<Page>
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, 2001
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, 2001, the registrant had 29,143,206 shares of Class A
Common Stock, par value $0.001 per share, and 0 shares of Class B Common Stock,
par value $0.001 per share, outstanding.
<Page>
DELTATHREE, INC.
Table of Contents
Page
----
PART I FINANCIAL INFORMATION...................................................1
Item 1. Financial Statements.........................................1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..........................4
Item 3. Quantitative and Qualitative Disclosures About Market Risk...9
PART II OTHER INFORMATION.....................................................10
Item 1. Legal Proceedings...........................................10
Item 2. Change in Securities and Use of Proceeds....................10
Item 3. Submission of Matters to a Vote of Security Holders.........10
Item 4. Other Information...........................................10
Item 5. Exhibits and Reports on Form 8-K............................12
Signatures....................................................................14
i
<Page>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DELTATHREE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
As of
June 30, As of
2001 December 31,
(unaudited) 2000
--------- ---------
($ IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................ $ 13,299 $ 20,857
Short-term investments ............................... 22,183 30,542
Accounts receivable, net ............................. 2,633 3,245
Due from affiliates .................................. 223 331
Prepaid expenses and other current assets ............ 1,296 2,084
--------- ---------
Total current assets .............................. 39,634 57,059
--------- ---------
PROPERTY AND EQUIPMENT, NET .............................. 18,905 22,270
--------- ---------
GOODWILL, NET ............................................ 4,909 6,425
--------- ---------
DEPOSITS ................................................. 106 415
--------- ---------
Total assets ......................................... $ 63,554 $ 86,169
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................... 4,168 5,236
Due to affiliates ...................................... 1,234 2,721
Deferred revenues ...................................... 359 251
Other current liabilities .............................. 2,622 5,313
--------- ---------
Total current liabilities .......................... 8,383 13,521
--------- ---------
LONG-TERM LIABILITIES:
Severance pay obligations .............................. 191 169
--------- ---------
Total liabilities .................................. 8,574 13,690
--------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A Common stock, -- par value $0.001 .............. 29 9
Class B Common stock, -- par value $0.001 .............. -- 20
Additional paid-in capital ............................. 166,781 166,733
Deferred compensation .................................. (594) (2,588)
Accumulated deficit .................................... (111,236) (91,695)
--------- ---------
Total stockholder's equity ..................... 54,980 72,479
--------- ---------
Total liabilities and stockholder's equity ..... $ 63,554 $ 86,169
========= =========
</Table>
See notes to condensed consolidated financial statements.
1
<Page>
DELTATHREE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2001 2000 2001 2000
(unaudited) (unaudited)
---------------------------- ----------------------------
($ IN THOUSANDS EXCEPT SHARE DATA)
Revenues:
Affiliates .................................................... $ 223 $ 4,629 $ 1,669 $ 9,387
Non-affiliates ................................................ 2,618 3,237 7,198 5,049
------------ ------------ ------------ ------------
Total revenues ......................................... 2,841 7,866 8,867 14,436
------------ ------------ ------------ ------------
Costs and operating expenses:
Cost of revenues, net ......................................... 2,526 6,221 7,865 11,910
Research and development expenses, net ........................ 1,527 1,572 3,364 2,774
Selling and marketing expenses ................................ 1,921 6,053 5,135 10,998
General and administrative expenses (exclusive of non-cash
compensation expense shown below) .......................... 1,628 1,669 3,678 2,836
Non-cash compensation expense ................................. 233 1,758 501 4,156
Depreciation and amortization ................................. 2,490 1,904 4,461 3,257
Write-down of fixed assets resulting from RSL sale (Note 3) ... 1,147 -- 1,147 --
Expenses due to cancellation of a supplier agreement (including
Non-cash compensation of $1,493) ........................... 3,628 -- 3,628 --
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Total costs and operating expenses ..................... 15,100 19,177 29,779 35,931
------------ ------------ ------------ ------------
Loss from operations .............................................. (12,259) (11,331) (20,912) (21,495)
Interest income (expense), net .................................... 527 976 1,259 1,901
Income taxes ...................................................... (181) -- (112) --
------------ ------------ ------------ ------------
Net loss .......................................................... $ (11,551) $ (10,335) $ (19,541) $ (19,594)
============ ============ ============ ============
Net loss per share - basic and diluted ............................ $ (0.40) $ (0.36) $ (0.67) $ (0.68)
============ ============ ============ ============
Weighted average shares outstanding - basic and diluted ........... 29,055,783 28,737,781 29,050,934 28,688,267
============ ============ ============ ============
</Table>
See notes to condensed consolidated financial statements.
