UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER PURSUANT TO RULE 13A-16 AND L5D-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(DECEMBER 19, 2002)
DIVERSINET CORP.
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(Name of Registrant)
2225 Sheppard Avenue East, Suite 1700, Toronto, Ontario M2J 5C2
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(Address of principal executive offices)
1. Management Information Circular
2. Notice of Meeting
3. Form of Proxy
4. National Instrument 54-102
5. Annual Report Year Ended October 31, 2002
Indicate by check mark whether the Registrant files or will file annual reports
under cover of Form 20-F or Form 40-F
Form 20-F X Form 40-F
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Indicate by check mark whether the Registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
YES NO X
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 6-K to be signed on its behalf by the
undersigned, thereunto duly authorized
DIVERSINET CORP. - SEC FILE NO.0-23304
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(REGISTRANT)
DATE: December 19, 2002 BY: /s/ DAVID HACKETT
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DAVID HACKETT, CHIEF FINANCIAL OFFICER
DIVERSINET CORP.
ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON WEDNESDAY, JANUARY 22, 2003
MANAGEMENT INFORMATION CIRCULAR
SOLICITATION OF PROXIES
THIS MANAGEMENT INFORMATION CIRCULAR (THE "CIRCULAR") IS FURNISHED IN CONNECTION
WITH THE SOLICITATION OF PROXIES BY THE MANAGEMENT OF DIVERSINET CORP. (THE
"CORPORATION") FOR USE AT THE ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS (THE
"MEETING") OF THE CORPORATION TO BE HELD AT THE TIME AND PLACE AND FOR THE
PURPOSES SET FORTH IN THE ATTACHED NOTICE OF THE MEETING (THE "NOTICE OF
MEETING"). IT IS EXPECTED THAT THE SOLICITATION WILL BE BY MAIL PRIMARILY, BUT
REGULAR EMPLOYEES OF THE CORPORATION MAY ALSO SOLICIT PROXIES PERSONALLY. THE
COST OF SOLICITATION WILL BE BORNE BY THE CORPORATION.
The Corporation may also pay brokers or other persons holding common shares in
their own names or in the names of nominees for their reasonable expenses of
sending proxies and proxy material to beneficial owners and obtaining their
proxies.
No person is authorized to give any information or to make any representations
other than those contained in this Circular and, if given or made, such
information or representation should not be relied upon as having been
authorized. Unless otherwise indicated, all dollar references in this Circular
are to Canadian dollars.
APPOINTMENT AND REVOCATION OF PROXIES
The persons named in the enclosed form of proxy are officers of the Corporation.
A SHAREHOLDER HAS THE RIGHT TO APPOINT A PERSON (WHO NEED NOT BE A SHAREHOLDER)
TO ATTEND AND ACT FOR HIM AND ON HIS BEHALF AT THE MEETING OR ANY ADJOURNMENTS
THEREOF OTHER THAN THE PERSONS DESIGNATED IN THE ENCLOSED FORM OF PROXY. SUCH
RIGHT MAY BE EXERCISED BY STRIKING OUT THE NAMES OF THE PERSONS DESIGNATED IN
THE ENCLOSED FORM OF PROXY AND BY INSERTING IN THE BLANK SPACE PROVIDED FOR THAT
PURPOSE THE NAME OF THE DESIRED PERSON OR BY COMPLETING ANOTHER PROPER FORM OF
PROXY AND, IN EITHER CASE, DELIVERY OF THE COMPLETED AND EXECUTED PROXY TO THE
CORPORATION OR ITS TRANSFER AGENT PRIOR TO THE CLOSE OF BUSINESS ON THE SECOND
BUSINESS DAY PRECEDING THE DAY OF THE MEETING OR ANY ADJOURNMENTS THEREOF.
A shareholder forwarding the enclosed proxy may indicate the manner in which the
appointee is to vote with respect to any specific item by checking the
appropriate space. If the shareholder giving the proxy wishes to confer a
discretionary authority with respect to any item of business then the space
opposite the item is to be left blank. The shares represented by the proxy
submitted by a shareholder will be voted in accordance with the directions, if
any, given in the proxy.
A shareholder who has given a proxy may revoke it at any time insofar as it has
not been exercised. A proxy may be revoked, as to any matter on which a vote
shall not already have been cast pursuant to the authority conferred by such
proxy, by instrument in writing executed by the shareholder or by his attorney
authorized in writing or, if the shareholder is a body corporate, under its
corporate seal or by an officer or attorney thereof duly authorized, and
deposited either with the Corporation or its transfer agent, Computershare Trust
Company of Canada, 100 University Avenue, Toronto, Ontario, M5J 2Y1 at any time
up to and including the last business day preceding the day of the Meeting or
any adjournments thereof, at which the proxy is to be used, or with the Chairman
of such Meeting on the date of the Meeting or any adjournments thereof, and upon
either of such deposits the proxy is revoked. A proxy may also be revoked in
any other manner permitted by law.
-2-
EXERCISE OF DISCRETION BY PROXIES
The persons named in the enclosed form of proxy will vote the shares in respect
of which they are appointed in accordance with the direction of the shareholders
appointing them. IN THE ABSENCE OF SUCH DIRECTION, SUCH SHARES WILL BE VOTED IN
FAVOR OF THE PASSING OF ALL THE RESOLUTIONS DESCRIBED BELOW. THE ENCLOSED FORM
OF PROXY CONFERS DISCRETIONARY AUTHORITY UPON THE PERSONS NAMED THEREIN WITH
RESPECT TO AMENDMENTS OR VARIATIONS TO MATTERS IDENTIFIED IN THE NOTICE OF
MEETING AND WITH RESPECT TO OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE
MEETING OR ANY ADJOURNMENTS THEREOF. At the time of printing of this Circular,
management knows of no such amendments, variations or other matters to come
before the Meeting or any adjournments thereof other than the matters referred
to in the Notice of Meeting.
NON-REGISTERED HOLDERS
Only registered shareholders or the persons they appoint as their proxyholders
are permitted to attend and/or vote at the Meeting. However, in any case,
shares of the Corporation beneficially owned by a holder (a "Non-Registered
Holder") are registered either:
(a) in the name of an intermediary (an "Intermediary") that the
Non-Registered Holder deals with in respect of the shares, such as,
among others, banks, trust companies, securities dealers or brokers
and trustees or administrators of self-administered RRSPs, RRIFs,
RESPs and similar plans; or
(b) in the name of a clearing agency (such as The Canadian Depository for
Securities Limited) of which the Intermediary is a participant.
In accordance with the requirements of National Instruments 54-101 and 54-102 of
the Canadian Securities Administrators, the Corporation has distributed copies
of the Notice of Meeting, this Circular, the form of proxy, and the 2002 Annual
Report (collectively, the "Meeting Materials") to the clearing agencies and
Intermediaries for onward distribution to Non-Registered Holders.
Intermediaries are required to forward Meeting Materials to Non-Registered
Holders unless a Non-Registered Holder has waived the right to receive them.
Very often, Intermediaries will use service companies to forward the Meeting
Materials to Non-Registered Holders. Generally, Non-Registered Holders who have
not waived the right to receive Meeting Materials will either:
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A. be given a form of proxy which has already been signed by the
Intermediary (typically by a facsimile, stamped signature), which is
restricted as to the number of shares beneficially owned by the
Non-Registered Holder but which is otherwise uncompleted. The
Non-Registered Holder need not sign this form of proxy. In this case,
the Non-Registered Holder who wishes to submit a proxy should
otherwise properly complete the form of proxy and deposit it as
described above;
or
B. more typically, be given a voting instruction form that must be
completed and signed by the Non-Registered Holder in accordance with
the directions on the voting instruction form (which may in some cases
permit the completion of the voting instruction form by telephone).
The purpose of these procedures is to permit Non-Registered Holders to direct
the voting of the shares they beneficially own. Should a Non-Registered Holder
who receives either a proxy or a voting instruction form wish to attend and vote
at the Meeting in person (or have another person attend and vote on behalf of
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the Non-Registered Holder), the Non-Registered Holder should strike out the
names of the persons named in the proxy and insert the Non-Registered Holder's
(or such other person's) name in the blank space provided or, in the case of a
voting instruction form, follow the corresponding instructions on the form. IN
EITHER CASE, NON-REGISTERED HOLDERS SHOULD CAREFULLY FOLLOW THE INSTRUCTIONS OF
THEIR INTERMEDIARIES AND THEIR SERVICE COMPANIES.
-3-
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
As at October 31, 2002, 32,222,084 common shares of the Corporation were issued
and outstanding. Each common share entitles the registered holder thereof to
one vote at all meetings of shareholders.
All voting shareholders of record as of the time of the Meeting or any
adjournments thereof are entitled either to attend and vote thereat in person
the shares held by them or, provided a completed and executed proxy shall have
been delivered to Computershare Trust Company of Canada within the time
specified herein, to attend and vote thereat by proxy the shares held by them.
The Corporation has fixed December 23, 2002, as the record date for the purpose
of determining shareholders entitled to receive a Notice of Meeting. In
accordance with the provisions of the Business Corporations Act (Ontario), the
Corporation will prepare a list of holders of shares at the close of business on
the record date. Each holder of voting shares named in the list will be
entitled to vote at the Meeting or any adjournments thereof the shares shown
opposite his name on the list except to the extent that; (a) the shareholder
has transferred any of his shares after the date on which the list was prepared;
and (b) the transferee of those shares produces properly endorsed share
certificates or otherwise establishes that he owns such shares and demands not
later than ten (10) days before the Meeting or any adjournments thereof that his
name be included in the list before the Meeting or any adjournments thereof, in
which case the transferee is entitled to vote his shares at the Meeting or any
adjournments thereof.
To the knowledge of the directors and senior officers of the Corporation, there
are no persons, firms or corporations which beneficially own or exercise control
or direction over securities of the Corporation carrying more than ten (10%)
percent of the voting rights attached to any class of outstanding voting
securities of the Corporation.
BUSINESS TO BE TRANSACTED AT THE MEETING
A. FINANCIAL STATEMENTS
The consolidated financial statements of the Corporation for the fiscal year
ended October 31, 2002 and the report of the auditors thereon accompany this
Circular.
B. ELECTION OF DIRECTORS
The Board of Directors of the Corporation presently consists of five (5)
directors. The number of directors to be elected at the Meeting has been fixed
at five (5) persons. All of the nominees are now directors of the Corporation
and have been directors since the dates indicated below. UNLESS AUTHORITY TO DO
SO IS WITHHELD, THE PERSONS NAMED IN THE ENCLOSED FORM OF PROXY INTEND TO VOTE
FOR THE ELECTION OF THE NOMINEES WHOSE NAMES ARE SET FORTH BELOW. Management
does not contemplate that any of the nominees will be unable to serve as a
director but if that should occur for any reason prior to the Meeting or any
adjournments thereof, it is intended that discretionary authority shall be
exercised by the person named in the enclosed form of proxy to vote the proxy
for the election of any other person or persons in place of any nominee or
nominees unable to serve. Each director elected will hold office until the
close of business of the first Annual Meeting of Shareholders of the Corporation
following his election unless his office is earlier vacated in accordance with
the Corporation's by-laws.
The statement as to the shares of the Corporation beneficially owned or over
which the nominees for election as directors exercise control or discretion
hereinafter named is in each instance based upon information furnished by the
person concerned. The names of the nominees for election as directors, their
positions with the Corporation, the year they became a director of the
Corporation and the number of shares beneficially owned, directly or indirectly,
or over which control or direction is exercised is as follows:
-4-
================================================= ================= ========= ==============================
NUMBER OF SHARES BENEFICIALLY
POSITION WITH APPOINTED OWNED, DIRECTLY OR INDIRECTLY,
NAME AND PRESENT PRINCIPAL OCCUPATION THE SINCE OR OVER WHICH CONTROL OR
CORPORATION DIRECTION IS EXERCISED
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Nagy Moustafa(1) President, Chief 1997 627,250
President, Chief Executive Officer Executive Officer
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Mark C. Steinman (1) (3) (4) Chairman 1998 NIL
Chairman of the Corporation
Executive Vice-President and Chief Financial
Officer, Stelco Inc.
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Stanley M. D. Beck(2) (3) (5) Director 2002 NIL
Chairman of 407 International Inc. and President
of Granville Arbitrations Limited
Keith Powell(1) (2) (3) (6) Director 2002 NIL
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Managing Director at XPV Capital Corporation
Charles M. H. Shiu(7) Director 2002 NIL
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Chairman of Allied Asia Investments Limited,
Vice-Chairman of Power Pacific Corporation
Limited
================================================= ================= ========= ==============================
<FN>
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Governance Committee.
(4) Mr. Steinman has served as a Director since June 1998 and Chairman since
July 2002. Mr. Steinman has been the Executive Vice-President and Chief
Financial Officer of Stelco Inc. (steel manufacturer) since July 12, 1999.
From 1996 to May 1999 he was the Senior Vice-President and Chief Financial
Officer of Spar Aerospace Limited.
(5) Mr. Beck has served as a Director since July 2002. Mr. Beck was formerly
Chairman of the Ontario Securities Commission, Dean of Osgoode Hall Law
School, and has held senior management positions over his seven years at
Central Capital Corporation, now YMG Capital Management. Mr. Beck is
currently Chairman of 407 International Inc. and President of Granville
Arbitrations Limited, and holds seats on a number of Boards.
(6) Mr. Powell has served as a Director since July 2002. Mr. Powell was
previously the Senior Vice-President, Information Services and Chief
Information Officer at Nortel Networks. Mr. Powell is currently Managing
Director at XPV Capital Corporation, a venture capital company investing in
early stage communications start-up companies. Mr. Powell was recently
inducted into the Canadian Information Productivity Awards (CIPA) Hall of
Fame (1999), and holds seats on a number of Boards.
(7) Mr. Shiu has served as a Director since September 2002. Mr. Shiu is a
former senior executive with Nortel Networks and has more than 25 years
experience with strategic alliances, joint ventures and investments in the
European, North American and Asia Pacific markets. Mr. Shiu is currently
Chairman of Allied Asia Investments Limited, Vice-Chairman of Power Pacific
Corporation Limited and sits on numerous boards.
As at the date of this Circular, the directors and officers of the Corporation
as a group, directly and indirectly, beneficially own or exercise control or
discretion over 724,793 Common Shares, representing approximately 2% of the
issued and outstanding Common Shares of the Corporation.
C. APPOINTMENT OF AUDITORS
Shareholders will be asked at the Meeting to approve the appointment of KPMG,
LLP Chartered Accountants, as auditors to the Corporation at a remuneration to
be fixed by the directors. KPMG, LLP were appointed as the auditors of the
Corporation on August 29, 2000. From March 1, 1999 to August 29, 2000 Ernst &
Young, LLP were the Corporation's auditors. Prior to that time Zeifman &
Company, LLP were the Corporation's auditors. UNLESS THE SHAREHOLDER DIRECTS
THAT HIS OR HER COMMON SHARES ARE TO BE WITHHELD FROM VOTING IN CONNECTION WITH
THE APPOINTMENT OF AUDITORS, THE PERSONS NAMED IN THE ENCLOSED FORM OF PROXY
INTEND TO VOTE FOR THE APPOINTMENT OF KPMG, LLP, CHARTERED ACCOUNTANTS AS
AUDITORS OF THE CORPORATION UNTIL THE NEXT ANNUAL MEETING OF SHAREHOLDER AND TO
AUTHORIZE THE DIRECTORS TO FIX THEIR REMUNERATION.
-5-
D. REVERSE STOCK SPLIT
Shareholders will be asked at the Meeting to approve a special resolution
authorizing an amendment to the Corporation's Amended Articles of Amalgamation
("Amended Articles") to effect a reverse stock split of the Corporation's common
shares as soon as time permits at a ratio of a fixed integer of Old Shares for
each New Share that would result in an anticipated after-split price on Nasdaq
of as close to US $3.00 as possible. The number of currently-held shares of the
Corporation (the "Old Shares") to be traded for each new share of the
Corporation (the "New Shares") will be determined by dividing US $3.00 by the
weighted average of the closing price on each of the five trading days from
January 15 through January 21, 2003 inclusive (the "Formula"); the resulting
ratio will be rounded up or down to a whole number if and as necessary to
produce a ratio of a fixed number of Old Shares for each New Share. For
example, if the weighted average price for the five trading days were US $.50,
then the Corporation would amend the Amended Articles to reflect a one-for-six
share split. If the weighted average price for the five trading days were US
$.47, then the Corporation would amend the Amended Articles also to reflect a
one-for-six share split. Likewise, if the weighted average price for the five
trading days were US $.55, then the Corporation would amend the Amended Articles
to reflect a one-for-five share split. The ratio will be determined prior to,
and announced at, the Meeting. The text of the special resolution is included
with this Circular. The special resolution requires the approval of a majority
of not less than two-thirds of the total votes cast in respect thereof by the
holders of common shares of the Corporation.
GENERAL
As of October 31, 2002 the Corporation's aggregate market capitalization was
approximately US $9,667,000. Because over 32,222,084 of the Corporation's
common shares are outstanding, the per share price of the Corporation's common
shares on that date was only US $0.30. In order to reduce the number of common
shares outstanding, the Board of Directors unanimously determined to seek
shareholder approval by way of special resolution to amend the Corporation's
Amended Articles to effect a reverse split of the Corporation's common shares.
The ratio of the reverse stock split that the Board of Directors approved and
deemed advisable and for which it is seeking shareholder approval is such that
the share price after the split is expected to stabilize in the US $3.00 range.
Approval of this reverse stock split proposal would give the Board of Directors
authority to implement the reverse stock split as soon as time permits. In
addition, approval of this reverse stock split proposal would also give the
Board of Directors authority to decline to implement a reverse stock split and
revoke the special resolution without further approval of the shareholders.
