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Registration No.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM F-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Diversinet Corp.
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(Exact name of registrant as specified in its charter)
Ontario, Canada
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(State or other jurisdiction of incorporation or organization)
N/A
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(I.R.S. Employer Identification Number)
2225 Sheppard Avenue East, Suite 1700, Toronto, ON M2J 5C2 Canada (416) 756-2324
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(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
David Hackett c/o Diversinet Corp.
2225 Sheppard Avenue East, Suite 1700, Toronto, ON M2J 5C2 Canada (416) 756-2324
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(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement is declared effective.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box: [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
(In U.S. $)
Proposed Proposed
maximum maximum
Title of each class of Amount to offering price per aggregate Amount of
securities to be registered be registered share offering price registration fee
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Common shares underlying
the common share purchase
warrants 4,515,541(1) 0.72 $ 3,251,190 $ 299.11
Common shares 5,420,708 0.60 $ 3,252,425 $ 299.22
Total Due $ 598.33
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(1) Consists of 4,515,541 common shares underlying common share purchase
warrants held by the selling shareholders.
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Subject to completion, dated May 8, 2002
PROSPECTUS
9,936,249 COMMON SHARES
DIVERSINET CORP.
Certain selling shareholders are offering up to 9,936,249 common shares of
the Company for sale under this prospectus. We will not receive the proceeds of
any shares sold under this prospectus.
Our common shares are quoted on The Nasdaq SmallCap Market(SM) under the
symbol "DVNT." On April 23, 2002, the average of the closing bid and asked
prices of our common shares on Nasdaq was U.S. $0.66 per share.
AN INVESTMENT IN OUR COMMON SHARES INVOLVES A HIGH DEGREE OF RISK AND ONLY
PEOPLE WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT SHOULD CONSIDER
INVESTING. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is May , 2002
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IT IS NOT A SOLICITATION OF AN OFFER TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
INFORMATION SUMMARY
This summary highlights important information about our business and about
this offering. Because this is a summary, it does not contain all of the
information you should consider before investing in our common shares or
warrants. You should read the entire prospectus before making an investment
decision.
ABOUT DIVERSINET
Diversinet Corp. (formerly The Instant Publisher Inc.) was formed on
December 8, 1993 through the amalgamation of The Instant Publisher Inc. with
Lombard Consolidated Resources Inc., an Ontario corporation. We are regulated
in accordance with the Ontario Business Corporation Act.
Our company was formed under the laws of Ontario, Canada. Our principal
executive offices are located at 2225 Sheppard Avenue East, Suite 1700, Toronto,
Ontario, M2J 5C2, Canada. Our telephone number is (416) 756-2324.
OUR PRODUCTS HAVE NOT GENERATED CONTINUING REVENUES
We are a security software product company that develops, markets and
distributes PKI security solutions that provide for the secure transmission of
data over wireless networks and devices. Our solution encompasses all aspects
of commercial transaction security requirements, covering the authentication and
authorization of individuals involved, the integrity of the information being
sent and the non-repudiation or legalization of the transaction.
We are a pioneer in providing security products for mobile commerce over
wireless networks and are striving to become the leading provider of wireless
security solutions. Our strategy to achieve this objective involves: targeting
emerging m-commerce markets, expanding strategic partnerships and sales channel
relationships, maintaining a leadership position in terms of products and
research and development and building awareness of the Diversinet brand.
We develop and license the Passport Certificate Server(R) and Passport
Authorization Product', which is computer software that provides for the secure
transmission of data over wireless networks as well as various other kinds of
networks, including corporate networks, telecommunications systems and the
Internet. The transmission of data over these networks is known as "e-commerce".
The Passport Certificate Server(R) verifies the identities of the parties
to an e-commerce transmission through the use of digital certificates so that
unauthorized persons cannot intercept its contents.
The Passport Authorization Product(TM) issues Digital Permits that are
linked to the holder's digital certificate. The Digital Permit is designed to
allow digital certificates to serve additional functions such as authorizing
users to perform specific tasks once they have accessed a given network. We
believe that the Passport Certificate Server(R) and the Passport Authorization
Product' offer a unique approach to facilitating and securing commercial
transactions and data transmissions over these networks.
SELECTED FINANCIAL DATA
Our selected financial data for the three-month periods ended January 31,
2002 and 2001, and the fiscal years ended October 31, 2001, 2000, 1999, 1998,
and 1997 are derived from our financial statements and should be read in
conjunction with our consolidated financial statements and the accompanying
notes incorporated by reference into this prospectus. Our financial statements
are expressed in Canadian dollars. All financial information contained in the
prospectus is presented in Canadian dollars except where otherwise indicated.
The exchange rate of the U.S. dollar to the Canadian dollar was CDN $1.57 to
U.S. $1.00 as of April 22, 2002.
2
Our financial statements have been prepared in accordance with Canadian
GAAP. These principles conform in all material respects with U.S. GAAP except
as described in Note 17 to our 2001 consolidated financial statements. The
differences between line items under Canadian GAAP and those as determined 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, greater by $1,549,000
for the year ended October 31, 2000 and less by $179,000, $4,131,000 and
$5,001,000 for the years ended October 31, 1999, October 31, 1998 and October
31, 1997, respectively. Under U.S. GAAP, total assets would be less by
$4,913,000 for the year ended October 31, 1997, primarily due to the difference
in accounting treatment of the $10 million of technology purchased in 1996.
Under U.S. GAAP share capital would be greater and deficit would be less by
$41,249,000 for each of the years due to a reduction in stated capital offset
against accumulated shareholders' deficit in March of 1999. The value of the
U.S. Dollar in relation to the Canadian Dollar is 1.58 to 1.00 at October 31,
2001.
3
SELECTED FINANCIAL DATA
(CDN$ IN 000'S, EXCEPT PER SHARE DATA)
THREE MONTHS
ENDED JANUARY 31 FISCAL YEAR ENDED OCTOBER 31
----------------- ---------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
-------- ------- --------- --------- --------- -------- --------
(Unaudited)
CONSOLIDATED STATEMENT OF LOSS DATA
License Revenue . . . . . . . . . . . . $ 174 571 $ 1,221 $ 2,636 $ 246 $ ---- $ ----
Loss from Continuing Operations . . . . (1,725) (5,437) (18,900) (14,777) (13,826) (7,716) (5,999)
Net loss from Discontinued Operations . 0 0 0 (250) (285) (688) (75)
Net Loss. . . . . . . . . . . . . . . . (1,725) (5,437) (18,900) (15,027) (14,111) (8,404) (6,074)
Weighted Average no. of shares (000's). 26,414 26,358 23,376 23,534 16,742 15,325 14,376
Loss Per Share - Continuing Operations. (0.07) (0.21) (0.72) (0.63) (0.82) (0.50) (0.42)
Net Loss Per Share. . . . . . . . . . . (0.07) (0.21) (0.72) (0.64) (0.84) (0.55) (0.42)
Dividends Per Share . . . . . . . . . . 0.00 0.00 0.00 0.00 0.00 0.00 0.00
CONSOLIDATED BALANCE SHEET DATA
Working Capital . . . . . . . . . . . . 1,943 3,555 3,555 21,647 4,985 2,636 659
Long-term Investment. . . . . . . . . . 0 0 0 0 0 100 100
Long-term Liabilities . . . . . . . . . 0 0 0 0 1,421 2,051 0
Shareholders' Equity. . . . . . . . . . 4,327 6,052 6,052 24,846 7,852 3,746 9,171
Total Assets. . . . . . . . . . . . . . 6,748 9,616 9,616 28,771 12,226 7,356 9,386
Share Capital . . . . . . . . . . . . . 53,993 53,993 53,993 53,887 20,917 43,707 41,918
US GAAP
Loss from Continuing Operations . . . . (1,782) (6,886) (18,956) (16,226) (13,647) (3,585) (998)
Net Loss from Discontinued Operations . 0 0 0 (250) (285) (688) (75)
Net Loss. . . . . . . . . . . . . . . . (1,782) (6,886) 18,956 (16,476) (13,932) (4,273) (1,073)
Loss Per Share - Continuing Operations. (0.07) (0.26) (0.72) (0.69) (0.82) (0.23) (0.07)
Net Loss Per Share. . . . . . . . . . . (0.07) (0.26) (0.72) (0.70) (0.83) (0.28) (0.07)
Long-term Liabilities . . . . . . . . . 0 0 0 0 1,703 2,652 0
Shareholders' Equity. . . . . . . . . . 5,832 7,501 4,547 23,397 7,571 3,101 4,258
Total Assets. . . . . . . . . . . . . . 6,748 9,616 9,616 28,771 12,226 7,310 4,473
Share Capital . . . . . . . . . . . . . 95,242 95,242 95,242 95,136 62,166 44,576 41,918
THE OFFERING
Certain of our shareholders are offering the following securities for sale
under this prospectus:
- 4,515,541 common shares which may be issued on the exercise of
Warrants, and
- 5,420,708 common shares
We are not offering or selling any securities under this prospectus and
will not receive any proceeds from the sale of the selling shareholder's
securities. We may receive up to U.S. $3,251,190 upon the exercise of the
warrants. However, we will pay all costs associated with this prospectus.
4
RISK FACTORS
The common shares offered by this prospectus are speculative, involve a
high degree of risk and should only be purchased by persons who can afford to
lose their entire investment. You should therefore carefully review the
following risk factors, as well as all of the other information in this
prospectus, before investing in the securities offered by this prospectus.
RISKS RELATING TO OUR BUSINESS
WE HAVE LOST MONEY IN THE PAST, WE HAVE REALIZED MINIMAL REVENUES FROM
CONTINUING OPERATIONS AND WE EXPECT TO CONTINUE TO SUSTAIN LOSSES IN THE FUTURE.
We have generated minimal revenue to date from the licensing of our products.
For the three months ended January 31, 2002, we posted a net loss of $1,725,000.
For the year ended October 31, 2001, we posted a net loss of $18,900,000 and for
October 31, 2000, we posted a net loss of $15,027,000. For the years ended
October 31, 1999 and October 31, 1998, we had net losses of $14,111,000 and
$8,404,000, respectively. We generated licensing revenue of $174,000 for the
three months ended January 31, 2002 and $1,221,000 in the year ended October 31,
2001, $2,636,000 in the year ended October 31, 2000, $246,000 in the year ended
October 31, 1999 and nil in the year ended October 31, 1998. The revenue
represents the initial licensing of our Passport Certificate Server(R) and
Passport Authorization Product(TM) together with related professional services.
During the 2000 fiscal year, 24% of revenue was generated from one customer.
During the 2001 fiscal year, 40% of revenue was generated from one customer
although not the same customer as in fiscal 2000. To date, licensing our
products to various customers and providing them with related professional
services has generated our revenues. We cannot provide assurance that recurring
revenues will arise from these license agreements. The auditors' report on our
October 31, 2001 consolidated financial statements includes an explanatory
paragraph that states that conditions and events exist that cast substantial
doubt on the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.
COMMERCIAL DEPLOYMENT. Our ability to continue operations is also
dependent on the acceptance of our security products and the adoption of
transaction-based applications using Public Key Infrastructure-based security
(also known in the industry as PKI) 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.
Our products are marketed to large companies and government agencies. The
implementation of our products by these entities typically involves a lengthy
education process and a significant technical evaluation and commitment of
capital and other resources. This process is also subject to the risk of delays
associated with customers' internal budgeting and other procedures for approving
large capital expenditures, deploying new technologies within their networks and
testing and accepting new technologies that affect key operations. As a result,
the associated sales and implementation cycles can be lengthy. Our quarterly and
annual operating results could be materially harmed if orders forecasted for a
specific customer for a particular quarter are not realized.
PRODUCT AND 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, Pounds 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. With the
completion of this recent private placement, we now have a portion of our
available cash resources in both Canadian and U.S. dollars.
5
WE MAY NOT BE SUCCESSFUL IF WE FAIL TO RETAIN OUR KEY TECHNICAL PERSONNEL.
During September 2001 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.
We currently have four senior officers and 38 employees and contractors. We
may not be able to improve our products or create new products if we lose any of
our key employees or contractors. The contract with our CEO, Mr. Nagy Moustafa,
has a term of five years, commencing September 29, 1997. None of our other
employment agreements has a specified term. We do not maintain key person life
insurance policies on any of our employees. Skilled technical personnel can be
difficult to attract depending on the strength of the economy and competitive
opportunities. We may not be able to retain our current employees if they
receive better job offers from other employers. The weakened economy throughout
2001 and into 2002 may not alleviate this risk in the future.
