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
(FEBRUARY 26, 2002)
DIVERSINET CORP.
- --------------------------------------------------------------------------------
(Name of Registrant)
2225 Sheppard Avenue East, Suite 1700, Toronto, Ontario M2J 5C2
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(Address of principal executive offices)
1. Annual Report
2. Confirmation of Mailing
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 XXX
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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. - SEC FILE NO.0-23304
--------------------------------------
(REGISTRANT)
DATE: FEBRUARY 26, 2002 BY: /s/ RICHARD PALMER
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RICHARD PALMER, EXECUTIVE VICE PRESIDENT & CFO
D*I*V*E*R*S*I*N*E*T
-------------------
2*0*0*1 A*N*N*U*A*L R*E*P*O*R*T
[GRAPHIC OMITTED]
To Our Shareholders:
Year 2001 presented a number of challenges and opportunities for Diversinet.
Several wireless vendors were impacted as part of the wireless data shakeout
that occurred during 2001. Diversinet was not immune. The Company's initial
marketing efforts concentrated on the wireless application service provider
(ASP) and middleware markets as a medium for the integration of our security
into new and hosted wireless applications. However, unproven business models of
the ASPs and modest wireless data growth in 2001 severely limited the growth of
the wireless ASP sector. To our disappointment, this prevented us from
generating recurring revenue through ASPs during fiscal 2001.
Diversinet took several steps forward in fiscal 2001: we broadened key
partnerships; realized the first full-scale infrastructure launch of our
security software through the Hongkong Post; added e-Scotia as a Certificate
Authority in North America; and positioned ourselves for expanded market
opportunity by focusing more on the faster growing Asian and European wireless
data markets. At the same time, we successfully built on our leading technology.
A series of product announcements, focused on meeting our customers' needs, were
made in fiscal 2001. These announcements reinforced our technological leadership
in the wireless security market. Fiscal 2002 will present some exciting
opportunities, as the wireless market grows with the intro-duction of GPRS
handsets and 2.5G networks. Future product development initiatives will be based
on enhancing existing offerings and broadening our suite of security solutions
to include these next-generation networks and handsets.
At the end of fiscal 2001, the Company completed a significant cost reduction
initiative to counter-balance the effects of the slowing economy. The cost
reduction measures decreased the Company's cash requirements and will enable the
Company to reach a break-even point more rapidly as recurring revenue commences.
However, we recognize that additional financing will be required in fiscal 2002
to continue to implement our business plan before we reach a breakeven point.
During fiscal 2001, Diversinet laid the foundation for future success by
investing in strong markets, such as the Asia-Pacific and European markets. I am
confident these investments will begin to pay back in 2002 as we see the start
of recurring revenue.
The Company is more focused now than it ever has been and we have a clear
objective to make our current initiatives successful and drive the Company
towards meaningful revenue and profitability.
In closing, I would like to thank our employees for their outstanding
contribution and our shareholders for their continued confidence and support.
Diversinet's Board of Directors and management team are committed to building
the Company into a viable and profitable company. Diversinet has a tremendous
future ahead and we look forward to sharing our progress and success-es with
you.
Regards,
/s/ Nagy Moutsafa
Nagy Moustafa
President and Chief Executive Officer
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 15 to our consolidated financial statements.
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this annual
report. Except for historical information, the following discussion contains
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Such forward-looking statements involve risks
and uncertainties. Such forward-looking statements include, among others, those
statements including the words, "expects", "anticipates", "intends", "believes",
and similar language. Our actual results may differ significantly from those
projected in the forward-looking statements. Factors that might cause future
results to differ materially from those discussed in the forward-looking
statements include, but are not limited to, those discussed under the heading
"Risks and Uncertainties."
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 $56,000 for the year ended October 31, 2001 and greater by $1,449,000
for the year ended October 31, 2000 and less by $79,000 for the year ended
October 31, 1999. These differences relate to differences in accounting for
stock based compensation in fiscal 2001 and 2000 and to dif-ferences in
accounting for deferred foreign exchange gains in fiscal 1999.
OVERVIEW
We are a security software product company that develops, markets and
distributes public key infrastructure (PKI) security solutions for the secure
transmission of data over wireless networks and devices. We are a pioneer in
providing wireless security products for mobile commerce over wireless networks
and are striving to become the leading provider of wireless security solutions.
We have been developing our products since 1997. Our main product is the
Passport Certificate Server, which enables the implementation of a PKI solution
for mobile electronic commerce through the use and management of digital
certificates. In addition, we have a Passport Authorization Product which
extends the functionality of digital certificates by granting related privileges
to the holder of a digital certificate.
We currently hold two patents in the Untied States and one patent in Israel
regarding our technology.
Using our solutions, our customers can establish secure, trusted environments to
facilitate mobile commerce transactions using wireless devices. During fiscal
2001, the Hongkong Post utilized our products to establish the world's first
community wide wireless certificate service. As applications that use this
service become available during fiscal 2002 and commence attracting subscribers,
we expect to begin to generate recurring revenue from our products.
We have incurred operating losses in each of the last five fiscal years, most
recently from our continuing operations of developing security products. We
have sustained our business during this period through the sale of common shares
in a series of private placements. We cannot provide assurance that we will be
able to raise sufficient funds in the future to sustain our operations.
OPERATING RESULTS
Year ended October 31, 2001 compared to year ended October 31, 2000
For the year ended October 31, 2001, we reported revenue of $1,221,000 compared
to revenue of $2,636,000 for the year ended October 31, 2000. The information
technology slowdown resulted in a deferral of purchases by our potential
customers throughout the year resulting in reduced revenue compared to the prior
year. We are operating in an evolving and unpredictable market and accordingly
have and may continue to experience wide fluctuations in our revenues. We
generated 55% of our revenue from the Asian region, 24% from the United States,
17% from Canada and 4% from other areas during the fiscal year 2001.
