-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ETtb4JFaCyRRkqaghcMiKb8rbkCXNcxMSjGyI5AyEk9i1rKXsYaAWavggQmRlkyi joIRbBUmR3PzmCsg0Py2nQ== 0001144204-04-011036.txt : 20040804 0001144204-04-011036.hdr.sgml : 20040804 20040804101805 ACCESSION NUMBER: 0001144204-04-011036 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040804 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DELTATHREE INC CENTRAL INDEX KEY: 0001086740 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 134006766 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28063 FILM NUMBER: 04950217 BUSINESS ADDRESS: STREET 1: 75 BROAD ST STREET 2: 31ST FL CITY: NEW YORK STATE: NY ZIP: 10004 BUSINESS PHONE: 2125004850 MAIL ADDRESS: STREET 1: 75 BROAD ST CITY: NEW YORK STATE: NY ZIP: 10004 FORMER COMPANY: FORMER CONFORMED NAME: DELTATHREE COM INC DATE OF NAME CHANGE: 19990519 10-Q 1 v05298_10q.txt FORM 10-Q ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 Commission file number 000-28063 DELTATHREE, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-4006766 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 75 BROAD STREET NEW YORK, NEW YORK 10004 (Address of principal executive offices) (Zip code) (212) 500-4850 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No | | Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X] As of August 3, 2004, the registrant had 29,579,823 shares of Class A Common Stock, par value $0.001 per share, outstanding. ================================================================================ i DELTATHREE, INC. Table of Contents
Page ---- PART I - FINANCIAL INFORMATION Item 1. Financial Statements.....................................................................................1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................6 Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................................10 Item 4. Controls and Procedures.................................................................................11 PART II - OTHER INFORMATION Item 1. Legal Proceedings.......................................................................................12 Item 2. Change in Securities and Use of Proceeds................................................................12 Item 4. Submission of Matters to a Vote of Security Holders.....................................................12 Item 5. Other Information.......................................................................................13 Item 6. Exhibits and Reports on Form 8-K........................................................................13 Signatures.......................................................................................................14 Exhibit Index....................................................................................................15 Certifications...................................................................................................16
ii PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. DELTATHREE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF AS OF JUNE 30, DECEMBER 31, 2004 2003 --------- ------------ (unaudited) ($ IN THOUSANDS) ASSETS CURRENT ASSETS: Cash and cash equivalents ......................................... $ 9,297 $ 1,682 Short-term investments ............................................ 8,222 16,442 Accounts receivable, net .......................................... 700 363 Prepaid expenses and other current assets ......................... 404 684 Inventory ......................................................... 141 60 --------- --------- Total current assets ........................................... 18,764 19,231 --------- --------- PROPERTY AND EQUIPMENT, NET ........................................ 3,476 4,307 --------- --------- DEPOSITS ........................................................... 104 105 --------- --------- Total assets .................................................. $ 22,344 $ 23,643 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable .................................................. $ 2,658 $ 2,139 Deferred revenues ................................................. 309 172 Other current liabilities ......................................... 2,046 2,100 --------- --------- Total current liabilities ...................................... 5,013 4,411 --------- --------- LONG-TERM LIABILITIES: Severance pay obligations ......................................... 93 91 --------- --------- Total liabilities .............................................. 5,106 4,502 --------- --------- STOCKHOLDERS' EQUITY: Class A common stock, - par value $0.001 .......................... 29 29 Additional paid-in capital ........................................ 167,242 167,168 Accumulated deficit ............................................... (149,823) (147,846) Treasury stock at cost: 257,600 shares of Class A common stock as of June 30, 2004 and December 31, 2003 .............................. (210) (210) --------- --------- Total stockholders' equity .................................... 17,238 19,141 --------- --------- Total liabilities and stockholders' equity .................... $ 22,344 $ 23,643 ========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 1 DELTATHREE, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 2004 2003 2004 2003 ------------ ------------ ------------ ------------ (unaudited) (unaudited) ($ IN THOUSANDS, EXCEPT SHARE DATA) Revenues ................................. $ 4,701 $ 2,985 $ 9,307 $ 5,957 Costs and operating expenses: Cost of revenues ....................... 