If our shareholders approve the reverse stock split proposal and the Board of
Directors decides to implement the reverse stock split, the Corporation will
file Articles of Amendment with the Corporations Branch of the Ministry of
Consumer and Business Services of the Province of Ontario which will effect a
reverse split of the shares of the Corporation's common shares then issued and
outstanding at the specific ratio determined by the Formula. Except for any
changes as a result of the treatment of fractional shares, each shareholder will
hold the same percentage of common shares outstanding immediately subsequent to
the reverse stock split as such shareholder did immediately prior to the split.
PURPOSE
Recently, market prices for stocks trading in the U.S. markets have generally
declined. For example, the closing price for the S&P 500 Index has decreased
from 1,381 on March 2, 2000 to 876 on November 11, 2002. In addition, the
already large number of the Corporation's common shares outstanding has
continued to increase. In order to reduce the number of the Corporation's
common shares outstanding and thereby attempt to proportionally raise the per
share price of the Corporation's common shares, the Board of Directors believes
that it is in the best interest of the Corporation's shareholders to approve the
special resolution authorizing the reverse stock split.
The Corporation is seeking shareholder approval of a reverse stock split in
order to raise the minimum bid price of the Corporation's shares to
approximately US $3.00 per share and maintain its listing on the Nasdaq SmallCap
Market. The Corporation is also seeking shareholder approval of a reverse stock
split because it believes that a higher stock price may help generate investor
interest in the Corporation and help the Corporation attract and retain
employees and other service providers. The Board of Directors concluded that
reducing the number of outstanding shares of the Corporation's common shares
might be desirable in order to attempt to support a higher stock price per share
based on the Corporation's current market capitalization. In addition, the
Board of Directors considered that the Corporation's common shares might not
appeal to brokerage firms that are reluctant to recommend lower priced
securities to their clients. Investors may also be dissuaded from purchasing
lower priced stocks because the brokerage commissions, as a percentage of the
total transaction, tend to be higher for such stocks. Moreover, the analysts at
many brokerage firms do not monitor the trading activity or otherwise provide
research coverage of lower priced stocks.
-6-
The Corporation's common shares are quoted on the Nasdaq SmallCap Market. Among
other requirements, the listing maintenance standards established by Nasdaq
require a company's common shares to have a minimum bid price of at least US
$1.00 per share. On February 4, 2002, the closing bid price per share for the
Corporation's common shares on the Nasdaq SmallCap Market closed below US $1.00
for the first time. Under Nasdaq's listing standards, a failure to meet the
minimum bid price requirement will be determined to exist only if the failure to
meet the minimum bid price requirement continues for thirty consecutive business
days. Accordingly, as of the date of this Circular, the Corporation is in
violation of Nasdaq's listing standards. On November 25, 2002 a Nasdaq Listing
Qualifications Panel determined to continue the listing of the Company's
securities pursuant to the following exception: on or before January 31, 2003,
the Company must demonstrate a closing bid price of US $1.00 per share and,
immediately thereafter, a closing bid price of at least US $1.00 per share for a
minimum of ten consecutive trading days. Thereafter, on or before April 20,
2003, the Company must file the Form 20-F for the fiscal year ended October 31,
2002 evidencing continued compliance with the US $2,500,000 shareholders' equity
requirement. In order to fully comply with the terms of this exception, the
Company must be able to demonstrate compliance with all requirements for
continued listing on the Nasdaq SmallCap Market. In the event that the Company
fails to comply with any of the terms of this exception, its securities will be
delisted from the Nasdaq Stock Market. The reverse stock split, as set forth in
this proposal, would enable the Corporation to offset the decline in the
Corporation's shares price.
CERTAIN RISKS ASSOCIATED WITH THE REVERSE STOCK SPLIT
There can be no assurance that the total market capitalization of the
Corporation's common shares after the proposed reverse stock split will be equal
to or greater than the total market capitalization before the proposed reverse
stock split or that the per share market price of the Corporation's common
shares following the reverse stock split will either exceed or remain higher
than the current per share market price.
There can be no assurance that the market price per New Share after the reverse
stock split will rise or remain constant in proportion to the reduction in the
number of Old Shares outstanding before the reverse stock split. For example,
based on the market price of the Corporation's common shares on October 31, 2002
of US $0.30 per share, if the Board of Directors decided to implement the
reverse stock split and the Formula determines a reverse stock split ratio that
would generate a split of one New Share for ten Old Shares, there can be no
assurance that the post-split market price of the Corporation's common shares
would maintain a price of US $3.00 per share or greater.
Accordingly, the total market capitalization of the Corporation's common shares
after the proposed reverse stock split may be lower than the total market
capitalization before the proposed reverse stock split and, in the future, the
market price of the Corporation's common shares following the reverse stock
split may not exceed or remain higher than the market price prior to the
proposed reverse stock split. In many cases, the total market capitalization of
a company following a reverse stock split is lower than the total market
capitalization before the reverse stock split.
There can be no assurance that the reverse stock split will result in a per
share price that will attract institutional investors and brokers.
While the Board of Directors believes that a higher stock price may help
generate investor interest, there can be no assurance that the reverse stock
split will result in a per share price that will attract institutional investors
and brokers.
There can be no assurance that the reverse stock split will result in a per
share price that will increase the Corporation's ability to attract and retain
employees and other service providers.
While the Board of Directors believes that a higher stock price may help the
Corporation attract and retain employees and other service providers who are
less likely to work for a company with a low stock price, there can be no
assurance that the reverse stock split will result in a per share price that
will increase the Corporation's ability to attract and retain employees and
other service providers.
-7-
A decline in the market price for the Corporation's common shares after the
reverse stock split may result in a greater percentage decline than would occur
in the absence of a reverse stock split, and the liquidity of the Corporation's
common shares could be adversely affected following a reverse stock split.
The market price of the Corporation's common shares will also be based on the
Corporation's performance and other factors, some of which are unrelated to the
number of shares outstanding. If the reverse stock split is effected and the
market price of the Corporation's common shares declines, the percentage decline
as an absolute number and as a percentage of the Corporation's overall market
capitalization may be greater than would occur in the absence of a reverse stock
split. In many cases, both the total market capitalization of a company and the
market price of a share of such company's common shares following a reverse
stock split are lower than they were before the reverse stock split.
Furthermore, the reduced number of shares that would be outstanding after the
reverse stock split could adversely affect the liquidity of the Corporation's
common shares.
PRINCIPAL EFFECTS OF THE REVERSE STOCK SPLIT
Corporate Matters. If approved and effected, the reverse stock split would have
the following effects:
<> depending on the exact reverse stock split ratio determined by the Formula,
at a price calculated by dividing US $3.00 by the weighted average of the
closing price on each of the five trading days from January 15 through
January 21, 2003 inclusive (and rounded to a whole number), might, for
example, if the weighted average were US $0.50, result in a situation
whereby six (6) Old Shares owned by a shareholder would be exchanged for
one (1) New Share;
<> the number of shares of the Corporation's common shares issued and
outstanding will be reduced proportionately based on the reverse stock
split ratio determined by the Formula;
<> where the exchange results in a fractional share, the number of New Shares
to be issued will be rounded a whole number of common shares.
<> based on the reverse stock split ratio determined by the Formula,
proportionate adjustments will be made to the per share exercise price and
the number of shares issuable upon the exercise of all outstanding options
and warrants entitling the holders thereof to purchase common shares of the
Corporation, which will result in approximately the same aggregate price
being required to be paid for such options or warrants upon exercise of
such options or warrants immediately preceding the reverse stock split;
and,
<> the number of shares reserved for issuance under the Corporation's existing
stock option plans will be reduced proportionately based on the reverse
stock split ratio selected by the Board of Directors.
If approved and effected, the reverse stock split will be effected
simultaneously for all of the Corporation's common shares and the ratio will be
the same for all of the Corporation's common shares. The reverse stock split
will affect all of the Corporation's shareholders uniformly and will not affect
any shareholder's percentage ownership interests in the Corporation, except to
the extent that the reverse stock split results in any of the Corporation's
shareholders owning a fractional share. Where the exchange results in a
fractional share, the number of New Shares to be issued will be rounded to a
whole number of common shares. Such rounding of fractional shares may reduce
the number of post-split shareholders to the extent there may be shareholders
presently holding fewer than the number of shares required for participation in
the reverse split, depending on the ratio for the reverse stock split determined
by the Formula. This, however, is not the purpose for which the Corporation is
effecting the reverse stock split. Common shares issued pursuant to the reverse
stock split will remain fully paid and non-assessable.
Fractional Shares. No scrip or fractional certificates will be issued in
connection with the reverse stock split. Where the exchange results in a
fractional share, the number of New Shares to be issued will be rounded up or
down as the case may be to a whole number of common shares. The ownership of a
fractional interest will not give the holder thereof any voting, dividend or
other rights as, subsequent to the rounding of fractional shares as described
herein.
If approved and effected, the reverse stock split will result in some
shareholders owning "odd lots" of less than 100 shares of the Corporation's
common shares. Brokerage commissions and other costs of transactions in odd
lots are generally somewhat higher than the costs of transactions in "round
lots" of even multiples of 100 shares.
-8-
Authorized Shares. The Corporation has an unlimited number of authorized shares
of common shares so there will be no impact upon the effectiveness of the
reverse stock split. As of October 31, 2002, the Corporation had an unlimited
number of shares of common shares authorized and 32,222,084 shares of common
shares issued and outstanding. Authorized but unissued shares will be available
for issuance, and the Corporation may issue such shares in financings or
otherwise. If the Corporation issues additional shares, the ownership interest
of holders of the Corporation's common shares may also be diluted.
Accounting Matters. The per share net income or loss and net book value of the
Corporation's common shares will be restated because there will be fewer shares
of the Corporation's common shares outstanding.
PROCEDURE FOR EFFECTING REVERSE STOCK SPLIT AND EXCHANGE OF STOCK CERTIFICATES
If the shareholders approve the special resolution to implement the reverse
stock split and the Board of Directors decides to implement the reverse stock
split, the Corporation will file Amended Articles with the Corporations Branch
of the Ministry of Consumer and Business Services of the Province of Ontario.
The reverse stock split will become effective at the time specified in the
Amended Articles, which is referred to below as the "effective time." Beginning
at the effective time, each certificate representing Old Shares will be deemed
for all corporate purposes to evidence ownership of New Shares.
The Corporation will issue a press release prior to the effective time and, as
soon as practicable after the effective time, shareholders will be notified that
the reverse stock split has been effected. The Corporation expects that its
transfer agent, ComputerShare Trust Company of Canada, will act as exchange
agent for purposes of implementing the exchange of stock certificates. Holders
of Old Shares will be asked to surrender to the exchange agent certificates
representing Old Shares in exchange for certificates representing New Shares in
accordance with the procedures to be set forth in the Letter of Transmittal in
the form as attached hereto as Schedule A. No new certificates will be issued
to a shareholder until such shareholder has surrendered such shareholder's
outstanding certificate(s), together with the properly completed and executed
Letter of Transmittal, to the transfer agent. Any Old Shares submitted for
transfer, whether pursuant to a sale, other disposition or otherwise, will
automatically be exchanged for New Shares. SHAREHOLDERS SHOULD NOT DESTROY ANY
STOCK CERTIFICATE(S) AND SHOULD NOT SUBMIT ANY CERTIFICATE(S) UNTIL REQUESTED TO
DO SO.
NO DISSENTERS' RIGHTS
Under the Business Corporations Act (Ontario), the Corporation's shareholders
are not entitled to dissenters' rights with respect to the reverse stock split,
and the Corporation will not independently provide shareholders with any such
right.
REGISTERED SHAREHOLDERS
Registered shareholders must fill out the attached Letter of Transmittal and
return it with their certificates to Computershare Trust Company of Canada in
order to ensure such certificates are replaced with post-split certificates.
Intermediaries will ensure that shares of beneficial shareholders of the
Corporation are properly adjusted.
SPECIAL RESOLUTION TO CONSOLIDATE THE ISSUED COMMON SHARES OF THE CORPORATION
The Special Resolution entitling the Corporation to give effect to the Reverse
Stock Split shall read as follows:
"RESOLVED as a special resolution that:
1. the articles of the Corporation be amended to consolidate the issued and
outstanding common shares of the Corporation (the "Old Shares") by changing
each Old Share into that fraction of a new common share of the Corporation
(a "New Share") equal to the quotient of one and the number obtained by
dividing (a) US $3.00 by (b) the weighted average of the closing price of
the common shares of the Corporation on the Nasdaq SmallCap Market on each
of the five trading days from January 15 through January 21, 2003
(inclusive); provided the denominator of the resulting fraction will be
rounded up or down to the nearest whole number if and as necessary to
produce a ratio of a fixed number of Old Shares for each New Share and
provided further that no fractional shares will be issued to a registered
holder, but in lieu thereof, the number of New Shares to be received by a
registered shareholder will be rounded up or down to a whole number of New
Shares;
2. the Corporation is hereby authorized to apply for a certificate of
amendment under the Business Corporations Act (Ontario) amending its
articles as set forth above, and any one director or officer of the
-9-
Corporation is hereby authorized to do all such things and to execute and
deliver for and on behalf of the Corporation all such notices, documents
and instruments, including articles of amendment, as may be considered
necessary or desirable to give effect to the foregoing; and
3. notwithstanding the foregoing, the directors of the Corporation, in their
sole discretion and without further approval of the shareholders of the
Corporation, may revoke this special resolution at any time before the
certificate of amendment giving effect to the consolidation becomes
effective."
E. AMENDMENT TO STOCK OPTION PLAN
It is important for the Corporation to be able to compensate officers and
employees at a level and in a manner that ensures they are motivated and their
interests aligned with those of the Corporation and its shareholders.
Accordingly, it is proposed that the Corporation increase the number of common
shares reserved for issuance under its stock option plan (the "Plan").
Under the Plan, the maximum number of shares which may be reserved for issuance
to insiders (as defined under the Plan) or under any other share compensation
arrangement of the Corporation is ten percent (10%) of the common shares
outstanding at the date of the grant. Moreover, the maximum number of common
shares which may be issued to any one insider and such insider's associates
under the Plan and any other share compensation arrangement in any twelve (12)
month period is five percent (5%) of the common shares outstanding at the date
of the issuance. The maximum number of common shares which may be issued to
insiders under the Plan and any other share compensation arrangement in any
twelve (12) month period is ten percent (10%) of the common shares outstanding
at the date of the issuance. No one optionee is entitled to hold options
exceeding five percent (5%) of the outstanding common shares.
As of October 31, 2002, an aggregate of 2,147,916 shares of common stock had
been purchased or options with respect thereto had been granted under the
Diversinet Corp. Amended and Restated Stock Option Plan dated May 15, 2000, and
all prior stock option plans of the Corporation (the "Plan"). Shareholders will
be asked at the Meeting to approve the reservation of additional 2,147,916
shares of common stock reserved for issuance under the Plan to replenish the
pool of available shares to the level previously reserved. The Plan currently
has 6,100,000 shares of common stock reserved for issuance, and 1,082,291 shares
remain available for issuance. On November 22, 2002, the Board of Directors
adopted, subject to shareholder approval, certain amendments to the Plan to
provide for this reservation. Unless the amount reserved for issuance
thereunder is increased, the Plan may run out of shares available to be optioned
during fiscal 2003.
The special resolution requires the approval of a majority of not less than
two-thirds of the total votes cast in respect thereof by the holders of common
shares of the Corporation. If shareholders approve the amendment to the Amended
Articles, the increase in the number of shares granted and available for future
grants under the Plan shall be adjusted proportionately to reflect any
consolidation of shares which may be effected by the reverse stock split of the
Corporation's common shares.
SUMMARY DESCRIPTION OF THE PLAN
GENERAL
The Plan was established to compensate substantially all of the Corporation's
directors, officers and employees for services rendered; to provide certain of
its directors, officers, employees and consultants with significant additional
incentive to promote the Corporation's financial success; and to provide an
incentive to induce able persons to serve or remain on its Board of Directors or
to enter into or remain in its employment. A maximum of 6,100,000 shares of
common stock, subject to adjustment, is authorized for the granting of stock
options under the Plan. The shares of common stock reserved for issuance under
the Plan on October 31, 2000 were registered pursuant to a Registration
Statement on Form S-8. As of October 31, 2002, options to purchase an aggregate
of 2,869,793 shares of common stock, at exercise prices ranging from US$0.23 to
US$41.68 per share, were outstanding under the Plan. The Plan is intended to
comply with Rule 16b-3 of the Securities Exchange Act of 1934, as amended.
Should shareholders approve a reverse stock split, then the number of options
available under the Plan would be reduced in a similar ratio as the
consolidation.
ELIGIBILITY
All of the Corporation's full-time, salaried employees and members of the
Corporation's Board of Directors are eligible to be granted options.
Individuals who have rendered or are expected to render advisory or consulting
services to the Corporation are also eligible to receive options under the Plan.
-10-
ADMINISTRATION
The Compensation Committee administers the Plan. Subject to the foregoing
limitations, options may be granted under the Plan by the Corporation's
Compensation Committee to directors, officers, full-time and part-time employees
and consultants of the Corporation or any subsidiary provided that:
(i) the options may not have a term exceeding five years; and
(ii) the exercise price may not be less than the market price of the common
shares of the Corporation on Nasdaq at the time of grant.
The options may be exercised in such manner as the Compensation Committee
determines provided that if no determination is made, an optionee may not take
up more than 33 1/3% of the options in any 12 month period.
The Plan does not currently provide for any financial assistance or support by
the Corporation to any optionee.
