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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 September 30, 2002
Commission file number 000-28063
DELTATHREE, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of 13-4006766
incorporation or organization) (I.R.S. employer
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 November 13, 2002, the registrant had 29,143,206 shares of Class
A Common Stock, par value $0.001 per share, outstanding.
DELTATHREE, INC.
Table of Contents
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.....................................................................................1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................5
Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................................10
Item 4. Controls and Procedures.................................................................................11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................................12
Item 2. Change in Securities and Use of Proceeds................................................................12
Item 4. Submission of Matters to a Vote of Security Holders.....................................................13
Item 5. Other Information.......................................................................................13
Item 6. Exhibits and Reports on Form 8-K........................................................................13
Signatures.......................................................................................................15
Certifications...................................................................................................16
Exhibit Index....................................................................................................18
ii
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
DELTATHREE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of As of
September 30, December 31,
2002 2001
---- ----
(unaudited)
($ in thousands)
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 21,609 $ 13,583
Short-term investments ............................................ 342 14,192
Accounts receivable, net .......................................... 778 1,092
Prepaid expenses and other current assets ......................... 828 1,264
--------- ---------
Total current assets ........................................... 23,557 30,131
--------- ---------
Property and equipment, net ........................................ 11,073 15,635
--------- ---------
Deposits ........................................................... 100 103
--------- ---------
Total assets .................................................. $ 34,729 $ 45,869
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 2,199 $ 3,417
Deferred revenues ................................................. 320 505
Other current liabilities ......................................... 2,437 2,835
--------- ---------
Total current liabilities ...................................... 4,956 6,757
--------- ---------
Long-term liabilities:
Severance pay obligations ......................................... 125 191
--------- ---------
Total liabilities .............................................. 5,081 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 ............................................... (136,972) (127,429)
Treasury stock at cost: 257,600 shares of class A common stock as of
September 30, 2002 and December 31, 2001 ......................... (210) (210)
--------- ---------
Total stockholders' equity .................................... 29,648 38,921
--------- ---------
Total liabilities and stockholders' equity .................... $ 34,729 $ 45,869
========= =========
See notes to condensed consolidated financial statements.
DELTATHREE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September September 30,
2002 2001 2002 2001
---- ---- ---- ----
(unaudited) (unaudited)
($ in thousands, except share data)
Revenues:
Affiliates ....................................... $ - $ - $ - $ 1,669
Non-affiliates ................................... 3,214 3,418 9,705 10,616
----------- ------------ ------------ -----------
Total revenues ................................ 3,214 3,418 9,705 12,285
----------- ------------ ------------ -----------
Costs and operating expenses:
Cost of revenues, net ............................ 2,193 2,820 6,929 10,683
Research and development expenses, net ........... 772 1,279 2,645 4,643
Selling and marketing expenses ................... 808 1,488 3,027 6,623
General and administrative expenses (exclusive of
non-cash compensation expense shown below) .... 623 1,228 1,743 4,907
Non-cash compensation expense .................... - 162 270 663
Depreciation and amortization .................... 1,675 2,758 4,953 7,364
Write-down of fixed assets resulting from RSL sale - - - 1,003
Expenses due to cancellation of a supplier
agreement (including non-cash
compensation of $1,493) - - - 3,628
----------- ------------ ------------ -----------
Total costs and operating expenses ............ 6,071 9,735 19,567 39,514
----------- ------------ ------------ -----------
Loss from operations ............................... (2,857) (6,317) (9,862) (27,229)
Interest income, net ............................... 194 232 375 1,491
----------- ------------ ------------ -----------
Loss before income taxes ........................... (2,663) (6,085) (9,487) (25,738)
Income taxes ....................................... (45) (106) (56) (6)
----------- ------------ ------------ -----------
Net loss ........................................... (2,708) $ (6,191) $ (9,543) $ (25,744)
=========== ============ ============ ============
Net loss per share - basic and diluted ............. $ (0.09) $ (0.21) (0.33) $ (0.88)