2
During fiscal 2001, 40% of our revenue came from one customer whereas in fiscal
2000, 24% of our revenue came from one customer. These customers are not
related to each other. As the market 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 a net loss of $18,900,000 for the year ended October 31, 2001,
compared to a net loss of $15,027,000 in the prior year. The increased net loss
in fiscal 2001 is attributable partly to a decrease in revenue compared to the
prior year and partly to increased costs, especially in sales and marketing,
during the year. We completed operating cost reductions in the fourth quarter
of 2001 that should result in a decline in expenses from operations during
fiscal 2002 compared to fiscal 2001. We incurred $730,000 in severance costs
related to these operating cost reductions of which $150,000 was paid subsequent
to our year-end.
Research and development expenses increased to $6,907,000 in 2001 from
$5,888,000 in 2000 resulting primarily from wages, occupancy, and travel costs
which were higher on average than in the prior year. These expenses are
expected to decline in fiscal 2002 as a result of the cost reductions completed
late in fiscal 2001.
Sales and marketing expenses were $7,256,000 in 2001 compared to $5,435,000 in
2000. During the fourth quarter, sales and marketing staff in North America
were reduced as the Company refocused its efforts in the Asian and European
markets where the Company has been achieving some success. With the launch of
the Hongkong Post wireless certificate service late in fiscal 2001, interest in
our products has increased in the Asian region. We expect that activity in this
region will increase during fiscal 2002.
General and administrative expenses were $4,029,000 for fiscal 2001,
approximately the same level as the $4,185,000 incurred during fiscal 2000. A
decline in these expenses during fiscal 2002 is expected as the result of
continuing operating cost controls.
Depreciation and amortization expense in fiscal 2001 decreased to $1,888,000
from $2,604,000 in fiscal 2000. The Company's deferred development costs are
now fully amortized and the reduction in additions to capital assets has
resulted in reduced amortization for the year.
During fiscal 2001, we entered into a joint venture to conduct certain of our
Asian activities, as detailed in note 9 to our audited financial statements. We
own 50% of this joint venture and our financial statements reflect our
proportion-ate interest in its assets, liabilities, revenue and expenses.
Year ended October 31, 2000 compared to year ended October 31, 1999
Revenue increased to $2,636,000 in fiscal 2000 from $246,000 in fiscal 1999.
During our 2000 fiscal year, 24% of revenue was generated from a single
customer. The remaining revenue was generated from a number of transactions
with various customers. The increase in revenue is the result of a greater
number of initial license agreements being concluded in the fiscal year ended
October 31, 2000.
The aggregate of research and development, sales and marketing and general and
administrative expenses in the year ended October 31, 2000, increased to
$15,509,000 from $5,995,000 in the year ended October 31, 1999. The increase of
$9,514,000 was due to continuing expansion of our research and development and
sales and marketing departments.
Research and development expenses, net of amounts capitalized as deferred
development costs, increased to $5,888,000 in the year ended October 31, 2000,
compared to $1,685,000 in the year ended October 31, 1999. The increase was
primarily attributable to a higher number of employees and contractors resulting
in increases in remuneration of $2,192,000, travel of $525,000, human resources
of $224,000 and facilities of $267,000 and a decrease of $714,000 in amounts
capitalized for deferred development costs.
3
Sales and marketing expenses were $5,435,000 in the year ended October 31, 2000,
compared to $1,880,000 in the year ended October 31, 1999. The increase in
sales and marketing expenses of $3,555,000 in the year ended October 31, 2000,
was attributable primarily to a higher number of sales and marketing employees.
This was reflected in increased remuneration of $1,735,000, a $957,000 increase
in travel and recruiting expenses, a $352,000 increase in facilities and an
increase of $279,000 in public relations and investor relations expense.
General and administrative expenses were $4,185,000 fiscal 2000 compared to
$2,431,000 in fiscal 1999. The increase in general and administrative expenses
of $1,754,000 was attributable to a higher number of administrative employees.
This was reflected in increased remuneration of $1,021,000, an increase in
facilities and office expenses, resulting principally from the leasing of new
head office space, of $364,000, an increase in professional services fees of
$884,000 and a decrease in foreign exchange loss of $479,000.
Amortization expense in fiscal 2000 increased to $2,604,000 from $1,446,000 in
the comparable period in 1999. The increase was due to the addition of computer
equipment and leasehold improvements required to facilitate our growth. We
incurred a charge for the settlement of litigation of $6,581,000 in the year
ended October 31, 1999. There was no comparable charge in the year ended
October 31, 2000.
We incurred interest expense of $7,000 and $297,000 in fiscal 2000 and 1999,
respectively, primarily on the convertible debenture.
We earned interest income of $706,000 and $247,000 in fiscal 2000 and 1999,
respectively. The increase is primarily attributable to our higher average cash
and cash equivalents in fiscal 2000 due to the proceeds from the private
placement.
Our net loss from discontinued operations was $250,000 in the year ended October
31, 2000, compared to $285,000 for the year ended October 31, 1999. The loss in
2000 related to the write-off of the amount receivable for an investment tax
credit. The loss in 1999 related to the sale of our IPS 950 division in January
1998.
LIQUIDITY AND CAPITAL RESOURCES
Year ended October 31, 2001 compared to year ended October 31, 2000 and year
ended October 31, 1999
Cash used in operating activities was $15,963,000 in the year ended October 31,
2001, attributable to a net loss of $18,900,000, plus a net decrease in a net
increase in accounts payable, accrued liabilities and deferred revenue of
$361,000, offset by a net decrease in receivables and prepaid expenses of
$1,410,000 and depreciation and amortization of $1,888,000. Cash used in
operating activities was $13,121,000 in the year ended October 31, 2000,
attributable to a net loss of $14,777,000, plus increases in receivables of
$1,471,000 and prepaid expenses of $376,000, less increases in accounts payable
and accrued liabilities of $894,000, increases in deferred revenue of $78,000,
less net amortization and depreciation and debenture non-cash costs of
$2,531,000.