GRANT OF OPTION: VESTING
The Compensation Committee may grant at any time to any eligible person an
option entitling such person to purchase the Corporation's common stock in such
quantity, at such price, on such terms and subject to such conditions consistent
with the provisions of the Plan as may be established by the Compensation
Committee on or prior to the date of grant of such option. The exact terms of
the option will be contained in an option agreement between the Corporation and
the person to whom such option is granted. Eligible employees are not required
to pay anything to receive options. The exercise price for stock options must
be no less than the fair market value of the common stock at the close of
trading on the day immediately preceding the date of grant. Options will expire
not later than the fifth anniversary of the date of grant. An option holder
will be able to exercise options from time to time, subject to vesting. All of
the options granted under the Plan vest in twelve equal installments beginning
three months after the grant date and each and every quarter thereafter, and
have an exercise price equal to the closing price of the stock on the trading
day immediately preceding the grant date. Upon the death of a participant,
vested options will be exercisable for a period of six months by the legal
representative(s) of the participant. Upon termination for cause or thirty days
after termination for any other reason, the unvested portion of the options
shall be forfeited. Subject to the above conditions, the exercise price,
duration of the options and vesting provisions will be set by the Compensation
Committee in its discretion.
ADJUSTMENTS
In order to prevent dilution or enlargement of the rights of grantees, the Board
of Directors shall appropriately and proportionately adjust the number, price
and kind of shares subject to outstanding options and those available for
subsequent grant to reflect any stock dividend, stock split, combination or
exchange of shares, merger, consolidation or other similar change in the
Corporation's capitalization. The Board of Directors may also make any
appropriate adjustment to reflect any spin-off, spin-out or other distribution
of assets to shareholders or any acquisition of stock or assets or other similar
change. The Compensation Committee shall determine the amount of the adjustment
to be made in each such case, but no adjustment approved by the Compensation
Committee shall be effective until and unless it is approved by the Board of
Directors. In the event of any reorganization, reclassification, consolidation,
merger or sale of all or substantially all of the Corporation's assets, which is
effected in such a way that holders of common stock are entitled to receive
(either directly or upon subsequent liquidation) stock, securities or assets
with respect to or in exchange for such common stock, the Board of Directors may
substitute the per share amount of such stock, securities or assets for shares
upon any subsequent exercise of any option.
AMENDMENT
So long as the Corporation's common stock is eligible for trading on the Nasdaq
SmallCap Market, the Board of Directors must obtain shareholder approval for
those amendments of the Plan required to be so approved pursuant to the By-laws
of the National Association of Securities Dealers. The Board of Directors may
not, without the affirmative approval of the Corporation's shareholders, amend
the Plan in any manner which would cause any outstanding stock options to no
longer qualify as options under the Plan. No amendment of the Plan may, without
the consent of the holder of any option prior to the adoption of such amendment,
materially and adversely affect the rights of such holder under such option.
-11-
TERMINATION
The Board of Directors may terminate the Plan at any time; provided that the
Board of Directors must obtain the consent of the holder of any option prior to
termination if such termination materially and adversely affects the rights of
such older under such options. No option shall be granted under the Plan after
the termination of the Plan, but the termination of the Plan shall not have any
other effect. Any option outstanding at the time of the termination of the Plan
may be exercised after termination of the Plan at any time prior to the
expiration date of such option to the same extent such option would have been
exercisable had the Plan not terminated.
TRANSFERABILITY
Options may be transferable as provided in the Option Agreement. It shall be a
condition precedent to any transfer of any option that the transferee executes
and delivers an agreement acknowledging such option has been acquired for
investment and not for distribution and is and shall remain subject to the Plan
and the Option Agreement.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors recommends a vote to approve the reservation of
additional shares of common stock reserved for issuance under the Plan. UNLESS
THE SHAREHOLDER DIRECTS THAT HIS OR HER COMMON SHARES ARE TO BE WITHHELD FROM
VOTING IN CONNECTION WITH THE POTENTIAL APPROVAL OF THE RESERVATION OF AN
ADDITIONAL 2,147,916 SHARES OF COMMON STOCK, THE PERSONS NAMED IN THE ENCLOSED
FORM OF PROXY INTEND TO VOTE FOR SUCH ISSUANCE. APPROVAL OF THIS PROPOSED
RESERVATION WOULD GIVE THE BOARD OF DIRECTORS AUTHORITY TO RESERVE SUCH SHARES
AT ANY TIME IT DETERMINED PRIOR TO OCTOBER 31, 2003. IN ADDITION, APPROVAL OF
THIS PROPOSED SHARE ISSUANCE WOULD ALSO GIVE THE BOARD OF DIRECTORS AUTHORITY TO
DECLINE TO IMPLEMENT SUCH PROPOSED RESERVATION PRIOR TO SUCH DATE OR AT ALL.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth all compensation earned during the fiscal years
ended October 31, 2000, October 31, 2001 and October 31, 2002 from the
Corporation by its President and Chief Executive Officer and the other officers
of the Corporation (the "Named Executive Officers"). The Corporation has
determined that it had a total of five Named Executive Officers during the
fiscal year.
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
---------------------------------- -----------------
NAME AND PRINCIPAL SECURITIES UNDER ALL OTHER
POSITION SALARY BONUS(5) OTHER ANNUAL OPTIONS COMPENSATION
YEAR ($) ($) COMPENSATION GRANTED (#) ($)
- ---------------------- ---- -------- ---------- ------------ ----------------- -------------
Nagy Moustafa (1) 2002 220,000 250,000(6) 6,000 - NIL
President and Chief 2001 200,000 125,000 6,000 400,000 NIL
Executive Officer 2000 200,000 212,500 6,000 500,000 NIL
- ---------------------- ---- -------- ---------- ------------ ----------------- -------------
David Hackett (2) 2002 60,640 43,750(6) 3,000 150,000 NIL
Chief Financial
Officer
- ---------------------- ---- -------- ---------- ------------ ----------------- -------------
Nick Darwish (3) 2002 154,000 100,000(6) 4,800 40,000 NIL
Vice-President, Sales 2001 140,000 50,000 4,800 76,250 NIL
& Marketing 2000 86,667 69,260 4,000 87,500 NIL
- ---------------------- ---- -------- ---------- ------------ ----------------- -------------
Hussam Mahgoub(4) 2002 132,000 100,000(6) 4,800 40,000 NIL
Vice-President 2001 120,000 50,000 4,800 30,000 NIL
Products 2000 120,000 64,000 4,800 40,000 NIL
- ---------------------- ---- -------- ---------- ------------ ----------------- -------------
Richard Palmer (7) 2002 75,000 - 2,500 - 182,900(8)
Executive Vice 2001 150,000 50,000 4,800 305,000 NIL
President and Chief 2000 33,077 9,082 1,000 100,000 NIL
Financial Officer
- ---------------------- ---- -------- ---------- ------------ ----------------- -------------
-12-
<FN>
NOTES:
(1) Nagy Moustafa was appointed President and Chief Executive Officer of the
Corporation on November 10, 1997. See "Management Employment Contracts".
(2) David Hackett was appointed Chief Financial Officer of the Corporation on
March 26, 2002. See "Management Employment Contracts".
(3) Nick Darwish was appointed Vice-President, Business Development of the
Corporation on December 20, 1999. Subsequent to fiscal 2001 Mr. Darwish was
appointed Vice President Sales and Marketing. See "Management Employment
Contracts".
(4) Hussam Mahgoub was appointed Vice-President, Products of the Corporation on
April 1, 1999. See "Management Employment Contracts".
(5) Bonus allocations, if any, are determined annually at the discretion of the
Board of Directors on the recommendations of the Compensation Committee.
Bonuses are paid in the fiscal year following the year in which they are
earned as the determination is made by the Board subsequent to the end of
the fiscal year.
(6) Maximum bonus payable in fiscal 2003 for services rendered in 2002.
(7) Mr. Palmer's employment with the Corporation terminated on March 25, 2002.
(8) Payment in accordance with terms of a settlement agreement.
OPTION GRANTS IN FISCAL YEAR ENDED OCTOBER 31, 2002
Details of options granted to each Named Executive Officer during the fiscal
year ended October 31, 2002 are as follows:
% OF TOTAL EXERCISE MARKET VALUE OF
NAME SECURITIES OPTIONS PRICE SECURITIES
UNDER GRANTED /SECURITY UNDERLYING
OPTIONS TO EMPLOYEES IN (US$) OPTIONS ON THE DATE EXPIRATION DATE (1)
GRANTED FINANCIAL YEAR OF GRANT/SECURITY
(#) (US$)
- ------------------- ----------- ---------------- ---------- -------------------- -------------------
Nagy Moustafa
President and Chief - - - - -
Executive Officer
- ------------------- ----------- ---------------- ---------- -------------------- -------------------
David Hackett
Chief Financial 150,000 7.3% 0.55 0.55 March 26, 2007
Officer
- ------------------- ----------- ---------------- ---------- -------------------- -------------------
Nick Darwish
Vice-President 40,000 2.0% 0.58 0.58 May 9, 2007
Sales & Marketing
- ------------------- ----------- ---------------- ---------- -------------------- -------------------
Hussam Mahgoub
Vice-President 40,000 2.0% 0.58 0.58 May 9, 2007
Products
- ------------------- ----------- ---------------- ---------- -------------------- -------------------
Richard Palmer
Executive Vice - - - - -
President and Chief
Financial Officer
- ------------------- ----------- ---------------- ---------- -------------------- -------------------
<FN>
(1) Pursuant to the Plan, unexercised options are subject to early expiration
upon the termination of employment of the optionee with the Corporation or
its affiliates and on the optionee's retirement or death.
OPTIONS EXERCISED DURING THE FISCAL YEAR ENDED OCTOBER 31, 2002
Details of aggregate number of options exercised by each Named Executive Officer
during the fiscal year ended October 31, 2002 and particulars of the fiscal year
end value of unexercised options held by Named Executive Officers are as
follows:
-13-
VALUE OF UNEXERCISED
SECURITIES AGGREGATE UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
NAME AND ACQUIRED ON VALUE REALIZED AT OCTOBER 31, 2002 (#) AT OCTOBER 31, 2002 (US$)
PRINCIPAL POSITION EXERCISE # (US$) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE (1)
- ------------------------ ----------- --------------- -------------------------- -----------------------------
Nagy Moustafa
President and Chief
Executive Officer NIL NIL 633,333/166,667(2) NIL/NIL
- ------------------------ ----------- --------------- -------------------------- -----------------------------
David Hackett
Chief Financial Officer NIL NIL 25,000/125,000 NIL/NIL
- ------------------------ ----------- --------------- -------------------------- -----------------------------
Hussam Mahgoub
Vice-President, Products NIL NIL 114,167/55,833 NIL/NIL
- ------------------------ ----------- --------------- -------------------------- -----------------------------
Nick Darwish
Vice-President
Sales & Marketing NIL NIL 118,229/85,521 NIL/NIL
<FN>
(1) Based on a closing market price of US$0.30 per Common Share of the Corporation on October 31, 2002 on the
NASDAQ (the last trading day in the fiscal year of the Corporation).
(2) During the year, Mr. Moustafa surrendered his rights under the Plan to 500,000 options with an exercise
price of US$16.25 expiring on December 1, 2004.
OTHER COMPENSATION MATTERS
There were no long-term incentive awards other than stock options made to the
Named Executive Officers of the Corporation during the fiscal year ended October
31, 2002. There are no pension plan benefits in place for the Named Executive
Officers and none of the Named Executive Officers, senior officers or directors
of the Corporation is indebted to the Corporation.
MANAGEMENT EMPLOYMENT CONTRACTS
Nagy Moustafa, the Corporation's President and Chief Executive Officer is
employed pursuant to a written employment contract effective September 29, 1997
as amended. The contract provides for a five-year term with an annual base
salary of $220,000 and an annual performance bonus of up to $250,000. The
contract provides for payment of twenty-four (24) months' salary and bonus upon
termination of employment, including termination as a result of a
change-in-control or a change in responsibilities following a change-in-control.
The agreement also contains certain non-competition and non-disclosure
provisions. This contract has been amended for a one-year term and is
renewable annually for one-year terms unless written notification is provided
not to renew.
David Hackett, Chief Financial Officer, is employed pursuant to a written
employment contract and consulting agreement effective March 26, 2002 as
amended. The contracts are renewable annually with a base compensation of
$165,000 and a performance bonus of up to $75,000 payable upon the achievement
of personal goals and corporate objectives as agreed upon. The contracts
provide for payment of six (6) months compensation and bonus upon termination of
employment for the first year of employment and thereafter twelve (12) months
salary and bonus and twenty-four (24) months compensation and bonus upon
termination of employment as a result of a change-in-control or a change in
responsibilities following a change-in-control. The agreement also contains
certain non-competition and non-disclosure provisions and is subject to certain
termination provisions.
Hussam Mahgoub, Vice-President, Products is employed pursuant to a written
employment contract effective April 1, 1999 as amended. The contract is
renewable annually with a base salary of $132,000 and a performance bonus of up
to $100,000 payable upon the achievement of personal goals and corporate
objectives as agreed upon. The contract provides for payment of twelve (12)
months salary and bonus upon termination of employment and twenty-four (24)
months salary and bonus upon termination of employment as a result of a
change-in-control or a change in responsibilities following a change-in-control.
The agreement also contains certain non-competition and non-disclosure
provisions and is subject to certain termination provisions.
-14-
Nick Darwish, Vice-President, Sales and Marketing is employed pursuant to a
written employment contract effective December 20, 1999 as amended. The
contract is renewable annually with a base salary of $154,000 and a performance
bonus of up to $100,000 payable upon the achievement of personal goals and
corporate objectives as agreed upon. The contract provides for payment of twelve
(12) months salary and bonus upon termination of employment and twenty-four (24)
months salary and bonus upon termination of employment as a result of a
change-in-control or a change in responsibilities following a change-in-control.
The agreement also contains certain non-competition and non-disclosure
provisions and is subject to certain termination provisions.
COMPOSITION OF THE COMPENSATION COMMITTEE
At the end of the fiscal year ended October 31, 2002 the Corporation's
compensation committee (the "Compensation Committee") included Keith Powell and
Stanley Beck.
REPORT ON EXECUTIVE COMPENSATION
It is the responsibility of the Compensation Committee to determine the level of
compensation in respect of the Corporation's senior executives (including Named
Executive Officers) with a view to providing such executives with a competitive
compensation package having regard to performance. Performance is defined to
include achievement of the Corporation's strategic objective of growth,
development of the business, enhancement of shareholder value and attainment of
annual goals as set by the Board of Directors.
Compensation for executive officers is composed primarily of three components;
base salary, performance bonuses and the granting of stock options. Performance
bonuses are considered from time to time having regard to the above referenced
objectives as well as the terms of each officer's employment contract.
In establishing the levels of base salary, the award of stock options and
performance bonuses the Compensation Committee takes into consideration
individual performance, responsibilities, length of service and levels of
compensation provided by industry competitors.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The Chief Executive Officer's compensation is paid in accordance with the terms
of his employment contract (See "Management Employment Contracts") which
provides for payment of an annual base salary of $220,000 and an annual
performance bonus of up to $250,000. In addition, Mr. Moustafa participates in
the Plan.
The Compensation Committee did not directly base Mr. Moustafa's bonus and option
grants on rates for comparable employers, although the Compensation Committee
did consider the compensation of CEOs of other issuers in the same industry in
determining Mr. Moustafa's overall compensation.
Submitted on behalf of the Compensation Committee:
Keith Powell (Chair)
Stanley Beck
COMPENSATION OF DIRECTORS
The directors of the Corporation receive no compensation for attending meetings
of the Board of Directors or a committee of the Board of Directors.
-15-
None of the directors of the Corporation was compensated in his capacity as a
director by the Corporation during the fiscal year ended October 31, 2002
pursuant to any other arrangement or in lieu of any standard arrangement. It
has been the Corporation's practice to grant to a director 100,000 options to
acquire common shares of the Corporation upon his or her election as a director.
In addition the Corporation may grant directors additional options from time to
time. During fiscal 2001 each "unrelated" director received an additional grant
of 40,000 options. Such options are exercisable to acquire common shares at the
market price on the day preceding the grant pursuant to the terms of the Plan.
DIRECTORS' AND OFFICERS' LIABILITY INSURANCE
The Corporation maintains insurance for its directors and officers against
liability in their respective capacities as directors and officers. The annual
premium payable by the Corporation in respect of such insurance is US$313,200
and the total amount of insurance purchased for the directors and officers as a
group is US$5,000,000. In addition to the premiums, the Corporation is liable
to the extent of up to US$125,000 per claim under the deductible provisions of
the policy. No claims have been made under these policies to date.
INDEBTEDNESS OF DIRECTORS AND OFFICERS
None of the directors or officers of the Corporation, any proposed nominee for
election as a director or any of their associates or affiliates is or has been
indebted to the Corporation at any time since the beginning of the last
completed fiscal year other than routine indebtedness (as defined in the
Securities Act (Ontario)).
STOCK PERFORMANCE CHART
The following graph and chart assume that $100 was invested over a five year
period commencing on October 31, 1998 and ending on October 31 of each
subsequent year thereafter by comparing the yearly percentage change in the
cumulative total shareholder return over those five years on the Corporation's
common shares.
S&P/TSX COMPOSITE DIVERSINET
(TSE 300 STOCK INDEX) CORP.
