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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(Amendment No. 1 to Form 10-K)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Fiscal Year Ended December 31, 2002
Commission File Number: 000-28063
DELTATHREE, INC.
(Exact name of registrant as specified in charter)
Delaware 13-4006766
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
75 Broad Street, 31st Floor
New York, New York 10004 10004
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(Address of principal executive offices) (Zip code)
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Registrant's telephone number, including area code: (212) 500-4850
Securities registered pursuant to Section 12(b) of the Act:
None.
Securities registered pursuant to Section 12(g) of the Act:
Name of Each Exchange on Which the
Title of Each Class Securities are Registered
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Class A Common Stock, Nasdaq SmallCap Market
par value $0.001 per share
Indicate by a 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 check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
The aggregate market value of the Class A common stock held by
non-affiliates of the Registrant based upon the closing price of the Class A
common stock as reported by The Nasdaq Stock Market on June 28, 2002 was
$5,692,191. Solely for purposes of this calculation, shares beneficially owned
by directors and officers of the Registrant and persons owning 5% or more of the
Registrant's Class A common stock have been excluded, in that such persons may
be deemed to be affiliates of the Registrant. Such exclusion should not be
deemed a determination or admission by the Registrant that such individuals or
entities are, in fact, affiliates of the Registrant.
The number of shares outstanding of the Registrant's capital stock as
of April 29, 2003 is as follows:
Number of Shares Outstanding
Title of Each Class at April 21, 2003
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Class A Common Stock, $0.001 par value 29,180,896
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EXPLANATORY NOTE
deltathree, Inc. (the "Company") hereby amends the following items of
its Annual Report on Form 10-K for the year ended December 31, 2002 (the
"Original Filing") filed with the Securities and Exchange Commission on March
31, 2002. Each of the below referenced Items in Part III and IV are hereby
amended by deleting the Items in their entirety and replacing them with the
Items set forth herein. Any Item in the Original Filing not expressly changed
hereby shall be as set forth in the Original Filing.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Board of Directors
Our Amended and Restated Certificate of Incorporation provides that a
director shall hold office until the annual meeting for the year in which his or
her term expires except in the case of elections to fill vacancies or newly
created directorships. Each director is elected for a one-year term. Each of the
nominees is now serving as director on our Board. Set forth below are the name,
age and the positions and offices held by each of our directors, his principal
occupation and business experience during at least the past five years and the
names of other publicly-held companies of which he serves as a director.
Noam Bardin, 32 - Chairman of the Board. Mr. Bardin co-founded
deltathree and has served as Chief Executive Officer and President from 2000
through June 17, 2002. Mr. Bardin has served as Chairman of the Board since
April 2001. Mr. Bardin served as Vice President of Technology and Chief
Technology Officer of deltathree since June 1997 before being named President
and Chief Executive Officer in April 2000. He served as Global Network Director
from November 1996 to May 1997. Prior to founding deltathree, he worked with
Ambient Corporation. Mr. Bardin graduated from Hebrew University(Jerusalem) with
a degree in Economics, and is currently attending the Harvard Kennedy School in
pursuit of his Mid Career, Master of Public Administration degree.
Ehud Erez, 47 - Director. Mr. Erez has served as a director of
deltathree since February 2002. Mr. Erez has served as the Chief Executive
Officer of Atarey and President and Chief Financial Officer of El-Ad Group
(Canada) since July 2001. Prior to July 2001, Mr. Erez was Auditor, Accountant
and Partner of several accounting firms, including KPMG and Arthur Andersen.
Prior to January 1985 Mr. Erez was a Revenue Inspector/Auditor for the Treasury
Department in Jerusalem. Mr. Erez was an active member of the Auditing Standards
Board of the Institute of Certified Public Accountants. He is a graduate of
Hebrew University with a BA in Economics and Accounting and holds a CPA.
Amir Gera, 42 - Director. Mr. Gera has served as a director of
deltathree since June 2001. Since January 2002, Mr. Gera has served as the Chief
Executive Officer of Green Venture Capital Ltd., an investment holding company
which engages primarily in acquiring holdings in venture capital funds, where he
had previously served as the Assistant Director General since January 2001. In
addition, Mr. Gera is also the Chief Executive Officer of Commutech Holding &
Investments Ltd and has served in this capacity since March 2001. From 1993
through 2000, Mr. Gera was the Assistant Director General of Emet Neveh Savion
Ltd., which owns and manages real estate assets.