Cash used in operating activities was $4,690,000 in the year ended October 31,
1999, attributable to a net loss of $13,826,000 and an increase in accounts
receivable of $306,000 and prepaid expenses of $169,000, partially offset by an
increase in accounts payable and accrued liabilities of $1,416,000 and net
non-cash charges of $8,195,000. The net non-cash charges in the year ended
October 31, 1999, of $8,195,000 included $6,394,000 for settlement of
litigation.
Cash provided by financing activities in the year ended October 31, 2001, was
$106,000. Cash provided by financing activities in the year ended October 31,
2000, was $30,674,000. In July 2000, we completed a private placement which
generated net proceeds of $23,544,000. Funds were also received during the year
on the exercise of stock options amounting to $2,022,000 and upon the exercise
of common share purchase warrants issued in April 1999, which generated proceeds
of $1,651,000. In December 1999, we received $3,429,000 as proceeds from the
exercise of a warrant, issued in December 1997, to purchase 900,000 common
shares at an exercise price of U.S. $2.50.
Cash provided by financing activities in the year ended October 31, 1999,
totaled $8,919,000, consisting of $6,488,000 in net proceeds from an April 1999
private placement described below and $2,982,000 from the exercise of stock
options and warrants to purchase common stock, partially offset by an increase
in deferred financing costs of $551,000.
4
On April 23, 1999, we consummated a private offering in Canada and elsewhere
outside the United States of 2,134,000 special warrants in accordance with
Regulation S under the Securities Act of 1933, as amended. Each special
warrant was offered at $3.45 and was exercisable at any time until October 23,
2000, for no additional consideration, to acquire one unit. Each unit
consisted of one share of our common shares and one quarter of a common shares
purchase warrant. Each whole common shares purchase warrant entitled the holder
to purchase one share of our common shares for $3.87 until October 23, 2000.
The offering was purchased primarily by Canadian institutional investors and
generated gross proceeds of $7,362,000. The market value of our common shares
at the time of the placement was $6.75 (U.S. $4.56).
All proceeds that we received were used for working capital purposes, including
product development and marketing and sales efforts.
Cash used in investing activities in the year ended October 31, 2001, consisted
of $1,186,000 spent on capital asset additions and the purchase a of $3,088,0000
short-term investment. Cash used in investing activities in the year ended
October 31, 2000 was $1,764,000 attributable to capital assets additions. Cash
used in investing activities in the year ended October 31, 1999 was $961,000,
attributable to additions to deferred development costs of $735,000 and to
additions to fixed assets for computer equipment, furniture and leasehold
improvements of $226,000.
As of October 31, 2001, we had commitments under non-cancelable operating leases
for our principal facilities and equipment through 2006 in amounts ranging from
$645,000 in fiscal 2002 declining to $314,000 in fiscal 2006.
As of October 31, 2001, we had a commitment to contribute up to $615,000 to our
50% owned joint venture for our share of the joint venture requirements. This
amount is expected to be contributed within six months of our 2001 year end.
We believe that our cash and cash equivalents and short-term investments as at
October 31, 2001, of $6,150,000 will not be sufficient to meet our short-term
working capital requirements for the next fiscal year. We plan 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.
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 annual Form 20-F filed with the SEC 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: Our ability to continue operations during the next fiscal
year will be dependent on our ability to obtain additional financing. Although
we have made progress in developing our products and have completed initial
consumer deployments, our revenue from operations is not sufficient to cover our
operating expenses at present and is unlikely to be sufficient within fiscal
2002. We have obtained funding for operations from private equity 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.
Commercial deployment: The ability of the Company to continue operations is also
dependent on the acceptance of its security products 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.
5
Market conditions: The general economic conditions may have a significant impact
on our ability to generate sales for our products. During fiscal 2001, we
experienced decreased activity from our potential customers and generally the
adoption of wireless services has not proceeded as rapidly as previously
expected. As a result, our revenue declined significantly from fiscal 2000
levels and may decline even further in the near future.
Foreign exchange: Our functional currency is the Canadian dollar. Sales
generated outside Canada are generally denominated in U.S. dollars. During
fiscal 2001, we incurred most of our expenses in Canadian dollars, but we also
incurred a significant portion of our expenses in foreign currencies including
U.S. dollars, Pound Sterling and Hong Kong dollars. Changes in the value of
these currencies relative to the Canadian dollar may result in currency gains
and losses that may have an adverse effect on our operating results. During the
year we maintained a portion of our cash resources in U.S. dollar term
deposits. Upon completion of our cost reductions during September 2001, our
exposure to U.S. expenses was significantly reduced and we transferred our
remaining U.S. dollar cash resources to Canadian dollar deposits.
Employees: During September we substantially reduced our headcount and curtailed
certain sales and marketing activities, particularly in the United States.
Substantial workforce reductions may have a detrimental effect on the morale of
remaining employees, impeding their performance levels. In addition, our
ability to attract potential new employees in the future may suffer if our
reputation was hurt by this staff reduction.
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.
6
[GRAPHIC OMITTED] KPMG LLP Telephone (416) 228-7000
CHARTERED ACCOUNTANTS Telefax (416) 228-7123
Yonge Corporate Centre www.kpmg.ca
4120 Yonge Street Suite 500
North York ON M2P 2B8
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Diversinet Corp. as at
October 31, 2001 and 2000 and the consolidated statements of earnings and
deficit and cash flows for the years then ended. 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 United States generally accepted auditing standards. 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 October 31, 2001
and 2000 and the results of its operations and its cash flows for the years then
ended in accordance with Canadian generally accepted accounting principles.
/s/ KPMG LLP
CHARTERED ACCOUNTANTS
TORONTO, CANADA
NOVEMBER 26, 2001
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 when the financial statements are affected by
conditions and events that cast 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 November 26, 2001, 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
NOVEMBER 26, 2001
7
DIVERSINET CORP.