3,047 1,955 6,056 3,817 Research and development expenses ...... 558 555 1,139 1,218 Selling and marketing expenses ......... 822 871 1,625 1,654 General and administrative expenses .... 484 478 1,091 1,139 Depreciation and amortization .......... 719 1,527 1,464 3,131 ------------ ------------ ------------ ------------ Total costs and operating expenses .. 5,630 5,386 11,375 10,959 ------------ ------------ ------------ ------------ Loss from operations ..................... (929) (2,401) (2,068) (5,002) Interest income, net ..................... 49 42 135 146 ------------ ------------ ------------ ------------ Loss before income taxes ................. (880) (2,359) (1,933) (4,856) Income taxes ............................. 6 4 44 22 ------------ ------------ ------------ ------------ Net loss ................................. $ (886) $ (2,363) $ (1,977) $ (4,878) ============ ============ ============ ============ Net loss per share - basic and diluted ... $ (0.03) $ (0.08) $ (0.07) $ (0.17) ============ ============ ============ ============ Weighted average shares outstanding - basic and diluted (number of shares) 29,312,835 28,923,296 29,298,717 28,921,536 ============ ============ ============ ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 2 DELTATHREE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2004 2003 ------- ------- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ........................................................ $(1,977) $(4,878) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ............................ 1,464 3,131 Capital gain, net ........................................ -- (18) Increase (decrease) in liability for severance pay ....... 2 (28) Provision for losses on accounts receivable .............. -- 42 Changes in assets and liabilities: Decrease (increase) in accounts receivable ............... (337) 320 Decrease in other current assets ......................... 280 312 Increase in inventory .................................... (81) -- Increase (decrease) in accounts payable .................. 519 (491) Increase in deferred revenues ............................ 137 5 Decrease in current liabilities .......................... (54) (381) ------- ------- 1,930 2,892 ------- ------- Net cash used in operating activities ......................... (47) (1,986) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment ....................... (633) (204) Proceeds from sale of property and equipment ............. -- 35 Decrease (increase) in deposits ......................... 1 (5) ------- ------- Net cash used in investing activities ........................ (632) (174) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Decrease in short-term investments, net .................. 8,220 451 Proceeds from exercise of employee options ............... 74 -- ------- ------- Net cash provided by financing activities ..................... 8,294 451 ------- ------- Increase (decrease) in cash and cash equivalents ................ 7,615 (1,709) Cash and cash equivalents at beginning of year .................. 1,682 5,681 ------- ------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ...................... $ 9,297 $ 3,972 ======= =======
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3 DELTATHREE, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The unaudited condensed consolidated financial statements of deltathree, Inc. and its subsidiaries (collectively, "the Company"), of which these notes are a part, have been prepared in accordance with generally accepted accounting principles for interim financial information and pursuant to the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for annual financial statements. In the opinion of management of the Company, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation of the financial information have been included. The results for the interim periods presented are not necessarily indicative of the results that may be expected for any future period. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2003. 2. NET LOSS PER SHARE The shares issuable upon the exercise of stock options and warrants are excluded from the calculation of net loss per share, as their effect would be antidilutive. 3. STOCK-BASED COMPENSATION The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and in accordance with FASB Interpretation No. 44. Pursuant to these accounting pronouncements, the Group records compensation for stock options granted to employees over the vesting period of the options based on the difference, if any, between the exercise price of the options and the market price of the underlying shares at that date. Deferred compensation is amortized to compensation expense over the vesting period of the options. See below a pro forma disclosure required in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", as amended by SFAS No. 148. If the Company had elected to recognize compensation expense for the issuance of options to employees of the Company based on the fair value method of accounting prescribed by SFAS No. 123, net income (loss) and earnings (loss) per share would have been reduced to the pro forma amounts as follows (in thousands, except per share amounts): 4
