UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 6-K
REPORT OF FOREIGN ISSUER PURSUANT TO RULE 13A-16 AND L5D-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(MARCH 11, 2004)
DIVERSINET CORP.
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(Name of Registrant)
2225 Sheppard Avenue East, Suite 1801, Toronto, Ontario M2J 5C2
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(Address of principal executive offices)
1. Notice of Meeting
2. Management Information Circular
3. Annual Report Year Ended December 31, 2004
4. Form of Proxy
5. National Instrument 54-102
6. Certifications of the Chief Executive Officer and the Chief
Financial Officer
Indicate by check mark whether the Registrant files or will file
annual reports under cover of Form 20-F or Form 40-F
Form 20-F X Form 40-F
--- ---
Indicate by check mark whether the Registrant by furnishing the
information contained in this Form is also thereby furnishing
the information to the Commission pursuant to Rule 12g3-2(b)
under the Securities Exchange Act of 1934
YES NO X
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this Form 6-K to be signed
on its behalf by the undersigned, thereunto duly authorized
DIVERSINET CORP.
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(REGISTRANT)
DATE: MARCH 11, 2004 BY: /s/ DAVID HACKETT
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DAVID HACKETT, CHIEF FINANCIAL OFFICER
DIVERSINET CORP.
NOTICE OF ANNUAL AND SPECIAL
MEETING OF SHAREHOLDERS
TAKE NOTICE THAT the annual and special meeting of
shareholders ("the Meeting") of DIVERSINET CORP. (the
"Corporation") will be held at the offices of the Corporation,
2225 Sheppard Avenue East, Suite 1801, Toronto, Ontario, on
Wednesday, April 14, 2004 at the hour of 3:00 o'clock in the
afternoon (Toronto time), for the following purposes:
1. To consider and receive the financial statements of the
Corporation for the year ended December 31, 2003, together
with the report of the auditors thereon;
2. To elect directors;
3. To appoint auditors and authorize the directors to fix
their remuneration;
4. To consider and approve the adoption of By-Law No. 2 to
change the Corporation's year end to December 31st until
changed by the Board;
5. To consider and approve the reservation of 1,190,000 shares
of common stock for issuance under the Diversinet Corp.
Amended and Restated Stock Option Plan; and
6. To transact such other business as may properly come before
the Meeting or any adjournments thereof.
Holders of common shares who are unable to attend the Meeting in
person are requested to sign and return the enclosed form of
proxy in the envelope provided for that purpose.
The Corporation's financial statements for the year ended
December 31, 2003, the report of the auditors thereon to the
shareholders, a management information circular and a form of
proxy are enclosed herewith.
The board of directors has fixed the close of business on March
12, 2004 as the record date for the determination of holders of
common shares entitled to notice of the Meeting and any
adjournments thereof.
The board of directors has by resolution fixed the close of
business on the second business day preceding the day of the
Meeting or any adjournment thereof (excluding Saturdays, Sundays
and holidays) as the time before which proxies to be used or
acted upon at the Meeting or any adjournment thereof shall be
deposited with the Corporation.
DATED at Toronto this 5th day of March 2004.
By Order of the
Board of Directors
Nagy Moustafa
President and Chief Executive Officer
DIVERSINET CORP.
ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON WEDNESDAY, APRIL 14, 2004
MANAGEMENT INFORMATION CIRCULAR
SOLICITATION OF PROXIES
This management information circular (the "Circular") is
furnished in connection with the solicitation of proxies by the
management of DIVERSINET CORP. (the "Corporation") for use at
the Annual and Special Meeting of Shareholders (the "Meeting")
of the Corporation to be held at the time and place and for the
purposes set forth in the attached notice of the Meeting (the
"Notice of Meeting"). It is expected that the solicitation will
be by mail primarily, but regular employees of the Corporation
may also solicit proxies personally. The cost of solicitation
will be borne by the Corporation.
The Corporation may also pay brokers or other persons holding
common shares in their own names or in the names of nominees for
their reasonable expenses of sending proxies and proxy material
to beneficial owners and obtaining their proxies.
No person is authorized to give any information or to make any
representations other than those contained in this Circular and,
if given or made, such information or representation should not
be relied upon as having been authorized. Unless otherwise
indicated, all dollar references in this Circular are to United
States dollars.
APPOINTMENT AND REVOCATION OF PROXIES
The persons named in the enclosed form of proxy are officers of
the Corporation. A shareholder has the right to appoint a
person (who need not be a shareholder) to attend and act for him
and on his behalf at the Meeting or any adjournments thereof
other than the persons designated in the enclosed form of proxy.
Such right may be exercised by striking out the names of the
persons designated in the enclosed form of proxy and by
inserting in the blank space provided for that purpose the name
of the desired person or by completing another proper form of
proxy and, in either case, delivery of the completed and
executed proxy to the Corporation or its transfer agent prior to
the close of business on the second business day preceding the
day of the Meeting or any adjournments thereof.
A shareholder forwarding the enclosed proxy may indicate the
manner in which the appointee is to vote with respect to any
specific item by checking the appropriate space. If the
shareholder giving the proxy wishes to confer a discretionary
authority with respect to any item of business then the space
opposite the item is to be left blank. The shares represented
by the proxy submitted by a shareholder will be voted in
accordance with the directions, if any, given in the proxy.
A shareholder who has given a proxy may revoke it at any time
insofar as it has not been exercised. A proxy may be revoked,
as to any matter on which a vote shall not already have been
cast pursuant to the authority conferred by such proxy, by
instrument in writing executed by the shareholder or by his
attorney who is authorized by a document that is signed in
writing or by electronic signature or, if the shareholder is a
body corporate, under its corporate seal or by an officer or
attorney thereof duly authorized, and deposited either with the
Corporation or its transfer agent, Computershare Trust Company
of Canada, 100 University Avenue, Toronto, Ontario, M5J 2Y1 at
any time up to and including the last business day preceding the
day of the Meeting or any adjournments thereof, at which the
proxy is to be used, or with the Chairman of such Meeting on the
date of the Meeting or any adjournments thereof, and upon either
of such deposits the proxy is revoked. A proxy may also be
revoked in any other manner permitted by law.
EXERCISE OF DISCRETION BY PROXIES
The persons named in the enclosed form of proxy will vote the
shares in respect of which they are appointed in accordance with
the direction of the shareholders appointing them. In the
absence of such direction, such shares will be voted or voted in
favor of the passing of all the resolutions described below.
The enclosed form of proxy confers discretionary authority upon
the persons named therein with respect to amendments or
variations to matters identified in the Notice of Meeting and
with respect to other matters which may properly come before the
Meeting or any adjournments thereof. At the time of printing of
this Circular, management knows of no such amendments,
variations or other matters to come before the Meeting or any
adjournments thereof other than the matters referred to in the
Notice of Meeting.
NON-REGISTERED HOLDERS
Only registered shareholders or the persons they appoint as
their proxyholders are permitted to attend and/or vote at the
Meeting. However, in any case, shares of the Corporation
beneficially owned by a holder (a "Non-registered Holder") are
registered either:
(a) in the name of an intermediary (an "Intermediary")
that the Non-Registered Holder deals with in respect of the
shares, such as, among others, banks, trust companies,
securities dealers or brokers and trustees or
administrators of self-administered RRSPs, RRIFs, RESPs and
similar plans; or
(b) in the name of a clearing agency (such as The Canadian
Depository for Securities Limited) of which the
Intermediary is a participant.
In accordance with the requirements of National Instrument 54-
101 of the Canadian Securities Administrators, the Corporation
has distributed copies of the Notice of Meeting, this Circular,
the form of proxy, and the 2003 Annual Report (collectively, the
"Meeting Materials") to the clearing agencies and Intermediaries
for onward distribution to Non-Registered Holders.
Intermediaries are required to forward Meeting Materials to Non-
Registered Holders unless a Non-Registered Holder has waived the
right to receive them. Very often, Intermediaries will use
service companies to forward the Meeting Materials to Non-
Registered Holders. Generally, Non-Registered Holders who have
not waived the right to receive meeting materials will either:
A. be given a form of proxy which has already been signed by
the Intermediary (typically by a facsimile, stamped
signature), which is restricted as to the number of shares
beneficially owned by the Non-Registered Holder but which
is otherwise uncompleted. The Non-Registered Holder need
not sign this form of proxy. In this case, the Non-
Registered Holder who wishes to submit a proxy should
otherwise properly complete the form of proxy and deposit
it as described above;
or
B. more typically, be given a voting instruction form that
must be completed and signed by the Non-Registered Holder
in accordance with the directions on the voting instruction
form (which may in some cases permit the completion of the
voting instruction form by telephone).
The purpose of these procedures is to permit Non-Registered
Holders to direct the voting of the shares they beneficially
own. Should a Non-Registered Holder who receives either a proxy
or a voting instruction form wish to attend and vote at the
Meeting in person (or have another person attend and vote on
behalf of the Non-Registered Holder), the Non-Registered Holder
should strike out the names of the persons named in the proxy
and insert the Non-Registered Holder's (or such other person's)
name in the blank space provided or, in the case of a voting
instruction form, follow the corresponding instructions on the
form. In either case, Non-Registered Holders should carefully
follow the instructions of their Intermediaries and their
service companies.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
As at March 1, 2004, the Corporation had 12,043,277 common
shares issued and outstanding. Each common share entitles the
registered holder thereof to one vote at all meetings of
shareholders.
All voting shareholders of record as of the time of the Meeting
or any adjournments thereof are entitled either to attend and
vote thereat in person the shares held by them or, provided a
completed and executed proxy shall have been delivered to
Computershare Trust Company of Canada within the time specified
herein, to attend and vote thereat by proxy the shares held by
them.
The Corporation has fixed March 12, 2004, as the record date for
the purpose of determining shareholders entitled to receive a
Notice of Meeting. In accordance with the provisions of the
Business Corporations Act (Ontario), the Corporation will
prepare a list of holders of shares at the close of business on
the record date. Each holder of voting shares named in the list
will be entitled to vote at the Meeting or any adjournments
thereof the shares shown opposite his name on the list except to
the extent that; (a) the shareholder has transferred any of his
shares after the date on which the list was prepared; and (b)
the transferee of those shares produces properly endorsed share
certificates or otherwise establishes that he owns such shares
and demands not later than ten (10) days before the Meeting or
any adjournments thereof that his name be included in the list
before the Meeting or any adjournments thereof, in which case
the transferee is entitled to vote his shares at the Meeting or
any adjournments thereof.
To the knowledge of the directors and senior officers of the
Corporation, except as noted below, there are no persons, firms
or corporations which beneficially own or exercise control or
direction over securities of the Corporation carrying more than
ten (10%) percent of the voting rights attached to any class of
outstanding voting securities of the Corporation. Mr. James B.
Wigdale Jr. is the control person of Lakefront Capital
Management, LLC, the manager of Lakefront Partners, LLC.
Lakefront Partners, LLC and Mr. Wigdale may be deemed to be
acting jointly or in concert in respect to their security
holdings of Diversinet. Together, Mr. Wigdale and Lakefront
Partners, LLC hold 1,080,000 common shares and 1,000,000 common
share purchase warrants. Upon conversion of the common share
purchase warrants, Mr. Wigdale and Lakefront Partners, LLC would
hold 2,080,000 common shares or 15.9% of the outstanding shares.
BUSINESS TO BE TRANSACTED AT THE MEETING
A. Financial Statements
The consolidated financial statements of the Corporation for the
fiscal year ended December 31, 2003 and the report of the
auditors thereon accompany this Circular.
B. Election of Directors
The Board of Directors of the Corporation presently consists of
seven (7) directors. The number of directors to be elected at
the Meeting has been fixed at seven (7) persons. All of the
nominees are now directors of the Corporation and have been
directors since the dates indicated below. Unless authority to
do so is withheld, the persons named in the enclosed form of
proxy intend to vote for the election of the nominees whose
names are set forth below. Management does not contemplate that
any of the nominees will be unable to serve as a director but if
that should occur for any reason prior to the Meeting or any
adjournments thereof, it is intended that discretionary
authority shall be exercised by the person named in the enclosed
form of proxy to vote the proxy for the election of any other
person or persons in place of any nominee or nominees unable to
serve. Each director elected will hold office until the close
of business of the first Annual Meeting of Shareholders of the
Corporation following his election unless his office is earlier
vacated in accordance with the Corporation's by-laws.
The statement as to the shares of the Corporation beneficially
owned or over which the nominees for election as directors
exercise control or discretion hereinafter named is in each
instance based upon information furnished by the person
concerned. The names of the nominees for election as directors,
their positions with the Corporation, the year they became a
director of the Corporation and the number of shares
beneficially owned, directly or indirectly, or over which
control or direction is exercised is as follows:
Name and Present Principal
Occupation
Position
with the
Corporati
on
Appoin
ted
Since
Number of
shares
beneficially
owned, directly
or indirectly,
or over which
control or
direction is
exercised
Nagy Moustafa
President, Chief Executive
Officer
President
, CEO,
Director
1997
111,846
Mark C. Steinman (1) (4)
Chairman of the Corporation
Chairman
1998
NIL
Stanley M. D. Beck(1) (3) (5)
Chairman of 407
International Inc. and
President of Granville
Arbitrations Limited
Director
2002
NIL
Keith Powell(1) (2) (8)
Partner at XPV Capital
Corporation
Director
2002
NIL
Charles M. H. Shiu(3) (7)
Chairman of Allied Asia
Investments Limited, Vice-
Chairman of Power Pacific
Corporation Limited
Director
2002
NIL
Derek Buntain(2) (6)
President of The Dundee
Bank
Director
2003
200,000
Charlie Walton(9)
EVP, Financial and
International Markets
EVP,
Director
2003
551,261
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Governance Committee.
(4) Mr. Steinman has served as a Director since June 1998 and
Chairman since July 2002. Mr. Steinman has been the
Executive Vice-President and Chief Financial Officer of
Stelco Inc. (steel manufacturer) from July 12, 1999 until
December 31, 2003. From 1996 to May 1999 he was the Senior
Vice-President and Chief Financial Officer of Spar Aerospace
Limited.
(5) Mr. Beck has served as a Director since July 2002. Mr.
Beck was formerly Chairman of the Ontario Securities
Commission, Dean of Osgoode Hall Law School, and has held
senior management positions over his seven years at Central
Capital Corporation, now YMG Capital Management. Mr. Beck is
currently Chairman of 407 International Inc. (sole
shareholder, operator, and manager of the 407 Express Toll
Route) and President of Granville Arbitrations Limited
(arbitration firm), and holds seats on a number of Boards.
(6) Mr. Buntain has served as a Director since July 2003. Mr.
Buntain has over 25 years experience in corporate finance,
mergers and acquisitions and international business. Mr.
Buntain is currently the President of The Dundee Bank, and
the former President of Goodman & Company (Bermuda) Limited
and holds seats on a number of boards.
(7) Mr. Shiu has served as a Director since September 2002.
Mr. Shiu is a former senior executive with Nortel Networks
and has more than 25 years experience with strategic
alliances, joint ventures and investments in the European,
North American and Asia Pacific markets. Mr. Shiu is
currently Chairman of Allied Asia Investments Limited
(investment firm), Vice-Chairman of Power Pacific Corporation
Limited and sits on numerous boards.
(8) Mr. Powell has served as a Director since July 2002. Mr.
Powell was previously the Senior Vice-President, Information
Services and Chief Information Officer at Nortel Networks.
Mr. Powell is currently a Partner at XPV Capital Corporation,
a venture capital company investing in early stage
communications start-up companies and Principal at his own
company, Keith Powell Consulting Inc. In addition he holds
seats on a number of technology company boards.
(9) Mr. Walton has served as a Director since September 2003.
Mr. Walton is the founder of Caradas and is currently EVP,
Business Development for the Corporation. Mr. Walton has
more than 20 years of business and technical experience in
the security industry.
As at the date of this Circular, the directors and officers of
the Corporation as a group, directly and indirectly,
beneficially own or exercise control or discretion over 863,107
Common Shares, representing approximately 7% of the issued and
outstanding Common Shares of the Corporation.
C. Appointment of Auditors
Shareholders will be asked at the Meeting to approve the
appointment of KPMG, LLP Chartered Accountants, as auditors to
the Corporation at a remuneration to be fixed by the directors.
KPMG, LLP were appointed as the auditors of the Corporation on
August 29, 2000. From March 1, 1999 to August 29, 2000 Ernst &
Young, LLP were the Corporation's auditors. Unless the
shareholder directs that his or her Common Shares are to be
withheld from voting in connection with the appointment of
auditors, the persons named in the enclosed form of proxy intend
to vote for the appointment of KPMG, LLP, Chartered Accountants
as auditors of the Corporation until the next Annual Meeting of
Shareholder and to authorize the directors to fix their
remuneration.
D. Change in Year End
Pursuant to section 116 of the Ontario Business Corporations
Act, the shareholders will be asked to approve a resolution
confirming the adoption of By-Law No. 2. This resolution must
be approved by an affirmative vote of the majority of the votes
cast in respect thereof by shareholders at the Meeting. The
Board of Directors recommends that shareholders vote in favour
of the resolution approving By-Law No. 2. If approved, By-Law
No. 2 will be adopted effective October 15, 2003.
General
On October 15, 2003 the Board of Directors approved By-Law No.
2., a resolution to change the Corporation's year end from
October 31st to December 31st, subject to shareholder approval.
The directors of the Corporation will have the discretion to
change the financial year end of the Corporation in future
without necessitating approval of shareholders. The text of By-
Law No. 2 and the resolution with respect thereto are set out
below. The Board of Directors feels that a December 31st year
end will be in line with the reporting year end of other
technology companies and will therefore provide our shareholder
with similar reporting dates. Approval of this year end change
proposal would give the Board of Directors authority to
implement the year end change.
The transition from the old financial year end (October 31) to
the new financial year end (December 31) will be effective for
the annual financial statements as of December 31, 2003.
The Corporation reported on the following interim periods in
2003: three months ended January 31 2003 and 2002, six months
ended April 30, 2003 and 2002, nine months ended July 31, 2003
and 2002. The Corporation will report its results of operations
for the 12 month and 14 month periods ending October 31, 2003
and December 31, 2003 and for the twelve months ending October
31, 2002. The Corporation will report on the following periods
in 2004: three months ending March 31, 2004 and 2003, six months
ending June 30, 2004 and 2003, nine months ending September 30,
2004 and 2003, and the year ending December 31, 2004 and 2003.
