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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, 2004
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
NEW YORK, NEW YORK 10004
(Address of principal executive offices) (Zip code)
(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 | |
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES | | NO |X|
As of November 2, 2004, the registrant had 29,593,606 shares of Class A
Common Stock, par value $0.001 per share, outstanding.
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i
DELTATHREE, INC.
Table of Contents
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements..................................................1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................6
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........10
Item 4. Controls and Procedures..............................................11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................12
Item 2. Change in Securities and Use of Proceeds.............................12
Item 4. Submission of Matters to a Vote of Security Holders..................12
Item 5. Other Information....................................................12
Item 6. Exhibits and Reports on Form 8-K.....................................13
Signatures....................................................................14
Exhibit Index.................................................................15
Certifications................................................................16
ii
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DELTATHREE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2004 2003
--------- ---------
(unaudited)
($ IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 14,488 $ 1,682
Short-term investments ............................................ 2,715 16,442
Accounts receivable, net .......................................... 819 363
Prepaid expenses and other current assets ......................... 463 684
Inventory ......................................................... 71 60
--------- ---------
Total current assets ........................................... 18,556 19,231
--------- ---------
PROPERTY AND EQUIPMENT, NET ........................................ 4,379 4,307
--------- ---------
DEPOSITS ........................................................... 105 105
--------- ---------
Total assets .................................................. $ 23,040 $ 23,643
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................. $ 3,888 $ 2,139
Deferred revenues ................................................. 316 172
Other current liabilities ......................................... 2,150 2,100
--------- ---------
Total current liabilities ...................................... 6,354 4,411
--------- ---------
LONG-TERM LIABILITIES:
Severance pay obligations ......................................... 113 91
--------- ---------
Total liabilities .............................................. 6,467 4,502
--------- ---------
STOCKHOLDERS' EQUITY:
Class A common stock, - par value $0.001 .......................... 29 29
Additional paid-in capital ........................................ 167,248 167,168
Accumulated deficit ............................................... (150,494) (147,846)
Treasury stock at cost: 257,600 shares of Class A common stock as of
September 30, 2004 and December 31, 2003 ......................... (210) (210)
--------- ---------
Total stockholders' equity .................................... 16,573 19,141
--------- ---------
Total liabilities and stockholders' equity .................... $ 23,040 $ 23,643
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
DELTATHREE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
(unaudited) (unaudited)
($ IN THOUSANDS, EXCEPT SHARE DATA)
Revenues ................................. $ 5,530 $ 3,320 $ 14,837 $ 9,277
Costs and operating expenses:
Cost of revenues ....................... 3,665 2,010 9,721 5,827
Research and development expenses ...... 703 562 1,842 1,780
Selling and marketing expenses ......... 737 888 2,362 2,542
General and administrative expenses .... 546 463 1,637 1,602
Depreciation and amortization .......... 619 1,313 2,083 4,444
------------ ------------ ------------ ------------
Total costs and operating expenses .. 6,270 5,236 17,645 16,195
------------ ------------ ------------ ------------
Loss from operations ..................... (740) (1,916) (2,808) (6,918)
Interest income, net ..................... 81 73 216 219
------------ ------------ ------------ ------------
Loss before income taxes ................. (659) (1,843) (2,592) (6,699)
Income taxes ............................. 12 24 56 46
------------ ------------ ------------ ------------
Net loss ................................. $ (671) $ (1,867) $ (2,648) $ (6,745)
============ ============ ============ ============
Net loss per share - basic and diluted ... $ (0.02) $ (0.06) $ (0.09) $ (0.23)
============ ============ ============ ============
Weighted average shares outstanding -
basic and diluted (number of shares) 29,319,307 28,976,345 29,304,340 28,940,979
============ ============ ============ ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
DELTATHREE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
2004 2003
-------- --------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................ $ (2,648) $ (6,745)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ............................ 2,083 4,444
Capital gain, net ........................................ -- (18)
Increase (decrease) in liability for severance pay ....... 22 (16)
Provision for losses on accounts receivable .............. -- 42
Changes in assets and liabilities:
Decrease (increase) in accounts receivable ............... (456) 265
Decrease in other current assets ......................... 221 23
Increase in inventory .................................... (11) --
Increase (decrease) in accounts payable .................. 734 (318)
Increase in deferred revenues ............................ 144 83
Increase (decrease in current liabilities) ............... 50 (408)
-------- --------
2,787 4,097
-------- --------
Net cash provided by (used in) operating activities ........... 139 (2,648)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ....................... (1,140) (244)
Proceeds from sale of property and equipment ............. -- 35
Increase in deposits ..................................... -- (3)
-------- --------
Net cash used in investing activities ........................ (1,140) (212)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in short-term investments, net .................. 13,727 383
Proceeds from exercise of employee options ............... 80 122
-------- --------
Net cash provided by financing activities ..................... 13,807 505
-------- --------
Increase (decrease) in cash and cash equivalents ................ 12,806 (2,355)
Cash and cash equivalents at beginning of year .................. 1,682 5,681
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 14,488 $ 3,326
======== ========
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, 2003.