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------------------- 2004 2003 2004 2003 ------- ------- ------- ------- NET INCOME (LOSS): Reported net income (loss) ..................... $ (886) $(2,363) $(1,977) $(4,878) Add stock-based employee compensation expense, included in reported net income, net of tax .. -- -- -- -- Deduct stock-based employee compensation expense determined under fair value method, net of tax (94) (198) (188) (404) ------- ------- ------- ------- Pro forma net income (loss) .................... $ (980) $(2,561) $(2,165) $(5,282) ======= ======= ======= ======= NET INCOME (LOSS) PER SHARE: Basic and diluted, as reported ................. $ (0.03) $ (0.08) $ (0.07) $ (0.17) Basic and diluted, pro forma ................... $ (0.03) $ (0.09) $ (0.07) $ (0.18)
For the purpose of presenting pro forma information required under SFAS 123, the fair value option grant has been estimated on the date of grant using the Black Scholes option pricing model for grants made after the Company became a public entity. During the six and three months ended June 30, 2004 and the six and three months ended June 30, 2003 there were no new option grants. 5 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2003. This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those discussed in the forward-looking statements. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to us as of the date thereof, and we assume no obligation to update any forward-looking statement or risk factors. SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO SIX MONTHS ENDED JUNE 30, 2003 REVENUES Revenues increased approximately $3.3 million or 55.0% to approximately $9.3 million for the six months ended June 30, 2004 from approximately $6.0 million for the six months ended June 30, 2003. Revenues from enhanced IP communications services (primarily PC-to-Phone) through iConnectHere increased approximately $0.6 million or 20% to approximately $3.6 million for the six months ended June 30, 2004 from approximately $3.0 million for the six months ended June 30, 2003 due primarily to a greater number of PC-to-Phone and Broadband Phone calls being placed by an increasing user base. Revenues from enhanced IP communications services through our reseller and service provider sales efforts (including sales of our Hosted Communications Solution) increased approximately $3.0 million or 115.4% to approximately $5.6 million for the six months ended June 30, 2004 from approximately $2.6 million for the six months ended June 30, 2003, due primarily to a greater number of PC-to-Phone and Broadband Phone calls being placed by an increasing user base. Revenues from carrier transmission services decreased by approximately $193,000 or 62.0% to approximately $118,000 for the six months ended June 30, 2004 from approximately $311,000 for the six months ended June 30, 2003, due primarily to reduced demand from a smaller customer base. One "Master Reseller" accounted for approximately 22.5% of our sales in aggregate during the first half of 2004. COSTS AND OPERATING EXPENSES COST OF REVENUES. Cost of revenues increased by approximately $2.3 million or 60.5% to approximately $6.1 million for the six months ended June 30, 2004 from approximately $3.8 million for the six months ended June 30, 2003, due primarily to an increase in the amount of traffic being terminated. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses decreased slightly by approximately $0.1 million or 8.3% to approximately $1.1 million for the six months ended June 30, 2004 from approximately $1.2 million for the six months ended June 30, 2003, due to lower personnel costs associated with the development of new services and enhancements to our existing services. 6 SELLING AND MARKETING EXPENSES. Selling and marketing expenses were essentially unchanged at approximately $1.6 million for the six months ended June 30, 2004 and for the six months ended June 30, 2003. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were essentially unchanged at approximately $1.1 million for the six months ended June 30, 2004 and for the six months ended June 30, 2003. DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by approximately $1.6 million or 51.6% to approximately $1.5 million for the six months ended June 30, 2004 from approximately $3.1 million for the six months ended June 30, 2003. LOSS FROM OPERATIONS Loss from operations decreased by approximately $2.9 million or 58.0% to approximately $2.1 million for the six months ended June 30, 2004 from approximately $5.0 million for the six months ended June 30, 2003, due primarily to the increase in revenues and decrease in in-direct operating expenses, including research and development expenses. We expect to continue to incur losses for the foreseeable future. INTEREST INCOME, NET Interest income, net decreased by approximately $11,000 or 7.5% to approximately $135,000 for the six months ended June 30, 2004 from approximately $146,000 for the six months ended June 30, 2003, due primarily to lower interest rates earned on the reduced balance of the remaining proceeds from our initial public offering. INCOME TAXES, NET We paid net income taxes of approximately $44,000 for the six months ended June 30, 2004 compared to approximately $22,000 for the six months ended June 30, 2003. NET LOSS Net loss decreased by