SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
Commission file number 000-28063
DELTATHREE, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-4006766
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
75 Broad Street 10004
New York, New York (Zip code)
(Address of principal executive offices)
(212) 500-4850
(Registrant's telephone number, including area code)
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 |X| No | |
As of August 13, 2002, the registrant had 29,143,206 shares of
Class A Common Stock, par value $0.001 per share, outstanding.
DELTATHREE, INC.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.................................................1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................5
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................11
Item 2. Change in Securities and Use of Proceeds............................11
Item 4. Submission of Matters to a Vote of Security Holders.................12
Item 5. Other Information...................................................12
Item 6. Exhibits and Reports on Form 8-K....................................13
Signatures...................................................................14
Exhibit Index................................................................15
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
DELTATHREE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of As of
June 30, December 31,
2002 2001
----------- -----------
(unaudited)
($ in thousands)
ASSETS
Current assets:
Cash and cash equivalents............................................ $7,530 $13,583
Short-term investments............................................... 15,560 14,192
Accounts receivable, net ............................................ 1,065 1,092
Prepaid expenses and other current assets ........................... 802 1,264
------- -------
Total current assets.............................................. 24,957 30,131
------- -------
Property and equipment, net........................................... 12,566 15,635
------- -------
Deposits.............................................................. 100 103
------- -------
Total assets..................................................... $37,623 $45,869
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $2,114 $3,417
Deferred revenues ................................................... 528 505
Other current liabilities ........................................... 2,486 2,835
------- -------
Total current liabilities......................................... 5,128 6,757
------- -------
Long-term liabilities:
Severance pay obligations ........................................... 139 191
------- -------
Total liabilities................................................. 5,267 6,948
Commitments and contingencies ------- -------
Stockholders' equity:
Class A common stock, - par value $0.001............................. 29 29
Class B common stock, - par value $0.001............................. - -
Additional paid-in capital........................................... 166,801 166,801
Deferred compensation................................................ - (270)
Accumulated deficit.................................................. (134,264) (127,429)
Treasury stock at cost: 257,600 shares of class A common stock as of
June 30, 2002 and December 31, 2001................................. (210) (210)
------- -------
Total stockholders' equity....................................... 32,356 38,921
------- -------
Total liabilities and stockholders' equity....................... $37,623 $45,869
======= =======
See notes to condensed consolidated financial statements.
DELTATHREE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30,
------- --------
2002 2001 2002 2001
---- ---- ---- ----
(unaudited) (unaudited)
($ in thousands, except share data)
Revenues:
Affiliates ....................................... $ -- $ 223 $ -- $ 1,669
Non-affiliates ................................... 3,154 2,618 6,491 7,198
------------ ------------ ------------ ------------
Total revenues ................................ 3,154 2,841 6,491 8,867
------------ ------------ ------------ ------------
Costs and operating expenses:
Cost of revenues, net ............................ 2,179 2,526 4,736 7,865
Research and development expenses, net ........... 880 1,527 1,873 3,364
Selling and marketing expenses ................... 1,168 1,921 2,219 5,135
General and administrative expenses (exclusive of
non-cash compensation expense shown below) .... 511 1,628 1,120 3,678
Non-cash compensation expense .................... 108 233 270 501
Depreciation and amortization .................... 1,643 2,490 3,278 4,461
Write-down of fixed assets resulting from RSL sale -- 1,147 -- 1,147
Expenses due to cancellation of a supplier agree-
ment (including non-cash compensation of $1,493) -- 3,628 -- 3,628
------------ ------------ ------------ ------------
Total costs and operating expenses ............ 6,489 15,100 13,496 29,779
------------ ------------ ------------ ------------
Loss from operations ............................... (3,335) (12,259) (7,005) (20,912)
Interest income, net ............................... 52 527 181 1,259
------------ ------------ ------------ ------------
Loss before income taxes ........................... (3,283) (11,732) (6,824) (19,653)
Income taxes ....................................... -- (181) (11) 112
------------- ------------ ------------ ------------
Net loss ........................................... $ (3,283) $ (11,551) $ (6,835) $ (19,541)
============ ============ ============ ============