WE ARE INVOLVED IN LITIGATION WHICH COULD RESULT IN JUDGMENTS AGAINST US
WHICH, IN THE AGGREGATE, COULD TOTAL MORE THAN OUR COMBINED CURRENT ASSETS,
WORKING CAPITAL AND NET ASSETS. There are currently three material claims
pending against us. If we lose any of these suits or enter into settlements
requiring us to pay cash or issue any of our common shares, our liquidity and
financial position will be adversely affected and our shareholders' ownership
may be diluted.
We have been sued, along with other individuals and corporations, by Silva
Run Worldwide Ltd. in connection with Silva Run's purchase of 212,500 common
shares (850,000 common shares prior to a one for four reverse split in May 1997)
in 1995 for a purchase price of U.S. $3,700,000. Silva Run is seeking to cancel
the stock purchase and reimbursement of the U.S. $3,700,000 purchase price, plus
interest, attorneys' fees and costs. Silva Run has alleged that we, directly or
as the control person of other defendants, violated the Securities Act of 1933,
as amended, and the Securities Exchange Act of 1934, as amended. This claim has
previously been dismissed twice, and we have filed a motion to dismiss this
claim again.
In May 2000 we were sued, along with our wholly-owned Barbados subsidiary,
Instant Publisher Ltd. The plaintiff is seeking damages of U.S. $1,533,950 for
breach of an October 25, 1995 dealer agreement with our previous printing
business regarding the distribution of printing equipment, and damages of U.S.
$25,000,000 for loss of reputation and loss of opportunity, pre-judgment and
post-judgment interest, and costs.
In January 2001 we were served with notice of a complaint in the United
States District Court, District of Nevada by Jason Lyons, who alleges that he
acted as a finder of individuals or entities interested in making investments in
us and was promised cash compensation in the amount of U.S. $70,000. In
addition, Mr. Lyons claims that he was subsequently promised warrants to
purchase 100,000 freely tradable shares of common stock of Diversinet at the
then-market price for such shares. Mr. Lyons is seeking an order directing
Diversinet to issue him warrants to purchase 100,000 shares at U.S. $1.06 per
share and damages of at least U.S. $4,800,000, in addition to his costs of the
action. On April 3, 2002, we succeeded on our motion for summary judgment on
the grounds that Nevada was an improper jurisdiction for this action.
WE HAVE LIMITED EXPERIENCE IN THE WIRELESS INTERNET SECURITY SOFTWARE
FIELD, AND WE ARE THEREFORE SUBJECT TO RISKS INHERENT IN ESTABLISHING A NEW
BUSINESS. We have only been in the wireless Internet security software field
since fiscal 1997, and we have generated minimal revenues from this business.
We are not sufficiently established to fully evaluate or forecast our prospects,
and we are subject to the risks inherent in establishing a new business
enterprise.
WE ARE DEPENDENT ON THE ADOPTION OF TRANSACTION-BASED APPLICATIONS OVER
WIRELESS NETWORKS AS AN ACCEPTED METHOD OF COMMERCE. In order for Diversinet to
be successful, transaction-based applications using Public Key
Infrastructure-based security (also known in the industry as PKI) over wireless
networks must be adopted as a means of trusted and secure communications and
commerce to a sufficient extent and within a reasonable time frame, particularly
considering our existing financial resources and future capital needs. Since
trusted and secure communications and commerce over these networks is new and
evolving, it is difficult to predict with any assurance the size of this market
and its growth rate, if any.
6
If the market for trusted and secure communications and commerce utilizing
PKI over these networks fails to develop or develops more slowly than expected,
we may have difficulty selling products or generating sufficient revenues to
support our business.
OUR ABILITY TO KEEP PACE WITH THE RAPID TECHNOLOGICAL CHANGES AND FREQUENT
NEW PRODUCT INTRODUCTIONS COMMON IN THE ELECTRONIC COMMERCE INDUSTRY WILL
DETERMINE OUR ABILITY TO REMAIN COMPETITIVE AND AFFECT THE VIABILITY OF OUR
PRODUCTS. To succeed in the mobile e-commerce business, we believe that we will
have to continuously improve the performance, features and reliability of our
products and be the first to the market with new products or enhancements to
existing products. We cannot provide assurance that we will be able to improve
our products in a timely manner. The emerging market for security products for
mobile e-commerce is characterized by rapid technological developments, frequent
new product introductions and evolving industry standards. We anticipate this
evolution to also occur in the mobile e-commerce market in which we focus our
technological developments. The adoption of new standards, or the informal
adoption of certain standards by a significant percentage of the computer
security and related industries, could require us to reconfigure our products.
We may not be able to counter challenges to our current products or to introduce
product offerings that keep pace with the technological changes introduced by
competitors or persons seeking to breach information security. We are not
currently aware of any significant new technologies either under development or
about to be introduced in the mobile e-commerce security field.
THE HIGHLY COMPETITIVE NATURE OF THE ELECTRONIC COMMERCE FIELD COULD
PREVENT US FROM ACHIEVING SUCCESS. Our products are targeted at the new and
rapidly evolving market for authentication and authorization products for
wireless electronic commerce and telecommunications. This market is not mature.
We anticipate that it will be intensely competitive, subject to rapid change and
significantly affected by new product and service introductions and other market
activities of industry participants. Many of our competitors and potential
competitors have a longer operating history, greater name recognition, larger
installed customer base and significantly greater financial, technical and
marketing resources than we have. As a result, they may be able to adapt more
quickly to new or emerging technologies and changes in customer requirements,
and they could therefore render our technologies and products obsolete.
Because of the broad potential application of our authentication and
authorization software, we compete with vendors offering a wide range of
computer security products. These competitors include Entrust Technologies,
VeriSign, Certicom, Baltimore Technologies, Sonera SmartTrust and RSA Security.
There also may be other potential entrants to the market of whom we are not yet
aware.
OUR LICENSING REVENUES ARE DEPENDENT ON OUR CUSTOMERS' ACCEPTANCE AND USE
OF OUR SOFTWARE PRODUCTS AND WE EXPECT OUR SALES CYCLE TO BE LENGTHY. Many of
our early licensing agreements permitted our customers to examine and test our
products with no initial up-front payments to us. These customers are not
required to make payments to us until they begin to use our product for
commercial purposes. We also enter into evaluation agreements in certain cases,
whereby potential customers may examine our software products for a specified
period of time with no payment to us. Our current licensing agreements
typically require the customer to pay a license fee attributable to the software
components and the development toolkit and upon shipment of these items to the
customer, although until early in fiscal 2000 we generally waived the up-front
fee.
Customers cannot simply license our products and begin using them
immediately in their businesses. Making our products work with a particular
customer's application may be a complex, expensive and, in certain cases, an
ultimately unsuccessful process. This process may also require the customer to
make significant commitments of time and money. Based on discussions with our
customers, we believe that a customer's required cycle of testing, internal
approval and network modifications can reasonably take between six and nine
months or longer. Therefore, we expect our sales cycle, or the time between
entering into a license agreement and when we begin to receive recurring
revenue, to be six to nine months or longer. Also, the amount of revenue can be
very limited until the customer's product is made generally available and
adopted. Our sales are also subject to significant risks over which we have
little or no control, including customers' budgetary constraints and internal
acceptance procedures regarding security-related matters.
TWO MAJOR ENCRYPTION TECHNOLOGY VENDORS SERVICE OUR AREA OF BUSINESS, AND
IF WE FAIL TO CONTINUE TO LICENSE ENCRYPTION TECHNOLOGY FROM EITHER OF THEM, IT
WOULD CAUSE A SIGNIFICANT DISRUPTION TO OUR BUSINESS. Our current product
7
offerings include encryption technology that we source from third-party vendors.
We currently license encryption technology from Certicom Corp. and RSA Security,
two encryption technology vendors who service the wireless and the e-commerce
security market. The term of each of the licensing arrangements is open-ended.
Encryption technology is currently available from other vendors; however, if
either of our agreements are terminated for any reason and we could not obtain
sufficient encryption technology from the other vendor, or if both agreements
were terminated, we would have to license encryption technology from an
alternative vendor. Accordingly, if both current agreements were terminated
there might be a disruption to our business.
Our success will depend in part on our continued ability to have access to
these and other technologies that are important to our existing products and may
become important to products we may develop in the future. We cannot be certain
that we will be able to procure or use any necessary technology on terms similar
to existing licenses.
WE LACK EXPERIENCE IN MARKETING AND SALES, AND DEPEND ON OUR RELATIONSHIPS
WITH MORE ESTABLISHED CORPORATIONS TO ASSIST IN MARKETING AND SELLING OUR
PRODUCT. We have limited sales and marketing experience and limited money to
fund marketing. A significant part of our business strategy is to form
strategic relationships with more established companies to expose our products
to a larger customer base than we could reach through direct sales and marketing
force. Our existing relationships have not resulted in any significant revenues
to date and may not result in any revenues in the future. Our existing sales
force generated all of our sales in fiscal 2001 and through our first quarter in
2002.
As a result of our emphasis on these relationships, our success will
partially depend on both the ultimate success of the third parties with which we
have these relationships and the ability of these third parties to market our
products and services successfully.
In the past, we have concentrated our sales efforts marketing to
application service providers. This strategy has lead to no commercial
deployments. As a result and due to some success experienced by us in Hong Kong,
we are focussing our efforts on working to establish the necessary
infrastructure first. We have jointly developed Mobile e-Cert with Hong Kong
Post. Hong Kong Post will support the Mobile e-Certs through its Mobile
Certification Authority and mobile operators will act as the Registration
Authorities for the authentication of the identity of Mobile e-Cert subscribers.
Hong Kong Post is the first recognized public Certification Authority in Hong
Kong. Hutchinson, the largest and the leading mobile operator in Hong Kong, has
been appointed the first certified Registration Authority for the registration
of Hong Kong Post Mobile e-Cert digital certificates to mobile users. This
appointment also marks the first time worldwide a mobile operator is acting as a
Registration Authority for the issuance of wireless digital certificates. After
this was successfully accomplished, we have been working with application
service providers who will develop applications that will have our software
embedded and will utilize Mobile e-Cert.
We cannot provide assurance that we will be able to enter into additional,
or maintain our existing, strategic relationships on commercially reasonable
terms, if at all. Our failure to do so would require us to devote substantially
more resources to the distribution, sales and marketing of our products and
services. Also, these strategic relationships do not afford us any exclusive
marketing or distribution rights. The third parties may reduce their
commitments to us in the future or pursue alternative technologies.
THE NATURE OF OUR PRODUCTS SUBJECTS US TO PRODUCTS LIABILITY RISKS,
POTENTIAL LOST REVENUES AND ADVERSE PUBLICITY IN THE EVENT OF PRODUCT FAILURE.
Our customers may rely on our products to prevent unauthorized access to
computer networks. Malfunctions or design defects of our products could:
- cause interruptions, delays or cessation of services to our customers
- result in product returns
- result in liability for damages that exceeds our errors and omissions
insurance coverage of U.S. $1,000,000 per occurrence and U.S.
$2,000,000 in the aggregate annually
- adversely affect the market's perception of the security offered by
our product, resulting in a lack of demand for our products
- require us to make significant expenditures of capital or other
resources to alleviate the problem.
8
OUR LICENSE AGREEMENTS MAY NOT BE ADEQUATE TO LIMIT OUR LIABILITY. A large
number of claims by our customers could subject us to significant liability as
well as limit the demand for our products. In most cases our license and
support agreements attempt to limit our liability to the total amount of the
licensing and support fees paid during the twelve-month period preceding an
alleged error in or failure of our software. This contractual provision may not
always be enforceable. Courts have held that contractual limitations of
liability of this type, or the "shrink-wrap licenses" in which they are
sometimes embodied, are unenforceable because the licensee does not sign them.
If these contract provisions limiting our liability are not enforceable, we
could be obligated to pay significant damages resulting from customer claims.
IF COMPUTER HACKERS FIND WAYS TO CIRCUMVENT OUR PRODUCTS, OUR PRODUCTS
WOULD NOT PERFORM THEIR ESSENTIAL FUNCTION. Any compromise of the security
offered by our products, in a single incident or a series of incidents, would
make our products less attractive to our customers. Software error or failure
may result from a hacker seeking unauthorized access to a computer network. The
methods used by hackers are evolving rapidly and generally are not recognized
until they are launched against one or more systems. We are unable to
anticipate hackers' tactics. The publicity surrounding any security breaches
could adversely affect the public perception of the security offered by our
authentication and authorization products and make it more difficult for us to
sell our products.