approximately $2.9 million or 59.2% to approximately $2.0 million for the six months ended June 30, 2004 from approximately $4.9 million for the six months ended June 30, 2003 due to the foregoing factors. THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO THREE MONTHS ENDED JUNE 30, 2003 REVENUES Revenues increased approximately $1.7 million or 56.7% to approximately $4.7 million for the three months ended June 30, 2004 from approximately $3.0 million for the three months ended June 30, 2003. Revenues from enhanced IP communications services (primarily PC-to-Phone) through iConnectHere increased approximately $0.3 million or 20.0% to approximately $1.8 million for the three months ended June 30, 2004 from approximately $1.5 million for the three months ended June 30, 2003 due primarily to a greater number of PC-to-Phone and Broadband Phone calls being placed by an increasing user base. Revenues from enhanced IP communications services through our reseller and service provider sales efforts (including sales of our Hosted 7 Communications Solution) increased approximately $1.5 million or 115.4% to approximately $2.8 million for the three months ended June 30, 2004 from approximately $1.3 million for the three months ended June 30, 2003, due primarily to a greater number of PC-to-Phone and Broadband Phone calls being placed by an increasing user base. Revenues from carrier transmission services decreased by approximately $176,000 or 78.57% to approximately $48,000 for the three months ended June 30, 2004 from approximately $224,000 for the three months ended June 30, 2003, due primarily to reduced demand from a smaller customer base. One "Master Reseller" accounted for approximately 17.17% of our sales in aggregate during the second quarter of 2004. COSTS AND OPERATING EXPENSES COST OF REVENUES. Cost of revenues increased by approximately $1.0 million or 50.0% to approximately $3.0 million for the three months ended June 30, 2004 from approximately $2.0 million for the three months ended June 30, 2003, due primarily to a increase in the amount of traffic being terminated. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were essentially unchanged at approximately $0.6 million for the three months ended June 30, 2004 and for the three months ended June 30, 2003. SELLING AND MARKETING EXPENSES. Selling and marketing expenses were essentially unchanged at approximately $0.8 million for the three months ended June 30, 2004 and for the three months ended June 30, 2003. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses were essentially unchanged at approximately $0.5 million for the three months ended June 30, 2004 and for the three months ended June 30, 2003. DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by approximately $0.8 million or 53.3% to approximately $0.7 million for the three months ended June 30, 2004 from approximately $1.5 million for the three months ended June 30, 2003. LOSS FROM OPERATIONS Loss from operations decreased by approximately $1.5 million or 62.5% to approximately $0.9 million for the three months ended June 30, 2004 from approximately $2.4 million for the three months ended June 30, 2003, due primarily to the increase in revenues and a slight decrease in in-direct operating expenses, including selling and marketing expenses. We expect to continue to incur losses for the foreseeable future. INTEREST INCOME, NET Interest income, net increased by approximately $7,000 or 16.7% to approximately $49,000 for the three months ended June 30, 2004 from approximately $42,000 for the three months ended June 30, 2003, due primarily to slightly higher interest rates earned on the reduced balance of the remaining proceeds from our initial public offering. 8 INCOME TAXES, NET We paid net income taxes of approximately $6,000 for the three months ended June 30, 2004 compared to approximately $4,000 for the three months ended June 30, 2003. NET LOSS Net loss decreased by approximately $1.5 million or 62.5% to approximately $0.9 million for the three months ended June 30, 2004 from approximately $2.4 million for the three months ended June 30, 2003 due to the foregoing factors. LIQUIDITY AND CAPITAL RESOURCES Since our inception in March 1996, we have incurred significant operating and net losses, due in large part to the start-up and development of our operations. As of June 30, 2004, we had an accumulated deficit of approximately $150 million. We anticipate that we will continue to incur operating and net losses as we continue to implement our growth strategy. As of June 30, 2004, we had cash and cash equivalents of approximately $9.3 million, marketable securities and other short-term investments of approximately $8.2 million and working capital of approximately $13.8 million. We generated negative cash flow from operating activities of approximately $47,000 during the six months ended June 30, 2004 compared with approximately $2.0 million during the six months ended June 30, 2003. Accounts receivable were approximately $0.7 million and $0.4 million at June 30, 2004 and June 30, 2003, respectively. Our capital expenditures were moderately higher, with approximately $633,000 expended in the six months ended June 30, 2004 compared to approximately $204,000 expended in the six months ended June 30, 2003 as we continued to optimize our overall utilization of our existing domestic and international network