IDT

Business Context and Reporting Period

IDT Corporation is a facilities-based multinational communications company providing retail and wholesale telecommunications services, including prepaid calling cards, consumer long distance, and carrier services. The company also operates media and entertainment businesses and, following a December 2001 acquisition, a broadband and telephony subsidiary named Winstar. This Form 10-K covers the fiscal year ended July 31, 2002.

Key Financial Metrics

Segment Performance:

• IDT Telecom: Generated $1.43 billion in revenue (93.4% of total) and $30.8 million in operating income.
• Winstar: Generated $79.6 million in revenue (5.2% of total) and an operating loss of $96.6 million.
• IDT Media: Generated $21.3 million in revenue (1.4% of total) and an operating loss of $132.0 million (including a $111.1 million impairment charge).

Material Changes vs. Prior Period

• Revenue Growth: Consolidated revenues increased 24.4% year-over-year, driven by an 18.8% increase in IDT Telecom revenues and the inclusion of Winstar operations.
• Profitability Shift: The company reported a net loss of $303.3 million in Fiscal 2002, a significant reversal from the $532.4 million net income in Fiscal 2001. The prior year's income was heavily influenced by a $1.04 billion gain on the sale of Net2Phone stock, which did not recur.
• Operating Improvement: Despite the net loss, the operating loss narrowed significantly from $432.7 million to $224.3 million, aided by lower impairment charges and improved gross margins in the telecom segment.
• Minutes of Use: Telecom minutes of use grew 55% to 11.3 billion, though average revenue per minute declined 17% to $0.120 due to intense price competition.

Guidance, Outlook, and Risks

Outlook: Management anticipates continued growth in IDT Telecom's retail services and an increase in wholesale carrier revenues in Fiscal 2003. The company expects Winstar to continue reducing operating losses through cost controls and revenue growth. IDT Media is expected to continue incurring significant costs as it develops new business lines.

Key Risks and Contingencies:

• Winstar RBOC Dispute: Regional Bell Operating Companies (RBOCs) are demanding approximately $40 million in "cure" payments for alleged debts owed by Old Winstar before providing uninterrupted service. Litigation and mediation are ongoing; an adverse ruling could disrupt Winstar's service or require significant payment.
• Customer Credit Risk: Deteriorating credit quality among wholesale carrier customers has led to stricter credit restrictions and potential revenue loss. The allowance for doubtful accounts increased to 23.6% of trade receivables.
• Legal Proceedings: The company faces multiple class-action lawsuits regarding calling card fees and undisclosed charges, with potential damages exceeding $100 million in some cases. There are also ongoing disputes with Telefonica and PT-1 Communications.
• Regulatory Changes: Changes in FCC regulations regarding universal service contributions, interconnection, and international settlement rates could materially impact costs and operations.

Investor Verification Checklist

• Winstar Service Continuity: Verify the status of the dispute with RBOCs regarding the $40 million cure payment and the potential for service interruption.
• Net2Phone Consolidation: Confirm the impact of the August 1, 2002, change in accounting treatment (from equity method to consolidation) on future financial statements, given Net2Phone's significant operating losses.
• Impairment Charges: Review the $110.4 million write-down of the TyCom undersea fiber asset and assess the remaining value of long-lived assets.
• Class Action Exposure: Monitor the certification and potential settlement of the multiple consumer class-action lawsuits regarding calling card fees.
• Wholesale Customer Concentration: Assess the financial stability of the top five wholesale customers, who accounted for 15.2% of total revenues.