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Registration No. -
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM F-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
DIVERSINET CORP.
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(Exact name of registrant as specified in its charter)
Ontario, Canada
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(State or other jurisdiction of incorporation or organization)
N/A
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(I.R.S. Employer Identification Number)
2225 Sheppard Avenue East, Suite 1801, Toronto, ON M2J 5C2 Canada (416) 756-2324
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(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
David Hackett c/o Diversinet Corp.
2225 Sheppard Avenue East, Suite 1801, Toronto, ON M2J 5C2 Canada (416) 756-2324
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(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement is declared effective.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box: [ ]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, other than securities offered only in connection with dividend
or interest reinvestment plans, please check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, as amended, please check the
following box and list the Securities Act of 1933, as amended registration
statement number of the earlier effective registration statement for the same
offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, as amended, please check the following box and list
the Securities Act of 1933, as amended registration statement number of the
earlier effective registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
(In U.S. $)
Proposed Proposed
maximum maximum
Title of each class of Amount to offering price per aggregate Amount of
securities to be registered be registered share offering price registration fee
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Common shares 6,760,000 (1) (3) $ 2.27(2) $ 15,345,200 $ 1,241.58
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(1) Includes of 770,000 common shares issuable upon the exercise of outstanding
warrants.
(2) Estimated pursuant to Rule 457(c) and 457(o) solely for the purpose of
computing the amount of the registration fee on the basis of the average of
the low bid and high ask prices (2.10 and 2.44) of a common share as
reported on the Over the Counter Bulletin Board on July 16, 2003. Includes
120,000 shares issuable upon exercise of warrants at U.S. $3.75 per share.
(3) Pursuant to Rule 416, also includes such indeterminate number of ordinary
shares as may become issuable upon stock splits, stock dividends and other
changes affecting the ordinary shares as described herein.
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended or until the Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
Subject to completion, dated July22, 2003
THE HOLDER OF THESE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT A SOLICITATION
OF AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
PROSPECTUS
6,760,000 COMMON SHARES
DIVERSINET CORP.
Certain selling securityholders are offering up to 6,760,000 of our common
shares for sale under this prospectus. We will not receive the proceeds of any
shares sold under this prospectus.
Our common shares are quoted on the Over-the-Counter Bulletin Board ("OTC BB")
under the symbol "DVNT.OB". On July 16, 2003, the average of the closing bid and
asked prices of our common shares on the OTC BB was U.S. $2.27 per share.
AN INVESTMENT IN OUR COMMON SHARES INVOLVES A HIGH DEGREE OF RISK AND ONLY
PEOPLE WHO CAN AFFORD THE LOSS OF THEIR ENTIRE INVESTMENT SHOULD CONSIDER
INVESTING. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is July 22, 2003
NOTICE REGARDING FORWARD-LOOKING INFORMATION
This prospectus and the documents incorporated in it by reference contain
forward-looking statements which involve known and unknown risks and
uncertainties. We include this notice for the express purpose of permitting us
to obtain the protections of the safe harbor provided by the Private Securities
Litigation Reform Act of 1995 with respect to all such forward-looking
statements. Examples of forward-looking statements include: projections of
capital expenditures, competitive pressures, revenues, growth prospects, product
development, financial resources and other financial matters. You can identify
these and other forward-looking statements by the use of words such as "may",
"will", "should", "plans", "anticipates", "believes", "estimates", "predicts",
"intends", "potential" or the negative of such terms, or other comparable
terminology.
Our ability to predict the results of our operations or the effects of various
events on our operating results is inherently uncertain. Therefore, we caution
you to consider carefully the matters described under the caption "Risk Factors:
and certain other matters discussed in this prospectus, the documents
incorporated by reference in this prospectus, and other publicly available
sources. Such factors and many other factors beyond the control of our
management could cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements that
may be expressed or implied by the forward-looking statements.
INFORMATION SUMMARY
This summary highlights important information about our business and about this
offering. Because this is a summary, it does not contain all of the information
you should consider before investing in our common shares or warrants. You
should read the entire prospectus before making an investment decision.
ABOUT DIVERSINET
Diversinet Corp. (formerly The Instant Publisher Inc.) was formed on December 8,
1993 through the amalgamation of The Instant Publisher Inc. with Lombard
Consolidated Resources Inc., an Ontario corporation. We are regulated in
accordance with the Business Corporation Act (Ontario).
Our company was formed under the laws of Ontario, Canada. Our principal
executive offices are located at 2225 Sheppard Avenue East, Suite 1801, Toronto,
Ontario, M2J 5C2, Canada. Our telephone number is (416) 756-2324.
We are a security software product company that develops, markets and
distributes wireless security infrastructure solutions that provide for the
secure transmission of data over wireless networks and devices. Our solution
encompasses all aspects of commercial transaction security requirements,
covering the authentication and authorization of individuals involved, the
integrity of the information being sent and the non-repudiation or legalization
of the transaction.
We believe we are a pioneer in providing security products for mobile commerce
over wireless networks and are striving to become the leading provider of
wireless security solutions. Our strategy to achieve this objective involves:
targeting emerging m-commerce markets, expanding strategic partnerships and
sales channel relationships, maintaining a leadership position in terms of
products and research and development and building awareness of the Diversinet
brand.
We develop and license the Passport Certificate Server(R), Passport ONE(TM),
Passport Authorization Product(TM) and Passport VPN computer software products,
which provide for the secure transmission of data over wireless networks as well
as various other kinds of networks, including corporate networks,
telecommunications systems and the Internet. The transmission of data over these
networks is known as "e-commerce".
The Passport Certificate Server(R) software verifies the identities of the
parties to an e-commerce transmission through the use of digital certificates so
that unauthorized persons cannot intercept its contents.
The Passport ONE(TM) software product provides a single point of contact to
enable the security tools embedded in mobile devices. By providing application
providers, enterprises, and operators a single security infrastructure solution
for all mobile devices, Passport avoids the development time and infrastructure
costs normally associated with multiple device coverage.
The Passport Authorization Product' software issues digital permits that are
linked to the holder's digital certificate. The Diversinet digital permit is
designed to allow digital certificates to serve additional functions such as
authorizing users to perform specific tasks once they have accessed a given
network.
Virtual private network ("VPN") software uses encryption to provide a secure
connection through the Internet, establishing a "secure tunnel" through which
any enterprise data can travel. VPNs are less expensive than true private
networks using dedicated connections and can use digital certificates to
securely identify and authenticate the enterprise server and remote user.
Diversinet's Passport Wireless VPN combines the strength of public key
infrastructure (PKI) digital certificates with a robust, wireless-optimized VPN
solution.
We believe that the Passport products offer a unique approach to facilitating
and securing commercial transactions and data transmissions over these networks.
ACQUISITION OF DSS SOFTWARE TECHNOLOGIES
In early January, 2003, we acquired all of the capital stock of DSS Software
Technologies ("DSS"), a systems integration provider headquartered in Fremont,
California. DSS provides technical consulting services to tier one customers
including financial, enterprise and technology companies such as Cisco Systems,
Lucent, Oracle, Sun Microsystems and Wells Fargo in the areas of systems
integration, software development, and Enterprise Resource Planning "ERP" and
Customer Relationship Management "CRM" implementation. Consideration for the DSS
acquisition was provided through a combination of cash payments and an earn-out
position, plus warrants, provided over a three-year term.
