682 | |
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 | |
Note
23—Selected Quarterly Financial Data (Unaudited)
The
table below presents selected quarterly financial data of the Company for its fiscal quarters in fiscal 2015 and fiscal 2014:
Quarter
Ended (in thousands, except per share data) | |
Revenues | | |
Direct
cost of revenues | | |
Income
from operations | | |
Net
income | | |
Net
income attributable to IDT Corporation | | |
Net income
per share –basic | | |
Net income
per share – diluted | |
2015: | |
| | |
| | |
| | |
| | |
| | |
| | |
| |
October 31(a) | |
$ | 412,878 | | |
$ | 343,807 | | |
$ | 79,607 | | |
$ | 80,354 | | |
$ | 80,155 | | |
$ | 3.52 | | |
$ | 3.47 | |
January 31 | |
| 394,173 | | |
| 328,737 | | |
| 3,735 | | |
| 2,757 | | |
| 2,510 | | |
| 0.11 | | |
| 0.11 | |
April
30(b) | |
| 383,930 | | |
| 316,508 | | |
| 2,470 | | |
| 1,123 | | |
| 565 | | |
| 0.02 | | |
| 0.02 | |
July
31 | |
| 405,796 | | |
| 339,311 | | |
| 7,238 | | |
| 1,881 | | |
| 1,260 | | |
| 0.05 | | |
| 0.05 | |
TOTAL | |
$ | 1,596,777 | | |
$ | 1,328,363 | | |
$ | 93,050 | | |
$ | 86,115 | | |
$ | 84,490 | | |
$ | 3.69 | | |
$ | 3.63 | |
2014: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
October 31 | |
$ | 420,670 | | |
$ | 350,319 | | |
$ | 7,283 | | |
$ | 4,050 | | |
$ | 3,523 | | |
$ | 0.17 | | |
$ | 0.15 | |
January
31 | |
| 406,423 | | |
| 335,258 | | |
| 7,574 | | |
| 2,973 | | |
| 2,535 | | |
| 0.12 | | |
| 0.11 | |
April
30 | |
| 403,761 | | |
| 332,376 | | |
| 9,170 | | |
| 5,599 | | |
| 5,017 | | |
| 0.22 | | |
| 0.22 | |
July
31 | |
| 420,687 | | |
| 349,313 | | |
| 5,813 | | |
| 8,388 | | |
| 7,709 | | |
| 0.34 | | |
| 0.33 | |
TOTAL | |
$ | 1,651,541 | | |
$ | 1,367,266 | | |
$ | 29,840 | | |
$ | 21,010 | | |
$ | 18,784 | | |
$ | 0.85 | | |
$ | 0.82 | |
(a)
Included in income from operations was gain on sale of interest in Fabrix Systems Ltd. of $75.1 million.
(b)
Included in income from operations was severance expense of $6.2 million, gain on sale of interest in Fabrix Systems Ltd. of $1.2
million and other operating losses of $1.6 million.
F-34
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) |
|
New Concepts
Distributors, LLC (DE) d/b/a IDT Retail Solutions |
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, 2015, 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, 2015. 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,File No.
333-177247, and File No. 333-199299).
/s/
GRANT THORNTON LLP |
|
New York,
New York |
|
October 14,
2015 |
|
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, 2015
/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, 2015
/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 2015 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, 2015
/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 2015 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, 2015
/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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