UNITED STATES
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, 2005
OR
|_| TRANSITIONAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission file number 000-28063
DELTATHREE, INC.
A DELAWARE CORPORATION I.R.S. EMPLOYER NO. 13-4006766
75 BROAD STREET, NEW YORK, NEW YORK 10004
TELEPHONE NUMBER: (212) 500-4850
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 check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
As of November 10, 2005, 29,980,499 shares of Class A Common Stock, par value
$0.001 per share, were outstanding.
================================================================================
i
TABLE OF CONTENTS
Item Description Page
- ---- ----------- ----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements..................................................1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................6
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........10
Item 4. Controls and Procedures..............................................11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................12
Item 5 Other Information......................................................12
Item 6. Exhibits.............................................................12
Signatures....................................................................13
Exhibit Index.................................................................14
ii
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DELTATHREE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF AS OF
SEPTEMBER 30, DECEMBER 31,
2005 2004
(unaudited)
($ IN THOUSANDS)
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 4,751 $ 3,905
Short-term investments ............................................ 473 2,723
Accounts receivable, net .......................................... 788 325
Prepaid expenses and other current assets ......................... 694 528
Inventory ......................................................... 169 193
------------- -------------
Total current assets ........................................... 6,875 7,674
------------- -------------
------------- -------------
LONG -TERM INVESTMENTS ............................................. 10,050 9,850
------------- -------------
PROPERTY AND EQUIPMENT, NET ........................................ 4,295 4,642
------------- -------------
DEPOSITS ........................................................... 103 107
------------- -------------
Total assets .................................................. $ 21,323 $ 22,273
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................................. $ 2,880 $ 3,657
Deferred revenues ................................................. 996 453
Other current liabilities ......................................... 1,768 2,034
------------- -------------
Total current liabilities ...................................... 5,644 6,144
------------- -------------
LONG-TERM LIABILITIES:
Severance pay obligations ......................................... 152 104
------------- -------------
Total liabilities .............................................. 5,796 6,248
------------- -------------
STOCKHOLDERS' EQUITY:
Class A common stock, - par value $0.001 .......................... 30 29
Additional paid-in capital ........................................ 167,678 167,301
Accumulated deficit ............................................... (151,971) (151,095)
Treasury stock at cost: 257,600 shares of class A common stock as of
September 30, 2005 and December 31, 2004 ......................... (210) (210)
------------- -------------
Total stockholders' equity .................................... 15,527 16,025
------------- -------------
Total liabilities and stockholders' equity .................... $ 21,323 $ 22,273
============= =============
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
DELTATHREE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2005 2004
---- ---- ---- ----
(unaudited) (unaudited)
($ IN THOUSANDS, EXCEPT SHARE DATA)
Revenues ................................. $ 7,105 $ 5,530 $ 20,636 $ 14,837
Costs and operating expenses:
Cost of revenues ....................... 4,379 3,665 12,873 9,721
Research and development expenses ...... 762 703 2,353 1,842
Selling and marketing expenses ......... 1,045 737 2,910 2,362
General and administrative expenses .... 744 546 2,089 1,637
Depreciation and amortization .......... 402 619 1,546 2,083
------------ ------------ ------------ ------------
Total costs and operating expenses .. 7,332 6,270 21,771 17,645
------------ ------------ ------------ ------------
Loss from operations ..................... (227) (740) (1,135) (2,808)
Interest income, net ..................... 198 81 302 216
------------ ------------ ------------ ------------
Loss before income taxes ................. (29) (659) (833) (2,592)
Income taxes ............................. 11 12 43 56
------------ ------------ ------------ ------------
Net loss ................................. $ (40) $ (671) $ (876) $ (2,648)
============ ============ ============ ============
Net loss per share - basic and diluted ... $ 0.00 $ (0.02) $ (0.03) $ (0.09)
============ ============ ============ ============
Weighted average shares outstanding -