Elie Housman, 66 - Director. Mr. Housman has served as a director of
deltathree since August 2001. Since March 2001, Mr. Housman has served as the
Chairman of InkSure, Inc. Prior to March 2001, Mr. Housman served as a Principal
and Consultant to Charterhouse Group International, Inc., a private equity firm
that manages approximately $2 billion in assets. Prior to 1996, Mr. Housman was
also the Chairman of Novo PLC, a media supply company in London, and President
of Pioneer Commercial Funding Corporation. Prior to 1988, he founded UM Shipping
Corporation, was Co-Owner of AP Parts Company, Chief Executive Officer of Rail
Finance, Inc. and a Principal of Maritime Fruit Carriers Ltd., one of the
world's largest diversified shipping companies. Mr. Housman is a graduate of the
New School for Social Research with BA and MA degrees in Economics.
Joshua Maor, 67 - Director. Since January 2002, Mr. Maor has served as
the Chairman of Green Venture Capital Ltd., an investment holding company which
engages primarily in acquiring holdings in venture capital funds, and the
Chairman of Commutech Holding & Investments Ltd., an investment holding company
which engages primarily in investments in high tech companies. Mr. Maor served
as both the Chairman and Chief Executive Officer Green Venture Capital Ltd from
1997 to January 2002. From 1996 through 1997, Mr. Maor was the Chairman of
I.B.M. Israel Ltd., which distributes and provides services for I.B.M. products,
and I.B.M. Science and Technology Ltd., a research and development company. Mr.
Maor served as a member of our Advisory Board from 1997 through 1998.
Lior Samuelson, 54 - Director. Mr. Samuelson has served as a director
of deltathree since August 2001. Since August 1999, Mr. Samuelson has served as
a Co-Founder and Principal of Mercator Capital. His experience includes advising
clients in the Technology, Communications and Consumer sectors on mergers,
acquisitions and private placements. From March 1997 to August 1999, Mr.
Samuelson was the President and CEO of PricewaterhouseCoopers Securities. Prior
to that, he was the President and CEO of The Barents Group, a merchant bank
specializing in advising and investing in companies in emerging markets. Mr.
Samuelson was also the Co-Chairman of Peloton Holdings, a Private Equity
management company. Before that, he was a managing partner with KPMG and a
senior consultant at Booz, Allen & Hamilton. Mr. Samuelson earned B.S. and M.S.
degrees in Economics from Virginia Polytechnic University.
Shimmy Zimels, 37 - Chief Operating Officer and Director. Mr. Zimels
joined deltathree in July 1997. Mr. Zimels is responsible for overseeing all
operations, including network operations and customer accounts. Prior to joining
deltathree, Mr. Zimels was the Controller and Vice President of Finance at Net
Media Ltd., a leading Israel-based Internet Service Provider, from June 1995 to
June 1997. From April 1991 to May 1995, Mr. Zimels was a senior tax auditor for
the Income Tax Bureau of the State of Israel. Mr. Zimels graduated from Hebrew
University (Jerusalem) with a degree in Economics and Accounting and holds a
Masters in Economics from Hebrew University (Jerusalem).
Executive Officers
Set forth below is a brief description of the present and past business
experience of each of the persons who serve as our executive officers or key
employees who are not also serving as directors.
Paul C. White, 40 - Chief Financial Officer and Secretary. Mr. White
has served as our Chief Financial Officer since September 2000 and is
responsible for corporate finance and all financial aspects of our operations,
including accounting, tax, treasury, financial analysis, billing, internal
audit, investor relations, real estate and procurement functions. Mr. White
brings a vast array of experience in both the telecommunications and Internet
industries having served as President and Chief Executive Officer of TelecomRFQ,
Inc., a business-to-business start-up designed to facilitate telecommunications
procurement between business buyers and major suppliers. Mr. White cultivated
his expertise in both telecommunications and the Internet with senior level
positions at Buyersedge.com, where he served as Vice President of Operations &
Finance, and at Southern New England Telecommunications (SNET), the SBC
Communications, Inc. subsidiary, where he served as Director of IT Strategy &
Finance, Director of Corporate Development and Director of Finance & Business
Development between 1995 and 1999. Mr. White has also worked in senior level
positions at Ernst & Young, LLP and Arthur Andersen, LLP. Mr. White has a BBA
and an MBA from Hofstra University, as well as a CPA.
Board of Directors and Committees of the Board
Our amended and restated certificate of incorporation provides that the
number of members of our Board shall be not less than three and not more than
thirteen. There are currently seven directors on the Board. At each annual
meeting of stockholders, directors will be elected to hold office for a term of
one year and until their respective successors are elected and qualified. All of
the officers identified above under "Executive Officers" serve at the discretion
of our Board.