We expect that the addition of DSS' services suite will enhance our ongoing
strategy to provide greater depth and breadth in our product and service
offering. Combined, DSS and our technical and industry expertise can offer
integrated solutions and full services offerings. We believe our acquisition of
DSS will strengthen our position in the U.S. through expanded access to key
customers and the addition of a comprehensive line of services that will help us
to better address rapidly growing demands for security in telecommunication
services.
The synergy between the two companies is expected to provide the infrastructure
and capability to expand into new markets and convey a unique opportunity to
deliver products and services that will meet the specific needs of enterprise
customers.
With DSS's professional services focus on high profile customers in our target
markets (enterprise, financial, et cetera) our complementary skill sets
(application development and wireless), and a U.S. sales force, the combined
company can provide technical consulting services to companies in the areas of
system integration, software development, and ERP and CRM implementation, which
are all natural extensions of wireless and require enhanced security.
DSS's operations have been integrated with ours as a wholly owned subsidiary of
Diversinet, and DSS is the principal office for our U.S. operations. The
purchase of DSS was accounted for using the purchase method and consolidated
financial statements have been prepared.
THE OFFERING
Certain of our shareholders are offering the following securities for sale under
this prospectus:
- 5,990,000 common shares, and
- 770,000 common shares issuable upon the exercise of the warrants.
There are a total of 6,760,000 common shares issued and common shares issuable
pursuant to this registration statement.
We are not offering or selling any securities under this prospectus and will not
receive any proceeds from the sale of the selling shareholder's securities. We
may receive up to U.S. $851,000 upon the exercise of the warrants. However, we
will pay all costs associated with this prospectus.
RISK FACTORS
The common shares offered by this prospectus are speculative, involve a high
degree of risk and should only be purchased by persons who can afford to lose
their entire investment. You should therefore carefully review the following
risk factors, as well as all of the other information in this prospectus, before
investing in the securities offered by this prospectus.
RISKS RELATING TO OUR BUSINESS
WE HAVE LOST MONEY IN THE PAST, WE HAVE REALIZED MINIMAL REVENUES FROM
CONTINUING OPERATIONS AND WE EXPECT TO CONTINUE TO SUSTAIN LOSSES IN THE FUTURE.
We have generated minimal revenue to date from the licensing of our products.
For the six months ended April 30, 2003, we posted a net loss of $3,198,000. For
the year ended October 31, 2002, we posted a net loss of $6,397,000 and for
October 31, 2001, we posted a net loss of $18,900,000. For the years ended
October 31, 2000 and October 31, 1999, we had net losses of $15,027,000 and
$14,111,000, respectively. We generated licensing revenue of $314,000 for the
six months ended April 30, 2003, $1,118,000 in the year ended October 31, 2002,
$1,221,000 in the year ended October 31, 2001, $2,636,000 in the year ended
October 31, 2000 and $246,000 in the year ended October 31, 1999. The revenue
represents the initial licensing of our Passport Certificate Server(R) and
Passport Authorization Product(TM) together with related professional services.
For the six months ended April 30, 2003, we also generated consulting revenue of
$3,553,000 through our newly acquired consulting services division, DSS Software
Technologies. During fiscal 2001, 40% of our revenue was generated from one
customer. During fiscal 2002, 28% of revenue was generated from one customer
although not the same customer as in fiscal 2001, and 54% of revenue was
generated from three customers. To date, licensing our products to various
customers and providing them with related professional services has generated
our revenues. We cannot provide assurance that recurring revenues will arise
from these license agreements. The auditors' reports on our October 31, 2001 and
2002 consolidated financial statements included additional comments for U.S.
readers that states that conditions and events exist that cast substantial doubt
on our ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
that uncertainty.
OUR BUSINESS PLAN IS DEPENDENT UPON CUSTOMER ADOPTION AND COMMERCIAL DEPLOYMENT
OF OUR PRODUCTS. Our ability to continue operations is also dependent on the
acceptance of our security products and the adoption of transaction-based
applications using public key infrastructure-based security (also known in the
industry as PKI-based security) over wireless networks as an accepted method of
commerce in sufficient volume for us to generate enough revenues to fund our
expenses and capital requirements. The wireless mobile commerce market is in a
very early stage, and it may not develop to a sufficient level to support our
business.
Our products are marketed to large companies and government agencies. The
implementation of our products by these entities typically involves a lengthy
education process and a significant technical evaluation and commitment of
capital and other resources. This process is also subject to the risk of delays
associated with customers' internal budgeting and other procedures for approving
large capital expenditures, deploying new technologies within their networks and
testing and accepting new technologies that affect key operations. As a result,
the associated sales and implementation cycles can be lengthy. Our quarterly and
annual operating results could be materially harmed if orders forecasted for a
specific customer for a particular quarter are not realized.
Many of our early licensing agreements permitted our customers to examine and
test our products with no initial up-front payments to us. These customers are
not required to make payments to us until they begin to use our product for
commercial purposes. In certain cases, we also enter into evaluation agreements,
whereby potential customers may examine our software products for a specified
period of time with no payment to us. Our current licensing agreements typically
require the customer to pay a license fee attributable to the software
components and the development toolkit and upon shipment of these items to the
customer, although until early in fiscal 2000 we generally waived the up-front
fee.
PRODUCT AND MARKET CONDITIONS. General economic conditions may have a
significant impact on our ability to generate sales for our products. During
fiscal 2002 and 2001, we experienced decreased activity from our potential
customers, and generally the adoption of wireless services has not proceeded as
rapidly as previously expected. As a result, our revenue in 2002 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. Furthermore
the majority of DSS's revenues and costs from operations are
denominated in U.S. dollars. During fiscal 2002 and 2003 year to date, 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 recent
financing in June 2003, we have a portion of our cash resources in U.S. dollar
term deposits. To date we have not entered into any foreign currency hedging
activities.
WE MAY NOT BE SUCCESSFUL IF WE FAIL TO RETAIN OUR KEY TECHNICAL PERSONNEL.
During September 2001, we substantially reduced our headcount and curtailed
certain sales and marketing activities, particularly in the U.S. During 2002 and
2003, we continued to review our cost structure and have continued to reduce our
headcount. Workforce reductions may have a detrimental effect on the morale of
remaining employees, impeding their performance levels. In addition, our ability
to attract potential new employees in the future may suffer if our reputation
was hurt by this staff reduction.
We currently have five senior officers and 66 employees and contractors. We may
not be able to improve our products or create new products if we lose any of our
key employees or contractors. The contract with our CEO, Mr. Nagy Moustafa, had
a term of five years, commencing September 29, 1997, and has been renewed on a
year to year basis. None of our other employment agreements has a specified
term. We do not maintain key person life insurance policies on any of our
employees. Skilled technical personnel can be difficult to attract depending on
the strength of the economy and competitive opportunities. We may not be able to
retain our current employees if they receive better job offers from other
employers. The weakened economy through 2001, 2002 and 2003 may not alleviate
this risk in the future.