Net loss per share - basic and diluted ............. $ (0.11) $ (0.40) $ (0.24) $ (0.67)
============ ============ ============ ============
Weighted average shares outstanding -
basic and diluted (number of shares) ......... 28,885,606 29,055,783 28,885,606 29,050,934
============ ============ ============ ============
See notes to condensed consolidated financial statements
DELTATHREE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
2002 2001
---- ----
(unaudited)
Cash flows from operating activities:
Net loss ........................................................ $ (6,835) $(19,541)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ............................ 3,278 4,461
Amortization of deferred compensation .................... 270 1,994
Capital loss, net ........................................ -- 1
Increase (decrease) in liability for severance pay, net .. (52) 22
Provision for losses on accounts receivable .............. (2) (98)
Write-down on fixed assets resulting from RSL sale ....... -- 1,147
Changes in assets and liabilities:
Decrease (increase) in accounts receivable ............... 29 1,498
Increase (decrease) in other current assets .............. 462 108
Increase (decrease) in accounts payable .................. (1,275) (1,068)
Decrease in deferred revenues ............................ 23 108
Increase (decrease) in current liabilities ............... (349) (4,178)
------- -------
2,384 3,995
------- -------
Net cash used in operating activities ......................... (4,451) (15,546)
------- -------
Cash flows from investing activities:
Purchase of property and equipment ....................... (238) (1,185)
Proceeds from sale of property and equipment ............. 1 457
Decrease (increase) in deposits .......................... 3 (33)
------- -------
Net cash used in investing activities ......................... (234) (761)
------- -------
Cash flows from financing activities:
Decrease (increase) in short-term investments ............ 1,368 8,701
Proceeds from exercise of employee stock options ......... -- 48
------- -------
Net cash provided by (used in) financing activities ........... (1,368) 8,749
------- -------
Increase (decrease) in cash and cash equivalents ................ (6,053) (7,558)
Cash and cash equivalents at beginning of period ................ 13,583 20,857
-------- --------
Cash and cash equivalents at end of period ...................... $ 7,530 $ 13,299
======== ========
See notes to condensed consolidated financial statements
DELTATHREE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The unaudited condensed consolidated financial statements of
deltathree, Inc. and its subsidiaries (collectively, "the Company"), of
which these notes are a part, have been prepared in accordance with
generally accepted accounting principles for interim financial information
and pursuant to the instructions of Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for annual financial
statements. In the opinion of management of the Company, all adjustments
(consisting only of normal recurring accruals) considered necessary for a
fair presentation of the financial information have been included. The
results for the interim periods presented are not necessarily indicative of
the results that may be expected for any future period. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 2001.
2. Net Loss Per Share
The shares issuable upon the exercise of stock options and
warrants are excluded from the calculation of net loss per share, as their
effect would be antidilutive.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and the Notes thereto
included in our Annual Report on Form 10-K for the year ended December 31,
2001. This quarterly report on Form 10-Q contains forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933,
as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. These forward-looking statements involve risks and uncertainties
and actual results could differ materially from those discussed in the
forward-looking statements. All forward-looking statements and risk factors
included in this document are made as of the date hereof, based on
information available to us as of the date thereof, and we assume no
obligation to update any forward-looking statement or risk factors.
Six Months Ended June 30, 2002 Compared to Six Months Ended June 30, 2001
Revenues
Affiliates. There were no revenues from affiliates for the six
months ended June 30, 2002 compared to $1.7 million for the six months
ended June 30, 2001. The decrease in revenues from affiliates was due to
the sale of all of our Class B Common Stock, representing majority
ownership of us, on June 29, 2001 by RSL Communications, Ltd. ("RSL COM")
and our disconnection from the RSL COM network. After June 29, 2001, there
were no further revenues from affiliates, and we do not anticipate
receiving revenues from affiliates in the future.
Non-affiliates. Revenues from non-affiliates decreased
approximately $0.7 million or 9.7% to approximately $6.5 million for the
six months ended June 30, 2002 from approximately $7.2 million for the six
months ended June 30, 2001. Revenues from enhanced IP communications
services (including our Hosted Communications Solution) decreased by
approximately $0.4 million or 6.5% to approximately $5.8 million for the
six months ended June 30, 2002 from approximately $6.2 million for the six
months ended June 30, 2001, due to a lesser number of new Hosted
Communications Solution partners, yielding lower up-front integration fees,
and partially offset by a greater number of PC-to-Phone and Phone-to-Phone
calls being placed by an increasing user base.
