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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
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 | |
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
As of May 13, 2003, the registrant had 29,180,896 shares of Class A Common
Stock, par value $0.001 per share, outstanding.
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DELTATHREE, INC.
Table of Contents
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.....................................................................................1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................6
Item 3. Quantitative and Qualitative Disclosures About Market Risk...............................................9
Item 4. Controls and Procedures..................................................................................9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................................10
Item 2. Change in Securities and Use of Proceeds................................................................11
Item 4. Submission of Matters to a Vote of Security Holders.....................................................11
Item 5. Other Information.......................................................................................11
Item 6. Exhibits and Reports on Form 8-K........................................................................12
Signatures.......................................................................................................13
Certifications...................................................................................................14
Exhibit Index....................................................................................................16
ii
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
DELTATHREE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
As of As of
March 31, December 31,
2003 2002
----------- -----------
(unaudited)
($ in thousands)
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 4,420 $ 5,681
Short-term investments............................................... 15,271 15,552
Accounts receivable, net ............................................ 344 652
Prepaid expenses and other current assets ........................... 832 760
----------- -----------
Total current assets.............................................. 20,867 22,645
----------- -----------
Property and equipment, net........................................... 7,905 9,452
----------- -----------
Deposits.............................................................. 100 100
----------- -----------
Total assets..................................................... $28,872 $32,197
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $1,829 $2,306
Deferred revenues ................................................... 240 334
Other current liabilities ........................................... 2,084 2,330
----------- -----------
Total current liabilities......................................... 4,153 4,970
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Long-term liabilities:
Severance pay obligations ........................................... 117 113
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Total liabilities................................................. 4,270 5,083
----------- -----------
Commitments and contingencies
Stockholders' equity:
Class A common stock, - par value $0.001............................. 29 29
Class B common stock, - par value $0.001............................. - -
Additional paid-in capital........................................... 166,801 166,801
Accumulated deficit.................................................. (142,018) (139,506)
Treasury stock at cost: 257,600 shares of class A common stock as of
March 31, 2002 and December 31, 2002................................ (210) (210)
----------- -----------
Total stockholders' equity....................................... 24,602 27,114
----------- -----------
Total liabilities and stockholders' equity....................... $28,872 $32,197
=========== ===========
See notes to condensed consolidated financial statements.
DELTATHREE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
2003 2002
----------- -------------
(unaudited)
($ in thousands, except share data)
Revenues....................................................... 2,972 3,337
Costs and operating expenses:
Cost of revenues, net........................................ 1,862 2,557
Research and development expenses, net ...................... 663 992
Selling and marketing expenses............................... 783 1,051
General and administrative expenses (exclusive of
non-cash compensation expense shown below)................ 661 610
Non-cash compensation expense................................ - 162
Depreciation and amortization ............................... 1,598 1,635
----------- -------------
Total costs and operating expenses............................. 5,567 7,007
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Loss from operations........................................... (2,595) (3,670)
Interest income (expense), net................................. 101 129
----------- -------------
Loss before income taxes....................................... (2,494) (3,541)
Income taxes................................................... 18 11
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Net loss....................................................... $ (2,512) $ (3,552)
=========== =============
Net loss per share - basic and diluted ........................ $ (0.09) $ (0.12)
=========== =============
Weighted average number of shares outstanding -
basic and diluted (number of shares).......................... 28,923,296 28,885,606
=========== =============
See notes to condensed consolidated financial statements
2
DELTATHREE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
2003 2002
---- ----
(unaudited)
Cash flows from operating activities:
Net loss $ (2,512) $ (3,552)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization.................................. 1,598 1,635
Amortization of deferred compensation.......................... - 162
Capital gain, net.............................................. (3) -
Increase (decrease) in liability for severance pay, net........ 4 (49)
Provision for losses on accounts receivable.................... 42 -
Changes in assets and liabilities:
Decrease (increase) in accounts receivable..................... 266 (118)
Increase (decrease) in other current assets.................... (72) (40)
Increase (decrease) in accounts payable........................ (477) (667)
Decrease in deferred revenues.................................. (94) (81)
Increase (decrease) in current liabilities..................... (246) (228)
------------- --------------
1,018 614
------------- --------------
Net cash used in operating activities............................... (1,494) (2,938)
------------- --------------
Cash flows from investing activities:
Purchase of property and equipment............................. (52) (33)
Proceeds from sale of property and equipment................... 4 1
Decrease (increase) in deposits................................ - 2
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Net cash used in investing activities............................... (48) (30)
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Cash flows from financing activities:
Decrease (increase) in short-term investments.................. 281 2,978
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Net cash provided by (used in) financing activities................. 281 2,978
Increase (decrease) in cash and cash equivalents...................... (1,261) 10
Cash and cash equivalents at beginning of year........................ 5,681 13,583
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Cash and cash equivalents at end of year.............................. $ 4,420 $ 13,593
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See notes to condensed consolidated financial statements
3
DELTATHREE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements of
deltathree, Inc. and its subsidiaries (collectively, "the Company"), of which
these notes are a part, have been prepared in accordance with generally accepted
accounting principles for interim financial information and pursuant to the
instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for annual financial statements. In the opinion of
management of the Company, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation of the financial
information have been included. The results for the interim periods presented
are not necessarily indicative of the results that may be expected for any
future period. The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 2002.