WE ARE INVOLVED IN LITIGATION WHICH COULD RESULT IN JUDGMENTS AGAINST US WHICH,
IN THE AGGREGATE, COULD TOTAL MORE THAN OUR COMBINED CURRENT ASSETS, WORKING
CAPITAL AND NET ASSETS. There are currently four material claims pending against
us. If we lose any of these suits or enter into settlements requiring us to pay
cash or issue any of our common shares, our liquidity and financial position
will be adversely affected and our shareholders' ownership may be diluted.
We have been sued, along with other individuals and corporations, by Silva Run
Worldwide Ltd. in connection with Silva Run's purchase of 212,500 common shares
(850,000 common shares prior to a one for four reverse split in May 1997) in
1995 for a purchase price of U.S. $3,700,000. Silva Run is seeking to cancel the
stock purchase and reimbursement of the U.S. $3,700,000 purchase price, plus
interest, attorneys' fees and costs. Silva Run has alleged that we, directly or
as the control person of other defendants, violated certain provisions of the
Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended. Kaye Scholer, our former attorneys, were successful on their
application to withdraw as counsel. Kaye Scholer sought an order directing us to
pay Kaye Scholer's fees and expenses. The fee dispute was heard in January 2003
and Judge Patterson entered his decision on May 12, 2003, ordering us to pay to
Kaye Scholer its outstanding fees. We are currently appealing this decision.
In May 2000 we were sued, along with our wholly-owned Barbados subsidiary,
Instant Publisher Ltd. The plaintiff is seeking damages of U.S. $1,533,950 for
breach of an October 25, 1995 dealer agreement with our previous printing
business regarding the distribution of printing equipment, and damages of U.S.
$25,000,000 for loss of reputation and loss of opportunity, pre-judgment and
post-judgment interest, and costs.
In April, 2003, we were served with a claim filed in the Ontario Superior Court
of Justice, Small Claims Court, by Michael Crerar, a former employee who was
terminated without cause on February 28, 2003. Mr. Crerar claims that Diversinet
breached his employment contract, that he was wrongfully terminated, and that he
failed to receive reasonable notice of his termination. Mr. Crerar seeks special
damages in the sum of $73,266.68, but, having brought the matter in Small Claims
Court, is limited to a maximum award of $10,000.
In July, 2003, we were sued in the Ontario Superior Court of Justice by Annette
Hamilton and Farhad Pezeshki, two former employees who claim, inter alia, that
each was terminated, while on short term disability, in a manner that exhibited
bad faith and unfair dealings. Annette Hamilton is seeking against Diversinet
$125,000 in special, general, punitive and exemplary damages. Farhad (Adam)
Pezeshki is seeking against Diversinet $350,000 in special, general, punitive
and exemplary damages.
WE HAVE LIMITED EXPERIENCE IN THE WIRELESS INTERNET SECURITY SOFTWARE FIELD, AND
WE ARE THEREFORE SUBJECT TO RISKS INHERENT IN ESTABLISHING A NEW BUSINESS. We
have been in the wireless Internet security software field since fiscal
1997, and we have only generated minimal revenues from this business. We are not
sufficiently established to fully evaluate or forecast our prospects, and we are
subject to the risks inherent in establishing a new business enterprise.
WE ARE DEPENDENT ON THE ADOPTION OF TRANSACTION-BASED APPLICATIONS OVER WIRELESS
NETWORKS AS AN ACCEPTED METHOD OF COMMERCE. In order for us to be successful,
transaction-based applications using PKI-based security over wireless networks
must be adopted as a means of trusted and secure communications and commerce to
a sufficient extent and within a reasonable time frame, particularly considering
our existing financial resources and future capital needs. Since trusted and
secure communications and commerce over these networks is new and evolving, it
is difficult to predict with any assurance the size of this market and its
growth rate, if any.
If the market for trusted and secure communications and commerce utilizing PKI
over these networks fails to develop or develops more slowly than expected, we
may have difficulty selling products or generating sufficient revenues to
support our business.
OUR ABILITY TO KEEP PACE WITH THE RAPID TECHNOLOGICAL CHANGES AND FREQUENT NEW
PRODUCT INTRODUCTIONS COMMON IN THE ELECTRONIC COMMERCE INDUSTRY WILL DETERMINE
OUR ABILITY TO REMAIN COMPETITIVE AND AFFECT THE VIABILITY OF OUR PRODUCTS. To
succeed in the mobile e-commerce business, we believe that we will have to
continuously improve the performance, features and reliability of our products
and be the first to the market with new products or enhancements to existing
products. We cannot provide assurance that we will be able to improve our
products in a timely manner. The emerging market for security products for
mobile e-commerce is characterized by rapid technological developments, frequent
new product introductions and evolving industry standards. We anticipate this
evolution will also occur in the mobile e-commerce market in which we focus our
technological developments. The adoption of new standards, or the informal
adoption of certain standards by a significant percentage of the computer
security and related industries, could require us to reconfigure our products.
We may not be able to counter challenges to our current products or to introduce
product offerings that keep pace with the technological changes introduced by
competitors or persons seeking to breach information security. We are not
currently aware of any significant new technologies either under development or
about to be introduced in the mobile e-commerce security field.
THE HIGHLY COMPETITIVE NATURE OF THE ELECTRONIC COMMERCE FIELD COULD PREVENT US
FROM ACHIEVING SUCCESS. Our products are targeted at the new and rapidly
evolving market for authentication and authorization products for wireless
electronic commerce and telecommunications. This market is not mature. We
anticipate that it will be intensely competitive, subject to rapid change and
significantly affected by new product and service introductions and other market
activities of industry participants. Many of our competitors and potential
competitors have a longer operating history, greater name recognition, larger
installed customer base and significantly greater financial, technical and
marketing resources than we have. As a result, they may be able to adapt more
quickly to new or emerging technologies and changes in customer requirements,
and they could therefore render our technologies and products obsolete.
Because of the broad potential application of our authentication and
authorization software, we compete with vendors offering a wide range of
computer security products. These competitors include Entrust Technologies,
VeriSign, Certicom, Baltimore Technologies and RSA Security. There also may be
other potential entrants to the market of whom we are not yet aware.
OUR LICENSING REVENUES ARE DEPENDENT ON OUR CUSTOMERS' ACCEPTANCE AND USE OF OUR
SOFTWARE PRODUCTS, AND WE EXPECT OUR SALES CYCLE TO BE LENGTHY. Many of our
early licensing agreements permitted our customers to examine and test our
products with no initial up-front payments to us. These customers are not
required to make payments to us until they begin to use our product for
commercial purposes. We also enter into evaluation agreements in certain cases,
whereby potential customers may examine our software products for a specified
period of time with no payment to us. Our current licensing agreements typically
require the customer to pay a license fee attributable to the software
components and the development toolkit and upon shipment of these items to the
customer, although until early in fiscal 2000 we generally waived the up-front
fee.