2
<Page>
DELTATHREE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 31,
----------------------------------
2001 2000
(unaudited)
----------------------------------
($ IN THOUSANDS EXCEPT SHARE DATA)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................. $(19,541) $(19,594)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ........................................ 4,461 3,157
Write-down of fixed assets from RSL sale ............................. 1,147 --
Amortization of deferred compensation ................................ 1,994 4,156
Capital loss, net .................................................... 1 (6)
Increase in liability for severance pay .............................. 22 10
Provision for losses on accounts receivable .......................... (98) (18)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable ........................... 1,498 (1,495)
Decrease (increase) in other current assets and due from affiliates .. 108 37
Decrease in accounts payable ......................................... (1,068) (413)
Increase (decrease) in deferred revenues ............................. 108 544
Increase (decrease) in current liabilities and due to affiliates ..... (4,178) 120
-------- --------
3,995 6,092
-------- --------
Net cash used in operating activities ..................................... (15,546) (13,502)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................................... (1,185) (4,885)
Proceeds from disposal of property and equipment ..................... 457 28
Increase in deposits ................................................. (33) (362)
-------- --------
Net cash used in investing activities ..................................... (761) (5,219)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease (increase) in short-term investments ........................ 8,701 (54,721)
Payments of short-term debt from affiliates .......................... -- (1,726)
Expenses relating to share issuance in 1999 .......................... -- (272)
Proceeds from exercise of employee options ........................... 48 413
Proceeds of other long-term debt ..................................... -- 314
-------- --------
Net cash provided by (used in) financing activities ....................... 8,749 (55,992)
-------- --------
Decrease in cash and cash equivalents ..................................... (7,558) (74,713)
Cash and cash equivalents at beginning of period .......................... 20,857 89,957
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................ $ 13,299 $ 15,244
======== ========
</Table>
See notes to condensed consolidated financial statements.
3
<Page>
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, 2000.
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. SALE OF MAJORITY OWNERSHIP BY RSL
On June 28, 2001, RSL Communications, Ltd. ("RSL COM"), the Company's
then majority stockholder and sole owner of the Company's Class B Common Stock,
par value $0.001, entered into a share purchase agreement with Atarey Hasharon
Chevra Lepituach Vehashkaot Benadlan (1991) Ltd., an Israeli company ("Atarey")
to sell to Atarey all of the Class B Common Stock of the Company owned by RSL
COM. On June 29, 2001, the sale was consummated, and all of RSL COM's shares of
Class B Common Stock, which carried ten votes per share, were automatically
converted into shares of Class A Common Stock, which carry one vote per share.
As a result of the sales transaction, Atarey is now the majority stockholder of
the Company, owning approximately 72% of the outstanding Class A Common Stock of
the Company. Simultaneously with the completion of the transaction on June 29,
2001, all of the contracts and inter-company agreements by and between RSL COM
(and all of its subsidiaries) and the Company were terminated. At the same time,
the Company severed its reliance on RSL COM as its primary pan-European
wholesale telecommunications carrier, and shifted to other service providers.
Additionally, at the time of the sales transaction between RSL COM and
Atarey, the Company reviewed all of the equipment that had been purchased and
deployed over a several year period in servicing the contracts between the
Company and RSL COM. As a result of such review, the Company determined that
approximately $1.1 million in previously purchased equipment should be
written-down as a result of the cancellation of the contracts. This write down
is based on the following factors: (i) the new carrier arrangements did not
allow for the utilization of this equipment, (ii) the Company does not foresee
using this equipment to service other accounts, and (iii) due to the nature of
the used telecommunications equipment marketplace, the Company believes there is
no opportunity to sell this equipment.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company 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 the
Company's Annual Report on Form 10-K for the year ended December 31, 2000. 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
4
<Page>
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 the Company as of the date thereof, and the Company assumes no
obligation to update any forward-looking statement or risk factors.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
REVENUES
AFFILIATES. Revenues from affiliates were $0.2 million for the three
months ended June 30, 2001 compared to $4.6 million for the three months ended
June 30, 2000, a decrease of $4.4 million or 95.2%. The decrease in revenues
from affiliates was due to an decrease in sales of calling card products through
our affiliate RSL COM USA.
