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
(JULY 22, 2003)
DIVERSINET CORP.
- --------------------------------------------------------------------------------
(Name of Registrant)
2225 Sheppard Avenue East, Suite 1801, Toronto, Ontario M2J 5C2
- --------------------------------------------------------------------------------
(Address of principal executive offices)
1. DSS Software Technologies audited financial statements for the years ended
December 31, 2002 and 2001
2. Pro Forma Consolidated Statements of Operations of Diversinet Corp. for the
year ended October 31, 2002 and the six months ended April 30, 2003.
3. Reconciliation of Canadian and United States generally accepted accounting
principles.
Indicate by check mark whether the Registrant files or will file annual reports
under cover of Form 20-F or Form 40-F
Form 20-F X Form 40-F
------
Indicate by check mark whether the Registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
YES NO X
------
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.
- --------------------
(REGISTRANT)
DATE: JULY 22, 2003 BY: /s/ DAVID HACKETT
--------------------------
DAVID HACKETT, CHIEF FINANCIAL OFFICER
AUDITORS' REPORT TO THE BOARD OF DIRECTORS
We have audited the accompanying balance sheets of DSS Software Technologies as
at December 31, 2002 and 2001 and the related statements of earnings,
stockholder's equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about 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. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, these financial statements referred to above present fairly, in
all material respects, the financial position of the Company as at December 31,
2002 and 2001 and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 1 to the
financial statements, the Company has incurred significant losses from
operations which raise substantial doubt about its ability to continue as a
going concern. Continued operations depend upon the Company's ability to
generate future profitable operations and/or obtain additional financing to fund
future operations. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
KPMG LLP
Chartered Accountants
Toronto, Canada
July 18, 2003
DSS SOFTWARE TECHNOLOGIES
Balance Sheets
(Expressed in U.S. dollars)
December 31, 2002 and 2001
===========================================================================================
2002 2001
- -------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 21,997 $ -
Accounts receivable, net of allowance for doubtful
accounts of $125,096 (2001 - $66,431) 2,250,350 2,780,746
Other receivables 31,319 28,758
-----------------------------------------------------------------------------
Total current assets 2,303,666 2,809,504
Fixed assets, net (note 3) 93,374 111,558
- -------------------------------------------------------------------------------------------
Total assets $2,397,040 $2,921,062
===========================================================================================
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Bank indebtedness (note 4) $ 250,000 $ -
Accounts payable 727,007 1,226,594
Accrued liabilities (note 5) 249,513 370,000
Deferred revenue - 96,880
Notes payable (note 6) 860,000 -
Current portion of capital lease obligations (note 7) 32,947 10,500
-----------------------------------------------------------------------------
Total current liabilities 2,119,467 1,703,974
Capital lease obligations (note 7) 39,537 17,500
Stockholder's equity
Common stock:
Authorized:
20,000 common shares
Issued and outstanding:
10,000 common shares (2001 - 10,000) 2,961 2,961
Retained earnings 235,075 1,196,627
-----------------------------------------------------------------------------
Total shareholder's equity 238,036 1,199,588
Commitments and contingencies (note 10)
Subsequent event (note 11)
- -------------------------------------------------------------------------------------------
Total liabilities and shareholder's equity $2,397,040 $2,921,062
===========================================================================================
See accompanying notes to financial statements.
DSS SOFTWARE TECHNOLOGIES
Statements of Earnings
(Expressed in U.S. dollars)
Years Ended December 31, 2002 and 2001
=============================================================
2002 2001
- -------------------------------------------------------------
Revenues $8,791,361 $13,767,738
Cost of sales 6,244,490 8,831,980
- -------------------------------------------------------------
Gross profit 2,546,871 4,935,758
Sales and marketing 3,213,364 5,533,651
General and administrative 258,372 296,044
Write down of fixed assets 22,085 -
- -------------------------------------------------------------
Loss before the following: (946,950) (893,937)
Interest income - 1,995
Interest expense (14,000) (633)
Interest expense on capital leases (602) -
- -------------------------------------------------------------
Loss for the year $ (961,552) $ (892,575)
=============================================================
See accompanying notes to financial statements.