Customers cannot simply license our products and begin using them immediately in
their businesses. Making our products work with a particular customer's
application may be a complex, expensive and, in certain cases, an ultimately
unsuccessful process. This process may also require the customer to make
significant commitments of time and money. Based on discussions with our
customers, we believe that a customer's required cycle of testing, internal
approval and network modifications can reasonably take between six and nine
months or longer. Therefore, we expect our sales cycle, or the time between
entering into a license agreement and when we begin to receive
recurring revenue, to be six to nine months or longer. Also, the amount of
revenue can be very limited until the customer's product is made generally
available and adopted. Our sales are also subject to significant risks over
which we have little or no control, including customers' budgetary constraints
and internal acceptance procedures regarding security-related matters.
TWO MAJOR ENCRYPTION TECHNOLOGY VENDORS SERVICE OUR AREA OF BUSINESS, AND IF WE
ARE UNABLE TO LICENSE ENCRYPTION TECHNOLOGY FROM AT LEAST ONE OF THEM, IT WOULD
CAUSE A SIGNIFICANT DISRUPTION TO OUR BUSINESS. Our current product offerings
include encryption technology that we source from a third-party vendor, RSA
Security, an encryption technology vendor who services the wireless and the
e-commerce security market. The term of each licensing arrangement is
open-ended. Encryption technology is currently available from other vendors;
however, if this agreement is terminated for any reason, we would have to
license encryption technology from an alternative vendor, and there might be a
significant disruption to our business.
Our success will depend in part on our continued ability to have access to these
and other technologies that are important to our existing products and may
become important to products we may develop in the future. We cannot be certain
that we will be able to procure or use any necessary technology on terms similar
to existing licenses.
WE LACK EXPERIENCE IN SALES AND MARKETING, AND DEPEND ON OUR RELATIONSHIPS WITH
MORE ESTABLISHED CORPORATIONS TO ASSIST IN SELLING AND MARKETING OUR PRODUCTS.
We have limited sales and marketing experience and limited money to fund
marketing. A significant part of our business strategy is to form strategic
relationships with more established companies to expose our products to a larger
customer base than we could reach through direct sales and marketing force. Our
existing relationships have not resulted in any significant revenues to date and
may not result in any revenues in the future.
As a result of our emphasis on these relationships, our success will partially
depend on both the ultimate success of the third parties with which we have
these relationships and the ability of these third parties to market our
products and services successfully.
In the past, we have concentrated our sales and marketing efforts on application
service providers. This strategy has lead to no commercial deployments. As a
result and due to some success experienced by us in Hong Kong, we are focussing
our efforts on working to establish the necessary infrastructure first. We have
jointly developed Mobile e-Cert with Hongkong Post. Hongkong Post will support
the Mobile e-Certs through its Mobile Certification Authority and mobile
operators will act as the Registration Authorities for the authentication of the
identity of Mobile e-Cert subscribers. Hongkong Post is the first recognized
public Certification Authority in Hong Kong. Hutchinson, the largest and the
leading mobile operator in Hong Kong, has been appointed the first certified
Registration Authority for the registration of Hongkong Post Mobile e-Cert
digital certificates to mobile users. This appointment also marks the first time
worldwide a mobile operator is acting as a Registration Authority for the
issuance of wireless digital certificates. After this was successfully
accomplished, we have been working with application service providers who will
develop applications that will have our software embedded and will utilize
Mobile e-Cert.
We cannot provide assurance that we will be able to enter into additional, or
maintain our existing, strategic relationships on commercially reasonable terms,
if at all. Our failure to do so would require us to devote substantially more
resources to the distribution, sales and marketing of our products and services.
Also, these strategic relationships do not afford us any exclusive marketing or
distribution rights. The third parties may reduce their commitments to us in the
future or pursue alternative technologies.
THE NATURE OF OUR PRODUCTS SUBJECTS US TO PRODUCT LIABILITY RISKS, POTENTIAL
LOST REVENUES AND ADVERSE PUBLICITY IN THE EVENT OF PRODUCT FAILURE. Our
customers may rely on our products to prevent unauthorized access to computer
networks. Malfunctions or design defects of our products could:
- cause interruptions, delays or cessation of services to our customers
- result in product returns
- result in liability for damages
- adversely affect the market's perception of the security offered by
our product, resulting in a lack of demand for our products
- require us to make significant expenditures of capital or other
resources to alleviate the problem.
OUR LICENSE AGREEMENTS MAY NOT BE ADEQUATE TO LIMIT OUR LIABILITY. A large
number of claims by our customers could subject us to significant liability as
well as limit the demand for our products. In most cases our license and support
agreements attempt to limit our liability to the total amount of the licensing
and support fees paid during the twelve-month period preceding an alleged error
in or failure of our software. This contractual provision may not always be
enforceable. Courts have held that contractual limitations on liability of this
type, or the "shrink-wrap licenses" in which they are sometimes embodied, are
unenforceable because the licensee does not sign them. If these contract
provisions limiting our liability are not enforceable, we could be obligated to
pay significant damages resulting from customer claims.
IF COMPUTER HACKERS FIND WAYS TO CIRCUMVENT OUR PRODUCTS, OUR PRODUCTS WOULD NOT
PERFORM THEIR ESSENTIAL FUNCTION. Any compromise of the security offered by our
products, in a single incident or a series of incidents, would make our products
less attractive to our customers. Software error or failure may result from a
hacker seeking unauthorized access to a computer network. The methods used by
hackers are evolving rapidly and generally are not recognized until they are
launched against one or more systems. We are unable to anticipate hackers'
tactics. The publicity surrounding any security breaches could adversely affect
the public perception of the security offered by our authentication and
authorization products and make it more difficult for us to sell our products.
TECHNICAL ADVANCES IN THE INFORMATION SECURITY MARKET MAY MAKE OUR PRODUCTS
OBSOLETE. Our products are based on PKI technology and depend in part on the
application of certain mathematical principles forming the basis of the
encryption technology that we license and embed in our products. Any significant
advance in techniques for decoding or cracking encrypted computer information
could render our products obsolete or unmarketable.
Our PKI products use algorithms, or mathematical formulae, to encrypt and secure
information. The security afforded by our products is predicated on the
assumption that these mathematical formulae are very difficult to solve. This
assumption is based on the fact that years of theoretical and empirical research
by leading mathematicians have not resulted in any efficient solutions to these
problems. There can be no assurance, however, that future research will not
uncover efficient solutions to these problems.
Also, even if no breakthrough in solving these problems is discovered, they may
eventually be solved by computer systems having sufficient speed and power. If
improved techniques for decoding encrypted information are developed or made
possible by the increased availability of powerful computing resources, our
products could be rendered obsolete.
WE MIGHT NOT BE ABLE TO ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS. Our success
depends significantly upon our proprietary technology, and our means of
protecting our proprietary and intellectual property rights may not be adequate.
We rely on a combination of patent and trademark laws, trade secrets,
confidentiality agreements and contractual provisions to protect our proprietary
rights. We have two U.S. patents, which will be in effect until August 22, 2017,
and one patent granted in Israel in effect until 2021, as well as 14
applications pending in Europe, Israel, U.S. and Canada. We cannot provide
assurance that any of our applications will be approved, that any new patents
will be issued, that we will develop proprietary products or technologies that
are subject to patent protection, that any issued patent will provide us with
any competitive advantages or will not be challenged by third parties.