NON-AFFILIATES. Revenues from non-affiliates were $2.6 million for the
three months ended June 30, 2001 compared to $3.2 million for the three months
ended June 30, 2000, a decrease of $0.6 million or 19.1%. Revenues from carrier
transmission services for telecommunications carriers other than RSL COM were
approximately $0.2 million for the three months ended June 30, 2001 compared to
approximately $0.5 million for the three months ended June 30, 2000, an decrease
of approximately $0.3 million or 59.5%. The decrease was primarily due to a
decreased demand from a smaller customer base. Revenues from enhanced IP
communications services were $2.4 million for the three months ended June 30,
2001 compared to $2.7 million for the three months ended June 30, 2000, a
decrease of $0.3 million or 11.1%. The decrease in revenues from enhanced IP
communications services was due to a lack of integration and other service fees
received from new partners in our Hosted Communications Solution as the Company
focused on optimizing existing accounts.
Revenues from carrier transmission services to RSL COM and other
telecommunications carriers accounted for 14.4% and 24.4% of revenues for the
periods ended June 30, 2001 and June 30, 2000, respectively. Other than RSL COM,
no other customer accounted for greater than 10% of the Company's revenues
during these periods.
COSTS AND OPERATING EXPENSES
COST OF REVENUES. Cost of revenues were $2.5 million for the three
months ended June 30, 2001 compared to $6.2 million for the three months ended
June 30, 2000. The decrease in cost of revenues was due primarily to a decrease
in the amount of traffic being terminated.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $1.5 million for the three months ended June 30, 2001 compared to $1.6
million for the three months ended June 30, 2000. The decrease in research and
development expenses was 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 were
$1.9 million for the three months ended June 30, 2001 compared to $6.1 million
for the three months ended June 30, 2000, a decrease of $4.3 million or 68.3%.
The decrease in selling and marketing expenses was due to a significant decrease
in branding and promotional activities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses (exclusive of non-cash compensation expenses) were $1.6 million for the
three months ended June 30, 2001 compared to $1.7 million for the three months
ended June 30, 2000, a decrease of $0.1 million or 2.5%. The decrease in general
and administrative expenses was primarily lower personnel costs associated with
these activities.
NON-CASH COMPENSATION EXPENSES. Non-cash compensation expenses were
approximately $0.2 million for the three months ended June 30, 2001 compared to
$1.8 million for the three months ended June 30, 2000, a decrease of $1.6
million or 87.3%. The decrease in non-cash compensation expenses was due to the
completed amortization of costs incurred during 1997. Remaining amortization of
costs related to the 1998 and 1999 grants of options and warrants below the then
fair market value will continue to be reflected in future financial statements.
DEPRECIATION AND AMORTIZATION OF GOODWILL. Depreciation and
amortization of goodwill was $2.5 million for the three months ended June 30,
2001 compared to $1.9 million for the three months ended June 30, 2000, an
increase of $0.6
5
<Page>
million or 30.7%. The increase in depreciation and amortization of goodwill was
due to the continued increase in our fixed assets.
WRITE DOWN OF FIXED ASSETS FROM RSL SALE. The Company 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 RSL COM and the Company that were cancelled at the time of
RSL COM's sale of their majority ownership interest in deltathree to Atarey in
accordance with FAS 121. See note 3 to the accompanying financial statements for
further details.
EXPENSE DUE TO THE CANCELLATION OF A SUPPLIER AGREEMENT. The Company
incurred a one-time expense of approximately $3.6 million that resulted from the
cancellation of a development and promotion agreement between the Company and
CNET Investments, Inc. Expenses included a payment to terminate the contract and
the acceleration of the amortization of compensation charges deferred in
previous years.
LOSS FROM OPERATIONS
Loss from operations was $12.3 million for the three months ended June
30, 2001 compared to $11.3 million for the three months ended June 30, 2000, an
increase of $1.0 million or 8.2%. The increase in loss from operations was due
primarily to the decrease in costs and operating expenses, including non-cash
compensation expenses and sales and marketing expenses, off-set by one-time
charges. The Company expects to continue to incur losses for the foreseeable
future.