Statements of Stockholder's Equity
(Expressed in U.S. dollars)
Years Ended December 31, 2002 and 2001
=====================================================================================================
Common stock Total stockholders'
Number Amount Retained earnings equity
- -----------------------------------------------------------------------------------------------------
Stockholder's equity January 1, 2001 10,000 $ 2,961 $ 2,089,202 $2,092,163
Loss for the year (892,575) (892,575)
- -----------------------------------------------------------------------------------------------------
Stockholder's equity December 31, 2001 10,000 2,961 1,196,627 1,199,588
Loss for the year (961,552) (961,552)
- -----------------------------------------------------------------------------------------------------
Stockholder's equity December 31, 2002 10,000 $ 2,961 $ 235,075 $ 238,036
=====================================================================================================
See accompanying notes to financial statements
DSS SOFTWARE TECHNOLOGIES
Statements of Cash Flows
(Expressed in U.S. dollars)
Years Ended December 31, 2002 and 2001
================================================================================================
2002 2001
- ------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Loss for the year $ (961,552) $ (892,575)
Add (deduct) items not requiring an outlay of cash:
Depreciation and amortization 67,076 91,193
Write down of fixed assets 22,085 -
Changes in non-cash working capital items related to operations:
Accounts receivable 530,396 1,719,622
Other receivables (2,561) 61,416
Accounts payable (499,587) (1,305,071)
Accrued liabilities (120,487) 260,550
Deferred revenue (96,880) 96,880
- ------------------------------------------------------------------------------------------------
Cash used in operating activities (1,061,510) 32,015
================================================================================================
FINANCING ACTIVITIES
Notes payable 860,000 -
Capital lease payments (24,895) (10,500)
Bank indebtedness advances 250,000 -
- ------------------------------------------------------------------------------------------------
Cash provided by (used in) financing activities 1,085,105 (10,500)
================================================================================================
INVESTING ACTIVITIES
Additions to fixed assets (1,598) (21,515)
- ------------------------------------------------------------------------------------------------
Cash used in investing activities (1,598) (21,515)
================================================================================================
Net increase (decrease) in cash and cash equivalents during the year 21,997 -
Cash and cash equivalents, beginning of the year - -
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of the year $ 21,997 $ -
================================================================================================
Supplemental cash flow information:
Interest paid $ 6,602 $ 633
Supplemental disclosure of non-cash investing activities:
Fixed assets acquired under capital leases $ 69,380 $ -
================================================================================================
See accompanying notes to financial statements.
DSS SOFTWARE TECHNOLOGIES
Notes to Financial Statements
(Expressed in U.S. dollars)
Years ended December 31, 2002 and 2001
DSS Software Technologies (the "Company"), a California corporation, is a full
cycle project management and consulting company specializing in the
implementation and integration of CRM and ERP applications.
1. FUTURE OPERATIONS:
These 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 financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. Significant
accounting policies adopted by the Company are as follows:
(a) Revenue recognition:
Revenues include all amounts that are billable to clients. Revenues
are recognized on a time and materials basis, or on a percentage of
completion basis, depending on the contract, as employees and
subcontractors provide services. Revenue from time and materials
service contracts are recognized as the services are provided. Revenue
from fixed price long-term contracts is recognized over the contract
term based on the percentage of services provided during the period
compared to the total estimated services to be provided over the
entire contract. Losses on contracts are recognized during the period
in which the loss first becomes probable and reasonably estimable.
Contract losses are determined to be the amount by which the estimated
direct and indirect costs of the contract exceed the estimated total
revenues that will be generated by the contract. Revenue recognized in
excess of billings is recorded as unbilled services. Billings in
excess of revenue recognized are recorded as deferred revenue until
the above revenue recognition criteria are met. Reimbursements,
including those relating to travel and other out-of-pocket expenses,
and other similar third-party costs, are included in Revenues.
(b) 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.
(c) Allowance for doubtful accounts:
The Company records an allowance for uncollectible accounts receivable
based on historical loss experience, customer payment patterns and
current economic trends. The Company reviews the adequacy of the
allowance for uncollectible accounts receivable on a quarterly basis
and, if necessary, increases or decreases the balance.
(d) Fixed assets:
Fixed 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 on
a straight-line basis:
======================================================================
Asset Rate
----------------------------------------------------------------------
Automobile 5 years
Computer hardware 3 years
Telephone equipment 3 years
Office equipment 3 years
Computer software 3 years
Furniture and fixtures 3 years
Furniture under capital lease 3 years
Leasehold improvements Over term of lease
======================================================================
The Company regularly reviews the carrying values of its fixed 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.
(e) Income taxes:
The Company is an S Corporation under the applicable provisions of
federal and state income tax statutes. As an S Corporation, taxable
income or loss is passed through directly to the stockholders.