Furthermore, we cannot provide assurance that the patents of others will not
have a material adverse effect on our business and operating results. There is
also a risk that our competitors will independently develop similar technology,
duplicate our products or design around our patents or other intellectual
property rights.
If our technology or products were determined to infringe upon the rights of
others, we would be required to obtain licenses to use that technology. If we
are not able to obtain a license in a timely manner on acceptable terms or at
all, we may have to stop producing our product until we can develop an
alternative that does not infringe the rights of others.
Patent disputes are common in technology-related industries. We cannot provide
any assurance that we will have the financial resources to enforce or defend a
patent infringement or proprietary rights action. As the number of products and
competitors in our target markets grows, the likelihood of infringement claims
also increases. Any claims or litigation may be time-consuming and costly, cause
product shipment delays or require us to redesign our product or require us to
enter into royalty or licensing agreements. Any of these events could have a
material adverse effect on our business and operating results. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy aspects of our products or to use our proprietary information and software.
In addition, the laws of some foreign countries do not protect proprietary and
intellectual property rights to as great an extent as do the laws of Canada and
the U.S.
WE HAVE FOCUSED OUR SALES AND MARKETING EFFORTS IN ASIA AND HONG KONG. IN RECENT
MONTHS, SEVERAL ECONOMIES IN ASIA, INCLUDING HONG KONG, HAVE BEEN NEGATIVELY
AFFECTED BY THE OUTBREAK OF SEVERE ACUTE RESPIRATORY SYNDROME, OR SARS. Some
industries in Hong Kong have been hit hard by the SARS outbreak. The dramatic
decline in the business is expected to have negative effects on the economy of
Hong Kong for 2003. The Government of Hong Kong and business communities have
taken various measures to stimulate the economic recovery of Hong Kong. While
the ultimate impact of SARS is unclear at this time, the effects of these
measures are crucial to Hong Kong's future financial condition and economic
developments, which would in turn affect our financial condition and results of
operations.
CHANGES IN THE EXPORT REGULATION OF ENCRYPTION-BASED TECHNOLOGIES MAY RESTRICT
OUR ABILITY TO SELL OR LICENSE OUR PRODUCTS. Our products are subject to export
controls under Canadian and U.S. laws and regulations. These laws and
regulations may be revised from time to time in ways that may materially and
adversely affect our ability to sell our products abroad or to make products
available for sale or license via international computer networks such as the
Internet, although pursuant to an international treaty, a number of countries
have relaxed, or are in the process of relaxing, their export rules as
applicable to products of the type licensed by us. Canadian and U.S. government
controls on the export of encryption technologies which we license from third
parties and which are embedded in our products may, if subject to revision, be
amended and subsequently restrict our ability to freely export our products. As
a result, foreign competitors subject to less stringent export controls on their
products may be able to compete more effectively than we can in the global
information and computer security market.
OUR ARTICLES OF INCORPORATION AUTHORIZE US TO ISSUE AN UNLIMITED NUMBER OF
COMMON SHARES, WHICH COULD RESULT IN DILUTION TO OUR SHAREHOLDERS. Shareholders
may experience dilution because our articles of incorporation authorize us to
issue an unlimited number of common shares, subject to regulatory and/or
shareholder approval. Our shareholders have no right to purchase additional
common shares when we issue new shares. As of June 23, 2003, we had 9,212,308
common shares issued and outstanding.
In addition, our ability to issue an unlimited number of common shares may have
the effect of delaying, deferring or preventing a takeover attempt by a third
party attempting to acquire control of us.
WE HAVE LIMITED FINANCIAL RESOURCES. Our ability to continue operations during
the next fiscal year 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, raising approximately $63,368,000 through
selling a total of 9,211,132 common shares, but there is no assurance we will be
able to do so again in the near future despite the progress of the business. As
well, the terms of new capital, if any, may materially dilute existing
shareholders. Our failure to either raise capital when needed or to generate
revenues would leave us with insufficient resources to continue our business.
IF OUR COMMON SHARES SHOULD BECOME INELIGIBLE FOR CONTINUED QUOTATION ON THE OTC
BB OR A PUBLIC TRADING MARKET DOES NOT CONTINUE FOR ANY REASON, HOLDERS OF OUR
COMMON SHARES MAY HAVE DIFFICULTY SELLING THEIR SHARES. Our common shares became
ineligible for continued quotation on the NASDAQ SmallCap Market and are now
trading on the Over the Counter Bulletin Board; therefore holders of our common
shares will have difficulty selling their shares. Our common shares were quoted
on the NASDAQ SmallCap Market from June 1995 through late April 2003.
OUR COMMON SHARES MAY CONTINUE TO BE PENNY STOCK, WHICH MAY ADVERSELY AFFECT THE
LIQUIDITY OF OUR COMMON SHARES. The United States Securities and Exchange
Commission has adopted regulations that define a penny stock to be any equity
security that has a market price, as defined in those regulations, of less than
U.S. $5.00 per share, subject to certain exceptions. Our common shares are
currently penny stock.
Generally, for any transaction involving a penny stock, a broker-dealer is
required to deliver, prior to the transaction, a disclosure schedule relating to
the penny stock market as well as disclosure concerning, among other things, the
commissions payable, current quotations for the securities and information on
the limited market in penny stocks.
The liquidity of our common shares may be materially and adversely affected if
our common shares continue to be penny stock due to the administration
requirements imposed by these rules.
IT MAY BE DIFFICULT FOR OUR SHAREHOLDERS TO ENFORCE CIVIL LIABILITIES UNDER THE
U.S. FEDERAL SECURITIES LAWS BECAUSE WE ARE INCORPORATED IN CANADA. We are
incorporated under Canadian law and the majority of our directors and executive
officers are Canadian citizens or residents. All, or a substantial portion, of
these persons' assets and substantially all of our assets are located outside
the U.S. As a result, it may not be possible for investors to effect service of
process within the U.S. upon those persons or Diversinet or to enforce against
them judgments of U.S. courts predicated upon civil liabilities under U.S.
federal or state securities laws. Also, there is uncertainty as to the
enforceability in Canada, in original actions or in actions for enforcement of
judgments of the U.S. courts, of civil liabilities predicated upon U.S. federal
or state securities laws.
WE MAY BE TREATED AS A PASSIVE FOREIGN INVESTMENT COMPANY, WHICH WOULD HAVE
ADVERSE TAX CONSEQUENCES FOR OUR U.S. SHAREHOLDERS. We may be treated as a
passive foreign investment company, or a PFIC. While we do not believe that we
should be treated as a PFIC, whether we are treated as a PFIC depends on
questions of fact concerning our assets and revenues. Accordingly, we cannot
assure you that we will not be treated as a PFIC. If we were to be treated as a
PFIC, there could be material adverse tax consequences to U.S. holders of our
common shares. See "United States Federal Income Tax Consequences" beginning on
page 23.
USE OF PROCEEDS
We will not receive any proceeds when the selling shareholders sell their common
shares. The U.S. $851,000 in gross proceeds that we may receive upon the
exercise of 720,000 warrants will be used for continued sales efforts, general
operations and general working capital purposes. We will pay all costs of this
prospectus.