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.
3. STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation in accordance
with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and in accordance with FASB Interpretation No. 44. Pursuant to these
accounting pronouncements, the Group records compensation for stock options
granted to employees over the vesting period of the options based on the
difference, if any, between the exercise price of the options and the market
price of the underlying shares at that date. Deferred compensation is amortized
to compensation expense over the vesting period of the options. See below a pro
forma disclosure required in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation", as amended by SFAS No. 148.
4
If the Company had elected to recognize compensation expense for the
issuance of options to employees of the Company based on the fair value method
of accounting prescribed by SFAS No. 123, net income (loss) and earnings (loss)
per share would have been reduced to the pro forma amounts as follows (in
thousands, except per share amounts):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------
2004 2003 2004 2003
------- ------- ------- -------
NET INCOME (LOSS):
Reported net income (loss) ..................... $ (671) $(1,867) $(2,648) $(6,745)
Add stock-based employee compensation expense,
included in reported net income, net of tax .. -- -- -- --
Deduct stock-based employee compensation expense
determined under fair value method, net of tax (91) (127) (272) (531)
------- ------- ------- -------
Pro forma net income (loss) .................... $ (762) $(1,994) $(2,920) $(7,276)
======= ======= ======= =======
NET INCOME (LOSS) PER SHARE:
Basic and diluted, as reported ................. $ (0.02) $ (0.06) $ (0.09) $ (0.23)
Basic and diluted, pro forma ................... $ (0.03) $ (0.07) $ (0.10) $ (0.25)
For the purpose of presenting pro forma information required under SFAS
123, the fair value option grant has been estimated on the date of grant using
the Black Scholes option pricing model for grants made after the Company became
a public entity. During the nine and three months ended September 30, 2004 and
the nine and three months ended September 30, 2003 there were no new option
grants.
5
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, 2003. 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, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
REVENUES
Revenues increased approximately $5.5 million or 59.1% to approximately
$14.8 million for the nine months ended September 30, 2004 from approximately
$9.3 million for the nine months ended September 30, 2003. Revenues from
enhanced IP communications services (primarily PC-to-Phone) through iConnectHere
increased approximately $0.9 million or 20% to approximately $5.4 million for
the nine months ended September 30, 2004 from approximately $4.6 million for the
nine months ended September 30, 2003 due primarily to a greater number of
PC-to-Phone and Broadband Phone calls being placed by an increasing user base.
Revenues from enhanced IP communications services through our reseller and
service provider sales efforts (including sales of our Hosted Communications
Solution) increased approximately $4.9 million or 114.7% to approximately $9.2
million for the nine months ended September 30, 2004 from approximately $4.3
million for the nine months ended September 30, 2003, due primarily to a greater
number of PC-to-Phone and Broadband Phone calls being placed by an increasing
user base.
Revenues from carrier transmission services decreased by approximately
$263,000 or 63.0% to approximately $154,000 for the nine months ended September
30, 2004 from approximately $417,000 for the nine months ended September 30,
2003, due primarily to reduced demand from a smaller customer base. One "Master
Reseller" accounted for approximately 19.0% of our sales in aggregate during the
first nine months of 2004.