(f) Comprehensive income:
FAS No. 130, "Reporting Comprehensive Income", issued by the Financial
Accounting Standards Board establishes standards for the reporting and
presentation of comprehensive income. This standard defines
comprehensive income as the changes in equity of an enterprise, except
those resulting from shareholder transactions. For all years
presented, the loss for the year is the same as comprehensive loss for
the year.
(g) Use of estimates:
The preparation of these 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 financial statements and the reported amounts of
revenue and expenses during the year. Actual results could differ from
those estimates.
(h) Recent accounting pronouncements:
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of the Financial Accounting
Standards Board Statements No. 5, 57 and 107 and a rescission of the
Financial Accounting Standards Board Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor
in its interim and annual financial statements about its obligations
under guarantees issued. The Interpretation also clarifies that a
guarantor is required to recognize, at inception of a guarantee, a
liability for the fair value of the obligation undertaken. The initial
recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002
and are not expected to have a material effect on the Company's
financial statements. The disclosure requirements are effective for
financial statements of interim or annual periods ending after
December 31, 2002.
3. FIXED ASSETS:
================================================================
Accumulated Net book
2002 Cost depreciation value
and amortization
- ----------------------------------------------------------------
Automobile $ 39,200 $ - $39,200
Computer hardware 113,379 98,224 15,155
Telephone equipment 45,445 35,674 9,771
Office equipment 3,255 2,228 1,027
Computer software 10,417 8,259 2,158
Furniture and fixtures 43,255 29,305 13,950
Leasehold improvements 20,188 8,075 12,113
- ----------------------------------------------------------------
$ 275,139 $ 181,765 $93,374
================================================================
In 2002, depreciation and amortization expense amounted to $67,076, which
has been included in cost of sales during the period.
=================================================================
Accumulated Net book
2001 Cost depreciation value
and amortization
- -----------------------------------------------------------------
Computer hardware $ 111,781 $ 72,440 $ 39,341
Telephone equipment 45,445 20,889 24,556
Office equipment 3,255 1,143 2,112
Computer software 10,417 4,891 5,526
Furniture and fixtures 43,254 19,381 23,873
Leasehold improvements 20,188 4,038 16,150
- -----------------------------------------------------------------
$ 234,340 $ 122,782 $111,558
=================================================================
In 2001, depreciation and amortization expense amounted to $91,193, which
has been included in cost of sales during the period.
4. BANK INDEBTEDNESS:
Bank indebtedness in the amount of $250,000 (2001 - nil) represents a
revolving credit facility payable on demand and bears interest at a
floating rate per annum equal to the sum of the prime rate plus 1.25%. The
bank indebtedness is collateralized by a first security interest in all
personal property of the Company and all of the personal property of the
shareholder. The entire balance of the indebtedness was repaid in February
2003.
5. ACCRUED LIABILITIES:
========================================================================
2002 2001
------------------------------------------------------------------------
Remuneration $ 132,757 $ 74,992
Professional fees 98,854 285,000
Miscellaneous 17,902 10,008
------------------------------------------------------------------------
$ 249,513 $ 370,000
6. NOTES PAYABLE:
========================================================================
2002 2001
------------------------------------------------------------------------
Due to shareholder (a) $ 650,000 $ -
Due to employee (b) 210,000 -
------------------------------------------------------------------------
$ 860,000 $ -
========================================================================
(a) This note bears interest a 12% per annum and is repayable on the
earliest of the closing date of the stock purchase agreement between
Diversinet Corp. and the Company (note 11) and January 2, 2003. The
note payable is secured by certain accounts receivable of the Company.
(b) This note bears interest a 12% per annum and is repayable on the
earliest of the closing date of the stock purchase agreement between
Diversinet Corp. and the Company (note 11) and January 2, 2003. The
note payable is secured by certain accounts receivable of the Company.
7. CAPITAL LEASES OBLIGATIONS:
===========================================================================
Year ending December 31:
2003 $ 33,796
2004 30,296
2005 9,707
---------------------------------------------------------------------------
Total minimum payments 73,799
Less amount representing interest (at a rate of 1.9%) 1,315
---------------------------------------------------------------------------
Present value of net minimum capital lease payments 72,484
Less current portion 32,947
$ 39,537
===========================================================================
8. RELATED PARTY TRANSACTIONS:
Related party transactions are in the normal course of operations and are
measured at the exchange amount, which is the amount established and agreed
to by the related parties.
During 2002, the Company incurred management fees to its shareholder in the
amount of $107,974 (2001 - $215,324) and interest of $8,950 (2001 - nil).