Consolidated Balance Sheets
(in Canadian dollars)
October 31, 2001 and 2000
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2001 2000
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Assets
Current assets:
Cash and cash equivalents $ 3,061,844 $ 23,192,586
Short-term investments 3,087,680 -
Accounts receivable 274,521 1,657,748
Other receivables 99,469 154,644
Prepaid expenses 596,105 567,470
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Total current assets 7,119,619 25,572,448
Capital assets, net (note 3) 2,496,738 1,855,966
Purchased technology, net (note 4) - 723,975
Deferred development costs, net (note 5) - 618,726
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Total assets $ 9,616,357 $ 28,771,115
==================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 1,191,117 $ 420,140
Accrued liabilities (note 6) 2,329,269 3,421,380
Deferred revenue 43,843 83,336
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Total current liabilities 3,564,229 3,924,856
Shareholders' equity:
Share capital (note 7):
Authorized:
Unlimited common shares
Issued and outstanding:
26,413,876 common shares (2000 - 26,350,760) 53,992,992 53,887,264
Contributed surplus 97,500 97,500
Deficit (48,038,364) (29,138,505)
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Total shareholders' equity 6,052,128 24,846,259
Future operations (note 1)
Commitments and contingencies (note 12)
- ----------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 9,616,357 $ 28,771,115
==================================================================================
See accompanying notes to consolidated financial statements.
On behalf of the Board: /s/ Mark Steinman, Director /s/ Nagy Moustafa, Director
8
DIVERSINET CORP.
Consolidated Statements of Earnings and Deficit
(in Canadian dollars)
Years ended October 31, 2001 and 2000
===========================================================================
2001 2000
- ---------------------------------------------------------------------------
Revenue: $ 1,220,981 $ 26,361,800
Expenses:
Research and development 6,906,566 5,888,028
Sales and marketing 7,256,432 5,435,378
General and administrative 4,029,236 4,185,431
Depreciation and amortization 1,888,147 2,603,589
Severance costs 730,000 -
----------------------------------------------------------------------
20,810,381 18.112,426
- ---------------------------------------------------------------------------
Loss before the following (19,589,400) (15,476,246)
Interest income (689,541) (705,815)
Interest expense - 6,777
- ---------------------------------------------------------------------------
Loss from continuing operations (18,899,859) (14,777,208)
Loss from discontinued operations - (250,000)
- ---------------------------------------------------------------------------
Loss for the year (1,776) (15,027,208)
Deficit, beginning of year (29,138,505) (14,111,297)
- ---------------------------------------------------------------------------
Deficit, end of year (48,038,364) (29,138,505)
===========================================================================
Basic and diluted loss per share -continuing
operations (note 8) ($0.72) ($0.63)
Basic and diluted loss per share (note 8) (0.72) (0.64)
===========================================================================
Weighted average number of common shares 26,376,480 23,534,438
===========================================================================
See accompanying notes to consolidated financial statements.
9
DIVERSINET CORP.
Consolidated Statements of Cash Flows
(in Canadian dollars)
Years ended October 31, 2001 and 2000
========================================================================================
2001 2000
- ----------------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Loss from continuing operations $(18,899,859) $(14,777,208)
Items not involving cash:
Depreciation and amortization 1,888,147 2,603,589
Foreign exchange gain on debenture - (78,864)
Interest on debenture - 4,833
Change in non-cash operating working capital:
Accounts receivable 1,383,227 (1,387,844)
Other receivables 55,175 (82,699)
Prepaid expenses (28,635) (375,700)
Accounts payable 770,977 202,146
Accrued liabilities (1,092,111) 692,233
Deferred revenue (39,493) 78,100
-----------------------------------------------------------------------------------
Cash used in continuing operations (15,962,572) (13,121,414)
Financing activities:
Issue of common shares, common share
purchase options and warrants for cash 105,728 30,674,246
Investing activities:
Short-term investments (3,087,680) -
Additions to capital assets (1,186,218) (1,763,658)
-------------------------------------------------------------------------------------
Cash used in investing activities (4,273,898) (1,763,658)
- ----------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (20,130,742) 15,789,174
Cash and cash equivalents, beginning of year 23,192,586 7,403,412
- ----------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 3,061,844 $ 23,192,586
========================================================================================
Supplementary non-cash financing and investing activities:
Conversion of convertible debenture $ - $ 1,707,468
========================================================================================
See accompanying notes to consolidated financial statements.
10
DIVERSINET CORP.
Notes to Consolidated Financial Statements
(in Canadian dollars)
Years ended October 31, 2001 and 2000
Diversinet Corp. (the "Company"), an Ontario corporation, develops and markets
security software products utilizing public-key infrastructure technology
primarily for use within wireless mobile e-commerce applications, such as
banking, stock trading, gaming and healthcare.
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 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.
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 15, 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) 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
through the proportionate consolidation method. All significant intercompany
transactions and balances have been eliminated.
(b) Revenue recognition:
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 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, etc.) is allocated to each element based on vendor
specific objective evidence of relative fair value of the elements. 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. When arrangements
contain multiple elements and vendor specific objective evidence exists for
undelivered elements, the Company recognizes revenue for the delivered elements
using the residual method. 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.
Amounts received in advance of revenue recognition are recorded as deferred
revenue.
(c) 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.
11
(d) Short-term investments:
Short-term investments consist of bonds which are recorded at cost plus accrued
interest.
(e) 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.
(f) Research and development costs:
Research costs are expensed as incurred. Software development costs are deferred
once costs meet the criteria under generally accept-ed 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.
(g) Purchased 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.
(h) Foreign currency translation:
Monetary assets and liabilities denominated in foreign currencies are translated
into Canadian 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
Canadian dollars at the approximate rates prevailing at the dates of the
transactions. Foreign exchange gains and losses are included in loss for the
year.
(i) Capital assets:
Capital assets are stated at cost less accumulated depreciation. Depreciation 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 fixture 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 cash flows to
be generated by the asset. If the carrying value exceeds the amount recoverable,
a write-down of the asset to estimated fair value is charged to the statements
of earnings and deficit.
(j) 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
substantially 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 carryforward 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.