basic and diluted (number of shares) 29,719,899 29,319,307 29,653,238 29,304,340
============ ============ ============ ============
SEE NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2
DELTATHREE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
2005 2004
---- ----
(unaudited)
OPERATING ACTIVITIES:
Net loss ........................................................ $ (876) $ (2,648)
Adjustments to reconcile net loss to net cash used in operating
activities
Depreciation and amortization ............................ 1,546 2,083
Increase in liability for severance pay, net ............ 48 22
Changes in assets and liabilities:
Increase in accounts receivable .......................... (463) (456)
Decrease (increase) in other current assets .............. (166) 221
Decrease (increase) in inventory ......................... 24 (11)
Increase (decrease) in accounts payable .................. (897) 734
Increase in deferred revenues ............................ 543 144
Increase (decrease) in current liabilities .............. (266) 50
--------- ---------
Net cash provided by (used in) operating activities ........... (507) 139
--------- ---------
INVESTING ACTIVITIES:
Purchase of property and equipment ....................... (1,079) (1,140)
Increase in deposits ..................................... 4 --
Proceeds from sale of long-term investments .............. 4,350 3,125
Purchase of long-term investments ........................ (4,550) (7,975)
--------- ---------
Net cash used in investing activities ......................... (1,275) (5,990)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from exercise of employee options ............... 378 80
Decrease in short-term investments, net ................. 2,250 8,727
--------- ---------
Net cash provided by financing activities ..................... 2,628 8,807
--------- ---------
Increase in cash and cash equivalents ........................... 846 2,956
Cash and cash equivalents at beginning of year .................. 3,905 1,682
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 4,751 $ 4,638
========= =========
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION:
Taxes ........................................................... $ 24 $ 45
========= =========
SUPPLEMENTAL SCHEDULE OF NO CASH INVESTING AND FINANCING
ACTIVITIES:
Acquisition of fixed assets on credit ......................... $ 120 $ 1,015
========= =========
SEE NOTES TO UNAUDITED 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 referred to in this report as the
"Company", "we", "us", or "our"), 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 our management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair
presentation of the financial information as of and for the periods presented
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
unaudited condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and notes for the
year ended December 31, 2004 included in our Annual Report on Form 10-K.
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
We follow accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and Financial Accounting Standards Board (FASB)
Interpretation No. 44 for our stock-based compensation plans. Pursuant to these
accounting pronouncements, we do not recognize expense for stock options granted
to employees if the exercise price is at least equal to the market value of the
underlying stock at the date of grant. Deferred compensation is amortized to
compensation expense over the vesting period of the options.
In accordance with Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation", as amended by SFAS No. 148, if
we had elected to recognize compensation expense for the issuance of options to
our employees 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------
2 0 0 5 2 0 0 4 2 0 0 5 2 0 0 4
------- ------- ------- -------
NET INCOME (LOSS):
Reported net loss ................................ $ (40) $ (671) $ (876) $ (2,648)
Add: Stock-based employee compensation expense,
included in reported net income, net of tax .... -- -- -- --
Deduct: Stock-based employee compensation expense (108) (91) (328) (272)
--------- --------- -------- --------
determined under fair value method, net of tax
Pro forma net loss ............................... $ (148) $ (762) $ (1,204) $ (2,920)
========= ========= ======== ========
NET LOSS PER SHARE:
Basic and diluted, as reported ................... $ 0.00 $ (0.02) $ (0.03) $ (0.09)
Basic and diluted, pro forma ..................... $ 0.00 $ (0.03) $ (0.04) $ (0.10)
For the purpose of presenting pro forma information required under SFAS
123, the fair value option grant has been estimated on the date of grant using
the Black-Scholes option pricing model for grants made after the Company became
a public entity.
During the nine and three months ended September 30, 2005 there were new
option grants. The following assumptions were used for the nine and three months
periods ended September 30, 2005: dividend yield of 0.00% for all periods;
risk-free interest rate of 4.06% for all periods, an expected life of 3-years
for all periods; a volatility rate of 78% for all periods
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) 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, 2004.