TECHNICAL ADVANCES IN THE INFORMATION SECURITY MARKET MAY MAKE OUR PRODUCTS
OBSOLETE. Our products are based on PKI technology and depend in part on the
application of certain mathematical principles forming the basis of the
encryption technology that we license and embed in our products. Any
significant advance in techniques for decoding or cracking encrypted computer
information could render our products obsolete or unmarketable.
Our PKI products use algorithms, or mathematical formulae, to encrypt and
secure information. The security afforded by our products is predicated on the
assumption that these mathematical formulae are very difficult to solve. This
assumption is based on the fact that years of theoretical and empirical research
by leading mathematicians have not resulted in any efficient solutions to these
problems. There can be no assurance, however, that future research will not
uncover efficient solutions to these problems.
Also, even if no breakthrough in solving these problems is discovered, they
may eventually be solved by computer systems having sufficient speed and power.
If improved techniques for decoding encrypted information are developed or made
possible by the increased availability of powerful computing resources, our
products could be rendered obsolete.
WE MIGHT NOT ALWAYS BE ABLE TO ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS.
Our success depends significantly upon our proprietary technology and our means
of protecting our proprietary and intellectual property rights may not be
adequate. We rely on a combination of patent and trademark laws, trade secrets,
confidentiality agreements and contractual provisions to protect our proprietary
rights. We have two U.S. patents, which will be in effect until at least August
22, 2017, and one patent granted in Israel in effect until 2021, as well as 14
applications pending in Europe, Israel, United States and Canada. We cannot
provide assurance that any of our applications will be approved, that any new
patents will be issued, that we will develop proprietary products or
technologies that are subject to patent, that any issued patent will provide us
with any competitive advantages or will not be challenged by third parties.
Furthermore, we cannot provide assurance that the patents of others will not
have a material adverse effect on our business and operating results. There is
also a risk that our competitors will independently develop similar technology,
duplicate our products or design around our patents or other intellectual
property rights.
If our technology or products were determined to infringe upon the rights
of others, we would be required to obtain licenses to use that technology. If
we are not able to obtain a license in a timely manner on acceptable terms or at
all, we may have to stop producing our product until we can develop an
alternative that does not infringe the rights of others.
Patent disputes are common in technology-related industries. We cannot
provide assurance that we will have the financial resources to enforce or defend
a patent infringement or proprietary rights action. As the number of products
and competitors in our target markets grows, the likelihood of infringement
claims also increases. Any claims or litigation may be time-consuming and
costly, cause product shipment delays or require us to redesign our product or
9
require us to enter into royalty or licensing agreements. Any of these events
could have a material adverse effect on our business and operating results.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to use our proprietary information
and software. In addition, the laws of some foreign countries do not protect
proprietary and intellectual property rights to as great an extent as do the
laws of Canada and the United States.
THE TERMS OF THE AGREEMENT IN WHICH WE SETTLED TWO LAWSUITS COULD RESULT IN
THE PLAINTIFFS HAVING THE ABILITY TO INFLUENCE CORPORATE DECISIONS BECAUSE OF
THEIR SIGNIFICANT EQUITY POSITION. Pursuant to a settlement agreement with Moti
Barkan, Knockagh International Ltd. and others, the following obligations still
remain:
- We granted to Knockagh a warrant to purchase 150,000 of our common
shares at a price of U.S. $13.125, which warrant (a) becomes
exercisable as to 12,500 common shares on the last day of each
three-month period commencing on November 26, 1999 and (b) expires on
November 25, 2004.
- On May 15, 2000, we issued to Knockagh a warrant to purchase 263,500
common shares at an exercise price of U.S. $8.594, exercisable as to
21,958 warrants in each three month period following the date of
issuance. Such warrant will expire on May 15, 2005.
We believe that Knockagh, as of April 23, 2002, holds 1,113,682 of our
common shares, or 3.5% of our outstanding common shares. If Knockagh exercises
warrants granted to it in connection with the settlement, it would own
approximately 1,379,888 shares, or 4.3% of our common shares currently
outstanding. The exercise of those warrants will result in dilution to our
existing shareholders.
CHANGES IN THE EXPORT REGULATION OF ENCRYPTION-BASED TECHNOLOGIES MAY
RESTRICT OUR ABILITY TO SELL OR LICENSE OUR PRODUCTS. Our products are subject
to export controls under Canadian and U.S. laws and regulations. These laws and
regulations may be revised from time to time in ways that may materially and
adversely affect our ability to sell our products abroad or to make products
available for sale or license via international computer networks such as the
Internet, although pursuant to an international treaty, a number of countries
have relaxed, or are in the process of relaxing, their export rules as
applicable to products of the type licensed by us. Canadian and U.S. government
controls on the export of encryption technologies which we license from third
parties and which are embedded in our products may, if subject to revision, be
amended and subsequently restrict our ability to freely export our products. As
a result, foreign competitors subject to less stringent export controls on their
products may be able to compete more effectively than we can in the global
information and computer security market.
RISKS RELATING TO THE OFFERING
OUR ARTICLES OF INCORPORATION AUTHORIZE US TO ISSUE AN UNLIMITED NUMBER OF
COMMON SHARES, WHICH COULD RESULT IN DILUTION TO OUR SHAREHOLDERS. Shareholders
may experience dilution because our articles of incorporation authorize us to
issue an unlimited number of common shares, subject to regulatory and/or
shareholder approval. Our shareholders, with the exception of Knockagh, have no
right to purchase additional common shares when we issue new shares. As of
April 5, 2002, we had 31,600,584 common shares issued and outstanding.
In addition, our ability to issue an unlimited number of common shares may
have the effect of delaying, deferring or preventing a takeover attempt by a
third party attempting to acquire control of us.
WE HAVE LIMITED 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, raising approximately $47,498,000 through
selling a total of 14,598,099 common shares, but there is no assurance we will
be able to do so again in the near future despite the progress of the business.
As well, the terms of new capital, if any, may materially dilute existing
shareholders. Our failure to either raise capital when needed or to generate
revenues would leave us with insufficient resources to continue our business.
10
IF OUR COMMON SHARES SHOULD BECOME INELIGIBLE FOR CONTINUED QUOTATION ON
THE NASDAQ SMALLCAP MARKET(SM) OR A PUBLIC TRADING MARKET DOES NOT CONTINUE FOR
ANY REASON, HOLDERS OF OUR COMMON SHARES WILL HAVE DIFFICULTY SELLING THEIR
SHARES. Within the eighteen months ended October 31, 2001, our net tangible
assets and the bid price for our common shares were very close to the minimum
listing requirements of the NASDAQ SmallCap Market(SM); if we fall below these
requirements, the holders of our common shares may have difficulty selling their
shares. Our common shares have been quoted on the NASDAQ SmallCap Market(SM)
since June 1995. Within the eighteen months ended October 31, 2001 our net
tangible assets were as low as U.S. $3,830,000, and the closing bid price for
our common shares was as low as U.S. $1.00 during fiscal 2001. NASDAQ requires
that we maintain a minimum bid price of U.S. $1.00 for continued listing but
allows a grace period of 180 days. Following this initial grace period, issuers
that demonstrate compliance with the core initial listing standards will be
afforded an additional 180-day grace period within which to regain compliance.
On March 19, 2002 we received notice from NASDAQ that we had not met the minimum
U.S. $1.00 per share requirement and may be subject to delisting should, prior
to September 16, 2002, our share price not close at $1.00 or more for a minimum
of 10 consecutive trading days.
In addition to the foregoing requirement, in order for our common shares to
continue to be listed on the NASDAQ SmallCap Market(SM):
- We must maintain:
- net tangible assets of at least U.S. $2,000,000; or
- stock holders' equity of at least U.S. $2,500,000, or
- a market capitalization of at least U.S. $35,000,000; or
- net income in the latest fiscal year or in two of the last three
fiscal years of at least U.S. $500,000;
- Our public float must be at least 500,000 shares;
- The market value of our public float must be at least U.S. $1,000,000;
- We must have at least two market makers; and
- We must have at least 300 round lot shareholders.
- Maintain corporate governance including independent directors and an
Audit Committee.
As of April 5, 2002, we met all of these tests. However, we cannot provide
assurance that we will continue to meet all of these tests. Failure to meet
these listing requirements would result in our stock being traded on an
unlisted, less transparent market such as the OTC Bulletin Board.
OUR COMMON SHARES MAY CONTINUE TO BE PENNY STOCK, WHICH MAY ADVERSELY
AFFECT THE LIQUIDITY OF OUR COMMON SHARES. The 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
U.S. $5.00 per share, subject to certain exceptions. Our common shares are
currently penny stock.
Generally, for any transaction involving a penny stock, a broker-dealer is
required to deliver, prior to the transaction, a disclosure schedule relating to
the penny stock market as well as disclosure concerning, among other things, the
commissions payable, current quotations for the securities and information on
the limited market in penny stocks.
The liquidity of our common shares may be materially and adversely affected
if our common shares continue to be penny stock due to the administration
requirements imposed by these rules.
IT MAY BE DIFFICULT FOR OUR SHAREHOLDERS TO ENFORCE CIVIL LIABILITIES UNDER
THE U.S. FEDERAL SECURITIES LAWS BECAUSE WE ARE INCORPORATED IN CANADA.
Diversinet is incorporated under Canadian law and the majority of our directors
and executive officers are Canadian citizens or residents. All, or a
substantial portion, of these persons' assets and substantially all of our
assets are located outside the United States. As a result, it may not be
possible for investors to effect service of process within the United States
upon those persons or Diversinet or to enforce against them judgments of U.S.
courts predicated upon civil liabilities under U.S. federal or state securities
laws. Also, there is uncertainty as to the enforceability in Canada, in
original actions or in actions for enforcement of judgments of the U.S. courts,
of civil liabilities predicated upon U.S. federal or state securities laws.
- --------------------------------
1 For issuers listed as of June 29, 2001, continued listing can be maintained
by either the new U.S. $2,500,000 stock holders' equity or the old minimum U.S.
$2,000,000 net tangible asset standard until November 1, 2002.
11
WE MAY BE TREATED AS A PASSIVE FOREIGN INVESTMENT COMPANY, WHICH WOULD HAVE
ADVERSE TAX CONSEQUENCES FOR OUR U.S. SHAREHOLDERS. We may be treated as a
passive foreign investment company, or a PFIC. While we do not believe that we
should be treated as a PFIC, whether we are treated as a PFIC depends on
questions of fact concerning our assets and revenues. Accordingly, we cannot
assure you that we will not be treated as a PFIC. If we are treated as a PFIC,
there could be material adverse tax consequences to U.S. Holders. For
additional information on the PFIC issue, please turn to "Item 10-E. Taxation
- - United States Federal Income Tax Consequences - Passive Foreign Investment
Company."
12
USE OF PROCEEDS
We will not receive any proceeds when the selling shareholders sell their
common shares. The U.S. $3,251,190 in proceeds that we may receive upon the
exercise of the warrants will be used for general working capital purposes. We
will pay all costs of this prospectus.
DIVIDEND POLICY
We have not paid any cash dividends on our common shares to date and do not
anticipate paying cash dividends in the foreseeable future.
FORWARD-LOOKING INFORMATION
This prospectus, including the information incorporated by reference,
contains forward-looking statements made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Our actual results
could differ materially from those projected in the forward-looking statements
as a result of the risk factors set forth beginning on page 5.
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 respects with U.S. GAAP except
as described in Note 17 to our 2001 consolidated financial statements. The
differences between line items under Canadian GAAP and those as determined 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, greater by $1,549,000
for the year ended October 31, 2000 and less by $179,000, $4,131,000 and
$5,001,000 for the years ended October 31, 1999, October 31, 1998 and October
31, 1997, respectively. Under U.S. GAAP, total assets would be less by
$4,913,000 for the year ended October 31, 1997, primarily due to the difference
in accounting treatment of the $10 million of technology purchased in 1996.
Under U.S. GAAP share capital would be greater and deficit would be less by
$41,249,000 for each of the years due to a reduction in stated capital offset
against accumulated shareholders' deficit in March of 1999.