DIVIDEND POLICY
We have not paid any cash dividends on our common shares to date and do not
anticipate paying cash dividends in the foreseeable future.
SELECTED FINANCIAL DATA
Our selected financial data for the six-month periods ended April 30, 2003 and
2002, and the fiscal years ended October 31, 2002, 2001, 2000, 1999, and 1998
are derived from our financial statements and should be read in conjunction with
our consolidated financial statements and the accompanying notes. Our financial
statements are expressed in Canadian dollars. All financial information
contained in the prospectus is presented in Canadian dollars except where
otherwise indicated. On January 28, 2003, the Company implemented a 1 for 10
reverse stock split that was approved by its shareholders at the Company's
Annual and Special Meeting of Shareholders on January 22, 2003. The share data
has been adjusted for this reverse stock split.
Our financial statements have been prepared in accordance with Canadian GAAP.
These principles conform in all material respects with U.S. GAAP except as
described in Note 15 to our 2002 consolidated financial statements.
SELECTED FINANCIAL DATA
(CDN$ IN 000'S, EXCEPT PER SHARE DATA)
SIX MONTHS ENDED
APRIL FISCAL YEAR ENDED OCTOBER 31
-------------------- ----------------------------------------------------
2003 2002 2002 2001 2000 1999 1998
--------- --------- --------- --------- --------- --------- --------
(Unaudited)
CONSOLIDATED STATEMENT OF LOSS DATA
Revenue . . . . . . . . . . . . . . . . $ 3,867 $ 486 $ 1,118 $ 1,221 $ 2,636 $ 246 $ 0
Loss from Continuing Operations . . . . (3,198) (3,788) (6,397) (18,900) (14,777) (13,826) (7,716)
Net loss from Discontinued Operations . 0 0 0 0 (250) (285) (688)
Net Loss. . . . . . . . . . . . . . . . (3,198) (3,788) (6,397) (18,900) (15,027) (14,111) (8,404)
Weighted Average no. of shares (000's). 3,222 2,719 2,972 2,638 2,353 1,674 1,533
Loss Per Share - Continuing Operations. (0.99) (1.39) (2.20) (7.20) (6.30) (8.20) (5.00)
Net Loss Per Share. . . . . . . . . . . (0.99) (1.39) (2.20) (7.20) (6.40) (8.40) (5.50)
Dividends Per Share . . . . . . . . . . 0.00 0.00 0.00 0.00 0.00 0.00 0.00
CONSOLIDATED BALANCE SHEET DATA
Working Capital (Deficit) . . . . . . . (440) 4,797 2,743 3,555 21,647 4,985 2,636
Long-term Investment. . . . . . . . . . 0 0 0 0 0 0 100
Long-term Liabilities . . . . . . . . . 437 0 0 0 0 1,421 2,051
Shareholders' Equity. . . . . . . . . . 2,004 7,037 4,620 6,052 24,846 7,852 3,746
Total Assets. . . . . . . . . . . . . . 5,701 9,170 6,279 9,616 28,771 12,226 7,356
Share Capital . . . . . . . . . . . . . 58,950 58,767 58,958 53,993 53,887 20,917 43,707
US GAAP
Loss from Continuing Operations . . . . (3,215) (3,814) (6,452) (18,956) (16,226) (13,647) (3,585)
Net Loss from Discontinued Operations . 0 0 0 0 (250) (285) (688)
Net Loss. . . . . . . . . . . . . . . . (3,215) (3,814) (6,452) (18,956) (16,476) (13,932) (4,273)
Loss Per Share - Continuing Operations. (1.00) (1.40) (2.20) (7.20) (6.90) (8.20) (2.30)
Net Loss Per Share. . . . . . . . . . . (1.00) (1.40) (2.20) (7.20) (7.00) (8.30) (2.80)
Long-term Liabilities . . . . . . . . . 437 0 0 0 0 1,703 2,652
Shareholders' Equity. . . . . . . . . . 426 5,505 3,059 4,547 23,397 7,571 3,101
Total Assets. . . . . . . . . . . . . . 5,701 9,170 6,279 9,616 28,771 12,226 7,310
Share Capital . . . . . . . . . . . . . 100,207 100,016 100,207 95,242 95,136 62,166 44,576
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Our financial statements have been prepared in accordance with Canadian GAAP.
These principles conform in all material respects with U.S. GAAP except as
described in Note 15 to our 2002 consolidated financial statements.
CRITICAL ACCOUNTING POLICIES
The nature of our business is not highly complex, as we operate in one primary
business. We develop, market and sell wireless security software solutions. We
also perform professional services to install, support and integrate our
solutions with other applications. We operate globally in a functional
organization. We do not have any off-balance sheet financing, other than
operating leases entered into in the normal course of business, and we do not
actively engage in derivative or hedging transactions. In 2002, our most complex
accounting judgments were made in the areas of software revenue recognition.
Software revenue recognition is expected to continue to be an on-going element
of our accounting processes and judgments.
SOFTWARE REVENUE RECOGNITION
We derive our revenue primarily from two sources: sales of products, including
hardware and software licenses, and services, including maintenance, support and
professional services. Significant management judgments and estimates must be
made and used in connection with the revenue recognized in any reporting period.
Material differences may affect the amount and timing of our revenue for any
period if our management made different judgments.
With respect to software revenue recognition, we recognize revenues in
accordance with the provisions of the American Institute of Certified Public
Accountants' Statement of Position No. 97-2, "Software Revenue Recognition" and
SOP No. 98-9, "Modifications of SOP No. 97-2, Software Revenue Recognition, with
Respect to Certain Transactions".
For all sales, we use a binding contract, purchase order or another form of
documented agreement as evidence of an arrangement with the customer. Revenues
from software license agreements are recognized upon receipt of an executed
license agreement and shipment of the software, if there are no significant
remaining vendor obligations, collection of the receivable is probable and
payment is due in accordance with our normal payment terms.
We consider delivery to occur when we ship the product, so long as title and
risk of loss have passed to the customer.
At the time of a transaction, we assess whether the sale amount is fixed or
determinable and whether collection is probable. If we determine the fee is not
fixed or determinable, we recognize revenue when payment becomes due. We assess
collectibility based on a number of factors, including the creditworthiness of
the customer. If we determine that collectibility is not probable, we do not
record revenue until such time when collectibility becomes probable, which is
generally upon the receipt of cash.
When arrangements contain multiple elements and vendor specific objective
evidence ("VSOE") of fair value exists for all undelivered elements, we
recognize revenue for the delivered elements using the residual method. Our
determination of fair value of each of the undelivered elements in multi-element
arrangements is based on VSOE of fair value. VSOE of fair value for each element
is either the price charged when the same element is sold separately or the
price established by management, having the relevant authority to do so, for an
element not yet sold separately. For arrangements containing multiple elements
wherein VSOE of fair value does not exist for all undelivered elements, revenue
for the delivered and undelivered elements is deferred until VSOE of fair value
exists or all elements have been delivered.
