UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Under Rule 14a-12
deltathree, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how it
was determined):
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing:
1) Amount previously paid:
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2) Form, Schedule or Registration Statement No:
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4) Date Filed:
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deltathree, Inc.
75 Broad Street
31st Floor
New York, New York 10004
November 14, 2005
Dear Stockholder:
You are cordially invited to attend the Annual Meeting of Stockholders
(the "Meeting") of deltathree, Inc. (the "Company") to be held at the offices of
Mintz Levin Cohn Ferris Glovsky and Popeo, P.C., Chrysler Center, 666 Third
Avenue, 25th Floor, New York, New York 10017, on December 20, 2005, commencing
at 10:30 a.m., local time. I urge you to be present in person or represented by
proxy at the Meeting.
The enclosed Notice of Annual Meeting and Proxy Statement fully
describes the business to be transacted at the Meeting, which includes (i) the
election of seven directors of the Company, (ii) the proposal to approve an
amendment to the 2004 Stock Incentive Plan, (iii) the proposal to approve an
amendment to the 2004 Non-Employee Director Stock Option Plan, (iv) the
ratification of the appointment by the Board of Directors of Brightman Almagor &
Co., a member firm of Deloitte & Touche, as independent auditors for the year
ending December 31, 2005, and (v) the transaction of any other business that may
properly be brought before the Meeting or any adjournment or postponement
thereof.
Our Board of Directors believes that a favorable vote on each of the
matters to be considered at the Meeting is in the best interests of us and our
stockholders and unanimously recommends a vote "FOR" each of the matters.
Accordingly, we urge you to review the accompanying material carefully and to
return the enclosed proxy promptly.
The Board of Directors has fixed the close of business on November 14,
2005 as the record date for the determination of the stockholders entitled to
notice of and to vote at the Meeting. Accordingly, only stockholders of record
at the close of business on that date will be entitled to vote at the Meeting. A
list of the stockholders entitled to vote at the Meeting will be located at our
offices, 75 Broad Street, 31st Floor, New York, New York 10004, at least ten
days prior to the Meeting and will also be available for inspection at the
Meeting.
If you are planning to attend the meeting in person, because of
security procedures, you will be required to present government-issued photo
identification (e.g. driver's license or passport) to enter the Meeting. In
addition, packages and bags will be inspected, among other measures that may be
employed to enhance the security of those attending the Meeting. These
procedures may require additional time, so please plan accordingly.
Some or all of our directors and officers will be present to help host
the Meeting and to respond to any questions that our stockholders may have. I
hope you will be able to attend. Even if you expect to attend the Meeting,
please sign, date and return the enclosed proxy card without delay. If you
attend the Meeting, you may vote in person even if you have previously mailed a
proxy.
Sincerely,
/s/ Shimmy Zimels
Shimmy Zimels
Chief Executive Officer and President
deltathree, Inc.
75 Broad Street
31st Floor
New York, New York 10004
NOTICE OF 2005 ANNUAL MEETING OF STOCKHOLDERS
To Be Held on December 20, 2005
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the
"Meeting") of deltathree, Inc. (the "Company") will be held at the offices of
Mintz Levin Cohn Ferris Glovsky and Popeo, P.C., Chrysler Center, 666 Third
Avenue, 25th Floor, New York, New York 10017, on December 20, 2005, commencing
at 10:30 a.m., local time. A proxy card and a Proxy Statement for the Meeting
are enclosed.
The Meeting is for the purpose of considering and acting upon:
1. The election of seven directors for a one-year term expiring at our
Annual Meeting of Stockholders in 2006 and until their successors are
duly elected and qualified;
2. The proposal to approve an amendment to the 2004 Stock Incentive Plan;
3. The proposal to approve an amendment to the 2004 Non-Employee Director
Stock Option Plan;
4. The ratification of the appointment by the Board of Directors of
Brightman Almagor & Co., a member firm of Deloitte & Touche, as
independent auditors for the year ending December 31, 2005; and
5. Such other matters as may properly come before the Meeting or any
adjournment or postponement thereof.
The close of business on November 14, 2005 has been fixed as the record
date for determining stockholders entitled to notice of and to vote at the
Meeting or any adjournment or postponement thereof. For a period of at least 10
days prior to the Meeting, a complete list of stockholders entitled to vote at
the Meeting shall be available for examination by any stockholder during
ordinary business hours at our offices at 75 Broad Street, 31st Floor, New York,
New York 10004.
Information concerning the matters to be acted upon at the Meeting is
set forth in the accompanying Proxy Statement.
A copy of our Annual Report for 2004, which includes our audited
financial statements, is being mailed together with this proxy material.
Your vote is important. Whether or not you plan to attend the meeting
in person, please complete, date, sign and return the enclosed proxy card in the
accompanying pre-addressed reply envelope, which requires no postage if mailed
in the united states.
By Order of the Board of Directors,
/s/ Paul C. White
Paul C. White
Secretary
New York, New York
November 14, 2005
TABLE OF CONTENTS
Page
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Information About the Annual Meeting 1
General 1
Solicitation and Voting of Proxies 1
Record Date and Voting Securities 1
Quorum and Voting 2
Security Ownership of Management and Principal Stockholders 4
Board of Directors and Committees of the Board 5
Shareholder Communications to the Board 6
Audit Committee Report 6
Proposal # 1. Election of Directors 8
General 8
Vote Required and Recommendation of the Board of Directors 8
Nominees for Director 8
Independent Directors 9
Proposal # 2. Amendment to Increase the Aggregate Number of Shares for which Awards May Be Granted Under
the Company's 2004 Stock Incentive Plan 10
General 10
Material Features of the 2004 Plan 10
Federal Income Tax Considerations 12
Israeli Income Tax Considerations 13
New Plan Benefits 15
Vote Required and Recommendation of the Board of Directors 15
Proposal # 3. Amendment to Increase the Aggregate Number of Shares for which Awards May Be Granted Under
the Company's 2004 Non-Employee Director Stock Option Plan 16
General 16
Material Features of the 2004 Directors Plan 16
Federal Income Tax Considerations 18
New Plan Benefits 19
Vote Required and Recommendation of the Board of Directors 19
Proposal # 4. Ratification of Appointment of Independent Auditors 20
General 20
Vote Required and Recommendation of the Board of Directors 20
Audit and Non-Audit Fees 20
Policy on Audit Committee Pre-Approval and Permissible Non-audit Services of Independent Auditors 20
Executive Officers 21
Executive Compensation and Other Information 22
Stock Performance Chart 29
Certain Relationships and Related Transactions 30
Section 16(a) Beneficial Ownership Reporting Compliance 30
Code of Conduct and Ethics 30
Stockholder Proposals for 2006 Annual Meeting 30
Other Matters 31
Miscellaneous 31
deltathree, Inc.
75 Broad Street
31st Floor
New York, New York 10004
PROXY STATEMENT
FOR
ANNUAL MEETING OF STOCKHOLDERS
To Be Held December 20, 2005
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INFORMATION ABOUT THE ANNUAL MEETING
General
This Proxy Statement and accompanying proxy materials are being first
mailed on or about November 17, 2005 to stockholders of deltathree, Inc. (the
"Company") at the direction of our Board of Directors (the "Board") to solicit
proxies in connection with the 2005 Annual Meeting of Stockholders (the
"Meeting"). The Meeting will be held at the offices of Mintz Levin Cohn Ferris
Glovsky and Popeo, P.C., Chrysler Center, 666 Third Avenue, 25th Floor, New
York, New York 10017, on December 20, 2005, commencing at 10:30 a.m., local
time, or at such other time and place to which the Meeting may be adjourned or
postponed.
Solicitation and Voting of Proxies
All shares represented by valid proxies at the Meeting, unless the
stockholder otherwise specifies, will be voted (i) FOR the election of the seven
persons named under "Proposal 1-Election of Directors" as nominees for election
as our directors for a one-year term expiring at our annual meeting of
stockholders in 2006 and until their successors are duly elected and qualified,
(ii) FOR the proposal to approve an amendment to the 2004 Stock Incentive Plan
named under "Proposal 2--Amendment to increase the aggregate number of shares
for which awards may be granted under the Company's 2004 Stock Incentive Plan,"
(iii) FOR the proposal to approve an amendment to the 2004 Non-Employee Director
Stock Option Plan named under "Proposal 3--Amendment to Increase the aggregate
number of shares for which stock options may be granted under the company's 2004
Non-Employee Director Stock Option Plan," (iv) FOR the ratification of the
appointment by the Board of the independent auditors named under "Proposal
4-Ratification of Appointment of Independent Auditors" and (v) at the discretion
of the proxy holders, with regard to any matter not known to the Board on the
date of mailing this Proxy Statement that may properly come before the Meeting
or any adjournment or postponement thereof. Where a stockholder has
appropriately specified how a proxy is to be voted, it will be voted
accordingly. The Board has designated Paul C. White and Shimmy Zimels, as
proxies for the solicitation on behalf of the Board of proxies of our
stockholders, to vote on all matters as may properly come before the Meeting and
any adjournment of the Meeting.
A proxy may be revoked at any time by providing written notice of such
revocation to deltathree, Inc., 75 Broad Street, 31st Floor, New York, New York
10004, which notice must be received prior to the Meeting. If notice of
revocation is not received prior to the Meeting, a stockholder may nevertheless
revoke a proxy if he or she attends the Meeting and votes in person.
Record Date and Voting Securities
The close of business on November 14, 2005 is the record date (the
"Record Date") for determining the stockholders entitled to vote at the Meeting.
At the close of business on November 10, 2005, we had issued and outstanding
approximately 29,980,499 shares of our Class A Common Stock, par value $0.001
(the "Common Stock"), held by approximately 123 holders of record. No shares of
our Class B Common Stock are outstanding. The Common Stock constitutes the only
outstanding class of voting securities entitled to be voted at the Meeting.
1
Quorum and Voting
The presence at the Meeting, in person or by proxy relating to any
matter, of the holders of a majority of the outstanding shares of Common Stock
is necessary to constitute a quorum. For purposes of the quorum and the
discussion below regarding the vote necessary to take stockholder action,
stockholders of record who are present at the Meeting in person or by proxy and
who abstain, including brokers holding customers' shares of record who cause
abstentions to be recorded at the Meeting, are considered stockholders who are
present and entitled to vote at the Meeting, and thus, shares of Common Stock
held by such stockholders will count toward the attainment of a quorum. If a
quorum should not be present, the Meeting may be adjourned from time to time
until a quorum is obtained.
Each share of Common Stock entitles the holder thereof to one vote with
respect to each proposal to be voted on at the Meeting.
Atarey Hasharon Chevra Lepituach Vehashkaot Benadlan (1991) Ltd., an
Israeli company ("Atarey") beneficially owns approximately 41% of our
outstanding Common Stock. Therefore, Atarey will influence the outcome of any
matter submitted to a vote of our stockholders, including the election of the
directors at the Meeting.
