| IDT CORP 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 and common stock could decline due to any of these risks |
| 19 ______________________________________________________________________ [48]Table of Contents RISKS RELATED TO OUR TELECOMMUNICATIONS BUSINESSES Each of our telecommunications business lines is highly sensitive to declining prices, which may adversely affect our revenues and margins |
| The worldwide telecommunications industry has been characterized in recent years by intense price competition, which has resulted in a significant decline in both our average per-minute price realizations and our average per-minute termination costs as well as more recent decreases in revenue in our calling cards division |
| Many of our competitors in all of the retail telecommunications market segments in which we operate are aggressively pricing their services |
| This has led to continued erosion in pricing power, both in our retail and wholesale markets, and we have generally had to pass along any 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 |
| Although our gross margins have recently increased on our prepaid calling cards because of an increase in our pricing, this increased pricing, along with other competitive factors, has caused revenue generated by our prepaid calling cards to decrease |
| If this trend continues or intensifies, it could have a material adverse effect on the revenues generated by our telecommunications business lines or our ability to maintain our margins |
| Because our calling cards generate the bulk of our revenue, our growth and our results of operations are substantially dependent upon continuing growth in this business, and we face significant competition |
| During fiscal 2006, calling cards accounted for 59dtta8prca of IDT Telecom’s revenues and 52dtta7prca of our total consolidated revenues |
| Accordingly, our results of operations and future growth depend on the performance of this business |
| We compete in the prepaid calling card market with many of the established facilities-based carriers, such as AT&T (now owned by SBC), MCI (now owned by Verizon) and Sprint |
| 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 could significantly impact our ability to compete successfully |
| In addition to these larger competitors, we face significant competition from smaller calling card 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 wireless services, largely due to lower pricing of such services, has adversely affected the sales of our prepaid calling cards as customers migrate from using prepaid calling cards to wireless services |
| We expect pricing of wireless services to continue to decrease, resulting in increased substitution by wireless services for prepaid calling cards and increased pricing pressure on our prepaid calling cards |
| If we are not able to increase or maintain our sales of prepaid calling cards, our overall growth rates and results of operations could suffer |
| Further, if our competitors determine to utilize their greater resources or operate at lower levels of profitability in order to more aggressively market their products and services, this significant portion of our revenues and profitability could be adversely affected |
| 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 expansion, 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 a 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 in foreign countries, 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 |
| Our ability to compete in foreign countries would be adversely affected if 20 ______________________________________________________________________ [49]Table of Contents our carrier agreements with foreign partners 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 |
| Our customers, particularly our wholesale carrier customers, could experience financial difficulties, which could adversely affect our revenues and profitability if we experience difficulties in collecting our receivables |
| As a wholesale 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 |
| Since 2002, several of these customers have declared bankruptcy or otherwise faced financial difficulties |
| Even as this segment of the industry has stabilized somewhat over the past two years, the wholesale market continues to feature many smaller, less financially stable companies |
| If continued weakness in the telecommunications industry reduces our ability to collect our accounts receivable from our major customers, particularly our wholesale carrier customers, our profitability may be substantially reduced |
| While our most significant customers vary from quarter to quarter, our five largest wholesale carrier customers accounted for 5dtta1prca of our total consolidated revenues in fiscal 2006 compared with 5dtta6prca in fiscal 2005 |
| This concentration of revenues increases our exposure to non-payment by our larger customers, and we may experience significant write-offs related to the provision of wholesale carrier services if any of our large customers fail to pay their outstanding balances, which could adversely affect our revenue base and profitability |
| Our revenues will suffer if our distributors and sales representatives, particularly Union Telecard Alliance, LLC, fail to effectively market and distribute our prepaid calling card products and other services |
| We rely on our distributors and representatives for marketing and distribution of our prepaid calling card products and other services |
