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, 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 November 13, 2001, the registrant had 29,143,206 shares of
Class A Common Stock, par value $0.001 per share, outstanding.
DELTATHREE, INC.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.................................................1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................................13
Item 2. Change in Securities and Use of Proceeds............................13
Item 4. Submission of Matters to a Vote of Security Holders.................14
Item 5. Other Information...................................................14
Item 6. Exhibits and Reports on Form 8-K....................................15
Signatures...................................................................17
Exhibit Index................................................................18
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
DELTATHREE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of As of
September 30, December 31,
2001 2000
(unaudited)
----------- ----------
($ IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents....................... $14,424 $ 20,857
Short-term investments.......................... 16,450 30,542
Accounts receivable, net ....................... 3,177 3,245
Due from affiliates ............................ -- 331
Prepaid expenses and other current assets ...... 1,383 2,084
------- --------
Total current assets........................ 35,434 57,059
------- --------
Property and equipment, Net. ..................... 16,962 22,270
------- --------
Goodwill, net .................................... 4,151 6,425
------- --------
Deposits.......................................... 103 415
------- --------
Total assets.................................... $56,650 $86,169
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ 4,435 5,236
Due to affiliates .............................. - 2,721
Deferred revenues............................... 414 251
Other current liabilities ...................... 2,660 5,313
------- --------
Total current liabilities................... 7,509 13,521
------- --------
Long-term liabilities:
Severance pay obligations ...................... 197 169
------- --------
Total liabilities........................... 7,706 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...................... 166,801 166,733
Deferred compensation........................... (432) (2,588)
Accumulated deficit............................. (117,427) (91,695)
Treasury Stock.................................. (27) --
------- --------
Total stockholder's equity.................. 48,944 72,479
------- --------
Total liabilities and stockholder's equity.. $56,650 $86,169
======= ========
See notes to condensed consolidated financial statements.
DELTATHREE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2001 2000 2001 2000
(unaudited) (unaudited)
------------------ -----------------
($ IN THOUSANDS EXCEPT SHARE DATA)
Revenues:
Affiliates............................. $ - $ 2,969 $ 1,669 $ 12,356
Non-affiliates......................... 3,418 5,566 10,616 10,615
------- ------- ------- -------
Total revenues.................. 3,418 8,535 12,285 22,971
------- ------- ------- -------
Costs and operating expenses:
Cost of revenues, net.................. 2,820 6,944 10,683 18,854
Research and development
expenses, net......................... 1,279 1,952 4,643 4,726
Selling and marketing expenses......... 1,488 5,328 6,623 16,326
General and administrative expenses
(exclusive of non-cash compensation
expense shown below) .............. 1,228 1,736 4,907 4,572
Non-cash compensation expense.......... 162 1,374 663 5,530
Depreciation and amortization.......... 2,758 2,150 7,364 5,407
Write-down of fixed assets resulting
from RSL sale (Note 3)................ - - 1,003 -
Expenses due to cancellation of a
supplier agreement (including
non-cash compensation of $1,493).... - - 3,628 -
------- ------- ------- -------
Total costs and operating
expenses......................... 9,735 19,484 39,514 55,415
------- ------- ------- -------
Loss from operations.....................(6,317) (10,949) (27,229) (32,444)
Interest income (expense), net........... 232 608 1,491 2,509
Income taxes............................. (106) - (6) -
------- ------- ------- -------
Net loss.................................$(6,191) $(10,341) $(25,744) $(29,935)
======= ======= ======= =======
Net loss per share - basic and diluted...$ (0.21) $ (0.36) $ (0.88) $ (1.04)
======= ======= ======= =======
Weighted average shares outstanding -
basic and diluted.................. 29,129,604 28,737,781 29,077,15 28,688,267
========== ========= ========= ==========
See notes to condensed consolidated financial statements.
