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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
------------------
Commission file number 000-28063
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DELTATHREE.COM, 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 | |
As of November 10, 2000, the registrant had 9,457,972 shares of
Class A Common Stock, par value $0.001 per share, and 19,569,459 shares of
Class B Common Stock, par value $0.001 per share, outstanding.
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DELTATHREE.COM, INC.
TABLE OF CONTENTS
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Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000 (Unaudited)
and December 31, 1999.........................................................................................1
Condensed Consolidated Statements of Operations for the Three and Nine Month Periods Ended
September 30, 2000 (Unaudited) and September 30, 1999 (Unaudited).............................................3
Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended
September 30, 2000 (Unaudited) and September 30, 1999 (Unaudited).............................................4
Notes to Condensed Consolidated Financial Statements..............................................................5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................6
Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................................12
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................................13
Item 2. Change in Securities and Use of Proceeds................................................................13
Item 4. Submission of Matters to a Vote of Security Holders.....................................................14
Item 5. Other Information.......................................................................................14
Item 6. Exhibits and Reports on Form 8-K........................................................................15
Signatures.......................................................................................................17
Exhibit Index....................................................................................................18
</TABLE>
ii
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
DELTATHREE.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data and share data)
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<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
(UNAUDITED)
ASSETS
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CURRENT ASSETS:
Cash and cash equivalents $18,179 $ 89,957
Short-term investments 52,775 11,276
Accounts receivable, net 5,665 903
Due from affiliates 4,769 1,760
Prepaid expenses and other current assets 2,646 3,090
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Total current assets 84,034 106,986
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INVESTMENTS -- 90
-- --
PROPERTY AND EQUIPMENT:
Telecommunications equipment 17,657 9,844
Furniture, fixtures and other 4,326 721
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21,983 10,565
Less accumulated depreciation 2,962 1,066
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Property and equipment, net 19,021 9,499
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GOODWILL, NET 16,176 9,457
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DEPOSITS 1,494 800
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Total assets $ 120,725 $ 126,832
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term debt due to affiliates $13,469 $ 14,752
Accounts payable 5,975 2,580
Due to affiliates 3,910 626
Deferred revenues 391 538
Other current liabilities 6,306 5,548
----- -----
Total current liabilities 30,051 24,044
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LONG-TERM LIABILITIES:
Long-term debt 474 --
Severance pay obligations 223 208
--- ---
Total long-term liabilities 697 208
--- ---
Total liabilities 30,748 24,252
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STOCKHOLDER'S EQUITY:
Class A common stock, par value $0.001 9 9
Class B common stock, par value $0.001 20 20
Additional paid-in capital 168,621 157,891
Receivable for capital stock (83) (1,232)
Deferred compensation (5,217) (10,670)
Accumulated deficit (73,373) (43,438)
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Total stockholder's equity 89,977 102,580
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Total liabilities and stockholder's equity $ 120,725 $ 126,832
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</TABLE>
See notes to condensed consolidated financial statements.
2
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DELTATHREE.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data and share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
2000 1999 2000 1999 1999
---- ---- ---- ----- ----
(UNAUDITED) (UNAUDITED)
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REVENUES:
Affiliates $ 2,969 $ 991 $ 12,356 $ 4,077 $ 7,431
Non-affiliates 5,566 1,198 10,615 2,355 3,621
---------- ---------- ---------- ---------- ----------
TOTAL REVENUES 8,535 2,189 22,971 6,432 11,052
---------- ---------- ---------- ---------- ----------
COSTS AND OPERATING EXPENSES:
Cost of revenues 6,944 2,271 18,854 5,585 9,723
Research and development expenses 1,952 292 4,726 721 1,233
Selling and marketing expenses 5,328 1,626 16,326 3,087 7,403
General and administrative expenses
(exclusive of non-cash compensation
expense shown below) 1,736 600 4,572 2,014 2,754
Non-cash compensation expense 1,374 6,800 5,530 8,926 19,116