infrastructure, while making necessary investments to support significant increases in traffic volumes. Short-term, we obtain our funding from our utilization of the remaining proceeds from our initial public offering offset by positive or negative cash flow from our operations. These proceeds are maintained as cash, cash equivalents, and short-term investments with an original maturity of twelve months or less. Based on current trends in our operations, we believe that these funds will be sufficient to meet our working capital requirements, including operating losses, and capital expenditure requirements for at least the next fiscal year, assuming that our business plan is implemented successfully, and that: o our recent revenue trends, which reflected an increase in our higher-margin (primarily PC-to-Phone and Broadband Phone) products and services, continue to increase; o our indirect expense trends remain at or near the rates of our second quarter 2004 rates, which were essentially unchanged during the past twelve months through curtailment of discretionary expenditures, and steady network rent and termination rates from our carriers; and o our net cash-burn rate, which was reduced during the past twelve months due to the foregoing factors to approximately $326,000 in the second quarter of 2004, continues to improve throughout the remainder of 2004 and beyond. 9 To the extent that these trends do not remain steady, or if in the longer-term we are not able to successfully implement our business strategy, we may be required to raise additional funds for our ongoing operations. Additional financing may not be available when needed or, if available, such financing may not be on terms favorable to us, especially in light of current economic conditions and the unfavorable market for telecommunications companies in particular. If additional funds are raised through the issuance of equity securities, our existing stockholders may experience significant dilution. In addition, we cannot assure you that any third party will be willing or able to provide additional capital to us on favorable terms or at all. FORWARD-LOOKING STATEMENTS Certain matters discussed in this Report under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operation - Liquidity and Capital Resources" contain certain forward-looking statements which involve risks and uncertainties and depend upon certain assumptions, some of which may be beyond our control, including, but not limited to, uncertainty of financial estimates and projections, the competitive environment for Internet telephony, our limited operating history, changes of rates of all related telecommunications services, the level and rate of customer acceptance of new products and services, legislation that may affect the Internet telephony industry, rapid technological changes, as well as other risks referenced from time to time in our filings with the Securities and Exchange Commission, and, accordingly, there can be no assurance with regard to such statements. All forward-looking statements and risk factors included in this document are made as of the date hereof, based on information available to us as of the date thereof, and we assume no obligation to update any forward-looking statement or risk factors. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Securities and Exchange Commission's rule related to market risk disclosure requires that we describe and quantify our potential losses from market risk sensitive instruments attributable to reasonably possible market changes. Market risk sensitive instruments include all financial or commodity instruments and other financial instruments (such as investments and debt) that are sensitive to future changes in interest rates, currency exchange rates, commodity prices or other market factors. We believe that our exposure to market risk is immaterial. We currently do not invest in, or otherwise hold, for trading or other purposes, any financial instruments subject to market risk. 10 ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were adequate and effective to ensure that material information relating to us was made known to them by others within deltathree, particularly during the period in which this quarterly report on Form 10-Q was being prepared. (b) Changes in Internal Controls. There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 11 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We, as well as certain of our former officers and directors, have been named as defendants in a number of purported securities class actions in Federal District Court for the Southern District of New York, arising out of our initial public offering in November 1999 (the "IPO"). Various underwriters of the IPO also are named as defendants in the actions. The complaints allege, among other things, that the registration statement and prospectus filed with the Securities and Exchange Commission for purposes of the IPO were false and misleading because they failed to disclose that the underwriters allegedly (i) solicited and received commissions from certain investors in exchange for allocating to them shares of our stock in connection with the IPO and (ii) entered into agreements with their customers to allocate such stock to those customers in exchange for the customers agreeing to purchase additional shares in the aftermarket at predetermined