CRITICAL ACCOUNTING POLICIES
The nature of our business is not highly complex, as we operate in one
primary business. We develop, market and sell wireless security software
solutions. We also perform professional services to install, support and
integrate our solutions with other applications. We operate globally in a
functional organization. We do not have any off-balance sheet financing, other
than operating leases entered into in the normal course of business, and we do
not actively engage in derivative or hedging transactions. In 2001, our most
complex accounting judgments were made in the areas of software revenue
recognition. Software revenue recognition is expected to continue to be an
on-going element of our accounting processes and judgments.
SOFTWARE REVENUE RECOGNITION
We derive our revenue primarily from two sources: sales of products,
including hardware and software licenses, and services, including maintenance,
support and professional services. Significant management judgments and
estimates must be made and used in connection with the revenue recognized in any
reporting period. Material differences may affect the amount and timing of our
revenue for any period if our management made different judgments.
With respect to software revenue recognition, we recognize revenues in
accordance with the provisions of the American Institute of Certified Public
Accountants' Statement of Position No. 97-2, "Software Revenue Recognition" and
SOP No. 98-9, "Modifications of SOP No. 97-2, Software Revenue Recognition, with
Respect to Certain Transactions".
13
For all sales, we use a binding contract, purchase order or another form of
documented agreement as evidence of an arrangement with the customer. Revenues
from software license agreements are recognized upon receipt of an executed
license agreement and shipment of the software, if there are no significant
remaining vendor obligations, collection of the receivable is probable and
payment is due in accordance with our normal payment terms.
We consider delivery to occur when we ship the product, so long as title
and risk of loss have passed to the customer.
At the time of a transaction, we assess whether the sale amount is fixed or
determinable and whether collection is probable. If we determine the fee is not
fixed or determinable, we recognize revenue when payment becomes due. We assess
collectibility based on a number of factors, including the creditworthiness of
the customer. If we determine that collectibility is not probable, we do not
record revenue until such time when collectibility becomes probable, which is
generally upon the receipt of cash.
When arrangements contain multiple elements and vendor specific objective
evidence ("VSOE") of fair value exists for all undelivered elements, we
recognize revenue for the delivered elements using the residual method. Our
determination of fair value of each of the undelivered elements in multi-element
arrangements is based on VSOE of fair value. VSOE of fair value for each element
is either the price charged when the same element is sold separately or the
price established by management, having the relevant authority to do so, for an
element not yet sold separately. For arrangements containing multiple elements
wherein VSOE of fair value does not exist for all undelivered elements, revenue
for the delivered and undelivered elements is deferred until VSOE of fair value
exists or all elements have been delivered.
Maintenance service revenue, whether sold separately or as part of a
multiple element arrangement, is deferred and recognized ratably over the term
of the maintenance contract, generally twelve months. Revenue allocated to
professional service elements is recognized as the services are performed.
Due to the complexity of some software license agreements, we routinely
apply judgment to the application of software revenue recognition accounting
principles to specific agreements and transactions. Different judgments and/or
different contract structures could have led to different accounting
conclusions, which could have had a material effect on our reported quarterly
earnings.
RECENT ACCOUNTING DEVELOPMENTS
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 tangible 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 tangible 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 when adopted.
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.
LIQUIDITY AND CAPITAL RESOURCES
14
QUARTER ENDED JANUARY 31, 2002 COMPARED TO QUARTER ENDED JANUARY 31, 2001
Cash used in operating activities was $2,357,000 in the quarter ended
January 31, 2002, a decline of 52% from the amount used in the same period of
the prior year. Cash used during the quarter was comprised of the net loss of
$1,725,000, plus a decrease in accounts payable and accrued liabilities of
$1,151,000, offset by a decrease in receivables of $213,000, a decrease in
prepaid expenses of $177,000, an increase in deferred revenue of $7,000 less
depreciation and amortization of $122,000. Cash used in operating activities was
$4,943,000 in the quarter ended January 31, 2001, attributable to the net loss
of $5,437,000, plus a decrease in accounts payable and accrued liabilities of
$352,000 and an increase in prepaid expenses of $562,000, offset by a decrease
in receivables of $692,000, an increase in deferred revenue of $92,000, less
depreciation and amortization of $623,000.
There were no financing activities in the quarter ended January 31, 2002.
Cash provided by financing activities in the quarter ended January 31, 2001, was
$33,000 as a result of proceeds received from issuing common shares under an
employee stock option exercise.
Cash provided by investing activities in the quarter ended January 31, 2002
consisted of $9,000 spent on capital asset additions and the sale of a
$3,088,0000 short-term investment. Cash used in investing activities in the
quarter ended January 31, 2001 was $476,000 attributable to capital assets
additions.
We believe that our cash and cash equivalents as at January 31, 2002 of
$3,783,000 will not be sufficient to meet our short-term working capital
requirements for the remainder of the fiscal year. On April 4, 2002 we completed
a private placement selling 5,186,708 units for gross proceeds of
U.S.$3,112,022. We expect these funds, when taken together with existing working
capital, to be sufficient to meet our needs. However, we may still require
additional amounts to meet our working capital requirements which will be raised
through private or public financings, strategic relationships or other
arrangements. 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.
...
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 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, less net
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 that
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.
15
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 of a
$3,088,000 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. We
expect to contribute this amount within six months of our 2001 year-end.
RESULTS OF OPERATIONS
QUARTER ENDED JANUARY 31, 2002 COMPARED TO QUARTER ENDED JANUARY 31, 2001
We reported an improved net loss of $1,725,000 for the quarter ended
January 31, 2002 compared to a net loss of $5,437,000 in the prior year's first
quarter. The decreased net loss in the first quarter of 2002 is attributable to
cost reduction measures. 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.
For the quarter ended January 31, 2002, we reported revenue of $174,000
compared to revenue of $571,000 for the quarter ended January 31, 2001. We are
operating in an evolving and unpredictable market and accordingly have and may
continue to experience wide fluctuations in our revenues.
Research and development expenses decreased to $648,000 in the three months
ended January 31, 2002 from $2,198,000 in three months ended January 31, 2001
resulting primarily from wages, occupancy, and travel costs due to head count
reductions completed in the last quarter of fiscal 2001.
Sales and marketing expenses were $432,000 in the first quarter of fiscal
2002 compared to $2,354,000 in the first quarter of fiscal 2001. The Company
continues to focus its efforts in the Asian and European markets. The launch of
the Hong Kong Post's Mobile e-Cert in fiscal 2001 and the appointment of
Hutchinson as the first Registration Authority have generated interest in our
products in the Asian region. We expect that activity in this region will
continue to increase during the remainder of fiscal 2002.
General and administrative expenses were $736,000 for the first quarter of
2002 compared to $1,172,000 incurred during the first quarter of 2001. This
decline in expenses during fiscal 2002 was the result of continuing operating
cost controls.
16
Depreciation and amortization expense in the first quarter of fiscal 2002
decreased to $122,000 from $623,000 in the first quarter of fiscal 2002. The
Company's deferred development and purchased technology costs are now fully
amortized and the reduction in additions to capital assets has resulted in
reduced amortization for the quarter.
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 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.
During fiscal 2001, 40% of our revenue came from one customer whereas in
fiscal 2000, 24% of our revenue came from a different 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 the remaining $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 Hong Kong 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,
included in the Annual Report on form 20-F, which was filed on April 1, 2002 and
is incorporated herein by reference. We own 50% of this joint venture and our
financial statements reflect our proportionate 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.
17
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.
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 facilitating 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.
18
PRINCIPAL SHAREHOLDERS
Diversinet is a publicly owned Canadian corporation. Another corporation
or any government does not control us directly or indirectly.
As of April 5, 2002, we had 31,600,584 common shares outstanding.
The following table shows the ownership of our common shares as of April 5, 2002
of:
- each person known to us to be the beneficial owner of more than 5% of
our outstanding common shares;
- each of our directors and officers; and
- all of our directors and officers as a group.
The second column indicates the number of common shares actually owned, and
the third column indicates the number of common shares that each person has the
right to acquire within sixty days from the date hereof upon the exercise of
outstanding options, warrants or convertible securities. The fourth column
reflects a description of the shares underlying those options, warrants and
convertible securities and the vesting and exercise prices thereof. The fifth
column reflects the sum of the second and third columns, expressed as a
percentage of the issued and outstanding common shares of Diversinet.
Unless otherwise indicated, the business address for each of these
individuals is c/o Diversinet Corp., 2225 Sheppard Avenue East, Suite 1700,
Toronto, Ontario, Canada M2J 5C2.
NUMBER OF NUMBER OF PERCENTAGE OF
SHARES OPTIONS OUTSTANDING
NAME AND ADDRESS OWNED OWNED OPTIONS REPRESENT SHARES
- ---------------------- --------- --------- --------------------------------------------- --------------
Nagy Moustafa 627,250 983,333 The vested and immediately exercisable 5.00
portion of options to purchase 1,300,000
common shares at purchase prices ranging
from U.S. $1.06 to U.S. $16.25 per share.
The balance of these options vest at the
rate of 8.3% per quarter beginning
December 1, 1999 as to 83,333 options
and beginning January 11, 2001 as to the
remaining 233,333 options.
Hussam Mahgoub 63,334 99,167 The vested and the immediately *
exercisable portion of options to purchase
130,000 common shares at purchase
prices ranging between U.S. $2.22 and
U.S. $6.47 per share. The balance of
these options vest at the rate of 8.3% per
quarter, beginning April 17, 2000 as to
13,333 options and beginning January 11,
2001 as to the remaining 17,500 options.
19
NUMBER OF NUMBER OF PERCENTAGE OF
SHARES OPTIONS OUTSTANDING
NAME AND ADDRESS OWNED OWNED OPTIONS REPRESENT SHARES
- ---------------------- --------- --------- --------------------------------------------- --------------
Nick Darwish 97,334 87,604 The vested and immediately exercisable *
portion of options to purchase an
aggregate of 163,750 common shares at
purchase prices ranging between U.S.
1.53 and U.S. $11.94 per share. The
balance of these options vest at the rate of
8.3% per quarter beginning December 20,
1999 as to the 17,500 of the options,
beginning April 17, 2000 as to the 5,833
options, beginning January 11, 2001 as to
the 15,312 options and beginning July 24,
2001 as to the remaining 37,500 options.
David Hackett -0- -0- The vested and immediately exercisable *
portion of an option to purchase 150,000
common shares at a purchase prices of
U.S. $0.55. These options vest at the rate
of 8.3% per quarter beginning March 27,
2002.
Frank Clegg -0- 110,000 The vested and immediately exercisable *
portion of an option to purchase 140,000
common shares at a purchase prices
ranging between of U.S. $1.53 and U.S
1.94 per share. The balance of these
options vest at the rate of 8.3% per quarter
and beginning July 24, 2001 as to the
remaining 10,000 options.
David F. Masotti -0- 60,417 The vested and immediately exercisable *
portion of options to purchase an
aggregate of 90,471 common shares at
purchase prices ranging between U.S.
1.13 and CDN $4.50 per share. The
balance of these options vests at the rate
of 8.3% per quarter beginning July 24,
2001.
Mark C. Steinman -0- 85,000 The vested and immediately exercisable *
portion of an option to purchase 115,000
common shares at a purchase prices
ranging between of U.S. $1.53 and U.S.
2.06 per share. The balance of these
options vests at the rate of 8.3% per
quarter beginning July 24, 2001.
20
NUMBER OF NUMBER OF PERCENTAGE OF
SHARES OPTIONS OUTSTANDING
NAME AND ADDRESS OWNED OWNED OPTIONS REPRESENT SHARES
- ---------------------- --------- --------- --------------------------------------------- --------------
William Linton -0- 76,667 The vested and immediately exercisable
portion of an option to purchase 140,000
common shares at a purchase prices
ranging between U.S. $1.53 and U.S.
8.59 per share. The balance of this
option vest at the rate of 8.3% per quarter
beginning May 15, 2000 as to 33,333
options and beginning July 24, 2001 as to
the remaining 30,000 options.
Knockagh 1,113,682 300,667 The vested and immediately exercisable 4.4%
International Ltd. (1) warrants portion of warrants to purchase an
aggregate of 413,500 common shares at a
purchase price ranging between U.S.
13.125 and U.S. $8.594. The balance of
the warrants vest at the rate of 8.3% per
quarter beginning November 26, 1999 as
to 25,000 of the warrants and beginning
May 15, 2000 as to the remaining 87,833
warrants.
All Officers and 753,918 1,545,522 6.94%
Directors as a group
(10 persons)
- ---------------
* Less than 1%
(1) We believe that Moti Barkan is an affiliate of Knockagh International Ltd.