Revenues from carrier transmission services, for
telecommunications carriers other than RSL COM, decreased by approximately
$0.3 million or 30.0% to approximately $0.7 million for the six months
ended June 30, 2002 from approximately $1.0 million for the six months
ended June 30, 2001, due primarily to decreased demand from a smaller
customer base. No customer (other than RSL COM in 2001) accounted for
greater than 10% of our revenues during these periods.
Costs and Operating Expenses
Cost of revenues. Cost of revenues decreased by approximately $3.2
million or 40.5% to approximately $4.7 million for the six months ended
June 30, 2002 from approximately $7.9 million for the six months ended June
30, 2001, due primarily to a decrease in the amount of traffic being
terminated.
Research and development expenses. Research and development
expenses decreased by approximately $1.5 million or 44.1% to approximately
$1.9 million for the six months ended June 30, 2002 from approximately $3.4
million for the six months ended June 30, 2001, due to lower personnel
costs associated with the development of new services and enhancements to
our existing services.
Selling and marketing expenses. Selling and marketing expenses
decreased by approximately $2.9 million or 56.9% to approximately $2.2
million for the six months ended June 30, 2002 from approximately $5.1
million for the six months ended June 30, 2001, due to a significant
decrease in our branding and promotional activities.
General and administrative expenses. General and administrative
expenses (exclusive of non-cash compensation expenses) decreased by
approximately $2.6 million or 70.3% to approximately $1.1 million for the
six months ended June 30, 2002 from approximately $3.7 million for the six
months ended June 30, 2001, primarily due to decreased personnel costs.
Non-cash compensation expenses. Non-cash compensation expenses
decreased by approximately $230,000 or 46.0% to approximately $270,000 for
the six months ended June 30, 2002 from approximately $500,000 for the six
months ended June 30, 2001, due to the completed amortization of costs
incurred during 1998. Remaining amortization of costs related to the 1999
grants of options and warrants below the then fair market value will
continue to be reflected in our future financial statements.
Depreciation and amortization. Depreciation and amortization of
goodwill decreased by approximately $1.2 million or 26.7% to approximately
$3.3 million for the six months ended June 30, 2002 from approximately $4.5
million for the six months ended June 30, 2001, due to our impairment of
goodwill during 2001, and consequently there were no goodwill related
expenses during the six months ended June 30, 2002.
Write down of fixed assets from RSL COM sale. During the six
months ended June 30, 2001, we incurred a one-time expense of approximately
$1.1 million from the write-down of equipment that was purchased in
previous periods to support contracts and inter-company agreements between
us and RSL COM that were cancelled at the time of RSL COM's sale of their
majority ownership interest in us to Atarey Hasharon Chevra Lepituach
Vehashkaot Benadlan (1991) Ltd., an Israeli company ("Atarey"), in
accordance with FAS 121.
Expenses due to the cancellation of a supplier agreement. During
the six months ended June 30, 2001, we incurred a one-time expense of
approximately $3.6 million that resulted from the cancellation of a
development and promotion agreement between us and CNET Investments, Inc.
Expenses included a payment to terminate the agreement and the acceleration
of the amortization of non-cash compensation charges deferred in previous
years.
Loss from Operations
Loss from operations decreased by approximately $13.9 million or
66.5% to approximately $7.0 million for the six months ended June 30, 2002
from approximately $20.9 million for the six months ended June 30, 2001,
due primarily to the decrease in costs and operating expenses, including
non-cash compensation expenses and selling and marketing expenses. We
expect to continue to incur losses for the foreseeable future.
Interest Income, Net
Interest income, net decreased by approximately $1.1 million or
84.6% to approximately $180,000 for the six months ended June 30, 2002 from
approximately $1.3 million for the six months ended June 30, 2001, due
primarily to lower interest rates earned on the reduced balance of
remaining proceeds from our initial public offering.
Income Taxes, Net
We paid net income taxes of approximately $11,000 for the six
months ended June 30, 2002 compared to receiving an income tax credit of
approximately $112,000 for the six months ended June 30, 2001.
Net Loss
Net loss decreased by approximately $12.7 million or 65.1% to
approximately $6.8 million for the six months ended June 30, 2002 from
approximately $19.5 million for the six months ended June 30, 2001 due to
the foregoing factors.
Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001
Revenues
Affiliates. There were no revenues from affiliates for the three
months ended June 30, 2002 compared to $223,000 for the three months ended
June 30, 2001. The decrease in revenues from affiliates was due to the sale
of all of our Class B Common Stock, representing majority ownership of us,
on June 29, 2001 by RSL COM and our disconnection from the RSL COM network.