FORWARD-LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operation (MD&A) 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 are based on current expectations, estimates, forecasts and
projections about us, our future performance, the industries in which we
operate, our beliefs and our management's assumptions. In addition, other
written or oral statements that constitute forward-looking statements may be
made by us or on our behalf. Words such as "expects," "anticipates," "targets,"
"goals," "projects," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements. These statements are not guarantees of future
performance and involve certain risks, uncertainties and assumptions that are
difficult to assess. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. These risks and uncertainties include, but are not limited to, the
following: uncertainty of financial estimates and projections, the competitive
environment of Internet telephony and our ability to compete effectively, our
limited operating history, changes in the rates of all related
telecommunications services, the level and rate of customer acceptance of new
products and services, governmental regulation and legal uncertainties that may
affect the Internet telephony industry, and rapid changes in technology, as well
as other risks referenced from time to time in our filings with the Securities
and Exchange Commission (SEC). For a more complete list and description of such
risks and uncertainties, refer to our Form 10-K for the year ended December 31,
2004. Except as required under the federal securities laws and the rules and
regulations of the SEC, we do not have any intention or obligation to update
publicly any forward-looking statements or risk factors after the distribution
of this MD&A, whether as a result of new information, future events, changes in
assumptions or otherwise.
RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED
TO NINE MONTHS ENDED SEPTEMBER 30, 2004
REVENUES
Revenues increased approximately $5.8 million or 39.1% to approximately
$20.6 million for the nine months ended September 30, 2005 from approximately
$14.8 million for the nine months ended September 30, 2004. Revenues from
enhanced IP communications services (primarily PC-to-Phone and Broadband Phone)
through iConnectHere decreased by $0.4 million or 7.4% to approximately $5.0
million for the nine months ended September 30, 2005 from approximately $5.4
million for the nine months ended September 30, 2004 due primarily to a reduced
volume of PC-to-Phone and Broadband Phone calls. Revenues from enhanced IP
communications services through our reseller and service provider sales efforts
(including sales of our Hosted Communications Solution) increased approximately
$6.3 million or 68.4% to approximately $15.5 million for the nine months ended
September 30, 2005 from approximately $9.2 million for the nine months ended
September 30, 2004, due primarily to a greater number of PC-to-Phone and
Broadband Phone calls being placed by an increasing user base.
6
COSTS AND OPERATING EXPENSES
COST OF REVENUES. Cost of revenues increased by approximately $3.2 million
or 33% to approximately $12.9 million for the nine months ended September 30,
2005 from approximately $9.7 million for the nine months ended September 30,
2004, due primarily to an increase in the amount of traffic being terminated.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by approximately $0.6 million or 33% to approximately $2.4 million for
the nine months ended September 30, 2005 from approximately $1.8 million for the
nine months ended September 30, 2004, due to higher personnel costs associated
with the development of new services and enhancements to our existing services.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
by approximately $0.5 million or 20.8% to approximately $2.9 million for the
nine months ended September 30, 2005 from approximately $2.4 million for the
nine months ended September 30, 2004 due to slightly higher personnel and
external marketing related costs associated with the sales and marketing of our
products and services.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by approximately $0.5 million or 31.25% to approximately $2.1 million
for the nine months ended September 30, 2005 from approximately $1.6 million for
the nine months ended September 30, 2004 due to somewhat higher personnel costs
associated with the increased general and administrative activities associated
with higher transaction volumes.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
approximately $0.6 million or 28.6% to approximately $1.5 million for the nine
months ended September 30, 2005 from approximately $2.1 million for the nine
months ended September 30, 2004 primarily due to a lower level of certain assets
purchased in prior years being included in the computation of depreciation
expense in 2005 compared to 2004 as they have already been fully depreciated in
prior periods.
LOSS FROM OPERATIONS
Loss from operations decreased by approximately $1.7 million or 60.7% to
approximately $1.1 million for the nine months ended September 30, 2005 from
approximately $2.8 million for the nine months ended September 30, 2004, due
primarily to the increase in revenues and relative decrease in indirect
operating expenses, including depreciation and amortization expenses.
INTEREST INCOME, NET
Interest income, net increased by approximately $86,000 or 39.8% to
approximately $302,000 for the nine months ended September 30, 2005 from
approximately $216,000 for the nine months ended September 30, 2004.
INCOME TAXES, NET
We paid net income taxes of approximately $43,000 for the nine months
ended September 30, 2005 compared to approximately $56,000 for the nine months
ended September 30, 2004.