Does not include options to purchase common shares held by Mr. Barkan.
SELLING SECURITYHOLDERS
The Registration Statement filed with the Securities and Exchange
Commission of which this prospectus forms a part covers the registration of the
following securities:
- 5,420,708 common shares;
- 4,515,541 common shares issuable upon the exercise of the warrants.
The following table lists the common shares that may be offered pursuant to
this prospectus:
NO. OF SHARES NO. OF SHARES
OWNED BEFORE NO. OF SHARES OWNED AFTER
SELLING SHAREHOLDER OFFERING BEING OFFERED OFFERING
- ------------------------------------------------------- ------------- ------------- -------------
Jamal Abdalla (1) 18,800 16,700 2,100
- ------------------------------------------------------- ------------- ------------- -------------
Alfred W. Arsenault & Mary D. Arsenault (1) 33,534 33,334 200
- ------------------------------------------------------- ------------- ------------- -------------
Michael & Shelia Alessandro 166,667 166,667 -0-
- ------------------------------------------------------- ------------- ------------- -------------
Chau, Yiu Cheung (1) 33,334 33,334 -0-
- ------------------------------------------------------- ------------- ------------- -------------
Compound Capital Growth, Ltd. 268,271 268,271 -0-
- ------------------------------------------------------- ------------- ------------- -------------
Compound Capital Growth Partners II, LP 126,956 126,956 -0-
- ------------------------------------------------------- ------------- ------------- -------------
Compound Capital Growth Partners III, LP 56,051 56,051 -0-
- ------------------------------------------------------- ------------- ------------- -------------
- --------------------------------
1 Employee or relative of an employee of the company
21
Compound Capital Growth Partners, LP 42,816 42,816 -0-
- ------------------------------------------------------- ------------- ------------- -------------
The Caddis Master Fund, Ltd. 5,906 5,906 -0-
- ------------------------------------------------------- ------------- ------------- -------------
Nizar Darwish 97,334 63,334 34,000
- ------------------------------------------------------- ------------- ------------- -------------
Scott DeSano 1,093,334 333,334 760,000
- ------------------------------------------------------- ------------- ------------- -------------
Woodrow Partners, Ltd. 416,667 416,667 -0-
- ------------------------------------------------------- ------------- ------------- -------------
Woodrow Partners, L.P. 166,667 166,667 -0-
- ------------------------------------------------------- ------------- ------------- -------------
Wajde Darwish (1) 100,000 55,000 45,000
- ------------------------------------------------------- ------------- ------------- -------------
Dalaware Charter Guarantee & Trust Company
TTEE F\B\O J James Finnerty IRA 482,434 333,334 149,100
- ------------------------------------------------------- ------------- ------------- -------------
Aegon Gabelli Global Growth Fund 97,000 97,000 -0-
- ------------------------------------------------------- ------------- ------------- -------------
The Gabelli Global Growth Fund 205,000 205,000 -0-
- ------------------------------------------------------- ------------- ------------- -------------
I.F.T.C.O. 67,500 67,500 -0-
- ------------------------------------------------------- ------------- ------------- -------------
Strategic Nova U.S. Mid-Cap Value Fund 66,000 66,000 -0-
- ------------------------------------------------------- ------------- ------------- -------------
Strategic Nova World Equity Fund 64,500 64,500 -0-
- ------------------------------------------------------- ------------- ------------- -------------
Cheryl Hackett (1) 33,334 33,334 -0-
- ------------------------------------------------------- ------------- ------------- -------------
Lakefront Partners, LLC 250,000 250,000 -0-
- ------------------------------------------------------- ------------- ------------- -------------
J. Graeme MacLetchie III 482,100 250,000 232,100
- ------------------------------------------------------- ------------- ------------- -------------
Hussam Mahgoub (2) 63,334 63,334 -0-
- ------------------------------------------------------- ------------- ------------- -------------
David S. Moore 666,667 666,667 -0-
- ------------------------------------------------------- ------------- ------------- -------------
Nagy Moustafa (2) 627,250 105,000 522,250
- ------------------------------------------------------- ------------- ------------- -------------
Mark E. Murphy 1,168,334 333,334 835,000
- ------------------------------------------------------- ------------- ------------- -------------
Paul Murphy 41,667 41,667 -0-
- ------------------------------------------------------- ------------- ------------- -------------
Scott Sipprelle IRA R/O 416,667 416,667 -0-
- ------------------------------------------------------- ------------- ------------- -------------
Robert Trobec 41,667 41,667 -0-
- ------------------------------------------------------- ------------- ------------- -------------
Humberco In Trust for Lee Torell (1) 40,509 33,334 7,175
- ------------------------------------------------------- ------------- ------------- -------------
Valor Capital Management, LP 333,333 333,333 -0-
- ------------------------------------------------------- ------------- ------------- -------------
Allen & Company Incorporated 234,000 234,000 -0-
- ------------------------------------------------------- ------------- ------------- -------------
TOTAL 5,420,708
- ------------------------------------------------------- ------------- ------------- -------------
The following table lists the common shares to be received upon exercise of
the warrants that may be offered pursuant to this prospectus:
NO. OF SHARES NO. OF WARRANTS
OWNED BEFORE NO. OF SHARES BEING OWNED AFTER
SELLING SHAREHOLDER OFFERING OFFERED OFFERING
- ------------------------------------------ ------------- ------------------- ---------------
Jamal Abdalla (1) 12,525 12,525 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Alfred W. Arsenault & Mary D. Arsenault (1) 25,001 25,001 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Michael & Sheila Alessandro 125,001 125,001 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Chau, Yiu Cheung (1) 25,001 25,001 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Compound Capital Growth, Ltd. 201,204 201,204 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Compound Capital Growth Partners II, LP 95,217 95,217 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Compound Capital Growth Partners III, LP 42,038 42,038 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Compound Capital Growth Partners, LP 32,112 32,112 -0-
- ------------------------------------------ ------------- ------------------- ---------------
The Caddis Master Fund, Ltd. 4,430 4,430 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Nizar Darwish (2) 47,501 47,501 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Scott DeSano 250,001 250,001 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Woodrow Partners, Ltd. 312,501 312,501 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Woodrow Partners, L.P. 125,001 125,001 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Wajde Darwish (1) 41,250 41,250 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Dalaware Charter Guarantee & Trust Company
TTEE F\B\O J James Finnerty IRA 250,001 250,001 -0-
- ------------------------------------------ ------------- ------------------- ---------------
- --------------------------------
2 Officer of the company
22
J James Finnerty 350,000 350,000
- ------------------------------------------ ------------- ------------------- ---------------
Aegon Gabelli Global Growth Fund 72,750 72,750 -0-
- ------------------------------------------ ------------- ------------------- ---------------
The Gabelli Global Growth Fund 153,750 153,750 -0-
- ------------------------------------------ ------------- ------------------- ---------------
I.F.T.C.O. 50,625 50,625 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Strategic Nova U.S. Mid-Cap Value Fund 49,500 49,500 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Strategic Nova World Equity Fund 48,375 48,375 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Cheryl Hackett (1) 25,001 25,001 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Lakefront Partners, LLC 187,500 187,500 -0-
- ------------------------------------------ ------------- ------------------- ---------------
J. Graeme MacLetchie III 187,500 187,500 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Hussam Mahgoub (2) 47,501 47,501 -0-
- ------------------------------------------ ------------- ------------------- ---------------
David S. Moore 500,001 500,001 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Nagy Moustafa (2) 78,750 78,750 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Mark E. Murphy 250,001 250,001 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Paul Murphy 31,251 31,251 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Scott Sipprelle IRA R/O 312,500 312,500 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Robert Trobec 31,251 31,251 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Humberco In Trust for Lee Torell 25,001 25,001 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Valor Capital Management, LP 250,000 250,000 -0-
- ------------------------------------------ ------------- ------------------- ---------------
Allen & Company Incorporated 275,500 275,500 -0-
- ------------------------------------------ ------------- ------------------- ---------------
TOTAL 4,515,541
- ------------------------------------------ ------------- ------------------- ---------------
We will pay all of the costs of qualifying these securities under federal
and state securities laws, including legal and accounting fees, as well as
printing and other related costs.
We will not receive any proceeds from the sale of the securities by the
selling shareholders.
PLAN OF DISTRIBUTION
The selling shareholders may offer their common shares and common shares
received upon exercise of their warrants at various times in one or more of the
following transactions:
- in the over-the-counter market on the Nasdaq SmallCap Market(SM) or
other exchange or automated quotation systems on which our common
shares are listed; or
- in private transactions.
The selling shareholders may sell their shares at market prices prevailing
at the time of sale, or at prices related to that price, at negotiated prices or
at fixed prices. The offering of common shares by the selling shareholders is
not being underwritten.
The selling shareholders may use broker-dealers to sell their securities.
If this happens, these brokers-dealers will receive commissions or discounts
from the selling shareholders, or they will receive commissions from purchasers
of common shares or warrants for whom they acted as agents. We will not pay any
broker-dealer commissions in connection with this offering.
DESCRIPTION OF PRIVATE PLACEMENTS
2002 PRIVATE PLACEMENTS
ISSUANCE OF 5,186,708 UNITS FOR U.S. $3,112,022
On April 4, 2002, we completed a private placement of 5,186,708 units at a
price of U.S. $0.60 per unit for gross proceeds of U.S. $3,112,022. Each unit
is comprised of one (1) common share and three-quarters (3/4) of one common
share purchase warrant. Each warrant will entitle the holder thereof to acquire
one (1) common share at a price of U.S. $0.72 per common share for a period of
up to three years from April 4, 2002. This transaction was effected as a
23
private placement in accordance with Rule 506 of Regulation D promulgated under
the Securities Act. We will use the net proceeds of that private placement for
working capital purposes, to continue our research and development activities
and for general corporate purposes.
Allen & Company Incorporated ("Allen"), as Placement Agent, had the option
to receive its U.S. $140,400 fee from the Private Placement entirely in units.
On April 8, 2002, Allen notified us of their decision to receive 234,000 units
and we issued 234,000 common shares and 175,500 common share purchase warrants.
2000 PRIVATE PLACEMENT
ISSUANCE OF 2,450,001 COMMON SHARES FOR U.S. $17,150,007
On July 25, 2000, we completed a private placement of 2,150,001 common
shares for a price of U.S. $7.00 per share for a total purchase price of U.S.
$15,050,007. This transaction was effected as a private placement in accordance
with Rule 506 of Regulation D promulgated under the Securities Act. We used the
net proceeds of that private placement, U.S. $15,050,007, expanded our sales and
marketing activities, continued our research and development activities and for
general corporate purposes.
Pursuant to a settlement agreement with Moti Barkan, in early August 2000,
Knockagh International Ltd. and others, Knockagh purchased 300,000 common shares
at U.S. $7.00 per share for an aggregate purchase price of U.S. $2,100,000.
1999 PRIVATE PLACEMENT
On April 23, 1999, we completed a private placement in Canada and elsewhere
outside the U.S. of 2,134,000 special warrants in a transaction exempt from
registration under the Securities Act pursuant to Regulation S promulgated
thereunder. We received gross proceeds of CDN $7,362,200 in this private
placement. In connection with this private placement, we entered into a special
warrant indenture with Montreal Trust Company of Canada, as trustee. Each
special warrant was offered for CDN $3.45 and is exercisable for one unit, for
no additional consideration, at any time until October 23, 2000. Each unit
consists of one of our common shares and one quarter of a common share purchase
warrant. Each whole common share purchase warrant entitles the holder to
purchase one common share for CDN $3.87 until October 23, 2000.
We used the net proceeds of the private placement as follows:
- approximately CDN $2.0 million for product development, principally
remuneration expenses for existing and additional staff;
- approximately CDN $3.0 million for marketing, sales and business
development expenses, principally remuneration expenses for additional
and existing staff, travel, marketing material design and production,
industry trade show attendance and public relations and investor
relations; and
- approximately CDN $1.5 million for general working capital purposes,
principally remuneration expenses for executive and administrative
staff, professional services fees and facilities and insurance
expenses.
In order to receive the consent of the 1998 convertible debenture purchaser
to issue common shares upon exercise of the units issued in connection with this
private placement, we issued 400,000 warrants to the 1998 convertible debenture
purchaser. Such warrants were exercisable for two years at an exercise price
equal to U.S. $4.50, which was 115% of the average closing bid price on the
Nasdaq for the five trading days prior to April 23, 1999. In July 2000, the
warrants were amended to permit a cashless exercise. The formula used to
determine the number of shares to be issued upon exercise of the warrants was:
X (FMV - U.S. $1.18)
--------------------
FMV
Where,
24
X = the number of common shares which was exercisable.