(k) Earnings per share:
In fiscal 2001, the Company adopted the new provisions of The Canadian Institute
of Chartered Accountants' ("CICA") Handbook, Section 3500, "Earnings per Share."
Basic earnings per share is computed using the weighted average number of common
shares that are outstanding during the year. This method is consistent with that
previously applied. 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
12
of the incremental number of common shares issuable upon the exercise of stock
options using the treasury stock method.
Previously, the Company calculated diluted earnings per share using the current
imputed earnings method. The change in accounting policy has been applied
retroactively and did not result in changes in previously disclosed diluted
earnings per share.
(l) Stock-based compensation:
The Company has a stock-based compensation plan as described in note 13. No
compensation expense is recognized when stock or stock options are issued to
employees and consultants. Any consideration paid by employees on exercise of
stock options or purchase of stock is credited to share capital. If stock or
stock options are repurchased from employees, the excess of the consideration
paid over the carrying amount of the stock option cancelled is charged to
deficit.
(m) 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. CAPITAL ASSETS:
================================================================================================
Accumulated
2001 Cost depreciation Net book value
- ------------------------------------------------------------------------------------------------
Computer hardware $1,550,159 $ 516,417 $ 1,033,742
Computer software 689,927 215,268 474,659
Furniture and fixtures 520,257 138,196 382,061
Leasehold improvements 732,549 126,273 606,276
- ------------------------------------------------------------------------------------------------
$3,492,892 $ 996,154 $ 2,496,738
================================================================================================
In 2001, depreciation expense amounted to $545,446.
================================================================================================
Accumulated
2000 Cost depreciation Net book value
- ------------------------------------------------------------------------------------------------
Computer hardware 911,665 $ 281,256 $ 630,409
Computer software 464,172 78,744 385,428
Furniture and fixtures 350,839 67,508 283,331
Leasehold improvements 579,998 23,200 556,798
- ------------------------------------------------------------------------------------------------
$2,306,674 $ 450,708 $ 1,855,966
================================================================================================
In 2000, depreciation expense amounted to $295,556.
4. PURCHASED TECHNOLOGY:
================================================================================================
2001 2000
- ------------------------------------------------------------------------------------------------
Cost $1,447,950 $1,447,950
Accumulated amortization 1,447,950 723,975
- ------------------------------------------------------------------------------------------------
$ - $ 723,975
================================================================================================
In 2001, amortization expense related to purchased technology amounted to
$723,975 (2000 -$723,975).
13
5. Deferred development costs:
================================================================================================
2001 2000
- ------------------------------------------------------------------------------------------------
Cost $2,474,900 $2,474,900
Accumulated amortization 2,474,900 1,856,174
- ------------------------------------------------------------------------------------------------
$ - $ 618,726
================================================================================================
In 2001, amortization expense related to deferred development costs amounted to
$618,726 (2000 - $1,237,449).
6. ACCRUED LIABILITIES:
================================================================================================
2001 2000
- ------------------------------------------------------------------------------------------------
Remuneration $1,328,200 $1,590,814
Professional fees 460,084 1,390,689
Miscellaneous 540,985 439,877
- ------------------------------------------------------------------------------------------------
$2,329,269 $3,421,380
================================================================================================
7. 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 for the two years ended October 31, 2001:
================================================================================================
Compensation options
and warrants Common shares
- ------------------------------------------------------------------------------------------------
Number Amount Number Amount
- ------------------------------------------------------------------------------------------------
Balance, October 31, 1999 2,185,625 $ 589,000 20,280,528 $20,916,550
Conversion of warrants (b) (300,000) (468,000) 205,017 468,000
Conversion of warrants (c) (400,000) - 273,356 -
Conversion of debenture (b) 1,050,102 1,707,468
Common share purchase warrants exercised (c) (298,875) - 298,875 1,156,646
Compensation options exercised (c) (136,750) - 136,750 494,194
Stock options exercised and shares issued (e) 656,131 2,022,253
Warrants (a) (900,000) (121,000) 900,000 3,428,500
Private placement (d) 2,450,001 23,543,653
Settlement of litigation 263,500 - 100,000 150,000
- ------------------------------------------------------------------------------------------------
Balance, October 31, 2000 413,500 - 26,350,760 53,887,264
Stock options exercised and shares issued (e) 63,116 105,728
- ------------------------------------------------------------------------------------------------
Balance, October 31, 2001 413,500 $ - $26,413,876 $53,992,992
================================================================================================
(a) On December 5, 1997, the Company received $1,295,000 (U.S. $900,000) from
the issue and sale of 900,000 common shares and a warrant to purchase
900,000 common shares at a price of U.S. $2.50 per share until December 5,
1999. These warrants were exercised during the fiscal year ended October
31, 2000 and common shares issued. Proceeds to the Company as a result of
this exercise were $3,428,500.
(b) During the year ended October 31, 1998, the Company completed a private
placement of an unsecured convertible debenture (the "Convertible
Debenture") in the principal amount of U.S. $2,000,000 and a non-redeemable
warrant (the "Warrant") to purchase 300,000 common shares for total
proceeds of U.S. $2,000,000. The Convertible Debenture was convertible
until October 14, 2001 and bore interest at 3% per annum which was payable
in cash or common shares, at the option of the Company. The Convertible
Debenture was convertible at the holder's option into common shares of the
Company at the lower of (a) U.S. $1.18 per share or (b) approximately 80%
of the market price of the common shares at the time of conversion. The
Warrant entitled the holder to purchase an aggregate of 300,000 of the
Company's common shares at an exercise price of U.S. $1.18 per share until
October 15, 2003.
14
During fiscal 2000, the Convertible Debenture plus accrued interest were fully
converted into common shares leaving a principal balance of nil. During fiscal
2000, the Warrant was converted to common shares for no additional consideration
based on the prevailing market price at the time of conversion less U.S. $1.18.