- ---------------- --------------------- ----------
October 31, 1998 100 100
October 31, 1999 406 912
October 31, 2000 540 467
October 31, 2001 386 97
October 31, 2002 350 23
-16-
[GRAPH OMITTED]
Close price on NASDAQ, October 31, Price shares FMV
1998 $ 1.31 76.34 100.00
1999 11.94 76.34 911.50
2000 6.12 76.34 467.20
2001 1.27 76.34 96.95
2001 0.30 76.34 22.90
TSE index (^GSPTSE)
1998 6,208.3 0.016 100.000
1999 7,256.2 0.056 406.347
2000 9,639.6 0.056 539.818
2001 6,885.7 0.056 385.599
2001 6,248.8 0.056 349.933
INTERIM FINANCIAL STATEMENTS
Pursuant to National Instruments 54-101 and 54-102 published by the Canadian
Securities Administrators in November 1987, the Corporation is not required to
mail out its interim quarterly financial statements. The Corporation maintains
a supplemental mailing list containing the names of the holders of the
securities of the Corporation to whom the interim financial statements of the
Corporation will be mailed. A return card is enclosed with this Circular
permitting shareholders to request that they be placed on the supplemental
mailing list.
STATEMENT OF CORPORATE GOVERNANCE PRACTICES
The Toronto Stock Exchange (the "TSX") has issued a series of guidelines (the
"TSX Guidelines") for effective corporate governance. These guidelines deal
with matters such as the constitution and independence of corporate boards,
their functions, the effectiveness and education of board members and other
items dealing with sound corporate governance. The TSX requires that each
listed corporation disclose on an annual basis its approach to corporate
governance. Although the Corporation is not listed on the TSX, it refers to the
TSX guidelines for guidance. The Corporation's approach to corporate governance
is described below.
The Board of Directors is responsible for the supervision of the management of
the Corporation's business and affairs. Under applicable law, the board is
required to carry out its duties with a view to the best interests of the
Corporation.
The frequency of the meetings of the Board of Directors as well as the nature of
the agenda items change depending on the state of the Corporation's affairs and
in light of opportunities or risks which the Corporation faces from time to
time.
COMPOSITION OF THE BOARD
The TSX Guidelines recommend that a Board of Directors be constituted with a
majority of individuals who qualify as "unrelated directors". The TSX
Guidelines define an "unrelated director" as a director who is independent of
management and free from any interest and any business or other relationship
which could, or could reasonably be perceived to, materially interfere with that
director's ability to act with a view to the best interests of the corporation,
other than an interest arising from shareholding. The TSX Guidelines also
recommend that in circumstances where a corporation has a "significant
shareholder" (a shareholder with the ability to exercise the majority of votes
for the election of directors), the Board of Directors should include a number
of directors who do not have interests in or relationships with either
corporation or the significant shareholder, which fairly reflects the investment
in the corporation by shareholders other than the significant shareholder. The
Corporation does not have a "significant shareholder" at this time. Diversinet
-17-
recently incorporated new changes to its Board of Directors, including the
institution of a Corporate Governance Committee and the replacement of the Chief
Executive Officer as Chairman of the Board with an external director. Moreover,
as further indication of the Corporation's mandate to comply fully with emerging
corporate governance issues, the CEO and CFO each certified the most recent 6-K
filing with the Securities & Exchange Commission in accordance with the
Sarbanes-Oxley Act, although, as a foreign issuer, they are not technically
required to do so.
The directors of the Corporation have examined these definitions in the TSX
Guidelines and have individually considered their respective interests in and
relationships with the Corporation. As a consequence, the Board of Directors
has concluded that four of the Board's five members are "unrelated" within the
meaning of the guidelines. Mr. Nagy Moustafa, President and Chief Executive
Officer, is related by virtue of being a member of the management team. The
Corporation does not have a significant shareholder (as defined above). The
Board of Directors considers its current size of five to be appropriate at the
current time.
The Board of Directors believes that the presence of the President and Chief
Executive Officer on the Corporation's Board of Directors is key to the
effective corporate governance of the Corporation. The knowledge and insight
that this director bring to the Board has been instrumental in creating a Board
of Directors that functions effectively and, in turn, achieves the Corporation's
successful development.
At present, in addition to those matters which must by law be approved by the
Board of Directors, management seek board approval for any transaction that is
out of the ordinary course of business or could be considered to be material to
the business of the Corporation.
The Board of Directors has three standing committees: the Audit Committee, the
Compensation Committee and the Governance Committee. The Board of Directors
does not have an Executive Committee.
COMMITTEES
AUDIT COMMITTEE
The Audit Committee is comprised of three directors. The Audit Committee's
responsibilities included reviewing the Corporation's financial report
procedures, the adequacy of its internal controls and information systems, the
external audit plan and the independence and terms of engagement and fees of the
external auditors and the performance of the Corporation's external auditors.
The committee also has the responsibility to review, and to recommend for
approval, the Corporation's interim unaudited consolidated financial statements
and annual consolidated financial statements, management's discussion and
analysis of financial condition and results of operations and related press
releases, prior to their approval by the full Board. The members of the Audit
Committee are Mark Steinman (Chair), Keith Powell and Nagy Moustafa.
COMPENSATION COMMITTEE
The Compensation Committee is comprised of two directors. It is the
responsibility of the Compensation Committee to determine the level of
compensation in respect of the Corporation's senior executives (including Named
Executive Officers) with a view to providing such executives with a competitive
compensation package having regard to performance. Performance is defined to
include achievement of the Corporation's strategic objective of growth,
development of the business, enhancement of shareholder value and attainment of
annual goals as set by the Board of Directors. The members of the Compensation
Committee are Keith Powell (Chair) and Stanley Beck.
GOVERNANCE COMMITTEE
The Governance Committee is comprised of two directors. The Governance
Committee will assist the Board of Directors in fulfilling its oversight
responsibilities related to seeking candidates for membership on the Board of
Directors, assessing the corporate governance policies and processes of the
Board of Directors and reviewing from time to time the policies of the Board of
Directors related to director qualifications, compensation, tenure and
retirement. The members of the Governance Committee are Stanley Beck (Chair)
and Keith Powell.
-18-
GENERAL
Management knows of no matters to come before the Meeting or any adjournments
thereof other than the matters referred to in the Notice of the Meeting.
However, if any other matters that are not now known to management should
properly come before the Meeting or any adjournments thereof, the proxy
solicited hereby will be voted on such matters in accordance with the best
judgment of the persons voting the proxy.
DIRECTORS' APPROVAL
The undersigned hereby certifies that the Board of Directors of the Corporation
has approved the contents and sending of this Circular.
DATED at Toronto, Ontario, the 13th day of December 2002.
BY ORDER OF THE
BOARD OF DIRECTORS
/s/ Mark Steinman
MARK STEINMAN
Chairman
December 13, 2002
Toronto, Ontario
-19-
SCHEDULE A
DIVERSINET CORP.
LETTER OF TRANSMITTAL
TO: COMPUTERSHARE TRUST COMPANY OF CANADA
The undersigned hereby represents and warrants that the undersigned is the owner
of the number of common shares of Diversinet Corp. ("Common Shares"), which
shares are represented by the share certificate(s) described below and delivered
herewith and the undersigned has good title to the shares represented by the
said certificate(s), free and clear of all liens, charges and encumbrances, and
has full power and authority to herewith deposit such shares.
- --------------------------------------------------------------------------------
Certificate Number Number of Shares Registered in the Name of
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The above-listed share certificates are hereby surrendered in exchange for
certificates representing common shares of Diversinet Corp. to be exchanged in
accordance with the following formula. Each Old Share shall be exchanged for
that fraction of a new common share of the Corporation (a "New Share") equal to
the quotient of one and the number obtained by dividing (a) US $3.00 by (b) the
weighted average of the closing price of the common shares of the Corporation on
the Nasdaq SmallCap Market on each of the five trading days from January 15
through January 21, 2003 (inclusive); provided the denominator of the resulting
fraction will be rounded up or down to the nearest whole number if and as
necessary to produce a ratio of a fixed number of Old Shares for each New Share
and provided further that no fractional shares will be issued to a registered
holder, but in lieu thereof, the number of New Shares to be received by a
registered shareholder will be rounded up or down to a whole number of New
Shares. The exact ratio will be disclosed on January 22, 2003, or as shortly
thereafter as is practical.
The undersigned authorizes and directs Computershare Trust Company of Canada to
issue a certificate for Diversinet Corp. to which the undersigned is entitled as
indicated below and to mail such certificate to the address indicated below or,
if no instructions are given, in the name and to the address if any, of the
undersigned as appears on the share register maintained by Diversinet Corp.
- --------------------------------------------------------------------------------
NAME (please print)
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ADDRESS
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City State/Province
- --------------------------------------------------------------------------------
Zip/Postal Code Country
- --------------------------------------------------------------------------------
Telephone (Office) ( ) Social Insurance Number Tax
- --------------------------------------------------------------------------------
Identification Number
- --------------------------------------------------------------------------------
Date: ___________________________
Signature of Shareholder: ____________________________________
INSTRUCTIONS
1. USE OF LETTER OF TRANSMITTAL
(a) Each shareholder holding share certificate(s) of Diversinet Corp. must
send or deliver this Letter of Transmittal duly completed and signed
together with the share certificate(s) described herein to
Computershare Trust Company of Canada (the "Trust Company") at the
office listed below. The method of delivery to the Trust Company is at
the option and risk of the shareholder, but if mail is used,
registered mail is recommended.
(b) Share certificate(s) registered in the name of the person by whom (or
on whose behalf) the Letter of Transmittal is signed need not be
endorsed or accompanied by any share transfer power of attorney.
(c) Share certificate(s) not registered in the name of the person by whom
(or on whose behalf) the Letter of Transmittal is signed must be
endorsed by the registered holder thereof or deposited together with
share transfer power of attorney properly completed by the registered
holder. Such signature must be guaranteed by an "Eligible
Institution", or in some other manner satisfactory to the Trust
Company.
An "Eligible Institution" means a Canadian schedule 1 chartered bank,
a major trust company in Canada, a member of the Securities Transfer
Agent Medallion Program (STAMP), a member of the Stock Exchanges
Medallion Program (SEMP) or a member of the New York Stock Exchange
Inc Medallion Signature Program (MSP). Members of these programs are
usually members of a recognized stock exchange in Canada and the
United States, members of the Investment Dealers Association of
Canada, members of the National Association of Securities Dealers or
banks and trust companies in the United States.
(d) Where the Letter of Transmittal is executed on behalf of a
corporation, partnership or association, or by an agent, executor,
administrator, trustee, guardian or any person acting in a
representative capacity, the Letter of Transmittal must be accompanied
by satisfactory evidence of the representative's authority to act.
(e) Diversinet Corp. reserves the right if it so elects in its absolute
discretion to instruct the Trust Company to waive any defect or
irregularity contained in any Letter of Transmittal received by it.
2. LOST SHARE CERTIFICATES
If a share certificate has been lost or destroyed, the Letter of
Transmittal must be completed as fully as possible and forwarded to the
Trust Company together with a letter stating the loss. The Trust Company
will respond with the replacement requirements, which must be properly
completed and returned prior to effecting the exchange.
3. MISCELLANEOUS
Additional copies of the Letter of Transmittal may be obtained from The
Trust Company at the office listed below. Any questions should be directed
to Computershare Trust Company of Canada at 1-800-564-6253 or by e-mail to
caregistryinfo@computershare.com.
---------------------------------
BY MAIL BY HAND OR COURIER
P.O. Box 7021 100 University Avenue
31 Adelaide St E 9th Floor
Toronto, ON M5C 3H2 Toronto, ON M5J 2Y1
Attn: Corporate Actions Attn: Corporate Actions
DIVERSINET (TM)
DIVERSINET CORP.
NOTICE OF ANNUAL AND SPECIAL
MEETING OF SHAREHOLDERS
TAKE NOTICE THAT the annual and special meeting of shareholders ("the
Meeting") of DIVERSINET CORP. (the "Corporation") will be held at the offices of
the Corporation, 2225 Sheppard Avenue East, Suite 1700, Toronto, Ontario, on
Wednesday, January 22, 2003 at the hour of 10:00 o'clock in the morning (Toronto
time), for the following purposes:
1. To consider and receive the financial statements of the Corporation for the
year ended October 31, 2002, together with the report of the auditors
thereon;
2. To elect directors;
3. To appoint auditors and authorize the directors to fix their remuneration;
4. To consider and grant the Board discretionary authority to effect a reverse
stock split at a fixed integer of Old Shares for each New Share that would
result in an anticipated after-split price on Nasdaq of approximately US
$3.00;
5. To consider and approve the reservation of 2,147,916 shares of common stock
for issuance under the Diversinet Corp. Amended and Restated Stock Option
Plan; and
6. To transact such other business as may properly come before the Meeting or
any adjournments thereof.
Holders of common shares who are unable to attend the Meeting in person are
requested to sign and return the enclosed form of proxy in the envelope provided
for that purpose.
The Corporation's financial statements for the year ended October 31, 2002, the
report of the auditors thereon to the shareholders, a management information
circular and a form of proxy are enclosed herewith.
The board of directors has fixed the close of business on December 23, 2002 as
the record date for the determination of holders of common shares entitled to
notice of the Meeting and any adjournments thereof.
The board of directors has by resolution fixed the close of business on the
second business day preceding the day of the Meeting or any adjournment thereof
(excluding Saturdays, Sundays and holidays) as the time before which proxies to
be used or acted upon at the Meeting or any adjournment thereof shall be
deposited with the Corporation.
DATED at Toronto this 13th day of December 2002.
BY ORDER OF THE
BOARD OF DIRECTORS
/s/ NAGY MOUSTAFA
NAGY MOUSTAFA
President and Chief Executive Officer
DIVERSINET (TM)
FORM OF PROXY SOLICITED BY THE MANAGEMENT OF
DIVERSINET CORP.
FOR USE AT THE ANNUAL AND SPECIAL MEETING
OF SHAREHOLDERS TO BE HELD ON
JANUARY 22, 2003
The undersigned shareholder(s) of DIVERSINET CORP. (the "Corporation") hereby
appoints Nagy Moustafa, President and Chief Executive Officer of the
Corporation, or failing him David Hackett, Chief Financial Officer of the
Corporation, or in lieu of the foregoing, ______________________, as nominee of
the undersigned to attend, act and vote for the undersigned at the annual and
special meeting of shareholders of the Corporation (the "Meeting") to be held on
the 22nd day of January 2003 and at all adjournments thereof (the "Meeting").
The undersigned specifies that all of the voting shares owned by him and
represented by this form of proxy shall be:
(a) VOTED FOR ( ) WITHHELD FROM VOTING ( )
in respect of the election of directors;
(b) VOTED FOR ( ) WITHHELD FROM VOTING ( )
in respect of the appointment of KPMG LLP as auditors
and authorizing the directors to fix their
remuneration;
(c) VOTED FOR ( ) WITHHELD FROM VOTING ( )
in respect of amending the articles of the Corporation
to consolidate the common shares (the "Old Shares") by
changing each Old Share into that fraction of a new
common share (a "New Share") equal to the quotient of
one and the number obtained by dividing (a) US $3.00 by
(b) the weighted average of the closing price on each
of the five trading days from January 15 through
January 21, 2003;
(d) VOTED FOR ( ) WITHHELD FROM VOTING ( )
in respect of the reservation of 2,147,916 shares of
common stock for issuance under the Diversinet Corp.
Amended and Restated Stock Option Plan;
(e) VOTED at the discretion of the proxy nominee on
such matters as may properly come before the Meeting or
any adjournment thereof;
hereby revoking any proxy previously given.
IF ANY AMENDMENTS OR VARIATIONS TO MATTERS
IDENTIFIED IN THE NOTICE OF MEETING ARE PROPOSED
AT THE MEETING OR ANY ADJOURNMENTS THEREOF OR IF
ANY OTHER MATTERS PROPERLY COME BEFORE THE MEETING
OR ANY ADJOURNMENTS THEREOF, THIS PROXY CONFERS
DISCRETIONARY AUTHORITY TO VOTE ON SUCH AMENDMENTS
OR VARIATIONS ON SUCH OTHER MATTERS ACCORDING TO
THE BEST JUDGMENT OF THE PERSON VOTING THE PROXY
AT THE MEETING OR ANY ADJOURNMENTS THEREOF.
DATED THIS ______ DAY OF __________________, 2003.
__________________________________________
Signature of Shareholder
__________________________________________
Name of Shareholder (Please print)
SEE NOTES ON REVERSE
NOTES:
1. This form of proxy must be dated and signed by the appointor or his
attorney authorized in writing or, if the appointor is a body corporate,
this form of proxy must be executed by an officer or attorney thereof duly
authorized.
2. A SHAREHOLDER HAS THE RIGHT TO APPOINT A PERSON (WHO NEED NOT BE A
SHAREHOLDER) TO ATTEND AND ACT FOR HIM AND ON HIS BEHALF AT THE MEETING
OTHER THAN THE PERSONS DESIGNATED IN THE ENCLOSED FORM OF PROXY. SUCH RIGHT
MAY BE EXERCISED BY STRIKING OUT THE NAMES OF THE PERSONS DESIGNATED
THEREIN AND BY INSERTING IN THE BLANK SPACE PROVIDED FOR THAT PURPOSE THE
NAME OF THE DESIRED PERSON OR BY COMPLETING ANOTHER FORM OF PROXY AND, IN
EITHER CASE, DELIVERING THE COMPLETED AND EXECUTED PROXY TO THE CORPORATION
OR ITS TRANSFER AGENT PRIOR TO THE CLOSE OF BUSINESS ON THE SECOND BUSINESS
DAY PRECEDING THE DAY OF THE MEETING OR ANY ADJOURNMENTS THEREOF.
3. THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
INSTRUCTIONS OF THE SHAREHOLDER ON ANY BALLOT THAT MAY BE CALLED FOR AND,
SUBJECT TO SECTION 114 OF THE BUSINESS CORPORATIONS ACT (ONTARIO), WHERE A
CHOICE IS SPECIFIED, THE SHARES SHALL BE VOTED ACCORDINGLY AND WHERE NO
CHOICE IS SPECIFIED, THE SHARES SHALL BE VOTED FOR THE MATTERS REFERRED TO.