The accompanying proxy card is designed to permit each holder of Common
Stock as of the close of business on the Record Date to vote on each of the
matters to be considered at the Meeting. A stockholder is permitted to vote in
favor of, or to withhold authority to vote for, any or all of the nominees for
election to the Board and to vote in favor of or against or to abstain from
voting with respect to all of the other proposals included in this Proxy
Statement.
Brokers holding shares of record for customers generally are not
entitled to vote on certain matters unless they receive voting instructions from
their customers. As used herein, "uninstructed shares" means shares held by a
broker who has not received instructions from its customers on such matters, if
the broker has so notified us on a proxy form in accordance with industry
practice or has otherwise advised us that it lacks voting authority. As used
herein, "broker non-votes" means the votes that could have been cast on the
matter in question by brokers with respect to uninstructed shares if the brokers
had received their customers' instructions. Although there are no controlling
precedents under Delaware law regarding the treatment of broker non-votes in
certain circumstances, we intend to treat broker non-votes in the manner
described in the Proposals set forth herein.
In December 2000, the Securities and Exchange Commission ("SEC")
adopted a rule concerning the delivery of annual disclosure documents. The rule
allows us or brokers holding shares on behalf of our stockholders to send a
single set of our annual report and proxy statement to any household at which
two or more of our stockholders reside, if either we or the brokers believe that
the stockholders are members of the same family. This practice, referred to as
"householding," benefits both stockholders and us. It reduces the volume of
duplicate information received by stockholders and helps to reduce our expenses.
The rule applies to our annual reports, proxy statements and information
statements. Once stockholders receive notice from their brokers or from us that
communications to their addresses will be "householded," the practice will
continue until stockholders are otherwise notified or until they revoke their
consent to the practice. Each stockholder will continue to receive a separate
proxy card or voting instruction card.
Stockholders whose households received a single set of disclosure
documents this year, but who would prefer to receive additional copies, may
contact our transfer agent, American Stock Transfer and Trust Company, by
calling the toll free number, 1-800-937-5449.
Stockholders who do not wish to participate in "householding" and would
like to receive their own sets of our annual disclosure documents in future
years, should follow the instructions described below. Stockholders who share an
address with another stockholder of the Company and who would like to receive
only a single set of our annual disclosure documents, should follow these
instructions:
o Stockholders whose shares are registered in their own name
should contact our transfer agent, American Stock Transfer and
Trust Company, and inform them of their request by calling
them at 1-800-937-5449 or writing them at 6201 15th Avenue,
Brooklyn, NY 11219.
o Stockholders whose shares are held by a broker or other
nominee should contact the broker or other nominee directly
and inform them of their request. Stockholders should be sure
to include their name, the name of their brokerage firm and
their account number.
2
SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the
beneficial ownership of shares of our Common Stock as of November 14, 2005 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. Shares of Common Stock that an individual or group has the right to
acquire within 60 days of November 14, 2005 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)
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Shares of deltathree Class A Common Stock
Beneficially Owned
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Principal Stockholder:
Atarey Hasharon Chevra Lepituach Vehashkaot Benadlan
(1991) Ltd....................................... 12,262,677 40.9%
7 Giborey Israel St., P.O. Box 8468.
South Netanya Industrial Zone 42504, Israel.
Executive Officers and Directors:
Noam Bardin(2)(3).................................. 696,304 2.3%
Shimmy Zimels(2)(4)................................ 672,407 2.2%
Paul C. White(2)(5)................................ 343,402 1.1%
Noam Ben-Ozer (2)(5)............................... 24,848 *
Ilan Biran (2)(5).................................. 49,848 *
Benjamin Broder (2)(5)............................. 20,000 *
Joshua Maor (2)(6)................................. 70,999 *
Lior Samuelson (2)(5).............................. 30,000 *
All Directors and Executive Officers as a group
(8 persons)(7)................................... 1,907,808 6.4%
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* Less than 1%.
(1) Percentage of beneficial ownership is based on 29,980,499 shares of Common
Stock outstanding as of November 10, 2005.
(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
508,938 shares of Common Stock.
(4) Includes (a) 64,469 shares of Common Stock and (b) options to purchase
607,938 shares of Common Stock.
(5) Represents options to purchase shares of Common Stock.
(6) Includes (a) 16,151 shares of Common Stock and (b) options to purchase
54,848 shares of Common Stock.
(7) Includes (a) 267,986 shares of Common Stock and (b) options to purchase
1,639,822 shares of Common Stock.
3
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 below under "Executive Officers" serve at the discretion
of our Board.
The Board had eight regular and no special meetings during the fiscal
year ended December 31, 2004. During the fiscal year ended December 31, 2004,
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. One of our directors attended our annual meeting of stockholders held
in 2004. The Board has established an Executive Committee, a Compensation
Committee, a Nominating and Governance 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.
Executive Committee. 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 2004. Joshua Maor
(Chairman), Noam Bardin and Noam Ben-Ozer are the current members of the
Executive Committee.
Compensation 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 is responsible for the determination of the
compensation of our Chief Executive Officer, and shall conduct its decision
making process with respect to that issue without the Chief Executive Officer
present. All members of the Compensation Committee qualify as independent under
the definition promulgated by the Nasdaq Stock Market. The Compensation
Committee had two meetings during 2004. Benjamin Broder (Chairman), Ilan Biran,
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
Proxy Statement.
Nominating and Governance Committee. The Nominating and Governance
Committee is responsible for assisting, identifying and recommending qualified
candidates for director nominees to the Board, and leading the Board in its
annual review of the Board's performance. All members of the Nominating
Committee qualify as independent under the definition promulgated by the Nasdaq
Stock Market. The Nominating and Governance Committee had no meetings during
2004. Joshua Maor (Chairman), Benjamin Broder, and Lior Samuelson are the
current members of the Nominating and Governance Committee. The Nominating and
Governance Committee may consider candidates recommended by stockholders as well
as from other sources such as other directors or officers, third party search
firms or other appropriate sources. For all potential candidates, the Nominating
and Governance Committee may consider all factors it deems relevant, such as a
candidate's personal integrity and sound judgment, business and professional
skills and experience, independence, knowledge of the industry in which we
operate, possible conflicts of interest, diversity, the extent to which the
candidate would fill a present need in the Board, and concern for the long-term
interests of the stockholders.
In general, persons recommended by stockholders will be considered on
the same basis as candidates from other sources. If a stockholder wishes to
nominate a candidate to be considered for election as a director at the 2006
Annual Meeting of Stockholders using the procedures set forth in the Company's
By-laws, it must follow the procedures described in the By-laws under the
heading "Nomination of Directors." If a stockholder wishes simply to propose a
candidate for consideration as a nominee by the Nominating and Governance
Committee, it should submit any pertinent information regarding the candidate to
the Chairman of the Nominating and Governance Committee by mail at 75 Broad
Street, New York, New York 10004. A copy of the Nominating Committee's written
charter is publicly available on the Company's website at www.deltathree.com.
Audit Committee. The Audit Committee recommends to the Board the
appointment of the firm selected to serve as our independent auditors 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. Ilan Biran (Chairman), Noam Ben-Ozer and Lior Samuelson are the
current members of the Audit Committee. All members of the Audit Committee
satisfy the current independence standards promulgated by the SEC and by the
Nasdaq Stock Market, as such standards apply specifically to members of audit
committees. The Board has determined that each of Mr. Ben-Ozer, Mr. Biran and
Mr. Samuelson are "audit committee financial experts," as the SEC has defined
that term in Item 401 of Regulation S-K. The Audit Committee had four meetings
during 2004.
4
SHAREHOLDER COMMUNICATIONS TO THE BOARD
The Board of Directors recommends that stockholders initiate any
communications with the Board in writing and send them in care of our Secretary,
at 75 Broad Street, 31st Floor, New York, NY 10004. This centralized process
will assist the Board in reviewing and responding to stockholder communications
in an appropriate manner. The name of any specific intended Board recipient
should be noted in the communication. The Board has instructed our Secretary to
forward such correspondence only to the intended recipients; however, the Board
has also instructed our Secretary, prior to forwarding any correspondence, to
review such correspondence and, in his or her discretion, not to forward certain
items if they are deemed of a commercial or frivolous nature or otherwise
inappropriate for the Board's consideration. In such cases, some of that
correspondence may be forwarded elsewhere in the Company for review and possible
response.
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors, which consisted entirely
of directors who met the independence and experience requirements as promulgated
by the SEC and the Nasdaq Stock Market and as in effect on the date of the
filing of the Company's Annual Report on Form 10-K, furnished the following
report:
The Audit Committee assists the Board in overseeing and monitoring the
integrity of the Company's financial reporting process, its compliance with
legal and regulatory requirements and the quality of its internal and external
audit processes. The role and responsibilities of the Audit Committee are set
forth in a written Charter adopted by the Board. The Audit Committee reviews and
reassesses the Charter annually and recommends any changes to the Board for
approval. The Audit Committee is responsible for overseeing the Company's
overall financial reporting process, and for the appointment, compensation,
retention and oversight of the work of the Company's independent auditors,
Brightman Almagor & Co., a member firm of Deloitte & Touche. In fulfilling its
responsibilities for the financial statements for the fiscal year ended 2004,
the Audit Committee, among other activities, reviewed and discussed our audited
financial statements for such fiscal year with management and with Brightman
Almagor & Co. The Audit Committee has discussed with Brightman Almagor & Co. the
matters required to be discussed by American Institute of Certified Public
Accountants Auditing Standards Board Statement on Auditing Standards No. 61
("Communications with Audit Committees") relating to the conduct of the audit.
The Audit Committee has received written disclosures and a letter from Brightman
Almagor & Co. including disclosures required by the Independence Standards Board
Standard No. 1, "Independence Discussions with Audit Committees," and has
discussed with Brightman Almagor & Co. their independence. The Audit Committee
has considered the compatibility of the provision of non-audit services with
maintaining the auditor's independence.
Based on the Audit Committee's review of the audited financial
statements and the review and discussions described in the foregoing paragraph,
the Audit Committee recommended to the Board of Directors that the audited
financial statements for the fiscal year ended December 31, 2004 be included in
our Annual Report on Form 10-K for the fiscal year ended December 31, 2004 for
filing with the Securities and Exchange Commission.
The Audit Committee
Noam Ben-Ozer
Ilan Biran
Lior Samuelson
The Audit Committee Report in this Proxy Statement shall not be deemed
filed or incorporated by reference into any other filings by us under the
Securities Act of 1933 or the Securities Exchange Act of 1934 except to the
extent that we specifically incorporate this information by reference.