DELTATHREE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2001 2000
(unaudited)
----------- -----------
($ IN THOUSANDS EXCEPT SHARE DATA)
Cash flows from operating activities:
Net loss.......................................... $ (25,732) $ (29,935)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization.................. 7,364 5,407
Write-down of fixed assets from RSL sale....... 1,003 -
Amortization of deferred compensation.......... 2,156 5,530
Capital loss, net. ............................ 1 (44)
Increase in liability for severance pay........ 28 15
Provision for losses on accounts receivable.... 551 42
Changes in assets and liabilities:
Decrease (increase) in accounts receivable..... 520 (4,786)
Decrease (increase) in other current assets
and due from affiliates...................... 29 (2,565)
Decrease in accounts payable................... (2,035) 3,395
Increase (decrease) in deferred revenues....... 163 (147)
Increase (decrease) in current liabilities
and due to affiliates........................ (4,140) 4,482
Increase (decrease) in other assets.... ....... - (695)
----------- -----------
5,640 10,634
----------- -----------
Net cash used in operating activities............. (20,092) (19,301)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment............. (1,244) (11,057)
Proceeds from disposal of property and
equipment.................................... 458 40
Proceeds from sale of investments ............. - 150
Increase in deposits........................... (30) -
----------- -----------
Net cash used in investing activities............. (816) (10,867)
----------- -----------
Cash flows from financing activities:
Decrease (increase) in short-term investments.. 14,434 (41,499)
Payments of long -term debt from affiliates.... -- (2,179)
Proceeds of long -term debt from affiliates.... -- 455
Expenses relating to share issuance in 1999.... -- (272)
Purchase of treasury stock.... .... .... ...... (27) -
Proceeds from exercise of employee options..... 68 1,411
Proceeds of other long-term debt............... -- 474
----------- -----------
Net cash provided by (used in) financing
activities...................................... 14,475 (41,610)
----------- -----------
Decrease in cash and cash equivalents............. (6,433) (71,778)
Cash and cash equivalents at beginning of
period.......................................... 20,857 89,957
----------- -----------
Cash and cash equivalents at end of period........ $ 14,424 $ 18,179
=========== ===========
See notes to condensed consolidated financial statements.
DELTATHREE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation
The unaudited condensed consolidated financial statements of
deltathree, Inc. and its subsidiaries (collectively, "the Company"), of
which these notes are a part, have been prepared in accordance with
generally accepted accounting principles for interim financial information
and pursuant to the instructions of Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for annual financial
statements. In the opinion of management of the Company, all adjustments
(consisting only of normal recurring accruals) considered necessary for a
fair presentation of the financial information have been included. The
results for the interim periods presented are not necessarily indicative of
the results that may be expected for any future period. The condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 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 do 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.
4. Recent Pronouncements
On June 29, 2001, the Financial Accounting Standards Board
approved for issuance Statement of Financial Accounting Standards ("SFAS")
No. 141, "Business Combinations" ("SFAS 141"), and SFAS No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). These statements become
effective for fiscal years beginning after December 15, 2001. SFAS 141 will
require that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. As a result, the
pooling-of-interests method of accounting will be prohibited. SFAS 142 will
change the accounting for goodwill from an amortization method to an
impairment-only approach. Thus, amortization of goodwill, including
goodwill recorded in past business combinations, will cease upon adoption
of SFAS 142. However, for any acquisition completed after June 30, 2001,
goodwill and intangible assets with an indefinite life will not be
amortized.
The adoption of SFAS 141 will not have an impact on the business, results
of operations and financial condition of the Company. The Company is still
evaluating the potential impact of the adoption of SFAS 142 and has not yet
determined the effect of its adoption on the business, results of
operations and financial condition of the Company.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis 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 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.
Nine Months Ended September 30, 2001 Compared to Nine Months Ended
September 30, 2000
Revenues
Affiliates. Revenues from affiliates were $1.7 million for the
nine months ended September 30, 2001 compared to $12.4 million for the nine
months ended September 30, 2000, a decrease of $10.7 million or 86.3%. The
decrease in revenues from affiliates was due to the sale of majority
ownership of the Company's Class B Common Stock on June 29, 2001 by RSL COM
and the Company's disconnection from the RSL COM network.