WHERE NO SPECIFICATION IS MADE TO VOTE OR WITHHOLD FROM VOTING IN RESPECT
OF THE ELECTION OF DIRECTORS OR THE APPOINTMENT OF AUDITORS, THE SHARES
WILL BE VOTED.
4. Proxies to be used at the Meeting must be received at the Corporation's
office or the office of its transfer agent prior to the close of business
on the second business day preceding the day of the Meeting or any
adjournments thereof.
5. Please date the proxy. If not dated, the proxy shall be deemed to be dated
on the date on which it is mailed.
6. This proxy ceases to be valid one year from its date.
7. If your address as shown is incorrect, please give your correct address
when returning this proxy.
PLEASE RETURN THIS FORM OF PROXY, COMPUTERSHARE TRUST COMPANY OF CANADA
IN THE ENVELOPE PROVIDED FOR PROXY DEPARTMENT
THAT PURPOSE (OR BY FAX) TO: 100 UNIVERSITY AVENUE
TORONTO, ONTARIO
M5J 2Y1
FAX: (416) 981-9800
DIVERSINET CORP.
REQUEST FOR INTERIM FINANCIAL STATEMENTS
Dear Shareholder:
In accordance with National Instrument 54-102 of the Canadian Securities
Administrators, registered and beneficial shareholders of the Corporation may
elect annually to receive interim corporate mailings, including interim
financial statements of the Corporation, if they so request. If you wish to
receive such communications, please complete and return this form to:
COMPUTERSHARE TRUST COMPANY OF CANADA
100 University Avenue
9th Floor
Toronto, Ontario
M5J 2Y1
NAME:___________________________________________________________________________
ADDRESS:________________________________________________________________________
______________________________ POSTAL CODE:_____________________________________
EMAIL: ________________________ FAX:____________________________________________
I confirm that I am the owner of common shares of the Corporation.
SIGNATURE OF
SHAREHOLDER:____________________________ DATE:____________________________
CUSIP: 25536K204
Diversinet
2002 Annual Report
[GRAPHIC OMITTED]
To Our Shareholders:
During the past year, we continued to focus on the high-growth Asia-Pacific
region and have made significant progress in developing the beginning of a
worldwide security infrastructure by proving our ability to deliver
technologically advanced wireless security solutions.
In 2002, we entered into agreements with several application developers in the
Asia-Pacific region, as well as the six mobile operators in Hong Kong. We also
entered into an agreement with SecureNet Ltd., thereby expanding the
availability of Diversinet's leading-edge wireless security and presence in the
Australian and Chinese markets. These relationships will help support the use of
Diversinet's end-to-end wireless security for mobile commerce applications.
The Company has spent the past year investing in these new markets and the
progress made to date has been very substantial and will serve as a model for
future developments in the region.
Last year, I mentioned that future product development initiatives will be based
on meeting our customers' needs and broadening our suite of security solutions
for next-generation networks and handsets. In 2002, Diversinet introduced
support for several new mobile devices and validated our technological lead with
the award of Common Criteria (ISO 15408-3) certification for our core product,
Passport Certificate Server(R). These new developments will help open the door
to new potential sales.
While still in an early market stage, the wireless market is starting to show
new signs of life. We are witnessing the introduction of new phones that feature
color screens and multimedia messaging capabilities, as well as the launch of
next-generation networks. As the market continues to develop and the
applications mature, we feel that it will give rise to future expansion of the
Company's operations.
Our decisions in 2002 have provided us with a platform for significant growth
going forward. To build on these gains, we have taken several steps to improve
our long-term performance by focusing on launching new applications and
controlling costs, as is evident in our reduced cash burn. While controlling
costs, we have still maintained our market lead in both technology and through
expansion into new markets. Our efforts to date should position the Company
towards profitability in the near term.
In November, the Board approved a share consolidation plan, subject to
shareholder approval, that will help increase the minimum bid price of
Diversinet's stock. After the effects of the share consolidation, it is the
Company's expectation that the share price will be approximately US$3. We feel
that continued listing on the Nasdaq SmallCap Market is important for the
Company and we look forward to your support for the share consolidation.
I would like to thank our shareholders for their continued support; we look
forward to updating you throughout the exciting year ahead. I would also like to
thank our employees for their dedication and efforts to build the solid
operational foundation that Diversinet enjoys today.
Regards,
/s/ Nagy Moustafa
Nagy Moustafa
President and Chief Executive Officer
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
When used herein, the words "may", "will", "expect", "anticipate", "continue",
"estimate", "project", "intend", "plan" and similar expressions are intended to
identify forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended, regarding events, conditions and
financial trends that may affect the Company's future plans of operations,
business strategy, operating results and financial position. All statements,
other than statements of historical facts, included or incorporated by reference
in this document which address activities, events or developments which the
Company expects or anticipates will or may occur in the future, including such
things as future capital expenditures (including the amount and nature thereof),
business strategy, expansion and growth of the Company's business and
operations, and other such matters are forward-looking statements. These
statements are based on certain assumptions and analyses made by the Company in
light of its experience and its perception of historical trends, current
conditions and expected future developments as well as other factors it believes
are appropriate in the circumstances. Such statements are not guarantees of
future performance and are subject to risks and significant uncertainties and
that actual results may differ materially from those included within the
forward-looking statements as a result of various factors. The occurrence of
any unanticipated events may cause actual results to differ from those expressed
or implied by the forward-looking statements contained herein. You are
cautioned not to place undue reliance on these statements, which speak only as
of the date of this report.
Please find enclosed the Consolidated Balance Sheets as at October 31, 2002 and
2001 and the Consolidated Statements of Loss and Deficit and the Consolidated
Statements of Cash Flows for the years ended October 31, 2002, 2001 and 2000 and
the Notes to Consolidated Financial Statements for Diversinet Corp. Our
financial statements have been prepared in accordance with Canadian GAAP. These
principles conform in all material respect with U.S. GAAP except as described in
Note 15 to our consolidated statements. The following discussion should be read
in conjunction with the consolidated financial statements and notes thereto
appearing elsewhere in this annual report.
The differences between line items under Canadian GAAP and those under U.S. GAAP
are not significant except that, under U.S. GAAP, our total loss would be
greater by $55,000, $56,000 and $1,449,000 for the years ended October 31, 2002,
2001 and 2000 respectively. These differences relate to differences in
accounting for stock based compensation in fiscal 2002, 2001 and 2000.
OVERVIEW
We are a security software product company that develops, markets and sells
identity management security solutions for the secure transmission of data over
wireless networks and devices. We are a pioneer in providing wireless security
products for mobile commerce over wireless networks and are striving to become
the leading provider of wireless security solutions.
We have been developing our products since 1997. Our main product is the
Passport Certificate Server(R), which enables the implementation of a public key
infrastructure (PKI) solution for mobile electronic commerce through the use and
management of digital certificates. In addition we have a Passport Authorization
ProductTM which extends the functionality of digital certificates by granting
related privileges to the holder of a digital certificate. We currently hold
two patents in the Untied States and one patent in Israel regarding our
technology.
Using our solutions, our customers can establish secure, trusted environments to
facilitate mobile commerce transactions using wireless devices. During fiscal
2002, we completed a pilot test with the Hong Kong m-Cert Implementation Forum
(HKMIF) - a forum jointly created by Hong Kong's six local mobile operators to
develop and implement a single mobile digital certificate standard to promote
mobile commerce in Hong Kong. The Company also received Common Criteria (ISO
15408-3) certification for its Passport Certificate Server(R) Version 4.1.1.
Common Criteria, a rigorous international security standard recognized by 14
countries, evaluates the trustworthiness of information technology security
products and systems.
3
We have incurred operating losses in each of the last six fiscal years, most
recently from our continuing operations of developing security products. We
have sustained our business during this period through the sale of common shares
in a series of private placements. We cannot provide assurance that we will be
able to raise sufficient funds in the future to sustain our operations.
OPERATING RESULTS
Year ended October 31, 2002 compared to year ended October 31, 2001
For the year ended October 31, 2002, we reported revenue of $1,118,000 compared
to revenue of $1,221,000 for the year ended October 31, 2001. We are operating
in an evolving and unpredictable market and accordingly have and may continue to
experience wide fluctuations in our revenues. We generated 63% (55% for 2001) of
our revenues from the Asian region, 2% (24% in 2001) from the United States, 29%
(17% in 2001) from Canada and 6% (4% in 2001) from other areas during fiscal
year 2002.
During fiscal 2002, 28% (40% in 2001) of our revenue came from one customer.
These customers are not related to each other. As the market that we operate in
is still in an early stage of development and our revenue is still quite small,
it is reasonable to expect that our revenue may continue to be concentrated
among relatively few customers for the near future.
We reported an improved net loss of $6,397,000 for the year ended October 31,
2002 compared to a net loss of $18,900,000 in the prior year. We completed
operating cost reductions in the fourth quarter of 2001 that resulted in a
decline in expenses from operations during fiscal 2002 compared to fiscal 2001.
These reductions included workforce reductions in the United States and Canada,
closure of offices in the United States and the discontinuance of non-core
programs particularly in the marketing area. The restructuring was aimed at
refocusing our efforts on the most significant market opportunities in Asia and
Europe.
Research and development expenses decreased to $2,328,000 in 2002 from
$6,907,000 in 2001 resulting primarily as a result of continued efforts to
reduce costs as started in the last quarter of fiscal 2001. During the year we
received a net amount of $286,000 relating to investment tax credits for R&D
work done in 2000 and 1999.
Sales and marketing expenses were $1,737,000 in 2002 compared to $7,256,000 in
2001. The Company continues to focus a significant portion of its efforts in
the Austral Asian markets where we derived 63% of our 2002 revenues. During
2002 we implemented a pilot project for Hong Kong's six local mobile operators,
the Hong Kong m-Cert Implementation Forum to develop and implement a single
mobile digital certificate (m-Cert) standard to promote mobile commerce in Hong
Kong. We continue to make progress in this region and expect to increase our
presence in 2003.
General and administrative expenses were $2,989,000 in 2002 compared to
$4,029,000 in 2001. These figures include foreign exchange losses of $228,000
for 2002 and a gain of $621,000 for 2001.
Depreciation and amortization expense in fiscal 2002 decreased to $636,000 from
$1,888,000 in fiscal 2001. The Company's deferred development and purchased
technology costs were fully amortized in 2001 and the reduction in additions to
capital assets has resulted in reduced amortization for the 2002 fiscal year.
During fiscal 2001, we entered into a joint venture to conduct certain of our
Asian activities, as detailed in note 7 to our audited financial statements. We
own 50% of this joint venture and our financial statements reflect our
proportionate interest in its assets, liabilities, revenue and expenses.
4
We earned interest income of $175,000 and $690,000 in fiscal 2002 and 2001,
respectively. The decrease is primarily due to our lower average cash and cash
equivalents in 2002 and due to lower interest rates than we received during
2001.
Year ended October 31, 2001 compared to year ended October 31, 2000
For the year ended October 31, 2001, we reported revenue of $1,221,000 compared
to revenue of $2,636,000, for the year ended October 31, 2000. The information
technology slowdown resulted in a deferral of purchases by our potential
customers throughout the year resulting in reduced revenue compared to the prior
year. We are operating in an evolving and unpredictable market and accordingly
have and may continue to experience wide fluctuations in our revenues. We
generated 55% (0% in 2000) of our revenue from the Asian region, 24% (56% in
2000) from the United States, 17% (12% in 2000) from Canada and 4% (32% in 2000)
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 one customer. These customers are not
related to each other. As the market we operate in is still in an early stage
of development and our revenue is still quite small, it is reasonable to expect
that our revenue may continue to be concentrated among relatively few customers
for the near future.
We reported a net loss of $18,900,000, for the year ended October 31, 2001,
compared to a net loss of $15,027,000, in the prior year. The increased net
loss in fiscal 2001 is attributable partly to a decrease in revenue compared to
the prior year and partly to increased costs, especially in sales and marketing,
during the year. We completed operating cost reductions in the fourth quarter
of 2001 that resulted in a decline in expenses from operations during fiscal
2002 compared to fiscal 2001. We incurred $730,000 in severance costs related
to these operating cost reductions of which $150,000 was paid subsequent to our
year-end.
Research and development expenses increased to $6,907,000 in 2001 from
$5,888,000 in 2000 resulting primarily from wages, occupancy, and travel costs
which were higher on average than in the prior year. These expenses declined in
fiscal 2002 as a result of the cost reductions completed late in fiscal 2001.
Sales and marketing expenses were $7,256,000 in 2001 compared to $5,435,000 in
2000. During the fourth quarter sales and marketing staff in North America were
reduced as the Company refocused its efforts in the Asian and European markets
where the Company has been achieving some success. With the launch of the
Hongkong Post wireless certificate service late in fiscal 2001, interest in our
products has increased in the Asian region. Activity in this region increased
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.
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 were
fully amortized during fiscal 2001 and the reduction in additions to capital
assets resulted in reduced amortization for the year.
LIQUIDITY AND CAPITAL RESOURCES
Year ended October 31, 2002 compared to year ended October 31, 2001 and year
ended October 31, 2000
Cash used in operating activities was $7,258,000 in the year ended October 31,
2002, a decline of 55% from the amount used in the same period of the prior
year. Cash used in operating activities during the year was comprised of the
net loss of $6,397,000, less net depreciation and amortization of $636,000.
Changes in other non-cash items include a decrease in accounts payable and
accrued liabilities of $1,876,000, an increase in receivables of $67,000, a
decrease in deferred revenue of $29,000 and a decrease in prepaid expenses of
$475,000.
5
Cash used in operating activities was $15,963,000 in the year ended October 31,
2001, attributable to the net loss of $18,900,000 less net depreciation and
amortization of $1,888,000. Changes in other non-cash items include a decrease
in accounts payable and accrued liabilities of $321,000, a decrease in
receivables of $1,438,000, a decrease in deferred revenue of $39,000 and an
increase in prepaid expenses of $29,000.
Cash used in operating activities was $13,121,000 in the year ended October 31,
2000, attributable to the net loss of $14,777,000 less net depreciation and
amortization of $2,604,000. Changes in other non-cash items include an increase
in accounts payable and accrued liabilities of $894,000, an increase in
receivables of $1,471,000, an increase in deferred revenue of $78,000 and a
increase in prepaid expenses of $376,000.
Cash provided by financing activities in the year ended October 31, 2002 was
$4,965,000. In April 2002, we completed a private placement for net proceeds of
$4,965,000. The Company completed the issue and sale of 5,186,708 units in the
capital of the Company at U.S.$0.60 per unit for gross proceeds of
U.S.$3,112,022. Cash provided by financing activities in the year ended October
31, 2001, was $106,000 as a result of proceeds received from issuing common
shares under an employee stock option exercise.
Cash provided by financing activities in the year ended October 31, 2000 was
$30,674,000. In July 2000, we completed a private placement which generated net
proceeds of $23,544,000. Funds were also received during the year on the
exercise of stock options amounting to $2,022,000 and upon the exercise of
common share purchase warrants issued in April 1999 which generated proceeds of
$1,651,000. In December 1999, we received $3,429,000 as proceeds from the
exercise of a warrant, issued in December 1997, to purchase 900,000 common
shares at an exercise price of U.S. $2.50.
Cash provided by investing activities in the year ended October 31, 2002 was
$184,000 consisting of $200,000 received from proceeds of a short-term
investment offset by $16,000 spent on capital assets. Cash used in investing
activities in the year ended October 31, 2001 was $4,274,000 consisting of
$1,186,000 spent on capital asset additions and the purchase of a $3,088,0000
short-term investment. Cash used in investing activities in the year ended
October 31, 2000 was $1,764,000 attributable to capital assets additions.
As of October 31, 2002 we had commitments under non-cancelable operating leases
for our principal facilities and equipment through 2006 in amounts ranging from
$554,000 in fiscal 2003 declining to $398,000 in fiscal 2006.
As of October 31, 2002 we had a commitment to contribute up to $27,000 to our
50% owned joint venture for our share of the joint venture requirements. This
amount is expected to be contributed within six months of our 2002 year-end.
We believe that our cash and cash equivalents and short-term investments as at
October 31, 2002 of $3,841,000 will not be sufficient to meet our short-term
working capital requirements for the next fiscal year. We plan to raise
additional amounts to meet our working capital requirements through private or
public financings, strategic relationships or other arrangements. However,
additional funding may not be available on terms attractive to us, or at all.
If we enter into strategic relationships to raise additional funds, we may be
required to relinquish rights to certain of our technologies. Our failure to
either raise capital when needed or to generate revenues would leave us with
insufficient resources to continue our business.
RISKS AND UNCERTAINTIES
Our Company is subject to a number of risks and uncertainties that could cause
actual results to differ materially from those predicted or anticipated. These
risks are described in our F-3 and annual Form 20-F filed on EDGAR in the United
States and filed on SEDAR in Canada. We encourage you to review these filings
in order to evaluate an investment in our securities. Some key risks that could
cause actual results to differ materially from those predicted or anticipated
are listed below.
6
Financial resources: The attached consolidated financial statements are
prepared on a going concern basis that assumes that the Company will continue in
operation in the foreseeable future and be able to realize its assets and
discharge its liabilities in the normal course of business. The projected cash
flows for the Company are based upon assumptions that include, amongst others, a
revenue stream from mobile business and the success of future external financing
initiatives. Should these projects be delayed then the present working capital
would not be sufficient for the Company to continue in the normal course of
operations.