5
PROPOSAL # 1
ELECTION OF DIRECTORS
(Notice Item 1)
General
At the Meeting, seven directors will be elected to the Board to serve
until our next annual meeting of stockholders and until their respective
successors have been elected and qualified.
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 a director on our Board.
Vote Required and Recommendation of the Board of Directors
Under our Amended and Restated By-laws, directors are elected by a
majority of the outstanding shares of Common Stock present in person or
represented by proxy at the Meeting, and thus, the seven nominees for election
as directors who receive the most votes cast will be elected. Instructions
withholding authority and broker non-votes will not be taken into account in
determining the outcome of the election of directors.
Unless authority to vote for any of the nominees named above is
withheld, the shares represented by the enclosed proxy will be voted FOR the
election as directors of such nominees. In the event that any nominee shall
become unable or unwilling to serve, the shares represented by the enclosed
proxy will be voted for the election of such other person as the Board of
Directors may recommend in that nominee's place. The Board has no reason to
believe that any nominee will be unable or unwilling to serve.
The Board of Directors unanimously recommends that the stockholders
vote FOR each of the seven nominees listed herein.
Nominees for Director
Set forth below is certain information regarding each nominee as of
November 14, 2005, including such individual's age and principal occupation, a
brief account of such individual's business experience during at least the last
five years and other directorships currently held.
Noam Bardin, 34 - Chairman of the Board. Mr. Bardin co-founded
deltathree and served as Chief Executive Officer and President from July 2000
through June 2002. Mr. Bardin has served as Chairman of the Board since April
2002. 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 served as Director
of Operations at Ambient Corporation. Mr. Bardin earned a B.A. in Economics from
the Hebrew University (Jerusalem) and an M.P.A. from the Harvard University
Kennedy School of Government.
Noam Ben-Ozer, 42 - Director. Mr. Ben-Ozer was named a director of
deltathree in September 2004. Mr. Ben-Ozer currently serves as a Director, and
is Chairman of the Audit Committee for Equity-One, Inc., a NYSE-listed real
estate investment trust. Previously, Mr. Ben-Ozer co-founded iPhrase
Technologies, Inc., a privately-held software company. From 1994 to 1999, Mr.
Ben-Ozer served as a consultant for Bain & Company, a management consulting
company. From 1993 to 1994, Mr. Ben-Ozer served as an outside consultant to
Lernout & Hauspie Speech Products. Mr. Ben-Ozer is a certified public accountant
in Israel and received an M.B.A. from the Harvard Business School.
6
Ilan Biran, 59 - Director. Mr. Biran has served as a director of
deltathree since December 2003. Mr. Biran brings a wealth of business and
management experience from the telecom and defense industries. Since January
2004, Mr. Biran has served as the Chairman of YES Satellite Television, one of
the leading satellite television companies in Israel. From 1999 to 2003, Mr.
Biran served as the President and CEO of Bezeq Ltd. - the Israeli PTT, with
annual sales of over $2 billion and approximately 16,000 employees. Mr. Biran
holds the rank of Major General (res.) in the Israeli Defense Force where, as
Commander of the IDF's Central Command, he played an active role in reaching the
peace agreements with Jordan. From 1996 to 1999, he served as the Director
General of the Israeli Ministry of Defense, and prior to that command, he held a
wide variety of senior-level positions in other Israeli units, since 1964. Mr.
Biran holds a B.A. in Economics and Business Administration from Bar-Ilan
University, and holds an Associate Diploma in Strategy and Political Economic
Research from Georgetown University. He is also a graduate of the U.S. Marine
Corps Command and Staff College. In addition, Mr. Biran's public activities
include: serving as the Israeli Prime Minister's Special Coordinator for POWs
and MIAs; is a member of the Board of Trustees of Haifa University; is a member
of the Shevach-Mofet High School Executive Committee and; since 1996, has served
as the Chairman of the Board of Directors of the Israeli Oil Refineries, Ltd.
Benjamin Broder, 41 - Director. Mr. Broder has served as a director of
deltathree since July 24, 2005. As of 2002, Mr. Broder has served as the Finance
Director of Atarey. From 1996 to 2001, Mr. Broder worked as the chief financial
officer of a telecom start-up company and a bio-tech start-up company.
Previously, Mr. Broder also held various positions with several leading banks,
including HSBC, Bank Hapoalim, and Bank of Israel. Mr. Broder earned a B.S.
degree in Economics from University of London. Mr. Broder is a Chartered
Accountant in the U.K. and a C.P.A. in Israel.
Joshua Maor, 69 - Director. Mr. Maor has served as a director of
deltathree since June 2001. Mr. Maor has served as the Chairman of Commutech
Holding & Investments Ltd., an investment holding company which engages
primarily in investments in high tech companies, since January 2002, and as the
Chairman of the board of Mofet Venture Capital since 2001. 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, 56 - 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, 40 - President and Chief Executive Officer and Director.
Mr. Zimels has served as Chief Executive Office and President since June 2002,
and served as Vice President of Operations and Chief Operating Officer of
deltathree since June 1997, before being named President and Chief Executive
Officer in June 2002. 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 with distinction from Hebrew University with a
degree in Economics and Accounting and holds a Masters in Economics from Hebrew
University.
Independent Directors
Our Board has determined that each member of the Board other than Mr.
Zimels is independent under the definition promulgated by the Nasdaq Stock
Market for independent board members. In addition, the Board has determined that
the members of the Audit Committee meet the additional independence criteria
required for audit committee membership.
7
PROPOSAL # 2
AMENDMENT TO INCREASE THE AGGREGATE NUMBER OF SHARES
FOR WHICH AWARDS MAY BE GRANTED UNDER THE COMPANY'S
2004 STOCK INCENTIVE PLAN
(Notice Item 2)
General
Our deltathree 2004 Stock Incentive Plan (the "2004 Plan") was approved
by our Board of Directors and stockholders in 2004. A total of 759,732 shares of
Common Stock, which represented the total number of shares issuable under the
1999 deltathree Stock Incentive Plan (the "1999 Plan") less the amount of shares
granted as awards under the 1999 Plan, plus such additional shares of Common
Stock as are represented by Awards previously granted under the 1999 Plan which
are cancelled or expire after the date of stockholder approval of the 2004 Plan
without delivery of shares of stock by the Company, were initially reserved for
issuance under the 2004 Plan. The total amount of shares issuable under the 2004
Plan did not, in effect, increase from the amount of shares that were originally
issuable under the 1999 Plan. Therefore, the Board of Directors recommends the
amendment to the 2004 Plan described in this proposal to increase the number of
shares issuable under the 2004 Plan by an additional 2,000,000 shares.
In October 2005, the Board of Directors voted to approve an amendment
to the 2004 Plan to increase the aggregate number of shares of Common Stock
which may be offered under the Plan by an additional 2,000,000 shares. By its
terms, the 2004 Plan may be amended by the Board of Directors, provided that any
amendment which the Board of Directors determines requires stockholder approval
is subject to receiving such stockholder approval. This amendment is being
submitted for your approval to ensure continued qualification of the 2004 Plan
under the rules of the Nasdaq Stock Market and in order to receive favorable
federal income tax treatment for grants of incentive stock options under Section
422 of the Internal Revenue Code of 1986, as amended (the "Code").
We are requesting that you approve the amendment to the 2004 Plan in
order that the Company may have sufficient shares available for the grant of
options in the future. We believe the increased number of shares we are asking
you to approve are necessary for the Company to be able to attract and retain
executive officers and key employees and consultants while continuing the
Company's policy of conserving its cash resources.
The proposed amendment to the 2004 Plan is made solely to increase the
number of shares available for issuance by 2,000,000 shares and is being
submitted to the stockholders for approval because there are only 417,234 shares
currently remaining for future grants under the 2004 Plan. No other changes in
the 2004 Plan are being proposed.
Because our named executive officers are otherwise eligible to receive
option grants under the 2004 Plan, they have an interest in this proposal. On
November 11, 2005, the closing market price per share of our Common Stock was $
2.50, as reported in the Nasdaq SmallCap Market.
Material Features of the 2004 Plan
The following paragraphs provide a summary of the principal features of
our 2004 Plan and its operation.
The purpose of the 2004 Plan is to foster and promote the long-term
financial success of our company and materially increase shareholder value by
(a) motivating superior performance by means of performance-related incentives,
(b) encouraging and providing for the acquisition of an ownership interest in
our company by executive officers, other employees and consultants and (c)
enabling us to attract and retain the services of an outstanding management team
upon whose judgment, interest and effort the successful conduct of our
operations is largely dependent.
8
General. The Plan provides for the grant of (i) incentive stock options
and non-incentive stock options to purchase our 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; and (v) stock in lieu of cash. Excluding the proposed
amendment for which we are seeking stockholder approval, the aggregate number of
shares that may be issued under the 2004 Plan cannot exceed (a) 759,732 shares,
plus (b) such additional shares of Common Stock as are represented by Awards
previously granted under the 1999 Plan which are cancelled or expire after the
date of stockholder approval of this Plan without delivery of shares of stock by
the Company.
Administration. The 2004 Plan is administered by a committee that will
be made up of directors who are not employees of the Company and whose
membership on the committee (i) does not adversely impact the Company's ability
to deduct compensation payments made under the Plan and (ii) will permit
recipients of awards to avail themselves of exemptions under federal securities
laws.
Eligibility and Extent of Participation. The 2004 Plan provides for
discretionary grants of awards to officers of the Company within the meaning of
Rule 16a-1(f) of the Exchange Act and to other employees and consultants of the
Company. Directors who are non-employees are prohibited from participating in
the plan. The maximum number of shares for which options or stock appreciation
rights may be granted to any one participant in a calendar year is 500,000 of
the shares of Common Stock available under the Plan.
Stock Options. Under the Plan, the compensation committee may grant
both incentive and non-incentive stock options for Common Stock of the Company.
The options generally will have a term of ten years and will become exercisable
in three equal installments commencing on the first anniversary of the date of
grant. The purchase price per share payable upon exercise of an option will be
established by the compensation committee; provided, however, that such option
exercise price may be no less than the fair market value of a share of Common
Stock on the date of grant. The option exercise price is payable by one of the
following methods or a combination of methods to the extent permitted by the
compensation committee: (i) in cash or its equivalent, or (ii) subject to the
approval of the compensation committee, in shares of Common Stock owned by the
participant for at least six months prior to the date of exercise. The
compensation committee may provide that a participant who delivers shares of
Common Stock to exercise an option when the market value of the Common Stock
exceeds the exercise price of the option will be automatically granted reload
options for the number of shares delivered to exercise the option. Reload
options will be subject to the same terms and conditions as the related option
except that the exercise price will be the fair market value on the date the
reload option is granted and such reload option will not be exercisable for six
months.