Non-affiliates. Revenues from non-affiliates were $10.6 million
for the nine months ended September 30, 2001 compared to $10.6 million for
the nine months ended September 30, 2000. Revenues from carrier
transmission services for telecommunications carriers other than RSL COM
were approximately $1.2 million for the nine months ended September 30,
2001 compared to approximately $1.7 million for the nine months ended
September 30, 2000, a decrease of approximately $0.5 million or 29.4%. The
decrease in revenues from carrier transmission services for
telecommunications carriers other than RSL COM was primarily due to a
decreased demand from a smaller customer base. Revenues from enhanced IP
communications services were $9.4 million for the nine months ended
September 30, 2001 compared to $8.7 million for the nine months ended
September 30, 2000, an increase of $0.7 million or 8.0%. The increase in
revenues from enhanced IP communications services was due to integration
and other service fees received from partners in the Company's 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 20.7% and 26.7% of revenues for
the nine months ended September 30, 2001 and September 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 $10.7 million for the nine
months ended September 30, 2001 compared to $18.9 million for the nine
months ended September 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 $4.6 million for the nine months ended September 30, 2001
compared to $4.7 million for the nine months ended September 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 $6.6 million for the nine months ended September 30, 2001 compared to
$16.3 million for the nine months ended September 30, 2000, a decrease of
$9.7 million or 59.5%. 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 $4.9 million
for the nine months ended September 30, 2001 compared to $4.6 million for
the nine months ended September 30, 2000, an increase of $0.3 million or
6.5%. 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 $0.7 million for the nine months ended September 30,
2001 compared to $5.5 million for the nine months ended September 30, 2000,
a decrease of $4.8 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 $7.4 million for the nine months ended
September 30, 2001 compared to $5.4 million for the nine months ended
September 30, 2000, an increase of $2.0 million or 37.0%. The increase in
depreciation and amortization of goodwill was due to the continued increase
in the Company's 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 its majority ownership interest
in the Company to Atarey in accordance with FAS 121. See note 3 to the
accompanying financial statements for further details.
Expenses 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 $27.2 million for the nine months ended
September 30, 2001 compared to $32.4 million for the nine months ended
September 30, 2000, a decrease of $5.2 million or 16.0%. The decrease in
loss from operations was due primarily to the decrease in costs and
operating expenses, including non-cash compensation expenses and selling
and marketing expenses. The Company expects to continue to incur losses for
the foreseeable future.
Interest Income (Expense), Net
Interest income, net was $1.5 million for the nine months ended
September 30, 2001 compared to interest income, net of $2.5 million for the
nine months ended September 30, 2000, a decrease of $1.0 million. The
decrease in interest income, net was primarily due to interest earned on
the remaining proceeds from the Company's initial public offering.
Income Taxes, Net
Income taxes, net was $6,000 for the nine months ended September
30, 2001 compared to no income taxes for the nine months ended September
30, 2000.
Net Loss
Net loss was $25.7 million for the nine months ended September 30,
2001 compared to $29.9 million for the nine months ended September 30,
2000, a decrease of $4.2 million or 14.0%. The decrease in net loss was due
to the foregoing factors.
Three Months Ended September 30, 2001 Compared to Three Months Ended
September 30, 2000
Revenues
Affiliates. There were no revenues from affiliates for the three
months ended September 30, 2001 compared to $3.0 million for the three
months ended September 30, 2000. The decrease in revenues from affiliates
was due to the sale of majority ownership of the Company's Class B Common
Stock on June 29, 2001 by RSL COM and the Company's disconnection from the
RSL COM network.
Non-affiliates. Revenues from non-affiliates were $3.4 million for
the three months ended September 30, 2001 compared to $5.6 million for the
three months ended September 30, 2000, a decrease of $2.2 million or 39.3%.