2. NET LOSS PER SHARE
The shares issuable upon the exercise of stock options and warrants are
excluded from the calculation of net loss per share, as their effect would be
antidilutive.
3. STOCK-BASED COMPENSATION
The Company accounts for employee stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and in accordance with FASB Interpretation No. 44.
Pursuant to these accounting pronouncements, the Group records compensation for
stock options granted to employees over the vesting period of the options based
on the difference, if any, between the exercise price of the options and the
market price of the underlying shares at that date. Deferred compensation is
amortized to compensation expense over the vesting period of the options. See
below a pro forma disclosure required in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation", as amended by SFAS No. 148.
If the Company had elected to recognize compensation expense for the
issuance of options to employees of the Company based on the fair value method
of accounting prescribed by SFAS No. 123, net income (loss) and earnings (loss)
per share would have been reduced to the pro forma amounts as follows (in
thousands, except per share amounts):
4
THREE MONTHS ENDED
MARCH 31,
---------------- -----------------
2 0 0 3 2 0 0 3
------- -------
NET INCOME (LOSS):
Reported net income (loss)................. $ (2,512) $ (3,552)
Add stock-based employee compensation expense, included in
reported net income, net of tax............................ - 270
Deduct stock-based employee compensation expense determined
under fair value method, net of tax........................ (748) (458)
----------- ------------
Pro forma net income (loss) $ (3,260) $ (3,740)
=========== ============
NET INCOME (LOSS) PER SHARE:
Basic and diluted, as reported............. $ (0.09) $ (0.12)
Basic and diluted, pro forma............... $ (0.11) $ (0.13)
For the purpose of presenting pro forma information required under SFAS
123, the fair value option grant has been estimated on the date of grant using
the Black Scholes option pricing model for grants made after the Company became
a public entity. The following assumptions were used for the three months
periods ended March 31, 2003 and 2002: dividend yield of 0.00% for all periods;
risk free interest rate of 4.8% for all periods; an expected life of 3 years for
all periods; a volatility rate of 150% for all periods.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations and the
Consolidated Financial Statements and the Notes thereto included in our Annual
Report on Form 10-K for the year ended December 31, 2001. This quarterly report
on Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements involve risks
and uncertainties and actual results could differ materially from those
discussed in the forward-looking statements. All forward-looking statements and
risk factors included in this document are made as of the date hereof, based on
information available to us as of the date thereof, and we assume no obligation
to update any forward-looking statement or risk factors.
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
REVENUES
Revenues decreased approximately $0.3 million or 9.1% to approximately
$3.0 million for the three months ended March 31, 2003 from approximately $3.3
million for the three months ended March 31, 2002. Revenues from enhanced IP
communications services (including our Hosted Communications Solution) was
essentially unchanged at approximately $3.0 million for the three months ended
March 31, 2003 and the three months ended March 31, 2002, due to a greater
number of PC-to-Phone and Phone-to-Phone calls being placed by an increasing
user base, offset by lower up-front integration fees from fewer new Hosted
Communications Solution partners.
Revenues from carrier transmission services, decreased by approximately
$0.3 million or 75% to approximately $0.1 million for the three months ended
March 31, 2003 from approximately $0.4 million for the three months ended March
31, 2002, due primarily to a slightly increased demand from a smaller customer
base. No customer accounted for greater than 10% of our revenues during these
periods.