The Board had five regular and no special meetings during the fiscal
year ended December 31, 2002. During the fiscal year ended December 31, 2002,
each member of the Board participated in at least 75% of all Board and
applicable committee meetings held during the period for which he was a
director. The Board has established an executive committee, a compensation
committee and an audit committee to devote attention to specific subjects and to
assist the Board in the discharge of its responsibilities. The functions of
these committees and their current members are set forth below.
The Executive Committee is empowered to act on any matter except those
matters specifically reserved to the full Board by applicable law. The Executive
Committee had no meetings during 2002. Amir Gera and Joshua Maor are the current
members of the Executive Committee.
The Compensation Committee is responsible for evaluating our
compensation policies, determining our executive compensation policies and
guidelines and administering our stock option and compensation plans. The
Compensation Committee had one meeting during 2002. Amir Gera and Joshua Maor
are the current members of the Compensation Committee. Please see also the
report of the Compensation Committee set forth elsewhere in this report.
We do not have a standing nominating committee.
The Audit Committee recommends to the Board the appointment of the firm
selected to serve as our independent auditors and our subsidiaries and monitors
the performance of such firm; reviews and approves the scope of the annual audit
and evaluates with the independent auditors our annual audit and annual
financial statements; reviews with management the status of internal accounting
controls; evaluates issues having a potential financial impact on us which may
be brought to the Audit Committee's attention by management, the independent
auditors or the Board; evaluates our public financial reporting documents;
reviews the non-audit services to be performed by the independent auditors, if
any; and considers the effect of such performance on the auditor's independence.
During the year ended December 31, 2002, the Board examined the composition of
the Audit Committee in light of the adoption by The Nasdaq Stock Market of new
rules governing audit committees. Based upon this examination, the Board
confirmed that all members of the Audit Committee during the year ended December
31, 2002 were "independent" within the meaning of Nasdaq's new rules. The Audit
Committee had five meetings during 2002. Ehud Erez, Elie Housman and Lior
Samuelson are the current members of the Audit Committee. Under new listing
rules adopted by the Securities and Exchange Commission in connection with the
Sarbanes-Oxley Act of 2002, Mr. Erez will no longer meet the required criteria
for audit committee member independence due to his position with Atarey, an
affiliate of the Company. The SEC has stated that listed issuers will be
required to comply with the new listing rules by the date of their first annual
meeting of shareholders after January 15, 2004. The Company intends to replace
Mr. Erez on the Audit Committee with a new member who meets the criteria for
audit committee independence prior to such date.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our
directors and executive officers and persons who own more than 10% of a
registered class of our equity securities, to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
beneficial ownership of Common Stock and other equity securities of us.
Directors, officers and greater than 10% stockholders are required by SEC
regulations to furnish us with all Section 16(a) forms they file.
To our knowledge, based solely upon our review of the copies of such
reports furnished to us, we believe that all of our directors, officers and
greater than 10% stockholders have complied with the applicable Section 16(a)
reporting requirements.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain summary information concerning
the compensation paid or awarded for services rendered during each of our last
three fiscal years to our chief executive officer and each of our two other most
highly compensated executive officers in 2000, 2001 and 2002 whose total salary
and bonus exceeded $100,000. These three executive officers are referred to in
this report as "named executive officers".
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Annual Compensation Long-Term Compensation
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Securities
Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options (#) Compensation
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Shimmy Zimels (1)
President and Chief Executive 2002 182,335 -- 100,000 --
Officer and former Chief 2001 214,395 -- 80,000 --
Operating Officer................ 2000 187,500 112,000 130,000 --
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2002 182,335 -- 100,000 --
Paul C. White 2001 201,391 -- -- --
Chief Financial Officer........... 2000 59,500 21,000 160,000 --
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Noam Bardin (1)
Chairman of the Board and 2002 111,060 -- 100,000 --
Former President and Chief 2001 264,267 -- 80,000 --
Executive Officer................ 2000 229,167 142,000 250,000 --
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(1) Mr. Noam Bardin was our President and Chief Executive Officer until June 16,
2002. Mr. Shimmy Zimels, our former Chief Operating Officer, was appointed our
Chief Executive Officer effective June 17, 2002.
Option Grants During 2002
The following table sets forth information regarding each stock option
granted during fiscal year 2002 to each of the named executive officers.
Individual Grants
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Potential Realizable
Shares of % of Total Value at
Common Stock Options Exercise Assumed Rates of
Underlying Granted to Price Stock Price
Options Employees in Per Expiration Appreciation for
Granted (#)(1) Fiscal Year Share Date Option Term (2)
Name ($/Sh) 5% 10%
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Shimmy Zimels ......... 100,000 7.45% 1.02 3/12/09 $41,524 $96,769
Paul C. White.......... 100,000 7.45% 1.02 3/12/09 $41,524 $96,769
Noam Bardin........... 100,000 7.45% 1.02 3/12/09 $41,524 $96,769
(1) The options were granted pursuant to the Company's 1999 Stock Incentive Plan
(the "Plan"). The options granted to the named executive officers are
non-qualified stock options and vest annually in three equal installments
commencing one year from the date of grant.