Revenues from carrier transmission services for telecommunications carriers
other than RSL COM were approximately $0.3 million for the three months
ended September 30, 2001 compared to approximately $0.8 million for the
three months ended September 30, 2000, a decrease of approximately $0.5
million or 62.5%. The decrease in revenues from carrier transmission
services for telecommunications carriers other than RSL COM was primarily
due to a decreased demand from a smaller customer base. Revenues from
enhanced IP communications services were $3.1 million for the three months
ended September 30, 2001 compared to $4.7 million for the three months
ended September 30, 2000, a decrease of $1.6 million or 34.0%. 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 the
Company's Hosted Communications Solution as the Company focused on
optimizing existing accounts.
Costs and Operating Expenses
Cost of revenues. Cost of revenues were $2.8 million for the three
months ended September 30, 2001 compared to $6.9 million for the three
months ended September 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 $1.3 million for the three months ended September 30, 2001
compared to $2.0 million for the three months ended September 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 $1.5 million for the three months ended September 30, 2001 compared to
$5.3 million for the three months ended September 30, 2000, a decrease of
$3.8 million or 71.7%. 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 $1.2 million
for the three months ended September 30, 2001 compared to $1.7 million for
the three months ended September 30, 2000, a decrease of $0.5 million or
29.4%. The decrease in general and administrative expenses was primarily
due to lower personnel costs associated with these activities.
Non-cash compensation expenses. Non-cash compensation expenses
were approximately $0.1 million for the three months ended September 30,
2001 compared to $1.4 million for the three months ended September 30,
2000, a decrease of $1.3 million or 92.9%. 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 $2.8 million for the three months ended
September 30, 2001 compared to $2.2 million for the three months ended
September 30, 2000, an increase of $0.6 million or 27.3%. The increase in
depreciation and amortization of goodwill was due to the continued increase
in the Company's fixed assets.
Loss from Operations
Loss from operations was $6.3 million for the three months ended
September 30, 2001 compared to $10.9 million for the three months ended
September 30, 2000, a decrease of $4.6 million or 42.2%. The decrease in
loss from operations was due primarily to the decrease in costs and
operating expenses, including non-cash compensation expenses and selling
and marketing expenses. The Company expects to continue to incur losses for
the foreseeable future.
Interest Income (Expense), Net
Interest income, net was $0.2 million for the three months ended
September 30, 2001 compared to interest income, net of $0.6 million for the
three months ended September 30, 2000, a decrease of $0.4 million. The
decrease in interest income, net 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 three months ended
September 30, 2001 compared to no income taxes, net for the three months
ended September 30, 2000.
Net Loss
Net loss was $6.2 million for the three months ended September 30,
2001 compared to $10.3 million for the three months ended September 30,
2000, a decrease of $4.1 million or 39.8%. The decrease in net loss was due
to the foregoing factors.
Liquidity and Capital Resources
As of September 30, 2001, the Company had cash and cash
equivalents of approximately $14.4 million, marketable securities and other
short-term investments of approximately $16.5 million and working capital
of approximately $27.9 million. The Company generated negative cash flow
from operating activities of approximately $20.1 million during the nine
months ended September 30, 2001 compared with negative cash flow from
operating activities of approximately $19.3 million during the nine months
ended September 30, 2000. Accounts receivable were approximately $3.2
million and $5.7 million at September 30, 2001 and September 30, 2000,
respectively.
The Company's capital expenditures decreased from approximately
$11.1 million in the nine months ended September 30, 2000 compared to
approximately $1.2 million in the nine months ended September 30, 2001, as
the Company continued to optimize its domestic and international network
infrastructure.
The Company registered 6,900,000 shares of its Class A Common
Stock on a Form S-1 registration statement, which became effective on
November 22, 1999. The Company received net proceeds, after deducting
underwriting discounts and commissions and offering expenses, of
approximately $96,255,000 from the sale of 6,900,000 shares at the initial
public offering price of $15.00 per share on November 29, 1999.
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 fiscal year, 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. In
addition, while the indentures governing outstanding indebtedness of RSL
COM were cancelled and no longer restrict the Company's ability to incur
indebtedness, the Company cannot assure you that any third party will be
willing or able to provide additional capital on favorable terms or at all.
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.