| We hold a 51prca ownership interest in Union Telecard Alliance, LLC, or UTA, which utilizes a network of more than 1cmam000 sub-distributors (ranging from large companies to sole proprietors) that sell to over 250cmam000 retail outlets throughout the United States to distribute our prepaid calling cards |
| Subject to provisions of early termination, our exclusive distribution agreement with UTA is set to expire on April 25, 2007 |
| Management expects and intends to renew this agreement in some format upon its expiration, and to continue the distributor relationship with UTA In foreign countries, we are dependent upon our distributors and independent sales representatives, many of which also sell services or products of 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 retailers and sales representatives in new markets that we may enter |
| If our distribution agreement with UTA is not extended or our distributors or sales representatives fail to effectively market or distribute our prepaid calling card products and other services, our ability to generate revenues and grow our customer base could be substantially impaired |
| Increased competition in the consumer and business telephone market, particularly from the regional bell operating companies, or RBOCs, and cable operators, could limit our ability to grow, and accelerate revenue declines and profit declines in that area |
| We offer stand-alone long distance phone service to residential and business subscribers throughout the United States and we offer local service, bundled with long distance service, to residential subscribers in 13 states |
| The US consumer phone services industry is characterized by numerous entities competing for a relatively static number of customers, leading to a high customer turnover rate because customers frequently change service providers in response to offers of lower rates or promotional incentives |
| Our primary competitors in the long distance market include major long distance carriers and the RBOCs |
| The four RBOCs are (i) BellSouth, (ii) AT&T/SBC Communications, (iii) Qwest and (iv) Verizon (which now includes MCI) |
| Each of the RBOCs continues to enjoy a virtual monopoly as the Incumbent Local Exchange Carrier, or ILEC, in its respective territory and the RBOCs are well funded |
| In a battle for market share, the RBOCs have considerable resources and we expect the RBOCs to continue to increase their share of the long distance market |
| Some of our competitors offer products and services available as part of their bundled service offerings, such as wireless services and high speed Internet access, that we do not presently offer as a bundled service offering |
| We also compete in the consumer phone services market with cable operators |
| Many cable operators market their cable telephony product as a VoIP service, so they do not charge certain fees, such as the Subscriber Line Charge and the Federal Excise Tax, to subscribers, thus permitting the cable operators to provide their service at highly competitive rates |
| Cable operators also offer television and high-speed Internet access along with their telephony product, providing a “one stop shopping” service |
| In addition, we are at a disadvantage vis-à-vis 21 ______________________________________________________________________ [50]Table of Contents cable operators because cable operators have their own network and are not reliant on ILEC facilities to provide service and are not affected by regulatory uncertainty facing access to and the cost of ILEC facilities |
| In particular, we face an additional competitive challenge because Cablevision and Time Warner—two cable operators that have been particularly aggressive in rolling out a cable telephony product—have clusters of cable franchises that overlap areas where a high percentage of our local telephony subscribers are located |
| In the consumer phone services market, we also compete with “stand-alone” VoIP operators, who provide service over a customer’s existing broadband Internet connection |
| While these operators have captured a relatively small portion of the overall market to date, their share is growing |
| We rely on utilizing the RBOCs’ networks to gain access to our customers’ premises to provide the local portion of our bundled local and long distance services |
| That access was previously assured by the UNE-P rules of the Federal Communications Commission, or FCC, which mandated that the RBOCs make their networks available to alternate service providers, such as us, at set rates |
| In February 2005, the FCC effectively repealed the UNE-P rules, which has constrained our ability to compete |
| We have entered into agreements with Verizon, AT&T/SBC and BellSouth granting us access to their respective networks, albeit at higher rates than we paid under the UNE-P system |
| This has impaired our overall ability to offer our bundled service and has led to a decline in our consumer phone services business and our overall revenues |
| Further, as the consumer bundled service has higher margins than does most of our other telecom offerings, the decrease in the proportions of our overall revenues from that source has negatively affected our overall profit margins |
| RISKS RELATED TO NET2PHONE We may not be able to integrate Net2Phone’s existing operations and network into those of IDT Telecom without experiencing significant difficulties |
| We are in the process of integrating Net2Phone’s existing operations, including its network for international termination of telecom minutes and its VoIP product lines and services, into IDT Telecom, a process that we believe should conclude in fiscal 2008 |
| In the process, we may experience significant difficulties and may not be able to complete the process within the expected timeframe |