Purpose
The Corporation is seeking stockholder approval of a change in
year end to December 31st in order to have our fiscal year on a
calendar year basis. The Board of Directors concluded that
changing the year end to December 31st might be desirable in
order to have our fiscal year on a calendar year basis. This
year end change has been made to harmonize the release of the
Corporation's quarterly and annual financial statements and
operating results with the release of similar information by the
majority of the companies in its industry. This will facilitate
the comparison of the Corporation's financial and operating
performance to other companies in its peer group
Principal Effects of the Change in Year End
Accounting Matters. If approved and effected, the year end
change would have the following effects: For our December 31,
2003 annual financial statements the reporting period would be
January 1, 2003 to December 31, 2003 with comparative figures
for November 1, 2001 to October 31, 2002. There would be
disclosure in the notes to the financial statements that show
the fourteen month period from November 1, 2002 to December 31,
2003.
Resolution to Change the Year End of the Corporation
The Resolution entitling the Corporation to give effect to the
year end change shall read as follows:
1. RESOLVED THAT By-law Number 2, a copy of which is set out
below, and being a by-law to change the financial year end
of the Corporation to December 31 in each year, until
changed by the board, is hereby confirmed as a by-law of
the Corporation.
BY-LAW NUMBER 2
A by-law to change the financial year end of
DIVERSINET CORP.
(the "Corporation")
BE IT ENACTED as a by-law of the Corporation as follows:
1.01 Until changed by the board, the financial year of the
Corporation shall end on the 31st day of December in each
year.
1.02 All prior by-laws, resolutions and proceedings of the
Corporation inconsistent herewith are hereby amended,
modified and revised in order to give effect to this by-
law.
ENACTED by the Board the 15th day of October 2003.
WITNESS the corporate seal of the Corporation.
/s/ Nagy Moustafa____ /s/ David Hackett
President Secretary
CONFIRMED by the shareholders the day of , 2004.
/s/ David Hackett
Secretary
Unless the shareholder directs that his or her Common Shares are
to be withheld from voting in connection with the change in year
end, the persons named in the enclosed form of proxy intend to
vote for the approval of the resolution confirming the adoption
of By-Law No. 2.
E. Amendment to Stock Option Plan
It is important for the Corporation to be able to compensate
officers and employees at a level and in a manner that ensures
they are motivated and their interests aligned with those of the
Corporation and its shareholders. Accordingly, it is proposed
that the Corporation increase the number of common shares
reserved for issuance under its stock option plan (the "Plan").
Under the Plan, the maximum number of shares which may be
reserved for issuance to insiders (as defined under the Plan) or
under any other share compensation arrangement of the
Corporation is ten percent (10%) of the common shares
outstanding at the date of the grant. Moreover, the maximum
number of common shares which may be issued to any one insider
and such insider's associates under the Plan and any other share
compensation arrangement in any 12 month period is five percent
(5%) of the common shares outstanding at the date of the
issuance. The maximum number of common shares which may be
issued to insiders under the Plan and any other share
compensation arrangement in any twelve (12) month period is ten
percent (10%) of the common shares outstanding at the date of
the issuance. No one optionee is entitled to hold options
exceeding five percent (5%) of the outstanding common shares.
As of December 31, 2003, an aggregate of 602,501 shares of
common stock had been purchased or options with respect thereto
had been granted under the Diversinet Corp. Amended and Restated
Stock Option Plan dated May 15, 2000, and all prior stock option
plans of the Corporation. Shareholders will be asked at the
Meeting to approve the reservation of additional 1,190,000
shares of common stock reserved for issuance under the Plan to
bring the Plan up to a total of 1,800,000 shares of common stock
reserved for issuance under the Plan. On July 28, 2003, the
Board of Directors adopted, subject to stockholder approval,
certain amendments to the Plan to provide for this reservation.
Unless the amount reserved for issuance thereunder is increased,
the Plan may run out of shares available to be optioned during
fiscal 2004.
Approval of the proposal to amend the Plan requires the
affirmative vote of a majority of the shares present and
entitled to vote at the Meeting.
Summary description of the Plan
General
The Plan was established to compensate substantially all of the
Corporation's directors, officers and employees for services
rendered; to provide certain of its directors, officers,
employees and consultants with significant additional incentive
to promote the Corporation's financial success; and to provide
an incentive to induce able persons to serve or remain on its
Board of Directors or to enter into or remain in its employment.
A maximum of 602,501 shares of common stock, subject to
adjustment, is authorized for the granting of stock options
under the Plan. The shares of common stock reserved for
issuance under the Plan on October 31, 2000 were registered
pursuant to a Registration Statement on Form S-8. As of
December 31, 2003, options to purchase an aggregate of 1,118,846
shares of common stock, at exercise prices ranging from US$0.62
to US$149.40 per share, were outstanding under the Plan. The
Plan is intended to comply with Rule 16b-3 of the Securities
Exchange Act of 1934, as amended.
Eligibility
All of the Corporation's full-time, salaried employees and
members of the Corporation's Board of Directors are eligible to
be granted options. Individuals who have rendered or are
expected to render advisory or consulting services to the
Corporation are also eligible to receive options under the Plan.
Administration
The Compensation Committee administers the Plan. Subject to the
foregoing limitations, options may be granted under the Plan by
the Corporation's Compensation Committee to directors, officers,
full-time and part-time employees and consultants of the
Corporation or any subsidiary provided that:
(i) the options may not have a term exceeding five years;
and
(ii) the exercise price may not be less than the market
price of the common shares of the Corporation on Nasdaq at
the time of grant.
The options may be exercised in such manner as the Compensation
Committee determines provided that if no determination is made,
an optionee may not take up more than 33 1/3% of the options in
any 12 month period.
The Plan does not currently provide for any financial assistance
or support by the Corporation to any optionee.
Grant of Option: Vesting
The Compensation Committee may grant at any time to any eligible
person an option entitling such person to purchase the
Corporation's common stock in such quantity, at such price, on
such terms and subject to such conditions consistent with the
provisions of the Plan as may be established by the Compensation
Committee on or prior to the date of grant of such option. The
exact terms of the option will be contained in an option
agreement between the Corporation and the person to whom such
option is granted. Eligible employees are not required to pay
anything to receive options. The exercise price for stock
options must be no less than the fair market value of the common
stock at the close of trading on the day immediately preceding
the date of grant. Options will expire not later than the fifth
anniversary of the date of grant. An option holder will be able
to exercise options from time to time, subject to vesting. All
of the options granted under the Plan vest in twelve equal
instalments beginning three months after the grant date and each
and every quarter thereafter, and have an exercise price equal
to the closing price of the stock on the trading day immediately
preceding the grant date. Upon the death of a participant,
vested options will be exercisable for a period of six months by
the legal representative(s) of the participant. Upon
termination for cause or thirty days after termination for any
other reason, the unvested portion of the options shall be
forfeited. Subject to the above conditions, the exercise price,
duration of the options and vesting provisions will be set by
the Compensation Committee in its discretion.
Adjustments
In order to prevent dilution or enlargement of the rights of
grantees, the Board of Directors shall appropriately and
proportionately adjust the number, price and kind of shares
subject to outstanding options and those available for
subsequent grant to reflect any stock dividend, stock split,
combination or exchange of shares, merger, consolidation or
other similar change in the Corporation's capitalization. The
Board of Directors may also make any appropriate adjustment to
reflect any spin-off, spin-out or other distribution of assets
to stockholders or any acquisition of stock or assets or other
similar change. The Compensation Committee shall determine the
amount of the adjustment to be made in each such case, but no
adjustment approved by the Compensation Committee shall be
effective until and unless it is approved by the Board of
Directors. In the event of any reorganization,
reclassification, consolidation, merger or sale of all or
substantially all of the Corporation's assets, which is effected
in such a way that holders of common stock are entitled to
receive (either directly or upon subsequent liquidation) stock,
securities or assets with respect to or in exchange for such
common stock, the Board of Directors may substitute the per
share amount of such stock, securities or assets for shares upon
any subsequent exercise of any option.
Termination
The Board of Directors may terminate the Plan at any time;
provided that the Board of Directors must obtain the consent of
the holder of any option prior to termination if such
termination materially and adversely affects the rights of such
holder under such options. No option shall be granted under the
Plan after the termination of the Plan, but the termination of
the Plan shall not have any other effect. Any option
outstanding at the time of the termination of the Plan may be
exercised after termination of the Plan at any time prior to the
expiration date of such option to the same extent such option
would have been exercisable had the Plan not terminated.
Transferability
Options may be transferable as provided in the Option Agreement.
It shall be a condition precedent to any transfer of any option
that the transferee executes and delivers an agreement
acknowledging such option has been acquired for investment and
not for distribution and is and shall remain subject to the Plan
and the Option Agreement.
Recommendation of the Board of Directors
The Board of Directors recommends a vote to approve the
reservation of additional shares of common stock reserved for
issuance under the Plan. Unless the shareholder directs that
his or her Common Shares are to be withheld from voting in
connection with the potential approval of the reservation of an
additional 1,190,000 shares of common stock, the persons named
in the enclosed form of proxy intend to vote for such issuance.
Approval of this proposed reservation would give the Board of
Directors authority to reserve such shares at any time it
determined prior to December 31, 2004. In addition, approval of
this proposed share issuance would also give the Board of
Directors authority to decline to implement such proposed
reservation prior to such date or at all.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth all compensation earned during
the fiscal years ended October 31, 2001, October 31, 2002 and
the fourteen month period ended December 31, 2003 from the
Corporation by its President and Chief Executive Officer and the
other officers of the Corporation (the "Named Executive
Officers"). The Corporation has determined that it had a total
of seven Named Executive Officers during the fiscal year.
Summary Compensation Table
(Shown in Canadian dollars unless noted)
Annual Compensation
Long
Term
Compensa
tion
Name and
Principal
Position
Year
(9)
Salary
($)
Bonus(
8)
($)
Other
Annual
Compen
sation
Securiti
es Under
Options
granted
(#)
All
Other
Compens
ation
($)
Nagy Moustafa
(1)
President and
Chief
Executive
Officer
2003
2002
2001
256,667
220,000
200,000
15,00
0
50,00
0
125,0
00
7,000
6,000
6,000
300,000
- -
40,0000
- -
- -
- -
David Hackett
(2)
Chief
Financial
Officer
2003
2002
192,500
60,640
8,000
10,00
0
5,600
3,000
60,000
15,000
- -
- -
Atul Parikh
(5)
EVP,
Professional
Services
2003
US$140,
000
- -
US$4,8
00
29,000
- -
Charles
Walton (6)
EVP,
Financial and
International
Markets
2003
US$50,0
00
- -
- -
- -
- -
Scott Lowry
(7)
EVP,
Government
and
Enterprise
Markets
2003
US$60,0
00
- -
US$1,6
00
- -
- -
Nick Darwish
(3)
EVP, OEM
Channels
2003
2002
2001
179,667
154,000
140,000
- -
11,66
7
50,00
0
5,600
4,800
4,800
17,000
4,000
7,625
- -
- -
- -
Hussam
Mahgoub(4)
EVP, Products
2003
2002
2001
154,000
132,000
120,000
5,000
11,66
7
50,00
0
5,600
4,800
4,800
37,000
4,000
3,000
- -
- -
- -
(1) Nagy Moustafa was appointed President and Chief Executive
Officer of the Corporation on November 10, 1997. See
"Management Employment Contracts".
(2) David Hackett was appointed Chief Financial Officer of the
Corporation on March 26, 2002. See "Management Employment
Contracts".
(3) Nick Darwish was appointed Vice-President, Business
Development of the Corporation on December 20, 1999.
Subsequent to fiscal 2001 Mr. Darwish was appointed EVP, OEM
Channels. See "Management Employment Contracts".
(4) Hussam Mahgoub was appointed Vice-President, Products of
the Corporation on April 1, 1999. Subsequent to fiscal 2001,
Mr. Mahgoub was appointed EVP, Products. See "Management
Employment Contracts".
(5) Atul Parikh was appointed EVP, Professional Services on
January 3, 2003 upon the acquisition of DSS. See "Management
Contracts".
(6) Charles Walton was appointed EVP, Financial and
International Markets of the Corporation on September 1, 2003
upon the acquisition of Caradas. See "Management Contracts".
(7) Scott Lowry was appointed EVP, Government and Enterprise
Markets of the Corporation on September 1, 2003 upon the
acquisition of Caradas. See "Management Contracts".
(8) Bonus allocations, if any, are determined annually at the
discretion of the Board of Directors on the recommendations of
the Compensation Committee. Bonuses are paid in the fiscal
year following the year in which they are earned as the
determination is made by the Board subsequent to the end of
the fiscal year.
(9) The 2003 year is for the fourteen month period ended
December 31, 2003. The 2001 and 2002 year is for the twelve
months ended October 31, 2001 and 2002, respectively.
Option Grants in the Fourteen Months Ended December 31, 2003
Details of options granted to each Named Executive Officer
during the fourteen months ended December 31, 2003 are as
follows:
Name
Securi
ties
Under
Option
s
Grante
d (#)
% of
Total
Options
Granted
to
Employees
in
Financial
Year
Exerci
se
Price
/Secur
ity
(US$)
Market
Value of
Securitie
s
Underlyin
g Options
on the
Date of
Grant/Sec
urity
(US$)
Expiration
Date (1)
Nagy
Moustafa
President
and Chief
Executive
Officer
50,000
100,00
0
150,00
0
31.9%
0.62
0.62
2.45
0.62
0.62
2.45
December 20,
2007
June 3, 2008
August 15,
2008
David
Hackett
Chief
Financial
Officer
5,000
5,000
50,000
6.4%
1.50
0.62
2.45
1.50
0.62
2.45
February 28,
2008
June 3, 2008
August 15,
2008
Atul Parikh
EVP,
Professiona
l Services
10,000
4,000
15,000
3.1%
3.00
0.62
2.45
3.00
0.62
2.45
January 2,
2008
June 3, 2008
August 15,
2008
Nick
Darwish
EVP, OEM
Channel
5,000
2,000
10,000
1.8%
1.50
0.62
2.45
1.50
0.62
2.45
February 28,
2008
June 3, 2008
August 15,
2008
Hussam
Mahgoub
EVP,
Products
5,000
2,000
30,000
3.9%
1.50
0.62
2.45
1.50
0.62
2.45
February 28,
2008
June 3, 2008
August 15,
2008
(1) Pursuant to the Plan, unexercised options are subject to
early expiration upon the termination of employment of the
optionee with the Corporation or its affiliates and on the
optionee's retirement or death.
Aggregated Option Exercises During the Most Recently Completed
Financial Year End and Financial Year End Option Values
Details of aggregate number of options exercised by each Named
Executive Officer during the fourteen months ended December 31,
2003 and particulars of the fiscal year end value of unexercised
options held by Named Executive Officers are as follows:
Name and
Principal
Position
Sec
uri
tie
s
Acq
uir
ed
on
Exe
rci
se
#
Aggregate
Value
Realized
(US$)
Unexercised
Options/SARs at
December 31,
2003 (#)
exercisable/unex
ercisable
Value of
Unexercised
in-the-
money
Options/SAR
s at
December
31, 2003
(US$)
exercisable
/unexercisa
ble (1)
Nagy Moustafa
President and
Chief
Executive
Officer
- -
- -
82,500/257,500
16,667/83,3
33
David Hackett
Chief
Financial
Officer
- -
- -
15,000/60,000
2,083/7,917
Atul Parikh
EVP,
Professional
Services
- -
- -
4,417/24,583
667/3,333
Charles
Walton
EVP,
Financial and
International
Markets
- -
- -
- -/-
- -
Scott Lowry
EVP,
Government
and
Enterprise
Markets
- -
- -
- -/-
- -
Nick Darwish
EVP, OEM
Channels
- -
- -
19,323/18,052
1,583/5,417
Hussam
Mahgoub
EVP, Products
- -
- -
18,833/35,167
1,583/5,417
(1) Based on a closing market price of US$2.09 per Common Share
of the Corporation on December 31, 2003 on the OTC Bulletin
Board (the last trading day in the fiscal year of the
Corporation).
Other Compensation Matters
There were no long-term incentive awards other than stock
options made to the Named Executive Officers of the Corporation
during the fiscal year ended December 31, 2003. There are no
pension plan benefits in place for the Named Executive Officers
and none of the Named Executive Officers, senior officers or
directors of the Corporation is indebted to the Corporation.
Management Employment Contracts
Nagy Moustafa, the Corporation's President and Chief Executive
Officer is employed pursuant to a written employment contract
effective September 29, 1997 as amended. The contract provides
for a five-year term with an annual base salary of Cdn$220,000
and an annual performance bonus of up to Cdn$250,000. The
contract provides for payment of twenty-four (24) months' salary
and bonus upon termination of employment, including termination
as a result of a change-in-control or a change in
responsibilities following a change-in-control. The agreement
also contains certain non-competition and non-disclosure
provisions. This contract has been amended for a one-year term
and is renewable annually for one-year terms unless written
notification is provided not to renew.
David Hackett, Chief Financial Officer, is employed pursuant to
a written employment contract and consulting agreement effective
March 26, 2002 as amended. The contracts are renewable annually
with a base compensation of Cdn$165,000 and a performance bonus
of up to Cdn$75,000 payable upon the achievement of personal
goals and corporate objectives as agreed upon. The contracts
provide for payment of six (6) months compensation and bonus
upon termination of employment for the first year of employment
and thereafter twelve (12) months salary and bonus and twenty-
four (24) months compensation and bonus upon termination of
employment as a result of a change-in-control or a change in
responsibilities following a change-in-control. The agreement
also contains certain non-competition and non-disclosure
provisions and is subject to certain termination provisions.
Atul Parikh, Executive Vice-President Professional Services is
employed pursuant to a written employment contract effective
January 2, 2003. The contracts are renewable annually with a
base compensation of $140,000 and a performance bonus of up to
$100,000 payable upon the achievement of personal goals and
corporate objectives as agreed upon. The contracts provide for
payment of six (6) months compensation, bonus and benefits upon
termination of employment. The agreement also contains certain
non-competition and non-disclosure provisions and is subject to
certain termination provisions.
Hussam Mahgoub, Executive Vice-President, Products is employed
pursuant to a written employment contract effective April 1,
1999 as amended. The contract is renewable annually with a base
salary of Cdn$132,000 and a performance bonus of up to
Cdn$100,000 payable upon the achievement of personal goals and
corporate objectives as agreed upon. The contract provides for
payment of twelve (12) months salary and bonus upon termination
of employment and twenty-four (24) months salary and bonus upon
termination of employment as a result of a change-in-control or
a change in responsibilities following a change-in-control. The
agreement also contains certain non-competition and non-
disclosure provisions and is subject to certain termination
provisions.