(2) The amounts shown in this table represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option term.
These gains are based on assumed rates of stock appreciation of 5% and 10%
compounded annually from the date the respective options were granted to their
expiration date. The gains shown are net of the option exercise price, but do
not include deductions for taxes or other expenses associated with the exercise.
Actual gains, if any, on stock option exercises will depend on the future
performance of the Common Stock, the optionee's continued employment through the
option period and the date on which the options are exercised.
Option Exercises in Fiscal 2002 and Year-End Option Values
The following table sets forth information for the named executive
officers with respect to option exercises during 2002 and the value as of
December 31, 2002 of unexercised in-the-money options held by each of the named
executive officers.
Number of
Securities Value of
underlying Unexercised
Unexercised In-The-Money
Options at Options at
Shares Year End (#) Year-End ($)
Acquired Value Exercisable Exercisable
Name On Exercise (#) Realized ($) /Unexercisable /Unexercisable
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Shimmy Zimels.......... -- -- 383,938 /100,000 --
Paul C. White.......... -- -- 160,000/100,000 --
Noam Bardin ........... -- -- 503,938/100,000 --
Compensation Committee Interlocks and Insider Participation
Executive compensation decisions in 2002 were made by the Compensation
Committee. During 2002, no interlocking relationship existed between our Board
and the board of directors or compensation committee of any other company.
Director Compensation
During 2002, we paid $10,000 to each of Lior Samuelson and Elie Housman
for their services as directors, and paid $5,000 to Noam Bardin for his services
as a director for the one-half year term he served as a non-management director.
We anticipate paying $10,000 to each outside director in 2003.
Directors are reimbursed for the expenses they incur in attending
meetings of the Board and Board committees. Under our 1999 Directors' Plan, each
director who is not our employee receives options to purchase 24,848 shares of
Common Stock on the date such director is elected to the Board. In addition,
under our 1999 Directors' Plan, each non-employee director will be eligible to
receive on an annual basis options to purchase 10,000 shares of Common Stock
with an exercise price equal to the fair market value on the date of grant at
the time of our Annual Meeting.
1999 Directors' Plan
The purposes of the 1999 Directors' Plan are to enable us to attract,
maintain and motivate qualified directors and to enhance a long-term mutuality
of interest between our directors and stockholders of our Common Stock by
granting our directors options to purchase our shares.
Under the Directors' Plan, on the first business day following each
annual meeting of our stockholders during the term of the Directors' Plan, each
director who is not our employee will be granted options to acquire 10,000
shares of our Common Stock with an exercise price per share equal to the fair
market value of a share of our Common Stock on the date of grant. These options
will have a seven-year term and will become exercisable on the first anniversary
of the date of grant. In addition, each director who was not our employee on the
date of the completion of our initial public offering was granted options to
acquire 24,848 shares of our Common Stock with an exercise price per share equal
to the initial public offering price. Each individual who becomes a director
will be granted options to acquire 24,848 shares of our Common Stock with an
exercise price per share equal to the fair market value on the date of grant.
These options will have a seven-year term and will be immediately exercisable.
The maximum number of shares that may be issued under the Directors' Plan is
600,000 shares of Common Stock. The plan will terminate December 31, 2009,
unless sooner terminated by our stockholders.
Employment Agreements
We currently have employment agreements in place with Messrs. White and
Zimels, each with the following principal terms:
o The agreements, as amended, are effective until August 31, 2004, and
shall thereafter automatically renew for one-year periods unless either
party provides the other party with written notice of non-renewal at
least 60 days prior to expiration of a term.
o Pursuant to the agreements, Mr. Zimels and Mr. White are entitled to
receive a base salary of $225,000 and $213,000, respectively. Such base
salary shall be increased on each January 1, commencing January 1,
2003, by an amount equal to his base salary then in effect, multiplied
by the applicable cost of living index during the prior year. The
employee's base salary, as adjusted for cost of living increases, may
be further increased at the option and in the discretion of the Board.
o The employee's options are immediately exercisable in full upon a
change of control. The employee's options, following any termination of
the employee's employment, other than for cause, remain exercisable for
the lesser of two years and the remaining term of his options.
o If employee's employment is terminated by us without cause or by the
employee for good reason (which includes, without limitation, a
reduction in salary and/or bonus opportunity, a change of control and a
material reduction in duties and responsibilities), the employee is
entitled to receive previously earned, but unpaid salary, vested
benefits and a payment equal to his base salary as in effect
immediately prior to the termination date.
o If employee dies or is unable to perform his duties, he or his
representative, estate or beneficiary will be paid, in addition to any
previously earned but unpaid salary and vested benefits, 12 months'
total base salary reduced, in the case of disability, by any disability
benefits he receives.