FMV = the closing price of the common shares on the Nasdaq SmallCap
Market(SM) for the fifteen trading days immediately prior to the exercise of the
warrants.
On July 20, 2000, the warrant holder exercised the warrants in full and
received 213,333 common shares.
A nominee of the 1998 convertible debenture purchaser who is a non-U.S.
person purchased 114,000 of the special warrants offered in the private
placement on the terms set forth in the first paragraph of this section.
In connection with this private placement, Yorkton Securities Inc., the
underwriter of the private placement, received an 8% cash commission of CDN
$588,984 and reimbursement of its out-of-pocket expenses, including legal fees
of CDN $90,000. The underwriter also received warrants entitling the
underwriter to acquire options to purchase 213,400 units, each unit consisting
of one common share and one-quarter of one common share purchase warrant, at CDN
$3.45 per unit until April 23, 2001. Each whole common share purchase warrant
entitles the holder to purchase one common share for CDN $3.87 until October 23,
2000. If the underwriter does not exercise such options before October 23,
2000, the options will thereafter be exercisable for one common share each. In
lieu of paying the cash exercise price of the options, the underwriter may elect
to receive a number of warrants equal to one quarter of the options being
exercised and that number of common shares equal to the quotient of:
X(FMV - CDN $3.45)
------------------
FMV
where X= the number of options to be exercised and FMV = the closing price of
our common shares on the Nasdaq on the trading day immediately prior to such
election by the underwriter. For example, if the underwriter elected to receive
warrants and common shares in lieu of paying the cash exercise price of the
warrants on July 26, 2000, the underwriter would have received one quarter of
the 213,400 options, or 53,350 warrants, plus the quotient of (a) (1) 213,400,
which is the number of options being exercised, multiplied by (2) U.S. $8.938,
the closing price of the common shares on July 26, 2000, minus CDN $3.45,
divided by (b) U.S. $8.938, or 157,365 common shares.
The underwriter of this private placement had the right to purchase up to
20% of our next offering and Knockagh International Ltd. had the right to
purchase up to 20% of our next two offerings.
The market value of our common shares on April 23, 1999, the closing date
of this private placement, was U.S. $4.56 per share.
One of our past directors, Mr. John A. McMahon, is also a consultant for
Yorkton Securities Inc. We believe that the compensation payable to the
underwriter in connection with this private placement is at least as favorable
as could have been obtained from an unaffiliated party.
OCTOBER 1998 PRIVATE PLACEMENT
ISSUANCE OF CONVERTIBLE DEBENTURE AND WARRANTS FOR U.S. $2,000,000
In accordance with a securities purchase agreement dated October 15, 1998,
we sold to WEC Investors V, LLC:
a convertible debenture in the principal amount of U.S. $2,000,000; and
warrants to purchase 300,000 common shares at an exercise price of U.S.
$1.18 per share
for a total purchase price of U.S. $2,000,000. This transaction qualified as a
private placement in accordance with Rule 506 of Regulation D promulgated under
the Securities Act. We applied the net proceeds of that private placement
towards product development, sales and marketing support and general working
capital purposes.
25
TERMS OF THE CONVERTIBLE DEBENTURE
The convertible debenture was unsecured, matured on October 14, 2001, if
not earlier converted, and paid interest at the rate of 3% per year. The
interest was payable, at our option, in either cash or in common shares.
CONVERSION
At the holder's option, all or any portion of the unpaid principal balance
of the convertible debenture was convertible into fully paid, non-assessable
common shares at a per share conversion price equal to the lesser of:
- U.S. $1.18; and
- 80% of the average closing bid price on Nasdaq, as reported by
Bloomberg,
L.P. or The Wall Street Journal, of our common shares for the five
trading days before the delivery of the notice of conversion.
As of December 8, 1999, the debenture purchaser had converted the entire
principal amount of the debenture and accrued interest into 1,748,475 of our
common shares, at a conversion price of U.S. $1.18 per share.
We have no current plans to issue any additional convertible securities
that do not have a minimum per share conversion price.
WARRANTS
The warrants:
- expired on October 15, 2003; and
- entitled the holder to purchase up to 300,000 common shares at an
exercise
price of U.S. $1.18 per share, subject to proportionate adjustment
if we either:
- pay a dividend on our common shares in common shares; or
- subdivide or combine our common shares.
In July 2000 the warrants were amended to permit a cashless exercise. The
formula used to determine the number of shares to be issued upon exercise of the
warrants was:
X (FMV - U.S. $1.18)
------------------------
FMV
Where,
X = the number of common shares which was exercisable.
FMV = the closing price of the common shares on the Nasdaq SmallCap
Market(SM) for the fifteen trading days immediately prior to the exercise of the
warrants.
On July 20, 2000, the warrantholder exercised the warrants in full and
received 265,040 common shares.
OTHER AGREEMENTS
We entered into a registration rights agreement dated October 15, 1998 with
the debenture purchaser granting it certain registration rights with respect to:
- the common shares underlying the convertible debenture;
- the warrants; and
- the common shares underlying the warrants.
The registration rights agreement requires us to register a number of
shares equal to 200% of the sum of:
26
- the number of common shares issuable as of the date of this prospectus
upon conversion of the convertible debenture; and
- the number of common shares issuable upon the exercise of the
warrants.
At the date of this prospectus, the debenture has been fully converted and
we have been advised that the debenture purchaser has sold all of the shares
issued on the conversion. In addition, all common shares issuable upon the
exercise of the warrants have been issued. As a result of the conversion of the
debenture and the exercise of the warrants, we believe the debenture purchaser
has no further rights under the registration rights agreement.
In the securities purchase agreement, the debenture purchaser has also:
- represented that neither it nor any of its officers, directors or
affiliates had entered into any short sales with respect to our common
shares as of the date thereof; and
- agreed that neither it nor any of its officers, directors or
affiliates will enter into any short selling transactions regarding
our common shares, except that the debenture purchaser may sell common
shares which it may receive upon conversion of the convertible
debenture up to five days prior to giving us notice of its intent to
convert the debenture.
The terms of our October 1998 private placement prohibit us, with certain
exceptions, from issuing any securities, including issuing common shares to our
employees, without the debenture purchaser's prior consent until six months
after the date of the prospectus covering the sale of the debenture purchaser's
common shares. As a result of the conversion of the debenture and the exercise
of the warrants, we believe the debenture purchaser has no further rights under
the securities purchase agreement.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of material United States Federal income tax
consequences generally applicable to a U.S. Holder (as defined below) of our
common shares. This discussion does not address all potentially relevant
Federal income tax matters and it does not address consequences peculiar to
persons subject to special provisions of Federal income tax law, such as, for
example, tax-exempt organizations, qualified retirement plans, persons subject
to alternative minimum tax, financial institutions, insurance companies, real
estate investment trusts, regulated investment companies, broker-dealers,
non-resident alien individuals or foreign corporations whose ownership of our
common shares is not effectively connected with the conduct of a trade or
business in the United States and shareholders who acquired their shares through
the exercise of employee share options or otherwise as compensation. In
addition, this discussion only applies to common shares held by U.S. Holders as
capital assets within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended, and does not cover any state, local or foreign tax
consequences.
The following discussion is based upon the sections of the Internal Revenue
Code, Treasury Regulations, published Internal Revenue Service rulings,
published administrative positions of the Internal Revenue Service and court
decisions that are currently applicable, any or all of which could be materially
and adversely changed, possibly on a retroactive basis, at any time. The
following discussion is for general information only and is not intended to be,
nor should it be construed to be, legal or tax advice to any holder or
prospective holder of our common shares and no opinion or representation with
respect to the United States Federal income tax consequences to any such holder
or prospective holder is made. Accordingly, holders and prospective holders of
our common shares should consult their own tax advisors about the federal,
state, local, and foreign tax consequences of purchasing, owning and disposing
of our common shares.
U.S. HOLDERS
As used herein, a "U.S. Holder" includes any person, with the exception of
those subject to special provisions of Federal income tax law, who holds our
common shares who is a citizen or resident of the United States, a partnership
or corporation organized under the laws of the United States, an estate, the
income of which is subject to United States federal income tax without regard to
its source and a trust if a United States court is able to exercise primary
supervision over administration of the trust and one or more United States
27
persons have authority to control all substantial decisions of the trust or if
the trust was in existence on August 20, 1996 and has elected to continue to be
treated as a United States person, and any other person or entity whose
ownership of our common shares is effectively connected with the conduct of a
trade or business in the United States.
DISTRIBUTIONS ON OUR COMMON SHARES
U.S. Holders receiving dividend distributions (including constructive
dividends) with respect to our common shares are required to include in gross
income for United States Federal income tax purposes the gross amount of such
distributions to the extent that we have current or accumulated earnings and
profits, without reduction for any Canadian income tax withheld from such
distributions. Such Canadian tax withheld may be credited, subject to certain
limitations, against the U.S. Holder's United States Federal Income tax
liability or, alternatively, may be deducted in computing the U.S. Holder's
United States Federal taxable income by those who itemize deductions (see more
detailed discussion at "Foreign Tax Credit" below). To the extent that
distributions exceed our current or accumulated earnings and profits, they will
be treated first as a return of capital up to the U.S. Holder's adjusted basis
in the common shares and thereafter as gain from the sale or exchange of the
common shares. Preferential tax rates for long-term capital gains are
applicable to an U.S. Holder, which is an individual, estate or trust. There
are currently no preferential tax rates for long-term capital gains for an U.S.
Holder, which is a corporation. Dividends paid in Canadian dollars will be
included in income in an U.S. dollar amount based on the exchange rate at the
time of their receipt. U.S. Holders should consult their own tax advisors
regarding the treatment of any foreign currency gain or loss on any Canadian
dollars received as a dividend which are converted into U.S. dollars on a date
subsequent to receipt.
Dividends paid on our common shares will not generally be eligible for the
dividends received deduction provided to corporations receiving dividends from
certain United States corporations. A U.S. Holder which is a corporation may,
under certain circumstances, be entitled to a 70% deduction of the United States
source portion of dividends received from us (unless we qualify as a "foreign
personal holding company" or a "passive foreign investment company", as defined
below) if such U.S. Holder owns shares representing at least 10% of the voting
power and value of Diversinet. The availability of this deduction is subject to
several complex limitations, which are beyond the scope of this discussion.
FOREIGN TAX CREDIT
A U.S. Holder who pays (or has withheld from distributions) Canadian income
tax with respect to the ownership of our common shares may be entitled, at the
option of the U.S. Holder, to either a deduction or a tax credit for such
foreign tax paid or withheld. Generally, it will be more advantageous to claim
a credit because a credit reduces United States Federal income taxes on a
dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income
subject to tax. This election is made on an annual basis and applies to all
foreign income taxes (or taxes in lieu of income tax) paid by (or withheld from)
the U.S. Holder during the year. There are significant and complex limitations
which apply to the credit, among which is the general limitation that the credit
cannot exceed the proportionate share of the U.S. Holders United States income
tax liability that the U.S. Holder's foreign source income bears to his/her or
its worldwide taxable income.
In the determination of the application of this limitation, the various
items of income and deduction must be classified into foreign and domestic
sources. Complex rules govern this classification process. There are further
limitations on the foreign tax credit for certain types of income such as
"passive income", "high withholding tax interest", "financial services income",
"shipping income", and certain other classifications of income. In certain
circumstances, recently enacted legislation and other guidance issued by the
United States Treasury may deny a United States holder foreign tax credits (and
instead may allow deductions) for foreign taxes imposed on a dividend if the
United States holder (i) has not held the common shares for at least 16 days in
the 30-day period beginning 15 days before the ex-dividend date, during which it
is not protected from risk of loss; (ii) is obligated to make payments related
to the dividends; or (iii) holds the common shares in arrangements in which the
United States holder's expected economic profit, after non-US taxes, is
insubstantial.
The availability of the foreign tax credit and the application of the
limitations on the credit are fact specific and holders and prospective holders
of our common shares should consult their own tax advisors regarding their
individual circumstances.
28
DISPOSITION OF OUR COMMON SHARES
A U.S. Holder will recognize gain or loss upon the sale of our common
shares equal to the difference, if any, between (i) the amount of cash plus the
fair market value of any property received, and (ii) the shareholder's tax basis
in the our common shares. Any gain recognized on the sale or other disposition
of common shares will generally be U.S. source income. Any loss recognized on
the sale or other disposition of common shares will generally be U.S. source.