Stock Appreciation Rights. The compensation committee may grant stock
appreciation rights in tandem with or independently of a stock option. Stock
appreciation rights entitle the participant to receive the excess of the fair
market value of a stated number of shares of Common Stock on the date of
exercise over the base price of the stock appreciation right. The base price may
not be less than 100% of the fair market value of the Common Stock on the date
the stock appreciation right is granted. The compensation committee will
determine when a stock appreciation right is exercisable, the method of
exercise, and whether settlement of the stock appreciation right is to be made
in cash, shares of Common Stock or a combination of cash and shares.
Restricted Stock and Restricted Units. The compensation committee may
grant awards in the form of restricted stock and restricted units. For purposes
of the Plan, restricted stock is an award of Common Stock and a restricted unit
is a contractual right to receive Common Stock (or cash based on the fair market
value of Common stock). Such awards are subject to such terms and conditions, if
any, as the compensation committee deems appropriate. Unless otherwise
determined by the compensation committee, participants are entitled to receive
either currently or at a future date, dividends or other distributions paid with
respect to restricted stock and, if and to the extent determined by the
compensation committee, either to be credited with or receive currently an
amount equal to dividends paid with respect to the corresponding number of
shares covered by restricted units. Restricted stock and restricted units become
vested and nonforfeitable and the restricted period shall lapse upon the third
anniversary of the date of grant unless the compensation committee determines
otherwise.
Incentive Stock and Incentive Units. The Plan allows for the grant of
awards in the form of incentive stock and incentive units. For purposes of the
plan, incentive stock is an award of Common Stock and an incentive unit is a
contractual right to receive Common Stock. Such awards will be contingent upon
the attainment, in whole or in part, of certain performance objectives over a
period to be determined by the compensation committee. With regard to a
particular performance period, the compensation committee has the discretion,
subject to the plan's terms, to determine the terms and conditions of such
awards, including the performance objectives to be achieved during such period
and the determination of whether and to what degree such objectives have been
attained. Unless otherwise determined by the compensation committee,
participants are entitled to receive, either currently or at a future date, all
dividends and other distributions paid with respect to the incentive stock and,
if and to the extent determined by the compensation committee, either to be
credited with or receive currently an amount equal to dividends paid with
respect to the corresponding number of shares covered by the incentive units.
9
Stock in Lieu of Cash. The Plan authorizes the compensation committee
to grant awards of Common Stock to executive officers in lieu of all or a
portion of an award otherwise payable in cash pursuant to any bonus or incentive
compensation plan of the company, based on the fair market value of the Common
Stock.
Amendment and Termination. The Plan will terminate not later than ten
years from the date of its adoption. The board of directors or the compensation
committee may amend, suspend or terminate the Plan or any portion of it at any
time. However, no amendment may be made to the Plan without shareholder approval
if such amendment would (1) increase the number of shares of Common Stock
subject to the Plan, (2) change the price at which awards may be granted, or (3)
remove the administration of the Plan from the compensation committee.
Federal Income Tax Considerations
The following summary of the federal income tax consequences of 2004
Plan transactions is based upon federal income tax laws in effect on the date of
this Proxy Statement. This summary does not purport to be complete, and does not
discuss, state, local or non-U.S. tax consequences except as set forth below.
Nonqualified Stock Options. The grant of a nonqualified stock option
under the 2004 Plan will not result in any federal income tax consequences to
the participant or to us. Upon exercise of a nonqualified stock option, the
participant is subject to income taxes at the rate applicable to ordinary
compensation income on the difference between the option exercise price and the
fair market value of the shares on the date of exercise. This income is subject
to withholding for federal income and employment tax purposes. We are entitled
to an income tax deduction in the amount of the income recognized by the
participant, subject to possible limitations imposed by Section 162(m) of the
Code and so long as we withhold the appropriate taxes with respect to such
income (if required) and the participant's total compensation is deemed
reasonable in amount. Any gain or loss on the participant's subsequent
disposition of the shares of Common Stock will receive long or short-term
capital gain or loss treatment, depending on whether the shares are held for
more than one year following exercise. We do not receive a tax deduction for any
such gain.
Incentive Stock Options. Incentive stock options are intended to
qualify for treatment under Section 422 of the Code. An incentive stock option
does not result in taxable income to the optionee or deduction to the Company at
the time it is granted or exercised, provided that no disposition is made by the
optionee of the shares acquired pursuant to the option within two years after
the date of grant of the option nor within one year after the date of issuance
of shares to him (referred to as the "ISO holding period"). However, the
difference between the fair market value of the shares on the date of exercise
and the option price will be an item of tax preference includible in
"alternative minimum taxable income." Upon disposition of the shares after the
expiration of the ISO holding period, the optionee will generally recognize long
term capital gain or loss based on the difference between the disposition
proceeds and the option price paid for the shares. If the shares are disposed of
prior to the expiration of the ISO holding period, the optionee generally will
recognize taxable compensation, and the Company will have a corresponding
deduction, in the year of the disposition, equal to the excess of the fair
market value of the shares on the date of exercise of the option over the option
price. Any additional gain realized on the disposition will normally constitute
capital gain. If the amount realized upon such a disqualifying disposition is
less than fair market value of the shares on the date of exercise, the amount of
compensation income will be limited to the excess of the amount realized over
the optionee's adjusted basis in the shares.
In the year of the disqualifying disposition, the Company is entitled
to a deduction equal to the amount of ordinary income recognized by the
optionee, subject to possible limitations imposed by Section 162(m) of the Code
and so long as we withhold the appropriate taxes with respect to such income (if
required) and the participant's total compensation is deemed reasonable in
amount.
10
Restricted Stock. The grant of restricted stock will subject the
recipient to ordinary compensation income on the difference between the amount
paid for such stock and the fair market value of the shares on the date that the
restrictions lapse. This income is subject to withholding for federal income and
employment tax purposes. We are entitled to an income tax deduction in the
amount of the ordinary income recognized by the recipient, subject to possible
limitations imposed by Section 162(m) of the Code and so long as we withhold the
appropriate taxes with respect to such income (if required) and the
participant's total compensation is deemed reasonable in amount. Any gain or
loss on the recipient's subsequent disposition of the shares will receive long
or short-term capital gain or loss treatment depending on how long the stock has
been held since the restrictions lapsed. We do not receive a tax deduction for
any such gain.
Recipients of restricted stock may make an election under Section 83(b)
of the Code ("Section 83(b) Election") to recognize as ordinary compensation
income in the year that such restricted stock is granted, the amount equal to
the spread between the amount paid for such stock and the fair market value on
the date of the issuance of the stock. If such an election is made, the
recipient recognizes no further amounts of compensation income upon the lapse of
any restrictions and any gain or loss on subsequent disposition will be long or
short-term capital gain to the recipient. The Section 83(b) Election must be
made within thirty days from the time the restricted stock is issued.
Stock Appreciation Rights. Recipients of stock appreciation rights
("SARs") generally should not recognize income until the SAR is exercised
(assuming there is no ceiling on the value of the right). Upon exercise, the
participant will normally recognize taxable ordinary income for federal income
tax purposes equal to the amount of cash and fair market value the shares, if
any, received upon such exercise. Participants who are employees will be subject
to withholding for federal income and employment tax purposes with respect to
income recognized upon exercise of an SAR. Participants will recognize gain upon
the disposition of any shares received on exercise of an SAR equal to the excess
of (i) the amount realized on such disposition over (ii) the ordinary income
recognized with respect to such shares under the principles set forth above.
That gain will be taxable as long or short-term capital gain depending on
whether the shares were held for more than one year.
We will be entitled to a tax deduction to the extent and in the year
that ordinary income is recognized by the participant, subject to possible
limitations imposed by Section 162(m) of the Code and so long as we withhold the
appropriate taxes with respect to such income (if required) and the
participant's total compensation is deemed reasonable in amount.
Restricted Stock Units. Recipients of restricted stock units generally
should not recognize income until such units are converted into cash or shares
of stock. Upon conversion, the participant will normally recognize taxable
ordinary income for federal income tax purposes equal to the amount of cash and
fair market value the shares, if any, received upon such conversion.
Participants who are employees will be subject to withholding for federal income
and employment tax purposes with respect to income recognized upon conversion of
the restricted stock units. Participants will recognize gain upon the
disposition of any shares received upon conversion of the restricted stock units
equal to the excess of (i) the amount realized on such disposition over (ii) the
ordinary income recognized with respect to such shares under the principles set
forth above. That gain will be taxable as long or short-term capital gain
depending on whether the shares were held for more than one year.
We will be entitled to a tax deduction to the extent and in the year
that ordinary income is recognized by the participant, subject to possible
limitations imposed by Section 162(m) of the Code and so long as we withhold the
appropriate taxes with respect to such income (if required) and the
participant's total compensation is deemed reasonable in amount.
Israeli Income Tax Considerations
The following summary of the income tax consequences for our employees
residing in the State of Israel of options granted under the 2004 Plan is based
upon Israeli income tax laws in effect on the date of this Proxy Statement.
These tax consequences will not apply in any way to individuals who are not
residents of the State of Israel or who are not deemed to be residents of the
State of Israel for the payment of tax.
11
Approved 102 Options
Approved 102 Options are governed by Section 102(b) of Israel's Income Tax
Ordinance (New Version), 1961 (the "Ordinance") and will be held by a trustee
for the benefit of the option holders for the requisite holding period under
Section 102, which is two years following the end of the tax year in which the
options were granted to the optionee, with respect to a CGA (as defined below)
and which is one year following the end of the tax year in which the options
were granted to the optionee, with respect to an OIA (as defined below). Under
current tax laws in effect in the State of Israel, the optionees will not be
required to recognize income for Israeli income tax purposes at the date of
grant of Approved 102 Options nor at the date of exercise of such options. The
release of an Approved 102 Option (or of a share received on the exercise
thereof) from the trustee to the optionee, or the sale of an Approved 102 Option
(or of a share received on the exercise thereof), whichever is earlier, is a
taxable event under Israeli law. The grant of Approved 102 Options is subject to
approval by Israel's Income Tax Authorities. In addition, CGAs and OIAs may not
be granted simultaneously, and our election of the type of Approved 102 Options
to be granted under the Plan has to be filed with the Israeli Tax Authorities at
least 30 days before the first date of grant of Approved 102 Options. Such
election will become effective as of the first date of grant of an Approved 102
Option under the Plan and shall remain in effect at least until the end of the
year following the year during which we first granted an Approved 102 Option.
Our election shall not prevent us from also granting Unapproved 102 Options at
any time or from time to time. Approved 102 Options may either be classified as
a capital gain option ("CGA") or an ordinary income option ("OIA").