INTEREST INCOME (EXPENSE), NET
Interest income, net was $0.5 million for the three months ended June
30, 2001 compared to interest income, net of $0.9 million for the three months
ended June 30, 2000, a decrease of $0.4 million. The decrease in interest income
was primarily due to interest earned on the remaining proceeds from the
Company's initial public offering.
INCOME TAXES, NET
Income taxes, net was $0.2 million for the three months ended June 30,
2001 compared to no income taxes for the three months ended June 30, 2000.
NET LOSS
Net loss was $11.6 million for the three months ended June 30, 2001
compared to $10.3 million for the three months ended June 30, 2000, an increase
of $1.3 million or 11.8%. The increase in net loss was due to the foregoing
factors.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
REVENUES
AFFILIATES. Revenues from affiliates were $1.7 million for the six
months ended June 30, 2001 compared to $9.4 million for the six months ended
June 30, 2000, a decrease of $7.7 million or 82.2%. The decrease in revenues
from affiliates was due to an decrease in sales of calling card products through
our then affiliate RSL COM USA.
NON-AFFILIATES. Revenues from non-affiliates were $7.2 million for the
six months ended June 30, 2001 compared to $5.0 million for the six months ended
June 30, 2000, an increase of $2.2 million or 44.0%. Revenues from carrier
transmission services for telecommunications carriers other than RSL COM were
approximately $1.0 million for the six months ended June 30, 2001 compared to
approximately $0.8 million for the six months ended June 30, 2000, an increase
6
<Page>
of approximately $0.2 million or 16.1%. The increase was primarily due to an
increased demand from a smaller customer base. Revenues from enhanced IP
communications services were $6.3 million for the six months ended June 30, 2001
compared to $3.9 million for the six months ended June 30, 2000, an increase of
$2.4 million or 61.5%. The increase in revenues from enhanced IP communications
services was due to integration and other service fees received from partners in
our Hosted Communications Solution as well as a greater number of PC-to-phone
and phone-to-phone calls being placed by an increasing user base.
Revenues from carrier transmission services to RSL COM and other
telecommunications carriers accounted for 29.5% and 28.6% of revenues for the
periods ended June 30, 2001 and June 30, 2000, respectively. Other than RSL COM,
no other customer accounted for greater than 10% of the Company's revenues
during these periods.
COSTS AND OPERATING EXPENSES
COST OF REVENUES. Cost of revenues were $7.9 million for the six months
ended June 30, 2001 compared to $11.9 million for the six months ended June 30,
2000. The decrease in cost of revenues was due primarily to a decrease in the
amount of traffic being terminated.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $3.4 million for the six months ended June 30, 2001 compared to $2.8
million for the six months ended June 30, 2000, an increase of $6.0 million. The
increase in research and development expenses was due to greater costs incurred
in hiring additional personnel to develop new services and enhancements to our
existing services.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses were
$5.1 million for the six months ended June 30, 2001 compared to $11.0 million
for the six months ended June 30, 2000, a decrease of $5.9 million or 53.3%. The
decrease in selling and marketing expenses was due to a significant decrease in
branding and promotional activities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses (exclusive of non-cash compensation expenses) were $3.7 million for the
six months ended June 30, 2001 compared to $2.8 million for the six months ended
June 30, 2000, an increase of $0.9 million or 29.6%. The increase in general and
administrative expenses was primarily due to hiring additional personnel and
increased occupancy costs.
NON-CASH COMPENSATION EXPENSES. Non-cash compensation expenses were
approximately $0.5 million for the six months ended June 30, 2001 compared to
$4.2 million for the six months ended June 30, 2000, a decrease of $3.7 million
or 87.9%. The decrease in non-cash compensation expenses was due to the
completed amortization of costs incurred during 1997. Remaining amortization of
costs related to the 1998 and 1999 grants of options and warrants below the then
fair market value will continue to be reflected in future financial statements.
DEPRECIATION AND AMORTIZATION OF GOODWILL. Depreciation and
amortization of goodwill was $4.5 million for the six months ended June 30, 2001
compared to $3.3 million for the six months ended June 30, 2000, an increase of
$1.2 million or 36.9%. The increase in depreciation and amortization of goodwill
was due to the continued increase in our fixed assets.
WRITE DOWN OF FIXED ASSETS FROM RSL SALE. The Company 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 RSL COM and the Company that were cancelled at the time of
RSL COM's sale of their majority ownership interest in deltathree to Atarey in
accordance with FAS 121. See note 3 to the accompanying financial statements for
further details.