However, such loss will be foreign source to the extent certain dividends were
received by the U.S. Holder within the 24-month period proceeding the date on
which the loss was recognized. This gain or loss will be capital gain or loss
if the common shares are capital asset in the hands of the U.S. Holder, which
will be a short-term or long-term capital gain or loss depending upon the
holding period of the U.S. Holder. Gains and losses are netted and combined
according to special rules in arriving at the overall capital gain or loss for a
particular tax year. Deductions for net capital losses are subject to
significant limitations. For U.S. Holders who are individuals, a capital loss
is deductible only to the extent of capital gains, plus ordinary income of up to
U.S. $3,000; any unused portion of such net capital loss may be carried over to
be used in later tax years until such net capital loss is thereby exhausted.
For U.S. Holders which are corporations (other than corporations subject to
Subchapter S of the Internal Revenue Code), any unused net capital loss may be
carried back three years from the loss year and carried forward five years from
the loss year to be offset against capital gains until such net capital loss is
thereby exhausted. If the amount realized on a sale or exchange is not
denominated in U.S. dollars, the amount realized will be equal to the U.S.
dollar value thereof, determined at the spot rate on the date of the sale or
exchange.
OTHER CONSIDERATIONS
In the following three circumstances, the above sections of the discussion
may not describe the United States Federal income tax consequences resulting
from the holding and disposition of our common shares. Based on (a) the number
of shareholders of our common shares, and (b) the majority ownership of our
shares by Canadian residents, we do not believe that we are either a "Foreign
Personal Holding Company" or a "Controlled Foreign Corporation." However, we do
believe that we are likely to be treated as a "Passive Foreign Investment
Company" for the taxable years 1999, 2000 and 2001.
FOREIGN PERSONAL HOLDING COMPANY
If, at any time during a taxable year, more than 50% of the total combined
voting power or the total value of our outstanding shares are owned, actually or
constructively, by five or fewer individuals who are citizens or residents of
the United States and 60% or more of our gross income for such year was derived
from certain passive sources (e.g. from dividends received from unrelated
persons), we would be treated as a "foreign personal holding company." In that
event, U.S. Holders that hold our common shares would be required to include in
gross income for such year their allowable portions of such foreign personal
holding company income to the extent that we do not actually distribute such
income.
CONTROLLED FOREIGN CORPORATION
If more than 50% of the voting power of all classes of shares or the total
value of our shares is owned, directly or indirectly, by U.S. shareholders, each
of whom own 10% or more of our voting shares ("U.S. Shareholders"), we could be
treated as a "controlled foreign corporation" (a "CFC") under SubPart F of the
Internal Revenue Code. If we were classified as a CFC and as a PFIC, CFC
treatment would prevail with respect to U.S. Shareholders. CFC classification
would effect many complex results including the required inclusion by such
United States shareholders in income of their pro rata share: of "SubPart F
Income" (as specially defined by the Internal Revenue Code) of Diversinet; and
of our earnings invested in U.S. property. In addition, under Section 1248 of
the Internal Revenue Code, gain from the sale or exchange of our common shares
by a U.S. person who is or was a United States shareholder (as defined in the
Internal Revenue Code) at any time during the five years period ending with the
sale or exchange is generally treated as ordinary dividend income to the extent
of our earnings and profits attributable to the shares sold or exchanged.
Because of the complexity of SubPart F, and because it is not clear that we are
a controlled foreign corporation, a more detailed review of these rules is
outside of the scope of this discussion.
29
PASSIVE FOREIGN INVESTMENT COMPANY
As stated above, we believe that we will not be treated as a passive
foreign investment company ("PFIC"), as defined in Section 1297 of the Internal
Revenue Code, for our fiscal years 1999, 2000, and 2001.
United States income tax legislation contains rules governing PFIC's, that
can have significant tax effects on U.S. Holders of foreign corporations. These
rules do not apply to non-U.S. Holders. Section 1297 of the Internal Revenue
Code defines a PFIC as a corporation that is not formed in the United States
and, for any taxable year, either (i) 75% or more of its gross income is
"passive income", which includes interest, dividends and some types of rents and
royalties or (ii) the average percentage, by fair market value (or, if the
company is a controlled foreign corporation or makes an election, by adjusted
tax basis), of its assets that produce or are held for the production of
"passive income" is 50% or more. Based on these tests we do not meet the
definition of a PFIC in 1999, 2000 or 2001.
An U.S. Holder who holds shares in a foreign corporation during any year in
which such corporation qualifies as a PFIC is subject to U.S. Federal income
taxation under alternative tax regimes, depending upon whether such U.S. Holder
makes elections. The following is a discussion of these alternative tax regimes
as applicable to our U.S. Holders.
A U.S. Holder of a PFIC who does not make either of the elections described
below (a "Non-electing U.S. Holder") is subject to special taxation rules under
Section 1291 of the Internal Revenue Code with respect to (i) gains realized on
the disposition (or deemed to be realized by reason of a pledge) of his/her
common shares and (ii) excess distributions by us, defined as any distribution
received by a U.S. Holder from a PFIC in a taxable year that is greater than
125% of the average distributions received by the U.S. Holder in the three
preceding taxable years, or, if shorter, the U.S. Holder's holding period for
the shares.
A Non-electing U.S. Holder generally would be required to include in income
pro rata all gains realized on the disposition of his/her common shares and all
excess distributions over the entire holding period for the PFIC common shares.
All gains or excess distributions allocated to prior years of the U.S. Holder
(other than years prior to the first taxable year of the company during such
U.S. Holder's holding period and beginning after January 1, 1987 for which it
was a PFIC) would be taxed at the highest tax rate for each such prior year
applicable to ordinary income. The Non-electing U.S. Holder also would be
liable for interest on the foregoing tax liability for each such prior year
calculated as if such liability had been due with respect to each such prior
year. A Non-electing U.S. Holder that is not a corporation must treat this
interest charge as "personal interest" which, as discussed above, is partially
or wholly non-deductible. The balance of the gain or the excess distribution
will be treated as ordinary income in the year of the disposition or
distribution, and no interest charge will be incurred with respect to such
balance.
If we are a PFIC for any taxable year during which a Non-electing U.S.
Holder holds common shares, then we will continue to be treated as a PFIC with
respect to such common shares, even if we are no longer a PFIC as defined above.
A Non-electing U.S. Holder may terminate this deemed PFIC status by electing to
recognize a gain (which will be taxed under the rules discussed above for
Non-electing U.S. Holders) as if such common shares had been sold on the last
day of the last taxable year for which it was a PFIC.
Under Section 1291(f) of the Internal Revenue Code, the Department of the
Treasury has issued proposed regulations that would treat as taxable transfers
of PFIC shares by Non-electing U.S. Holders that are generally not otherwise
taxed, such as gifts, exchanges pursuant to corporate reorganizations, and
transfers at death. Special, generally adverse, rules will apply with respect to
the common shares while the company is a PFIC. For example under Section
1298(b)(6) of the Internal Revenue Code, a U.S. Holder who uses PFIC shares as
security for a loan (including a margin loan) will, except as may be provided in
regulations, be treated as having made a taxable disposition of such shares.
Alternatively, if we are a PFIC, an U.S. Holder (an "Electing U.S. Holder")
who owns common shares is permitted generally to elect out of the tax treatment
discussed above, if an U.S. Holder makes a mark-to-market election with respect
to common shares. Under such election, an Electing U.S. Holder would generally
recognize as ordinary income for each taxable year an amount equal to the
excess, if any, of the fair market value of common shares as of the close of the
30
taxable year over the Electing U.S. Holder's adjusted tax basis in such shares.
An Electing U.S. Holder would generally be allowed an ordinary deduction (to the
extent of any net mark-to-market gains recognized for prior taxable years) for
the excess, if any, of the adjusted tax basis of the common shares over their
fair market value as of the close of the taxable year. An Electing U.S. Holder's
adjusted tax basis of the common shares would generally be adjusted to reflect
the amounts included or deducted under the mark-to-market election.
Additionally, any gain on the actual sale or other disposition of the common
shares generally will be treated as ordinary income. Ordinary loss treatment
also would generally apply to any loss realized on the actual sale or other
disposition of the common shares to the extent that the amount of such loss did
not exceed the net mark-to-market gains previously included with respect to such
shares. An election to mark to market would generally apply to the taxable year
made and all subsequent taxable years. A mark-to-market election is subject to
complex and specific rules and requirements, and U.S. Holders are strongly urged
to consult their tax advisors concerning such election if the company is
classified as a PFIC.
Finally, an U.S. Holder who elects in a timely manner to treat us as a
"qualified electing fund" (a "QEF") as defined in the Internal Revenue Code
would be subject to another set of special rules different from those described
above. Although a QEF election may be beneficial to some U.S. Holders depending
upon their particular tax situations, it requires us to make information
available to such holders, and we do not intend to make such information
available even if it is classified as a PFIC. Accordingly, the QEF election will
not be available to U.S. Holders.
The foregoing discussion is based on existing provisions of the Internal
Revenue Code, existing and proposed regulations thereunder, and current
administrative ruling and court decisions, all of which are subject to change.
Any such change could affect the validity of this discussion. In addition, the
implementation of aspects of the PFIC rules requires the issuance of regulations
which in many instances have not been promulgated and which may have retroactive
effect. There can be no certainty that any of these proposed regulations will be
enacted or promulgated and if so, the form they will take or the effect that
they may have on this discussion. Accordingly, and due to the complexity of the
PFIC rules, U.S. Holders who are shareholders of Diversinet are strongly urged
to consult their own tax advisors concerning the impact of these rules on their
investment in us.
RECENT DEVELOPMENTS
Not applicable.
LEGAL MATTERS
The legality of the common shares has been passed upon for us by Lang
Michener, Toronto, Ontario, Canada. Certain legal matters in connection with
this offering relating to U.S. federal and New York law will be passed upon for
us by Heller Ehrman White & McAuliffe, LLP, New York, New York.
EXPERTS
The consolidated financial statements of Diversinet Corp. at October 31,
2001 and 2000, and for the years then ended, have been included in this
Prospectus and Registration Statement in reliance on the report of KPMG LLP,
independent auditors, and for the year ended October 31, 1999 in reliance on the
report of Ernst & Young LLP, independent auditors, appearing elsewhere herein,
and upon the authority of said firms as experts in accounting and auditing. The
audit report of KPMG LLP concerning the October 31, 2001 consolidated financial
statements contains an explanatory paragraph that states that conditions and
events exist that cast substantial doubt on our ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of that uncertainty.
WHERE YOU CAN FIND MORE INFORMATION AND INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You can inspect and
copy the registration statement on Form F-3 of which this prospectus is a part,
as well as reports, proxy statements and other information filed by us, at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
31
You can obtain copies of such material from the Public Reference Room of the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You can
call the SEC at 1-800-SEC-0330 for information regarding the operation of its
Public Reference Room. The SEC also maintains an Internet site at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding registrants, like us, that file electronically.
The Securities and Exchange Commission allows us to incorporate by
reference the information we file with them, which means that we can disclose
important information to you by referring you to those documents. The
information we incorporate by reference is considered to be part of this
prospectus, and information that we file later with the Securities and Exchange
Commission will automatically update and supersede this information. The
information that we are incorporating by reference should also be read in light
of the other information in this prospectus because some of that information may
be updated or superseded by the information in this prospectus.
We incorporate by reference any subsequent annual reports filed on Form
20-F and all subsequent filings on Form 6-K that we file pursuant to the
Securities Exchange Act prior to the termination of this offering. We also
incorporate by reference the documents listed below:
(a) Diversinet's Annual Report on Form 20-F dated April 19, 2002;
(b) Diversinet's Report on Form 6-K dated April 9, 2002;
(c) Diversinet's Report on Form 6-K dated April 3 2002;
(d) Diversinet's Report on Form 6-K dated March 28, 2002;
(e) Diversinet's Report on Form 6-K dated February 28, 2002;
(f) Diversinet's Report on Form 6-K dated February 7, 2002; and
(g) The description of Diversinet's securities contained in Diversinet's
Registration Statement under Section 12 of the Exchange Act, of which
this prospectus is a part and any and all amendments and reports filed
for the purpose of updating such description.