CGA
With respect to a CGA, the optionee will realize a capital gain in an
amount equal to the spread between (i) the fair market value of the share
purchased upon such exercise, on the date such share is sold or released from
trust, as the case may be, and (ii) the exercise price of the option. Capital
gains realized will be taxed at a flat rate of 25%. In cases where the exercise
price of options is lower than the fair market value of the company's shares on
the date of grant, the excess of the fair market value of the shares on the date
of grant over the exercise price (the "Rebate") shall be considered as
compensation income. Upon the sale of shares received following the exercise of
options or upon release from the trust, whichever is earlier, the taxable gain
shall be taxed in two parts:
o The Rebate will be taxable as ordinary income, and the optionee will be
subject to social taxes and income tax rates will be determined in
accordance with the optionee's marginal tax rates; and
o The difference between (i) the fair market value of the share on the date
such shares were sold or released from the trust, as the case may be, and
(ii) the exercise price of the option (plus the Rebate) shall be taxable as
capital gain at a flat rate of 25%. Furthermore, the capital gains upon the
sale of the shares will not be subject to Israeli social taxes.
For so long as the shares received upon exercise of the options are held in
trust, there will be no taxable event. However, if such shares are transferred
from the trust to the optionee, a taxable event will then occur. If the optionee
then sells such shares, a second taxable event will occur. To the extent the
shares received following the exercise of options are sold during the holding
period required under Section 102 of the Ordinance, the taxable gain will be
considered as ordinary income and will be liable for social taxes. Income tax
rates will be determined in accordance with the optionee's marginal tax rates.
OIA
With respect to an OIA, the optionee will recognize compensation income,
taxable as ordinary income in an amount equal to the difference between (i) the
fair market value of the share purchased upon such exercise, on the date such
share is sold or released from trust, as the case may be, and (ii) the exercise
price of the option. Furthermore, the compensation income upon the sale of the
shares will be subject to Israeli social taxes. Income tax rates will be
determined in accordance with the optionee's marginal tax rates. For so long as
the shares received upon exercise of the options are held in trust, there will
be no taxable event. However, if such shares are transferred from the trust to
the optionee, a taxable event will then occur. If the optionee then sells such
shares, a second taxable event will occur. To the extent the shares received
following exercise of options are sold during the trust period applicable to
OIAs, the optionee will recognize ordinary income at the time of such sale or
transfer equal to the higher of the tax liability on the grant date or the tax
liability upon disposition or transfer.
12
Unapproved 102 Options
Unapproved 102 Options are governed by Section 102(c) of the Ordinance and
are not required to be held by a trustee. With respect to non-traded options,
the optionee will recognize compensation income, taxable as ordinary income at
his or her marginal tax rate upon the sale of shares received following the
exercise of options. Furthermore, the compensation income upon the sale of the
shares will be subject to Israeli social taxes.
New Plan Benefits
Because awards under the 2004 Plan, as amended, will be granted at the
sole discretion of the Compensation Committee of the Board of Directors, we
cannot determine at this time either the persons who will receive awards under
the 2004 Plan or the amount or types of any such awards.
Vote Required and Recommendation of the Board of Directors
The affirmative vote of a majority of the shares present or represented
by proxy and entitled to vote for this proposal at the Annual Meeting is
required to approve the increase in the aggregate number of shares of Common
Stock available under the 2004 Plan. Proxies solicited by the Board of Directors
will be voted in favor of the amendment unless a stockholder has indicated
otherwise on the proxy. Abstentions will be treated as votes against this
proposal. Brokerage firms do not have authority to vote customers' unvoted
shares held by the firms in street name on this proposal, therefore, any shares
not voted by a customer will be treated as a broker non-vote, such broker
non-votes will have no effect on the results of this vote.
The Board of Directors unanimously recommends that stockholders vote FOR the
approval of the adoption of an amendment to the 2004 Stock Incentive Plan to
increase by 2,000,000 shares the aggregate number of shares for which stock may
be granted under the Plan.
13
PROPOSAL # 3
AMENDMENT TO INCREASE THE AGGREGATE NUMBER OF SHARES
FOR WHICH STOCK OPTIONS MAY BE GRANTED UNDER THE COMPANY'S
2004 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
(Notice Item 3)
General
Our deltathree 2004 Non-Employee Director Stock Option Plan (the "2004
Directors Plan") was approved by our Board of Directors and stockholders in
2004. A total of 351,216 shares of Common Stock, which represented the total
number of shares issuable under the deltathree 1999 Directors Compensation Plan
(the "1999 Directors Plan") less the amount of shares granted as awards under
the 1999 Directors Compensation Plan, plus such additional shares of Common
Stock as are represented by Awards previously granted under the 1999 Directors
Compensation Plan which are cancelled or expire after the date of stockholder
approval of the 2004 Directors Plan without delivery of shares of stock by the
Company, were initially reserved for issuance under the 2004 Directors Plan. The
total amount of shares issuable under the 2004 Directors Plan did not, in
effect, increase from the amount of shares that were originally issuable under
the 1999 Directors Plan. Therefore, the Board of Directors recommends the
amendment to the 2004 Directors Plan described in this proposal to increase the
number of shares issuable under the 2004 Directors Plan by an additional 500,000
shares.
In October 2005, the Board of Directors voted to approve an amendment
to the 2004 Directors Plan to increase the aggregate number of shares of Common
Stock which may be offered under the Plan by an additional 500,000 shares. By
its terms, the 2004 Directors Plan may be amended by the Board of Directors,
provided that any amendment which the Board of Directors determines requires
stockholder approval is subject to receiving such stockholder approval. This
amendment is being submitted for your approval to ensure continued qualification
of the 2004 Directors Plan under the Nasdaq Stock Market rules.
We are requesting that you approve the amendment to the 2004 Directors
Plan in order that the Company may have sufficient shares available for the
grant of options to directors in the future. We believe the increased number of
shares we are asking you to approve are necessary for the Company to be able to
attract and retain directors while continuing the Company's policy of conserving
its cash resources.
The proposed amendment to the 2004 Directors Plan is made solely to
increase the number of shares available for issuance by 500,000 shares and is
being submitted to the stockholders for approval because there are only 236,216
shares currently remaining for future grants under the 2004 Directors Plan. No
other changes in the 2004 Directors Plan are being proposed.
Because our non-employee directors are otherwise eligible to receive
option grants under the 2004 Directors Plan, they have an interest in this
proposal.
Material Features of the 2004 Directors Plan
The following paragraphs provide a summary of the principal features of
our 2004 Directors Plan and its operation.
The purposes of the 2004 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 shareholders of our Common Stock by
granting our directors options to purchase our shares.
14
General. The Directors Plan provides for the automatic grant of
nonstatutory stock options. Options granted under the Plan are not intended to
qualify as "incentive stock options" within the meaning of Section 422 of the
Code. Excluding the proposed amendment for which we are seeking stockholder
approval, the aggregate number of shares of Common Stock that may be issued
under the 2004 Directors Plan cannot exceed (a) 351,216 shares, plus (b) such
additional shares of Common Stock as are represented by Options previously
granted under the 1999 Directors Plan which are cancelled or expire after the
date of stockholder approval of this Plan without delivery of shares of stock by
the Company. Shares subject to any option granted under the 2004 Directors Plan,
or under the 1999 Directors Plan, which expire or are terminated or canceled
prior to exercise will be available for future grants under the 2004 Directors
Plan.
Administration. The 2004 Directors Plan is administered by the Board.
The Board may delegate its powers and functions hereunder to a duly appointed
committee of the Board. The Board shall have full authority to interpret the
Plan; to establish, amend and rescind rules for carrying out the Plan; to
administer the Plan; to incorporate in any option agreement such terms and
conditions, not inconsistent with the Plan, as it deems appropriate; to construe
the respective option agreements and the Plan; and to make all other
determinations and to take such steps in connection with the Plan as the Board,
in its discretion, deems necessary or desirable for administering the Plan.
Non-Discretionary Grants
Initial Option Awards. Each director who is not an employee of the
Company will be granted options to acquire 10,000 shares of Common Stock on the
date he or she joins the Board.
Subsequent Option Awards. On the first business day after each annual
meeting of stockholders of the Company occurring during the term of the Plan
commencing with the Meeting, each non-employee director who meets the guidelines
for Board service and who continues to be a non-employee director following such
annual meeting shall automatically be granted an option to purchase 10,000
shares of Common Stock; provided that no Subsequent Option Award shall be made
to any non-employee director who has not served as a director of the Company, as
of the time of such annual meeting, for at least six months.
Committee Chairman Awards. Each non-employee director who is appointed
as chairman of a standing committee of the Board (and has not served as the
chairman of such committee immediately prior to the appointment) shall be
automatically granted an option to purchase 10,000 shares of Common Stock on the
date of such appointment. Each non-employee director who serves as a chairman of
the full Board or of a standing committee of the Board other than the audit
committee, and who meets the guidelines for Board service, immediately following
each annual meeting of the Company's stockholders, commencing with the Meeting,
shall be granted an option to purchase an additional 10,000 shares of Common
Stock; provided that no Committee Chairman Award shall be made to: any
non-employee director who has not served as a director of the Company, as of the
time of such annual meeting, for at least six months, and no Committee Chairman
Award shall be made to any Eligible Director who has received a Committee
Chairman award for such service on the same committee within the past six
months.
Audit Committee Service Awards. Each non-employee director who is
appointed as a member of the audit committee of the Board (and has not served as
a member of such committee immediately prior to that appointment) shall be
automatically granted an option to purchase 10,000 shares of Common Stock on the
date of such appointment. Each non-employee director who serves as a member of
the audit committee of the Board, and who meets the guidelines for Board
service, immediately following each annual meeting of the Company's
stockholders, commencing with the Meeting, shall be granted an option to
purchase an additional 10,000 shares of Common Stock; provided that: no Audit
Committee Service Award shall be made to any non-employee director who has not
served as a director of the Company, as of the time of such annual meeting, for
at least six months, and no Audit Committee Award shall be made to any Eligible
Director who has received an Audit Committee award for such service within the
past six months. In addition, the chairman of the audit committee of the Board
shall be granted an additional option to purchase 5,000 shares of Common Stock.
Annual Limitation. Notwithstanding the foregoing, a non-employee
director shall receive a maximum of options to purchase 30,000 shares of Common
Stock during any single calendar year.
Exercise Price. The exercise price per share of Common Stock of each
option granted pursuant to the Plan shall be equal to the fair market value per
share on the date of grant.
15
Option Term. If not previously exercised, each option shall expire on
the earlier of (i) the tenth anniversary of the date of the grant thereof and
(ii) on the first anniversary of the termination of the non-employee director's
status as a director of the Company.
Exercisability. Each option granted under the Plan shall become fully
vested and exercisable on the first anniversary of the date of grant.