=========== ============ ============ ============
Weighted average shares outstanding -
basic and diluted (number of shares) ......... 28,885,606 29,129,604 28,885,606 29,077,157
=========== ============ ============ ============
See notes to condensed consolidated financial statements
2
DELTATHREE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
2002 2001
---- ----
(unaudited)
Cash flows from operating activities:
Net loss ........................................................ $ (9,543) $(25,732)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ............................ 4,952 7,364
Amortization of deferred compensation .................... 270 2,156
Capital loss, net ........................................ 1 1
Increase (decrease) in liability for severance pay, net .. (66) 28
Provision for losses on accounts receivable .............. 30 551
Write-down on fixed assets resulting from RSL sale ....... - 1,003
Changes in assets and liabilities:
Decrease (increase) in accounts receivable ............... 284 520
Increase (decrease) in other current assets .............. 436 29
Increase (decrease) in accounts payable .................. (1,218) (2,035)
Increase (decrease) in deferred revenues ................. (185) 163
Increase (decrease) in current liabilities ............... (398) (4,140)
-------- --------
4,106 5,640
-------- --------
Net cash used in operating activities ......................... (5,347) (20,092)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ....................... (399) (1,244)
-------- --------
Proceeds from sale of property and equipment ............. 8 458
Decrease (increase) in deposits .......................... 4 (30)
-------- --------
Net cash used in investing activities ......................... (387) (816)
-------- --------
Cash flows from financing activities:
Decrease (increase) in short-term investments ............ 13,850 14,434
Proceeds from exercise of employee stock options ......... - 68
Purchase of treasury stock ............................... - (27)
-------- --------
Net cash provided by (used in) financing activities ........... (13,850) 14,475
-------- --------
Increase (decrease) in cash and cash equivalents ................ (8,026) (6,443)
Cash and cash equivalents at beginning of period ................ 13,583 20,857
-------- --------
Cash and cash equivalents at end of period ...................... $ 21,609 $ 14,424
======== ========
See notes to condensed consolidated financial statements
3
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.
4
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.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September 30,
2001
Revenues
Affiliates. There were no revenues from affiliates for the nine months
ended September 30, 2002 compared to $1.7 million for the nine months ended
September 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
$0.9 million or 8.5% to approximately $9.7 million for the nine months ended
September 30, 2002 from approximately $10.6 million for the nine months ended
September 30, 2001. Revenues from enhanced IP communications services (including
our Hosted Communications Solution) decreased by approximately $0.8 million or
6.5% to approximately $8.6 million for the nine months ended September 30, 2002
from approximately $9.4 million for the nine months ended September 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 $0.1 million or 8.3% to
approximately $1.1 million for the nine months ended September 30, 2002 from
approximately $1.2 million for the nine months ended September 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 $3.8
million or 35.5% to approximately $6.9 million for the nine months ended
September 30, 2002 from approximately $10.7 million for the nine months ended
September 30, 2001, due primarily to a decrease in the amount of traffic being
terminated.
5
Research and development expenses. Research and development expenses
decreased by approximately $2.0 million or 43.5% to approximately $2.6 million
for the nine months ended September 30, 2002 from approximately $4.6 million for
the nine months ended September 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 $3.6 million or 54.5% to approximately $3.0 million
for the nine months ended September 30, 2002 from approximately $6.6 million for
the nine months ended September 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 $3.2 million or 65.3% to approximately $1.7 million for the nine
months ended September 30, 2002 from approximately $4.9 million for the nine
months ended September 30, 2001, primarily due to decreased personnel costs.
Non-cash compensation expenses. Non-cash compensation expenses
decreased by approximately $390,000 or 59.1% to approximately $270,000 for the
nine months ended September 30, 2002 from approximately $660,000 for the nine
months ended September 30, 2001, due to the completed amortization of costs
incurred during 1998 and 1999.
Depreciation and amortization. Depreciation and amortization of
goodwill decreased by approximately $2.4 million or 32.4% to approximately $5.0
million for the nine months ended September 30, 2002 from approximately $7.4
million for the nine months ended September 30, 2001, due to our impairment of
goodwill during 2001. Consequently, there were no goodwill related expenses
during the nine months ended September 30, 2002.
Write down of fixed assets from RSL COM sale. During the nine months
ended September 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
nine months ended September 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 $17.3 million or 63.6%
to approximately $9.9 million for the nine months ended September 30, 2002 from
approximately $27.2 million for the nine months ended September 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.