After June 29, 2001, there were no further revenues from affiliates, and we
do not anticipate receiving revenues from affiliates in the future.
Non-affiliates. Revenues from non-affiliates increased
approximately $0.6 million or 23.1% to approximately $3.2 million for the
three months ended June 30, 2002 from approximately $2.6 million for the
three months ended June 30, 2001. Revenues from enhanced IP communications
services (including our Hosted Communications Solution) increased by
approximately $0.5 million or 20.8% to approximately $2.9 million for the
three months ended June 30, 2002 from approximately $2.4 million for the
three months ended June 30, 2001, due to a greater number of PC-to-Phone
and Phone-to-Phone calls being placed by an increasing user base, partially
offset by lower up-front integration fees from fewer new Hosted
Communications Solution partners.
Revenues from carrier transmission services, for
telecommunications carriers other than RSL COM, increased by approximately
$0.1 million or 50.0% to approximately $0.3 million for the three months
ended June 30, 2002 from approximately $0.2 million for the three months
ended June 30, 2001, due primarily to a slightly increased demand from a
smaller customer base. No customer (other than RSL COM in 2001) accounted
for greater than 10% of our revenues during these periods.
Costs and Operating Expenses
Cost of revenues. Cost of revenues decreased by approximately $0.3
million or 12.0% to approximately $2.2 million for the three months ended
June 30, 2002 from approximately $2.5 million for the three months ended
June 30, 2001, due primarily to a decrease in the amount of traffic being
terminated.
Research and development expenses. Research and development
expenses decreased by approximately $0.6 million or 40.0% to approximately
$0.9 million for the three months ended June 30, 2002 from approximately
$1.5 million for the three months ended June 30, 2001, due to lower
personnel costs associated with the development of new services and
enhancements to our existing services.
Selling and marketing expenses. Selling and marketing expenses
decreased by approximately $0.7 million or 36.8% to approximately $1.2
million for the three months ended June 30, 2002 from approximately $1.9
million for the three months ended June 30, 2001, due to a significant
decrease in our branding and promotional activities.
General and administrative expenses. General and administrative
expenses (exclusive of non-cash compensation expenses) decreased by
approximately $1.1 million or 68.8% to approximately $0.5 million for the
three months ended June 30, 2002 from approximately $1.6 million for the
three months ended June 30, 2001, primarily due to decreased personnel costs.
Non-cash compensation expenses. Non-cash compensation expenses
decreased by approximately $120,000 or 52.2% to approximately $110,000 for
the three months ended June 30, 2002 from approximately $230,000 for the
three months ended June 30, 2001, due to the completed amortization of
costs incurred during 1998. Remaining amortization of costs related to the
1999 grants of options and warrants below the then fair market value will
continue to be reflected in our future financial statements.
Depreciation and amortization. Depreciation and amortization of
goodwill decreased by approximately $0.9 million or 36.0% to approximately
$1.6 million for the three months ended June 30, 2002 from approximately
$2.5 million for the three months ended June 30, 2001, due to our
impairment of goodwill during 2001, and consequently there were no goodwill
related expenses during the three months ended June 30, 2002.
Write down of fixed assets from RSL COM sale. During the three
months ended June 20, 2001, we incurred a one-time expense of approximately
$1.1 million from the write-down of equipment that was purchased in
previous periods to support contracts and inter-company agreements between
us and RSL COM that were cancelled at the time of RSL COM's sale of their
majority ownership interest in us to Atarey in accordance with FAS 121.
Expenses due to the cancellation of a supplier agreement. During
the six months ended June 30, 2001, we incurred a one-time expense of
approximately $3.6 million that resulted from the cancellation of a
development and promotion agreement between us and CNET Investments, Inc.
Expenses included a payment to terminate the agreement and the acceleration
of the amortization of non-cash compensation charges deferred in previous years.
Loss from Operations
Loss from operations decreased by approximately $9.0 million or
73.2% to approximately $3.3 million for the three months ended June 30,
2002 from approximately $12.3 million for the three months ended June 30,
2001, due primarily to the decrease in costs and operating expenses,
including non-cash compensation expenses and selling and marketing
expenses. We expect to continue to incur losses for the foreseeable future.