Change in Control. Notwithstanding anything to the contrary in the
Plan, options granted pursuant to the Plan will become exercisable in full upon
a "change in control." A "change in control" shall arise if, at any time while
the non-employee director is a member of the Company's Board any one or more of
the following events occurs:
(i) The Company is merged, consolidated or reorganized into or with
another corporation, or other entity and, as a result thereof, less than 50% of
the outstanding stock or other capital interests of the surviving, resulting or
acquiring corporation, person, or other entity is owned, in the aggregate, by
the stockholder or stockholders of the Company immediately prior to such merger,
consolidation or reorganization;
(ii) The Company sells all or substantially all of its business or
assets (or both) to any other corporation, person, or other entity, less than
50% of the outstanding, voting stock or other capital interests of which are
owned, in the aggregate, by the stockholders of the Company, directly or
indirectly, immediately prior to or after such sale; or
(iii) Any "Person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended) other than a Person who is an
affiliate as of the effective date of the Plan becomes the "Beneficial Owner"
(as defined in Rule 13d-3 under said Act), directly or indirectly, of securities
of the Company representing 50% or more of the total voting power represented by
the Company's then outstanding voting securities (excluding for this purpose the
Company or its Affiliates or any employee benefit plan of the Company) pursuant
to a transaction or a series of related transactions which the Board of
Directors does not approve.
Transferability of Awards. No option under the Plan shall be
transferable by the non-employee otherwise than by will or under the applicable
laws of descent and distribution, unless such transfer shall be (a) acceptable
under Rule 16b-3 and is approved by the Board or its authorized delegate or (b)
if the option agreement pursuant to which an option is made so provides, by gift
or domestic relations order, to (i) the spouse, children or grandchildren of
such non-employee director (collectively, "Family Members"), (ii) a trust or
trusts for the exclusive benefit of such Family Members, or (iii) a partnership
or limited liability company in which such Family Members and trusts for the
exclusive benefit of such Family Members are the only partners or members, as
the case may be.
Termination and Amendment. This Plan shall terminate at the close of
business on September 23, 2014, unless sooner terminated by action of the Board
or stockholders of the Company. The Board at any time or from time to time may
amend this Plan to effect (i) amendments necessary or desirable in order that
this Plan and the options granted thereunder shall conform to all applicable
laws and regulations and (ii) any other amendments deemed appropriate.
Notwithstanding the foregoing, (i) the provisions of the Plan relating to (A)
the number of shares to be granted under the Plan or subject to any option
granted to any non-employee director, (B) the timing of any option grant and (C)
the material terms of any such option (including, without limitation, the time
of any such grant) may not be amended without the approval of the Company's
stockholders and (ii) the Board may not effect any amendment that would require
the approval of the stockholders of the Company under any applicable laws or the
listing requirements of The Nasdaq Stock Market (if applicable to the Company at
the time such amendment is adopted or will be effective) unless such approval is
obtained.
Federal Income Tax Considerations
The following summary of the federal income tax consequences of 2004
Directors Plan transactions is based upon federal income tax laws in effect on
the date of this Proxy Statement. This summary does not purport to be complete,
and does not discuss, state, local or non-U.S. tax consequences.
16
Nonqualified stock options granted under the 2004 Directors Plan
generally have the following federal income tax consequences.
The grant of a nonqualified stock option under the 2004 Directors Plan
will not result in any federal income tax consequences to the participant or to
us. Upon exercise of a nonqualified stock option, the participant is subject to
income taxes at the rate applicable to ordinary compensation income on the
difference between the option exercise price and the fair market value of the
shares on the date of exercise. If the participant becomes an employee, the
Company is required to withhold from regular wages or supplemental wage payments
an amount based on the ordinary income recognized. We are entitled to an income
tax deduction in the amount of the income recognized by the participant, subject
to possible limitations imposed by Section 162(m) of the Code and so long as we
withhold the appropriate taxes with respect to such income (if required) and the
participant's total compensation is deemed reasonable in amount. Any gain or
loss on the participant's subsequent disposition of the shares of Common Stock
will receive long or short-term capital gain or loss treatment, depending on
whether the shares are held for more than one year following exercise. We do not
receive a tax deduction for any such gain.
New Plan Benefits
The following table shows the estimated awards to be issued under the
2004 Directors Plan following the Meeting during the remainder of 2005 (and in
each subsequent calendar year) to all current director nominees who are not
executive officers.
NEW PLAN BENEFITS
2004 Non-Employee Director Stock Option Plan
- ---------------------------------------- --------------------------------------
Name and Position Number of Shares
- ---------------------------------------- --------------------------------------
Non-Executive Directors 135,000
- ---------------------------------------- --------------------------------------
Vote Required and Recommendation of the Board of Directors
The affirmative vote of a majority of the shares present or represented
by proxy and entitled to vote for this proposal at the Annual Meeting is
required to approve the increase in the aggregate number of shares of Common
Stock available under the 2004 Directors Plan. Proxies solicited by the Board of
Directors will be voted in favor of the amendment unless a stockholder has
indicated otherwise on the proxy. Abstentions will be treated as votes against
this proposal. Brokerage firms do not have authority to vote customers' unvoted
shares held by the firms in street name on this proposal, therefore, any shares
not voted by a customer will be treated as a broker non-vote, such broker
non-votes will have no effect on the results of this vote.
The Board of Directors unanimously recommends that stockholders vote FOR the
approval of the adoption of an amendment to the 2004 Non-Employee Director Stock
Option Plan to increase by 500,000 shares the aggregate number of shares for
which stock may be granted under the Plan.
17
PROPOSAL # 4
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
(Notice Item 4)
General
Subject to ratification by our stockholders, on the recommendation of
the Audit Committee, the Board has reappointed Brightman Almagor & Co., a member
firm of Deloitte & Touche, as independent auditors to audit our financial
statements for the fiscal year ending December 31, 2005.
Representatives of Brightman Almagor & Co. are invited to the Meeting
and will have an opportunity to make a statement if they so desire and may be
available to respond to appropriate questions.
Vote Required and Recommendation of the Board of Directors
The ratification of the selection of Brightman Almagor & Co. as our
independent auditors for the fiscal year ending December 31, 2005 will require
the affirmative vote of the holders of a majority of the outstanding shares of
Common Stock present at the Meeting, in person or represented by proxy, and
entitled to vote. In determining whether the proposal has received the requisite
number of affirmative votes, abstentions will be counted and will have the same
effect as a vote against the proposal. Broker non-votes will be disregarded and
will have no effect on the outcome of the vote.
The Board believes that a vote for the proposal to ratify the
appointment by the Board of the independent auditors as described above is in
the best interests of our stockholders and us and unanimously recommends a vote
"FOR" such proposal.
Audit and Non-Audit Fees
The following table presents fees for professional audit services
rendered by Brightman Almagor & Co. for the audit of the Company's annual
financial statements for the years ended December 31, 2004, and December 31,
2003, and fees billed for other services rendered by Brightman Almagor & Co.
during those periods.
2004 2003
---- ----
Audit fees $ 54,000 $ 54,000
Audit related fees 3,000 4,000
Tax fees 11,000 -
All Other Fees - -
- -----------------------------------------------------------------------
Total $ 68,000 $ 58,000
- -----------------------------------------------------------------------
In the above table, in accordance with the SEC's definitions and rules,
"audit fees" are fees we paid Brightman Almagor & Co. for professional services
for the audit of our annual financial statements and review of financial
statements included in our quarterly reports filed with the SEC, as well as work
generally only the independent auditor can reasonably be expected to provide,
such as statutory audits and consultation regarding financial accounting and/or
reporting standards; "audit-related fees" are fees billed by Brightman Almagor &
Co. for assurance and related services that are reasonably related to the
performance of the audit or review of our financial statements, "tax fees" are
fees for tax compliance, tax advice and tax planning; and "all other fees" are
fees billed by Brightman Almagor & Co for any services not included in the first
three categories.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-audit
Services of Independent Auditors
Consistent with SEC policies regarding auditor independence, the Audit
Committee has responsibility for appointing, setting compensation and overseeing
the work of the independent auditor. In recognition of this responsibility, the
Audit Committee has established a policy to pre-approve all audit and
permissible non-audit services provided by the independent auditor.
18
Prior to engagement of the independent auditor for the next year's
audit, management will submit an aggregate of services expected to be rendered
during that year for each of four categories of services to the Audit Committee
for approval.
1. Audit services include audit work performed in the preparation of
financial statements, as well as work that generally only the independent
auditor can reasonably be expected to provide, including comfort letters,
statutory audits, and attest services and consultation regarding financial
accounting and/or reporting standards.
2. Audit-Related services are for assurance and related services that
are traditionally performed by the independent auditor, including due diligence
related to mergers and acquisitions, employee benefit plan audits, and special
procedures required to meet certain regulatory requirements.
3. Tax services include all services performed by the independent
auditor's tax personnel except those services specifically related to the audit
of the financial statements, and includes fees in the areas of tax compliance,
tax planning, and tax advice.
4. Other Fees are those associated with services not captured in the
other categories. The Company generally does not request such services from the
independent auditor.
Prior to engagement, the Audit Committee pre-approves these services by
category of service. The fees are budgeted and the Audit Committee requires the
independent auditor and management to report actual fees versus the budget
periodically throughout the year by category of service. During the year,
circumstances may arise when it may become necessary to engage the independent
auditor for additional services not contemplated in the original pre-approval.
In those instances, the Audit Committee requires specific pre-approval before
engaging the independent auditor.
The Audit Committee may delegate pre-approval authority to one or more
of its members. The member to whom such authority is delegated must report, for
informational purposes only, any pre-approval decisions to the Audit Committee
at its next scheduled meeting.
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, 42 - Chief Financial Officer, Executive Vice President
for Strategy, Development and Planning, and Secretary. Mr. White has served as
our Chief Financial Officer since September 2000 and is responsible for
corporate finance and all financial and strategic 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. Mr. White cultivated his expertise in both telecommunications and
the Internet with senior level positions at Tangoe Inc. (formerly TelecomRFQ,
Inc.,) a leading provider of enterprise-wide Telecommunications Expense
Management software , where he served as President and Chief Executive Officer,
Buyersedge.com, an on-line consumer services "reverse-auction' company, 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.
19
EXECUTIVE COMPENSATION AND OTHER INFORMATION
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 other most
highly compensated executive officers in 2002, 2003 and 2004 whose total salary
and bonus exceeded $100,000. These two executive officers are referred to in
this report as "named executive officers".
Annual Compensation Long-Term Compensation
----------------------- --------------------------
Securities
Underlying All Other
Name and Principal Position Year Salary ($) Bonus ($) Options (#) Compensation
--------------------------- ---- ---------- --------- ------------ ------------
Shimmy Zimels 2004 $180,000 $125,050 80,000 --
President and Chief Executive
Officer and former Chief 2003 180,000 -- 85,000 --
Operating Officer................ 2002 182,335 -- 100,000 --
2004 $180,000 $94,100 75,000 --
Paul C. White 2003 180,000 -- 65,000 --
Chief Financial Officer and EVP... 2002 182,335 -- 100,000 --
Option Grants During 2004
The following table sets forth information regarding each stock option
granted during fiscal year 2004 to each of the named executive officers.