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. 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. At a
status conference held on September 7, 2001, Judge Scheindlin adjourned all
defendants' time to respond to the complaints until further order of the
Court. 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
On November 22, 1999, the Company offered 6,900,000 shares of its
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. The Company 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 the 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, 2001, the Company has used approximately $28
million of the net proceeds for sales, marketing and promotional
activities, $19 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 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 2001.
Item 5. 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 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.
(b) During the quarterly period ended September 30, 2001,
Mark Gazit resigned as Executive Vice President of Technology of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Securities and Exchange
Commission.
Exhibit
Number Description
- ------- -----------
3.1.1* Form of Restated Certificate of Incorporation of
deltathree, Inc.
3.1.2**** Form of Amendment to Restated Certificate of
Incorporation of deltathree, Inc.
3.2* Form of Amended and Restated By-laws of deltathree, Inc.
4.1* Specimen Certificate of Common Stock.
4.2* Specimen Certificate of Class B Common Stock.
10.1* Form of deltathree, Inc. 1999 Stock Incentive Plan.
10.2* Form of deltathree, Inc. 1999 Employee Stock Purchase Plan.
10.3* Form of deltathree, Inc. 1999 Performance Incentive Plan.
10.4* Form of deltathree, Inc. 1999 Directors' Plan.
10.5* Employment Agreement, effective as of April 1, 1999,
between Noam Bardin and deltathree, Inc.
10.6*** Amendment No. 1 to Employment Agreement, effective as of
June 1, 2000, between Noam Bardin and deltathree, Inc.
10.7* Employment Agreement, effective as of April 1, 1999,
between Shimmy Zimels and deltathree, Inc.
10.8*** Amendment No. 1 to Employment Agreement, effective as of
June 1, 2000, between Shimmy Zimels and deltathree, Inc.
10.9*** Employment Agreement, effective as of August 28, 2000,
between Paul White and deltathree, Inc.
10.10** Agreement and Plan of Merger, dated as of February 3,
2000, between deltathree, Inc., YourDay Acquisition
Corp., YourDay.com, Inc. and SenseNet Inc.
- -------------
* 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.
(b) Reports on Form 8-K.
On July 10, 2001, the Company filed a current report on Form 8-K
to report under Item 1 changes in control of the Company, as well as
changes in the Company's Board of Directors.
On September 24, 2001, the Company filed a current report on Form
8-K to report under Item 5 that the Company was in the final stages of
negotiating an Integration and Marketing Agreement with Microsoft
Corporation.
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, 2001 By: /s/ Paul C. White
----------------------------------
Name: Paul C. White
Title: Chief Financial Officer
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3.1.1* Form of Restated Certificate of Incorporation of
deltathree, Inc.
3.1.2**** Form of Amendment to Restated Certificate of
Incorporation of deltathree, Inc.
3.2* Form of Amended and Restated By-laws of deltathree, Inc.
4.1* Specimen Certificate of Common Stock.
4.2* Specimen Certificate of Class B Common Stock.
10.1* Form of deltathree, Inc. 1999 Stock Incentive Plan.
10.2* Form of deltathree, Inc. 1999 Employee Stock Purchase Plan.
10.3* Form of deltathree, Inc. 1999 Performance Incentive Plan.
10.4* Form of deltathree, Inc. 1999 Directors' Plan.
10.5* Employment Agreement, effective as of April 1, 1999,
between Noam Bardin and deltathree, Inc.
10.6*** Amendment No. 1 to Employment Agreement, effective as of
June 1, 2000, between Noam Bardin and deltathree, Inc.
10.7* Employment Agreement, effective as of April 1, 1999,
between Shimmy Zimels and deltathree, Inc.
10.8*** Amendment No. 1 to Employment Agreement, effective as of
June 1, 2000, between Shimmy Zimels and deltathree, Inc.
10.9*** Employment Agreement, effective as of August 28, 2000,
between Paul White and deltathree, Inc.
10.10** Agreement and Plan of Merger, dated as of February 3,
2000, between deltathree, Inc., YourDay Acquisition
Corp., YourDay.com, Inc. and SenseNet Inc.
- -------------
* 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.