| We expect to migrate some or all of the traffic from IDT Telecom’s network onto Net2Phone’s network to take advantage of benefits associated with an IP-based network |
| We also cannot be assured that Net2Phone’s network can be expanded as much as we expect |
| If we experience these or other difficulties, our business, financial condition and results of operations may be materially and adversely affected |
| Pricing pressures and increasing use of VoIP technology may lessen Net2Phone’s competitive pricing advantage |
| Net2Phone’s business is based partly on its ability to provide discounted voice services by taking advantage of cost savings achieved by carrying voice traffic employing VoIP packet switched technologies, as compared to carrying calls over traditional circuit switched networks |
| In recent years, the price of telephone service has generally fallen |
| The price of telephone service may continue to fall for various reasons, including the adoption of VoIP technology by other communications carriers |
| Many carriers have adopted pricing plans such that the rates that they charge are not always substantially higher than the rates that Net2Phone charges for similar service |
| In addition, other providers of long distance services are offering unlimited or nearly unlimited use of some of their services for a competitive monthly rate |
| The overall effect of these developments may be to reduce the price of local and long distance calls to a point where VoIP providers such as Net2Phone no longer have a price advantage |
| Net2Phone would then have to rely on factors other than price to differentiate its product and service offerings, which it may not be able to do |
| If it is not able to do so, Net2Phone’s business, financial condition and results of operations may be materially and adversely affected |
| Net2Phone depends and plans to increasingly depend on its international operations, which subject it to geographic regulatory and business uncertainties |
| Net2Phone’s customers based outside of the United States currently generate a majority of its revenue |
| A significant component of Net2Phone’s strategy is to continue to expand internationally |
| Net2Phone may not be successful in expanding into additional international markets |
| In addition to the uncertainty regarding 22 ______________________________________________________________________ [51]Table of Contents Net2Phone’s ability to generate revenue from foreign operations and expand its international presence, there are certain risks inherent in doing business on an international basis, including: • changing regulatory requirements, which vary widely from country to country; • action by foreign governments or foreign telecommunications companies to limit access to Net2Phone’s services; • increased bad debt and subscription fraud; • legal uncertainty regarding liability, tariffs and other trade barriers; • economic and political instability; and • potentially adverse tax consequences |
| RISKS RELATED TO IDT ENERGY In the event that certain best practices with which we comply were to be revised, it could disrupt our operations and adversely affect our results operations |
| Certain “best practices” have been recommended by the New York Public Service Commission and implemented in several utility service territories in which IDT Energy operates |
| These practices include: ESCO referral programs, purchase of receivables, access to customer data, and alignment of utility incentives |
| In particular, we participate in a program under which certain utilities offer guarantees of customer receivables in exchange for a percentage, generally less than or equal to 1dtta5prca, of the total receivables of their customers in region |
| In the event that any of these best practices were to be revised by the Commission or the individual utilities, we would need to adjust IDT Energy’s current strategy regarding customer acquisition and continuation of focus on the growth of our customer base |
| Any failure to properly respond to changing conditions could adversely affect our results of operations and profitability |
| Our current strategy with respect to our energy business is based on current conditions and assumptions which could change or prove to be incorrect |
| Our current approach to the ESCO business is to aggressively seek to add customers through active marketing |
| We believe that is the proper strategy based on market conditions, the financial results of the business and our ability to manage our costs and risk profile |
| All of those factors are subject to change based on changes in the relatively young industry, weather conditions and the prices for energy which are subject to market, geopolitical and other factors out of our control |
| Milder weather than expected could reduce demand for our services |
| While we seek to pass along increases in energy costs to our customers, we may not always be able to do so |
| Any changes in these factors, or if the industry development changes significantly, could have an adverse effect on the revenues, profitability and growth of this business or call into question the viability of our current growth strategy |
| The ESCO business, and our participation in this market, is relatively new and evolving factors could adversely impact the market and our performance |
| The ESCO business grew out of the deregulation of the energy market in the State of New York, which only began in 2000 |
| Further, IDT only entered the market in 2004 |
| Accordingly, the entire market is still evolving and we are continuing to hone our operations and strategy |