Individual Grants
Potential Realizable
Shares of % of Total Exercise Value at
Common Stock Options Price Assumed Rates of Stock
Underlying Granted to Per Price Appreciation
Options Employees in Share Expiration for Option Term (2)
Name Granted (#)(1) Fiscal Year ($/Sh) Date 5% 10%
- --------------------------------------------------------------------------------------------------
Shimmy Zimels ......... 80,000 20.0% 2.85 12/22/14 $92,819 $216,307
Paul C. White.......... 75,000 18.7% 2.85 12/22/14 $87,018 $202,788
(1) The options were granted pursuant to the Company's 2004 Stock Incentive Plan
(the "Plan"). The options granted to the named executive officers are
non-qualified stock options and vest annually in three equal installments
commencing one year from the date of grant.
(2) The amounts shown in this table represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option term.
These gains are based on assumed rates of stock appreciation of 5% and 10%
compounded annually from the date the respective options were granted to their
expiration date. The gains shown are net of the option exercise price, but do
not include deductions for taxes or other expenses associated with the exercise.
Actual gains, if any, on stock option exercises will depend on the future
performance of the Common Stock, the optionee's continued employment through the
option period and the date on which the options are exercised.
20
Option Exercises in Fiscal 2004 and Year-End Option Values
The following table sets forth information for the named executive
officers with respect to option exercises during 2004 and the value as of
December 31, 2004 of unexercised in-the-money options held by each of the named
executive officers.
Number of
Securities Value of
underlying Unexercised
Unexercised In-The-Money
Options at Options at
Shares Year End (#) Year-End ($)
Acquired Value Exercisable Exercisable
Name On Exercise (#) Realized ($) /Unexercisable /Unexercisable
- --------------------------------------------------------------------------------------------------------------------
Shimmy Zimels.......... -- -- 478,937/170,001 626,265/203,235
Paul C. White.......... -- -- 248,332/151,668 498,547/179,953
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, 2004:
- -------------------------- ---------------------------- ---------------------------- -----------------------------
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 3,066,939 $2.50 662,950
Plans Approved by
Security Holders (1)
- -------------------------- ---------------------------- ---------------------------- -----------------------------
Equity Compensation
Plans not Approved by
Security Holders N/A N/A N/A
- -------------------------- ---------------------------- ---------------------------- -----------------------------
Total 3,066,939 $2.50 662,950
- -------------------------- ---------------------------- ---------------------------- -----------------------------
(1) These plans consist of our 1999 Stock Incentive Plan, 1999 Directors'
Plan, and 1999 Employee Stock Purchase Plan, 2004 Stock Incentive Plan
and 2004 Non-Employee Director Stock Option Plan.
Compensation Committee Interlocks and Insider Participation
Executive compensation decisions in 2004 were made by the Compensation
Committee. During 2004, no interlocking relationship existed between our Board
and the board of directors or compensation committee of any other company.
Director Compensation
At our Annual Meeting on November 8, 2004, each of our non-management
directors became eligible to receive $10,000 for their services as directors,
through the next Annual Meeting date. We anticipate paying $10,000 to each
outside director in 2005. Directors are reimbursed for the expenses they incur
in attending meetings of the Board and Board committees.
2004 Non-Employee Director Stock Option Plan
The purposes of the 2004 Non-Employee Director Stock Option Plan (the
"Director 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 shareholders of our Common Stock by granting our directors options to
purchase our shares.
21
The Director Plan provides for the automatic grant of nonstatutory
stock options. Options granted under the Plan are not intended to qualify as
"incentive stock options" within the meaning of Section 422 of the Code.
Excluding the proposed amendment for which we are seeking stockholder approval
described in our Proposal Number 3, the aggregate number of shares of Common
Stock that may be issued under the Director Plan cannot exceed (a) 351,216
shares, plus (b) such additional shares of Common Stock as are represented by
Options previously granted under the 1999 Directors Plan which are cancelled or
expire after the date of stockholder approval of the Director Plan without
delivery of shares of stock by the Company.
Initial Option Awards. Each director who is not an employee of the
Company will be granted options to acquire 10,000 shares of Common Stock on the
date he or she joins the Board.
Subsequent Option Awards. On the first business day after each annual
meeting of stockholders of the Company occurring during the term of the Plan,
each non-employee director who meets the guidelines for Board service and who
continues to be a non-employee director following such annual meeting shall
automatically be granted an option to purchase 10,000 shares of Common Stock;
provided that no Subsequent Option Award shall be made to any non-employee
director who has not served as a director of the Company, as of the time of such
annual meeting, for at least six months.
Committee Chairman Awards. Each non-employee director who is appointed
as chairman of a standing committee of the Board (and has not served as the
chairman of such committee immediately prior to the appointment) shall be
automatically granted an option to purchase 10,000 shares of Common Stock on the
date of such appointment. Each non-employee director who serves as a chairman of
the full Board or of a standing committee of the Board other than the audit
committee, and who meets the guidelines for Board service, immediately following
each annual meeting of the Company's stockholders, shall be granted an option to
purchase an additional 10,000 shares of Common Stock; provided that no Committee
Chairman Award shall be made to: any non-employee director who has not served as
a director of the Company, as of the time of such annual meeting, for at least
six months, and no Committee Chairman Award shall be made to any Eligible
Director who has received a Committee Chairman award for such service on the
same committee within the past six months.
Audit Committee Service Awards. Each non-employee director who is
appointed as a member of the audit committee of the Board (and has not served as
a member of such committee immediately prior to that appointment) shall be
automatically granted an option to purchase 10,000 shares of Common Stock on the
date of such appointment. Each non-employee director who serves as a member of
the audit committee of the Board, and who meets the guidelines for Board
service, immediately following each annual meeting of the Company's
stockholders, shall be granted an option to purchase an additional 10,000 shares
of Common Stock; provided that: no Audit Committee Service Award shall be made
to any non-employee director who has not served as a director of the Company, as
of the time of such annual meeting, for at least six months, and no Audit
Committee Award shall be made to any Eligible Director who has received an Audit
Committee award for such service within the past six months. In addition, the
chairman of the audit committee of the Board shall be granted an additional
option to purchase 5,000 shares of Common Stock.
Notwithstanding the foregoing, a non-employee director shall receive a
maximum of options to purchase 30,000 shares of Common Stock during any single
calendar year. The exercise price per share of Common Stock of each option
granted pursuant to the Plan shall be equal to the fair market value per share
on the date of grant. If not previously exercised, each option shall expire on
the earlier of (i) the tenth anniversary of the date of the grant thereof and
(ii) on the first anniversary of the termination of the non-employee director's
status as a director of the Company. Each option granted under the Plan shall
become fully vested and exercisable on the first anniversary of the date of
grant. In addition, options granted pursuant to the Plan will become exercisable
in full upon a "change in control" as defined in the Plan. The Plan terminates
at the close of business on September 23, 2014, unless sooner terminated by
action of the Board or stockholders of the Company.
Employment Agreements, Termination of Employment and Change-in-Control
Arrangements
We currently have employment agreements in place with Messrs. Zimels
and White, each with the following principal terms:
22
o The agreements, dated as of April 26, 2004, and as amended on October
6, 2005 for Mr. White, are effective until August 31, 2006, and March
31, 2007, for Messrs. Zimels and White, respectively, and are
thereafter automatically extended for the same duration on the
expiration date and on each expiration date thereafter unless either
party provides the other party with written notice of non-renewal at
least 90 days prior to expiration of a term, provided that the
executive provides notice of renewal to the Compensation Committee six
(6) months prior to expiration of the term.
o Pursuant to the agreements, Mr. Zimels and Mr. White are entitled to
receive a base salary of $239,000 and $226,000, respectively during
2004. Such base salary shall be increased on each January 1, commencing
January 1, 2005, by an amount equal to the 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. As such, in 2005, Mr. Zimels and Mr. White are entitled
to receive a base salary of $248,800 and $235,300, respectively.
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 the 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 their annual 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 they receive.
On March 31, 2002, Messrs. White and Zimels each took a voluntary pay
reduction for an unspecified time, from their then current salaries of $213,210,
and $213,210, respectively, to $180,000 each. Messrs. Zimels' and White's kept
their voluntary pay reduction in effect at $180,000 each, throughout 2004
whereas their contractual salaries for 2004 were $239,000 and $226,000,
respectively, for 2004.
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, the 1999
Directors' Plan, the 2004 Stock Incentive Plan, and the 2004 Non-Employee
Director's 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
The 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.
23
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.
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 established the 1999 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 (45% in the case
of the Chief Executive Officer) 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.
24
With respect to 2004, bonuses in the amount of $107,550 and $79,100
were awarded to Mr. Zimels and Mr. White respectively, under the 1999
Performance Incentive Plan. Pursuant to the terms of the 1999 Performance
Incentive Plan, awards will be paid in the current year, following the
completion of the audit of the Company's 2004 financial statements. In addition,
one-time bonuses of $17,500 and $15,000 were awarded to Mr. Zimels and Mr. White
respectively by the Compensation Committee in the first-half of 2004. Mr. Zimels
and Mr. White's bonuses for 2004 were based on the Company's achievement of
certain targets for revenues, gross profit and EBITDA as well as the signing up
a certain number of additional customers to use the deltathree platform
solution.
Long-Term Incentive Compensation
The Company reinforces the importance of producing satisfactory returns
to stockholders over the long term through the operation of the 2004 Stock
Incentive Plan and the 2004 Non-Employee Director Stock Option Plan. 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 our
Common Stock.
2004 Stock Incentive Plan and Proposal to Amend the 2004 Stock Incentive Plan
The Board of Directors adopted the 2004 Stock Incentive Plan on
September 23, 2004 and it was subsequently approved by the stockholders at the
annual meeting on November 8, 2004. The purposes of the 2004 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 2004 Stock Incentive Plan, the Compensation Committee is
authorized to grant options for 759,732 shares of Common Stock (which
represented 4,000,000 shares of Common Stock reserved under the 1999 Stock
Incentive Plan (the "1999 Plan") less the amount of shares represented by awards
previously granted under the 1999 Plan and exercised or outstanding as of
September 28, 2004), plus (b) such additional shares of Common Stock as are
represented by awards previously granted under the 1999 Plan which are cancelled
or without delivery of shares of stock by the Company. Options granted under the
2004 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 2004 Stock
Incentive Plan.