Nick Darwish, Executive Vice-President, OEM Channels is employed
pursuant to a written employment contract effective December 20,
1999 as amended. The contract is renewable annually with a base
salary of Cdn$154,000 and a performance bonus of up to
Cdn$100,000 payable upon the achievement of personal goals and
corporate objectives as agreed upon. The contract provides for
payment of twelve (12) months salary and bonus upon termination
of employment and twenty-four (24) months salary and bonus upon
termination of employment as a result of a change-in-control or
a change in responsibilities following a change-in-control. The
agreement also contains certain non-competition and
non-disclosure provisions and is subject to certain termination
provisions.
Charles Walton, Executive Vice-President, Financial and
International Markets is employed pursuant to a written
employment contract effective September 1, 2003. The contract
is renewable annually with a base salary of $150,000 and a
performance bonus of up to $100,000 payable upon the achievement
of personal goals and corporate objectives as agreed upon. The
contract provides for payment of three (3) months salary and
benefits upon termination of employment. The employment
agreement also contains certain non-disclosure provisions and is
subject to certain termination provisions.
Scott Lowry, Executive Vice-President, Government and Enterprise
Markets is employed pursuant to a written employment contract
effective September 1, 2003. The contract is renewable annually
with a base salary of $180,000 and a performance bonus of up to
$100,000 payable upon the achievement of personal goals and
corporate objectives as agreed upon. The contract provides for
payment of three (3) months salary and benefits upon termination
of employment. The employment agreement also contains certain
non-disclosure provisions and is subject to certain termination
provisions.
Composition of the Compensation Committee
At the end of the fiscal year ended December 31, 2003 the
Corporation's compensation committee (the "Compensation
Committee") included Keith Powell and Derek Buntain.
Report on Executive Compensation
It is the responsibility of the Compensation Committee to
determine the level of compensation in respect of the
Corporation's senior executives (including Named Executive
Officers) with a view to providing such executives with a
competitive compensation package having regard to performance.
Performance is defined to include achievement of the
Corporation's strategic objective of growth, development of the
business, enhancement of shareholder value and attainment of
annual goals as set by the Board of Directors.
Compensation for executive officers is composed primarily of
three components; base salary, performance bonuses and the
granting of stock options. Performance bonuses are considered
from time to time having regard to the above referenced
objectives as well as the terms of each officer's employment
contract.
The Corporation's executive compensation program may include
base salary, bonus and participation in the Corporation's stock
option plans. In establishing the levels of base salary, the
award of stock options and performance bonuses the Compensation
Committee takes into consideration individual performance,
responsibilities, length of service and levels of compensation
provided by industry competitors. The Compensation Committee
considers and, if thought fit, approves the issuance of options
in accordance with the Corporation's stock option plans. Such
stock option grants are dependent upon individual performance
and competitive conditions. The Corporation's stock option
plans require that the option exercise price be equal to the
market price on the date immediately prior to the date the
option was granted.
Compensation of the Chief Executive Officer
The Chief Executive Officer's compensation is paid in accordance
with the terms of his employment contract (See "Management
Employment Contracts") which provides for payment of an annual
base salary of Cdn$220,000 and an annual performance bonus of up
to Cdn$250,000. In addition, Mr. Moustafa participates in the
Plan.
The Compensation Committee did consider the compensation of CEOs
of other issuers in the same industry in determining the basis
for Mr. Moustafa's overall compensation. In addition, Mr.
Moustafa is entitled to participate in the Corporation's bonus
plan and stock option awards as part of his compensation. In
the financial year ended December 31, 2003, Mr. Moustafa was
granted options to purchase a total of 300,000 Common Shares at
exercise prices ranging from Cdn$0.94 to Cdn$3.38. The stock
option awards to Mr. Moustafa are consistent with the
compensation philosophy of the Corporation, which is to tie a
portion of the Chief Executive Officer's compensation to
corporate performance and the achievement of growth in
shareholder value.
Mr. Moustafa is an executive officer and a member of the Board
and is required to absent himself from deliberations of the
Board with respect to matters related to his compensation and
also abstain from voting on these matters.
Submitted on behalf of the Compensation Committee:
Keith Powell (Chair) and Derek Buntain
Compensation of Directors
The directors of the Corporation receive no compensation for
attending meetings of the Board of Directors or a committee of
the Board of Directors.
None of the directors of the Corporation was compensated in his
capacity as a director by the Corporation during the fiscal year
ended December 31, 2003 pursuant to any other arrangement or in
lieu of any standard arrangement. It has been the Corporation's
practice to grant to a director 50,000 options to acquire common
shares of the Corporation upon his or her election as a
director. In addition the Corporation may grant directors
additional options from time to time. During fiscal 2003
Stanley Beck received 15,000 options at Cdn$0.84 and 25,000
options at Cdn$3.38; Derek Buntain received 25,000 options at
$0.62 and 25,000 options at $2.45; Keith Powell received 15,000
options at Cdn$0.84 and 25,000 options at Cdn$3.38; Charles Shiu
received 15,000 options at $0.62 and 25,000 options at $2.45;
and Mark Steinman received 20,000 options at Cdn$0.84 and 40,000
options at Cdn$3.38. Such options are exercisable to acquire
common shares at the market price on the day preceding the grant
pursuant to the terms of the Plan.
DIRECTORS' AND OFFICERS' LIABILITY INSURANCE
The Corporation maintains insurance for its directors and
officers against liability in their respective capacities as
directors and officers. The annual premium payable by the
Corporation in respect of such insurance is $120,000 and the
total amount of insurance purchased for the directors and
officers as a group is $5,000,000. In addition to the premiums,
the Corporation is liable to the extent of up to $250,000 per
claim under the deductible provisions of the policy. No claims
have been made under these policies to date.
INDEBTEDNESS OF DIRECTORS AND OFFICERS
None of the directors or officers of the Corporation, any
proposed nominee for election as a director or any of their
associates or affiliates is or has been indebted to the
Corporation at any time since the beginning of the last
completed fiscal year other than routine indebtedness (as
defined in the Securities Act (Ontario)).
STOCK PERFORMANCE CHART
The following graph and chart assume that $100 was invested over
a five year period commencing on December 31, 1999 and ending on
December 31 of each subsequent year thereafter by comparing the
yearly percentage change in the cumulative total shareholder
return over those five years on the Corporation's common shares.
S&P/TSX
Composite
(TSE 300 Stock
Index)
DIVERSINET
CORP.
December 31,
1999
100
100
December 31,
2000
106
10
December 31,
2001
91
6
December 31,
2002
78
1
December 31,
2003
97
1
INTERIM FINANCIAL STATEMENTS
Pursuant to National Instrument 54-102 published by the Canadian
Securities Administrators, the Corporation is not required to
mail out its interim quarterly financial statements. The
Corporation maintains a supplemental mailing list containing the
names of the holders of the securities of the Corporation to
whom the interim financial statements of the Corporation will be
mailed. A return card is enclosed with this Circular permitting
shareholders to request that they be placed on the supplemental
mailing list.
STATEMENT OF CORPORATE GOVERNANCE PRACTICES
The Toronto Stock Exchange (the "TSX") has issued a series of
guidelines (the "TSX Guidelines") for effective corporate
governance. These guidelines deal with matters such as the
constitution and independence of corporate boards, their
functions, the effectiveness and education of board members and
other items dealing with sound corporate governance. The TSX
requires that each listed corporation disclose on an annual
basis its approach to corporate governance. Although the
Corporation is not listed on the TSX, it refers to the TSX
guidelines for guidance. The Corporation's approach to
corporate governance is described below.
The Board of Directors is responsible for the supervision of the
management of the Corporation's business and affairs. Under
applicable law, the board is required to carry out its duties
with a view to the best interests of the Corporation.
The frequency of the meetings of the Board of Directors as well
as the nature of the agenda items change depending on the state
of the Corporation's affairs and in light of opportunities or
risks which the Corporation faces from time to time.
Composition of the Board
The TSX Guidelines recommend that a Board of Directors be
constituted with a majority of individuals who qualify as
"unrelated directors". The TSX Guidelines define an "unrelated
director" as a director who is independent of management and
free from any interest and any business or other relationship
which could, or could reasonably be perceived to, materially
interfere with that director's ability to act with a view to the
best interests of the corporation, other than an interest
arising from shareholding. The TSX Guidelines also recommend
that in circumstances where a corporation has a "significant
shareholder" (a shareholder with the ability to exercise the
majority of votes for the election of directors), the Board of
Directors should include a number of directors who do not have
interests in or relationships with either corporation or the
significant shareholder, which fairly reflects the investment in
the corporation by shareholders other than the significant
shareholder. The Corporation does not have a "significant
shareholder" at this time. Diversinet recently incorporated new
changes to its Board of Directors, including the institution of
a Corporate Governance Committee and the replacement of the
Chief Executive Officer as Chairman of the Board with an
external director. Moreover, as further indication of the
Corporation's mandate to comply fully with emerging corporate
governance issues, the CEO and CFO each certified the most
recent 6-K filing with the Securities & Exchange Commission in
accordance with the Sarbanes-Oxley Act, although, as a foreign
issuer, they are not technically required to do so.
The directors of the Corporation have examined these definitions
in the TSX Guidelines and have individually considered their
respective interests in and relationships with the Corporation.
As a consequence, the Board of Directors has concluded that five
of the Board's seven members are "unrelated" within the meaning
of the guidelines. Mr. Nagy Moustafa, President and Chief
Executive Officer, and Mr. Charlie Walton, EVP, Financial and
International Markets are related by virtue of being members of
the management team. The Corporation does not have a
significant shareholder (as defined above). The Board of
Directors considers its current size of seven to be appropriate
at the current time. The Chairman of the Board is not a member
of management.
The Board of Directors believes that the presence of the
President and Chief Executive Officer and the EVP, Financial and
International Markets on the Corporation's Board of Directors is
key to the effective governance of the Corporation. The
knowledge and insight that these directors bring to the Board
has been instrumental in creating a Board of Directors that
functions effectively and, in turn, achieves the Corporation's
successful development.
At present, in addition to those matters which must by law be
approved by the Board of Directors, management seeks Board
approval for any transaction that is out of the ordinary course
of business or could be considered to be material to the
business of the Corporation.
The Board of Directors has three standing committees: the Audit
Committee, the Compensation Committee and the Governance
Committee. The Board of Directors does not have an Executive
Committee.
COMMITTEES
Audit Committee
The Audit Committee is comprised of three directors. The Audit
Committee recommends engagement of the Corporation's independent
auditors and is primarily responsible for approving the services
performed by the Corporation's independent auditors. The Audit
Committee's responsibilities included reviewing the
Corporation's financial report procedures, the adequacy of its
internal controls and information systems, the external audit
plan and the independence and terms of engagement and fees of
the external auditors and the performance of the Corporation's
external auditors. The Audit Committee also has the
responsibility to review, and to recommend for approval, the
Corporation's interim unaudited consolidated financial
statements and annual consolidated financial statements,
management's discussion and analysis of financial condition and
results of operations and related press releases, prior to their
approval by the full Board. The members of the Audit Committee
are Mark Steinman (Chair), Keith Powell and Derek Buntain.
To carry out its responsibilities, the Audit Committee held four
meetings during the fourteen month period of November 1, 2002 to
December 31, 2003.
Compensation Committee
Overview and Philosophy
The Compensation Committee is comprised of two directors. It is
the responsibility of the Compensation Committee to determine
the level of compensation and to develop recommendations for
stock option grants for approval by the Board of Directors in
respect of the Corporation's senior executives (including Named
Executive Officers) with a view to providing such executives
with a competitive compensation package having regard to
performance. Performance is defined to include achievement of
the Corporation's strategic objective of growth, development of
the business, enhancement of shareholder value and attainment of
annual goals as set by the Board of Directors. The members of
the Compensation Committee are Keith Powell (Chair) and Derek
Buntain.
Published industry salary data is reviewed and relied upon in
the Committee's assessment of appropriate compensation levels,
specifically the analysis of proxies of certain public software
companies and appropriate and relevant compensation surveys.
The Committee recognizes that the industry sector in which the
Corporation operates is both highly competitive and undergoing
significant globalization with the result that there is
substantial demand for qualified, experienced executive
personnel. The Committee considers it crucial that the
Corporation be assured of retaining and rewarding its top
calibre executives who are essential to the attainment of the
Corporation's ambitious long-term, strategic goals.
For these reasons, the Committee believes the Corporation's
executive compensation arrangements must remain competitive with
those offered by other companies of similar size, scope,
performance levels and complexity of operations, including some,
but not all, of the companies comprising the Nasdaq Stock
Market, the Over the Counter Bulletin Board and the Toronto
Venture Exchange.
Annual Cash Compensation (Base Salary Plus Performance
Incentives)
The Committee believes that annual cash compensation should be
paid commensurate with attained performance. The Corporation's
executive cash compensation consists of base compensation and
performance incentives. Base salaries for executive officers
are established by considering a number of factors, including
the Corporation's operating results; the executive's individual
performance and measurable contribution to the Corporation's
success; and pay levels of similar positions with comparable
companies in the industry. The Committee believes that its
executive compensation must remain competitive for it to retain
talented executives. Base salaries are typically reviewed
annually.
The purpose of annual performance incentive compensation is to
provide cash compensation that is at-risk on an annual basis and
is contingent on the achievement of annual business and
operating objectives. Annual incentives measure business
performance and individual performance, and are designed to
provide a pay-out scale with high upside opportunity for high
performance and zero pay out for low performance. The
Compensation Committee sets targets for executive bonuses each
year and the pay out of those bonuses, if any, is determined
based on the Corporation's operating results, the executive's
measurable contribution to the Corporation's success, and bonus
levels of similar positions with comparable companies in the
industry.
For the fourteen month period ending December 31, 2003, the
Compensation Committee recommended and approved a total of
Cdn$223,000 for the executive team out of a potential total
bonus pool of Cdn$657,000 or 34% of the potential total bonus
pool. The low percentage pay out of executive bonuses reflects
the view of both management and the Compensation Committee that
executive bonuses should be based on the factors described
above. There are currently no guaranteed executive bonuses for
2004 or beyond.
Stock Options
The Committee recommends executive stock options under the
Diversinet Corp. Amended and Restated Stock Option Plan (the
"Plan") to foster executive officer ownership of the
Corporation's Common Stock, to stimulate a long-term orientation
in decisions and to provide direct linkage with stockholder
interests. The Committee considers the total compensation
package, industry practices and trends, the executive's
accountability level, and assumed potential stock value in the
future when granting stock options. The Committee recommends
option amounts to provide retention considering projected
earnings to be derived from option gains based upon relatively
conservative assumptions relating to planned growth and
earnings. Therefore, the stock option program is intended to
serve as an effective and competitive long-term incentive and
retention tool for the Corporation's executives, as well as
other key employees. The exercise prices of stock options
granted to executive officers are equal to the fair market value
of the Corporation's Common Stock on the date of grant.
Therefore, stock options provide an incentive to maximize the
Corporation's profitable growth that ordinarily, over time,
should be reflected in the price of the Corporation's Common
Stock.
For example, during the fourteen months period ending December
31, 2003, at the recommendation of the Compensation Committee,
the Compensation Committee awarded options to purchase 433,000
shares of the Corporation's Common Stock to five key employees
of the Corporation. During the year the Corporation completed
two acquisitions and the purpose of these grants was to align
these key employees with combined corporate culture. The
exercise prices of these stock options are equal to the fair
market value of the Corporation's Common Stock on the date of
grant and the majority of them vest quarterly over three years.
Benefits
The Corporation provides benefits to the named executive
officers that are generally available to all employees of the
Corporation.
Chief Executive Officer Compensation
The Chief Executive Officer's compensation is paid in accordance
with the terms of his employment contract (See "Management
Employment Contracts") which provides for payment of an annual
base salary of Cdn$220,000 and an annual performance bonus of up
to Cdn$250,000. In addition, Mr. Moustafa participates in the
Plan.
The Compensation Committee did not directly base Mr. Moustafa's
bonus and option grants on rates for comparable employers,
although the Compensation Committee did consider the
compensation of CEOs of other issuers in the same industry in
determining Mr. Moustafa's overall compensation. In addition,
Mr. Moustafa is entitled to participate in the Corporation's
bonus plan and stock option awards as part of his compensation.
In the financial year ended December 31, 2003, Mr. Moustafa was
granted options to purchase a total of 300,000 Common Shares at
exercise prices ranging from Cdn$0.94 to Cdn$3.38. The stock
option awards to Mr. Moustafa are consistent with the
compensation philosophy of the Corporation, which is to tie a
portion of the Chief Executive Officer's compensation to
corporate performance and the achievement of growth in
shareholder value.
Governance Committee
The Governance Committee is comprised of two directors. The
Governance Committee will assist the Board of Directors in
fulfilling its oversight responsibilities related to seeking
candidates for membership on the Board of Directors, assessing
the corporate governance policies and processes of the Board of
Directors and reviewing from time to time the policies of the
Board of Directors related to director qualifications,
compensation, tenure and retirement. The members of the
Governance Committee are Stanley Beck (Chair) and Charles Shiu.
GENERAL
Management knows of no matters to come before the Meeting or any
adjournments thereof other than the matters referred to in the
Notice of the Meeting. However, if any other matters that are
not now known to management should properly come before the
Meeting or any adjournments thereof, the proxy solicited hereby
will be voted on such matters in accordance with the best
judgment of the persons voting the proxy.
DIRECTORS' APPROVAL
The undersigned hereby certifies that the Board of Directors of
the Corporation has approved the contents and sending of this
Circular.
DATED at Toronto, Ontario, the 5th day of March 2004.
BY ORDER OF THE BOARD OF
DIRECTORS
March 5, 2004 /s/ Mark Steinman
Toronto, Ontario Mark Steinman, Chairman
D i v e r s i n e t
2 0 0 3 A n n u a l R e p o r t
To Our Shareholders:
The past year has been a year of growth for the Company, in
January 2003 we acquired DSS Software Technologies, a systems
integration provider headquartered in Fremont, California and
continuing in September 2003 with the acquisition of Caradas,
Inc., a digital identity and authentication management
technology provider headquartered near Boston, Massachusetts.