COSTS AND OPERATING EXPENSES
COST OF REVENUES. Cost of revenues increased by approximately $3.9 million
or 67.2% to approximately $9.7 million for the nine months ended September 30,
2004 from approximately $5.8 million for the nine months ended September 30,
2003, due primarily to an increase in the amount of traffic being terminated.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased slightly by approximately $0.1 million or 5.9% to approximately $1.8
million for the nine months ended September 30, 2004 from approximately $1.7
million for the nine months ended September 30, 2003, due to higher costs
associated with the development of new services and enhancements to our existing
services.
6
SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased
slightly by approximately $0.1 million or 4.0% to approximately $2.4 million for
the nine months ended September 30, 2004 from approximately $2.5 million for the
nine months ended September 30, 2003.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were essentially unchanged at approximately $1.6 million for the nine months
ended September 30, 2004 and for the nine months ended September 30, 2003.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
approximately $2.4 million or 54.5% to approximately $2.0 million for the nine
months ended September 30, 2004 from approximately $4.4 million for the nine
months ended September 30, 2003.
LOSS FROM OPERATIONS
Loss from operations decreased by approximately $4.1 million or 59.4% to
approximately $2.8 million for the nine months ended September 30, 2004 from
approximately $6.9 million for the nine months ended September 30, 2003, due
primarily to the increase in revenues and decrease in in-direct operating
expenses, including depreciation and amortization. We expect to continue to
incur losses for the foreseeable future.
INTEREST INCOME, NET
Interest income, net decreased by approximately $3,000 or 1.4% to
approximately $216,000 for the nine months ended September 30, 2004 from
approximately $219,000 for the nine months ended September 30, 2003, 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, 2004 compared to approximately $46,000 for the nine months
ended September 30, 2003.
NET LOSS
Net loss decreased by approximately $4.1 million or 61.2% to approximately
$2.6 million for the nine months ended September 30, 2004 from approximately
$6.7 million for the nine months ended September 30, 2003 due to the foregoing
factors.
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
REVENUES
Revenues increased approximately $2.2 million or 66.7% to approximately
$5.5 million for the three months ended September 30, 2004 from approximately
$3.3 million for the three months ended September 30, 2003. Revenues from
enhanced IP communications services (primarily PC-to-Phone) through iConnectHere
increased approximately $0.3 million or 20.0% to approximately $1.8 million for
the three months ended September 30, 2004 from approximately $1.5 million for
the three months ended September 30, 2003 due primarily to a greater number of
PC-to-Phone and Broadband Phone calls being placed by an increasing user base.
Revenues from enhanced IP communications services through our reseller and
service provider sales efforts (including sales of our Hosted Communications
Solution) increased approximately $1.9 million or 111.8% to approximately $3.6
million for the three months ended September 30, 2004 from approximately $1.7
million for the three months ended September 30, 2003, due primarily to a
greater number of PC-to-Phone and Broadband Phone calls being placed by an
increasing user base.
7
Revenues from carrier transmission services decreased by approximately
$70,000 or 66.0% to approximately $36,000 for the three months ended September
30, 2004 from approximately $106,000 for the three months ended September 30,
2003, due primarily to reduced demand from a smaller customer base. Two "Master
Resellers" accounted for approximately 13.2% and 11.2% of our sales,
respectively, during the third quarter of 2004.
COSTS AND OPERATING EXPENSES
COST OF REVENUES. Cost of revenues increased by approximately $1.7 million
or 85.0% to approximately $3.7 million for the three months ended September 30,
2004 from approximately $2.0 million for the three months ended September 30,
2003, due primarily to a increase in the amount of traffic being terminated.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
increased by approximately $0.1 million or 16.7% to approximately $0.7 million
for the three months ended September 30, 2004 from approximately $0.6 million
for the three months ended September 30, 2003.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses were
decreased by approximately $0.2 million or 22.2% to approximately $0.7 million
for the three months ended September 30, 2004 from approximately $0.9 million
for the three months ended September 30, 2003.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were essentially unchanged at approximately $0.5 million for the three months
ended September 30, 2004 and for the three months ended September 30, 2003.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
approximately $0.7 million or 53.9% to approximately $0.6 million for the three
months ended September 30, 2004 from approximately $1.3 million for the three
months ended September 30, 2003.