On March 31, 2002, the employment agreements for each of Mr. Bardin and
Mr. Zimels expired pursuant to the terms of the original employment agreements.
Messrs. Bardin's, and Zimels' employment agreements were extended until
September 30, 2002 on the same terms as their original employment agreements. At
the same time, Messrs. Bardin, White and Zimels each took a voluntary pay
reduction for an unspecified time, from their then current salaries of $266,513,
$213,210, and $213,210, respectively, to $180,000 each. On June 16, 2002, Mr.
Bardin's employment agreement ceased to be in effect due to his resignation as
Chief Executive Officer. On September 1, 2002, the employment agreements for Mr.
Zimels and Mr. White were extended until August 31, 2004. Messrs. Zimels' and
White's have kept their voluntary pay reduction in effect at $180,000 each
whereas their current contractual salaries have increased to $232,650 and
$220,242, respectively, due to a cost-of-living increase clause included in
their respective contracts.
Compensation Committee Report on Executive Compensation
The Compensation Committee is responsible for recommending to
the Board of Directors the overall executive compensation strategy of the
Company and for the ongoing monitoring of the compensation strategy's
implementation. In addition to recommending and reviewing the compensation of
the executive officers, it is the responsibility of the Compensation Committee
to recommend new incentive compensation plans and to implement changes and
improvements to existing compensation plans, including the 1999 Stock Incentive
Plan, the 1999 Performance Incentive Plan, the 1999 Employee Stock Purchase Plan
and the 1999 Directors' Plan. The Compensation Committee makes its compensation
determinations based upon its own analysis of information it compiles and the
business experience of its members.
Overall Policy
Compensation Committee believes that the stability of the Company's
management team, as well as the Company's ability to continue to incentivize
management and to attract and retain highly qualified executives for its
expanding operations, will be a contributing factor to the Company's continued
growth and success. In order to promote stability, growth and performance, and
to attract new executives, the Company's strategy is to compensate its
executives with an overall package that the Company believes is competitive with
those offered by similarly situated companies and which consists of (i) a stable
base salary set at a sufficiently high level to retain and motivate these
officers but generally targeted to be in the lower half of its peer group
comparables, (ii) an annual bonus linked to the Company's overall performance
each year and to the individual executive's performance each year and (iii)
equity-related compensation which aligns the financial interests of the
Company's executive officers with those of the Company's stockholders by
promoting stock ownership and stock performance through the grant of stock
options and stock appreciation rights, restricted stock and other equity and
equity-based interests under the Company's various plans.
Executive officers are also entitled to customary benefits generally
available to all employees of the Company, including group medical and life
insurance. Base salary, bonuses and benefits are paid by the Company and its
subsidiaries.
Federal Income Tax Deductibility of Executive Compensation
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), limits the amount of compensation a publicly held corporation may
deduct as a business expense for Federal income tax purposes. The limit, which
applies to a company's chief executive officer and the four other most highly
compensated executive officers, is $1 million (the "Deductibility Limit"),
subject to certain exceptions. The exceptions include the general exclusion of
performance-based compensation from the calculation of an executive officer's
compensation for purposes of determining whether his or her compensation exceeds
the Deductibility Limit. The Compensation Committee has determined that
compensation payable to the executive officers should generally meet the
conditions required for full deductibility under section 162(m) of the Code.
While the Company does not expect to pay its executive officers compensation in
excess of the Deductibility Limit, the Compensation Committee also recognizes
that in certain instances it may be in the best interest of the Company to
provide compensation that is not fully deductible.
With respect to the 1999 Performance Incentive Plan described below,
because the 1999 Performance Incentive Plan was in existence prior to the
completion of the Company's initial public offering, the Deductibility Limit
generally will not apply to payments under such plan until the Company's annual
general meeting of stockholders to be held in 2001, the first meeting of the
Company's stockholders at which directors will be elected after the close of the
third calendar year following the calendar year in which the initial public
offering was closed.
Base Salary
The base salaries for the named executive officers are based upon
employment agreements between the Company and such officers.