| We cannot predict how the market will develop or if our focus on customer acquisition and growth will prove to be the proper strategy |
| If our presumptions prove to be incorrect, the results of operations of this business could be adversely affected |
| RISKS RELATED TO OUR FINANCIAL PERFORMANCE AND GROWTH STRATEGY We have incurred significant losses since our inception, which could cause the trading price of our stock to decline |
| We have incurred significant losses since our inception |
| During fiscal 2006, we had a consolidated net loss of dlra178dtta7 million |
| If we are not able to achieve overall profitability or maintain any profitability that we do achieve, the trading price of our stock could be negatively affected |
| Our growth strategy depends, in part, on our acquiring complementary businesses and assets and expanding our existing operations, which we may be unable to do |
| Our growth strategy is based, in part, on our ability to acquire businesses and assets that are complimentary to our existing operations |
| We may also seek to acquire other businesses |
| The success of this acquisition strategy will depend, in part, on our ability to accomplish the following: 23 ______________________________________________________________________ [52]Table of Contents • identify suitable businesses or assets to buy; • complete the purchase of those businesses on terms acceptable to us; • complete the acquisitions in the time frame we expect; • improve the results of operations of the businesses that we buy and successfully integrate their operations into our own; and • avoid or overcome any concerns expressed by regulators, including antitrust concerns |
| Our failure to implement our acquisition strategy could have an adverse effect on other aspects of our business strategy and our business in general |
| We may not be able to find appropriate acquisition candidates, acquire those candidates that we find or integrate acquired businesses effectively or profitably |
| Our acquisition program and strategy may lead us to contemplate acquisitions of companies in distress or in bankruptcy, which entail additional risks and uncertainties |
| Such risks and uncertainties include, without limitation, that, before assets may be acquired, customers may leave in search of more stable providers and vendors may terminate key relationships |
| Also, assets are generally acquired on an “as is” basis, with no recourse to the seller if the assets are not as valuable as may be represented |
| Finally, while distressed or bankrupt companies may be acquired for comparatively less money, the cost of continuing the operations may significantly exceed expectations |
| We have in the past used, and may continue to use, our capital stock as payment for all or a portion of the purchase price for acquisitions |
| If we issue significant amounts of our capital stock for such acquisitions, this could result in substantial dilution of the equity interests of our stockholders |
| We hold significant cash, cash equivalents and marketable securities that are subject to various market risks |
| As of July 31, 2006, we had approximately dlra514dtta8 million of cash, cash equivalents and marketable securities |
| In addition, as of that date we had cash, cash equivalents and marketable securities of approximately dlra60dtta7 million included in the assets of our discontinued operations |
| As discussed below in the Quantitative and Qualitative Disclosure of Market Risk section, due to the variety of financial instruments that we hold we are exposed to various market risks |
| In particular, we are exposed to changes in interest rates primarily from our investments in cash equivalents and marketable debt securities |
| Furthermore, we hold a small portion of our total asset portfolio in hedge funds for speculative and strategic purposes; as of July 31, 2006, the carrying value of our investments in such hedge funds was approximately dlra31dtta2 million |
| This carries a significant degree of risk, as there can be no assurance that hedge fund 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 and marketable securities, as well as our hedge funds portfolio, could be materially and adversely affected |
| INTELLECTUAL PROPERTY AND REGULATORY 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 |
| 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 24 ______________________________________________________________________ [53]Table of Contents 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 |
| IDT is subject to tax and regulatory audits which could result in the imposition of liabilities that may or may not have been reserved against |
| IDT is subject to audit by taxing and regulatory authorities with respect to certain of its 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 IDT’s positions are not accepted by the auditing entity |
| Our financial statements contain reserves against certain of such liabilities, but we do not reserve against liabilities that we do not reasonably expect to be imposed |
| For example, as disclosed elsewhere in this Annual Report, in February 2006, we were notified that USAC had issued an audit report with respect to our liability with respect to payments to the USF We are challenging the conclusions reached and certain actions taken with respect to that audit, have reserved certain amounts in respect of prior periods and, pending resolution of the matter, will accrue in accordance with USAC’s methodology |
| The Internal Revenue Service, in the ordinary course of business, may audit some or all of our tax filings |