During 2002, the Company advanced the shareholder $420,000 (2001 - nil).
The shareholder advance was non-interest bearing and payable on demand. The
Company forgave the shareholder advance and the amount was written off and
charged to selling, general and administrative expenses.
9. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
The Company is exposed to the following risks related to financial assets
and liabilities:
(a) Fair values:
The fair values of the Company's current financial instruments
approximate their carrying amounts due to their short-term nature. The
fair value of the Company's capital lease approximates its carrying
value as it bears an interest rate that is at the current market rate.
The fair value of the notes payable is not determinable due to its
related party nature and terms.
(b) Credit risk:
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash equivalents
and accounts receivable. Cash equivalents 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.
A summary of sales to major customers that exceeded 10% of total sales
during each of the years ended December 31, 2002 and 2001, and the
approximate amount due from these customers, as of December 31, 2002,
are as follows:
=====================================================================
Sales Accounts
2002 2001 receivable
---------------------------------------------------------------------
Customer 1 18% - $ 495,240
Customer 2 21% 10% 634,977
---------------------------------------------------------------------
The Company does not consider itself to be economically dependent on
any single customer or supplier.
All revenue is attributable to geographic location based on the
location of the customer. All revenue was attributable to the United
States in the fiscal years ended December 31, 2002 and 2001.
10. COMMITMENTS AND CONTINGENCIES:
(a) Litigation:
In the ordinary course of business, the Company has legal proceedings
brought against them. Management does not expect the outcome of these
proceedings, in aggregate, to have a material adverse effect on the
Company's financial position or results of operations.
(b) Lease commitments:
Total future minimum operating lease payments including operating
costs are as follows:
======================================================================
2003 $ 202,000
2004 201,000
2005 86,000
----------------------------------------------------------------------
489,000
======================================================================
The rent expense was $132,809 and $103,336 in 2002 and 2001,
respectively.
11. SUBSEQUENT EVENT:
On January 2, 2003, Diversinet Corp. acquired 100% of the outstanding
shares of the Company. The aggregate purchase price was $2,009,034
consisting of $473,070 (U.S.$300,000) in cash, $946,140 (U.S.$600,000) of
promissory notes payable in instalments of U.S.$300,000 on January 2, 2004
and U.S.$300,000 on January 2, 2005 and 120,000 Diversinet Corp. share
purchase warrants with a fair value of $589,824 (U.S.$374,040) all payable
to the company's shareholder. The share purchase warrants vest equally on
January 2, 2003, 2004 and 2005 and are exercisable at U.S.$3.75 per share
for five years. Additional future cash consideration in the amount of
$1,892,280 (U.S.$1,200,000) is payable based on the achievement of certain
net income targets over the next three years and will be recorded when the
contingency has been met.
Pro Forma Consolidated Statements of Operations of
DIVERSINET CORP.
Year ended October 31, 2002 and the six months ended April 30, 2003
(Unaudited)
Definitely
DIVERSINET CORP.
Pro Forma Consolidated Statement of Operations
Year ended October 31, 2002
(Expressed in Canadian dollars)
(Unaudited)
========================================================================================================
Pro forma
Diversinet DSS Software Pro forma Diversinet Corp.
Corp. Technologies adjustments Notes (note 1)
- --------------------------------------------------------------------------------------------------------
Revenue $ 1,117,785 $ 13,802,437 $ $ 14,920,222
Cost of sales - 9,803,849 9,803,849
- --------------------------------------------------------------------------------------------------------
Gross margin 1,117,785 3,998,588 5,116,373
- --------------------------------------------------------------------------------------------------------
Expenses:
Research and development 2,327,604 - 2,327,604
Sales and marketing 1,737,027 5,044,982 6,782,009
General and administrative 2,989,102 440,318 3,429,420
Depreciation and amortization 635,835 - 635,835
- --------------------------------------------------------------------------------------------------------
7,689,568 5,485,300 13,174,868
- --------------------------------------------------------------------------------------------------------
Loss before the following (6,571,783) (1,486,712) (8,058,495)
Interest (income) expense (174,841) 22,925 5,625 3a (146,291)
- --------------------------------------------------------------------------------------------------------
Loss for the year $(6,396,942) $ (1,509,637) $ (5,625) $ (7,912,204)
========================================================================================================
Loss per share (note 4)
Basic and diluted $ (0.27) $ ($0.27)
========================================================================================================
Weighted average number of
shares outstanding 2,971,692 2,971,692
========================================================================================================
See accompanying notes to pro forma consolidated statement of operations.