(c) On April 23, 1999, the Company completed a private placement offering of
2,134,000 special warrants. Each special warrant was offered at $3.45 and was
exercisable at any time until October 23, 2000, for no additional consideration,
to acquire one unit. Each unit consisted of one common share and one quarter of
a common share purchase warrant. Each whole common share purchase warrant
entitled the holder to purchase one share for $3.87 until October 23, 2000. The
gross proceeds of the offering were $7,362,300.
The underwriter received commissions of 8% of gross proceeds plus out-of-pocket
expenses (approximately $285,170), for total cash commission of $588,984. The
underwriter also received compensation options entitling them to purchase up to
213,400 units at a price of $3.45 per unit at any time prior to April 23, 2001,
provided that if any compensation options are exercised after October 23, 2000,
such options shall entitle the underwriter to receive only one common share per
unit exercised.
On July 23, 1999, the Company received a receipt for its prospectus qualifying
the common shares to be issued in exchange for the special warrants. At that
time, all special warrants were converted and the Company received the funds
that were held in escrow. As part of the conversion, the Company issued 533,500
share purchase warrants exercisable upon payments of $3.87 per share until
October 23, 2000. During fiscal 1999, 234,625 share purchase warrants were
exercised, resulting in proceeds of $907,999 to the Company. The remaining share
purchase warrants expired unexercised.
The consent of the debentureholder was required to proceed with the private
placement offering. In consideration for this consent, the Company issued to the
debentureholder warrants to purchase up to 400,000 common shares at an exercise
price of U.S. $4.50 expiring on April 23, 2001. During fiscal 2000, these
warrants were converted to common shares for no additional consideration based
on the prevailing market price of the common shares at the time of exercise less
U.S. $4.50.
(d) During July and August of 2000, the Company completed a private placement
of 2,450,001 common shares for net proceeds of $23,543,653.
(e) During 2000 and 2001, the Company granted options to certain employees,
officers and directors under a share option plan (note 13), enabling them to
purchase common shares of the Company.
(f) Warrants outstanding as of October 31, 2001 and 2000 consist of 150,000
warrants issued in October 1999 at an exercise price of U.S. $13.13 per share,
expiring October 2004 and 263,500 warrants issued in May 2000 at an exercise
price of U.S. $8.59 per share, expiring May 2005.
8. 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 October 31, 2001 and 2000. During these periods, options and
warrants amounted to 2,985,175 (2000 - 2,529,031) and 413,500 (2000 -259,792),
respectively.
9. 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
October 31, 2001:
================================================================================
Prepaid expenses $ 9,622
Capital assets 523,138
- --------------------------------------------------------------------------------
Total assets $ 532,760
================================================================================
Accounts payable $ 600,649
Accrued liabilities 14,378
- --------------------------------------------------------------------------------
Total liabilities $ 615,027
================================================================================
Expenses $(483,472)
================================================================================
Loss $(483,472)
================================================================================
15
During fiscal 2001, the Company recognized revenue of $199,925 from sales to the
joint venture. As at October 31, 2001, the Company had contributed approximately
$401,000 into the joint venture. The Company has to date committed to contribute
an additional $615,000 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.
10. INCOME TAXES:
The tax effects of significant temporary differences representing future tax
assets is as follows:
============================================================================
2001 2000
- ----------------------------------------------------------------------------
Future tax assets:
Operating loss carryforwards $ 24,762,785 $ 23,499,822
Capital loss carryforwards 1,119,902 -
Share issue costs 982,616 426,290
Write-down of investment - 446,000
Capital assets, accounting depreciation in
excess of tax depreciation 5,327,984 527,399
------------------------------------------------------------------------
32,193,287 24,899,511
Valuation allowance (32,193,287) (24,623,559)
- ----------------------------------------------------------------------------
Net future tax assets - 275,952
Future tax liability:
Deferred development costs - (275,952)
- ----------------------------------------------------------------------------
$ - $ -
============================================================================
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 October 31, 2001, the Company has non-capital losses available for
carryforward for Canadian income tax purposes amounting to $55,675,000. These
losses expire in the following fiscal years:
============================================================================
2002 $ 2,270,000
2003 13,587,000
2004 1,211,000
2005 3,700,000
2006 6,854,000
2007 7,155,000
2008 20,898,000
- ----------------------------------------------------------------------------
$55,675,000
============================================================================
The Company also has non-capital losses available for carryforward for United
States income tax purposes amounting to $2,659,000, expiring between 2018 and
2020.
16
11. SEGMENTED INFORMATION:
The Company operates in a single reportable operating segment. This segment
derives its revenue from the sale of security software and related products and
services. As at October 31, 2000, significantly all the assets related to the
Company's operations were located in Canada. As at October 31, 2001,
significantly all the assets related to the Company's operations were located in
Canada with the exception of the assets held within the joint venture, as
disclosed in note 9, which were located in Asia.
A summary of sales to major customers that exceeded 10% of total sales during
each of the years in the two-year period ended October 31, 2001, and the
approximate amount due from these customers, as of October 31, 2001, are as
follows:
===============================================================
Sales Accounts receivable
2001 2000
- ---------------------------------------------------------------
Customer 1 - 24% $ -
Customer 2 40% -
Customer 3 19% -
Customer 4 17% 186,083
===============================================================
The Company does not consider itself dependent on any customer.
Revenue is attributable to geographic location based on the location of the
customer, as follows:
===============================================================
2001 2000
- ---------------------------------------------------------------
Sales:
United States $ 294,650 $1,464,630
Canada 213,295 308,000
Other 44,156 863,550
Asia 668,880 --
- ---------------------------------------------------------------
$1,220,981 $2,636,180
===============================================================
12. 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 it purchased 212,500 common shares (850,000 common shares
prior to a one-for-four reverse split) from the Company for U.S. $3,700,000. The
plaintiff is also seeking damages in the amount of U.S. $3,700,000 plus interest
and costs. This claim has previously been dismissed twice and the Company has
filed a motion to dismiss this claim again.
(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 U.S. $1,533,950 and damages of U.S.