These acquisitions bring Diversinet increased presence in the
important U.S. market and key relationships to act as channels
for the Company's products.
Our products' team continues its work to bring an integrated
management platform to market in the form of products that
combine the best of our secure wireless and identity management
technologies. We will be making announcements about this
platform throughout 2004. In July we received a patent from the
State of Israel Patent Office for our "System and Method for
Reliable Key Transfer". This system and method provides for an
automated method to securely update root CA keys and
certificates (basis for root rollover) and combine domains. In
August, we received a trademark from the U.S. Patent and
Trademark Office for our Diversinet logo, thus securing our
brand. Then in November, we received a patent from the State of
Israel Patent Office for our "System and Method for Handling
Permits". This technology provides for a unique permit
separation model that enhances the security and privacy of wired
and wireless e-commerce systems by improving the management of
personal privileges in advanced Identify Management security
environments. With these patents and combined with the
opportunities afforded by our acquisitions; we believe we are
better positioned than ever to increase shareholder value in the
future.
In 2003, we entered into agreements with several application
developers, as part of our strategy to find leading channel
partners to quickly establish a leadership presence in growing
markets for wireless security. The Company's channel partners
will assist the company in expanding its reach both
geographically and into new vertical applications.
We have had some opportunities and challenges in the capital
markets during the year. In April, we were delisted from the
Nasdaq Small Cap market and are currently trading on the OTC
Bulletin Board. During June 2003, we completed a private
placement for gross proceeds of $3,100,000. In January 2004, we
completed a private placement for gross proceeds of $2,000,000
by the issuance of 1,000,000 common shares and 1,100,000 share
purchase warrants.
In October, based on the substantial 'intellectual capital' that
our acquisitions brought us, we re-organized the Company into
customer-facing strategic business units, focusing on financial
and international, government and enterprise, professional
services and OEM channels. The strategic business unit
structure, channel partners and the Company's acquisitions are
part of the Company's overall strategy to improve its market
presence.
The wireless market is renewing and at the same time it is
expanding to include new devices and requiring advanced security
functions, such as identity and access management features, as
well as secure data communications and transactions. It is at
this juncture that Diversinet's original technology, combined
with that acquired from Caradas, will accelerate our prospects.
In conclusion, I would like to thank our shareholders for their
continued support; we look forward to updating you throughout
the exciting year ahead. I would also like to thank our
employees for their dedication and efforts to build the solid
operational foundation that Diversinet enjoys today.
Regards,
/s/ Nagy Moustafa
Nagy Moustafa
President and Chief Executive Officer
Management's Discussion and Analysis of Financial Condition and
Results of Operations
When used herein, the words "may", "will", "expect",
"anticipate", "continue", "estimate", "project", "intend",
"plan" and similar expressions are intended to identify forward-
looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, regarding events,
conditions and financial trends that may affect the Company's
future plans of operations, business strategy, operating results
and financial position. All statements, other than statements
of historical facts, included or incorporated by reference in
this document which address activities, events or developments
which the Company expects or anticipates will or may occur in
the future, including such things as future capital expenditures
(including the amount and nature thereof), business strategy,
expansion and growth of the Company's business and operations,
and other such matters are forward-looking statements. These
statements are based on certain assumptions and analyses made by
the Company in light of its experience and its perception of
historical trends, current conditions and expected future
developments as well as other factors it believes are
appropriate in the circumstances. Such statements are not
guarantees of future performance and are subject to risks and
significant uncertainties and that actual results may differ
materially from those included within the forward-looking
statements as a result of various factors. The occurrence of
any unanticipated events may cause actual results to differ from
those expressed or implied by the forward-looking statements
contained herein. You are cautioned not to place undue reliance
on these statements, which speak only as of the date of this
report.
Please find enclosed the Consolidated Balance Sheets as at
December 31, 2003, October 31, 2003 and October 31, 2002 and the
Consolidated Statements of Earnings and Deficit and the
Consolidated Statements of Cash Flows for each of the three year
periods ending October 31, 2003 and for the fourteen month
period ended December 31, 2003 and the Notes to Consolidated
Financial Statements for Diversinet Corp. Our financial
statements have been prepared in accordance with Canadian GAAP.
These principles conform in all material respect with U.S. GAAP
except as described in Note 14 to our consolidated statements.
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto appearing
elsewhere in this annual report.
The differences between line items under Canadian GAAP and those
under U.S. GAAP are not significant except that, under U.S.
GAAP, our total loss would be greater by $35,000 and $37,000 for
the years ended October 31, 2002 and 2001 respectively. These
differences relate to differences in accounting for stock-based
compensation in fiscal 2002 and 2001.
Overview
Founded in 1997 and based in Toronto, Canada, Diversinet
provides secure wireless infrastructure solutions to the
financial services, government and enterprise markets (including
gaming and wagering markets) to empower a mobile user to operate
securely.
Building on its expertise, Diversinet's solutions extend full
security and authentication management to the full range of
mobile devices such as mobile phones, handheld computing devices
and portable credit, debit and smart cards.
In addition to secure, reliable and scalable mobile solutions
through security products, Diversinet deploys an experienced
professional services team for application development and
integration, consulting, training and technical support in the
wireless security and identity management areas.
In January 2003, Diversinet acquired DSS, a systems integration
provider headquartered in Fremont, California. DSS provides
technical consulting services to tier one customers including
financial, enterprise and technology companies such as Cisco
Systems, Lucent, Oracle, Sun Microsystems and Wells Fargo in the
areas of systems integration, software development, and
Enterprise Resource Planning (ERP) and Customer Relationship
Management (CRM) implementation.
The Company expects that the addition of DSS' services suite
will enhance Diversinet's ongoing strategy to provide greater
depth and breadth in its solution offering. Combined, the
company's technical and industry expertise can provide
integrated solutions and full services offerings. The Company
believes its acquisition of DSS will strengthen its position in
the U.S. through the addition of a comprehensive line of
services that will help it to better address rapidly growing
demands for security in telecommunication services.
The acquisition of Caradas in September 2003 provides us with
'smart card enablement' to the financial, retail, enterprise,
government and other markets looking for open, secure, multi-
application solutions. Caradas technology answers the need for
multi-application smart card technology, essential for managing
critical business processes.
Caradas focuses on smart card-based application security systems
within the financial services industry, particularly as a
vehicle for managing relationships between issuers and
cardholders. Caradas offers a suite of solutions and services
to define and implement secure application infrastructures. The
Caradas ConnexusT Platform Caradas provides turnkey solutions
for smart card-based application security systems using a suite
of Caradas developed and third-party technology components.
Caradas services provides a set of professional integration
services for the strategy and support behind the technology.
The Caradas team has developed a methodology for implementing
application security systems. Caradas LabsT provides
benchmarking and evaluation of core technologies through the
testing centre.
The Company believes that the addition of Caradas will enhance
its ongoing strategy to provide greater depth and breadth in its
solution offering, namely in the financial services and
government verticals. Combined, Caradas and Diversinet's
technical and industry expertise can offer integrated solutions
and full service offerings. The Company believes the
acquisition of Caradas will strengthen its position in the U.S.
through expanded access to key customers and the addition of a
comprehensive line of services that will help us to better
address rapidly growing demands for security in
telecommunication services.
The synergy between the combined companies is expected to
provide the infrastructure and capability to expand into new
markets and convey a unique opportunity to deliver solutions
that will meet the specific needs of financial service and
government customers.
With Caradas' focus on smart card technology in the Company's
target markets, the complementary skill sets (application
development and wireless), and a U.S. sales force, the combined
company can provide technical consulting services to companies
in the areas of smart card-based application security systems
and software development, which are natural extensions of
wireless and require enhanced security.
During the year the Company changed its measurement and
reporting currency from Canadian dollars to United States
dollars and changed its year end, subject to shareholder
approval, from October 31st to December 31st. In addition,
except where otherwise indicated, all financial information is
presented in United States dollars.
We have incurred operating losses in each of the last seven
fiscal years, most recently from our continuing operations of
developing security solutions. We have sustained our business
during this period through the sale of common shares in a series
of private placements, by raising $3.1 million in June 2003 and
most recently by raising $2 million in January 2004. We cannot
provide assurance that we will be able to raise sufficient funds
in the future to sustain our operations.
Operating Results
Fourteen month period ended December 31, 2003 and year ended
October 31, 2003 compared to year ended October 31, 2002
During fiscal 2003, the Company purchased 100% of the common
shares of two companies, the DSS acquisition occurred on January
2, 2003 resulting in the inclusion of twelve month's activities
in the consolidated financial results for December 31, 2003 and
the Caradas acquisition occurred on September 1, 2003 resulting
in the inclusion of four month's activity in the consolidated
financial results for December 31, 2003. The common shares of
DSS were purchased through the issuance of shares, common share
purchase warrants, cash and a promissory note. The common shares
of Caradas were purchased through the issuance of shares and
common share purchase warrants. As a result of a number of
circumstances, including the current year financing activities,
the acquisition of DSS and Caradas and the U.S. dollar becoming
the measurement currency in which most of the Company's business
is transacted, effective October 1, 2003, the Company adopted
the U.S. dollar as its measurement and reporting currency for
preparation of its consolidated financial statements.
For the periods ending December 31, 2003 and October 31, 2003,
we reported revenue of $8,563,000 and $7,108,000 respectively
compared to revenue of $710,000 for the year ended October 31,
2002. We generated 96% (2% in 2002) of our revenues from the
United States, 3% (63% for 2002) from the Asia Pacific region,
0% (29% in 2002) from Canada and 1% (6% in 2002) from other
areas during the period ended December 31, 2003 and the period
ended October 31, 2003. The increase in revenue is the result
of the acquisition of DSS and Caradas during the year, both
companies are located in the United States, leading to the high
percentage of U.S. based revenue. Furthermore, we changed our
year end to December 31st, leading to a fourteen month reporting
period. We are operating in an evolving and unpredictable
market and accordingly have and may continue to experience wide
fluctuations in our revenues.
During the two periods ending in 2003, 30% (28% in 2002) of our
revenue came from one customer. These customers are not related
to each other. While we are endeavoring to increase our
customer base, as the market that we operate in is still in an
evolving stage and our revenue is still quite small, it is
reasonable to expect that our revenue may continue to be
concentrated among relatively few customers for the near future.
We reported a net loss of $5,618,000 for the period ended
December 31, 2003 and $4,834,000 for the year ended October 31,
2003 compared to a net loss of $4,065,000 in the prior year.
This net loss includes stock-based compensation expense relating
to the issuance of options and warrants of $825,000 and $772,000
respectively and nil for 2002. During the year the Company
started to report a fair value for stock-based compensation and
is including this as an expense.
Research and development expenses were $1,513,000 in the period
ended December 31, 2003 and $1,244,000 at October 31, 2003
compared to $1,479,000 in 2002. The annualized decrease is due
to further cost reduction measures carried out in the second
quarter of 2003. During the year we received a net amount of
$289,000 relating to investment tax credits for R&D work done in
2002 and 2001 and a rebate of retail sales taxes paid in excess
in 2001.
Sales and marketing expenses were $2,656,000 in the period ended
December 31, 2003 and $2,271,000 at October 31, 2003 compared to
1,104,000 in 2002. The increase in sales and marketing is
largely due to the two acquisitions that were done during the
year and the increase is consistent with the increase in sales
activity to generate the revenues during the period. While the
Asia Pacific market place continues to be a focal point for the
Company, with the addition of DSS and Caradas, we have increased
our U.S. presence and increased sales and marketing in the U.S.
accordingly. Included in the December 31, 2003 sales and
marketing expenses is $300,000 relating to stock-based
compensation expenses.
General and administrative expenses were $2,654,000 at December
31, 2003 and $2,369,000 at October 31, 2003 compared to
$1,899,000 in 2002. These figures include foreign exchange
losses of $309,000 for December 31, 2003 and $230,000 in October
31, 2003 and a loss of $145,000 for 2002. Until October 1, 2003
the Company has historically prepared its consolidated financial
statements in Canadian dollars and used the Canadian dollar as
its measurement currency. Included in the December 31, 2003 G&A
expenses is $525,000 relating to stock-based compensation
expenses.
Depreciation and amortization expense was $740,000 in the period
ended December 31, 2003 and $574,000 for the year ended October
31, 2003. These figures include amortization of intangible
assets acquired on September 1, 2003 in the amount of $173,000
and $87,000, respectively. Depreciation and amortization
expense in fiscal 2002 was $404,000.
We earned interest and other income of $26,000 during the period
ended December 31, 2003 and the year ended October 31, 2003 and
$111,000 in fiscal 2002 through investing our excess cash.
Interest expenses were $21,000 during the period ended December
31, 2003 and $20,000 for the year ended October 31, 2003
compared to $nil in 2002. This interest relates to notes
payable on capital assets acquired during the year.
Year ended October 31, 2002 compared to year ended October 31,
2001
For the year ended October 31, 2002, we reported revenue of
$710,000 compared to revenue of $793,000 for the year ended
October 31, 2001. We are operating in an evolving and
unpredictable market and accordingly have and may continue to
experience wide fluctuations in our revenues. We generated 63%
(55% for 2001) of our revenues from the Asian region, 2% (24% in
2001) from the United States, 29% (17% in 2001) from Canada and
6% (4% in 2001) from other areas during fiscal year 2002.
During fiscal 2002, 28% (40% in 2001) of our revenue came from
one customer. These customers are not related to each other.
As the market that we operate in is still in an early stage of
development and our revenue is still quite small, it is
reasonable to expect that our revenue may continue to be
concentrated among relatively few customers for the near future.
We reported an improved net loss of $4,065,000 for the year
ended October 31, 2002 compared to a net loss of $12,272,000 in
the prior year. We completed operating cost reductions in the
fourth quarter of 2001 that resulted in a decline in expenses
from operations during fiscal 2002 compared to fiscal 2001.
These reductions included workforce reductions in the United
States and Canada, closure of offices in the United States and
the discontinuance of non-core programs particularly in the
marketing area. The restructuring was aimed at refocusing our
efforts on the most significant market opportunities in Asia and
Europe.
Research and development expenses decreased to $1,479,000 in
2002 from $4,485,000 in 2001 resulting primarily as a result of
continued efforts to reduce costs as started in the last quarter
of fiscal 2001. During the year we received a net amount of
$182,000 relating to investment tax credits for R&D work done in
2000 and 1999.
Sales and marketing expenses were $1,104,000 in 2002 compared to
$4,712,000 in 2001. The Company continues to focus a
significant portion of its efforts in the Austral Asian markets
where we derived 63% of our 2002 revenues. During 2002 we
implemented a pilot project for Hong Kong's six local mobile
operators, the Hong Kong m-Cert Implementation Forum to develop
and implement a single mobile digital certificate (m-Cert)
standard to promote mobile commerce in Hong Kong. We continue
to make progress in this region and expect to increase our
presence in 2003.
General and administrative expenses were $1,899,000 in 2002
compared to $2,616,000 in 2001. These figures include foreign
exchange losses of $145,000 for 2002 and a gain of $403,000 for
2001.
Depreciation and amortization expense in fiscal 2002 decreased
to $404,000 from $1,226,000 in fiscal 2001. The Company's
deferred development and purchased technology costs were fully
amortized in 2001 and the reduction in additions to capital
assets has resulted in reduced amortization for the 2002 fiscal
year.
During fiscal 2001, we entered into a joint venture to conduct
certain of our Asian activities, as detailed in note 8 to our
audited financial statements. We own 50% of this joint venture
and our financial statements reflect our proportionate interest
in its assets, liabilities, revenue and expenses.
We earned interest and other income of $111,000 and $448,000 in
fiscal 2002 and 2001, respectively. The decrease is primarily
due to our lower average cash and cash equivalents in 2002 and
due to lower interest rates than we received during 2001.
Liquidity and Capital Resources
Fourteen month period ended December 31, 2003 and year ended
October 31, 2003 compared to year ended October 31, 2002 and
October 31, 2001
Cash used in operating activities was $1,677,000 in the period
ended December 31, 2003. Cash used in operating activities
during the year was comprised of the net loss of $5,618,000,
less net depreciation and amortization of $740,000, stock-based
compensation expense of $825,000 and unrealized foreign exchange
loss of $416,000. Changes in other non-cash items include a
decrease in accounts payable and accrued liabilities of
$140,000, a decrease in receivables of $2,356,000, a decrease in
deferred revenue of $156,000 and an increase in prepaid expenses
of $99,000. With the addition of DSS and Caradas in 2003, we
incorporated the fair value of their balance sheets into the
Company's on the acquisition dates. The inclusion of these
balance sheets have affected the calculation of non-cash
operating working capital.
Cash used in operating activities was $954,000 in the year ended
October 31, 2003. Cash used in operating activities during the
year was comprised of the net loss of $4,834,000, less net
depreciation and amortization of $574,000, stock-based
compensation expense of $772,000 and unrealized foreign exchange
loss of $491,000. Changes in other non-cash items include a
decrease in accounts payable and accrued liabilities of $41,000,
a decrease in receivables of $2,023,000, an increase in deferred
revenue of $20,000 and an decrease in prepaid expenses of
$43,000.
Cash used in operating activities was $4,532,000 in the year
ended October 31, 2002, a decline of 55% from the amount used in
the same period of the prior year. Cash used in operating
activities during the year was comprised of the net loss of
$4,065,000, less net depreciation and amortization of $404,000
and unrealized foreign exchange loss of $72,000. Changes in
other non-cash items include a decrease in accounts payable and
accrued liabilities of $1,180,000, an increase in receivables of
$45,000, a decrease in deferred revenue of $19,000 and a
decrease in prepaid expenses of $301,000.
Cash used in operating activities was $10,596,000 in the year
ended October 31, 2001, attributable to the net loss of
$12,272,000 less net depreciation and amortization of $1,226,000
and unrealized foreign exchange gain of $185,000. Changes in
other non-cash items include a decrease in accounts payable and
accrued liabilities of $278,000, a decrease in receivables of
$946,000, a decrease in deferred revenue of $27,000 and an
increase in prepaid expenses of $7,000.
Cash provided by financing activities in the period ended
December 31, 2003 was $1,806,000 and $1,822,000 in the year
ended October 31, 2003. In June 2003 the Company completed the
issue and sale of 5,000,000 common shares in the capital of the
Company at $0.62 per unit for gross proceeds of $3,100,000.
This was offset by repayments of bank indebtedness of $241,000
and notes payable of $873,000 at December 31, 2003 and $868,000
at October 31, 2003.