DIVERSINET CORP.
Pro Forma Consolidated Statement of Operations
Six months ended April 30, 2003
(Expressed in Canadian dollars)
(Unaudited)
==============================================================================================================
DSS Software
Technologies from Pro forma
Diversinet November 1, 2002 Pro forma Diversinet Corp.
Corp. to January 2, 2003 adjustments Notes (note 1)
- --------------------------------------------------------------------------------------------------------------
Revenue $ 3,866,919 $ 1,881,943 $ $ 5,748,862
Cost of sales 3,039,116 1,753,956 4,793,072
- --------------------------------------------------------------------------------------------------------------
Gross margin 827,803 127,987 955,790
- --------------------------------------------------------------------------------------------------------------
Expenses:
Research and development 969,535 - 969,535
Sales and marketing 780,984 1,554,854 2,335,838
General and administrative 1,839,120 87,025 1,926,145
Depreciation and amortization 502,838 - 502,838
- --------------------------------------------------------------------------------------------------------------
4,092,477 1,641,879 5,734,356
- --------------------------------------------------------------------------------------------------------------
Loss before the following (3,264,674) (1,513,892) (4,778,566)
Interest (income) expense (67,117) 2,000 938 3a (64,179)
- --------------------------------------------------------------------------------------------------------------
Loss for the period $(3,197,557) $ (1,515,892) $ (938) $ (4,714,387)
==============================================================================================================
Loss per share (note 3)
Basic and Diluted $ (1.46) $ (1.46)
==============================================================================================================
Weighted average number of shares
Outstanding 3,222,210 3,222,210
==============================================================================================================
See accompanying notes to pro forma consolidated statement of operations.
DIVERSINET CORP.
Notes to the Pro Forma Consolidated Statements of Operations
Year ended October 31, 2002 and six months ended April 30, 2003
(Expressed in Canadian dollars)
(Unaudited)
1. BASIS OF PRESENTATION:
The unaudited pro forma consolidated statements of operations are based
upon the historical financial information described below after giving
effect to the transactions and adjustments described in notes 2 and 3.
These unaudited pro forma consolidated statements of operation are not
necessarily indicative of the results of operations that would have been
achieved had the transactions actually taken place at the dates indicated
and do not purport to be indicative of the results that may be expected to
occur in the future.
The unaudited pro forma consolidated statements of operations have been
prepared in accordance with Canadian generally accepted accounting
principles and give effect to the acquisition of DSS Software Technologies
by Diversinet Corp on January 2, 2003 as if it had occurred at the dates
indicated below.
(a) The unaudited pro forma consolidated statement of operations for the
year ended October 31, 2002 has been prepared by the management of
Diversinet Corp. and has been derived from:
(i) The audited financial statements of Diversinet Corp. for the year
ended October 31, 2002;
(ii) The audited financial statements of DSS Software Technologies for
the year ended December 31, 2002 translated into Canadian dollars
using the average exchange rate for the period; and
(iii) The additional information provided in notes 2, 3 and 4.
(b) The unaudited pro forma consolidated statement of operations for the
six months ended April 30, 2003 has been prepared by the management of
Diversinet Corp. and has been derived from:
(i) The unaudited financial statements of Diversinet Corp. for the
six months ended April 30, 2003;
(ii) The unaudited results of operations of DSS Software Technologies
from November 1, 2002 to January 2, 2003 (date of acquisition)
translated into Canadian dollars using the average exchange rate
for the period; and
(iii)The additional information provided in notes 2, 3 and 4.
The unaudited results of operations of DSS Software Technologies from
November 1, 2002 to December 31, 2002 are included in the pro forma
statements of operations for both pro forma periods in (a) and (b)
above. The results of operations of DSS Software Technologies for the
period November 1, 2002 to December 31, 2002 are as follows:
================================================================================
Revenue $ 1,881,943
Cost of sales 1,753,956
- --------------------------------------------------------------------------------
Gross margin 127,987
- --------------------------------------------------------------------------------
Expenses 1,641,879
- --------------------------------------------------------------------------------
Loss before the following: (1,513,892)
Interest expense (2,000)
- --------------------------------------------------------------------------------
Loss for the period $ (1,515,892)
================================================================================
The unaudited pro forma consolidated statement of operations for the year
ended October 31, 2002 should be read in conjunction with the audited
financial statements described above which are incorporated by reference or
included in the prospectus.