6
Interest Income, Net
Interest income, net decreased by approximately $1.1 million or 73.3%
to approximately $400,000 for the nine months ended September 30, 2002 from
approximately $1.5 million for the nine months ended September 30, 2001, due
primarily to lower interest rates earned on the reduced balance of the remaining
proceeds from our initial public offering.
Income Taxes, Net
We paid net income taxes of approximately $56,000 for the nine months
ended September 30, 2002 compared to approximately $6,000 for the nine months
ended September 30, 2001.
Net Loss
Net loss decreased by approximately $16.2 million or 63.0% to
approximately $9.5 million for the nine months ended September 30, 2002 from
approximately $25.7 million for the nine months ended September 30, 2001 due to
the foregoing factors.
Three Months Ended September 30, 2002 Compared to Three Months Ended September
30, 2001
Revenues
Affiliates. There were no revenues from affiliates for the three months
ended September 30, 2002 and for the three months ended September 30, 2001. This
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 decreased approximately
$0.2 million or 5.9% to approximately $3.2 million for the three months ended
September 30, 2002 from approximately $3.4 million for the three months ended
September 30, 2001. Revenues from enhanced IP communications services (including
our Hosted Communications Solution) decreased by approximately $0.2 million or
6.5% to approximately $2.9 million for the three months ended September 30, 2002
from approximately $3.1 million for the three months ended September 30, 2001,
due to a greater number of PC-to-Phone and Phone-to-Phone calls being placed by
an increasing user base, 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 33.3% to
approximately $0.4 million for the three months ended September 30, 2002 from
approximately $0.3 million for the three months ended September 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 $0.6
million or 21.4% to approximately $2.2 million for the three months ended
September 30, 2002 from approximately $2.8 million for the three months ended
September 30, 2001, due primarily to a decrease in the amount of traffic being
terminated.
7
Research and development expenses. Research and development expenses
decreased by approximately $0.5 million or 38.5% to approximately $0.8 million
for the three months ended September 30, 2002 from approximately $1.3 million
for the three months ended September 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 46.7% to approximately $0.8 million
for the three months ended September 30, 2002 from approximately $1.3 million
for the three months ended September 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 $0.6 million or 50.0% to approximately $0.6 million for the three
months ended September 30, 2002 from approximately $1.2 million for the three
months ended September 30, 2001, primarily due to decreased personnel costs.
Non-cash compensation expenses. There were no non-cash compensation
expenses for the three months ended September 30, 2002 compared to approximately
$160,000 for the three months ended September 30, 2001, due to the completed
amortization of costs incurred during 1998 and 1999 related to the grants of
options and warrants below the then fair market value during those periods.
Depreciation and amortization. Depreciation and amortization of
goodwill decreased by approximately $1.1 million or 39.3% to approximately $1.7
million for the three months ended September 30, 2002 from approximately $2.8
million for the three months ended September 30, 2001, due to our impairment of
goodwill during 2001. Consequently, there were no goodwill related expenses
during the three months ended September 30, 2002.
Write down of fixed assets from RSL COM sale. During the three months
ended September 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
nine months ended September 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 $3.4 million or 54.0%
to approximately $2.9 million for the three months ended September 30, 2002 from
approximately $6.3 million for the three months ended September 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.
8
Interest Income, Net
Interest income, net decreased by approximately $38,000 or 16.4% to
approximately $194,000 for the three months ended September 30, 2002 from
approximately $232,000 for the three months ended September 30, 2001, due
primarily to lower interest rates earned on the reduced balance of the remaining
proceeds from our initial public offering.
Income Taxes, Net
We paid net income taxes of approximately $45,000 for the three months
ended September 30, 2002 compared to approximately $106,000 for the three months
ended September 30, 2001.
Net Loss
Net loss decreased by approximately $3.5 million or 56.5% to
approximately $2.7 million for the three months ended September 30, 2002 from
approximately $6.2 million for the three months ended September 30, 2001 due to
the foregoing factors.
Liquidity and Capital Resources
Since our inception in September 1996, we have incurred significant
operating and net losses, due in large part to the start-up and development of
our operations. As of September 30, 2002, we had an accumulated deficit of
approximately $137 million. We anticipate that we will continue to incur
operating and net losses as we continue to implement our growth strategy.