Depreciation and amortization 2,150 1,126 5,407 2,642 3,721
---------- ---------- ---------- ---------- ----------
TOTAL COSTS AND OPERATING EXPENSES 19,484 12,715 55,415 22,975 43,950
---------- ---------- ---------- ---------- ----------
LOSS FROM OPERATIONS (10,949) (10,526) (32,444) (16,543) (32,898)
INTEREST INCOME (EXPENSES), NET 608 (158) 2,509 (915) (873)
---------- ---------- ---------- ---------- ----------
NET LOSS $ (10,341) $ (10,684) $ (29,935) $ (17,458) $ (33,771)
========== ========== ========== ========== ==========
Net loss per share -
basic and diluted (0.36) (0.55) $ (1.04) $ (0.89) $ (1.65)
========== ========== ========== ========== ==========
Weighted average shares outstanding -
basic and diluted (number of shares) 28,932,232 19,569,459 28,727,148 19,569,459 20,418,457
========== ========== ========== ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
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DELTATHREE.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2000 1999 1999
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(UNAUDITED)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (29,935) $ (17,458) $ (33,771)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 5,407 2,642 3,721
Amortization of deferred compensation 5,530 8,926 19,116
Capital gain (44) -- --
Minority interest -- (21) (21)
Increase (decrease) in liability for severance pay 15 40 (25)
Provision for losses on accounts receivable 42 (294) (275)
Changes in assets and liabilities:
Increase in accounts receivable, net (4,786) (25) (85)
Decrease (increase) in other current assets
and due from affiliates (2,565) 742 (2,037)
Increase (decrease) in accounts payable 3,395 (154) (793)
Decrease in deferred revenues (147) (876) (1,072)
Increase in current liabilities
and due to affiliates 4,482 1,773 5,467
Increase in other assets (695) -- --
-------- --------- --------
10,634 12,753 23,996
-------- --------- --------
Net cash used in operating activities (19,301) (4,705) (9,775)
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (11,057) (1,988) (2,848)
Proceeds from disposal of property and equipment 40 -- --
Proceeds from sale of investments 150 -- --
Increase in deposits -- -- (685)
-------- --------- --------
Net cash used in investing activities (10,867) (1,988) (3,533)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term investments (41,499) -- (11,276)
Proceeds from issuance of capital stock -- -- 104,864
Proceeds from short-term debt from affiliates -- -- 8,320
Proceeds from long-term debt from affiliates 455 6,629 --
Payments of long-term debt from affiliates (2,179) -- --
Expenses relating to share issuance in 1999 (272) -- --
Proceeds from exercise of employee options 1,411 -- --
Increase in other long-term debt 474 -- --
-------- --------- --------
Net cash provided by (used in) financing activities (41,610) 6,629 101,908
-------- --------- --------
Increase (decrease) in cash and cash equivalents (71,778) (64) 88,600
Cash and cash equivalents at beginning of period 89,957 1,357 1,357
-------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,179 $ 1,293 $ 89,957
======== ========= ========
</TABLE>
See notes to condensed consolidated financial statements.
4
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DELTATHREE.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited consolidated condensed financial statements of
deltathree.com, 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, 1999.
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.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company 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 the
Company's Annual Report on Form 10-K for the year ended December 31, 1999.
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
the Company as of the date thereof, and the Company assumes no obligation to
update any forward-looking statement or risk factors.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1999
REVENUES
AFFILIATES. Revenues from affiliates were $12.4 million for the nine
months ended September 30, 2000 compared to $4.1 million for the nine months
ended September 30, 1999, an increase of $8.3 million or 202.4%. The increase
in revenues from affiliates was due to an increase in sales of calling card
products through our affiliate RSL COM USA. Additionally, the increase in
sales to RSL COM was also facilitated by the growth in our network resulting
in our ability to provide additional capacity to RSL COM and an increase in
demand for our services from RSL COM offset by decreases in prices.
NON-AFFILIATES. Revenues from non-affiliates were $10.6 million for
the nine months ended September 30, 2000 compared to $2.4 million for the
nine months ended September 30, 1999, an increase of $8.2 million or 341.7%.
Revenues from carrier transmission services for telecommunications carriers
other than RSL COM were $1.7 million for the nine months ended September 30,
2000 compared to $1.0 million for the nine months ended September 30, 1999,
an increase of $0.7 million or 70%. The increase was due primarily to an
increased demand from a larger customer base. Revenues from enhanced IP
communications services were $8.1 million for the nine months ended September
30, 2000 compared to $1.2 million for the nine months ended September 30,
1999, an increase of $6.9 million or 575%. The increase in revenues from
enhanced IP communications services was due to integration and other service
fees received from partners as well as a greater number of PC-to-phone and
phone-to-phone calls being placed by an increasing user base.