LOSS FROM OPERATIONS
Loss from operations decreased by approximately $1.2 million or 63.16% to
approximately $0.7 million for the three months ended September 30, 2004 from
approximately $1.9 million for the three months ended September 30, 2003, due
primarily to the increase in revenues and a slight decrease in in-direct
operating expenses, including selling and marketing expenses. We expect to
continue to incur losses for the foreseeable future.
INTEREST INCOME, NET
Interest income, net increased by approximately $8,000 or 11.0% to
approximately $81,000 for the three months ended September 30, 2004 from
approximately $73,000 for the three months ended September 30, 2003, due
primarily to slightly higher interest rates earned on the reduced balance of the
remaining proceeds from our initial public offering.
8
INCOME TAXES, NET
We paid net income taxes of approximately $12,000 for the three months
ended September 30, 2004 compared to approximately $24,000 for the three months
ended September 30, 2003.
NET LOSS
Net loss decreased by approximately $1.2 million or 63.2% to approximately
$0.7 million for the three months ended September 30, 2004 from approximately
$1.9 million for the three months ended September 30, 2003 due to the foregoing
factors.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception in March 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, 2004, we had an accumulated deficit of
approximately $150 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, 2004, we had cash and cash equivalents of
approximately $14.5 million, marketable securities and other short-term
investments of approximately $2.7 million and working capital of approximately
$12.2 million. We generated positive cash flow from operating activities of
approximately $139,000 during the nine months ended September 30, 2004 compared
with negative cash flow from operating activities of approximately $2.6 million
during the nine months ended September 30, 2003. Accounts receivable were
approximately $0.8 million and $0.4 million at September 30, 2004 and September
30, 2003, respectively.
Our capital expenditures were moderately higher, with approximately
$1,140,000 expended in the nine months ended September 30, 2004 compared to
approximately $244,000 expended in the nine months ended September 30, 2003 as
we continued to optimize our overall utilization of our existing domestic and
international network infrastructure, while making necessary investments to
support significant increases in traffic volumes.
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, we believe that 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 and Broadband Phone)
products and services, continue to increase;
o our indirect expense trends remain at or near the rates of our
third quarter 2004 rates, which were essentially unchanged
during the past twelve months through curtailment of
discretionary expenditures, and steady network rent and
termination rates from our carriers; and
o our net cash-burn rate, which was reduced during the past
twelve months due to the foregoing factors to approximately
$316,000 in the third quarter of 2004, continues to improve
throughout the remainder of 2004 and beyond.
9
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, 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-15(e) and 15d-15(e)), as of the end of the
period covered by this Quarterly Report on Form 10-Q, 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 changes in our internal control over financial reporting,
identified in connection with the evaluation of such internal control that
occurred during our last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
11
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We, as well as certain of our former officers and directors, were 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.
In July 2002, omnibus motions to dismiss the complaints based on common
legal issues were filed on behalf of all issuers and underwriters. On February
19, 2003, the Court issued an opinion granting in part and denying in part those
motions to dismiss. The complaint against the Company was not dismissed as a
matter of law. A final settlement agreement between the plaintiffs and issuer
defendants has been executed and submitted to the Court for approval.
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 September 30, 2004, we had used approximately $38 million of the net
proceeds for sales, marketing and promotional activities, $24 million for
capital expenditures and $17 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 third quarter of 2004.
ITEM 5. OTHER INFORMATION
Ehud Erez, one of our current directors, is not standing for re-election
as a director on our Board.
12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibits are filed herewith:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32 Certifications 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.
(b) Reports on Form 8-K. The following report was filed on Form 8-K during
the quarter ended September 30, 2004:
On July 29, 2004, we furnished a report on Form 8-K, as amended, reporting
under Item 12 our press release announcing our results and other data for the
year ended and quarter ended June 30, 2004, as well as financial guidance for
the quarter ending September 30, 2004.
On September 28, 2004, we filed a report on Form 8-K reporting under Item
5.02 the appointment of Noam Ben-Ozer to our Board of Directors.
13
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 3, 2004 By: /s/ Paul C. White
---------------------------------
Name: Paul C. White
Title: Chief Financial Officer
14
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32 Certifications 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.
15