EXPENSE DUE TO THE CANCELLATION OF A SUPPLIER AGREEMENT. The Company
incurred a one-time expense of approximately $3.6 million that resulted from the
cancellation of a development and promotion agreement between the Company and
CNET Investments, Inc. Expenses included a payment to terminate the contract and
the acceleration of the amortization of compensation charges deferred in
previous years.
7
<Page>
LOSS FROM OPERATIONS
Loss from operations was $20.9 million for the six months ended June
30, 2001 compared to $21.5 million for the six months ended June 30, 2000, a
decrease of $0.6 million or 2.7%. The decrease in loss from operations was due
primarily to the decrease in costs and operating expenses, including non-cash
compensation expenses and sales and marketing expenses. The Company expects to
continue to incur losses for the foreseeable future.
INTEREST INCOME (EXPENSE), NET
Interest income, net was $1.3 million for the six months ended June 30,
2001 compared to interest income, net of $1.9 million for the six months ended
June 30, 2000, a decrease of $0.6 million. The decrease in interest income was
primarily due to interest earned on the remaining proceeds from the Company's
initial public offering.
INCOME TAXES, NET
Income taxes, net was $0.1 million for the six months ended June 30,
2001 compared to no income taxes for the six months ended June 30, 2000.
NET LOSS
Net loss was $19.5 million for the six months ended June 30, 2001
compared to $19.6 million for the six months ended June 30, 2000, a decrease of
$0.1 million or 2.7%. The decrease in net loss was due to the foregoing factors.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001, the Company had cash and cash equivalents of
approximately $13.3 million, marketable securities and other short-term
investments of approximately $22.2 million and working capital of approximately
$31.3 million. The Company generated negative cash flow from operating
activities of approximately $15.5 million during the six months ended June 30,
2001 compared with negative cash flow from operating activities of $13.5 million
during the six months ended June 30, 2000. Accounts receivable were
approximately $2.6 million and $3.2 million at June 30, 2001 and June 30, 2000,
respectively.
The Company's capital expenditures decreased from approximately $5.2
million in the six months ended June 30, 2000 compared to approximately $1.2
million in the six months ended June 30, 2001, as the Company continued to
optimize its domestic and international network infrastructure.
The Company believes that its available cash and cash equivalents will
be sufficient to meet its working capital requirements, including operating
losses, and capital expenditure requirements for at least the next twelve
months, assuming that the Company's business plan is implemented successfully.
Thereafter, the Company may be required to raise additional funds. Additional
financing may not be available when needed or, if available, such financing may
not be on terms favorable to the Company. If additional funds are raised through
the issuance of equity securities, the Company's existing stockholders may
experience significant dilution. The Company cannot assure you that any third
party will be willing or able to provide additional capital on favorable terms
or at all.
The Company received a notice from the Nasdaq National Market stating
that the Company's Class A Common Stock had not maintained a minimum bid price
of $1.00 over a period of 30 days as required by the Nasdaq Marketplace Rules.
The Company is evaluating appropriate steps to take in response to such notice
to bring the Company into compliance with the Nasdaq Marketplace Rules within
the requisite time period.
8
<Page>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Securities and Exchange Commission's rule related to market risk
disclosure requires that the Company describe and quantify its 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. The Company believes its
exposure to market risk is immaterial. The Company currently does not invest in,
or otherwise hold, for trading or other purposes, any financial instruments
subject to market risk.
9
<Page>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 8, 1999, Aerotel, Ltd. and Aerotel U.S.A. commenced a suit
against the Company, RSL COM and an RSL COM subsidiary in the United States
District Court for the Southern District of New York, as well as several other
telecommunication companies. Aerotel alleges that the Company (as well as the
other defendants) is 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 the Company from using
the technology covered by this patent, monetary damages in an unspecified amount
and reimbursement of attorneys' fees. The Company has answered the complaint,
and the parties are currently engaged in pre-trial discovery. As the Company
continues to evaluate these claims, it believes that it has meritorious defenses
to the claims and the Company intends 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 the Company's business, financial
condition and results of operations. Regardless of the ultimate outcome, the
litigation could result in substantial expenses to the Company and significant
diversion of efforts by the Company's managerial and other personnel.