Interest Income, Net
Interest income, net decreased by approximately $475,000 or 90.1%
to approximately $52,000 for the three months ended June 30, 2002 from
approximately $527,000 for the three months ended June 30, 2001, due
primarily to lower interest rates earned on the reduced balance of
remaining proceeds from our initial public offering.
Income Taxes, Net
There were no income taxes, net for the three months ended June 30,
2002 compared to approximately $181,000 for the three months ended June
30, 2001.
Net Loss
Net loss decreased by approximately $8.3 million or 71.6% to
approximately $3.3 million for the three months ended June 30, 2002 from
approximately $11.6 million for the three months ended June 30, 2001 due to
the foregoing factors.
Liquidity and Capital Resources
Since our inception in June 1996, we have incurred significant
operating and net losses, due in large part to the start-up and development
of our operations. As of June 30, 2002, we had an accumulated deficit of
approximately $134 million. We anticipate that we will continue to incur
operating and net losses as we implement our growth strategy.
As of June 30, 2002, we had cash and cash equivalents of
approximately $7.5 million, marketable securities and other short-term
investments of approximately $15.6 million and working capital of
approximately $19.8 million. We generated negative cash flow from operating
activities of approximately $4.5 million during the six months ended June
30, 2002 compared with approximately $15.5 million during the six months
ended June 30, 2001. Accounts receivable were approximately $1.1 million
and $1.1 million at June 30, 2002 and June 30, 2001, respectively.
Our capital expenditures decreased approximately $1.0 million or
83.3% to approximately $0.2 million in the six months ended June 30, 2002
from approximately $1.2 million in the six months ended June 30, 2001 as we
improved our utilization of our existing domestic and international network
infrastructure.
Short-term, we obtain our funding from our utilization of the
remaining proceeds from our initial public offering offset by positive or
negative cash flow from our operations. These proceeds are maintained as
cash, cash equivalents, and short-term investments with an original
maturity of twelve months or less. Based on current trends in our
operations, these funds will be sufficient to meet our working capital
requirements, including operating losses, and capital expenditure
requirements for at least the next fiscal year, assuming that our business
plan is implemented successfully, and that:
o our recent revenue trends, which reflected an increase in
our higher-margin (primarily PC-to-Phone) products and
services, continue to increase;
o our expense trends remain at or near the rates of our second
quarter 2002 rates, which were significantly reduced during
the past twelve months through reductions in personnel,
curtailment of discretionary expenditures, and reduced
network rent and termination rates from our carriers; and
o our net cash-burn rate, which was significantly reduced
during the past twelve months due to the foregoing factors
to approximately $1.7 million in the second quarter of 2002,
continues to improve throughout 2002 and beyond.
To the extent that these trends do not remain steady, or if in the
longer-term we are not able to successfully implement our business
strategy, we may be required to raise additional funds for our ongoing
operations. Additional financing may not be available when needed or, if
available, such financing may not be on terms favorable to us. If
additional funds are raised through the issuance of equity securities, our
existing stockholders may experience significant dilution. In addition,
while the indentures governing the outstanding indebtedness of RSL COM were
cancelled and no longer restrict our ability to incur indebtedness, we
cannot assure you that any third party will be willing or able to provide
additional capital to us on favorable terms or at all.
Forward-Looking Statements
Certain matters discussed in this Report under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources" contain certain
forward-looking statements which involve risks and uncertainties and depend
upon certain assumptions, some of which may be beyond our control,
including, but not limited to, uncertainty of financial estimates and
projections, the competitive environment for Internet telephony, our
limited operating history, changes of rates of all related
telecommunications services, the level and rate of customer acceptance of
new products and services, legislation that may affect the Internet
telephony industry, rapid technological changes, as well as other risks
referenced from time to time in our filings with the Securities and
Exchange Commission, and, accordingly, there can be no assurance with
regard to such statements. All forward-looking statements and risk factors
included in this document are made as of the date hereof, based on
information available to us as of the date thereof, and we assume no
obligation to update any forward-looking statement or risk factors.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Securities and Exchange Commission's rule related to market
risk disclosure requires that we describe and quantify our potential losses
from market risk sensitive instruments attributable to reasonably possible
market changes. Market risk sensitive instruments include all financial or
commodity instruments and other financial instruments (such as investments
and debt) that are sensitive to future changes in interest rates, currency
exchange rates, commodity prices or other market factors. We believe that
our exposure to market risk is immaterial. We currently do not invest in,
or otherwise hold, for trading or other purposes, any financial instruments
subject to market risk.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
On October 8, 1999, Aerotel, Ltd. and Aerotel U.S.A. commenced a
suit against us, RSL COM and an RSL COM subsidiary in the United States
District Court for the Southern District of New York. Aerotel alleges that
we are infringing on a patent issued to Aerotel in November 1987 by making,
using, selling and offering for sale prepaid telephone card products in the
United States. Aerotel seeks an injunction to stop us from using the
technology covered by this patent, monetary damages in an unspecified
amount and reimbursement of attorneys' fees. We have answered the
complaint, and the parties are currently engaged in pre-trial discovery. As
we continue to evaluate these claims, we believe that we have meritorious
defenses to the claims and we intend to defend the lawsuit vigorously.