Annual Incentive Bonuses
The Board of Directors approved the 1999 Performance Incentive Plan
established by RSL COM. The Company established the Performance Incentive Plan
to enable the Company and its subsidiaries to attract, retain, motivate and
reward the best qualified executive officers and key employees by providing them
with the opportunity to earn competitive compensation directly linked to the
Company's performance. The Performance Incentive Plan is effective through and
including the year 2005, unless extended or earlier terminated by the Board of
Directors. As part of the Performance Incentive Plan, the Compensation Committee
may determine that any bonus payable under the Performance Incentive Plan be
paid in cash, in shares of Common Stock or in any combination thereof, provided
that at least 50% of such bonus is required to be paid in cash. In addition, the
Performance Incentive Plan permits a participant to elect to defer payment of
his or her bonus on terms and conditions established by the Compensation
Committee. No more than 400,000 shares of Common Stock may be issued under the
Performance Incentive Plan.
Under the 1999 Performance Incentive Plan, bonuses may be payable if
the Company meets any one or more of the following performance criteria, which
are set annually by the Compensation Committee: (i) revenues; (ii) operating
income; (iii) gross profit margin; (iv) net income; (v) earnings per share; (vi)
maximum capital or marketing expenditures; or (vii) targeted levels of
customers.
Under the 1999 Performance Incentive Plan, bonus amounts are determined
as follows: if 100% of such targets are achieved, the bonus potentially payable
to participants will generally equal 35% of their base salary for such year, if
80% of such targets are achieved, the bonus potentially payable to participants
will generally equal 25% of their base salary for such year, and if less than
80% of such targets are achieved, the participants will generally not be
entitled to receive any bonus for such year. To the extent the Company's results
exceed 80% of the targets but is less that 100% of the targets, the amount of
the bonus payable to participants will be adjusted proportionately based on
where such results fall within the ranges set forth above. Any such bonus will
consist of two components. Fifty percent of the amount determined pursuant to
the formula described above will be payable if the targets are achieved. Up to
an additional 50% of such amount will be payable in the discretion of the
Compensation Committee. In addition, the 1999 Performance Incentive Plan permits
the Compensation Committee to grant discretionary bonuses to participants,
notwithstanding that a bonus would not otherwise be payable under the 1999
Performance Incentive Plan, to recognize extraordinary individual performance.
With respect to 2002, there were no bonuses awarded to any executive
officer. Pursuant to the terms of the 1999 Performance Incentive Plan, any
awards would have been paid in the current year, promptly following the
completion of the audit of the Company's 2002 financial statements.
Long-Term Incentive Compensation
The Company reinforces the importance of producing satisfactory returns
to stockholders over the long term through the operation of the 1999 Stock
Incentive Plan and the 1999 Directors' Plan. For a discussion relating to the
1999 Directors' Plan, refer to the section entitled "1999 Directors' Plan" in
this annual report. Grants of stock, stock options, stock unit awards and stock
appreciation rights under such plans provide executives with the opportunity to
acquire an equity interest in the Company and align the executive's interest
with that of the stockholders to create stockholder value as reflected in growth
in the market price of the Common Stock.
1999 Stock Incentive Plan
The Board of Directors adopted the 1999 Stock Incentive Plan in
conjunction with the Company's initial public offering. The purposes of the 1999
Stock Incentive Plan are to foster and promote the long-term financial success
of the Company and materially increase stockholder value by (i) motivating
superior performance by means of performance-related incentives, (ii)
encouraging and providing for the acquisition of an ownership interest in the
Company by executive officers and other key employees and (iii) enabling the
Company to attract and retain the services of an outstanding management team
upon whose judgment, interest and special effort the successful conduct of its
operations is largely dependent.
Under the 1999 Stock Incentive Plan, the Compensation Committee is
authorized to grant options for up to 4,000,000 shares of Common Stock. This
represented, upon completion of the initial public offering, approximately 15%
of the outstanding shares of the Company, on a fully diluted basis. Options
granted under the 1999 Stock Incentive Plan are to be granted to certain
officers of the Company and to other employees and consultants of the Company.
Directors who are non-employees of the Company are prohibited from participating
in the 1999 Stock Incentive Plan.
The 1999 Stock Incentive Plan is administered by the Compensation
Committee and provides for the grant of (i) incentive and non-incentive stock
options to purchase Common Stock; (ii) stock appreciation rights, which may be
granted in tandem with or independently of stock options; (iii) restricted stock
and restricted units; (iv) incentive stock and incentive units; (v) deferred
stock units; and (vi) stock in lieu of cash. The maximum number of shares for
which options or stock appreciation rights may be granted to any one participant
in a calendar year is 600,000. As of December 31, 2002, the Company has granted
options to acquire an aggregate of 2,591,205 shares of Common Stock.
Chief Executive Officer's Fiscal 2002 Compensation
Mr. Noam Bardin was our chief executive officer until June 17, 2002.