In recognition of these concerns, management is considering various revenue and
cost management alternatives and may consider raising additional cash through
external financing activities. It is not possible at this time to predict with
any assurance the success of these initiatives.
Our ability to continue operations may be dependent on our ability to obtain
additional financing. Although we have made progress in developing our 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 2003. We have obtained funding for operations from
private equity placements in the past, but there is no assurance we will be able
to do so again in the near future despite the progress of the business. Our
failure to either raise capital when needed or to generate revenues would leave
us with insufficient resources to continue our business.
Our quarterly and annual operating results have varied substantially in the past
and are likely to vary substantially from quarter to quarter and year to year in
the future due to a variety of factors. In particular, our period-to-period
operating results are significantly dependent upon the completion date of
license agreements. In this regard, the purchase of our products often requires
our customers to make a significant capital investment, which customers may view
as a discretionary cost and, therefore, a purchase that can be deferred or
cancelled due to budgetary or other business reasons. Estimating future
revenues is also difficult because we ship our products upon receipt of a signed
license agreement and, therefore, we do not have a backlog. Thus, quarterly and
annual license revenues are heavily dependent upon agreements finalized and
software shipped within the same quarter or year. Moreover, we have generally
recorded a significant portion of our total quarterly revenues in the third
month of a quarter, with a concentration of these revenues in the last half of
that third month. This concentration of revenues is influenced by customers'
tendencies to make significant capital expenditures at the end of a fiscal
quarter. We expect these revenue patterns to continue for the foreseeable
future, until recurring revenue becomes a significant portion of total revenue.
Despite the uncertainties in our revenue patterns, our operating expenses are
based upon anticipated revenue levels and such expenses are incurred on an
approximately ratable basis throughout the quarter. As a result, if expected
revenues are delayed or otherwise not realized in a quarter for any reason, our
business, operating results and financial condition would be adversely affected
in a significant way.
Continued quotation on the Nasdaq SmallCap Market requires that we maintain a
minimum bid price of U.S.$1.00. On November 26, 2002 a Nasdaq Listing
Qualifications Panel determined to continue the listing of the Company's
securities pursuant to the following exception: On or before January 31, 2003,
the Company must demonstrate a closing bid price of U.S.$1.00 per share and,
immediately thereafter, a closing bid price of at least U.S.$1.00 per share for
a minimum of ten consecutive trading days. Thereafter, on or before April 20,
2003, the Company must file the Form 20-F for the fiscal year ended October 31,
2002 evidencing continued compliance with the U.S.$2,500,000 shareholders'
equity requirement. In order to fully comply with the terms of this exception,
Diversinet must be able to demonstrate compliance with all requirements for
continued listing on the Nasdaq SmallCap Market. In the event that Diversinet
fails to comply with any of the terms of this exception, its securities will be
delisted from the Nasdaq Stock Market. All companies operating under exceptions
are identified with a fifth letter "C" appended to the Company's trading symbol.
Accordingly effective with the open of business December 3, 2002, the trading
symbol was changed from DVNT to DVNTC. The "C" will be removed when the panel
has confirmed compliance with the terms of the exception.
7
On November 22, 2002 the Board of Directors approved a resolution to authorize
Diversinet to effect a share consolidation plan, subject to shareholder approval
at the January 22, 2003 special meeting of shareholders, to get the
Corporation's common share price over US$1.00 in order to be in compliance with
certain regulatory requirements for the Nasdaq SmallCap Market. As a result, it
is not possible at this time to predict with any assurance the success of this
proposed share consolidation.
Commercial deployment: The ability of the Company to continue operations is also
dependent on the acceptance of its security products and the adoption of
transaction-based applications over wireless networks as an accepted method of
commerce in sufficient volume for us to generate enough revenues to fund our
expenses and capital requirements. The wireless mobile commerce market is in a
very early stage and it may not develop to a sufficient level to support our
business.
Market conditions: The general economic conditions may have a significant impact
on our ability to generate sales for our products. During fiscal 2001 and 2002,
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 from fiscal 2001 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 2002 and 2001, we incurred most of our expenses in Canadian dollars, but
we also incurred a portion of our expenses in foreign currencies including U.S.
dollars, Pound Sterling and Hong Kong dollars. Changes in the value of these
currencies relative to the Canadian dollar may result in currency losses that
may have an adverse effect on our operating results. With the completion of our
financing in April 2002, we have a portion of our cash resources in U.S. dollar
short-term investments however, we have option dated contracts for U.S.$990,000
to minimize our exposure to fluctuations in the Canadian dollar. During fiscal
2002 we maintained a portion of our cash resources in U.S. dollar term deposits.
Litigation: Our Company has been named as a defendant in various proceedings
arising in the course of our Company's activities and arising from transactions
relating to a previous business operated by our Company. Litigation arising from
these matters may be time consuming, distracting and expensive. An adverse
resolution to any of these proceedings may have a material adverse impact on our
business and financial condition.
8
MANAGEMENT'S REPORT
The accompanying consolidated financial statements and all information in the
Annual Report have been prepared by management and approved by the Board of
Directors of the Company. The consolidated financial statements were prepared
in accordance with generally accepted accounting principles and, where
appropriate, reflect management's best estimates and judgements. Management is
responsible for the accuracy, integrity and objectivity of the consolidated
financial statements within reasonable limits of materiality and for the
consistency of financial data included in the text of the Annual Report with
that contained in the consolidated financial statements. To assist management
in the discharge of these responsibilities, the Company maintains a system of
internal controls designed to provide reasonable assurance that its assets are
safeguarded, that only valid and authorized transactions are executed and that
accurate, timely and comprehensive financial information is prepared and
disclosed. Consistent with the concept of reasonable assurance, the Company
recognizes that the relative cost of maintaining these controls should not
exceed their expected benefits.
The Company's Audit Committee is appointed by the Board of Directors annually
and is comprised of non-management directors. The Audit Committee meets with
management as well as with the independent auditors to satisfy itself that
management is properly discharging its financial reporting responsibilities and
to review the consolidated financial statements and the independent auditors'
report. The Audit Committee reports its findings to the Board of Directors for
consideration in approving the consolidated financial statements for
presentation to the shareholders. The independent auditors have direct access to
the Audit Committee.
The consolidated financial statements have been audited by KPMG LLP, Chartered
Accountants, on behalf of the shareholders, in accordance with generally
accepted auditing standards. Their report outlines the scope of their audit and
expresses their opinion on the consolidated financial statements of the Company.
/s/ Nagy Moustafa
Nagy Moustafa, President & Chief Executive Officer
/s/ David Hackett Chief
David Hackett, Financial Officer
KPMG LLP
Chartered Accountants Telephone (416) 228-7000
Yonge Corporate Centre Telefax (416) 228-7123
4100 Yonge Street Suite 200 www.kpmg.ca
North York, Ontario M2P 2H3
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Diversinet Corp. as at
October 31, 2002 and 2001 and the consolidated statements of earnings and
deficit and cash flows for each of the years in the three-year period ended
October 31, 2002. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and United States generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at October 31, 2002
and 2001 and the results of its operations and its cash flows for each of the
years in the three-year period ended October 31, 2002 in accordance with
Canadian generally accepted accounting principles.
/s/ KPMG LLP
9
Chartered Accountants, Toronto, Canada, November 22, 2002
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA - U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt on
the Company's ability to continue as a going concern, such as those described in
note 1 to the financial statements. Our report to the shareholders dated
November 22, 2002, is expressed in accordance with Canadian reporting standards
which do not permit a reference to such events and conditions in the auditors'
report when these are adequately disclosed in the financial statements.
/s/ KPMG LLP
Chartered Accountants, Toronto, Canada, November 22, 2002
10
DIVERSINET CORP.
Consolidated Balance Sheets
(In Canadian dollars)
October 31, 2002 and 2001
===========================================================================================================
2002 2001
- -----------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 953,272 $ 3,061,844
Short-term investments 2,887,352 3,087,680
Accounts receivable (including $172,503, $nil from joint venture, note 7) 416,070 274,521
Other receivables 24,952 99,469
Prepaid expenses 120,608 596,105
-------------------------------------------------------------------------------------------------------
Total current assets 4,402,254 7,119,619
Capital assets, net (note 3) 1,877,012 2,496,738
- -----------------------------------------------------------------------------------------------------------
Total assets $ 6,279,266 $ 9,616,357
===========================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 551,306 $ 1,191,117
Accrued liabilities (note 4) 1,093,352 2,329,269
Deferred revenue 14,452 43,843
-------------------------------------------------------------------------------------------------------
Total current liabilities 1,659,110 3,564,229
Shareholders' equity:
Share capital (note 5):
Authorized:
Unlimited common shares
Issued and outstanding:
32,222,084 common shares (2001 - 26,413,876) 58,957,962 53,992,992
Contributed surplus 97,500 97,500
Deficit (54,435,306) (48,038,364)
-------------------------------------------------------------------------------------------------------
Total shareholders' equity 4,620,156 6,052,128
Future operations (note 1)
Commitments and contingencies (note 11)
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 6,279,266 $ 9,616,357
===========================================================================================================
See accompanying notes to consolidated financial statements.
On behalf of the Board:
/s/ Nagy Moustafa /s/ David Hackett
Nagy Moustafa, Director David Hackett, Director
DIVERSINET CORP.
Consolidated Statements of Earnings and Deficit
(In Canadian dollars)
Years ended October 31, 2002, 2001 and 2000
============================================================================================
2002 2001 2000
- --------------------------------------------------------------------------------------------
Revenue (including $133,989, $199,925, $nil
from joint venture, note 7) $ 1,117,785 $ 1,220,981 $ 2,636,180
Expenses:
Research and development 2,327,604 6,906,566 5,888,028
Sales and marketing 1,737,027 7,256,432 5,435,378
General and administrative 2,989,102 4,029,236 4,185,431
Depreciation and amortization 635,835 1,888,147 2,603,589
Severance costs - 730,000 -
----------------------------------------------------------------------------------------
7,689,568 20,810,381 18,112,426
- --------------------------------------------------------------------------------------------
Loss before the following (6,571,783) (19,589,400) (15,476,246)
Interest income and other income (174,841) (689,541) (705,815)
Interest expense - - 6,777
- --------------------------------------------------------------------------------------------
Loss from continuing operations (6,396,942) (18,899,859) (14,777,208)
Net loss from discontinued operations (note 14) - - (250,000)
- --------------------------------------------------------------------------------------------
Loss for the year (6,396,942) (18,899,859) (15,027,208)
Deficit, beginning of year (48,038,364) (29,138,505) (14,111,297)
- --------------------------------------------------------------------------------------------
Deficit, end of year $(54,435,306) $(48,038,364) $(29,138,505)
============================================================================================
Basic and diluted loss per share -
continuing operations (note 6) $ (0.22) $ (0.72) $ (0.63)
Basic and diluted loss per share (note 6) (0.22) (0.72) (0.64)
============================================================================================
Weighted average number of
common shares 29,716,924 26,376,480 23,534,438
============================================================================================
See accompanying notes to consolidated financial statements.
DIVERSINET CORP.
Consolidated Statements of Cash Flows
(In Canadian dollars)
Years ended October 31, 2002, 2001 and 2000
===============================================================================================
2002 2001 2000
- -----------------------------------------------------------------------------------------------
Cash provided by (used in):
Operating activities:
Loss from continuing operations $(6,396,942) $(18,899,859) $(14,777,208)
Items not involving cash:
Depreciation and amortization 635,835 1,888,147 2,603,589
Foreign exchange gain on
debenture - - (78,864)
Interest on debenture - - 4,833
Change in non-cash operating working capital:
Accounts receivable (141,549) 1,383,227 (1,387,844)
Other receivables 74,517 55,175 (82,699)
Prepaid expenses 475,497 (28,635) (375,700)
Accounts payable (639,811) 770,977 202,146
Accrued liabilities (1,235,917) (1,092,111) 692,233
Deferred revenue (29,391) (39,493) 78,100
-------------------------------------------------------------------------------------------
Cash used in continuing operations (7,257,761) (15,962,572) (13,121,414)
Financing activities:
Issue of common shares, common share
purchase options and warrants for cash 4,964,970 105,728 30,674,246
-------------------------------------------------------------------------------------------
Cash provided by financing activities 4,964,970 105,728 30,674,246
Investing activities:
Short-term investments 200,328 (3,087,680) -
Additions to capital assets (16,109) (1,186,218) (1,763,658)
-------------------------------------------------------------------------------------------
Cash provided by (used in) investing activities 184,219 (4,273,898) (1,763,658)
- -----------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents (2,108,572) (20,130,742) 15,789,174
Cash and cash equivalents, beginning of year 3,061,844 23,192,586 7,403,412
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 953,272 $ 3,061,844 $ 23,192,586
===============================================================================================
Supplementary non-cash financing and
investing activities:
Conversion of convertible debenture $ - $ - $ 1,707,468
===============================================================================================
See accompanying notes to consolidated financial statements.
DIVERSINET CORP.
Notes to Consolidated Financial Statements
(In Canadian dollars)
Years ended October 31, 2002, 2001 and 2000
Diversinet Corp. (the "Company"), an Ontario corporation, develops and markets
security software products utilizing public-key infrastructure technology
primarily for use within wireless mobile e-commerce applications, such as
banking, stock trading, gaming and healthcare.
1. FUTURE OPERATIONS:
These consolidated financial statements have been prepared on a going
concern basis, which assumes the Company will continue in operation in the
foreseeable future and be able to realize assets and satisfy liabilities in
its normal course of business. Certain conditions and events exist that
cast doubt on the Company's ability to continue as a going concern.
The Company has incurred significant losses and used significant amounts of
cash in operating activities in recent years.
Continued operations depend upon the Company's ability to generate future
profitable operations and/or obtain additional financing to fund future
operations and, ultimately, to generate positive cash flows from operating
activities. There can be no assurance that the Company will be successful
in obtaining additional financing.
Should the Company be unable to generate positive cash flows from
operations or secure additional financing in the foreseeable future, the
application of the going concern principle for financial statement
reporting purposes may no longer be appropriate. These financial statements
do not include any adjustments related to the valuation or classification
of recorded asset amounts or the amounts or classification of liabilities
that may be necessary should the Company be unable to continue as a going
concern.
2. SIGNIFICANT ACCOUNTING POLICIES:
These consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada, which, except as
described in note 15, conform in all material respects with accounting
principles generally accepted in the United States. Significant accounting
policies adopted by the Company are as follows:
(a) Basis of consolidation:
The consolidated financial statements include the accounts of the
Company and its subsidiaries. The Company accounts for its interest in
a joint venture by the proportionate consolidation method. All
significant intercompany transactions and balances have been
eliminated.
(b) Revenue recognition:
Revenue from software license agreements is recognized upon execution
of a license agreement and the shipment of the software, as long as
all vendor obligations have been satisfied, the license fee is fixed
and determinable and collection of the license fees is probable.
Revenue from the sale of additional software products is recognized as
software is delivered.
Revenue earned on software arrangements involving multiple elements
(i.e., software products, upgrades/enhancements, post contract
customer support, installation, training, etc.) is allocated to each
element based on vendor specific objective evidence of relative fair
value of the elements. When arrangements contain multiple elements and
vendor specific objective evidence only exists for all undelivered
elements, the Company recognizes revenue for the delivered elements
using the residual method, whereby the total arrangement fee is
assigned to the undelivered elements based on their fair value, with
the residual assigned to the delivered elements and recognized. For
arrangements containing multiple elements where vendor specific
objective evidence does not exist for all undelivered elements,
revenue for the delivered and undelivered elements is deferred until
either vendor specific objective evidence exists for the remaining
undelivered elements or all elements have been delivered. The revenue
allocated to post contract customer support is recognized ratably over
the term of the support and revenue allocated to service elements
(such as training and installation) is recognized as the services are
performed.
The Company's sales arrangements generally include standard payment
terms ranging up to 90 days dependant upon geographic location of the
customer. The Company provides a limited product warranty, the costs
of which are insignificant.
Amounts received in advance of revenue recognition are recorded as
deferred revenue.
(c) Cash and cash equivalents:
Cash and cash equivalents include cash on account and short-term
investments in money market instruments with original maturities of 90
days or less when acquired.
(d) Short-term investments:
Short-term investments consist of bonds which are recorded at cost
plus accrued interest.
(e) Investment tax credits:
Investment tax credits are accrued when qualifying expenditures are
made and there is reasonable assurance that the credits will be
realized. Investment tax credits earned with respect to current
expenditures for qualified research and development activities are
included in the consolidated statements of earnings and deficit as a
reduction of related expenses in the year incurred. Assistance related
to the acquisition of capital assets used for research and development
is credited against the related capital assets. The Company has
recorded no investment tax credits.
(f) Research and development costs:
Research costs are expensed as incurred. Software development costs
are deferred once costs meet the criteria under Canadian generally
accepted accounting principles for deferral and amortization. Such
deferred costs are amortized, commencing when the product is
commercially released, on a straight-line basis over two years. The
recoverability of any unamortized deferred development costs is
reviewed on an ongoing basis.
(g) Purchased technology:
The Company capitalizes purchased technology and amortizes such costs
over two years. The carrying value is assessed on a periodic basis to
determine if a write-down is required.
(h) Foreign currency translation:
Monetary assets and liabilities denominated in foreign currencies are
translated into Canadian dollars at the exchange rates prevailing at
the consolidated balance sheet dates. Non-monetary assets and
liabilities are translated at historical rates. Transactions in
foreign currencies are translated into Canadian dollars at the
approximate rates prevailing at the dates of the transactions. Foreign
exchange gains and losses are included in loss for the year.