Revenues from carrier transmission services to RSL COM and other
telecommunications carriers accounted for 26.7% and 79.2% of revenues for the
periods ended September 30, 2000 and September 30, 1999, respectively. As
revenues from the Company's enhanced IP communication services continue to
grow as a percentage of total revenue, the Company expects that its revenues
from carrier transmission services will continue to account for a declining
percentage of its revenues. Other than RSL COM, no other customer accounted
for greater than 10% of the Company's revenues during these periods.
6
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COSTS AND OPERATING EXPENSES
COST OF REVENUES. Cost of revenues were $18.9 million for the nine
months ended September 30, 2000 compared to $5.6 million for the nine months
ended September 30,1999. The increase in cost of revenues was due primarily
to an increase in the amount of traffic being terminated.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $4.7 million for the nine months ended September 30, 2000 compared to
$0.7 million for the nine months ended September 30, 1999. The increase in
research and development expenses was due to greater costs incurred in hiring
additional personnel to develop new services and enhancements to the
Company's existing services.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses were
$16.3 million for the nine months ended September 30, 2000 compared to $3.1
million for the nine months ended September 30, 1999, an increase of $13.2
million or 425.8%. The increase in selling and marketing expenses was due to
a significant increase in branding costs, promotional activities and
personnel to support the expansion of such marketing and promotional
activities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses (exclusive of non-cash compensation expenses) were $4.6 million for
the nine months ended September 30, 2000 compared to $2.0 million for the
nine months ended September 30, 1999, an increase of $2.6 million or 130%.
The increase in general and administrative expenses was primarily due to
hiring additional personnel and increased occupancy costs. The Company
expects that general and administrative expenses will continue to increase as
additional personnel are recruited to support the Company's growth.
NON-CASH COMPENSATION EXPENSES. Non-cash compensation expenses were
$5.5 million for the nine months ended September 30, 2000 compared to $8.9
million for the nine months ended September 30, 1999, a decrease of $3.4
million or 38.2%. The decrease in non-cash compensation expenses was due to
the completed amortization of costs incurred during 1997. Remaining
amortization of costs related to the 1998 and 1999 grants of options and
warrants below the then fair market value will continue to be reflected in
future financial statements.
DEPRECIATION AND AMORTIZATION OF GOODWILL. Depreciation and
amortization of goodwill was $5.4 million for the nine months ended September
30, 2000 compared to $2.6 million for the nine months ended September 30,
1999, an increase of $2.8 million or 107.7%. The increase in depreciation and
amortization of goodwill was due to the continued increase in the Company's
fixed assets and the acquisition of YourDay.com, Inc. during the first
quarter of 2000.
LOSS FROM OPERATIONS
Loss from operations was $32.4 million for the nine months ended
September 30, 2000 compared to $16.5 million for the nine months ended
September 30, 1999, an increase of $15.9 million or 96.4%. The increase in
loss from operations was due primarily to the increase in costs and operating
expenses, including non-cash compensation expenses and sales and marketing
expenses, as well as a decrease in prices the Company charged for carrier
transmission services. The Company expects to continue to incur losses for
the foreseeable future.
7
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INTEREST INCOME (EXPENSE), NET
Interest income, net was $2.5 million for the nine months ended
September 30, 2000 compared to interest expense of $0.9 million for the nine
months ended September 30, 1999, an increase of $3.4 million. The increase in
interest income was primarily due to interest earned on the remaining
proceeds from the Company's initial public offering. The Company incurs
interest expense in connection with its borrowings from RSL COM, which it
expects to repay during the fourth quarter of 2000.
NET LOSS
Net loss was $29.9 million for the nine months ended September 30,
2000 compared to $17.5 million for the nine months ended September 30, 1999,
an increase of $12.4 million or 70.9%. The increase in net loss was due to
the foregoing factors.
8
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THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES
AFFILIATES. Revenues from affiliates were $3.0 million for the three
months ended September 30, 2000 compared to $1.0 million for the three months
ended September 30, 1999, an increase of $2.0 million or 200%. The increase
in revenues from affiliates was due to an increase in sales of calling card
products through our affiliate RSL COM USA. Additionally, the increase in
sales to RSL COM was also facilitated by the growth in our network resulting
in our ability to provide additional capacity to RSL COM and an increase in
demand for our services from RSL COM offset by decreases in prices.