As of September 30, 2002, we had cash and cash equivalents of
approximately $21.6 million, marketable securities and other short-term
investments of approximately $0.3 million and working capital of approximately
$18.6 million. We generated negative cash flow from operating activities of
approximately $5.4 million during the nine months ended September 30, 2002
compared with approximately $20.1 million during the nine months ended September
30, 2001. Accounts receivable were approximately $0.8 million and $1.1 million
at September 30, 2002 and September 30, 2001, respectively.
Our capital expenditures decreased approximately $0.8 million or 66.7%
to approximately $0.4 million in the nine months ended September 30, 2002 from
approximately $1.2 million in the nine months ended September 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;
9
o our expense trends remain at or near the rates of our third
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
$1.1 million in the third 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, especially in light of current economic
conditions and the unfavorable market for telecommunications companies in
particular. 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.
10
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures.
Our principal executive officer and principal financial officer, after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)), during November 2002,
have concluded that, based on such evaluation, our disclosure controls and
procedures were adequate and effective to ensure that material information
relating to us was made known to them by others within Deltathree, particularly
during the period in which this quarterly report on Form 10-Q was being
prepared.
(b) Changes in Internal Controls.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, nor were there any significant deficiencies or material
weaknesses in our internal controls. Accordingly, no corrective actions were
required or undertaken.
11
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.
12
As of September 30, 2002, we had used approximately $32 million of the
net proceeds for sales, marketing and promotional activities, $20 million for
capital expenditures and $13 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
No matter was submitted to a vote of the Company's security holders
during the first quarter of 2002.
Item 5. Other Information
During the quarterly period ended September 30, 2002, Shimmy Zimels'
and Paul White's contracts were extended until August 31, 2004.
The listing of our Class A Common Stock was transferred from the Nasdaq
National Market to the Nasdaq SmallCap Market effective as of the opening of
business on September 17, 2002. We currently meet all criteria for continued
inclusion in the Nasdaq SmallCap Market except for the $1.00 minimum bid price
per share requirement. We have an initial grace period until December 4, 2002,
to demonstrate a closing bid price of at least $1.00 for a minimum of ten
consecutive trading days. Should we not comply with the minimum bid price
requirement within this grace period, we will be eligible for an additional 180
day grace period ending June 2, 2003, to meet the $1.00 minimum bid price
requirement provided we can demonstrate that we remain in compliance with the
Nasdaq SmallCap Market's initial listing standards. Nasdaq regulations allow for
the transfer back to the Nasdaq National Market should we maintain a minimum bid
price of $1.00 for at least 30 consecutive trading days by June 2, 2003, and
comply at all times with other applicable continued listing requirements for the
Nasdaq National Market.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The following exhibits are filed herewith:
Exhibit
Number Description
- ------ -----------
10.10 Amendment No. 2 to Employment Agreement, effective as of March
25, 2002, between Shimmy Zimels and deltathree, Inc.
10.11 Amendment No. 3 to Employment Agreement, effective as of
September 1, 2002, between Shimmy Zimels and deltathree, Inc.
10.12 Amendment No. 1 to Employment Agreement, effective as of
September 1, 2002, between Paul C. 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.
13
(b) Reports on Form 8-K.The following report was filed on Form 8-K
during the quarter ended September 30, 2002:
On September 18, 2002, we filed a current report on Form 8-K under Item
5 regarding the transfer of the listing of our Class A Common Stock from the
Nasdaq National Market to the Nasdaq SmallCap Market.
14
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: November 14, 2002 By: /s/ Paul C. White
----------------------------------
Name: Paul C. White
Title: Chief Financial Officer
15
CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER
I, Shimmy Zimels, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of deltathree, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Shimmy Zimels
------------------------------------
Name:Shimmy Zimels
Title: Chief Executive Officer
16
CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER
I, Paul C. White, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of deltathree, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: November 14, 2002 /s/ Paul C. White
-----------------------------------
Name: Paul C. White
Title: Chief Financial Officer
17
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.10 Amendment No. 2 to Employment Agreement, effective as of March
25, 2002, between Shimmy Zimels and deltathree, Inc.
10.11 Amendment No. 3 to Employment Agreement, effective as of
September 1, 2002, between Shimmy Zimels and deltathree, Inc.
10.12 Amendment No. 1 to Employment Agreement, effective as of
September 1, 2002, between Paul C. 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.
18