Under the terms of his employment agreement, Mr. Bardin was entitled to receive
an aggregate annual base salary of $266,513. However, during 2002, Mr. Bardin
received an aggregate of $111,060, which did not include any bonus compensation,
due to his voluntary pay reduction and subsequent resignation in June 2002. Mr.
Shimmy Zimels, who became our chief executive officer effective June 17, 2002,
is entitled to an annual base salary of $232,650 pursuant to the terms of his
employment agreement. During 2002, Mr. Zimels received an aggregate of $182,335,
which did not include any bonus compensation, due to his voluntary pay
reduction.
Submitted by:
The Compensation Committee
Amir Gera
Joshua Maor
STOCK PERFORMANCE CHART
The following chart compares the cumulative total stockholder return on
our Common Stock from the date of our initial public offering (November 22,
1999) through December 31, 2002 with the cumulative total return on The Nasdaq
Stock Market (U.S.) Index and the Nasdaq Telecommunications Index. For purposes
of the chart, it is assumed that the value of the investment in our Common Stock
and each index was $100 on November 22, 1999. Shareholder returns over the
indicated period should not be considered indicative of future shareholder
returns.
[GRAPHIC OMITTED]
Cumulative Total Return
---------------------------------------------------------------------------------
11/23/99 12/99 3/00 6/00 9/00 12/00 3/01 6/01 9/01
--------- -------- -------- -------- ------- -------- -------- -------- --------
deltathree, Inc. $100.00 $171.67 $139.59 $97.09 24.17 7.92 8.33 4.93 5.33
Nasdaq Stock Market (U.S.) 100.00 121.58 136.49 118.68 109.21 73.13 54.59 64.34 44.64
Nasdaq Telecommunications 100.00 113.25 120.23 94.90 75.76 48.24 42.50 40.24 29.31
Market
---------------------------------------------------------------------------------
12/01 3/02 6/02 9/02 12/02
--------- -------- -------- -------- -------
deltathree, Inc. 6.00 7.13 4.14 3.20 3.20
Nasdaq Stock Market (U.S.) 58.03 55.01 43.85 35.18 40.13
Nasdaq Telecommunications 32.29 23.02 13.89 12.74 14.89
Market
---------------------------------------------------------------------------------
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the
beneficial ownership of shares of our Common Stock as of April 29, 2003 by:
o each person who we know owns beneficially more than 5% of our Common
Stock;
o each of our directors individually;
o each of our named executive officers individually; and
o all of our executive officers and directors as a group.
Unless otherwise indicated, to our knowledge, all persons listed below
have sole voting and investment power with respect to their shares of Common
Stock. Each person listed below disclaims beneficial ownership of their shares,
except to the extent of their pecuniary interests therein. Shares of Common
Stock that an individual or group has the right to acquire within 60 days of
April 21, 2003 pursuant to the exercise of options are deemed to be outstanding
for the purpose of computing the percentage ownership of such person or group,
but are not deemed outstanding for the purpose of calculating the percentage
owned by any other person listed.
Number Percentage(1)
------ -------------
Shares of deltathree Class A Common
Stock Beneficially Owned
------------------------
Principal Stockholder:
Atarey Hasharon Chevra Lepituach Vehashkaot Benadlan
(1991) Ltd....................................... 20,655,402 70.8%
7 Giborey Israel St., P.O. Box 8468.
South Netanya Industrial Zone 42504, Israel.
Executive Officers and Directors:
Noam Bardin(2)(3).................................. 791,304 2.7%
Shimmy Zimels(2)(4)................................ 548,407 1.9%
Paul C. White(2)(5)................................ 260,000 *
Ehud Erez (2)(5)(6)................................ 24,848 *
Amir Gera (2)(5)................................... 24,848 *
Elie Housman (2)(5)................................ 24,848 *
Joshua Maor (2)(7)................................. 40,999 *
Lior Samuelson (2)(5).............................. 24,848 *
All Directors and Executive Officers as a group
(8 persons)(8)................................... 1,740,102 6.0%
- -----------
* Less than 1%.
(1) Percentage of beneficial ownership is based on 29,143,206 shares of Common
Stock outstanding as of April 11, 2003.
(2) The address for the director or executive officer listed is c/o the
Company.
(3) Includes (a) 187,366 shares of Common Stock and (b) options to purchase
603,938 shares of Common Stock.
(4) Includes (a) 64,469 shares of Common Stock and (b) options to purchase
483,938 shares of Common Stock.
(5) Represents options to purchase shares of Common Stock.
(6) Excludes the 20,655,402 shares of Common Stock owned by Atarey.
(7) Includes (a) 16,151 shares of Common Stock and (b) options to purchase
24,848 shares of Common Stock.