Maintenance service revenue, whether sold separately or as part of a multiple
element arrangement, is deferred and recognized ratably over the term of the
maintenance contract, generally twelve months. Revenue allocated to professional
service elements is recognized as the services are performed.
Due to the complexity of some software license agreements, we routinely apply
judgment to the application of software revenue recognition accounting
principles to specific agreements and transactions. Different judgments and/or
different contract structures could have led to different accounting
conclusions, which could have had a material effect on our reported quarterly
earnings.
CAPITAL ASSETS
We record our capital assets at their cost less accumulated depreciation. On a
periodic basis, management reviews the carrying values of these assets and
compares it to their estimated net recoverable amount. The determination of net
recoverable amount necessitates various assumptions, many of which are forward
looking and which are based on management's best estimate of future revenues,
expenses and cash flows. To the extent that actual financial performance
adversely differs from the results projected by these assumptions, an impairment
charge in the value of these assets would be necessary.
RESULTS OF OPERATIONS
SIX MONTHS ENDED APRIL 30, 2003 COMPARED TO SIX MONTHS ENDED APRIL 30, 2002
We reported a similar net loss of $2,084,000 for the three months ended April
30, 2003 compared to a net loss of $2,063,000 in the prior year's second
quarter. The net loss was $3,198,000 for the six months ended April 30, 2003
compared to a net loss of $3,788,000 in the same period in fiscal 2002. During
the quarter we increased our depreciation and amortization of leasehold
improvements by $231,000 in anticipation of our subleasing of part of our
Toronto office space, effective July 1, 2003. The decreased net loss in the
first six months of 2003 is attributable to our continued efforts in cost
control and in part to the acquisition of DSS effective January 2, 2003.
For the three months ended April 30, 2003, we reported revenue of $2,649,000
compared to revenue of $311,000 for the quarter ended April 30, 2002. The
current period revenue is made up of DSS revenues of $2,619,000 and Diversinet
revenues of $30,000. While we signed a U.S. $200,000 licence deal in the second
quarter, we will be recognising the revenue upon confirmation of receipt of the
payment.
Cost of sales for the three months ended April 30, 2003 was $2,253,000
(representing a gross margin of 14% on DSS revenues) compared with $0 for the
quarter ended April 30, 2002. Cost of sales for the six months ended April 30,
2003 was $3,039,000 (representing a gross margin of 14% on DSS revenues)
compared with $0 for the six months ended April 30, 2002. The cost of sales
represents the direct costs associated for DSS completing the consulting
services revenue. As we integrate DSS and Diversinet and start to focus DSS
towards wireless application consulting, we expect that the gross margins on DSS
revenues will improve.
Research and development expenses decreased to $532,000 in the three months
ended April 30, 2003 from $761,000 in the three months ended April 30, 2002
resulting primarily as a result of continued efforts to reduce costs. Research
and development expenses decreased to $970,000 in the six months ended April 30,
2003 from $1,409,000 in same period of fiscal 2002.
Sales and marketing expenses were $382,000 in the second quarter of fiscal 2003
compared to $476,000 in the second quarter of fiscal 2002. Sales and marketing
expenses were $781,000 in the first six months of fiscal 2003 compared to
$908,000 in the same period of fiscal 2002. The decrease is due in part to a
reduction in travel costs and license fees. During the six months of fiscal 2003
we expanded the sales team adding experienced sales people in Hong Kong, the
U.S. and Canada. We believe that selective additions to the sales team will
benefit the Company through increased revenues in the short to medium term.
General and administrative expenses were $1,227,000 for the second quarter of
2003 compared to $1,056,000 incurred during the second quarter of 2002. Foreign
exchange gains were $10,000 for the three months compared to losses of $13,000
for the respective period in 2002. General and administrative expenses were
$1,839,000 for the first six months of 2003 compared to $1,792,000 incurred
during the first two quarters of 2002. Overall Diversinet G&A costs have been
reduced from last year, however with the acquisition of DSS, the additional of
the DSS infrastructure has caused the overall G&A to increase modestly.
Depreciation and amortization expense in the second quarter of fiscal 2003
increased to $365,000 from $146,000 in the second quarter of fiscal 2002. During
the quarter the Company increased its depreciation for leasehold improvements in
anticipation of our subleasing of certain of its office space in Toronto to be
effective July 1, 2003. Depreciation and amortization expense in the first two
quarters of fiscal 2003 increased to $503,000 from $267,000 for the same period
of fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
SIX MONTHS ENDED APRIL 30, 2003 COMPARED TO SIX MONTHS ENDED APRIL 30, 2002
We believe that our cash and cash equivalents as at April 30, 2003 of $843,000
and the additional amounts from the financing will be sufficient to meet our
short-term working capital requirements for the remainder of the fiscal year and
into the 2004 fiscal year. If necessary, 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.
With the completion of our recent financing after the quarter end, we believe
that our cash and cash equivalents as at April 30, 2003 of $843,000 and the
additional amounts from the financing will be sufficient to meet our short-term
working capital requirements for the remainder of the fiscal year and into the
2004 fiscal year.
Cash used in operating activities was $795,000 in the three months ended April
30, 2003, a decline of 64% from the amount used in the same period of the prior
year. Cash used during the quarter was comprised of the net loss of $2,084,000,
less net depreciation and amortization of $365,000. Other non-cash items include
an increase in accounts payable and accrued liabilities of $295,000, a decrease
in receivables of $494,000, a decrease in deferred revenue of $13,000 and a
decrease in prepaid expenses of $147,000. Cash used in operating activities was
$2,220,000 in the quarter ended April 30, 2002, attributable to the net loss of
$2,063,000 less net depreciation and amortization of $146,000. Other non-cash
items include a decrease in accounts payable and accrued liabilities of
$285,000, an increase in receivables of $116,000, a decrease in deferred revenue
of $3,000 and a decrease in prepaid expenses of $101,000.
Cash used in operating activities was $847,000 in the six months ended April 30,
2003, a decline of 81% from the amount used in the same period of the prior
year. Cash used during the quarter was comprised of the net loss of $3,198,000,
less net depreciation and amortization of $503,000. Other non-cash items include
a decrease in accounts payable and accrued liabilities of $393,000, a decrease
in receivables of $2,449,000, an increase in deferred revenue of $11,000 and an
increase in prepaid expenses of $220,000. Cash used in operating activities was
$4,578,000 in the six months ended April 30, 2002, attributable to the net loss
of $3,788,000 less net depreciation and amortization of $267,000. Other non-cash
items include a decrease in accounts payable and accrued liabilities of
$1,436,000, a decrease in receivables of $97,000, an increase in deferred
revenue of $4,000 and a decrease in prepaid expenses of $278,000.
Cash used in financing activities in the three months ended April 30, 2003, was
$557,000 representing a decrease in the notes payable of $87,000, a decrease in
the promissory notes payable of $82,000, repayment of the $380,000 bank
indebtedness and $8,000 spent on share consolidation costs. Cash provided by
financing activities in the quarter ended April 30, 2002, was $4,774,000. In
April 2002 we completed the issue and sale of 5,186,708 units in our capital at
U.S. $0.60 per unit for gross proceeds of 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.