Cash provided by financing activities in the year ended October
31, 2002 was $3,108,000. In April 2002, we completed a private
placement for net proceeds of $3,108,000. The Company completed
the issue and sale of 518,671 units in the capital of the
Company at $6.00 per unit for gross proceeds of $3,112,022.
Cash provided by financing activities in the year ended October
31, 2001, was $69,000 as a result of proceeds received from
issuing common shares under an employee stock option exercise.
Cash used in investing activities in the period ended December
31, 2003 was $16,000. Cash was provided by the maturity of a
short-term investment in the amount of $600,000. Cash in the
amount of $541,000 was utilized in the acquisitions that
occurred during the year. As well, the Company purchased
capital assets in the amount of $75,000 during this period.
Cash used in investing activities in the year ended October 31,
2003 was $613,000. Additional funds of $10,000 were invested in
a short-term investment. Cash in the amount of $541,000 was
utilized in the acquisitions that occurred during the year. As
well, the Company purchased capital assets in the amount of
$62,000 during this year.
Cash provided by investing activities in the year ended October
31, 2002 was $92,000 consisting of $113,000 received from
proceeds of a short-term investment offset by $21,000 spent on
capital assets.
Cash used in investing activities in the year ended October 31,
2001 was $2,676,000 consisting of $719,000 spent on capital
asset additions and the purchase of a $1,956,000 short-term
investment.
As of December 31, 2003 we had commitments under non-cancelable
operating leases for our facilities and equipment through 2006
in amounts ranging from $620,000 in fiscal 2004 declining to
$308,000 in fiscal 2006.
On January 20, 2004, the Company completed a private placement
through the issuance of 1,000,000 common shares and 1,100,000
common share purchase warrants. The Company received gross
proceeds of $2,000,000 in the transaction. The warrants were
comprised of 500,000 warrants exercisable at $2.00 and 600,000
at $2.05. Each warrant entitles the holder thereof to acquire
one common share for a period of three years. The common shares
cannot be re-sold in the public markets until a registration
statement has been filed and declared effective by the U.S.
Securities and Exchange Commission.
We believe that our cash and cash equivalents and short-term
investments as at December 31, 2003 of $1,967,000 together with
the additional funds raised subsequent to our year end will be
sufficient to meet our short-term working capital requirements
for the next fiscal year. We may need to raise additional
amounts to meet our working capital requirements through private
or public financings, strategic relationships or other
arrangements. However, additional funding may not be available
on terms attractive to us, or at all. If we enter into
strategic relationships to raise additional funds, we may be
required to relinquish rights to certain of our technologies.
Our failure to either raise capital when needed or to generate
revenues would leave us with insufficient resources to continue
our business.
The following table presents unaudited selected financial data
for each of the last eight quarters ending October 31, 2003 and
the two months ended December 31, 2003:
Revenue for
the period
Loss for the
period
Basic and
diluted loss
per share
December 31, 2003
$ 1,455,000
$ 784,000
$ 0.14
October 31, 2003
2,687,000
1,882,000
0.33
July 31, 2003
1,742,000
738,000
0.13
April 31, 2003
1,835,000
1,443,000
0.45
January 31, 2003
843,000
772,000
2.39
October 31, 2002
261,000
657,000
0.22
July 31, 2002
140,000
1,001,000
0.31
April 31, 2002
198,000
1,311,000
0.47
January 31, 2002
111,000
1,096,000
0.41
Risks and Uncertainties
Our Company is subject to a number of risks and uncertainties
that could cause actual results to differ materially from those
predicted or anticipated. These risks are described in our F-3
and annual Form 20-F filed on EDGAR in the United States and
filed on SEDAR in Canada. We encourage you to review these
filings in order to evaluate an investment in our securities.
Some key risks that could cause actual results to differ
materially from those predicted or anticipated are listed below.
Financial resources: The attached consolidated financial
statements are prepared on a going concern basis that assumes
that the Company will continue in operation in the foreseeable
future and be able to realize its assets and discharge its
liabilities in the normal course of business. The projected
cash flows for the Company are based upon assumptions that
include, amongst others, a revenue stream from our wireless
security and identity management solutions and the success of
future external financing initiatives. Should these projects be
delayed then the present working capital would not be sufficient
for the Company to continue in the normal course of operations.
In recognition of these concerns, management is considering
various revenue and cost management alternatives and may
consider raising additional cash through external financing
activities. It is not possible at this time to predict with any
assurance the success of these initiatives.
Our ability to continue operations may be dependent on our
ability to obtain additional financing. Although we have made
progress in developing our solutions and have completed initial
consumer deployments, our revenue from operations is not
sufficient to cover our operating expenses at present and may be
unlikely to be sufficient within fiscal 2004. We have obtained
funding for operations from private placements in the past, but
there is no assurance we will be able to do so again in the near
future despite the progress of the business. Our failure to
either raise capital when needed or to generate revenues would
leave us with insufficient resources to continue our business.
Our quarterly and annual operating results have varied
substantially in the past and are likely to vary substantially
from quarter to quarter and year to year in the future due to a
variety of factors. In particular, our period-to-period
operating results are significantly dependent upon the sale of
license agreements and the continued success in providing
professional services. In this regard, the purchase of our
solutions often requires our customers to make a significant
capital investment, which customers may view as a discretionary
cost and, therefore, a purchase that can be deferred or
cancelled due to budgetary or other business reasons.
Furthermore, our ability to continue providing professional
services is dependent upon being able to provide value added
resources at reasonable rates. Estimating future revenues is
also difficult because we ship our products upon receipt of a
signed license agreement and, therefore, we do not have a
backlog. Thus, quarterly and annual license revenues are
heavily dependent upon agreements finalized and software shipped
within the same quarter or year. Moreover, we have generally
recorded a significant portion of our total quarterly license
revenues in the third month of a quarter, with a concentration
of these license revenues in the last half of that third month.
This concentration of revenues is influenced by customers'
tendencies to make significant capital expenditures at the end
of a fiscal quarter. We expect these revenue patterns to
continue for the foreseeable future, until recurring revenue
becomes a significant portion of total revenue. Despite the
uncertainties in our revenue patterns, our operating expenses
are based upon anticipated revenue levels and such expenses are
incurred on an approximately ratable basis throughout the
quarter. As a result, if expected revenues are delayed or
otherwise not realized in a quarter for any reason, our
business, operating results and financial condition would be
adversely affected in a significant way.
If our common shares should become ineligible for continued
quotation on the OTC BB or a public trading market does not
continue for any reason, holders of our common shares may have
difficulty selling their shares. Our common shares became
ineligible for continued quotation on the NASDAQ SmallCap Market
and are now trading on the Over the Counter Bulletin Board;
therefore holders of our common shares will have difficulty
selling their shares. Our common shares were quoted on the
NASDAQ SmallCap Market from June 1995 through late April 2003.
Our common shares may continue to be penny stock, which may
adversely affect the liquidity of our common shares. The United
States Securities and Exchange Commission has adopted
regulations that define a penny stock to be any equity security
that has a market price, as defined in those regulations, of
less than $5.00 per share, subject to certain exceptions. Our
common shares are currently penny stock.
Commercial deployment: The ability of the Company to continue
operations is also dependent on the acceptance of its security
and identity management solutions and the adoption of
transaction-based applications over wireless networks as an
accepted method of commerce in sufficient volume for us to
generate enough revenues to fund our expenses and capital
requirements. The wireless mobile commerce market is in a very
early stage and it may not develop to a sufficient level to
support our business.
Market conditions: The general economic conditions may have a
significant impact on our ability to generate sales for our
solutions. During fiscal 2002 and 2003, we experienced
decreased activity from a number of our potential customers and
generally the adoption of wireless services has not proceeded as
rapidly as previously expected. We have focused a large portion
our sales and marketing efforts in Asia and Hong Kong. Over the
past year, several economies in Asia, including Hong Kong, have
been negatively affected by the outbreak of severe acute
respiratory syndrome, or SARS. Some industries in Hong Kong
have been hit hard by the SARS outbreak. The dramatic decline
in the business is expected to have negative effects on the
economy of Hong Kong for 2003 and 2004. The Government of Hong
Kong and business communities have taken various measures to
stimulate the economic recovery of Hong Kong. While the
ultimate impact of SARS is unclear at this time, the effects of
these measures are crucial to Hong Kong's future financial
condition and economic developments, which would in turn affect
our financial condition and results of operations.
Foreign exchange: Our functional currency is the U.S. dollar.
Sales generated outside Canada are generally denominated in U.S.
dollars. During fiscal 2003, we incurred a portion of our
expenses in U.S. dollars, but we also incurred a portion of our
expenses in other currencies including Canadian dollars, Pound
Sterling and Hong Kong dollars. Changes in the value of these
currencies relative to the U.S. dollar may result in currency
losses that may have an adverse effect on our operating results.
With the completion of our financings in June 2003 and January
2004, we have a portion of our cash resources in U.S. dollar
short-term investments and in Canadian dollars. During fiscal
2003 we maintained a portion of our cash resources in both U.S.
and Canadian dollar term deposits.
Litigation: Our Company has been named as a defendant in various
proceedings arising in the course of our Company's activities
and arising from transactions relating to a previous business
operated by our Company. Litigation arising from these matters
may be time consuming, distracting and expensive. An adverse
resolution to any of these proceedings may have a material
adverse impact on our business and financial condition.
MANAGEMENT'S REPORT
The accompanying consolidated financial statements and all
information in the Annual Report have been prepared by
management and approved by the Board of Directors of the
Company. The consolidated financial statements were prepared in
accordance with generally accepted accounting principles and,
where appropriate, reflect management's best estimates and
judgements. Management is responsible for the accuracy,
integrity and objectivity of the consolidated financial
statements within reasonable limits of materiality and for the
consistency of financial data included in the text of the Annual
Report with that contained in the consolidated financial
statements. To assist management in the discharge of these
responsibilities, the Company maintains a system of internal
controls designed to provide reasonable assurance that its
assets are safeguarded, that only valid and authorized
transactions are executed and that accurate, timely and
comprehensive financial information is prepared and disclosed.
Consistent with the concept of reasonable assurance, the Company
recognizes that the relative cost of maintaining these controls
should not exceed their expected benefits.
The Company's Audit Committee is appointed by the Board of
Directors annually and is comprised of non-management directors.
The Audit Committee meets with management as well as with the
independent auditors to satisfy itself that management is
properly discharging its financial reporting responsibilities
and to review the consolidated financial statements and the
independent auditors' report. The Audit Committee reports its
findings to the Board of Directors for consideration in
approving the consolidated financial statements for presentation
to the shareholders. The independent auditors have direct
access to the Audit Committee.
The consolidated financial statements have been audited by KPMG
LLP, Chartered Accountants, on behalf of the shareholders, in
accordance with generally accepted auditing standards. Their
report outlines the scope of their audit and expresses their
opinion on the consolidated financial statements of the Company.
/s/ Nagy Moustafa
/s/ David Hackett
Nagy Moustafa, President & Chief
Executive Officer
David Hackett, Chief
Financial Officer
KPMG LLP
Chartered Accountants Telephone (416) 228-7000
Yonge Corporate Centre Telefax (416) 228-7123
4100 Yonge Street Suite 200 www.kpmg.ca
North York, Ontario M2P 2H3
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Diversinet
Corp. as at December 31, 2003, October 31, 2003 and October 31,
2002 and the consolidated statements of earnings and deficit and
cash flows for each of the years in the three-year period ended
October 31, 2003 and for the fourteen-month period ended
December 31, 2003. These financial statements are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with Canadian generally
accepted auditing standards and auditing standards generally
accepted in the United States of America. Those standards
require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as at December 31, 2003, October 31, 2003 and October
31, 2002 and the results of its operations and its cash flows
for each of the years in the three-year period ended October 31,
2003 and the fourteen month period ended December 31, 2003 in
accordance with Canadian generally accepted accounting
principles.
/s/ KPMG LLP
Chartered Accountants, Toronto, Canada, January 29, 2004, except
for note 16(b) which is as of February 23, 2004
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA - U.S. REPORTING
DIFFERENCE
In the United States, reporting standards for auditors require
the addition of an explanatory paragraph (following the opinion
paragraph) when the financial statements are affected by
conditions and events that cast substantial doubt on the
Company's ability to continue as a going concern, such as those
described in note 1 to the financial statements. Our report to
the shareholders dated January 29, 2004, except for note 16(b)
which is as of February 23, 2004, is expressed in accordance
with Canadian reporting standards which do not permit a
reference to such events and conditions in the auditors' report
when these are adequately disclosed in the financial statements.
/s/ KPMG LLP
Chartered Accountants, Toronto, Canada
Diversinet Corp.
Consolidated Balance Sheets
(In United States dollars)
As at
December 31 October 31 October 31
2003 2003 2002
Assets
Current assets:
Cash and cash equivalents $ 722,569 $ 863,977 $
608,692
Short-term investments 1,243,960 1,853,369 1,843,657
Accounts receivable (including $62,293, $62,293,
$110,148 from joint venture, note 8) 1,081,760 1,422,943
265,672
Other receivables 85,748 77,720 15,933
Prepaid expenses 375,009 232,812 77,012
Total current assets 3,509,046 4,450,821 2,810,966
Capital assets, net (note 4) 986,316 1,053,544 1,198,527
Purchased technology, net of $62,833, $31,416,
$nil amortization (note 3) 314,167 345,584 -
Customer assets net of $110,256, $55,129,
$nil amortization (note 3) 882,048 937,175 -
Goodwill (note 3) 5,311,932 5,311,932 -
Total assets $ 11,003,509 $ 12,099,056 $ 4,009,493
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 899,644 $ 845,757 $ 352,025
Accrued liabilities (note 5) 1,351,400 1,504,319 698,137
Notes payable 28,192 33,178 -
Current portion of promissory note 300,000 300,000 -
Deferred revenue 477,449 653,350 9,228
Total current liabilities 3,056,685 3,336,604 1,059,390
Promissory note 300,000 300,000 -
Shareholders' equity:
Share capital (note 6):
Authorized:
Unlimited common shares
Issued and outstanding:
11,043,027, 11,043,027, 3,222,308
common shares 49,191,482 49,201,868 40,677,645
Contributed surplus 126,173 72,680 72,680
Cumulative translation adjustment (1,520,721) (1,445,932)
(1,936,534)
Share purchase warrants (note 6) 1,331,652 1,331,652 -
Deficit (41,481,762) (40,697,816) (35,863,688)
Total shareholders' equity 7,646,824 8,462,452 2,950,103
Future operations (note 1)
Commitments and contingencies (note 11)
Total liabilities and shareholders' equity $ 11,003,509
$ 12,099,056 $ 4,009,493
See accompanying notes to consolidated financial statements.
On behalf of the Board:
/s/ Mark Steinman /s/ Nagy Moustafa
Mark Steinman, Director Nagy Moustafa, Director
Diversinet Corp.
Consolidated Statements of Earnings and Deficit
(In United States dollars)
Fourteen
month
period
ended
Years ended
December 31 October 31 October 31 October 31
2003 2003 2002 2001
Revenue (including $nil, $nil, $85,138, $127,034,
from joint venture, note 8) $ 8,562,676 $ 7,108,003 $
710,250 $ 792,814
Cost of sales 6,622,495 5,491,029 - -
Gross margin 1,940,181 1,616,974 710,250 792,814
Expenses:
Research and development 1,513,323 1,243,545 1,478,980 4,484,608
Sales and marketing 2,656,099 2,270,982 1,103,722 4,711,785
General and administrative 2,654,214 2,368,903 1,899,302 2,616,285
Depreciation and amortization 740,049 573,672 404,015 1,226,022
Severance costs - - - 474,008
7,563,685 6,457,102 4,886,019 13,512,708
Loss before the following (5,623,504) (4,840,128) (4,175,769)
(12,719,894)
Interest income and other income (26,302) (25,653) (111,096)
(447,736)
Interest expense 20,872 19,653 - -
Loss for the period (5,618,074) (4,834,128) (4,064,673)
(12,272,158)
Deficit, beginning of period (35,863,688) (35,863,688) (31,799,015)
(19,526,857)
Deficit, end of period $ (41,481,762) $ (40,697,816) $
(35,863,688) $ (31,799,015)
Basic and diluted loss per share (note 7) $ (0.87) $
(0.85) $ (1.37) $ (4.65)
Weighted average number of
common shares 6,478,296 5,715,423 2,971,692 2,637,648
See accompanying notes to consolidated financial statements.
Diversinet Corp.
Consolidated Statements of Cash Flows
(In United States dollars)
Fourteen-
month
period
ended
Years ended
December 31 October 31 October 31 October 31
2003 2003 2002 2001
Cash provided by (used in):
Operating activities:
Loss from continuing operations $ (5,618,074) $
(4,834,128) $ (4,064,673) $
(12,272,158)
Items not involving cash:
Depreciation and amortization 740,049 573,672 404,015
1,226,022
Stock-based compensation expense 825,010 771,519 -
-
Unrealized foreign exchange loss (gain) 415,813 490,602
71,603 (185,117)
Change in non-cash operating working capital:
Accounts receivable 2,425,570 2,084,387 (91,726) 908,489
Other receivables (69,815) (61,787) 47,094 37,949
Prepaid expenses (98,846) 43,350 300,700 (7,180)
Accounts payable (571,786) (625,673) (402,707) 480,399
Accrued liabilities 431,892 584,811 (777,766) (758,104)
Deferred revenue (156,371) 19,530 (18,552) (26,634)
Cash used in continuing operations (1,676,558) (953,717)
(4,532,012) (10,596,334)
Financing activities:
Issue of common shares, common share
purchase options and warrants for cash 2,920,646 2,931,032
3,108,317 68,651
Notes payable (873,323) (868,337) - -
Bank indebtedness (240,979) (240,979) - -
Cash provided by financing activities 1,806,344 1,821,716
3,108,317 68,651
Investing activities:
Short-term investments 599,698 (9,712) 112,799 (1,956,457)
Acquisitions, net of cash received (541,084) (541,084) - -
Additions to capital assets (74,523) (61,918) (20,525) (719,453)
Cash provided by (used in) investing activities (15,909)
(612,714) 92,274 (2,675,910)
Increase (decrease) in cash and cash
equivalents 113,877 255,285 (1,331,421)
(13,203,593)
Cash and cash equivalents,
beginning of period 608,692 608,692 1,940,113 15,143,706
Cash and cash equivalents,
end of period $ 722,569 $ 863,977 $ 608,692 $1,940,113
Supplementary non-cash financing and
investing activities:
Issue of warrants on acquisitions $ 1,044,640 $
1,044,640 $ - $ -
Issue of common shares on acquisitions 4,959,875 4,959,875 - -
See accompanying notes to consolidated financial statements.