prices. On August 8, 2001, the court ordered that these actions, along with hundreds of IPO allocation cases against other issuers, be transferred to Judge Scheindlin for coordinated pre-trial proceedings. In July 2002, omnibus motions to dismiss the complaints based on common legal issues were filed on behalf of all issuers and underwriters. On February 19, 2003, the Court issued an opinion granting in part and denying in part those motions to dismiss. The complaint against the Company was not dismissed as a matter of law. These cases remain at a preliminary stage and no discovery proceedings have taken place. We believe that the claims asserted against us in these cases are without merit and intend to defend ourselves vigorously against them. A final settlement agreement between the plaintiffs and issuer defendants has been executed and submitted to the Court for approval. We are not a party to any other material litigation and are not aware of any other pending or threatened litigation that could have a material adverse effect on us or our business taken as a whole. ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS On November 22, 1999, we offered 6,000,000 shares of our class A common stock in an initial public offering. These shares were registered with the Securities and Exchange Commission on a registration statement on Form S-1 (file no. 333-86503), which became effective on November 22, 1999. We received net proceeds of approximately $96,255,000 from the sale of 6,900,000 shares at the initial public offering price of $15.00 per share after deducting underwriting commissions and discounts and expenses of approximately $6,300,000. The managing underwriters for our initial public offering were Lehman Brothers Inc., Merrill Lynch & Co., U.S. Bancorp Piper Jaffray, Lazard Freres & Co. LLC and Fidelity Capital Markets. As of June 30, 2004, we had used approximately $38 million of the net proceeds for sales, marketing and promotional activities, $23 million for capital expenditures and $17 million for general corporate purposes. Pending use of the remaining net proceeds, we have invested the remaining net proceeds in interest-bearing, investment-grade instruments, certificates of deposit, or direct or guaranteed obligations of the United States. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of the Company's security holders during the first quarter of 2004. 12 ITEM 5. OTHER INFORMATION On July 22, 2004, we announced that we had entered into an agreement with Verizon Communications, dated July 19, 2004, to provide VoIP consulting, management and back office integration services for Verizon's new VoiceWing consumer Voice over IP (VoIP) service. The agreement has a two-year initial term with an annual renewal after the initial term. Pursuant to the agreement, Verizon has paid us a small, up-front integration fee and has agreed to pay us monthly recurring fees, based on the number of end-users utilizing the service each month. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: The following exhibits are filed herewith: EXHIBIT NUMBER DESCRIPTION - ------- ----------- 31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. The following report was filed on Form 8-K during the quarter ended June 30, 2004: On April 29, 2004, we furnished a report on Form 8-K, as amended, reporting under Item 12 our press release announcing our results and other data for the year ended and quarter ended March 31, 2004, as well as financial guidance for the quarter ending June 30, 2004. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. DELTATHREE, INC. Date: August 3, 2004 By: /s/ Paul C. White ------------------------------------ Name: Paul C. White Title: Chief Financial Officer 14 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------- ----------- 31.1 Certification of CEO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of CFO Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 15 EX-31.1 2 v05298_ex31-1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATION BY PRINCIPAL EXECUTIVE OFFICER I, Shimmy Zimels, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of deltathree, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 3, 2004 /s/ Shimmy Zimels ------------------------------------ Name: Shimmy Zimels Title: Chief Executive Officer EX-31.2 3 v05298_ex31-2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATION BY PRINCIPAL FINANCIAL OFFICER I, Paul C. White, certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of deltathree, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 3, 2004 /s/ Paul C. White ---------------------------------------- Name: Paul C. White Title: Chief Financial Officer EX-32 4 v05298_ex32.txt EXHIBIT 32 EXHIBIT 32 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (SUBSECTIONS (A) AND (B) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES CODE) Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of deltathree, Inc., a Delaware corporation (the "Company"), does hereby certify, to such officer's knowledge, that: The Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 3, 2004 /s/Shimmy Zimels ---------------- Shimmy Zimels Chief Executive Officer (Principal Executive Officer) Dated: August 3, 2004 /s/Paul C. White ---------------- Paul C. White Chief Financial Officer (Principal Financial and Accounting Officer) A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----