7
NET LOSS
Net loss decreased by approximately $1.7 million or 65.4% to approximately
$0.9 million for the nine months ended September 30, 2005 from approximately
$2.6 million for the nine months ended September 30, 2004 due to the foregoing
factors.
RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2004
REVENUES
Revenues increased approximately $1.6 million or 29% to approximately $7.1
million for the three months ended September 30, 2005 from approximately $5.5
million for the three months ended September 30, 2004. Revenues from enhanced IP
communications services (primarily PC-to-Phone and Broadband Phone) through
iConnectHere decreased by $0.2 million or 11.1% to approximately $1.6 million
for the three months ended September 30, 2005 from approximately $1.8 million
for the three months ended September 30, 2004 due primarily to a reduced volume
of PC-to-Phone and Broadband Phone calls. Revenues from enhanced IP
communications services through our reseller and service provider sales efforts
(including sales of our Hosted Communications Solution) increased approximately
$1.9 million or 52.7% to approximately $5.5 million for the three months ended
September 30, 2005 from approximately $3.6 million for the three months ended
September 30, 2004, due primarily to an increasing PC-to-Phone and Broadband
Phone user base.
COSTS AND OPERATING EXPENSES
COST OF REVENUES. Cost of revenues increased by approximately $0.7 million
or 19 % to approximately $4.4 million for the three months ended September 30,
2005 from approximately $3.7 million for the three months ended September 30,
2004, due primarily to an increase in the amount of traffic being terminated.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased by approximately $0.1 million or 14.3% to approximately $0.8 million
for the three months ended September 30, 2005 from approximately $0.7 million
for the three months ended September 30, 2004, due to higher personnel costs
associated with the development of new services and enhancements to our existing
services.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
by approximately $0.3 million or 42.8% to approximately $1 million for the three
months ended September 30, 2005 from approximately $0.7 million for the three
months ended September 30, 2004 due to higher personnel and external marketing
related costs associated with the sales and marketing of our products and
services.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased by approximately $0.2 million or 40% to approximately $0.7 million for
the three months ended September 30, 2005 from approximately $0.5 million for
the three months ended September 30, 2004 due primarily to somewhat higher
personnel costs associated with the increased general and administrative
activities associated with higher transaction volumes.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
approximately $0.2 million or 33.3% to approximately $0.4 million for the three
months ended September 30, 2005 from approximately $0.6 million for the three
months ended September 30, 2004 primarily due to a lower level of certain assets
purchased in prior years being included in the computation of depreciation
expense in 2005 compared to 2004 as they have already been fully depreciated in
prior periods.
8
LOSS FROM OPERATIONS
Loss from operations decreased by approximately $0.5 million or 71.4% to
approximately $0.2 million for the three months ended September 30, 2005 from
approximately $0.7 million for the three months ended September 30, 2004, due
primarily to the increase in revenues and relative decrease in indirect
operating expenses, including depreciation and amortization expenses.
INTEREST INCOME, NET
Interest income, net increased by approximately $117,000 or 144% to
approximately $198,000 for the three months ended September 30, 2005 from
approximately $81,000 for the three months ended September 30, 2004.
INCOME TAXES, NET
We paid net income taxes of approximately $11,000 for the three months
ended September 30, 2005 compared to approximately $12,000 for the three months
ended September 30, 2004.
NET LOSS
Net loss decreased by approximately $0.6 million or 94.3% to approximately
$40,000 for the three months ended September 30, 2005 from approximately $0.7
million for the three months ended September 30, 2004 due to the foregoing
factors.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception in March 1996, we have incurred significant operating
and net losses, due in large part to the start-up and development of our
operations. As of September 30, 2005, we had an accumulated deficit of
approximately $152 million.
As of September 30, 2005, we had cash and cash equivalents of
approximately $4.8 million, marketable securities and other short-term
investments of approximately $0.5 million, long-term investments of $10 million
and working capital of approximately $1.2 million. We generated negative cash
flow from operating activities of approximately $0.5 million during the nine
months ended September 30, 2005 compared with positive cash flow from operating
activities of approximately $0.1 million during the nine months ended September
30, 2004. Accounts receivable were approximately $0.8 million and $0.3 million
at September 30, 2005 and September 30, 2004, respectively.