(i) Capital assets:
Capital assets are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization is provided over the
estimated useful lives of the assets at the following annual rates and
bases:
==============================================================
Asset Basis Rate
--------------------------------------------------------------
Computer hardware Declining balance 30%
Computer software Declining balance 30%
Furniture and fixtures Declining balance 20%
Leasehold improvements Straight-line Over term of lease
==============================================================
The Company regularly reviews the carrying values of its capital
assets by comparing the carrying amount of the asset to the expected
future undiscounted cash flows to be generated by the asset. If the
carrying value exceeds the amount recoverable, a write-down of the
asset to its estimated net recoverable amount is charged to the
statements of earnings and deficit.
(j) Income taxes:
The Company accounts for income taxes using the asset and liability
method. Under this method, future income taxes are recognized at the
enacted or substantively enacted tax rate expected to be applicable at
the date of reversal for all significant temporary differences between
the tax and accounting bases of assets and liabilities and for certain
tax carryforward items. Future income tax assets are recognized only
to the extent that, in the opinion of management, it is more likely
than not that the future income tax assets will be realized. Future
income tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of the substantive enactment
of the change.
(k) Earnings per share:
Basic earnings per share is computed using the weighted average number
of common shares that are outstanding during the year. Diluted
earnings per share is computed using the weighted average number of
common and potential common shares outstanding during the year.
Potential common shares consist of the incremental number of common
shares issuable upon the exercise of stock options and are calculated
using the treasury stock method.
(l) Stock-based compensation:
The Company has a stock-based compensation plan, as described in note
12. No compensation expense is recognized when stock or stock options
are issued to employees and consultants. Any consideration paid by
employees on exercise of stock options or purchase of stock is
credited to share capital. If stock or stock options are repurchased
from employees, the excess of the consideration paid over the carrying
amount of the stock option cancelled is charged to deficit.
(m) Use of estimates:
The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of these consolidated financial statements
and the reported amounts of revenue and expenses during the year.
Actual results could differ from those estimates.
(n) Derivatives:
From time to time the Company enters into forward exchange contracts
to limit the Company's exposure to exchange rate fluctuations. As
these contracts are accounted for as hedges, unrealized gains and
losses are recognized in income on their settlement dates.
3. CAPITAL ASSETS:
=================================================================================
Accumulated Net book
2002 Cost depreciation value
and amortization
---------------------------------------------------------------------------------
Computer hardware $1,541,580 $ 799,889 $ 741,691
Computer software 695,587 354,755 340,832
Furniture and fixtures 532,450 215,797 316,653
Leasehold improvements 731,268 253,432 477,836
---------------------------------------------------------------------------------
$3,500,885 $ 1,623,873 $1,877,012
=================================================================================
In 2002, depreciation and amortization expense amounted to $635,835.
=================================================================================
Accumulated Net book
2001 Cost depreciation value
and amortization
---------------------------------------------------------------------------------
Computer hardware $1,550,159 $ 516,417 $1,033,742
Computer software 689,927 215,268 474,659
Furniture and fixtures 520,257 138,196 382,061
Leasehold improvements 732,549 126,273 606,276
---------------------------------------------------------------------------------
$3,492,892 $ 996,154 $2,496,738
=================================================================================
In 2001, depreciation expense and amortization amounted to $545,446.
4. ACCRUED LIABILITIES:
=====================================================================
2002 2001
---------------------------------------------------------------------
Remuneration $ 369,670 $ 1,328,200
Professional fees 471,350 460,084
Miscellaneous 252,332 540,985
---------------------------------------------------------------------
$1,093,352 $ 2,329,269
=====================================================================
5. SHARE CAPITAL, WARRANTS AND COMMON SHARE PURCHASE OPTIONS:
There are an unlimited number of authorized common shares with no par
value.
The following details the changes in issued and outstanding shares,
compensation options and warrants for the three years ended October 31,
2002:
==============================================================================================
Compensation options
and warrants Common shares
----------------------------------------------------------------------------------------------
Number Amount Number Amount
----------------------------------------------------------------------------------------------
Balance, October 31, 1999 2,185,625 $ 589,000 20,280,528 $20,916,550
Conversion of warrants (b) (300,000) (468,000) 205,017 468,000
Conversion of warrants (c) (400,000) - 273,356 -
Conversion of debenture (b) - - 1,050,102 1,707,468
Common share purchase warrants
exercised (c) (298,875) - 298,875 1,156,646
Compensation options exercised (c) (136,750) - 136,750 494,194
Stock options exercised and shares issued (e) - - 656,131 2,022,253
Warrants (a) (900,000) (121,000) 900,000 3,428,500
Private placement (d) - - 2,450,001 23,543,653
Settlement of litigation (note 10) 263,500 - 100,000 150,000
----------------------------------------------------------------------------------------------
Balance, October 31, 2000 (f) 413,500 - 26,350,760 53,887,264
Stock options exercised and shares issued (e) - - 63,116 105,728
----------------------------------------------------------------------------------------------
Balance, October 31, 2001 413,500 - 26,413,876 53,992,992
Private placement (g) 4,715,541 - 5,808,208 4,964,970
----------------------------------------------------------------------------------------------
Balance, October 31, 2002 5,129,041 $ - 32,222,084 $58,957,962
==============================================================================================
<FN>
(a) On December 5, 1997, the Company received $1,295,000 (U.S. $900,000)
from the issue and sale of 900,000 common shares and a warrant to
purchase 900,000 common shares at a price of U.S. $2.50 per share
until December 5, 1999. These warrants were exercised during the
fiscal year ended October 31, 2000 and common shares were issued.
Proceeds to the Company as a result of this exercise were $3,428,500.
(b) During the year ended October 31, 1998, the Company completed a
private placement of an unsecured convertible debenture (the
"Convertible Debenture") in the principal amount of U.S. $2,000,000
and a non-redeemable warrant (the "Warrant") to purchase 300,000
common shares for total
proceeds of U.S. $2,000,000. The Convertible Debenture was convertible
until October 14, 2001 and bore interest at 3% per annum which was
payable in cash or common shares, at the option of the Company. The
Convertible Debenture was convertible at the holder's option into
common shares of the Company at the lower of (a) U.S. $1.18 per share
or (b) approximately 80% of the market price of the common shares at
the time of conversion. The Warrant entitled the holder to purchase an
aggregate of 300,000 of the Company's common shares at an exercise
price of U.S. $1.18 per share until October 15, 2003.
During fiscal 2000, the Convertible Debenture plus accrued interest
were fully converted into common shares leaving a principal balance of
nil. During fiscal 2000, the Warrant was converted to common shares
for no additional consideration based on the prevailing market price
at the time of conversion less U.S. $1.18.
(c) On April 23, 1999, the Company completed a private placement offering
of 2,134,000 special warrants. Each special warrant was offered at
$3.45 and was exercisable at any time until October 23, 2000, for no
additional consideration, to acquire one unit. Each unit consisted of
one common share and one quarter of a common share purchase warrant.
Each whole common share purchase warrant entitled the holder to
purchase one share for $3.87 until October 23, 2000. The gross
proceeds of the offering were $7,362,300.
The underwriter received commissions of 8% of gross proceeds for cash
commission of $588,984 plus out-of-pocket expenses (approximately
$285,170). The underwriter also received compensation options
entitling them to purchase up to 213,400 units at a price of $3.45 per
unit at any time prior to April 23, 2001, provided that if any
compensation options are exercised after October 23, 2000, such
options entitled the underwriter to receive only one common share per
unit exercised.
On July 23, 1999, the Company received a receipt for its prospectus
qualifying the common shares to be issued in exchange for the special
warrants. At that time, all special warrants were converted and the
Company received the funds that were held in escrow. As part of the
conversion, the Company issued 533,500 share purchase warrants
exercisable upon payments of $3.87 per share until October 23, 2000.
During fiscal 1999, 234,625 share purchase warrants were exercised,
resulting in proceeds of $907,999 to the Company. During fiscal 2000,
the remaining 298,875 warrants were exercised resulting in proceeds of
$1,156,646 to the Company.
The consent of the debentureholder was required to proceed with the
private placement offering. In consideration for this consent, the
Company issued to the debentureholder warrants to purchase up to
400,000 common shares at an exercise price of U.S. $4.50 expiring on
April 23, 2001. During fiscal 2000, these warrants were converted to
common shares for no additional consideration based on the prevailing
market price of the common shares at the time of exercise less U.S.
$4.50.
(d) During July and August of 2000, the Company completed a private
placement of 2,450,001 common shares for net proceeds of $23,543,653.
(e) During 2000, 2001 and 2002, the Company granted options to certain
employees, officers and directors under a share option plan (note 12),
enabling them to purchase common shares of the Company.
(f) Warrants outstanding as of October 31, 2001 and 2000 consist of
150,000 warrants issued in October 1999 as an exercise price of U.S.
$13.13 per share, expiring October 2004 and 263,500 warrants issued in
May 2000 at an exercise price of U.S. $8.59 per share, expiring May
2005.
(g) On April 4, 2002, the Company completed a private placement of
5,186,708 units at a price of U.S. $0.60 per unit for gross proceeds
before expenses of $4,979,235 (U.S. $3,112,022). Each unit was
comprised of one common share and three-quarters of one common share
purchase warrant. Each warrant entitles the holder thereof to acquire
one common share at a price of U.S. $0.72 per common share for a
period of up to three years from April 4, 2002.
The following consideration was issued to placement agents in
connection with the private placement: (i) cash consideration of
$224,640 (U.S.$140,400) plus out-of-pocket expenses of approximately
U.S.$7,500; (ii) compensation options to purchase up to 234,000 units
on the same terms as described above; (iii) 500,000 common share
purchase warrants to purchase common shares at prices of U.S.$0.60 and
U.S.$0.72 and expiring on April 2 and 3, 2005; (iv) 187,500 common
share purchase warrants to purchase common shares at a price of
U.S.$0.01 per common share.
On April 8, 2002, the compensation options noted in (ii) above, were
exercised and the Company issued 234,000 common shares and 175,500
common share purchase warrants to the placement agents.
On May 8, 2002, upon issuance of the common share purchase warrants
noted in (iv) above, the warrants were immediately exercised and the
Company issued 187,500 common shares. The fair value of these warrants
in the amount of $173,681 was recorded as share issue costs.
On May 8, 2002, the Company issued an additional 200,000 units at a
price of U.S.$0.60 per unit for gross proceeds of $188,400
(U.S.$120,000). Each unit was comprised of one common share and three
quarters of one common share purchase warrant. Each common share
purchase warrant entitles the holder to purchase one common share at a
price of U.S.$0.72 for a period of three years from May 8, 2002.
6. BASIC AND DILUTED LOSS PER SHARE:
Common shares issuable upon the exercise of options and warrants that could
dilute basic loss per share in the future were not included in the
computation of diluted loss per share because to do so would have been
anti-dilutive for the years ended October 31, 2002, 2001 and 2000. During
these periods, options and warrants amounted to 2,569,793 (2001 -
2,985,175; 2000 - 2,529,031) and 5,129,041 (2001 - 413,500; 2000 -
259,792), respectively.
7. INTEREST IN JOINT VENTURE:
On June 4, 2001, the Company entered into an agreement with an Asian
company to establish a joint venture to conduct certain of the Company's
Asian activities. Each party holds a 50% interest in the joint venture.
These financial statements reflect the Company's proportionate interest in
the joint venture's assets, liabilities, revenue and expenses.
The following amounts included in the consolidated financial statements
represent the Company's proportionate interest in the joint venture at
October 31, 2002:
===========================================
2002 2001
-------------------------------------------
Cash $ 78 $ -
Accounts receivable 1,979 -
Prepaid expenses 162 9,622
Capital assets 405,207 523,138
-------------------------------------------
Total assets $ 407,426 $ 532,760
===========================================
Accounts payable $ 157,343 $ 600,649
Accrued liabilities 6,250 14,378
-------------------------------------------
Total liabilities $ 163,593 $ 615,027
===========================================
Revenue $ 5,482 $ -
Expenses (297,171) (483,472)
-------------------------------------------
Loss $(291,689) $(483,472)
===========================================
During fiscal 2002, the Company recognized revenue of $133,989 (2001 -
$199,925) from sales to the joint venture. As at October 31, 2002, the
Company had contributed approximately $990,700 (2001 - $401,000) into the
joint venture. The Company has to date committed to contribute an
additional $27,000 to the joint venture for the Company's proportionate
share of the joint venture requirements. This amount is expected to be
contributed within the next six months.
8. INCOME TAXES:
The tax effects of significant temporary differences representing future
tax assets is as follows:
==================================================================================
2002 2001
----------------------------------------------------------------------------------
Future tax assets:
Operating loss carryforwards $ 17,496,136 $ 24,762,785
Capital loss carryforwards 1,018,332 1,119,902
Share issue costs 546,030 982,616
Capital assets, accounting basis less than tax basis 5,095,400 5,327,984
----------------------------------------------------------------------------------
24,155,898 32,193,287
Valuation allowance (24,155,898) (32,193,287)
----------------------------------------------------------------------------------
Net future tax assets $ - $ -
==================================================================================
In assessing the realizability of future tax assets, management considers
whether it is more likely than not that some portion or all of the future
tax assets will not be realized. The ultimate realization of future tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers projected future taxable income, uncertainties related to the
industry in which the Company operates and tax planning strategies in
making this assessment.
At October 31, 2002, the Company has non-capital losses available for
carryforward for Canadian income tax purposes amounting to $42,668,000.
These losses expire in the following fiscal years:
===========================================================================
2003 $6,052,000
2004 1,211,000
2005 3,700,000
2006 5,510,000
2007 7,589,000
2008 14,283,000
2009 4,323,000
---------------------------------------------------------------------------
$42,668,000
===========================================================================
The Company also has non-capital losses available for carryforward for
United States income tax purposes amounting to $2,659,000, expiring between
2018 and 2020.
9. SEGMENTED INFORMATION:
The Company operates in a single reportable operating segment. This segment
derives its revenue from the sale of security software and related products
and services. As at October 31, 2000, substantially all the assets related
to the Company's operations were located in Canada. As at October 31, 2001
and 2002, substantially all the assets related to the Company's operations
were located in Canada with the exception of the assets held within the
joint venture, as disclosed in note 7, which were located in Asia.
A summary of sales to major customers that exceeded 10% of total sales
during each of the years in the three-year period ended October 31, 2002,
and the approximate amount due from these customers, as of October 31,
2002, are as follows:
================================================
Sales Accounts
2002 2001 2000 receivable
------------------------------------------------
Customer 1 - - 24% $ -
Customer 2 - 40% - -
Customer 3 12% 19% - 134,553
Customer 4 25% 17% - -
Customer 5 28% - - 156,000
Customer 6 17% - - 81,900
================================================
The Company does not consider itself to be economically dependent on any
single customer or supplier.
Revenue is attributable to geographic location based on the location of the
customer, as follows:
======================================================
2002 2001 2000
------------------------------------------------------
Sales:
United States $ 27,162 $ 294,650 $1,464,630
Canada 321,304 213,295 308,000
Other 70,950 44,156 863,550
Asia 698,369 668,880 -
------------------------------------------------------
$1,117,785 $1,220,981 $2,636,180
======================================================
10. SETTLEMENT OF LITIGATION:
During fiscal 2000, the Company settled a lawsuit involving the Company,
among others, relating to 2,558,679 common shares issued as partial
consideration for technology acquired in 1996. The suit dealt with the
movement of the common shares after the Company had fulfilled its
obligation under the acquisition agreement by issuing the shares in the
name of two parties in accordance with the acquisition agreement.
As part of the settlement, the Company issued 300,000 common shares and a
warrant to acquire 150,000 common shares at an exercise price of U.S.$13.13
per share over a three-year period. The common shares were valued at
U.S.$14.50 representing the market price at the time that the terms of the
settlement were agreed upon by the parties. The estimated costs of this
settlement of $6,394,090 were accrued in fiscal year 1999. During the
fiscal year ended October 31, 2000, under the terms of the settlement, a
second warrant was issued to acquire 263,500 common shares at an exercise
price of U.S.$8.59 per share, exercisable over a three-year period.
During the year ended October 31, 2000, the Company also settled a lawsuit
brought against it by a former employee of the Company alleging breach of
contract for failing to honour a certain share option agreement. Under
terms of the settlement, the Company confirmed and continued options to
acquire 100,000 of the Company's common shares. These options were
exercised during fiscal 2000.
11. COMMITMENTS AND CONTINGENCIES:
(a) Litigation:
Management is of the opinion that the claims listed below are without
merit and will not materially impact the Company. As a result, no
provision for loss has been made in these consolidated financial
statements.
(i) The Company has been served with a statement of complaint, as a
co-defendant, wherein the plaintiff is seeking rescission of an
international offering private placement transaction it entered
into with the Company in August 1995, in which the plaintiff
purchased 212,500 common shares (850,000 common shares prior to a
one-for-four reverse split) from the Company for U.S.$3,700,000.
The plaintiff is also seeking damages in the amount of
U.S.$3,700,000 plus interest and costs. This claim has previously
been dismissed twice and the Company has filed a motion to
dismiss this claim again.
(ii) During fiscal 2000, the Company and its wholly owned Barbados
subsidiary, The Instant Publisher Ltd., were sued by a company
that alleged that the Company breached a dealer agreement entered
into in 1995 by the Company's former printing business and is
seeking damages of U.S.$1,533,950 and damages of U.S.$25,000,000
for loss of reputation and loss of opportunity, pre-judgment and
post-judgment interest, and costs.
(iii) In addition to the above, in the ordinary course of business,
the Company and its subsidiaries have legal proceedings brought
against them.