DIVERSINET CORP.
Notes to Consolidated Financial Statements
(In United States dollars)
Years ended October 31, 2003, 2002 and 2001 and the fourteen
month period ended December 31, 2003
Diversinet Corp. (the "Company"), an Ontario corporation,
develops and markets secured wireless and identity management
solutions and professional services to the enterprise, financial
services, government and gaming and wagering marketplaces.
1. Future operations:
These consolidated financial statements have been prepared on
a going concern basis, which assumes the Company will
continue in operation in the foreseeable future and be able
to realize assets and satisfy liabilities in its normal
course of business. Certain conditions and events exist that
cast substantial doubt on the Company's ability to continue
as a going concern.
The Company has incurred significant losses and used
significant amounts of cash in operating activities in recent
years.
Continued operations depend upon the Company's ability to
generate future profitable operations and/or obtain
additional financing to fund future operations and,
ultimately, to generate positive cash flows from operating
activities. There can be no assurance that the Company will
be successful in obtaining additional financing or generating
positive cash flows from operations.
Should the Company be unable to generate positive cash flows
from operations or secure additional financing in the
foreseeable future, the application of the going concern
principle for financial statement reporting purposes may no
longer be appropriate. These financial statements do not
include any adjustments related to the valuation or
classification of recorded asset amounts or the amounts or
classification of liabilities that may be necessary should
the Company be unable to continue as a going concern.
2. Significant accounting policies:
These consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in
Canada, which, except as described in note 14, conform in all
material respects with accounting principles generally
accepted in the United States. Significant accounting
policies adopted by the Company are as follows:
(a) Fiscal Year:
In 2003, the Company changed its fiscal year end from
October 31 to December 31. As a result, financial
statements for the fourteen-month period ended December
31, 2003 in addition to the financial statements for the
year ended October 31, 2003 have been presented.
(b) Basis of consolidation:
The consolidated financial statements include the accounts
of the Company and its subsidiaries. The Company accounts
for its interest in a joint venture by the proportionate
consolidation method. All significant intercompany
transactions and balances have been eliminated.
(c) Goodwill:
Handbook section 3062 "Goodwill and Other Intangible
Assets", requires that goodwill no longer be amortized but
instead be tested for impairment at least annually by
comparing the carrying value of a reporting unit with its
fair value. If any potential impairment is indicated,
then it is quantified by comparing the carrying value of
goodwill to its fair value.
During the fourth quarter the Company completed its
goodwill impairment test and concluded that no write-down
was required.
(d) Revenue recognition:
Consulting revenues are recognized on a time and materials
basis, or on a percentage of completion basis, depending
on the contract, as employees and subcontractors provide
services. Revenue from time and materials service
contracts are recognized as the services are provided.
Revenue from fixed price long-term contracts is recognized
over the contract term based on the percentage of services
provided during the period compared to the total estimated
services to be provided over the entire contract. Losses
on contracts are recognized during the period in which the
loss first becomes probable and reasonably estimable.
Contract losses are determined to be the amount by which
the estimated direct and indirect costs of the contract
exceed the estimated total revenues that will be generated
by the contract. Revenue recognized in excess of billings
is recorded as unbilled services. Billings in excess of
revenue recognized are recorded as deferred revenue until
the above revenue recognition criteria are met.
Reimbursements, including those relating to travel and
other out-of-pocket expenses, and other similar third-
party costs, are included in revenues.
Revenue from software license agreements is recognized
upon execution of a license agreement and the shipment of
the software, as long as all vendor obligations have been
satisfied, the license fee is fixed and determinable and
collection of the license fees is probable. Revenue from
the sale of additional software products is recognized as
software is delivered.
Revenue earned on software arrangements involving multiple
elements (i.e., software products, upgrades/enhancements,
post contract customer support, installation, training, et
cetera) is allocated to each element based on vendor
specific objective evidence of relative fair value of the
elements. When arrangements contain multiple elements and
vendor specific objective evidence only exists for all
undelivered elements, the Company recognizes revenue for
the delivered elements using the residual method, whereby
the total arrangement fee is assigned to the undelivered
elements based on their fair value, with the residual
assigned to the delivered elements and recognized. For
arrangements containing multiple elements where vendor
specific objective evidence does not exist for all
undelivered elements, revenue for the delivered and
undelivered elements is deferred until either vendor
specific objective evidence exists for the remaining
undelivered elements or all elements have been delivered.
The revenue allocated to post contract customer support is
recognized ratably over the term of the support and
revenue allocated to service elements (such as training
and installation) is recognized as the services are
performed.
The Company's sales arrangements generally include
standard payment terms ranging up to 90 days. The Company
provides a limited product warranty, the costs of which
have historically been insignificant.
(e) Cash and cash equivalents:
Cash and cash equivalents include cash on account and
short-term investments in money market instruments with
original maturities of 90 days or less when acquired.
(f) Short-term investments:
Short-term investments consist of bonds having a term of
90 days when acquired which are recorded at cost plus
accrued interest.
(g) Investment tax credits:
Investment tax credits are accrued when qualifying
expenditures are made and there is reasonable assurance
that the credits will be realized. Investment tax credits
earned with respect to current expenditures for qualified
research and development activities are included in the
consolidated statements of earnings and deficit as a
reduction of related expenses in the year incurred.
Assistance related to the acquisition of capital assets
used for research and development is credited against the
related capital assets. The Company has recorded no
investment tax credits.
(h) Research and development costs:
Research costs are expensed as incurred. Software
development costs are deferred once costs meet the
criteria under Canadian generally accepted accounting
principles for deferral and amortization. Such deferred
costs are amortized, commencing when the product is
commercially released, on a straight-line basis over two
years. The recoverability of any unamortized deferred
development costs is reviewed on an ongoing basis.
(i) Purchased and acquired technology:
The Company capitalizes purchased technology and amortizes
such costs over two years. The carrying value is assessed
on a periodic basis to determine if a write-down is
required.
(j) Customer assets:
Customer relationships are amortized over three years.
Customer contracts are amortized as services are
performed. The carrying value is accessed on a periodic
basis to determine if a write-down is required.
(k) Foreign currency translation:
Monetary assets and liabilities denominated in foreign
currencies are translated into United States dollars at
the exchange rates prevailing at the consolidated balance
sheet dates. Non-monetary assets and liabilities are
translated at historical rates. Transactions in foreign
currencies are translated into United States dollars at
the approximate rates prevailing at the dates of the
transactions. Foreign exchange gains and losses are
included in loss for the period.
The Company has historically prepared its consolidated
financial statements in Canadian dollars and used the
Canadian dollar as its measurement currency. As a result
of a number of circumstances, including the current year
financing activities, the acquisition of DSS Software
Technologies and Caradas, Inc. and the U.S. dollar
becoming the measurement currency in which most of the
Company's business is transacted, effective October 1,
2003, the Company adopted the U.S. dollar as its
measurement and reporting currency for preparation of its
consolidated financial statements. Comparative financial
information has been restated in U.S. dollars using the
current rate method.
Share capital has been translated at the exchange rate in
effect at the time of the transaction. Deficit has been
translated at the approximate rates prevailing at the
dates of the transactions and monetary assets and
liabilities have been translated into United States
dollars at the exchange rates prevailing at the
consolidated balance sheet dates. The resulting
difference has been classified as a cumulative translation
adjustment on the balance sheet.
(l) Capital assets:
Capital assets are stated at cost less accumulated
depreciation and amortization. Depreciation and
amortization is provided over the estimated useful lives
of the assets at the following annual rates and bases:
Asset Basis Rate
Computer hardware Declining balance 30%
Computer software Declining balance 30%
Furniture and fixtures Declining balance 20%
Leasehold improvements Straight-line Over term of lease
The Company regularly reviews the carrying values of its
capital assets by comparing the carrying amount of the
asset to the expected future undiscounted cash flows to be
generated by the asset. If the carrying value exceeds the
amount recoverable, a write-down of the asset to its
estimated net recoverable amount is charged to the
statements of earnings and deficit.
(m) Income taxes:
The Company accounts for income taxes using the asset and
liability method. Under this method, future income taxes
are recognized at the enacted or substantively enacted tax
rate expected to be applicable at the date of reversal for
all significant temporary differences between the tax and
accounting bases of assets and liabilities and for certain
tax carry forward items. Future income tax assets are
recognized only to the extent that, in the opinion of
management, it is more likely than not that the future
income tax assets will be realized. Future income tax
assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of the
substantive enactment of the change.
(n) Earnings per share:
Basic earnings per share is computed using the weighted
average number of common shares that are outstanding
during the year. Diluted earnings per share is computed
using the weighted average number of common and potential
common shares outstanding during the year. Potential
common shares consist of the incremental number of common
shares issuable upon the exercise of stock options and
warrants and are calculated using the treasury stock
method.
(o) Stock-based compensation:
Effective November 1, 2002, the Company adopted the new
CICA Handbook section 3870, "Stock-Based Compensation and
Other Stock-Based Payments", which requires that a fair
value based method of accounting be applied to all stock-
based payments to non-employees and to direct awards of
stock to employees. However, the standard permits the
Company to continue its existing policy of recording no
compensation cost on the grant of stock options and
warrants to employees with the addition of pro-forma
information as if the fair value method has been applied.
Had the company determined compensation expense based on
the fair value of stock options granted subsequent to
November 1, 2002, the Company's loss and loss per share
would have been reported as the pro-forma amounts
indicated below:
Fourteen months ended Year ended
December 31, 2003 October 31, 2003
Loss for the period as reported $ (5,618,074) $ (4,834,128)
Pro forma loss (5,804,961) (4,925,828)
Pro forma loss per common share:
Basic and diluted $ (0.90) $ (0.86)
Weighted average number of common shares 6,478,296 5,715,423
(p) Use of estimates:
The preparation of these consolidated financial statements
in conformity with generally accepted accounting
principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the date of these consolidated financial
statements and the reported amounts of revenue and
expenses during the year. Actual results could differ
from those estimates.
3. Acquisitions:
a) In January 2003, the Company acquired 100% of the
outstanding shares of DSS Software Technologies, a
consulting services provider. The aggregate purchase
price was $1,301,038 consisting of $300,000 in cash,
$26,998 in the costs associated with the acquisition,
$600,000 of promissory note payable in instalments of
$300,000 on January 2, 2004 and $300,000 on January 2,
2005 and 120,000 share purchase warrants with a value of
$374,040. The share purchase warrants vest equally on
January 2, 2003, 2004 and 2005 and are exercisable at
$3.75 per share for five years. Additional future cash
consideration in the amount of $800,000 is payable based
on the achievement of certain financial targets over the
next two years and will be recorded with an increase to
goodwill if and when the targets have been met. The
acquisition was accounted for using the purchase method
and the purchase price was allocated as follows:
Fair value of net capital assets
acquired
$ 93,374
Working capital
290,422
Goodwill
917,242
Purchase price
$ 1,301,038
b) In September 2003, the Company acquired 100% of the
outstanding shares of Caradas, Inc., a credential
management provider. The aggregate purchase price was
$5,630,475 consisting of 1,417,500 common shares with a
value of $4,895,310, $64,565 in the costs associated with
the acquisition and 200,000 common share purchase warrants
with a value of $670,600. The share purchase warrants
vest equally on a quarterly basis over three years and
each is exercisable to purchase one common share at $2.45
per share for five years from the date of vesting. The
acquisition was accounted for using the purchase method
and the purchase price was allocated as follows:
Fair value of net capital assets
acquired
$ 186,853
Working capital
(320,372)
Purchased technology
377,000
Customer assets
992,304
Goodwill
4,394,690
Purchase price
$ 5,630,475
The customer assets of $992,304 are comprised of customer
relationships and other customer contracts. The customer
relationships were assigned a useful life of three years,
while the customer contracts will be amortized as services
are performed. The purchased technology of $377,000 has
been assigned a useful life of two years.
4. Capital assets:
Accumulated Net
December 31, 2003 Cost depreciation book
and amortization value
Computer hardware $ 1,342,228 $ 817,852 $ 524,376
Computer software 556,319 365,310 191,009
Furniture and fixtures 291,174 138,401 152,773
Leasehold improvements 234,865 116,707 118,158
$ 2,424,586 $ 1,438,270 $ 986,316
In the fourteen months ended December 31, 2003, depreciation
expense and amortization amounted to $566,960.
Accumulated Net
October 31, 2003 Cost depreciation book
and amortization value
Computer hardware $ 1,333,937 $ 771,806 $ 562,131
Computer software 556,318 347,894 208,424
Furniture and fixtures 286,860 131,629 155,231
Leasehold improvements 234,865 107,107 127,758
$ 2,411,980 $ 1,358,436 $ 1,053,544
In the year ended October 31, 2003, depreciation expense and
amortization amounted to $499,732.
Accumulated Net
October 31, 2002 Cost depreciation book
and amortization value
Computer hardware $ 984,343 $ 510,752 $ 473,591
Computer software 444,153 226,521 217,632
Furniture and fixtures 339,985 137,793 202,192
Leasehold improvements 466,936 161,824 305,112
$ 2,235,417 $ 1,036,890 $ 1,198,527
In the year ended October 31, 2002, depreciation and
amortization expense amounted to $404,015.
5. Accrued liabilities:
December 31 October 31 October 31
2003 2003 2002
Remuneration $ 815,135 $ 914,523 $ 236,045
Professional fees 372,663 511,944 300,971
Miscellaneous 163,602 77,852 161,121
$ 1,351,400 $ 1,504,319 $ 698,137
6. Share capital, warrants and common share purchase options:
There are an unlimited number of authorized common shares
with no par value.
The following details the changes in issued and outstanding
shares, compensation options and warrants:
Compensation
options and
warrants
Common shares
Number
Amount
Number
Amount
Balance, October 31, 2000
(b)
41,350
$
- -
2,635,1
76
$
37,500,
677
Stock options exercised
and shares issued (a)
- -
- -
6,312
68,651
Balance, October 31, 2001
41,350
- -
2,641,4
88
37,569,
328
Private placement (c)
471,554
- -
580,820
3,108,2
17
Balance, October 31, 2002
512,904
- -
3,222,3
08
40,677,
545
Reverse stock split (d)
- -
- -
- -
(5,246)
Private placement (e)
60,000
68,304
5,844,0
37
2,932,5
87
Stock options exercised
and shares issued (a)
- -
- -
83
52
Acquisition of DSS (f)
120,000
374,040
- -
- -
Acquisition of Caradas (g)
200,000
670,600
1,417,5
00
4,895,3
10
Professional services (h)
127,500
218,708
559,099
701,620
Balance, October 31, 2003
1,020,4
04
1,331,6
52
11,043,
027
49,201,
868
Private placement (e)
- -
- -
- -
(10,386
)
Balance, December 31, 2003
1,020,4
04
$
1,331,6
52
11,043,
027
$
49,191,
482
(a) During 2001, 2002 and 2003, the Company granted options to
certain employees, officers and directors under a share
option plan (note 12), enabling them to purchase common
shares of the Company.
(b) Warrants outstanding as of October 31, 2001 and 2000
consist of 15,000 warrants issued in October 1999 as an
exercise price of $131.25 per share, expiring October 2004
and 26,350 warrants issued in May 2000 at an exercise price
of $85.90 per share, expiring May 2005.
(c) On April 4, 2002, the Company completed a private placement
of 518,670 units at a price of $6.00 per unit for gross
proceeds before expenses $3,112,022. Each unit was
comprised of one common share and three-quarters of one
common share purchase warrant. Each warrant entitles the
holder thereof to acquire one common share at a price of
$7.20 per common share for a period of up to three years
from April 4, 2002.
The following consideration was issued to placement agents
in connection with the private placement: (i) cash
consideration of $140,400 plus out-of-pocket expenses of
approximately $7,500; (ii) compensation options to
purchase up to 23,400 units on the same terms as described
above; (iii) 50,000 common share purchase warrants to
purchase common shares at prices of $6.00 and $7.20 and
expiring on April 2 and 3, 2005; (iv) 18,750 common share
purchase warrants to purchase common shares at a price of
$0.10 per common share.
On April 8, 2002, the compensation options noted in (ii)
above, were exercised and the Company issued 23,400 common
shares and 17,550 common share purchase warrants to the
placement agents.
On May 8, 2002, upon issuance of the common share purchase
warrants noted in (iv) above, the warrants were
immediately exercised and the Company issued 18,750 common
shares. The fair value of these warrants in the amount of
$110,625 was recorded as share issue costs.
On May 8, 2002, the Company issued an additional 20,000
units at a price of $6.00 per unit for gross proceeds of
$120,000. Each unit was comprised of one common share and
three quarters of one common share purchase warrant. Each
common share purchase warrant entitles the holder to
purchase one common share at a price of $7.20 for a period
of three years from May 8, 2002.
(d) On January 28, 2003 the Company completed a reverse stock
split of its issued and outstanding common shares whereby
every ten shares of common stock were exchanged for one
share of common stock. All common share amounts in the
financial statements have been restated to give effect to
the stock split.
(e) On June 23, 2003, the Company completed a private placement
of 5,000,000 common shares at a price of $0.62 per common
share for gross proceeds of $3,100,000.
The placement agent exercised its option to receive
500,000 common shares in lieu of its $310,000 fee from the
Private Placement. The placement agent also received
40,000 common shares in lieu of its $24,000 retainer fee
to act as placement agent. Further compensation was
issued as a three-year broker cashless exercisable warrant
terminating on June 20, 2006 to purchase up to 500,000
common shares of the Corporation at $0.62 per share. The
placement agent has exercised 440,000 in a cashless
exercise to receive 304,037 common shares.
(f) In January 2003, the Company acquired 100% of the
outstanding shares of DSS Software Technologies. The
purchase price included 120,000 share purchase warrants
with a value of $374,040. The share purchase warrants vest
equally on January 2, 2003, 2004 and 2005 and are
exercisable at $3.75 per share for five years.
(g) On September 1, 2003, Diversinet Corp acquired 100% of the
outstanding shares of Caradas, Inc. The aggregate
consideration was 1,417,500 Diversinet common shares and
200,000 share purchase warrants. The share purchase
warrants are exercisable at $2.45 per share for five years.
The share purchase warrants will vest to the holder
quarterly over three years.