NON-AFFILIATES. Revenues from non-affiliates were $5.6 million for
the three months ended September 30, 2000 compared to $1.2 million for the
three months ended September 30, 1999, an increase of $4.4 million or 366.7%.
Revenues from carrier transmission services for telecommunications carriers
other than RSL COM were $0.8 million for the three months ended September 30,
2000 compared to $0.5 million for the three months ended September 30, 1999,
an increase of $0.3 million or 60%. The increase was due primarily to an
increased demand from a larger customer base. Revenues from enhanced IP
communications services were $4.2 million for the three months ended
September 30, 2000 compared to $0.6 million for the three months ended
September 30, 1999, an increase of $3.6 million or 616.7%. The increase in
revenues from enhanced IP communications services was due to integration and
other service fees received from partners as well as a greater number of
PC-to-phone and phone-to-phone calls being placed by an increasing user base.
Revenues from carrier transmission services to RSL COM and other
telecommunications carriers accounted for 23.5% and 69.5% of revenues for the
periods ended September 30, 2000 and September 30, 1999, respectively. As
revenues from the Company's enhanced IP communication services continue to
grow as a percentage of total revenue, the Company expects that its revenues
from carrier transmission services will continue to account for a declining
percentage of its revenues. Other than RSL COM, no other customer accounted
for greater than 10% of the Company's revenues during these periods.
COSTS AND OPERATING EXPENSES
COST OF REVENUES. Cost of revenues were $6.9 million for the three
months ended September 30, 2000 compared to $2.3 million for the three months
ended September 30, 1999. The increase in cost of revenues was due primarily
to an increase in the amount of traffic being terminated.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
were $2.0 million for the three months ended September 30, 2000 compared to
$0.3 million for the three months ended September 30, 1999. The increase in
research and development expenses was due to greater costs incurred in
additional hiring personnel to develop new services and enhancements to the
Company's existing services.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses were
$5.3 million for the three months ended September 30, 2000 compared to $1.6
million for the three months ended
9
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September 30, 1999, an increase of $3.7 million or 231.3%. The increase in
selling and marketing expenses was due to a significant increase in branding
costs, promotional activities and personnel to support the expansion of such
marketing and promotional activities.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses (exclusive of non-cash compensation expenses) were $1.7 million for
the three months ended September 30, 2000 compared to $0.6 million for the
three months ended September 30, 1999, an increase of $1.1 million or 183.3%.
The increase in general and administrative expenses was primarily due to
hiring additional personnel and increased occupancy costs. The Company
expects that general and administrative expenses will continue to increase as
additional personnel are recruited to support the Company's growth.
NON-CASH COMPENSATION EXPENSES. Non-cash compensation expenses were
$1.4 million for the three months ended September 30, 2000 compared to $6.8
million for the three months ended September 30, 1999, a decrease of $5.4
million or 79.4%. The decrease in non-cash compensation expenses was due to
the completed amortization of costs incurred during 1997. Remaining
amortization of costs related to the 1998 and 1999 grants of options and
warrants below the then fair market value will continue to be reflected in
future financial statements.
DEPRECIATION AND AMORTIZATION OF GOODWILL. Depreciation and
amortization of goodwill was $2.2 million for the three months ended
September 30, 2000 compared to $1.1 million for the three months ended
September 30, 1999, an increase of $1.1 million or 100.0%. The increase in
depreciation and amortization of goodwill was due to the continued increase
in the Company's fixed assets and the acquisition of YourDay.com, Inc. during
the first quarter of 2000.
LOSS FROM OPERATIONS
Loss from operations was $10.9 million for the three months ended
September 30, 2000 compared to $10.5 million for the three months ended
September 30, 1999, an increase of $0.4 million or 3.8%. The increase in loss
from operations was due primarily to the increase in costs and operating
expenses, including non-cash compensation expenses and sales and marketing
expenses, as well as a decrease in prices the Company charged for carrier
transmission services. The Company expects to continue to incur losses for
the foreseeable future.