You may request a copy of any or all of these documents, other than any
exhibits filed with those documents, at no cost, by writing or telephoning our
principal offices: Diversinet Corp., 2225 Sheppard Avenue East, Suite 1700,
Toronto ON M2J 5C2 Canada, Attn: David Hackett, Chief Financial Officer,
telephone number (416) 756-2324. You may also obtain information about us by
visiting our website at www.dvnet.com. Information contained in our website is
not part of this prospectus.
32
___________
You should rely only on the information contained in this prospectus or
that to which we have referred you. We have not authorized anyone to provide
you with information that is different. This prospectus does not constitute an
offer to sell, or the solicitation of an offer to buy, any of the securities
offered hereby to any person in any jurisdiction in which such offer or
solicitation would be unlawful. Our business may change after the date of this
prospectus. Delivery of this document and any sale of securities made hereunder
does not mean otherwise.
TABLE OF CONTENTS
Page
----
INFORMATION SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
FORWARD-LOOKING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PRINCIPAL SHAREHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SELLING SECURITYHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
DESCRIPTION OF PRIVATE PLACEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . 37
RECENT DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
PLAN OF DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
WHERE YOU CAN FIND MORE INFORMATION AND INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
___________
DIVERSINET CORP.
9,936,249 COMMON SHARES
PROSPECTUS
___________
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses of this offering which will be borne by Diversinet are
estimated, in U.S. dollars, to be as follows:
SEC Registration Fee $598
Transfer Agent's Fees 500
Printing and Engraving 500
Legal Services 50,000
Accounting 10,000
Underwriting commission 140,400
Miscellaneous 5,000
--------
Total $206,998
--------
All of the above expenses except the registration fee are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Business Corporations Act (Ontario) (the "Act"), Diversinet may
indemnify a present or former director or officer or a person who acts or acted
at Diversinet's request as a director or officer of another corporation of which
Diversinet is or was a shareholder or creditor and his heirs and legal
representatives against all costs, charges and expenses, including an amount
paid to settle an action or satisfy a judgment, reasonably incurred by him in
respect of any civil, criminal or administrative action or proceeding to which
he is made a party by reason of being or having been such a director or officer
if the director or officer acted honestly and in good faith with a view to the
best interests of Diversinet and, in the case of a criminal or administrative
action or proceeding that is enforced by a monetary penalty, had reasonable
grounds for believing that his conduct was lawful. Such indemnification may be
made in connection with an action by or on behalf of Diversinet or such other
corporation only with court approval. A director or officer is entitled to
indemnification from Diversinet as a matter of right in respects of all costs,
charges and expenses reasonably incurred by him in connection with the defense
of any civil, criminal or administrative proceeding to which he is a party by
reason of being or having been a director or officer of such corporation if he
was substantially successful on the merits and fulfilled the conditions set
forth above.
The by-laws of Diversinet provide that each director, each officer, each
former director, each former officer and each person who acts or acted at
Diversinet's request as a director or officer of a body corporate of which
Diversinet is or was a shareholder or creditor, and his heirs and legal
representatives shall be indemnified and saved harmless by Diversinet from and
against all costs, charges and expenses, including without limitation, each
amount paid to settle an action or satisfy a judgment, reasonably incurred by
him in respect of any civil, criminal or administrative action or proceeding to
which his is made a party by reason or being or having been a director or
officer of Diversinet or such body corporation, if he acted honestly and in good
faith with a view to Diversinet's best interests and in the case of a criminal
or administrative action or proceeding that is enforced by a monetary penalty he
had reasonable grounds for believing his conduct was lawful. In certain
circumstances Diversinet has provided its Directors or its subsidiaries'
Directors with a written indemnification confirming the indemnification
available under its by-laws.
Diversinet currently maintains directors' and officers' liability
insurance, which, subject to the provisions contained in the policy, protects
the directors and officers, as such, against all claims during the term of their
office provided they acted honestly and in good faith with a view to the best
interests of Diversinet. Such insurance provides for an aggregate of U.S.
$15,000,000 annual protection against liability for and reimbursement of amounts
paid.
II-1
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the registrant
pursuant to the foregoing provisions, the registrant has been informed that, in
the opinion of the U.S. Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Securities Act and is therefore
unenforceable.
II-2
ITEM 16. EXHIBITS
EXHIBIT NO. EXHIBITS
- ----------- --------
1.1 Underwriting Agreement, dated as of April 23, 1999, between Diversinet and Yorkton Securities
Inc. *
1.2 Underwriting Agreement, dated as of June 12, 2000, between Diversinet and Tucker Anthony
Incorporated. *
1.3 Placement Agency Agreement dated March 27, 2002, between Diversinet and Allen & Company
Incorporated. **
4.1 Common Share Purchase Warrants held by WEC Investors V LLC dated October 15, 1998. *
4.2 Registration Rights Agreement between Diversinet and WEC Investors V LLC dated October 15,
1998. *
4.3 Special Warrant Indenture, dated as of April 23, 1999, between Diversinet and Montreal Trust
Company of Canada, as Trustee. *
4.4 Warrant Indenture, dated as of April 23, 1999, between Diversinet and Montreal Trust Company
of Canada, as Trustee. *
4.5 Form of Warrant for purchase of shares for the April 23, 1999 private placement. *
4.6 Form of Subscription Agreement for Special Warrants for the April 23, 1999 private placement. *
4.7 Form of Stock Purchase Agreement for the April 23, 1999 private placement. *
4.8 Form of Stock Purchase Agreement for the April 4, 2002 private placement. **
4.9 Form of Warrant for purchase of shares for the April 4, 2002 private placement. **
5.1 Opinion of Lang Michener. **
10.1 Form of Diversinet General Product License & Support Agreement. *
10.2 Diversinet OEM License Agreement, dated as of February 24, 1998, between Diversinet and
Research In Motion Limited. *
10.5 License Agreement, dated as of September 30, 1999, between RSA Data Security, Inc. and
Diversinet. *
10.6 Agreement, dated September 29, 1999, between Diversinet and Ubiq Communications, Inc. *
10.7 Amending Agreement, dated September 29, 1999, between Diversinet and Ubiq
Communications, Inc. *
10.8 License Agreement between Certicom Corp. and Diversinet dated February 26, 2002. **
10.9 License Agreement between Diversinet Corp. and Research In Motion, dated October 15, 1999. *
10.10 Settlement Agreement, dated as of February 16, 1999, among Diversinet, Moti Barkan,
Knockagh International Ltd., the other parties identified therein and Lang Michener, as
custodian. *
10.11 Employment Agreement, dated as of February 16, 1999, between Diversinet and Moti Barkan. *
23.1 Consent of KPMG LLP. **
23.2 Consent of Lang Michener (filed as part of Exhibit 5).
23.3 Purchase Agreement between The Instant Publisher Inc. n/k/a Diversinet and Knockagh
International Ltd. dated October 31, 1996. *
23.4 Purchase Agreement between Diversinet Corp. and 1273509 Ontario Limited dated January 30,
1998. *
23.7 Consent of Ernst & Young LLP. **
99.1 Custodian Agreement, dated as of April 23, 1999, among Diversinet, Montreal Trust Company of
Canada, as Escrow Agent and Yorkton Securities Inc. *
- --------------------------------
* Previously filed with Form F-3, File No. 333-12390
** Filed herewith
II-3
ITEM 17. UNDERTAKINGS
Paragraph designations correspond to designations in Regulation S-K, Item
512.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
registration statement or any material change to such
information in the registration statement; provided however,
that paragraphs (a)(1)(I) and (a)(1)(ii) shall not apply if
the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic
reports filed by the registration pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof;
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering;
(4) To file a post-effective amendment to the registration statement
to include any financial statements required by Rule 3-19 of
Regulation S-X at the start of any delayed offering or throughout
a continuous offering. Financial statements and information
otherwise required by Section 10(a)(3) of the Act need not be
furnished, provided, that the registrant includes in the
prospectus, by means of a post-effective amendment, financial
statements required pursuant to this paragraph (a)(4) and other
information necessary to ensure that all other information in the
prospectus is at least as current as the date of those financial
statements. Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective amendment
need not be filed to include financial statements and information
required by Section 10(a)(3) of the Act or Rule 3-19 of
Regulation S-X if such financial statements and information are
contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or Section
15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Form F-3.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the registrant's annual report pursuant to section 13(a) of
section 15(d) of the Securities Exchange Act of 1934 (and where
applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that
is incorporated by reference in the registration statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
II-4
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant, the registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the act and
is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the registrant of expense incurred or paid by a director, officer, or
controlling person of the registrant in the successful defense of any
such action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Toronto, Province of Ontario, Canada on May 8, 2002.
DIVERSINET CORP.
By: /s/ David Hackett
-----------------------------------
David Hackett, Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Nagy Moustafa
- -------------------
Nagy Moustafa Chairman, President and Chief Executive May 6, 2002
Officer and Director
/s/ Frank Clegg May 6, 2002
- -------------------
Frank Clegg Director
/s/ David Masotti May 6, 2002
- -------------------
David F. Masotti Director
/s/ Mark Steinman May 6, 2002
- -------------------
Mark C. Steinman Director
/s/ William Linton May 6, 2002
- -------------------
William Linton Director
/s/ Nagy Moustafa
- -------------------
Nagy Moustafa Authorized United States Representative May 6, 2002
CEO of Diversinet Corporation of America,
a Delaware corporation and wholly owned
subsidiary of the Registrant.
II-6
EXHIBIT INDEX
EXHIBIT NO. EXHIBITS
- ----------- --------
1.1 Underwriting Agreement, dated as of April 23, 1999, between Diversinet and Yorkton Securities
Inc. *
1.2 Underwriting Agreement, dated as of June 12, 2000, between Diversinet and Tucker Anthony
Incorporated. *
1.3 Placement Agency Agreement dated March 27, 2002, between Diversinet and Allen & Company
Incorporated. **
4.1 Common Share Purchase Warrants held by WEC Investors V LLC dated October 15, 1998. *
4.2 Registration Rights Agreement between Diversinet and WEC Investors V LLC dated October 15,
1998. *
4.3 Special Warrant Indenture, dated as of April 23, 1999, between Diversinet and Montreal Trust
Company of Canada, as Trustee. *
4.4 Warrant Indenture, dated as of April 23, 1999, between Diversinet and Montreal Trust Company
of Canada, as Trustee. *
4.5 Form of Warrant for purchase of shares for the April 23, 1999 private placement. *
4.6 Form of Subscription Agreement for Special Warrants for the April 23, 1999 private placement. *
4.7 Form of Stock Purchase Agreement for the April 23, 1999 private placement. *
4.8 Form of Stock Purchase Agreement for the April 4, 2002 private placement. **
4.9 Form of Warrant for purchase of shares for the April 4, 2002 private placement. **
5.1 Opinion of Lang Michener. **
10.1 Form of Diversinet General Product License & Support Agreement. *
10.2 Diversinet OEM License Agreement, dated as of February 24, 1998, between Diversinet and
Research In Motion Limited. *
10.5 License Agreement, dated as of September 30, 1999, between RSA Data Security, Inc. and
Diversinet. *
10.6 Agreement, dated September 29, 1999, between Diversinet and Ubiq Communications, Inc. *
10.7 Amending Agreement, dated September 29, 1999, between Diversinet and Ubiq
Communications, Inc. *
10.8 License Agreement between Certicom Corp. and Diversinet dated February 26, 2002. **
10.9 License Agreement between Diversinet Corp. and Research In Motion, dated October 15, 1999. *
10.10 Settlement Agreement, dated as of February 16, 1999, among Diversinet, Moti Barkan,
Knockagh International Ltd., the other parties identified therein and Lang Michener, as
custodian. *
10.11 Employment Agreement, dated as of February 16, 1999, between Diversinet and Moti Barkan. *
23.1 Consent of KPMG LLP. **
23.2 Consent of Lang Michener (filed as part of Exhibit 5).
23.3 Purchase Agreement between The Instant Publisher Inc. n/k/a Diversinet and Knockagh
International Ltd. dated October 31, 1996. *
23.4 Purchase Agreement between Diversinet Corp. and 1273509 Ontario Limited dated January 30,
1998. *
23.7 Consent of Ernst & Young LLP. **
- --------------------------------
* Previously filed with Form F-3, File No. 333-12390
** Filed herewith
II-7
EXHIBIT NO. EXHIBITS
- ----------- --------
99.1 Custodian Agreement, dated as of April 23, 1999, among Diversinet, Montreal Trust Company of
Canada, as Escrow Agent and Yorkton Securities Inc. *
II-8