(h) Professional services:
The following chart summarizes the activity during the year
ended December 31, 2003:
Compensation
options and
warrants
Common shares
Number
Amount
Number
Amount
Consulting services
(i)
20,000
$
42,088
- -
$
- -
Consulting services
(ii)
2,500
5,260
- -
- -
Business development
services (iii)
- -
- -
250,000
300,000
Public relations
services (iv)
100,000
57,620
200,000
240,000
Warrants exercised
(iv)
(100,00
0)
(57,620)
69,099
57,620
Advisory board
consulting services
(v)
50,000
59,260
- -
- -
Advisory board
consulting services
(vi)
25,000
52,508
- -
- -
Consulting services
(vii)
- -
- -
40,000
104,000
Consulting services
(viii)
25,000
39,640
- -
- -
Consulting services
(ix)
5,000
19,952
- -
- -
127,500
$
218,708
559,099
$
701,620
(i) On November 1, 2002 the Company entered into an
agreement for consulting services. In consideration for
the services to be rendered in accordance with the
agreement, Diversinet issued a three-year warrant
terminating on October 23, 2005 to purchase up to 20,000
of our common shares at $2.60 per share in regards to
the compensation payable by us for these services.
(ii) On November 1, 2002 the Company entered into an
agreement for consulting services. In consideration for
the services to be rendered in accordance with the
agreement, Diversinet issued a three-year warrant
terminating on October 23, 2005 to purchase up to 2,500
of our common shares at $2.60 per share in regards to
the compensation payable by us for these services.
(iii) On May 14, 2003, the Company entered into an
agreement for business development services. This
agreement is subject to certain milestones that if not
met may allow Diversinet to terminate the retainer
portion of the agreement and /or the entire agreement.
In consideration for the services to be rendered
Diversinet will pay a retainer equal to $25,000 per
month, which at our discretion may be paid as follows:
(i) $25,000 per month in cash, or (ii) $25,000 per month
by the issuance of 41,667 common shares per month, or
(iii) $20,000 per month in cash and issuance of 8,333
common shares per month. The Company has elected to pay
the first six months by way of 250,000 common shares.
(iv) On May 14, 2003, the Company entered into an
agreement for public relations services. In
consideration for the services to be rendered in
accordance with the agreement, the Company issued a
three-year cashless exercisable warrant terminating on
May 12, 2006 to purchase up to 100,000 of our common
shares at $0.60 per share and 200,000 common shares,
being 16,667 common shares per month for 12 months in
regards to the compensation payable by us for these
services. The consultant opted to have a cashless
exercise and received 69,099 common shares.
(v) On July 1, 2003, the Company entered into an
agreement for advisory board consulting services. In
consideration for the services to be rendered in
accordance with the agreement, we issued a three-year
warrant terminating on June 30, 2006 to purchase up to
50,000 of our common shares at $0.62 per share in
regards to the compensation payable by us for these
services.
(vi) On July 1, 2003, the Company entered into an
agreement for advisory board consulting services. In
consideration for the services to be rendered in
accordance with the agreement, we issued a five-year
warrant terminating on August 1, 2008, vesting equally
on a quarterly basis over three years, to purchase up to
25,000 of our common shares at $0.62 per share in
regards to the compensation payable by us for these
services.
(vii) On July 17, 2003, the Company entered into an
agreement for consulting services. In consideration for
the services to be rendered in accordance with the
agreement, we issued 40,000 of our common shares in
regards to the compensation payable by us for these
services.
(viii) On August 20, 2003 the Company entered into an
agreement for consulting services. In consideration for
the services to be rendered in accordance with the
agreement, Diversinet issued a one-year warrant
terminating on August 20, 2004 to purchase up to 25,000
of our common shares at $3.40 per share in regards to
the compensation payable by us for these services.
(ix) On September 1, 2003 the Company entered into an
agreement for consulting services. In consideration for
the services to be rendered in accordance with the
agreement, Diversinet issued a two-year warrant
terminating on September 30, 2005 to purchase up to
5,000 of our common shares at $2.50 per share in regards
to the compensation payable by us for these services.
7. Basic and diluted loss per share:
Common shares issuable upon the exercise of options and
warrants that could dilute basic loss per share in the future
were not included in the computation of diluted loss per
share because to do so would have been anti-dilutive for the
years ended December 31, 2003, October 31, 2003, 2002 and
2001. Anti-dilutive options amounted to 783,946 at December
31, 2003 and 739,646 at October 31, 2003 (2002 - 256,979;
2001 - 298,518). Anti-dilutive warrants amounted to 905,404
at December 31, 2003 and October 31, 2003 (2002 - 512,904;
2001 - 41,350), respectively.
8. Interest in joint venture:
On June 4, 2001, the Company entered into an agreement with
an Asian company to establish a joint venture to conduct
certain of the Company's Asian activities. Each party holds
a 50% interest in the joint venture. These financial
statements reflect the Company's proportionate interest in
the joint venture's assets, liabilities, revenue and
expenses.
The following amounts included in the consolidated financial
statements represent the Company's proportionate interest in
the joint venture at December 31, 2003, October 31, 2003 and
October 31, 2002:
December 31 October 31 October 31
2003 2003 2002
Cash $ 37 $ 37 $ 50
Accounts receivable 56 56 1,264
Prepaid expenses 445 1,334 103
Capital assets 172,495 196,644 258,736
Total assets $ 173,033 $ 198,071 $ 260,153
Accounts payable $ 80,950 $ 80,950 $ 100,468
Accrued liabilities 4,369 1,335 3,991
Total liabilities $ 85,319 $ 82,285 $ 104,459
Revenue $ 181 $ 181 $ 3,483
Expenses 170,944 134,445 (188,825)
Loss $ (170,763) $ (134,264) $ (185,342)
During fiscal 2003, the Company recognized revenue of $nil
(2002 - $85,138) from sales to the joint venture. As at
December 31, 2003, the Company had contributed approximately
$636,993 (2002 - $626,054) into the joint venture. The
Company has to date committed to contribute an additional
$6,200 to the joint venture for the Company's proportionate
share of the joint venture requirements. This amount is
expected to be contributed within the next six months.
9. Income taxes:
The tax effects of significant temporary differences
representing future tax assets is as follows:
December 31 October 31 October 31
2003 2003 2002
Future tax assets:
Operating loss carryforwards $ 10,813,090 $ 10,635,743 $ 8,046,570
Capital loss carryforwards 567,607 558,094 510,187
Share issue costs 121,514 119,478 273,562
Research and development costs 2,736,323 2,631,275 1,607,807
Capital assets,
accounting basis less than tax basis 5,706,491 5,604,328 3,735,410
19,945,025 19,548,918 14,173,536
Valuation allowance (19,945,025) (19,548,918) (14,173,536)
Net future tax assets $ - $ - $ -
In assessing the realizability of future tax assets,
management considers whether it is more likely than not that
some portion or all of the future tax assets will not be
realized. The ultimate realization of future tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible. Management considers projected future taxable
income, uncertainties related to the industry in which the
Company operates and tax planning strategies in making this
assessment.
At December 31, 2003, the Company has non-capital losses
available for carryforward for Canadian income tax purposes
amounting to $28,324,000. These losses expire in the
following fiscal years:
2004 $ 2,854,000
2005 4,250,000
2006 4,142,000
2007 10,862,000
2008 3,254,000
2009 2,539,000
2010 423,000
$ 28,324,000
The Company also has non-capital losses available for
carryforward for United States income tax purposes amounting
to $1,628,000, expiring between 2018 and 2023.
10. Segmented information:
The Company operates in a single reportable operating
segment. This segment derives its revenue from the sale of
secured wireless and identity management solutions and
related products and services. As at October 31, 2003 and
December 31, 2003, 60% [78% - October 31, 2002] of the
capital assets were located in Canada, 22% [nil - October 31,
2002] were located in the United States and 18% [22% -
October 31, 2002] in Hong Kong.
A summary of sales to major customers that exceeded 10% of
total sales and the approximate amount due from these
customers during each of the years in the three-year period
ended October 31, 2003 and the fourteen month period ended
December 31, 2003, are as follows:
Sales Accounts Receivable
December 31 and October 31 October 31 December 31 October 31
October 31, 2003 2002 2001 2003 2003
Customer 1 30% - - $ 203,752 $ 278,504
Customer 2 20% - - 125,746 191,452
Customer 3 - - 40% - -
Customer 4 - 12% 19% 62,293 62,293
Customer 5 - 25% 17% - -
Customer 6 - 28% - - -
Customer 7 - 17% - 42,500 42,500
The Company does not consider itself to be economically
dependent on any single customer or supplier.
Revenue is attributable to geographic location based on the
location of the customer, as follows:
December 31 October 31 October 31 October 31
2003 2003 2002 2001
Sales:
United States $ 8,219,149 $ 6,840,380 $ 17,259 $ 191,324
Canada 9,665 9,665 204,159 138,498
Other 70,000 - 45,082 28,672
Asia 263,862 257,958 443,750 434,320
$ 8,562,676 $ 7,108,003 $ 710,250 $ 792,814
11. Commitments and contingencies:
(a) Litigation:
Management is of the opinion that the claims listed below
are without merit and will not materially impact the
Company. As a result, no provision for loss has been made
in these consolidated financial statements.
(i) The Company has been served with a statement of
complaint, as a co-defendant, wherein the plaintiff is
seeking rescission of an international offering private
placement transaction it entered into with the Company
in August 1995, in which the plaintiff purchased 212,500
common shares (850,000 common shares prior to a one-for-
four reverse split) from the Company for $3,700,000.
The plaintiff is also seeking damages in the amount of
$3,700,000 plus interest and costs.
(ii) During fiscal 2000, the Company and its wholly
owned Barbados subsidiary, The Instant Publisher Ltd.,
were sued by a company that alleged that the Company
breached a dealer agreement entered into in 1995 by the
Company's former printing business and is seeking
damages of $1,533,950 and damages of $25,000,000 for
loss of reputation and loss of opportunity, pre-judgment
and post-judgment interest, and costs.
(iii) One of the Company's wholly owned subsidiaries is
being sued in Bankruptcy Court by a company alleging the
subsidiary received preferential payments. The
plaintiff is seeking to receive $200,000.
(iv) In addition to the above, in the ordinary course
of business, the Company and its subsidiaries have legal
proceedings brought against them.
(b) Lease commitments:
Total future minimum lease payments including operating
costs are as follows:
2004 $ 620,188
2005 458,585
2006 307,605
$ 1,386,378
12. Stock incentive plan:
The Company grants options to certain employees, officers,
directors and consultants under a share option plan (the
"Plan"), enabling them to purchase common shares of the
Company. The exercise price of an option under the Plan may
not be less than the current market price of common shares on
the day immediately proceeding the day the share option was
granted. The Plan provides that the number of common shares
reserved for issuance under the Plan shall not exceed
2,022,291 common shares. These options generally vest on a
quarterly basis over three years and expire five years after
the date of grant. As at December 31, 2003, the number of
common shares reserved for future issues of stock options
amounts to 688,573.
The following table summarizes information about stock
options outstanding at December 31, 2003:
Options outstanding
Options vested
Range of
exercise
price
Number
outstand
ing
Weighted
average
remaining
contractua
l life -
years
Weighted
average
exercise
price
Number
exercis
able
Weighted
average
exercise
price
$0.62 -
$3.00
897,400
4.51
$ 1.91
104,850
$ 1.72
$3.70 -
$6.10
109,726
3.62
5.02
43,511
5.08
$12.40 -
$30.00
85,520
2.12
19.87
74,299
20.27
$45.60 -
$48.80
4,750
..045
46.95
4,750
46.95
$51.88 -
$149.40
21,450
1.17
88.94
21,450
88.94
1,118,84
6
3.55
$ 5.45
248,860
$ 16.23
Changes for the employee stock option plan during the
fourteen month period ended December 31, 2003 were as
follows:
Fourteen months
ended 2003
Year ended 2002
Number
of
shares
Weighted
average
exercise
price
Number
of
shares
Weighted
average
exercise
price
Options outstanding,
beginning of year
286,979
$ 22.28
368,625
$ 49.42
Options granted
940,600
2.00
89,135
43.83
Options exercised
(83)
0.62
- -
- -
Options cancelled
(108,65
0)
20.96
(170,78
1)
75.89
Options outstanding,
end of year
1,118,8
46
$ 5.45
286,979
$ 22.28
Options exercisable,
end of year
248,860
$ 16.23
159,990
$ 30.40
Weighted average
fair value of
options granted
during the year
$ 1.61
$
2.40
The following table summarizes information about stock
options outstanding at October 31, 2003:
Options outstanding
Options vested
Range of
exercise
price
Number
outstand
ing
Weighted
average
remaining
contractua
l life -
years
Weighted
average
exercise
price
Number
exercis
able
Weighted
average
exercise
price
$0.62 -
$3.00
817,400
4.61
$ 1.90
41,483
$ 1.50
$3.70 -
$6.10
110,226
3.77
5.02
34,784
5.09
$12.40 -
$30.00
85,720
2.30
19.87
73,861
20.31
$45.60 -
$48.80
4,750
0.62
46.95
4,750
46.95
$51.88 -
$149.40
21,450
1.34
88.94
21,450
88.94
1,039,54
6
3.59
$ 5.71
176,328
$ 21.95
Changes for the employee stock option plan during the year
ended October 31, 2003 were as follows:
2003
Number of
shares
Weighted average
exercise price
Options outstanding,
beginning of year
286,979
$ 22.28
Options granted
859,600
1.99
Options exercised
(83)
0.62
Options cancelled
(106,950)
21.22
Options outstanding, end
of year
1,039,546
$ 5.71
Options exercisable, end
of year
176,328
$ 21.95
Weighted average fair
value of options granted
during the year
$1.61
13. Financial instruments and risk management:
The Company is exposed to the following risks related to
financial assets and liabilities:
(a) Currency risk:
The Company is subject to currency risk through its
activities in Canada, United Kingdom, Europe and Asia.
Unfavourable changes in the exchange rate may affect the
operating results of the Company.
The Company does not actively use derivative instruments
to reduce its exposure to foreign currency risk. However,
dependent on the nature, amount and timing of foreign
currency receipts and payments, the Company may enter into
forward exchange contracts to mitigate the associated
risks.
(b) Fair values:
The fair values of the Company's financial instruments
approximate their carrying amounts due to their short-term
nature.
(c) Credit risk:
Financial instruments, which potentially subject the
Company to concentrations of credit risk, consist
principally of cash equivalents, short-term investments
and accounts receivable. Cash equivalents and short-term
investments are maintained at high-quality financial
institutions.
The Company generally does not require collateral for
sales on credit. The Company closely monitors extensions
of credit. Management assesses the need for allowances
for potential credit losses by considering the credit risk
of specific customers, historical trends and other
information.
14. Related party transactions:
Related party transactions are in the normal course of
operations and are measured at the exchange amount, which is
the amount established and agreed to by the related parties.
As at December 31, 2003 and October 31, 2003, the Company had
a promissory note payable in the amount $600,000 due to an
officer of the Company. This note is payable in instalments
of $300,000 on January 2, 2004 and $300,000 on January 2,
2005 and bears no interest.
15. Reconciliation of Canadian and United States generally
accepted accounting principles ("GAAP"):
The consolidated financial statements are prepared in
accordance with Canadian generally accepted accounting
principles. Material differences between Canadian and United
States generally accepted accounting principles are described
below.
December 31 October 31 October 31 October 31
2003 2003 2002 2001
Share capital:
Canadian GAAP $ 49,191,482 $ 49,201,868 $ 40,677,545 $ 37,569,328
Elimination of reduction
of share capital (a) 30,089,054 30,089,054 30,089,054 30,089,054
U.S. GAAP $ 79,280,536 $ 79,290,922 $ 70,766,599 $ 67,658,382
Deficit and comprehensive loss:
Canadian GAAP $ (41,481,762) $ (40,697,816) $ (35,863,688) $ (31,494,254)
Elimination of reduction
of share capital (a) (30,089,054) (30,089,054) (30,089,054) (30,089,054)
Compensation expense (b) (991,696) (991,696) (991,696) (977,584)
U.S. GAAP $ (72,562,512) $ (71,778,566) $ (66,944,438) $ (62,560,892)
Consolidated statements of loss:
Loss under Canadian GAAP$ (5,618,074) $ (4,834,128) $ (4,064,673) $ (12,272,158)
Compensation expense (b) - - (35,052) (36,673)
Loss under U.S. GAAP $ (5,618,074) $ (4,834,128) $ (4,099,725) $ (12,308,831)
Basic and diluted loss per share
under U.S. GAAP $ (0.87) $ (0.85) $ (1.38) $ (4.67)
Loss under U.S. GAAP $ (5,618,074) $ (4,834,128) $ (4,099,725) $ (12,308,831)
Other comprehensive loss
being cumulative
translation adjustment (c) (74,789) (490,602) (1,936,534) -
Compensation loss under U.S.
GAAP $ (5,695,863) $ (5,324,730) $ (6,036,259) $ (12,308,831)
(a) Share capital and deficit:
On March 1, 1999, the shareholders approved a resolution
to reduce the stated capital of the Company by $30,089,054
to eliminate the deficit as at October 31, 1999. Under
Canadian GAAP, a reduction of the share capital of
outstanding common shares is allowed with a corresponding
offset to deficit. This reclassification, which the
Company made in 2000 to eliminate the deficit that existed
at October 31, 1999, did not meet the criteria specified
by U.S. GAAP and results in an increase to share capital
with a corresponding increase in deficit of $30,089,054.
(b) Options to consultants:
Effective November 1, 2002, the Company adopted the new
CICA Handbook section 3870, "Stock-Based compensation and
Other Stock Based Payments". As a result, the Company has
recognized compensation expense on options issued to
consultants in the current period. This resulted in no
U.S. GAAP differences in the current period. Prior to the
adoption of 3870, the company did not recognize
compensation expense when stock or stock options were
issued to consultants. Any consideration paid on exercise
of stock options or purchase of stock was credit to share
capital.
Under U.S. GAAP, the Company recorded compensation expense
for stock or stock options granted in exchange for
services from consultants. During the year ended
October 31, 2001, the Company issued 50,000 stock options
to consultants. The Company has recorded compensation
expense of $36,673, of which $9,033 relates to the options
issued in fiscal 2001 to consultants.
During the fiscal year 2002, the Company has recorded
compensation expense of $35,052 relating to options
granted to consultants.