COSTS AND OPERATING EXPENSES
COST OF REVENUES. Cost of revenues decreased by approximately $0.7
million or 26.9% to approximately $1.9 million for the three months ended March
31, 2003 from approximately $2.6 million for the three months ended March 31,
2002, due primarily to a decrease in the amount of traffic being terminated.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
decreased by approximately $0.3 million or 30.0% to approximately $0.7 million
for the three months ended March 31, 2003 from approximately $1.0 million for
the three months ended March 31, 2002, due to lower personnel costs associated
with the development of new services and enhancements to our existing services.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses
decreased by approximately $0.3 million or 27.3% to approximately $0.8 million
for the three months ended March 31, 2003 from approximately $1.1 million for
the three months ended March 31, 2002, due to a decrease in our branding and
promotional activities.
6
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses (exclusive of non-cash compensation expenses) increased by
approximately $0.1 million or 16.7% to approximately $0.7 million for the three
months ended March 31, 2003 from approximately $0.6 million for the three months
ended March 31, 2002, primarily due to increased professional fess, somewhat
off-set by decreased personnel costs.
NON-CASH COMPENSATION EXPENSES. There were no non-cash compensation
expenses for the three months ended March 31, 2003 compared to approximately
$162,000 for the three months ended March 31, 2002, due to the completed
amortization of costs incurred during 1998 and 1999 related to the grants of
options and warrants below the then fair market value during those periods.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization of
goodwill was essentially unchanged at approximately $1.6 million for the three
months ended March 31, 2003 and the three months ended March 31, 2002.
LOSS FROM OPERATIONS
Loss from operations decreased by approximately $1.1 million or 29.7%
to approximately $2.6 million for the three months ended March 31, 2003 from
approximately $3.7 million for the three months ended March 31, 2002, due
primarily to the decrease in costs and operating expenses, including non-cash
compensation expenses and selling and marketing expenses. We expect to continue
to incur losses for the foreseeable future.
INTEREST INCOME, NET
Interest income, net decreased by approximately $28,000 or 21.7% to
approximately $101,000 for the three months ended March 31, 2003 from
approximately $129,000 for the three months ended March 31, 2002, due primarily
to lower interest rates earned on the reduced balance of the remaining proceeds
from our initial public offering.
INCOME TAXES, NET
We paid net income taxes of approximately $18,000 for the three months
ended March 31, 2003 compared to approximately $11,000 for the three months
ended March 31, 2002.
NET LOSS
Net loss decreased by approximately $1.1 million or 30.6% to
approximately $2.5 million for the three months ended March 31, 2003 from
approximately $3.6 million for the three months ended March 31, 2002 due to the
foregoing factors.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception in March 1996, we have incurred significant
operating and net losses, due in large part to the start-up and development of
our operations. As of March 31, 2003, we had an accumulated deficit of
approximately $142 million. We anticipate that we will continue to incur
operating and net losses as we continue to implement our growth strategy.
7
As of March 31, 2003, we had cash and cash equivalents of approximately
$4.4 million, marketable securities and other short-term investments of
approximately $15.3 million and working capital of approximately $16.7 million.
We generated negative cash flow from operating activities of approximately $1.5
million during the three months ended March 31, 2003 compared with approximately
$2.9 million during the three months ended March 31, 2002. Accounts receivable
were approximately $0.3 million and $0.7 million at March 31, 2003 and March 31,
2002, respectively.
Our capital expenditures were essentially unchanged at approximately
$50,000 in the three months ended March 31, 2003 and the three months ended
March 31, 2002 as we continued to improved our overall utilization of our
existing domestic and international network infrastructure.
Short-term, we obtain our funding from our utilization of the remaining
proceeds from our initial public offering offset by positive or negative cash
flow from our operations. These proceeds are maintained as cash, cash
equivalents, and short-term investments with an original maturity of twelve
months or less. Based on current trends in our operations, we believe that these
funds will be sufficient to meet our working capital requirements, including
operating losses, and capital expenditure requirements for at least the next
fiscal year, assuming that our business plan is implemented successfully, and
that:
o our recent revenue trends, which reflected an increase in our
higher-margin (primarily PC-to-Phone) products and services, continue
to increase;
o our expense trends remain at or near the rates of our first quarter
2003 rates, which were significantly reduced during the past twelve
months through reductions in personnel, curtailment of discretionary
expenditures, and reduced network rent and termination rates from our
carriers; and
o our net cash-burn rate, which was significantly reduced during the
past twelve months due to the foregoing factors to approximately $1.5
million in the first quarter of 2003, continues to improve throughout
the remainder of 2003 and beyond.