$25,000,000 for loss of reputation and loss of opportunity, pre-judgment and
post-judgment interest, and costs.
(iii) In addition to the above, in the ordinary course of business, the Company
and its subsidiaries have legal proceedings brought against them. Management
does not expect the outcome of these proceedings, in aggregate, to have a
material adverse effect on the Company's consolidated financial position or
results of operations.
17
(b) Lease commitments:
Total future minimum lease payments including operating costs are as follows:
=============================================================================
2002 $ 645,082
2003 502,648
2004 470,994
2005 470,994
2006 313,996
- -----------------------------------------------------------------------------
$ 2,403,714
=============================================================================
13. 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 preceding 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 6,100,000 (2000 - 6,100,000) common shares. These options generally vest
on a quarterly basis over three years and expire five years after the date of
granting. As at October 31, 2001, the number of common shares reserved for
future issues of stock options amounts to 875,828.
The following table summarizes information about stock options outstanding at
October 31, 2001:
========================================================================================================
Options outstanding Options vested
- --------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Range of average remaining average average
exercise price U.S. Number contractual life exercise price Number exercise price
[Cdn.] outstanding (in years) U.S. [Cdn.] exercisable U.S. [Cdn.]
- --------------------------------------------------------------------------------------------------------
1.00 - $1.94 1,616,779 3.27 $ 1.36 848,168 $ 1.38
[$1.58 - $3.07] [2.15] [2.18]
2.05 - $2.84 701,500 3.84 2.25 248,563 2.26
[$3.24 - $4.49] [3.55] [3.57]
3.00 - $4.88 183,769 2.23 3.52 147,936 3.48
[$4.74 - $7.71] [5.56] [5.49]
5.19 - $9.66 476,887 3.51 7.53 219,873 7.44
[$8.20 - $15.26] [11.90] [11.75]
10.63 - $41.69 707,321 3.13 15.50 410,369 15.51
[$16.79 - $65.87] [24.49] [24.51]
- --------------------------------------------------------------------------------------------------------
3,686,256 3.33 5.15 1,874,909 5.46
[8.13] [8.63]
========================================================================================================
18
Changes for the employee stock option plan during the years ended October 31, 2001 and 2000
were as follows:
===============================================================================================
2001 2000
- -----------------------------------------------------------------------------------------------
Weighted average Weighted average
Number of exercise price Number of exercise price
Shares U.S [Cdn.] Shares U.S [Cdn.]
- ----------------------------------------------------------------------------------------------
Options outstanding, beginning
of year 3,275,045 $ 7.75 [10.87] 2,268,499 $ 2.27 [3.33]
Options granted 1,863,280 2.15 [3.40] 2,033,950 11.75 [17.63]
Options exercised (63,116) 1.10 [1.73] (756,132) 1.94 [2.92]
Options cancelled (1,388,953) 6.26 [9.91] (271,272) 6.35 [9.53]
Options cancelled for reissuance - - - (127,023) 24.23 [36.35]
Options reissued - - - 127,023 7.75 [11.62]
- ----------------------------------------------------------------------------------------------
Options outstanding, end of year 3,686,256 5.15 [8.13] 3,275,045 7.75 [10.87]
==============================================================================================
Options exercisable, end of year 1,874,909 $ 5.46 [8.63] 1,405,591 $ 9.76 [14.64]
==============================================================================================
Weighted average fair value
of options granted during
the year $ 1.57 [2.48] $ 8.23 [12.35]
==============================================================================================
14. 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 United States,
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. There were no forward
exchange contracts outstanding at October 31, 2001 and 2000.
(b) Fair values:
The fair values of the Company's current 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.
19
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.
The effect of these reconciling adjustments is as follows:
==============================================================================
2001 2000
- ------------------------------------------------------------------------------
Share capital:
Canadian GAAP $ 53,992,992 $ 53,887,264
Reduction of share capital (a) 41,248,993 41,248,993
- ------------------------------------------------------------------------------
U.S. GAAP $ 95,241,985 $ 95,136,257
==============================================================================
Deficit and comprehensive loss:
Canadian GAAP $(48,038,364) $(29,138,505)
Reduction of share capital (a) (41,248,993) (41,248,993)
Compensation expense (b) (1,505,557) (1,449,078)
- ------------------------------------------------------------------------------
U.S. GAAP $(90,792,914) $(71,836,576)
==============================================================================
Consolidated statements of loss:
Loss from continuing operations under
Canadian GAAP $(18,899,859) $(14,777,208)
Compensation expense (b) (56,479) (1,449,078)
- ------------------------------------------------------------------------------
Loss from continuing operations under U.S. GAAP (18,956,338) (16,226,286)
Loss from discontinued operations - (250,000)
- ------------------------------------------------------------------------------
Loss under U.S. GAAP $ (18,956,338) $(16,476,286)
==============================================================================
Basic and diluted:
Loss per share under U.S. GAAP $ (0.72) $ (0.70)
==============================================================================
(a) Share capital and deficit:
On March 1, 1999, the shareholders approved a resolution to reduce the stated
capital of the Company by $41,248,993 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 $41,248,993.
(b) Options to consultants:
Under Canadian GAAP, the Company does not recognize compensation expense when
stock or stock options are issued to consultants. Any consideration paid on
exercise of stock options or purchase of stock is credited to share capital.
Under U.S. GAAP, the Company records compensation expense for stock or stock
options granted in exchange for services from consultants. During the year ended
October 31, 2000, the Company issued 177,500 stock options to consultants and
has recorded $286,578 as compensation expense for the services rendered. In
addition, the Company recorded compensation expense in the amount of $1,162,500,
which is the difference between the exercise price and the share price at the
settlement date of a lawsuit.
During the year ended October 31, 2001, the Company issued 50,000 stock options
to consultants. The Company has recorded compensation expense of $56,479, of
which $13,912 relates to options issued in fiscal 2001 to consultants.