(b) Lease commitments:
Total future minimum lease payments including operating costs are as
follows:
===========================================================================
2003 $553,788
2004 482,185
2005 482,185
2006 398,091
---------------------------------------------------------------------------
$1,916,249
===========================================================================
12. STOCK INCENTIVE PLAN:
The Company grants options to certain employees, officers, directors and
consultants under a share option plan (the "Plan"), enabling them to
purchase common shares of the Company. The exercise price of an option
under the Plan may not be less than the current market price of common
shares on the day immediately proceeding the day the share option was
granted. The Plan provides that the number of common shares reserved for
issuance under the Plan shall not exceed 6,100,000 common shares. These
options generally vest on a quarterly basis over three years and expire
five years after the date of grant. As at October 31, 2002, the number of
common shares reserved for future issues of stock options amounts to
1,082,291.
The following table summarizes information about stock options outstanding at October 31, 2002:
====================================================================================================================
Options outstanding Options vested
- --------------------------------------------------------------------------------------- ---------------------------
Range of exercise price U.S. [Cdn.] Number Weighted Weighted Number Weighted
outstanding average average exercise exercisable average
remaining price U.S. [Cdn.] exercise price
contractual life U.S. [Cdn.]
- --------------------------------------------------------------------------------------- ---------------------------
0.23 - $0.61 [$0.36 - $0.96] 850,350 4.64 $ 0.40 [$0.63] 64,750 $ 0.43 [$0.68]
1.06 - $1.94 [$1.66 - $3.05] 986,258 1.99 $ 1.35 [$2.12] 763,190 1.31 [$2.06]
2.05 - $3.15 [$3.22 - 4.95] 640,267 2.70 $ 2.30 [$3.61] 429,871 $ 2.32 [$3.64]
4.00 - $9.66 [$6.28 - $15.17] 281,014 2.23 $ 6.43 [$10.10] 239,761 $ 6.33 [$9.94]
11.38 - 41.69 [$17.87 - $65.45] 111,904 2.13 $ 12.91 [$20.27] 102,323 $12.86 [$20.19]
- --------------------------------------------------------------------------------------- ---------------------------
2,869,793 2.96 $ 2.23 [$3.50] 1,599,895 $ 3.04 [$4.77]
====================================================================================================================
Changes for the employee stock option plan during the years ended October
31, 2002 and 2001 were as follows:
===========================================================================================================
2002 2001
------------------------------------------------------------------------ ----------------------------
Weighted
Weighted average
Number of average exercise Number of exercise price
shares |price U.S. [Cdn.] shares U.S. [Cdn.]
------------------------------------------------------------------------ ----------------------------
Options outstanding, beginning of year 3,686,256 $ 5.15 [8.13] 3,275,045 $ 7.75 [10.87]
Options granted 891,350 0.44 [0.69] 1,863,280 2.15 [3.40]
Options exercised - - (63,116) 1.10 [1.73]
Options cancelled (1,707,813) 7.59 [11.92] (1,388,953) 6.26 [9.91]
------------------------------------------------------------------------ ----------------------------
Options outstanding, end of year 2,869,793 2.23 [3.50] 3,686,256 5.15 [8.13]
======================================================================== ============================
Options exercisable, end of year 1,599,895 $ 3.04 [4.77] 1,874,909 $ 5.46 [8.63]
======================================================================== ============================
Weighted average fair value of options
granted during the year $ 0.24 [0.38] $ 1.57 [2.48]
======================================================================== ============================
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
The Company is exposed to the following risks related to financial assets
and liabilities:
(a) Currency risk:
The Company is subject to currency risk through its activities in
United States, United Kingdom, Europe and Asia. Unfavourable changes
in the exchange rate may affect the operating results of the Company.
The Company does not actively use derivative instruments to reduce its
exposure to foreign currency risk. However, dependent on the nature,
amount and timing of foreign currency receipts and payments, the
Company may enter into forward exchange contracts to mitigate the
associated risks.
A significant portion of the Company's cash balance is denoted in U.S.
dollars. To limit the Company's exposure to exchange rate
fluctuations, the Company uses financial instruments to reduce risks
associated with the exchange rate and is committed under various
forward exchange contracts to sell U.S.$330,000 for each of the next
three months ending January 31, 2003 at exchange rates ranging from
$1.540 to $1.541. As at October 31, 2002, the exchange rate was $1.57.
These financial instruments are subject to normal credit standards,
financial controls, risk management and monitoring procedures. As at
October 31, 2002, the net unrealized gain on these contracts was
insignificant.
(b) Fair values:
The fair values of the Company's current financial instruments
approximate their carrying amounts due to their short-term nature.
(c) Credit risk:
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash
equivalents, short-term investments and accounts receivable. Cash
equivalents and short-term investments are maintained at high-quality
financial institutions.
The Company generally does not require collateral for sales on credit.
The Company closely monitors extensions of credit. Management assesses
the need for allowances for potential credit losses by considering the
credit risk of specific customers, historical trends and other
information.
14. DISCONTINUED OPERATIONS:
During 1997, the Company decided to divest its IPS 950 division, which was
involved in the marketing and sale of high technology instant digital
printing systems to the on-demand print and graphics industry.
On January 30, 1998, the Company sold its IPS 950 division for total
proceeds of $3.2 million consisting of: (a) $1.1 million in cash, (b) a
$0.4 million eight-month promissory note, and (c) a $1.7 million promissory
note payable as the purchaser sells and is paid for such division's
inventory. The purchaser subsequently entered bankruptcy proceedings and
did not fulfil its obligation to repay the $0.4 million promissory note or
the $1.7 million promissory note. The Company does not expect repayment of
these notes and, accordingly, they were written off in 1999.
The carrying value of income taxes recoverable related to investment tax
credits for the IPS 950 division in 2000 was nil (1999 - $250,000). The
investment tax credits related to the 1993 and 1994 fiscal years. As a
result of a reassessment issued by Canada Customs and Revenue Agency during
the year ended October 31, 2000, the income tax recoverable was determined
to have no value and was written off.
15. RECONCILIATION OF CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES ("GAAP"):
The consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles. Material differences
between Canadian and United States generally accepted accounting principles
are described below.
===============================================================================================
2002 2001 2000
-----------------------------------------------------------------------------------------------
Share capital:
Canadian GAAP $ 58,957,962 $ 53,992,992 $ 53,887,264
Elimination of reduction of share capital (a) 41,248,993 41,248,993 41,248,993
-----------------------------------------------------------------------------------------------
U.S. GAAP $100,206,955 $ 95,241,985 $ 95,136,257
===============================================================================================
Deficit and comprehensive loss:
Canadian GAAP $(54,435,306) $(48,038,364) $(29,138,505)
Elimination of reduction of share capital (a) (41,248,993) (41,248,993) (41,248,993)
Compensation expense (b) (1,560,721) (1,505,557) (1,449,078)
-----------------------------------------------------------------------------------------------
U.S. GAAP $(97,245,020) $(90,792,914) $(71,836,576)
===============================================================================================
Consolidated statements of loss:
Loss from continuing operations
under Canadian GAAP $ (6,396,942) $(18,899,859) $(14,777,208)
Compensation expense (b) (55,164) (56,479) (1,449,078)
-------------------------------------------------------------------------------------------
Loss from continuing operations
under U.S. GAAP (6,452,106) (18,956,338) (16,226,286)
Loss from discontinued operations (note 14) - - (250,000)
-----------------------------------------------------------------------------------------------
Loss under U.S. GAAP $ (6,452,106) $(18,956,338) $(16,476,286)
===============================================================================================
Basic and diluted Loss per share under U.S. GAAP $ (0.22) $ (0.72) $ (0.70)
===============================================================================================
(a) Share capital and deficit:
On March 1, 1999, the shareholders approved a resolution to reduce the
stated capital of the Company by $41,248,993 to eliminate the deficit
as at October 31, 1999. Under Canadian GAAP, a reduction of the share
capital of outstanding common shares is allowed with a corresponding
offset to deficit. This reclassification, which the Company made in
2000 to eliminate the deficit that existed at October 31, 1999, did
not meet the criteria specified by U.S. GAAP and results in an
increase to share capital with a corresponding increase in deficit of
$41,248,993.
(b) Options to consultants:
Under Canadian GAAP, the Company does not recognize compensation
expense when stock or stock options are issued to consultants. Any
consideration paid on exercise of stock options or purchase of stock
is credited to share capital. Under U.S. GAAP, the Company records
compensation expense for stock or stock options granted in exchange
for services from consultants. During the year ended October 31, 2000,
the Company issued 177,500 stock options to consultants and has
recorded $286,578 as compensation expense for the services rendered.
In addition, the Company recorded compensation expense in the amount
of $1,162,500, which is the difference between the exercise price and
the share price at the settlement date of the lawsuit, as described in
note 10.
During the year ended October 31, 2001, the Company issued 50,000
stock options to consultants. The Company has recorded compensation
expense of $56,479, of which $13,912 relates to the options issued in
fiscal 2001 to consultants.
During the fiscal year 2002, the Company has recorded compensation
expense of $55,164 relating to options granted to consultants.
(c) Interest in joint venture:
Canadian GAAP requires the proportionate consolidation of interests in
joint ventures. Proportionate consolidation is not permitted under
U.S. GAAP and interests in joint ventures are accounted for on the
equity basis. However, as allowed by the Securities and Exchange
Commission ("SEC"), reclassification is not required in a SEC filing
when specified criteria are met and information disclosed. These
criteria have been met and the information is disclosed in note 7.
Although the adoption of proportionate consolidation has no impact on
net earnings or shareholders' equity, it does increase assets,
liabilities, revenue, expenses and cash flows from operations from
those amounts otherwise reported under U.S. GAAP.
(d) Short-term investments:
Short-term investments consist of corporate debt securities. For U.S.
GAAP purposes, the Company classifies its debt securities as
available-for-sale, which are recorded at fair value.
Unrealized holding gains and losses, net of the related tax effect, on
available-for-sale securities are excluded from earnings and are
reported as a separate component of other comprehensive income until
realized. Realized gains and losses from the sale of
available-for-sale securities are determined on a specific
identification basis. During the periods presented, there have been no
unrealized holding gains or losses on short-term investments.
A decline in the market value of any available-for-sale security below
cost that is deemed to be other than temporary results in a reduction
in carrying amount to fair value. The impairment is charged to
earnings and a new cost basis for the security is established.
(e) Notes to consolidated financial statements:
In order to comply with U.S. GAAP, the following notes to the
consolidated financial statements would need to be added:
(i) Stock-based compensation plan:
Under U.S. GAAP, for any stock options with an exercise price
that is less than the market price on the date of grant, the
difference between the exercise price and the market price on the
date of grant is recorded as compensation expense ("intrinsic
value-based method"). As the Company grants stock options at the
fair market value of the shares on the day immediately preceding
the date of the grant of the options, no compensation expense is
recognized under the intrinsic value-based method.
SFAS No. 123, Accounting for Stock-Based Compensation, requires
pro forma disclosures of net income and earnings per share, as if
the fair value-based method as opposed to the intrinsic
value-based method of accounting for employee stock options had
been applied. The disclosures in the following table show the
Company's loss for the year and loss per share on a pro forma
basis using the fair value method as determined by using the
Black-Scholes option-pricing model. Assumptions used when valuing
the options at their date of grant using in the Black-Scholes
option pricing model include: risk-free interest rate of 3.092%,
estimated life of three years, expected divided yield of 0% and
volatility of 150%.
=====================================================================================
2002 2001 2000
-------------------------------------------------------------------------------------
Loss under U.S. GAAP $ (6,452,106) $(18,956,338) $(16,476,286)
Pro forma loss under U.S. GAAP (13,153,667) (25,275,143) (22,638,303)
Pro forma loss per common share:
Basic and diluted (0.44) (0.96) (0.96)
=====================================================================================
Weighted average number of common shares 29,716,924 26,376,480 23,534,438
(ii) Recent accounting pronouncements:
In July 2001, the FASB issued SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Tangible
Assets." SFAS No. 141 provides new guidance on the accounting for
a business combination at the date a business combination is
completed. Specifically, it requires use of the purchase method
of accounting for all business combinations initiated after June
30, 2001, thereby eliminating use of the pooling-of-interests
method. SFAS No. 142 establishes new guidance on how to account
for goodwill and intangible assets after a business combination
is completed. Among other things, it requires that goodwill and
certain other intangible assets will no longer be amortized and
will be tested for impairment at least annually and written down
only when impaired. This statement will apply to existing
goodwill and intangible assets, beginning with fiscal years
starting after December 15, 2001. The Company does not believe
that the adoption of SFAS 141 and 142 will have a material impact
on its consolidated financial statements.
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.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" which requires
companies to recognized costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 is to be
applied prospectively to exit or disposal activities initiated
after December 31, 2002. The Company does not believe that
adoption of SFAS No. 146 will have a material effect on its
results of operations and financial position.
In December 2001, the Accounting Standards Board in Canada issued
CICA Handbook Section 3870 "Stock-Based Compensation and Other
Stock-Based Payments". This section establishes standards for the
recognition, measurement, and disclosure of stock-based
compensation and other stock-based payments made in exchange for
goods and services provided by employees and non-employees. It
applies to transactions in which shares of common stock, stock
options, or other equity instruments are granted or liabilities
incurred based on the price of common stock or other equity
instruments. The Company will adopt Section 3870 for its fiscal
year beginning November 1, 2002. The Company does not believe
that the adoption of this standard will have a material impact on
the Company's financial position or results of operations.
EXECUTIVE OFFICERS
NAGY MOUSTAFA, PRESIDENT & CHIEF EXECUTIVE OFFICER
In 1997, it was Nagy Moustafa's vision to take PKI technology into the wireless
market, thus making Diversinet a leading innovator in the wireless industry.
Mr. Moustafa was the founder of CIT Canada Inc., an IT consulting firm, and its
chief visionary since its inception. Prior to CIT Canada Inc., Mr. Moustafa was
Director of Information Technology with Rogers Communications and held senior
positions at IBM, Computerland and the Canadian Ministry of Treasury and
Economics.
DAVID HACKETT, CHIEF FINANCIAL OFFICER
David Hackett joined Diversinet in 2002 having most recently been the Chief
Financial Officer and Corporate Secretary of Aucxis Corp., a world leader in
electronic trading systems for agri-business. Mr. Hackett was Chief Financial
Officer, Director and Corporate Secretary of EveryWare Development Inc., a cross
platform Web based database conductivity applications company. Mr. Hackett was
instrumental in raising numberous financing rounds and acquisitions including
the eventual sale of EveryWare to Pervasive Software Inc. Mr. Hackett began
his professional career at Ernst & Young.
HUSSAM MAHGOUB, VICE PRESIDENT, PRODUCTS
Hussam Mahgoub brings with him over twenty years of electronic products and
service development experience with leading Canadian companies, where he
introduced messaging, EDI, and Internet services. Prior to joining Diversinet,
Mr. Mahgoub held senior positions at Canada Post, Bell Canada, and the Bank of
Montreal.
NICK DARWISH, VICE PRESIDENT, SALES & MARKETING
Nick Darwish is responsible for Diversinet's global Sales and Marketing
initiatives. Mr. Darwish has over 15 years experience in the wireless and
communications industries, with positions in sales and business development,
particularly in the area of mobile Internet. Mr. Darwish joined Diversinet after
twelve years at Nortel Networks, a leading global supplier of data and telephony
network solutions and services.
BOARD OF DIRECTORS
STANLEY BECK has served as one of Diversinet's Directors since July 2002. Mr.
Beck was formerly Chairman of the Ontario Securities Commission and Dean of
Osgoode Hall Law School. Mr. Beck is currently Chairman of 407 International
Inc. and President of Granville Arbitrations Limited, and holds seats on a
number of boards.
NAGY MOUSTAFA has served as Diversinet's President and Chief Executive Officer
since November 1997.
KEITH POWELL has served as one of Diversinet's Directors since July 2002. Mr.
Powell was previously the Senior Vice-President, Information Services and Chief
Information Officer at Nortel Networks. Mr. Powell is currently Managing
Director at XPV Capital Corporation, a venture capital company investing in
early stage communications start-up companies. Mr. Powell was recently inducted
into the Canadian Information Productivity Awards (CIPA) Hall of Fame (1999),
and holds seats on a number of boards.
CHARLES SHIU has served as one of Diversinet's Directors since September 2002.
Mr. Shiu is Chairman of Allied Asia Investing Limited, Vice-Chairman of Power
Pacific Corporation Limited and Vice-Chairman of Canada China Commerce in Hong
Kong. He is also a former senior executive of Nortel Networks and holds seats
on a number of boards.
MARK STEINMAN has served as one of Diversinet's Directors since June 1998 and
Chairman since September 2002. Mr. Steinman has thirty years of corporate
finance experience, currently as Executive Vice President and Chief Financial
Officer of Stelco Inc. and prior to 1999 as Chief Financial Officer of Spar
Aerospace and Chief Financial Officer of Rogers Cablesystems.
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DIVERSINET CORP. TRANSFER AGENT: AUDITORS: TRADED ON:
2225 Sheppard Avenue Computershare Trust KPMG, LLP NASDAQ (SmallCap)
East Company Chartered Accountants
Suite 1700 of Canada Yonge Corporate Centre SYMBOL: DVNT*
Toronto, Ontario 100 University Avenue 4100 Yonge Street Suite 200 *Effective December 3, 2002,
Canada M2J 5C2 Toronto, Ontario Toronto, Ontario the Company's trading symbol
Tel: (416) 756-2324 Canada M5J 2Y1 Canada M2P 2H3 was changed from DVNT to
Fax: (416) 756-7346 Tel: 1-800-663-9097 Tel: (416) 228-7000 DVNTC. The "C" will be
www.diversinet.com (416) 981-9633 removed when the Company
has regained compliance with
Nasdaq regulations.