2. PRO FORMA TRANSACTION:
On January 2, 2003, Diversinet Corp. acquired 100% of the outstanding
shares of DSS Software Technologies, a consulting services provider. The
aggregate purchase price was $2,009,034 consisting of $473,070
(U.S.$300,000) in cash, $946,140 (U.S.$600,000) of promissory note payable
in instalments of U.S.$300,000 on January 2, 2004 and U.S.$300,000 on
January 2, 2005 and 120,000 share purchase warrants with a fair value of
$589,824 (U.S.$374,040). The share purchase warrants vest equally on
January 2, 2003, 2004 and 2005 and are exercisable at U.S.$3.75 per share
for five years. Additional future cash consideration in the amount of
$1,892,280 (U.S.$1,200,000) is payable based on the achievement of certain
net income targets over the next three years and will be recorded when the
contingency has been met. The acquisition was accounted for using the
purchase method and the purchase price was allocated as follows:
================================================================================
Fair value of net capital assets acquired $ 147,242
Working capital 457,957
Goodwill 1,403,835
- --------------------------------------------------------------------------------
Fair value assigned to consideration issued, $ 2,009,034
being cash and share purchase warrants
================================================================================
3. PRO FORMA ADJUSTMENTS:
The unaudited pro forma consolidated statements of operations give effect
to the transactions described in note 2 above, as if they had occurred at
the beginning of the periods presented. Pro forma transactions recognized
in the unaudited pro forma consolidated financial statements of operations
are as follows:
(a) Reduction in interest revenue due to the use of cash and cash
equivalents of Diversinet Corp. to acquire DSS Software Technologies
effective November 1, 2001 and November 1, 2002 respectively.
4. LOSS PER SHARE:
Basic and diluted loss per share have been calculated using the weighted
average number of Diversinet Corp. common shares outstanding for the
periods, 2,971,692 for the year ended October 31, 2002 and 3,222,210 for
the six months ended April 30, 2003.
On January 28, 2003 Diversinet Corp. completed a reverse stock split of its
issued and outstanding common shares whereby every ten shares of common
stock were exchanged for one share of common stock. The pro forma weighted
average number of common share has been restated to give effect to the
stock split.
5. DIFFERENCE BETWEEN CANADIAN AND U.S. GAAP:
===========================================================================================
Year ended October Six months ended
31, 2002 April 30, 2003
- -------------------------------------------------------------------------------------------
Pro forma loss based on Canadian GAAP $ 7,912,204 $ 4,714387
Compensation expense (a) 55,164 17,908
- -------------------------------------------------------------------------------------------
Pro forma loss based on U.S. GAAP 7,967,368 4,732,295
- -------------------------------------------------------------------------------------------
Basic and diluted loss per share under U.S. GAAP ($0.27) ($1.47)
===========================================================================================
(a) Options to consultants:
Under Canadian GAAP, the Company did not recognize compensation expense
when stock or stock options were issued to consultants prior to November 1,
2002. Any consideration paid on exercise of stock options or purchase of
stock is credited to share capital. Under U.S. GAAP and Canadian GAAP
subsequent to October 31, 2002, the Company records compensation expense
for stock or stock options granted in exchange for services from
consultants.
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.
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April 30, 2003
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Share capital:
Canadian GAAP $ 58,957,962
Elimination of reduction of share capital (a) 41,248,993
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U.S. GAAP $ 100,206,955
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Deficit and comprehensive loss:
Canadian GAAP $ (57,632,863)
Elimination of reduction of share capital (a) (41,248,993)
Compensation expense (b) (1,578,629)
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U.S. GAAP $ (100,460,485)
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April 30, 2003 April 30, 2002
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Consolidated statements of loss:
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Loss under Canadian GAAP $ (3,197,557) $ (3,788,282)
Compensation expense (b) (17,908) (26,124)
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Loss under U.S. GAAP $ (3,215,465) $ (3,814,406)
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Basic and diluted loss per share under U.S. GAAP $ (1.00) $ (1.40)
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(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 did not recognize compensation expense when
stock or stock options were issued to consultants prior to November 1, 2002.
Any consideration paid on exercise of stock options or purchase of stock is
credited to share capital. Under U.S. GAAP and Canadian GAAP subsequent to
October 31, 2002, the Company records compensation expense for stock or stock
options granted in exchange for services from consultants.
During the six-month periods ended April 30, 2003 and April 30, 2002, the
Company has recorded compensation expense of $17,908 and $26,124 respectively
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 4 of the previously filed interim consolidated financial statements.
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.