However, the outcome of the litigation is inherently unpredictable and an
unfavorable result may have a material adverse effect on our business,
financial condition and results of operations. Regardless of the ultimate
outcome, the litigation could result in substantial expenses to us and
significant diversion of efforts by our managerial and other personnel.
We, as well as certain of our former officers and directors, have
been named as defendants in a number of purported securities class actions
in Federal District Court for the Southern District of New York, arising
out of our initial public offering in November 1999 (the "IPO"). Various
underwriters of the IPO also are named as defendants in the actions. The
complaints allege, among other things, that the registration statement and
prospectus filed with the Securities and Exchange Commission for purposes
of the IPO were false and misleading because they failed to disclose that
the underwriters allegedly (i) solicited and received commissions from
certain investors in exchange for allocating to them shares of our stock in
connection with the IPO and (ii) entered into agreements with their
customers to allocate such stock to those customers in exchange for the
customers agreeing to purchase additional shares in the aftermarket at
predetermined prices. On August 8, 2001, the court ordered that these
actions, along with hundreds of IPO allocation cases against other issuers,
be transferred to Judge Scheindlin for coordinated pre-trial proceedings.
By Order dated October 12, 2001, Judge Scheindlin adjourned all defendants'
time to respond to or answer any of the complaints until further order of
the Court. In July 2002, omnibus motions to dismiss the complaints based on
common legal issues were filed on behalf of all issuers (and underwriters).
The Court has not issued a decision on any of those motions. These cases
remain at a preliminary stage and no discovery proceedings have taken
place. We believe that the claims asserted against us in these cases are
without merit and intend to defend vigorously against them.
We are not a party to any other material litigation and are not
aware of any other pending or threatened litigation that could have a
material adverse effect on us or our business taken as a whole.
Item 2. Change in Securities and Use of Proceeds
On November 22, 1999, we offered 6,000,000 shares of our class A
common stock in an initial public offering. These shares were registered
with the Securities and Exchange Commission on a registration statement on
Form S-1 (file no. 333-86503), which became effective on November 22, 1999.
We received net proceeds of approximately $96,255,000 from the sale of
6,900,000 shares at the initial public offering price of $15.00 per share
after deducting underwriting commissions and discounts and expenses of
approximately $6,300,000. The managing underwriters for our initial public
offering were Lehman Brothers Inc., Merrill Lynch & Co., U.S. Bancorp Piper
Jaffray, Lazard Freres & Co. LLC and Fidelity Capital Markets.
As of June 30, 2002, we had used approximately $31 million of the
net proceeds for sales, marketing and promotional activities, $20 million
for capital expenditures and $12 million for general corporate purposes.
Pending use of the remaining net proceeds, we have invested the remaining
net proceeds in interest-bearing, investment-grade instruments,
certificates of deposit, or direct or guaranteed obligations of the United
States.
Item 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Stockholders (the "Meeting") on
June 27, 2002. The following matters were submitted to our stockholders for
their vote, and the results of the votes taken at the Meeting were as
follows:
(1) Eight Directors were elected for a term of one year:
(a) Noam Bardin: 27,242,300 votes for; 39,677 votes against;
(b) Ehud Erez: 27,242,300 votes for; 39,677 votes against;
(c) Amir Gera: 27,242,300 votes for; 39,677 votes against;
(d) Issakhar Hacmun: 27,242,300 votes for; 39,677 votes against;
(e) Elie Housman: 27,242,300 votes for; 39,677 votes against;
(f) Joshua Maor: 27,242,300 votes for; 39,677 votes against;
(g) Lior Samuelson: 27,242,300 votes for; 39,677 votes against; and
(h) Shimmy Zimels: 27,242,300 votes for; 39,677 votes against.