The Company is seeking stockholder approval to increase the number of
shares available for issuance under the 2004 Stock Incentive Plan. As discussed
in Proposal Number 2 of this Proxy Statement, the total number of shares
issuable under the 2004 Stock Incentive Plan did not increase from the amount of
shares that were originally issuable under the 1999 Plan. The Compensation
Committee determined that the Company should have a sufficient number of shares
available for potential future grants of options, both in the near-term and the
long-term. The Compensation Committee believes that the request for the increase
in the number of shares is necessary for the Company to be able to continue to
attract and retain executive officers and key employees and consultants while
continuing the Company's policy of conserving its cash resources. The
Compensation Committee, therefore, deemed it advisable and recommended to the
Board to increase the number of shares issuable under the 2004 Stock Incentive
Plan. The Board approved this recommendation and now seeks shareholder approval
to effectuate this increase by amending the 2004 Plan as described in Proposal
Number 2.
The 2004 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 500,000. As of December 31, 2004, the Company has
outstanding options to acquire an aggregate of 3,066,939 shares of Common Stock,
of which 2,555,439 were granted under the 1999 Plans and 511,500 were granted
under the 2004 Plans.
25
Chief Executive Officer's Fiscal 2004 Compensation
Mr. Shimmy Zimels was our chief executive officer for all of 2004.
Under the terms of his employment agreement, Mr. Zimels was entitled to receive
an aggregate annual base salary of $239,000. However, during 2004, Mr. Zimels
received an aggregate annual base salary of $180,000, due to his voluntary pay
reduction, a one-time bonus of $17,500 was awarded by the Compensation Committee
in the first-half of 2004 and his participation in the 1999 Performance
Incentive Plan resulted in bonus compensation of $107,550 for 2004.
Submitted by:
The Compensation Committee
Benjamin Broder (Chairman)
Ilan Biran
Joshua Maor
26
STOCK PERFORMANCE CHART
The graph depicted below shows a comparison of cumulative total
shareholder returns for our Common Stock with the cumulative total return on The
Nasdaq Stock Market (U.S.) Index and the Nasdaq Telecommunications Index.
Shareholder returns over the indicated period are based on historical data and
should not be considered indicative of future shareholder returns.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG DELTATHREE, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX
AND THE NASDAQ TELECOMMUNICATIONS INDEX
[LINE GRAPH]
Cumulative Total Return
-------------------------------------------------------
12/99 12/00 12/01 12/02 12/03 12/04
--------- -------- -------- -------- -------- --------
deltathree, Inc. $100.00 $4.61 $3.50 $1.84 $11.34 $12.89
Nasdaq Stock Market (U.S.) 100.00 60.09 45.44 26.36 38.55 40.87
Nasdaq Telecommunications Market 100.00 52.17 38.29 23.31 41.85 45.52
27
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We are not, and have not been during the last two fiscal years, a party
to any related-party agreements. All transactions between us and our officers,
directors, principal stockholders and affiliates must be reviewed and approved
in advance by the Audit Committee.
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 SEC 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 except that: an initial report of ownership was filed
late by Noam Ben-Ozer; one report of change in beneficial ownership, covering
one transaction, was filed late by Noam Bardin; one report of change in
beneficial ownership, covering one transaction, was filed late by Shimmy Zimels;
one report of change in beneficial ownership, covering one transaction, was
filed late by Paul White; one report of change in beneficial ownership, covering
one transaction, was filed late by Amir Gera and one report of change in
beneficial ownership, covering one transaction, was filed late by Joshua Maor.
CODE OF CONDUCT AND ETHICS
On March 25, 2004, we adopted a Corporate Code of Conduct and Ethics
applicable to all of our employees and directors, including our principal
executive officer, principal financial and accounting officer and controller. A
copy of our Corporate Code of Conduct and Ethics was filed as an exhibit to our
annual report on Form 10-K for our fiscal year ended 2004. There were no changes
made to the Corporate Code of Conduct and Ethics during 2004. We intend to post
on our website and include in a Current Report on Form 8-K filed with the SEC
any amendments to, or waivers from, our Code of Conduct and Ethics that apply to
our principal executive officer, principal financial and accounting officer and
controller.
STOCKHOLDER PROPOSALS FOR 2006 ANNUAL MEETING
Stockholders may submit proposals on matters appropriate for
stockholder action at our subsequent annual meetings consistent with Rule 14a-8
promulgated under the Securities Exchange Act of 1934, which in certain
circumstances may require the inclusion of qualifying proposals in our Proxy
Statement. For such proposals to be considered for inclusion in the Proxy
Statement and proxy relating to our 2006 Annual Meeting of Stockholders, all
applicable requirements of Rule 14a-8 must be satisfied and such proposals must
be received by us no later than July 1, 2006. Such proposals should be directed
to us at 75 Broad Street, 31st Floor, New York, New York 10004.
Except in the case of proposals made in accordance with Rule 14a-8, our
Amended and Restated By-laws require that stockholders desiring to bring any
business before our 2006 Annual Meeting of Stockholders deliver written notice
thereof to us not less than 90 days nor more than 120 days prior to such meeting
and comply with all other applicable requirements of the By-laws. However, in
the event that our 2006 Annual Meeting is called for a date that is not within
30 days before or after the date of the Meeting, the notice must be received by
the close of business on the 10th day following the public disclosure of the
date of the annual meeting or the mailing of notice of the annual meeting.
28
OTHER MATTERS
The Board knows of no matters other than those described herein that
will be presented for consideration at the Meeting and does not intend to bring
any other matters before the Meeting. However, should any other matters properly
come before the Meeting or any adjournment or postponement thereof, it is the
intention of the persons named in the accompanying proxy card to vote in
accordance with their best judgment in the interests of the Company.
MISCELLANEOUS
We will bear all costs incurred in the solicitation of proxies. In
addition to the solicitation by mail, our officers and employees may solicit
proxies by mail, facsimile, telephone or in person, without additional
compensation. We may also make arrangements with brokerage houses and other
custodians, nominees and fiduciaries for the forwarding of solicitation
materials to the beneficial owners of Common Stock held of record by such
persons, and we may reimburse such brokerage houses and other custodians,
nominees and fiduciaries for their out-of-pocket expenses incurred in connection
therewith.
Additional copies of our annual report will be furnished at no charge
to each person to whom a proxy statement is delivered upon receipt of a written
or oral request of such person addressed to deltathree, Inc., 75 Broad Street,
31st floor, New York, New York 10004.
By Order of the Board of Directors,
/s/ Paul C. White
Paul C. White
Secretary
New York, New York
November 14, 2005
29
ANNUAL MEETING OF STOCKHOLDERS OF
DELTATHREE, INC.
December 20, 2005
PLEASE DATE, SIGN AND MAIL
YOUR PROXY CARD IN THE
ENVELOPE PROVIDED AS SOON
AS POSSIBLE.
PLEASE DETACH ALONG PERFORATED LINE AND MAIL IN THE ENVELOPE PROVIDED.
- ------------------------------------------------------------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR PROPOSALS 1, 2, 3 AND 4.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE [X]
- ------------------------------------------------------------------------------------------------------------------------------------
FOR AGAINST ABSTAIN
[_] [_] [_]
1. ELECTION OR DIRECTORS (OR IF ANY NOMINEE 2. PROPOSAL TO ADOPT AMENDMENT TO
IS NOT AVAILABLE FOR ELECTION, SUCH INCREASE THE AGGREGATE NUMBER OF
SUBSTITUTE AS THE BOARD OF DIRECTORS SHARES FOR WHICH AWARDS MAY BE
MAY DESIGNATE). GRANTED UNDER THE 2004 STOCK
INCENTIVE PLAN.
NOMINEES:
[_] FOR ALL NOMINEES [_] NOAM BARDIN 3. PROPOSAL TO ADOPT AMENDMENT TO [_] [_] [_]
[_] WITHOLD AUTHORITY [_] NOAM BEN-OZER INCREASE THE AGGREGATE NUMBER OF
FOR ALL NOMINEES [_] ILAN BIRAN SHARES FOR WHICH STOCK OPTIONS MAY
[_] FOR ALL EXCEPT [_] BENJAMIN BRODER BE GRANTED UNDER THE 2004 NON-
(SEE INSTRUCTIONS [_] JOSHUA MAOR EMPLOYEE DIRECTOR PLAN.
BELOW) [_] LIOR SAMUELSON
[_] SHIMMY ZIMELS 4. PROPOSAL TO RATIFY THE APPOINTMENT
OF BRIGHTMAN ALMAGOR & CO., A MEMBER
FIRM OF DELOITTE & TOUCHE, AS THE
COMPANY'S INDEPENDENT PUBLIC
ACCOUNTANTS FOR THE FISCAL YEAR
ENDING DECEMBER 31, 2005. [_] [_] [_]
In their discretion, the proxies are authorized to vote upon such other matters
INSTRUCTIONS: to withold authority to vote as may properly come before the meeting or any adjournments thereof. If you wish
for any individual nominee(s), to vote in accordance with the Board of Directors' recommendations, just sign
mark "FOR ALL EXCEPT" and fill in below. You need not mark any boxes.
the circle next to each nominee
you wish to withold, as shown here: THIS PROXY, WHEN EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN. IF NO
- ------------------------------------------------ DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1,2,3 AND 4.
- ------------------------------------------------
To change the address on your account, please
check the box at right and indicate your new
address in the space above. Please note that
changes to the registered name(s) on the account
may not be submitted via this method. [_]
Signature of Stockholder [_____________________] Date: [_______] Signature of Stockholder [_____________________] Date: [_______]
Note: Please sign exactly as your name or names appear on this Proxy. When shares are held jointly, each holder should sign. When
signing as executor, administrator, attorney, trustee or guardian, please give full title as such. If the signer is a corporation,
please sign full corporate name by duly authorized officer, giving full title as such. If signer is a partnership, please sign in
partnership name by authorized person.
DELTATHREE, INC.
ANNUAL MEETING OF STOCKHOLDERS
DECEMBER 20, 2005
THIS PROXY IS BEING SOLICITED BY DELTATHREE INC.'S BOARD OF DIRECTORS
The undersigned, revoking any previous proxies relating to these
shares, hereby acknowledges receipt of the Notice and Proxy Statement, dated
November 14, 2005, in connection with the Annual Meeting of Stockholders to be
held at 10:30 a.m., local time, on December 20, 2005 at the offices of Mintz,
Levin, Cohn, Ferris, Glovsky and Popeo, P.C., located at the Chrysler Center,
666 Third Avenue, 25th Floor, New York, New York, and hereby appoints Shimmy
Zimels and Paul C. White, and each of them (with full power to act alone), the
attorneys and proxies of the undersigned, with full power of substitution to
each, to vote all shares of the common stock of deltathree, Inc. registered in
the name provided herein, which the undersigned is entitled to vote at the 2005
Annual Meeting of Stockholders, and at any adjournments thereof, with all the
powers the undersigned would have if personally present. Without limiting the
general authorization hereby given, said proxies are, and each of them is,
instructed to vote or act as follows on the proposals set forth in this Proxy.
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)