INTEREST INCOME (EXPENSE), NET
Interest income, net was $0.6 million for the three months ended
September 30, 2000 compared to interest expense of $0.2 million for the three
months ended September 30, 1999, an increase of $0.8 million. The increase in
interest income was primarily due to interest earned on the remaining
proceeds from the Company's initial public offering. The Company incurs
interest expense in connection with its borrowings from RSL COM, which it
expects to repay during the fourth quarter of 2000.
NET LOSS
Net loss was $10.3 million for the three months ended September 30,
2000 compared to $10.7 million for the three months ended September 30, 1999,
a decrease of $0.4 million or 3.7%. The decrease in net loss was due to the
foregoing factors.
10
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LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had cash and cash equivalents
of approximately $18.2 million, marketable securities and other short-term
investments of approximately $52.8 million and working capital of
approximately $54 million. The Company generated negative cash flow from
operating activities of approximately $19.3 million during the nine months
ended September 30, 2000 compared with negative cash flow from operating
activities of $4.7 million during the nine months ended September 30, 1999.
Accounts receivable were approximately $5.7 million and $0.9 million at
September 30, 2000 and September 30, 1999, respectively. Accounts receivable
and accounts payable have increased from period to period as the Company's
business has grown.
The Company's capital expenditures increased from approximately $2.0
million in the nine months ended September 30, 1999 compared to approximately
$11.1 million in the nine months ended September 30, 2000, as the Company
expanded its domestic and international network infrastructure.
The Company registered 6,900,000 shares of its Class A Common Stock
on a Form S-1 registration statement, which became effective on November 22,
1999. The Company received net proceeds, after deducting underwriting
discounts and commissions and offering expenses, of approximately $96,255,000
from the sale of 6,900,000 shares at the initial public offering price of
$15.00 per share on November 29, 1999.
The Company believes that its available cash and cash equivalents
will be sufficient to meet its working capital requirements, including
operating losses, and capital expenditure requirements for at least the next
fiscal year, assuming the Company's business plan is implemented
successfully. Thereafter, the Company will be required to raise additional
funds. Additional financing may not be available when needed or, if
available, such financing may not be on terms favorable to the Company. If
additional funds are raised through the issuance of equity securities, the
Company's existing stockholders may experience significant dilution. In
addition, the indentures governing outstanding indebtedness of RSL COM
restrict the Company's ability to incur indebtedness. The Company also has
agreed with RSL COM not to incur any debt (other than inter-company debt)
without its written consent so long as the Company is a restricted subsidiary
of RSL COM. Those limitations may require the Company to resort to other
sources of funding, such as the issuance of equity, and the Company may need
to rely upon RSL COM to provide any additional capital to meet its working
capital and capital expenditure requirements, and the Company cannot assure
you that RSL COM or any other third party will be willing or able to provide
additional capital on favorable terms or at all.
The Company expects that during the fourth quarter of 2000 it will
repay its outstanding indebtedness to RSL COM of approximately $12 million.
11
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Securities and Exchange Commission's rule related to market risk
disclosure requires that the Company describe and quantify its 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. The
Company believes its exposure to market risk is immaterial. The Company
currently does not invest in, or otherwise hold, for trading or other
purposes, any financial instruments subject to market risk.
12
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 8, 1999, Aerotel, Ltd. and Aerotel U.S.A. commenced a
suit against the Company, RSL COM and an RSL COM subsidiary in the United
States District Court for the Southern District of New York. Aerotel alleges
that the Company is infringing on a patent issued to Aerotel in November 1987
by making, using, selling and offering for sale prepaid telephone card
products in the United States. Aerotel seeks an injunction to stop the
Company from using the technology covered by this patent, monetary damages in
an unspecified amount and reimbursement of attorneys' fees. We have answered
the complaint, and the parties are currently engaged in pre-trial discovery.
As we continue to evaluate these claims, we believe that we have meritorious
defenses to the claims and we intend to defend the lawsuit vigorously.
However, the outcome of the litigation is inherently unpredictable and an
unfavorable result may have a material adverse effect on our business,
financial condition and results of operations. Regardless of the ultimate
outcome, the litigation could result in substantial expenses to us and
significant diversion of efforts by our managerial and other personnel.