(c) Other comprehensive loss (income):
FASB Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130") requires
disclosure of comprehensive income, which includes
reported net income as adjusted for other comprehensive
income. Other comprehensive income is defined as the
change in equity of a business enterprise during a period
from transactions and other events and circumstances from
non-owner sources.
(d) Interest in joint venture:
Canadian GAAP requires the proportionate consolidation of
interests in joint ventures. Proportionate consolidation
is not permitted under U.S. GAAP and interests in joint
ventures are accounted for on the equity basis. However,
as allowed by the Securities and Exchange Commission
("SEC"), reclassification is not required in a SEC filing
when specified criteria are met and information disclosed.
These criteria have been met and the information is
disclosed in note 8.
Although the adoption of proportionate consolidation has
no impact on net earnings or shareholders' equity, it does
increase assets, liabilities, revenue, expenses and cash
flows from operations from those amounts otherwise
reported under U.S. GAAP.
(e) Short-term investments:
Short-term investments consist of corporate debt
securities. For U.S. GAAP purposes, the Company
classifies its debt securities as available-for-sale,
which are recorded at fair value.
Unrealized holding gains and losses, net of the related
tax effect, on available-for-sale securities are excluded
from earnings and are reported as a separate component of
other comprehensive income until realized. Realized gains
and losses from the sale of available-for-sale securities
are determined on a specific identification basis. During
the periods presented, there have been no unrealized
holding gains or losses on short-term investments.
A decline in the market value of any available-for-sale
security below cost that is deemed to be other than
temporary results in a reduction in carrying amount to
fair value. The impairment is charged to earnings and a
new cost basis for the security is established.
(f) Notes to consolidated financial statements:
In order to comply with U.S. GAAP, the following notes to
the consolidated financial statements would need to be
added:
(i) Stock-based compensation plan:
Under U.S. GAAP, for any stock options with an exercise
price that is less than the market price on the date of
grant, the difference between the exercise price and the
market price on the date of grant is recorded as
compensation expense ("intrinsic value-based method").
As the Company grants stock options at the fair market
value of the shares on the day immediately preceding the
date of the grant of the options, no compensation
expense is recognized under the intrinsic value-based
method.
SFAS No. 123, Accounting for Stock-Based Compensation,
requires pro forma disclosures of net income and
earnings per share, as if the fair value-based method as
opposed to the intrinsic value-based method of
accounting for employee stock options had been applied.
The disclosures in the following table show the
Company's loss for the year and loss per share on a pro
forma basis using the fair value method as determined by
using the Black-Scholes option-pricing model.
Assumptions used when valuing the options at their date
of grant using in the Black-Scholes option pricing model
include: risk-free interest rate of 3.092%, estimated
life of three years, expected divided yield of 0% and
volatility of 150%.
December 31 October 31 October 31 October 31
2003 2003 2002 2001
Loss under U.S. GAAP $ (5,618,074) $ (4,834,128) $ (4,099,725) $ (12,308,831)
Compensation expense 1,281,680 1,283,886 4,258,204 4,102,960
Pro forma loss under
U.S. GAAP (6,899,754) (6,118,014) (8,357,929) (16,411,791)
Pro forma loss per common share:
Basic and diluted $ (1.07) $ (1.07) $ (2.81) $ (6.22)
Weighted average number of
common shares 6,478,296 5,715,423 2,971,692 2,637,648
(ii) Recent accounting pronouncements:
In July 2002, the FASB issued SFAS No. 146, "Accounting
for Costs Associated with Exit or Disposal Activities"
which requires companies to recognized costs associated
with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or
disposal plan. SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated
after December 31, 2002. The Company does not believe
that adoption of SFAS No. 146 will have a material
effect on its results of operations and financial
position.
In December 2001, the Accounting Standards Board in
Canada issued CICA Handbook Section 3870 "Stock-Based
Compensation and Other Stock-Based Payments". This
section establishes standards for the recognition,
measurement, and disclosure of stock-based compensation
and other stock-based payments made in exchange for
goods and services provided by employees and non-
employees. It applies to transactions in which shares
of common stock, stock options, or other equity
instruments are granted or liabilities incurred based on
the price of common stock or other equity instruments.
The Company will adopt Section 3870 for its fiscal year
beginning November 1, 2002. The adoption of this
standard will not have a material impact on the
Company's financial position or results of operations.
In January 2003, the FASB issued interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN
46"). Its consolidation provisions are applicable for
all newly created entities created after January 31,
2003, and are applicable to existing variable interest
entities as of the beginning of the Company's fiscal
year being January 1, 2004. With respect to entities
that do not quality to be assess for consolidation based
on voting interests, FIN 46 generally requires a company
that has variable interests that will absorb a majority
of the variable interests expected losses if they occur,
or both, to consolidate that variable interest entity.
For periods prior to FIN 46's effective date, certain
disclosures will be required if it is reasonably
possible that the Company will have a significant
variable interest in or be the primary beneficiary of a
variable interest entity when FIN 46 guidance if
effective. The adoption of this standard will have no
material impact on its financial results or operations
or cash flows.
16. Subsequent events:
(a) On January 20, 2004, the Company completed a private
placement through the issuance of 1,000,000 common shares
and 1,100,000 common share purchase warrants. The Company
received gross proceeds of $2,000,000 in the transaction.
The warrants were comprised of 500,000 warrants exercisable
at $2.00 and 600,000 at $2.05. Each warrant entitles the
holder thereof to acquire one common share for a period of
three years. The common shares cannot be re-sold in the
public markets until a registration statement has been
filed and declared effective by the U.S. Securities and
Exchange Commission.
(b) In February 2004, the Company amended the DSS Software
Technologies share purchase agreement. The promissory note
(see note 3) in the amount of $600,000 payable in
instalments of $300,000 on January 2, 2004 and $300,000 on
January 2, 2005 has been replaced by the issuance of
200,000 Diversinet common shares and cash payments of
$50,000 in February 2004, $50,000 on April 2004 and
$100,000 on January 2005. The existing 120,000 warrants
exercisable at $3.75 have been replaced by issuance of
120,000 warrants exercisable at $2.05, exercisable after
January 1, 2005 expiring on December 31, 2006. The common
shares cannot be re-sold in the public markets until a
registration statement has been filed and declared
effective by the U.S. Securities and Exchange Commission.
Executive Officers
Nagy Moustafa, President & Chief Executive Officer
In 1997, it was Nagy Moustafa's vision to take identity
management into the wireless market, thus making Diversinet a
leading innovator in the wireless industry. Mr. Moustafa was
the founder of CIT Canada Inc., an IT consulting firm, and its
chief visionary since its inception. Prior to CIT Canada Inc.,
Mr. Moustafa was Director of Information Technology with Rogers
Communications and held senior positions at IBM, Computerland
and the Canadian Ministry of Treasury and Economics.
David Hackett, Chief Financial Officer
David Hackett joined Diversinet in 2002 having most recently
been the Chief Financial Officer and Corporate Secretary of
Aucxis Corp. Prior to that Mr. Hackett was Chief Financial
Officer, Director and Corporate Secretary of EveryWare
Development Inc. Mr. Hackett was instrumental in raising
numerous financing rounds and acquisitions including the
eventual sale of EveryWare to Pervasive Software Inc. Mr.
Hackett began his professional career at Ernst & Young.
Atul Parikh, Executive Vice President, Professional Services
Atul Parikh joined Diversinet in January 2003 upon the
acquisition of DSS Software Technologies. Mr. Atul Parikh is
responsible for sales initiatives and fulfillment services in
the United States. Mr. Parikh holds Master Degree in Computer
Applications from India. He worked with major companies like
Oracle, Hitachi, Autodesk, and British Telecom before he founded
a DSS in 1996.
Charlie Walton, Executive Vice President, Financial and
International Markets
Mr. Walton is the founder of Caradas and is currently EVP,
Financial and International Markets for the Company. Mr. Walton
has more than 20 years of business and technical experience in
the security industry.
Scott Lowry, Executive Vice President, Government and Enterprise
Markets
Scott Lowry started at Chase Manhattan Bank in international
banking with assignments in New York, London, Frankfurt and
Beirut. He was then Chairman and CEO of Great Western Bank that
was later sold to Citibank. Mr. Lowry was Executive Director of
the Canary Wharf Development Company. In the mid-1990's, he
became President Digital Signature Trust, which was backed by
Zions Bank and the American Bankers Association, and in mid-2002
sold to Identrus LLC.
Hussam Mahgoub, Executive Vice President, Products
Hussam Mahgoub brings with him over twenty years of electronic
products and service development experience with leading
Canadian companies, where he introduced messaging, EDI, and
Internet services. Prior to joining Diversinet, Mr. Mahgoub held
senior positions at Canada Post, Bell Canada, and the Bank of
Montreal.
Nick Darwish, Executive Vice President, OEM Channels
Nick Darwish is responsible for Diversinet's global OEM channel
initiatives. Mr. Darwish has over 15 years experience in the
wireless and communications industries, with positions in sales
and business development. Mr. Darwish joined Diversinet after
twelve years at Nortel Networks, a leading global supplier of
data and telephony network solutions and services.
Board of Directors
Stanley Beck has served as one of Diversinet's Directors since
July 2002. Mr. Beck was formerly Chairman of the Ontario
Securities Commission and Dean of Osgoode Hall Law School. Mr.
Beck is currently Chairman of 407 International Inc. and
President of Granville Arbitrations Limited, and holds seats on
a number of boards.
Derek Buntain has served as one of Diversinet's Director since
July 2003. Mr. Buntain has over 25 years experience in
corporate finance, mergers and acquisitions and international
business. Mr. Buntain is currently the President of The Dundee
Bank, and the President of Goodman & Company (Bermuda) Limited
and holds seats on a number of boards.
Nagy Moustafa has served as Diversinet's President and Chief
Executive Officer since November 1997.
Keith Powell has served as one of Diversinet's Directors since
July 2002. Mr. Powell was previously the Senior Vice-President,
Information Services and Chief Information Officer at Nortel
Networks. Mr. Powell is currently a Partner at XPV Capital
Corporation, a venture capital company investing in early stage
communications start-up companies and Principal at his own
company, Keith Powell Consulting Inc. In addition he holds
seats on a number of technology company boards.
Charles Shiu has served as one of Diversinet's Directors since
September 2002. Mr. Shiu is Chairman of Allied Asia Investing
Limited, Vice-Chairman of Power Pacific Corporation Limited and
Vice-Chairman of Canada China Commerce in Hong Kong. He is also
a former senior executive of Nortel Networks and holds seats on
a number of boards.
Mark Steinman has served as one of Diversinet's Directors since
June 1998 and Chairman since September 2002. Mr. Steinman has
thirty years of corporate finance experience, recently as
Executive Vice President and Chief Financial Officer of Stelco
Inc. and prior to 1999 as Chief Financial Officer of Spar
Aerospace and Chief Financial Officer of Rogers Cablesystems.
Charlie Walton has served as Diversinet's EVP, Financial and
International Markets since September 2003.
Diversinet Corp.
2225 Sheppard
Avenue East
Suite 1801
Toronto, Ontario
Canada M2J 5C2
Tel: (416) 756-
2324
Fax: (416) 756-
7346
www.diversinet.co
m
Transfer Agent:
Computershare
Trust Company
of Canada
100 University
Avenue
Toronto,
Ontario
Canada M5J 2Y1
Tel: 1-800-564-
6253
www.computersha
re.com
Auditors:
KPMG, LLP
Chartered
Accountants
Yonge Corporate
Centre
4100 Yonge Street Suite
200
Toronto, Ontario
Canada M2P 2H3
Tel: (416) 228-
7000
Traded on:
OTC Bulletin
Board
Symbol:
DVNTF
FORM OF PROXY SOLICITED BY THE MANAGEMENT OF DIVERSINET CORP.
FOR USE AT THE ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS TO BE
HELD ON
APRIL 14, 2004
The undersigned shareholder(s) of DIVERSINET CORP. (the
"Corporation") hereby appoints Nagy Moustafa, President and
Chief Executive Officer of the Corporation, or failing him David
Hackett, Chief Financial Officer of the Corporation, or in lieu
of the foregoing, ______________________, as nominee of the
undersigned to attend, act and vote for the undersigned at the
annual and special meeting of shareholders of the Corporation
(the "Meeting") to be held on the 14th day of April, 2004 and at
all adjournments thereof (the "Meeting").
The undersigned specifies that all of the voting shares owned by
him and represented by this form of proxy shall be:
(a) VOTED FOR ( ) WITHHELD FROM VOTING ( )
in respect of the election of directors;
(b) VOTED FOR ( ) WITHHELD FROM VOTING ( )
in respect of the appointment of KPMG LLP as auditors and
authorizing the directors to fix their remuneration;
(c) VOTED FOR ( ) WITHHELD FROM VOTING ( )
in respect of adoption of By-Law No. 2 to change the
Corporation's year end to December 31st until changed by the
Board;
(d) VOTED FOR ( ) WITHHELD FROM VOTING ( )
in respect of the reservation of 1,190,000 shares of common
stock for issuance under the Diversinet Corp. Amended and
Restated Stock Option Plan;
(e) VOTED at the discretion of the proxy nominee on such matters
as may properly come before the Meeting or any adjournment
thereof;
hereby revoking any proxy previously given.
If any amendments or variations to matters identified in the
Notice of Meeting are proposed at the Meeting or any
adjournments thereof or if any other matters properly come
before the Meeting or any adjournments thereof, this proxy
confers discretionary authority to vote on such amendments or
variations on such other matters according to the best judgment
of the person voting the proxy at the Meeting or any
adjournments thereof.
DATED this ______ day of
_______________________, 2004.
___________________________________________
Signature of Shareholder
___________________________________________
Name of Shareholder (Please print)
NOTES:
1. This form of proxy must be dated and signed by the
appointor or his attorney authorized in writing or, if the
appointor is a body corporate, this form of proxy must be
executed by an officer or attorney thereof duly authorized.
2. A Shareholder has the right to appoint a person (who need
not be a Shareholder) to attend and act for him and on his
behalf at the Meeting other than the persons designated in the
enclosed form of proxy. Such right may be exercised by
striking out the names of the persons designated therein and by
inserting in the blank space provided for that purpose the name
of the desired person or by completing another form of proxy
and, in either case, delivering the completed and executed
proxy to the Corporation or its transfer agent prior to the
close of business on the second business day preceding the day
of the Meeting or any adjournments thereof.
3. The shares represented by this proxy will be voted in
accordance with the instructions of the Shareholder on any
ballot that may be called for and, subject to section 114 of
the Business Corporations Act (Ontario), where a choice is
specified, the shares shall be voted accordingly and where no
choice is specified, the shares shall be voted for the matters
referred to. Where no specification is made to vote or
withhold from voting in respect of the election of directors or
the appointment of auditors, the shares will be voted.
4. Proxies to be used at the Meeting must be received at the
Corporation's office or the office of its transfer agent prior
to the close of business on the second business day preceding
the day of the Meeting or any adjournments thereof.
5. Please date the proxy. If not dated, the proxy shall be
deemed to be dated on the date on which it is mailed.
6. This proxy ceases to be valid one year from its date.
7. If your address as shown is incorrect, please give your
correct address when returning this proxy.
Please return this form of proxy, Computershare Trust Company
of Canada
in the envelope provided for Proxy Department
that purpose (or by fax) to: 100 University Avenue
Toronto, Ontario
M5J 2Y1
Fax: (416) 981-9800
SUPPLEMENTAL MAILING LIST RETURN CARD
(National Instrument 54-101)
NOTICE TO SHAREHOLDERS OF DIVERSINET CORP
On July 1, 2002, the Canadian Securities Administrators
implemented National Instrument 54-102 Interim Financial
Statement and Report Exemption (the "Rule") and National
Instrument 54-101 Communication with Beneficial Owners of
Securities of a Reporting Issuer which together replace National
Policy 41 Shareholder Communication and establish a new
framework for communication between issuers and their registered
and non-registered shareholders.
The Rule exempts companies from having to deliver interim
financial statements to their registered shareholders if the
companies send interim financial statements to those
shareholders, whether registered or not, who request in writing
to receive them.
If you are a registered or non-registered shareholder, and wish
to be placed on a supplemental mailing list for the receipt of
these financial statements, you must complete and return the
Supplemental Return Card below.
The supplemental mailing list will be updated each year and,
therefore, a Supplemental Return Card will be required from you
annually in order for you to receive quarterly financial
statements. All other shareholder mailings will continue to be
mailed to registered shareholders in the normal manner without
the completion of a Return Card.
TO: "Diversinet Corp." (the "Company")
Cusip # 25536K 30 3 Company Code DRNQ Class
Code C04
The undersigned certifies that he/she/it is the owner of
securities of the Company, and requests that he/she/it be placed
on the Company's Supplemental Mailing List in respect of its
quarterly financial statements.
Name (please print)
Address
City/Province (or State)/Postal Code
Signature of shareholder, or if shareholder is a
Dated
Company, signature of authorized signatory
Please complete and return this document along with your Proxy
in the attached envelope or as indicated below. As the
supplemental list will be updated each year, a supplemental
return card will be required from you annually in order for your
name to remain on the list.
Computershare Trust Company of Canada
100 University Avenue
9th Floor
Toronto, Ontario
M5J 2Y1
Certifications
Certification of Principal Executive Officer Pursuant to Section
906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
In connection with the Quarterly Report of Diversinet Corp. (the
"Company") on Form 6-K for the fiscal period ended December 31,
2003 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, Nagy Moustafa, President and
Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to the best of my knowledge and
belief:
1. The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Date: March 11, 2002
/s/ Nagy Moustafa
Nagy Moustafa
President & CEO
The foregoing certification is provided solely for purposes of
complying with the provisions of Section 906 of the Sarbanes-
Oxley Act of 2002 and is not being filed as part of the Report
or as a separate disclosure document.
Certification of Principal Financial Officer Pursuant to Section
906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
In connection with the Quarterly Report of Diversinet Corp. (the
"Company") on Form 6-K for the fiscal period ended December 31,
2003 as filed with the Securities and Exchange Commission on the
date hereof (the "Report"), I, David Hackett, Chief Financial
Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge, such knowledge
being limited by the fact that I was not an officer of the
Company until March 26, 2002 and belief:
1. The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Date: March 11, 2004
/s/ David Hackett
David Hackett
Chief Financial Officer
The foregoing certification is provided solely for purposes of
complying with the provisions of Section 906 of the Sarbanes-
Oxley Act of 2002 and is not being filed as part of the Report
or as a separate disclosure document.