To the extent that these trends do not remain steady, or if in the
longer-term we are not able to successfully implement our business strategy, we
may be required to raise additional funds for our ongoing operations. Additional
financing may not be available when needed or, if available, such financing may
not be on terms favorable to us, especially in light of current economic
conditions and the unfavorable market for telecommunications companies in
particular. If additional funds are raised through the issuance of equity
securities, our existing stockholders may experience significant dilution. In
addition, we cannot assure you that any third party will be willing or able to
provide additional capital to us on favorable terms or at all.
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Report under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operation - Liquidity and Capital Resources" contain certain forward-looking
statements which involve risks and uncertainties and depend upon certain
assumptions, some of which may be beyond our control, including, but not limited
to, uncertainty of financial estimates and projections, the competitive
environment for Internet telephony, our limited operating history, changes of
rates of all related telecommunications services, the level and rate of customer
acceptance of new products and services, legislation that may affect the
Internet telephony industry, rapid technological changes, as well as other risks
8
referenced from time to time in our filings with the Securities and Exchange
Commission, and, accordingly, there can be no assurance with regard to such
statements. All forward-looking statements and risk factors included in this
document are made as of the date hereof, based on information available to us as
of the date thereof, and we assume no obligation to update any forward-looking
statement or risk factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Securities and Exchange Commission's rule related to market risk
disclosure requires that we describe and quantify our potential losses from
market risk sensitive instruments attributable to reasonably possible market
changes. Market risk sensitive instruments include all financial or commodity
instruments and other financial instruments (such as investments and debt) that
are sensitive to future changes in interest rates, currency exchange rates,
commodity prices or other market factors. We believe that our exposure to market
risk is immaterial. We currently do not invest in, or otherwise hold, for
trading or other purposes, any financial instruments subject to market risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Our principal executive officer and principal financial officer, after
evaluating the effectiveness of our disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15d-14(c)), during April 2003, have
concluded that, based on such evaluation, our disclosure controls and procedures
were adequate and effective to ensure that material information relating to us
was made known to them by others within deltathree, particularly during the
period in which this quarterly report on Form 10-Q was being prepared.
(b) Changes in Internal Controls.
There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, nor were there any significant deficiencies or material
weaknesses in our internal controls. Accordingly, no corrective actions were
required or undertaken.
9
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 8, 1999, Aerotel, Ltd. and Aerotel U.S.A. commenced
a suit against us, RSL COM and an RSL COM subsidiary in the United States
District Court for the Southern District of New York. Aerotel alleges that we
are infringing on a patent issued to Aerotel in November 1987 by making, using,
selling and offering for sale prepaid telephone card products in the United
States. Aerotel seeks an injunction to stop us from using the technology covered
by this patent, monetary damages in an unspecified amount and reimbursement of
attorneys' fees. We have answered the complaint, the parties engaged in
pre-trial discovery, and the case remains at a preliminary stage. We believe
that we have meritorious defenses to the claims and we intend to defend the
lawsuit vigorously. However, the outcome of the litigation is inherently
unpredictable and an unfavorable result may have a material adverse effect on
our business, financial condition and results of operations. Regardless of the
ultimate outcome, the litigation could result in substantial expenses to us and
significant diversion of efforts by our managerial and other personnel.
We, as well as certain of our former officers and directors,
have been named as defendants in a number of purported securities class actions
in Federal District Court for the Southern District of New York, arising out of
our initial public offering in November 1999 (the "IPO"). Various underwriters
of the IPO also are named as defendants in the actions. The complaints allege,
among other things, that the registration statement and prospectus filed with
the Securities and Exchange Commission for purposes of the IPO were false and
misleading because they failed to disclose that the underwriters allegedly (i)
solicited and received commissions from certain investors in exchange for
allocating to them shares of our stock in connection with the IPO and (ii)
entered into agreements with their customers to allocate such stock to those
customers in exchange for the customers agreeing to purchase additional shares
in the aftermarket at predetermined prices. On August 8, 2001, the court ordered
that these actions, along with hundreds of IPO allocation cases against other
issuers, be transferred to Judge Scheindlin for coordinated pre-trial
proceedings. In July 2002, omnibus motions to dismiss the complaints based on
common legal issues were filed on behalf of all issuers and underwriters. On
February 19, 2003, the Court issued an opinion granting in part and denying in
part those motions to dismiss. The complaint against the Company was not
dismissed as a matter of law. These cases remain at a preliminary stage and no
discovery proceedings have taken place. We believe that the claims asserted
against us in these cases are without merit and intend to defend ourselves
vigorously against them.