The Company is not a party to any other material litigation and we
are not aware of any other pending or threatened litigation that could have a
material adverse effect on the Company or its business taken as a whole.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
On November 22, 1999, the Company offered 6,900,000 shares of its
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. The Company 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 the 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 the date of this report, the Company has used approximately
$52.8 million of the cash proceeds to purchase marketable government
securities and other short-term investments. We have not otherwise made any
specific allocations with respect to the net proceeds from the initial public
offering. The Company expects that it will use the net proceeds to be
allocated as follows:
- approximately $25 million to fund marketing and promotional
activities;
- approximately $16 million for capital expenditures; and
- the balance for general corporate purposes.
13
<PAGE>
The preceding allocations are only an estimate and the amounts that
the Company actually expends will depend upon several factors, including its
available cash, the success of our marketing and promotional activities and
the availability of new business opportunities. Pending use of the net
proceeds, the Company intends to invest the 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 third quarter of 2000.
ITEM 5. OTHER INFORMATION
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 the Company's control, including,
but not limited to, the inherent uncertainty of financial estimates and
projections, the competitive environment for Internet telephony, the
Company's 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 and rapid technological changes, as well as other risks referenced
from time to time in the Company's 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
the Company as of the date thereof, and the Company assumes no obligation to
update any forward-looking statement or risk factors.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Securities and Exchange
Commission.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----- -----------
<S> <C>
3.1* Form of Amended and Restated Certificate of Incorporation of deltathree.com, Inc.
3.2* Form of Amended and Restated By-laws of deltathree.com, Inc.
4.1* Specimen Certificate of Common Stock.
4.2* Specimen Certificate of Class B Common Stock.
4.3* Registration Rights Agreement, dated September 1, 1999, between RSL Communications, Ltd. and
deltathree.com, Inc.
10.1* Amended and Restated Services Agreement, dated September 3, 1999, between RSL Communications,
Ltd. and deltathree.com, Inc.
10.2* Credit Facility, dated September 1, 1999, between RSL Communications, Ltd. and deltathree.com,
Inc.
10.3* Form of deltathree.com, Inc. 1999 Stock Incentive Plan.
10.4* Form of deltathree.com, Inc. 1999 Employee Stock Purchase Plan.
10.5* Form of deltathree.com, Inc. 1999 Performance Incentive Plan.
10.6* Form of deltathree.com, Inc. 1999 Directors' Plan.
10.7* Employment Agreement, effective as of April 1, 1999, between Noam Bardin and deltathree.com,
Inc.
10.8 Amendment No. 1 to Employment Agreement, effective as of June 1, 2000, between Noam Bardin and
deltathree.com, Inc.
10.9* Employment Agreement, effective as of April 1, 1999, between Shimmy Zimels and deltathree.com,
Inc.
10.10 Amendment No. 1 to Employment Agreement, effective as of June 1, 2000, between Shimmy Zimels
and deltathree.com, Inc.
10.11 Employment Agreement, dated as of May 30, 2000, between Mark Gazit and deltathree.com, Inc.
10.12 Amendment No. 1 to Employment Agreement, effective as of June 1, 2000, between Mark Gazit and
deltathree.com, Inc.
10.13 Employment Agreement, effective as of August 28, 2000, between Paul White and deltathree.com,
Inc.
10.14 Employment Agreement, effective as of August 30, 2000, between Lisa J. Indovino and
deltathree.com, Inc.
10.15* Investor Rights Agreement, dated as of September 29, 1999, between Yahoo! Inc. and
deltathree.com, Inc.
10.16* Form of Warrant issued to Yahoo! Inc. on October 18, 1999.
10.17* Management Agreement, dated as of November 1, 1999, between deltathree.com, Inc. and RSL
Communications, Ltd.
10.18* Amendment to Services Agreement by and between RSL Communications, Ltd. and deltathree.com,
Inc., dated November 1, 1999.
15
<PAGE>
10.19* Investor Rights Agreement dated as of October 20, 1999 between CNET Investments, Inc. and
deltathree.com, Inc.
10.20* Form of Warrant issued to CNET Investments, Inc. on October 20, 1999.
10.21* Intercompany Compliance Agreement, dated as of November 1, 1999, between RSL Communications,
Ltd., RSL Communications PLC and deltathree.com, Inc.
10.22* Development and Promotion Agreement, effective as of September 22, 1999, between CNET, Inc. and
deltathree.com, Inc.
10.23* Form of Proposed Release and Indemnification Agreement between RSL Communications, Ltd. and
deltathree.com, Inc.