| The IRS has recently concluded an audit for our fiscal year 2000, the findings of which were substantially consistent with our previously filed returns |
| IDT’s pre-tax income (loss) for those years was dlra741dtta8 million, $(281dtta2) million, $(91dtta4) million and $(99dtta6) million, respectively |
| Imposition of additional liabilities as a result of tax and regulatory audits could have an adverse affect on our results of operations, cash flows and financial condition |
| Federal, state, local and international government regulations may reduce our ability to provide services or make our business less profitable |
| We are subject to varying degrees of regulation by federal, state, local and foreign regulators |
| The implementation, modification, interpretation and enforcement of these laws and regulations vary and can limit our ability to provide many of our services |
| Our ability to compete in our target markets depends, in part, upon favorable regulatory conditions and the favorable interpretations of existing laws and regulations |
| For example, the FCC’s rules governing availability of ILEC unbundled network elements to CLECs have been the subject of on going litigation and rulemaking proceedings |
| In February 2005, the FCC eliminated the availability of unbundled local switching at TELRIC prices, and thereby eliminated the ability of CLECs to obtain a full “UNE Platform” that provides all elements of local dial-tone service at TELRIC prices |
| The FCC also limited the availability of high-capacity loops and dedicated transport elements at TELRIC prices; these elements will now be available only in particular markets that do not meet tests for the presence of competitive facilities as detailed in the FCC’s rules |
| These changes have resulted in higher wholesale rates and may impair our ability to offer local phone service at competitive rates |
| In addition, pursuant to rules adopted by the FCC, our consumer phone services business is required to contribute to the Universal Service Fund |
| The FCC has proceedings underway to evaluate possible changes to the current rules for assessing contributions for the Universal Service Fund |
| Any change in the current assessment calculation procedure could result in higher fees payable by our consumer phone services business and could adversely affect our revenues and margins in consumer phone services |
| On February 10, 2006, Universal Service Administrative Company, or USAC, notified us that it issued an Audit Report from its Internal Audit Division, or IAD In calendar year 2005, the IAD audited our FCC Form 499-A filings for calendar years 2000 through 2004 related to the payments to the Universal Service Fund, and concluded that we incorrectly reported certain revenues on its Forms 499-A USAC directed IDT to refile its Forms 499-A for calendar years 2002 through 2004 in a manner consistent with the IAD’s findings |
| We did not refile its Forms 499-A, as we believed the IAD was mistaken in certain conclusions regarding the treatment of our revenue |
| USAC, however, filed the forms on our behalf, which we believe to be impermissible under the FCC’s rules and regulations |
| We filed with the FCC a “Request for Review” of the Audit Report, which remains pending as of the date we are filing this Annual Report |
| We have estimated that USAC’s revisions to our filing methodology would result 25 ______________________________________________________________________ [54]Table of Contents in approximately dlra26dtta1 million in additional regulatory payments for the years covered by the audit, which we have accrued |
| Because we believe in the accuracy of our filing methodology and our Request remains pending, we have not revised our methodology for post-audit Form 499-A filings |
| 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 is denied and/or our methodology is not upheld on appeal |
| The accrual amount for the years covered by the audit and subsequent years, as of the date of this Annual Report, is dlra57dtta0 million |
| Until a final decision has been reached in our dispute, we will continue to accrue in accordance with IAD’s methodology |
| Our total accrual will likely continue to increase unless we remit certain regulatory payment to avoid late fees and/or penalties in spite of our pending appeal |
| 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 various taxes, fees and charges imposed pursuant to the different regulations to which we are subject |
| We believe that the reserves we have allocated for such taxes, fees and charges are adequate, but there can be no assurance that our assumptions and calculations used in determining the size of the reserves will be agreed with by the applicable regulatory bodies |
| In addition, such reservations and the amounts we are obligated to pay are based upon our positions under, and the interpretations we have taken of, complex regulatory schemes |
| Any changes to such regulations—or in our business that affect our positions under such regulations—could result in an increase in the amounts we are obligated to pay (on a prospective basis and, potentially, retroactively), and could have an adverse effect on our financial condition |
| For example, as a result of the overwhelming percentage of our traffic that is terminated in international destinations we may qualify for specific treatment in respect of certain regulatory fees |
| A shift in the mix of international and domestic traffic we carry, or a downturn in our calling card business which has a higher international component than some of our other operations, may affect this treatment and the profitability of our calling card business could suffer |