The Company, as well as certain of its former officers and directors,
has been named as a defendant in a number of purported securities class actions
in Federal District Court for the Southern District of New York, arising out of
the Company's 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 Company 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 Company shares in the aftermarket at pre-determined prices.
The Company has entered into stipulations with the plaintiffs extending the
Company's time to respond to the complaints, pending the appointment by the
Court of a lead plaintiff or plaintiffs and/or the filing of any consolidated
amended complaint. These cases remain at a preliminary stage and no discovery
proceedings have taken place. The Company believes that the claims asserted
against it in these cases are without merit and intends to defend vigorously
against them
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
As of June 30, 2001, the Company had used approximately $26 million of
the net proceeds of $96,255,000 from the Company's initial public offering in
November 1999 for sales, marketing and promotional activities, $17 million for
capital expenditures and $10 million for general corporate purposes. Pending use
of the remaining net proceeds, the Company has invested the remaining net
proceeds in interest-bearing, investment-grade instruments, certificates of
deposit, or direct or guaranteed obligations of the United States.
ITEM 3. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders
during the second quarter of 2001.
ITEM 4. OTHER INFORMATION
(a) 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 the Company's control, including, but
not limited to, uncertainty of financial estimates and projections, the
competitive environment for
10
<Page>
Internet telephony, the Company's 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 the Company's 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
the Company as of the date thereof, and the Company assumes no obligation to
update any forward-looking statement or risk factors.
11
<Page>
ITEM 5. 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
- ------ -----------
3.1.1* Form of Restated Certificate of Incorporation of deltathree,
Inc.
3.1.2**** Form of Amendment 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 May 30, 2000, between
Mark Gazit and deltathree, Inc.
10.10*** Amendment No. 1 to Employment Agreement, effective as of June
1, 2000, between Mark Gazit and deltathree, Inc.
10.11*** Employment Agreement, effective as of August 28, 2000, between
Paul White and deltathree, Inc.
10.12** Agreement and Plan of Merger, dated as of February 3, 2000,
between deltathree, Inc., YourDay Acquisition Corp.,
YourDay.com, Inc. and SenseNet Inc.
10.13 Settlement and Mutual Release Agreement, dated as of May 24,
2001, between deltathree, Inc. and CNET Investments, Inc.
10.14 Novation and Amendment Agreement, dated as of June 28, 2001,
by and among deltathree, Inc., RSL Communications, Ltd. and
Atarey Hasharon Chevra Lepituach Vehashkaot Benadlan (1991)
Ltd.
- --------------
* 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 May 15, 2000.
*** Incorporated by reference to the Company's quarterly report on
Form 10-Q filed on November 14, 2000.
**** Incorporated by reference to the Company's annual report on
Form 10-K/A filed on April 30, 2001.
12
<Page>
(b) Reports on Form 8-K.
On May 4, 2001, the Company filed a current report on Form 8-K to
report under Item 5 changes in the Company's Board of Directors.
13
<Page>
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, 2001 By: /s/ PAUL C. WHITE
-----------------------------------
Name: Paul C. White
Title: Chief Financial Officer
14
<Page>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
3.1.1* Form of Restated Certificate of Incorporation of deltathree,
Inc.
3.1.2**** Form of Amendment 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 May 30, 2000, between
Mark Gazit and deltathree, Inc.
10.10*** Amendment No. 1 to Employment Agreement, effective as of June
1, 2000, between Mark Gazit and deltathree, Inc.
10.11*** Employment Agreement, effective as of August 28, 2000, between
Paul White and deltathree, Inc.
10.12** Agreement and Plan of Merger, dated as of February 3, 2000,
between deltathree, Inc., YourDay Acquisition Corp.,
YourDay.com, Inc. and SenseNet Inc.
10.13 Settlement and Mutual Release Agreement, dated as of May 24,
2001, between deltathree, Inc. and CNET Investments, Inc.
10.14 Novation and Amendment Agreement, dated as of June 28, 2001,
by and among deltathree, Inc., RSL Communications, Ltd. and
Atarey Hasharon Chevra Lepituach Vehashkaot Benadlan (1991)
Ltd.
- --------------
* 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 May 15, 2000.
*** Incorporated by reference to the Company's quarterly report on
Form 10-Q filed on November 14, 2000.
**** Incorporated by reference to the Company's annual report on
Form 10-K/A filed on April 30, 2001.
15