10.24** Agreement and Plan of Merger, dated as of February 3, 2000, between deltathree.com, Inc.,
YourDay Acquisition Corp., YourDay.com, Inc. and SenseNet Inc.
27.1 Financial Data Schedule
--------------
* Incorporated by reference to the Company's registration statement on Form S-1 (Registration No.
333-86503).
** Incorporated by reference to the Company's quarterly report on Form 10-Q filed on May 15, 2000.
</TABLE>
(b) Reports on Form 8-K.
During the fiscal quarter ended September 30, 2000, the Company did
not file any reports on Form 8-K.
16
<PAGE>
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.COM, INC.
Date: November 14, 2000 By: /s/ Paul C. White
------------------------------
Name: Paul C. White
Title: Chief Financial Officer
17
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1* Form of Amended and Restated Certificate of Incorporation of deltathree.com, Inc.
3.2* Form of Amended and Restated By-laws of deltathree.com, Inc.
4.1* Specimen Certificate of Common Stock.
4.2* Specimen Certificate of Class B Common Stock.
4.3* Registration Rights Agreement, dated September 1, 1999, between RSL Communications, Ltd. and
deltathree.com, Inc.
10.1* Amended and Restated Services Agreement, dated September 3, 1999, between RSL Communications,
Ltd. and deltathree.com, Inc.
10.2* Credit Facility, dated September 1, 1999, between RSL Communications, Ltd. and deltathree.com,
Inc.
10.3* Form of deltathree.com, Inc. 1999 Stock Incentive Plan.
10.4* Form of deltathree.com, Inc. 1999 Employee Stock Purchase Plan.
10.5* Form of deltathree.com, Inc. 1999 Performance Incentive Plan.
10.6* Form of deltathree.com, Inc. 1999 Directors' Plan.
10.7* Employment Agreement, effective as of April 1, 1999, between Noam Bardin and deltathree.com,
Inc.
10.8 Amendment No. 1 to Employment Agreement, effective as of June 1, 2000, between Noam Bardin and
deltathree.com, Inc.
10.9* Employment Agreement, effective as of April 1, 1999, between Shimmy Zimels and deltathree.com,
Inc.
10.10 Amendment No. 1 to Employment Agreement, effective as of June 1, 2000, between Shimmy Zimels
and deltathree.com, Inc.
10.11 Employment Agreement, dated as of May 30, 2000, between Mark Gazit and deltathree.com, Inc.
10.12 Amendment No. 1 to Employment Agreement, effective as of June 1, 2000, between Mark Gazit and
deltathree.com, Inc.
10.13 Employment Agreement, effective as of August 28, 2000, between Paul White and deltathree.com,
Inc.
10.14 Employment Agreement, effective as of October 2, 2000, between Lisa J. Indovino and
deltathree.com, Inc.
10.15* Investor Rights Agreement, dated as of September 29, 1999, between Yahoo! Inc. and
deltathree.com, Inc.
10.16* Form of Warrant issued to Yahoo! Inc. on October 18, 1999.
10.17* Management Agreement, dated as of November 1, 1999, between deltathree.com, Inc. and RSL
Communications, Ltd.
10.18* Amendment to Services Agreement by and between RSL Communications, Ltd. and deltathree.com,
Inc., dated November 1, 1999.
10.19* Investor Rights Agreement dated as of October 20, 1999 between CNET Investments, Inc. and
deltathree.com, Inc.
10.20* Form of Warrant issued to CNET Investments, Inc. on October 20, 1999.
10.21* Intercompany Compliance Agreement, dated as of November 1, 1999, between RSL Communications,
Ltd., RSL Communications PLC and deltathree.com, Inc.
18
<PAGE>
10.22* Development and Promotion Agreement, effective as of September 22, 1999, between CNET, Inc. and
deltathree.com, Inc.
10.23* Form of Proposed Release and Indemnification Agreement between RSL Communications, Ltd. and
deltathree.com, Inc.
10.24** Agreement and Plan of Merger, dated as of February 3, 2000, between deltathree.com, Inc.,
YourDay Acquisition Corp., YourDay.com, Inc. and SenseNet Inc.
27.1 Financial Data Schedule
--------------
* Incorporated by reference to the Company's registration statement on Form S-1 (Registration No.
333-86503).
** Incorporated by reference to the Company's quarterly report on Form 10-Q filed on May 15, 2000.
</TABLE>
19
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