Our capital expenditures were approximately $1.0 million expended in the
nine months ended September 30, 2005 compared to approximately $1.1 million
expended in the nine months ended September 30, 2004 as we continued to both
make moderate investments and optimize our overall utilization of our existing
domestic and international network infrastructure.
9
Short-term, we obtain our funding from our utilization of the remaining
proceeds from our initial public offering offset by positive or negative cash
flow from our operations. These proceeds are maintained as cash, cash
equivalents, and short-term investments with an original maturity of twelve
months or less. Based on current trends in our operations, we believe that these
funds will be sufficient to meet our working capital requirements, including
operating losses, and capital expenditure requirements for at least the next
fiscal year, assuming that our business plan is implemented successfully, and
that:
o our recent revenue trends, which reflected an increase in our
higher-margin (primarily PC-to-Phone and Broadband Phone) products
and services, continue to increase;
o our indirect expense trends remain at or near the rates of our third
quarter 2005 rates, which were moderately increased compared to the
past twelve months as we make moderate increases in personnel to
support increased revenue generation activities and through the
continued curtailment of discretionary expenditures, and reduced
network rent and termination rates from our carriers; and
o our net cash-burn rate, which was reduced during the past twelve
months due to the foregoing factors, and eliminated for the first
quarter of 2005, continues to improve throughout the remainder of
2005 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. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The SEC's rule related to market risk disclosure requires that we describe
and quantify our potential losses from market risk sensitive instruments
attributable to reasonably possible market changes. Market risk sensitive
instruments include all financial or commodity instruments and other financial
instruments (such as investments and debt) that are sensitive to future changes
in interest rates, currency exchange rates, commodity prices or other market
factors. We believe that our exposure to market risk is immaterial. We currently
do not invest in, or otherwise hold, for trading or other purposes, any
financial instruments subject to market risk.
10
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
Our principal executive officer (CEO) and principal financial officer
(CFO), with the participation of our management, evaluated the effectiveness of
our disclosure controls and procedures. Based on that evaluation, the CEO and
CFO have concluded that as of the end of the period covered by this report, our
disclosure controls and procedures are effective to provide reasonable assurance
that information required to be disclosed by us in reports that we file or
submit under the Securities and Exchange Act of 1934, as amended, is recorded,
processed, summarized and timely reported as provided in the SEC rules and
forms.
(b) Changes in Internal Controls.
There have been no changes in our internal control over financial
reporting that occurred during the quarter ended September 30, 2005 that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
11
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We, as well as certain of our former officers and directors, were named as
defendants in a number of purported securities class actions in United States
District Court for the Southern District of New York, arising out of our initial
public offering in November 1999 (the "IPO"). On August 31, 2005, the Court
granted preliminary approval of an omnibus settlement of the litigation. Under
the terms of the proposed settlement agreement, we are not conceding any
liability and we presently do not expect to make any payments under the pending
settlement, other than legal fees we may incur.
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.
ITEM 5. OTHER INFORMATION
In October 2005, we agreed to amend our employment agreement with Mr. Paul
C. White, our Chief Financial Officer. The principal terms of this amendment,
dated October 6, 2005, are as follows: Mr. White's title has been changed to
Chief Financial Officer & Executive Vice President - Strategy, Development and
Planning; Mr. White's duties have formally expanded to include a focus on the
strategy, development and planning for the Company; and terms in connection with
transition and succession planning have been included.
The foregoing summary is qualified in its entirety by reference to the
Amendment No. 1 to Employment Agreement between deltathree, Inc. and Paul C.
White, dated October 6, 2005, which is included as an exhibit to this report on
Form 10-Q.
ITEM 6. EXHIBITS
See Exhibit Index on page 14 for a description of the documents that are
filed as Exhibits to this report on Form 10-Q or incorporated by reference
herein.
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: November 14, 2005 By: /s/ Paul C. White
------------------
Name: Paul C. White
Title: Chief Financial Officer
13
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10(ii).1 Amendment No. 1 to Employment Agreement between deltathree,
Inc. and Paul C. White, dated October 6, 2005.
31.1 Certification of CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certifications of CEO and CFO Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
14