| We may become subject to increased price competition from other carriers due to federal regulatory changes in determining international settlement rates |
| Revenues from, and payments made in connection with, international service reflect payments under agreements between us and foreign telecommunications administrations or private carriers, which are influenced by the guidelines of the international tariff and trade regulations and cover virtually all international calls to and from the United States |
| Various factors, including declining settlement rates, could affect the amount of net settlement payments from carriers to us in future years |
| These include changes in the proportion of outgoing as opposed to incoming calls |
| Any federal regulatory change to international telecommunications policy and/or settlement rates, may adversely affect our revenues costs and profitability |
| Federal and state regulations may be passed that could harm Net2Phone’s business |
| Net2Phone’s 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 |
| As such, VoIP providers can currently avoid paying some of the charges that traditional telephone companies must pay |
| Local exchange carriers are lobbying the FCC and the states to regulate VoIP on the same basis as traditional telephone services |
| Congress, the FCC and several states are examining this issue |
| If these regulators decide to increased VoIP regulations, they may impose surcharges, taxes or additional regulations upon providers of Internet telephony |
| These surcharges could include access charges payable to local exchange carriers to carry and terminate traffic or other charges and fees |
| The imposition of any such additional fees, charges, taxes and regulations on IP communications services could materially increase our costs and may limit or eliminate our competitive pricing advantages |
| In addition, we expect that regulations requiring compliance with the Communications Assistance for Law Enforcement Act (CALEA), or provision of 911 services required for traditional telecommunications providers, could place a significant financial burden on us depending on the technical changes required to accommodate the requirements |
| As a result of recent FCC actions regarding interconnect VoIP, we believe states may attempt to impose new or additional regulatory obligations and require us to pay additional charges and taxes |
| As a result, our business, financial condition and results of operations could be materially and adversely affected |
| Net2Phone’s ability to offer services outside the United States is subject to the local regulatory environment, which may be unfavorable, complicated and often uncertain |
| Regulatory treatment of Internet telephony 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 26 ______________________________________________________________________ [55]Table of Contents their home countries |
| The failure of these resellers to comply with these laws and regulations could reduce our revenue and profitability |
| Because of our relationship with the resellers, some countries may assert that we are required to register as a telecommunications carrier in that country |
| In such case, our failure to do so could subject us to regulatory action such as fines or penalties |
| In addition, some countries are considering subjecting VoIP services to the regulations applied to traditional telephone companies |
| Regulatory developments such as these could have a material adverse effect on our operating results |
| 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 |
| New regulations may increase Net2Phone’s cost of doing business and subject it to additional liability |
| We expect that Net2Phone’s need to comply with new regulations will increase its costs of doing business, which means it may need to raise its prices or lower its margins |
| This could adversely affect its ability to be competitive and to become profitable |
| In addition, as we begin to offer new products and services the failure of such products and services to perform or function properly may also subject us to legal claims or actions from our customers |
| New and existing laws may cover areas that impact our business and include, but are not limited to: • sales, excise and other taxes; • user privacy; • pricing controls; • export and international commerce related transactions; • characteristics and quality of products and services; • consumer protection; and • encryption |
| 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 “Business—Regulation” included elsewhere in this Annual Report on Form 10-K 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 and our 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 and holders of our common stock are entitled to one vote per share |
| As a result, the ability of holders of our Class B common stock to influence the management of our Company is limited |
| IDT is controlled by its principal stockholder, which limits the ability of other stockholders to affect the management of IDT Howard S Jonas, our Chairman of the Board and founder, has voting power over 11cmam642cmam130 shares of our common stock (which includes 9cmam816cmam988 shares of our Class A common stock, which are convertible into shares of our common stock on a 1-for-1 basis) and 6cmam084cmam196 shares of our Class B common stock, representing approximately 63dtta4prca of the combined voting power of our outstanding capital stock, as of October 5, 2006 |
| 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 the management of our Company is limited |