On February 12, 2003 we announced that four lawsuits had been filed
against us, our officers and directors, and our majority stockholder, Atarey
Hasharon Chevra Lepituach Vehashkaot Benadlan (1991) Ltd. ("Atarey"), in
connection with our formation of the special committee to evaluate the proposal
by Atarey to purchase all of our outstanding shares of common stock not held by
Atarey and its affiliates. On February 6, 2003, we issued a press release in
connection with the proposed transaction. The lawsuits purport to be class
actions on behalf of our public stockholders. The plaintiffs in these actions
have asserted a variety of claims, including allegations that Atarey's proposed
tender offer price for our publicly held shares is unfair and grossly
inadequate; and that our officers and directors have breached their fiduciary
duties to the public stockholders. Each of the lawsuits has been filed in the
Delaware Court of Chancery in and for New Castle County. We do not believe that
these lawsuits state valid claims against us or any of our officers or
directors.
We are not a party to any other material litigation and are
not aware of any other pending or threatened litigation that could have a
material adverse effect on us or our business taken as a whole.
10
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
On November 22, 1999, we offered 6,000,000 shares of our class A common
stock in an initial public offering. These shares were registered with the
Securities and Exchange Commission on a registration statement on Form S-1 (file
no. 333-86503), which became effective on November 22, 1999. We received net
proceeds of approximately $96,255,000 from the sale of 6,900,000 shares at the
initial public offering price of $15.00 per share after deducting underwriting
commissions and discounts and expenses of approximately $6,300,000. The managing
underwriters for our initial public offering were Lehman Brothers Inc., Merrill
Lynch & Co., U.S. Bancorp Piper Jaffray, Lazard Freres & Co. LLC and Fidelity
Capital Markets.
As of March 31, 2003, we had used approximately $33 million of the net
proceeds for sales, marketing and promotional activities, $20 million for
capital expenditures and $14 million for general corporate purposes. Pending use
of the remaining net proceeds, we have invested the remaining net proceeds in
interest-bearing, investment-grade instruments, certificates of deposit, or
direct or guaranteed obligations of the United States.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's security holders
during the first quarter of 2003.
ITEM 5. OTHER INFORMATION
Our existing grace period for compliance with the Nasdaq SmallCap
Market's $1.00 minimum bid price requirement was extended 90 days by Nasdaq
Listing Qualifications until September 1, 2003. If, at any time before September
1, 2003, the bid price of our common stock does not close at or above $1.00 per
share for a minimum of ten consecutive trading days, or such other time as
Nasdaq may require, then our common stock may be delisted from the Nasdaq
SmallCap Market.
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 contemplated 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
formed a special committee comprised of independent directors to evaluate the
proposal and negotiate its terms. The special committee of our board of
directors retained Kaufman Bros., L.P. as its financial advisor to assist the
special committee in evaluating strategic alternatives, including a possible
sale of the company. Among other things, Kaufman Bros. is assisting the special
committee in its continuing assessment of the D3 Acquisition proposal. Upon
completion of this review process, the special committee of independent
directors will make its recommendation to our board of directors in due course.
The special committee is currently in the process of evaluating the proposed
offer from Atarey and negotiating its terms. There can be no assurance that
Atarey or we will proceed with the proposed transaction or any of the other
strategic alternatives considered or when any resulting transaction would occur.
Upon our announcement that we were evaluating the D3 Acquisition offer,
litigation was commenced against our Board members and us with respect to the
transaction contemplated by the proposal. Please see Item 1, "Legal Proceedings"
for a description of such litigation.
11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibits are filed herewith:
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
99.1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K.The following report was filed on Form 8-K
during the quarter ended March 31, 2003:
On March 12, 2003, we filed a Current Report on Form 8-K under Items 7
and 9 On March 12, 2003, regarding our press release announcing our financial
results and other data for the quarter and year ended December 31, 2002, as well
as financial guidance for 2003.
12
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: May 14, 2003 By: /s/ Paul C. White
-------------------------------
Name: Paul C. White
Title: Chief Financial Officer
13
CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER
I, Shimmy Zimels, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of deltathree, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Shimmy Zimels
------------------------------
Name:Shimmy Zimels
Title: Chief Executive Officer
14
CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER
I, Paul C. White, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of deltathree, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 14, 2003 /s/ Paul C. White
-------------------------------
Name: Paul C. White
Title: Chief Financial Officer
15
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- -------- -----------
99.1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
16