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Technology Stocks : IDT *(idtc) following this new issue?* -- Ignore unavailable to you. Want to Upgrade?

To: Rajiv who wrote (11536)	7/16/1999 8:02:00 AM
From: Smear_campaign	Read Replies (2) \| Respond to of 30916

Interesting post by Mr. Gatz on Yahoo, plausible stuff. <Yesterday on the board I noticed some continuing confusion on the accounting for the spin-off and its impact on earnings and book value. To that end, I offer some thoughts on this matter... Situation- Subsequent NTOP public offering, IDTC will own 58% of NTOP stock and exert significant control over NTOP operating decisions (as evidenced by board of dirctors composition and operating agreements). SEC Reporting Requirements- Per SEC reporting requirements, a parent must consolidate a subsidiary into its financial statements for financial reporting purposes if the parent exerts "effective control" over the subsidiary as defined as: a. Ownership of more than 40% of outstanding common stock - or b. Significant control over management decision making (as evidenced by board seats and other agreements) Note, that were IDTC to reduce its holding of NTOP common stock significantly as a result of either a secondary offering or distribution to shareholders, it would still exert effective control over NTOP. Much has been made of the IR comment that IDTC must maintain majority ownership of NTOP - this is more likely due to bank requirements on pledged NTOP common stock than financial reporting considerations. Impact on IDTC Reported Financial Results - Two sets of financial statements will be issued - one for NTOP and one for IDTC consolidated. No separate set of financial statements will be issued for the core IDTC business. From an income statement perspective, all NTOP revenues and expenses will be added to IDTC core revenues and expenses to determine IDTC consolidated revenues and expenses. Any transactions between the two companies will be eliminated in this consolidation - thus any profit made on services provided to NTOP will be eliminated. A portion of the gains/lossess attibuted to NTOP (42%) will be subtracted from total IDTC gains/losses in determining consolidated net income. For example, if the core earns 0.30/share next quarter and NTOP losses 0.10/IDTC share, IDTC will report next income of 0.24/share. The company will recognize no income from repayment of the loan or any other financing activity. From a balance sheet perspective, all NTOP assets and liabilities will be added to IDTC core assets and liabilities to determine total IDTC consolidated assets and liabilities. A confusing but relevant liability/equity hybrid account will emerge to account for the portion of earnings/losses attributed to minority shareholders. Conclusion The implied market value of NTOP and IDTC's investment in NTOP is not relevant for financial reporting purposes. These amounts are only relevant when performing sum of the parts valuation excercises on IDTC. As you can see, the NTOP transaction does not free IDTC from the earnings drain of NTOP - it does, however, improve the earnings transparency of the underlying business.>