(8) Includes options to purchase 1,472,116 shares of Common Stock.
Equity Compensation Plan Information
The following table provides certain aggregate information with
respect to all of our equity compensation plans in effect as of December 31,
2002:
- -------------------------- ---------------------------- ---------------------------- -----------------------------
Plan Category Number of Securities to be Weighted Average Exercise Number of Securities
Issued Upon Exercise of Price of Outstanding Remaining Available for
Outstanding Options, Options, Warrants and Future Issuance Under
Warrants and Rights Rights Equity Compensation Plans
(excluding securities
reflected in first column)
- -------------------------- ---------------------------- ---------------------------- -----------------------------
Equity Compensation 3,449,520 $2.87 550,480
Plans Approved by
Security Holders (1)
- -------------------------- ---------------------------- ---------------------------- -----------------------------
Equity Compensation
Plans not Approved by
Security Holders N/A N/A N/A
- -------------------------- ---------------------------- ---------------------------- -----------------------------
Total 3,449,520 $2.87 550,480
- -------------------------- ---------------------------- ---------------------------- -----------------------------
(1) These plans consist of our 1999 Stock Incentive Plan, 1999 Directors' Plan,
and 1999 Employee Stock Purchase Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We believe that all of the transactions described below were made on an
arms-length basis. All future transactions between us and our officers,
directors, principal stockholders and affiliates must be approved, in good
faith, by a majority of the Board, including a majority of the disinterested
directors, unless they are on terms no less favorable to us than could be
obtained from unaffiliated third parties.
On February 6, 2003, we announced that we had received a letter from D3
Acquisition, Inc. relating to a proposal to purchase all of our outstanding
shares not held by Atarey Hasharon Chevra Lepituach Vehashkaot Benadlan (1991)
Ltd. ("Atarey") and its affiliates for a price of $0.70 per share in cash by
means of a cash tender offer. The proposal contemplates that upon successful
completion of the tender offer, D3 Acquisition would merge into us and we would
survive and continue as a wholly owned private subsidiary of Atarey. D3
Acquisition is a wholly owned special purpose acquisition corporation formed by
Atarey. Together, Atarey and its affiliates currently own approximately 71%
(20,655,402 shares) of our outstanding common stock. Our board of directors has
formed a special committee comprised of independent directors to evaluate the
proposal and negotiate its terms. Ehud Erez, a member of our Board of Directors,
is currently the Chief Executive Officer of Atarey.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements.
The Consolidated Financial Statements filed as part of this Annual
Report on Form 10-K are identified in the Index to Consolidated Financial
Statements on page F-1 hereto.
(a)(2) Financial Statement Schedules.
Financial Statement Schedules have been omitted because the information
required to be set forth therein is not applicable or is shown on the financial
statements or notes thereto.
(a)(3) 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# Amendment No. 2 to Employment Agreement, effective as of March 25, 2002, between Shimmy Zimels and deltathree, Inc.
10.11# Amendment No. 3 to Employment Agreement, effective as of September 1, 2002, between Shimmy Zimels and deltathree,
Inc.
10.12# Amendment No. 1 to Employment Agreement, effective as of September 1, 2002, between Paul C. White and deltathree,
Inc.
23.1## Consent of Brightman Almagor & Co.
99.1## Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
99.2 Certifications Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, filed herewith.
- ----------
* Incorporated by reference to the Company's registration statement on
Form S-1 (Registration No. 333-86503).
** Incorporated by reference to the Company's quarterly report on Form 10-Q
filed on November 14, 2000.
*** Incorporated by reference to the Company's annual report on Form 10-K/A
filed on April 30, 2001.
# Incorporated by reference to the Company's quarterly report on Form 10-Q
filed on November 14, 2002.
## Incorporated by reference to the Company's annual report on Form 10-K filed
on March 31, 2003.
(b) Reports on Form 8-K.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to its
Annual Report on Form 10-K/A to be signed on its behalf by the undersigned,
thereunto duly authorized, in New York, New York on April 29, 2003.
DELTATHREE, INC.
By: /s/ Paul C. White
--------------------------------------
Paul C. White, Chief Financial Officer
CERTIFICATIONS
I, Shimmy Zimels, certify that:
1. I have reviewed this annual report on Form 10-K/A of deltathree, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 29, 2003 /s/ Shimmy Zimels
--------------------------------------------
Shimmy Zimels
Title: Chief Executive Officer and President
(Principal Executive Officer)
I, Paul C. White, certify that:
1. I have reviewed this annual report on Form 10-K/A of deltathree, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: April 29, 2003 /s/ Paul C. White
------------------------------
Paul C. White
Title: Chief Financial Officer
(Principal Financial Officer)