(2) The appointment of Brightman Almagor & Co., a member firm of
Deloitte & Touche Tohmatsu, as our independent auditors for the fiscal year
ending December 31, 2002 was ratified by the following vote: 27,244,325
votes for; 21,452 votes against; and 16,200 abstentions.
(3) Our amended and restated certificate of incorporation was
ratified by the following vote: 27,200,642 votes for; 59,479 votes against;
and 21,856 abstentions. The amended and restated certificate of
incorporation, as filed with the Secretary of State of the State of
Delaware on July 2, 2002, decreases the authorized number of shares of our
Class A Common Stock from 200,000,000 shares to 75,000,000 shares and our
Class B Common Stock from 200,000,000 shares to 1,000 shares.
Item 5. Other Information
Issakhar Hacmun submitted his resignation as a member of our Board
of Directors, effective August 15, 2002.
On June 17, 2002, Shimmy Zimels was promoted to the role of our
Chief Executive Officer. Mr. Zimels succeeds Noam Bardin, the Chairman of
our Board of Directors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Securities and Exchange
Commission.
Exhibit
Number Description
- -------- -----------
3.1 Form of Amended and Restated Certificate of Incorporation
of deltathree, Inc.
3.2* Form of Amended and Restated By-laws of deltathree, Inc.
4.1* Specimen Certificate of Common Stock.
4.2* Specimen Certificate of Class B Common Stock.
10.1* Form of deltathree, Inc. 1999 Stock Incentive Plan.
10.2* Form of deltathree, Inc. 1999 Employee Stock Purchase Plan.
10.3* Form of deltathree, Inc. 1999 Performance Incentive Plan.
10.4* Form of deltathree, Inc. 1999 Directors' Plan.
10.5* Employment Agreement, effective as of April 1, 1999,
between Noam Bardin and deltathree, Inc.
10.6** Amendment No. 1 to Employment Agreement, effective as of
June 1, 2000, between Noam Bardin and deltathree, Inc.
10.7* Employment Agreement, effective as of April 1, 1999,
between Shimmy Zimels and deltathree, Inc.
10.8** Amendment No. 1 to Employment Agreement, effective as of
June 1, 2000, between Shimmy Zimels and deltathree, Inc.
10.9** Employment Agreement, effective as of August 28, 2000,
between Paul White and deltathree, Inc.
99.1 Certification of CEO and CFO Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ------------
* Incorporated by reference to the Company's registration statement on
Form S-1 (Registration No. 333-86503).
** Incorporated by reference to the Company's quarterly report on Form
10-Q filed on November 14, 2000.
(b) Reports on Form 8-K.
We did not file any current reports on Form 8-K during the period
ended June 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to
be signed on its behalf by the undersigned thereunto duly authorized.
DELTATHREE, INC.
Date: August 14, 2002 By: /s/ Paul C. White
------------------------------
Name: Paul C. White
Title: Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Description
- -------- -----------
3.1 Form of Amended and Restated Certificate of Incorporation
of deltathree, Inc.
3.2* Form of Amended and Restated By-laws of deltathree, Inc.
4.1* Specimen Certificate of Common Stock.
4.2* Specimen Certificate of Class B Common Stock.
10.1* Form of deltathree, Inc. 1999 Stock Incentive Plan.
10.2* Form of deltathree, Inc. 1999 Employee Stock Purchase Plan.
10.3* Form of deltathree, Inc. 1999 Performance Incentive Plan.
10.4* Form of deltathree, Inc. 1999 Directors' Plan.
10.5* Employment Agreement, effective as of April 1, 1999,
between Noam Bardin and deltathree, Inc.
10.6** Amendment No. 1 to Employment Agreement, effective as of
June 1, 2000, between Noam Bardin and deltathree, Inc.
10.7* Employment Agreement, effective as of April 1, 1999,
between Shimmy Zimels and deltathree, Inc.
10.8** Amendment No. 1 to Employment Agreement, effective as of
June 1, 2000, between Shimmy Zimels and deltathree, Inc.
10.9** Employment Agreement, effective as of August 28, 2000,
between Paul White and deltathree, Inc.
99.1 Certification of CEO and CFO Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ----------
* Incorporated by reference to the Company's registration statement on
Form S-1 (Registration No. 333-86503).
** Incorporated by reference to the Company's quarterly report on Form
10-Q filed on November 14, 2000.