(c) 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
20
Exchange Commission ("SEC"), reclassification is not required in an SEC filing
when specified criteria are met and information disclosed. These criteria have
been met and the information is disclosed in note 9.
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.
(d) 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) Short-term investments:
Note 2(d) would be restated as follows:
Short-term investments consist of corporate debt securities. 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.
(ii) Stock-based compensation plan:
Under U.S. GAAP, for any employee 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 would be
recognized under the intrinsic value 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 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
150.7%.
============================================================================
2001 2000
- ----------------------------------------------------------------------------
Loss under U.S. GAAP $(18,956,338) $(16,476,286)
Pro forma loss under U.S. GAAP (25,275,143) (22,638,303)
Pro forma loss per common share:
Basic (0.96) (0.96)
Diluted (0.96) (0.96)
Weighted average grant date fair
value of options granted
during the year U.S. $1.57 U.S.$8.23
============================================================================
(iii) Recent accounting pronouncements:
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS
No. 142, "Goodwill and Other Tangible Assets." SFAS No. 141 provides new
guidance on the accounting for a business combination at the date a business
combination is completed. Specifically, it requires use of the purchase method
of accounting for all business combinations initiated after June 30, 2001,
thereby eliminating use of the pooling-of-interests method. SFAS No. 142
establishes new guidance on how to account for goodwill and intangible assets
after a business combination is completed. Among other things, it requires that
goodwill and certain other intangible assets will no longer be amortized and
will be tested for impairment at least annually and written down only when
impaired. This statement will apply to existing goodwill and intangible assets,
beginning with fiscal years starting after December 15, 2001. The Company does
not believe that the adoption of SFAS 141 and 142 will have a material impact on
its consolidated financial statements.
21
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" and related literature and establishes
a single accounting model, based on the framework established in SFAS No. 121,
for long-lived assets to be disposed of by sale. The Company is required to
adopt SFAS No. 144 no later than January 1, 2002. The Company does not believe
that the adoption of SFAS No. 144 will have a material impact on its
consolidated financial statements.
22
EXECUTIVE OFFICERS
NAGY MOUSTAFA, PRESIDENT & CEO
In 1997, it was Nagy Moustafa's vision to take PKI technology 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.
RICHARD PALMER, EXECUTIVE VICE PRESIDENT & CFO
Richard Palmer joined Diversinet following 12 years at CTV Inc. (TSE:TV),
Canada's pre-eminent communications company. His most recent position at CTV,
was Senior Vice President, Finance.
HUSSAM MAHGOUB, 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, VICE PRESIDENT, SALES & MARKETING
Nick Darwish is responsible for Diversinet's global Sales and Marketing
initiatives. Mr. Darwish has over 15 years experience in the wireless and
communications industries, with positions in sales and business development,
particularly in the area of mobile Internet. 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
FRANK CLEGG has served as one of Diversinet's Directors since April 1998. Mr.
Clegg is currently the President of Microsoft Canada.
WILLIAM L. LINTON has served as a Director since May 2000. Mr. Linton is
currently President and Chief Executive Officer of CallNet Enterprises .
DAVID F. MASOTTI has served as one of the Company's Directors since April 1998,
and is currently an independent consultant.
JOHN A. MCMAHON has served as one of the Company's Directors since April 1998.
Mr. McMahon is the Managing Partner of Continua Capital Inc.
NAGY MOUSTAFA has served as Diversinet's Chairman, President and Chief Executive
Officer since November 1997.
RICHARD PALMER was appointed a Director on December 12th, 2001. Mr. Palmer is
currently Executive Vice President and Chief Financial Officer of Diversinet.
MARK C. STEINMAN has served as one of Diversinet's Directors since June 1998.
Mr. Steinman is currently the Executive Vice President and Chief Financial
Officer of Stelco Inc.
TONY WERNER has served as one of the Company's Directors since December 1998.
Mr. Werner is currently Chief Technology Officer of Liberty Media Corporation.
23
DIVERSINET CORP 2225 Sheppard Avenue East
Suite 1700
Toronto, Ontario
Canada M2J 5C2
tel: 1.416.756.2324
fax: 1.416.756.7346
www.diversinet.com
TRANSFER AGENT: Computershare Trust Company
100 University Avenue
Toronto, Ontario
Canada M5J 2Y1
tel: 1.800.663.9097
1.416.981.9633
AUDITORS: KPMG, LLP
Chartered Accountants
4120 Yonge Street
Suite 500
Toronto, Ontario
Canada M2P 2B8
tel: 1.416.228.7000
TRADED ON: NASDAQ (Small Cap)
TICKER SYMBOL: DVNT
24
Computershare
INVESTOR SERVICES
Computershare Trust Company of Canada
February 5, 2002 100 University Avenue
Toronto, Ontario
M5J 2Y1
Telephone 416-981-9500 CANADA
Facsimile 416-981-9800 Australia
www.computershare.com Channel Islands
Hong Kong
Ireland
To: Alberta Securities Commission New Zealand
British Columbia Securities Commission Philippines
Ontario Securities Commission South Africa
The Canadian Venture Exchange - CDNX United Kingdom
US Securities Exchange Commission USA
The NASDAQ Stock Exchange
Dear Sirs:
Subject: DIVERSINET CORP.
- --------
We confirm that the following English material was sent by pre-paid mail on
February 5, 2002 to the registered shareholders of Common Shares of the subject
Corporation:
1. Notice of Annual Meeting of Shareholders/Management Information Circular
2. Proxy
3. 2001 Annual Report
4. Mailing List Card
5. Return Envelope
We further confirm that copies of the above mentioned material, were sent by
courier on to each intermediary holding shares of the Corporation who responded
to the search procedures pursuant to Canadian Securities Administrators'
National Policy Statement No.41 regarding shareholder communications.
In compliance with regulations made under the Securities Act, we are providing
this material to you in our capacity as agent for the subject Corporation.
Yours truly,
Signed
Michael Lee
Assistant Account Manager
Stock Transfer Services
(416) 263-9644
(416) 981-9800 Fax