Cash used in financing activities in the six months ended April 30, 2003 was
$1,856,000 representing a decrease in the notes payable of $1,359,000, a
decrease in the promissory notes payable of $82,000, repayment of the $380,000
bank indebtedness, an increase in deferred financing costs of $27,000 and $8,000
spent on share consolidation costs. Cash provided by financing activities in the
six months ended April 30, 2002 was $4,774,000 representing the net proceeds
from the private placement described above.
Cash provided by investing activities in the three months ended April 30, 2003
was $45,000 and consisted of $58,000 of proceeds of a capital asset sale and
additional cost of $14,000 incurred for the acquisition of DSS. Cash
used in investing activities in the three months ended April 30, 2002 was $2,000
attributable to capital asset additions.
Cash provided by investing activities in the six months ended April 30, 2003 was
$2,594,000 consisting of $2,887,000 received from proceeds of a short term
investment and $57,000 of proceeds from the sale of capital assets. Cash
provided by investing activities in the six months ended April 30, 2002 was
3,077,000 consisting of $3,088,000 received from proceeds of a short term
investment offset by $11,000 spent of capital asset additions.
SELLING SECURITYHOLDERS
The Registration Statement filed with the Securities and Exchange Commission of
which this prospectus forms a part covers the registration of the following
securities:
- 5,990,000 common shares;
- 720,000 common shares issuable upon the exercise of the warrants.
SELLING SHAREHOLDERS
The table below sets forth the names of the selling shareholders; the number of
common shares beneficially owned by the selling shareholders, as of July 18,
2003, the percentage of our outstanding common shares beneficially owned by each
of the selling shareholders as of July 18, 2003, the number of common shares
that each selling shareholder may offer under this prospectus, are the number of
common shares that each selling shareholder will beneficially own assuming the
sale of all of the common shares covered by this prospectus.
Except as noted below, none of these selling shareholders has held any position
or office or had a material relationship with us or any of our affiliates within
the past three years, other than as a result of the ownership of our ordinary
shares.
TRANSACTION SHARES SHARES ISSUABLE UPON WARRANT
EXERCISE
Sunrise Private Placement 5,540,000 500,000
Public Relations Retainer Agreement 200,000 100,000
Business Development Agreement 250,000 -0-
DSS Acquisition Warrants -0- 120,000
Advisory Board Consulting Warrants -0- 50,000
---------------------------------------
Shares subject to this registration statement 5,990,000 770,000
---------------------------------------
- ---------------------------------------------------------------------------------------------------
COMMON SHARES COMMON COMMON SHARES
BENEFICIALLY OWNED PRIOR SHARES BENEFICIALLY OWNED AFTER
TO THIS OFFERING OFFERED THIS OFFERING
PERCENT OF PURSUANT TO PERCENT OF
TOTAL SHARES THIS TOTAL SHARES
NAME OF BENEFICIAL OWNER NUMBER OUTSTANDING PROSPECTUS NUMBER OUTSTANDING
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Ethan Benovitz
60 Paine Avenue
New Rockelle, NY 10804 120,968 1.31 120,968 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Stanley Raskas
301 Overlook Road
New Rockelle, NY 10804 120,968 1.31 120,968 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Daniel Saks
630 W. 246th Street, #823
Bronx, NY 10471 120,968 1.31 120,968 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Jaime Hartman
61 Paine Avenue
New Rockelle, NY 10804 40,323 * 40,323 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Josef Hartman
Borochov Street 3, Apt#4
Givataim, Israel 53201 40,323 * 40,323 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Platinum Partners Global Macro Fund
LP
152 West 57th Street, 54th Floor
New York, NY 10019 241,935 2.63 241,935 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
James Groninger
C/O The Bay South Company
101 Shockoe Slip, Suite M
Richmond VA 23219 252,270 1.95 180,000 72,270 *
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Joseph Klein III
1724 Hillside Road
Stevenson, MD 21153 106,500 1.09 100,000 6,500 *
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Portside Growth and Opportunity Fund
Corporate Centre, West Bay Road
PO Box 31106 SMB
Grand Caymen, Cayman Islands 403,226 4.38 403,226 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Smithfield Fiduciary LLC
C/O Highbridge Capital Management
LLC
9 West 57th Street, 27th Floor
New York, NY 10019 362,903 3.94 362,903 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Rock Associates
41 Winged Foot Drive
Larchmont, NY 10538 40,000 * 40,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Nagy Moustafa
78 Forester Crescent
Unionville, Ontario L6C 1V3 143,371 * 80,646 62,725 *
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Taher and Maual Elgamal
142 Almendral Avenue
Atherton, CA 94027 32,259 * 32,259 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Thomas Cain
103 Penshurst Road
Richmond, VA 23221 74,023 * 40,323 33,700 *
- ------------------------------------- ------------ ----------- ------------ ------ -----------
J. Graeme MacLatchie III
1 Dunham Place
Irvington, NY 10533 185,310 1.09 100,000 85,310 *
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Balestra Capital Partners LP 100,000 100,000
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
1185 Avenue of the Americas, 32nd
Floor
New York, NY 10036 1.09 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Balmoral Holdings Ltd.
PO Box HM 2706
Hamilton HM KX, Bermuda 200,000 2.17 200,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Mid Ocean Investments Ltd.
3rd Floor, Jardine House
33 Reid Street
Hamilton HM 12, Bermuda 300,000 3.26 300,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
CGT Management Ltd.
C/O Capital Generations Trust
Butterfield Trust (Bermuda) Limited
65 Front Street, PO Box HM 195
Hamilton HM AX, Bermuda 403,226 4.38 403,226 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Parul Atul Parikh (7)
44081 Linda Vista Road
Fremont, CA 94539 152,323 1.65 152,323 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
David Hackett
20 Astley Avenue
Toronto, Ontario M4W 3B4 35,259 * 32,259 3,000 *
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Ash Master Fund II LP
2 International Place, 24th Floor
Boston, MA 02110 161,290 1.75 161,290 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Vitel Ventures Corporation
802 Grand Pavilion, 1st Floor
PO Box 30543 SMB
Grand Cayman, Cayman Islands BWI 161,300 1.75 161,300 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Lakefront Partners, LLC
205 E. Wisconsin Avenue, Suite 220
Milwaukee, WI 53202 80,000 * 65,000 15,000 *
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Judson A. Cooper
61 Bankservice Road
Armonk, NY 10504 50,000 * 50,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Dwight E. Lee
c/o Upland Associates LP
530 Fifth Avenue, 26th Floor
New York, NY 10036 40,323 * 40,323 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Richard B. Stone (3)
44 West 77th Street
New York, NY 10024 218,728 2.37 218,728 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
William J. Ritger
623 Ocean Avenue
Sea Girt, NJ 08750 161,290 1.75 161,290 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Jerry Heymann
130 West 79th Street (#50)
New York, NY 10024 70,968 * 70,968 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Bradley Zipper
711 Fifth Avenue, 5th Floor
New York, NY 10022 80,645 * 80,645 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
LOM Securities (Bermuda) Limited
The LOM Building
27 Reid Street 50,000 * 50,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Dan Purjes
60 East 42nd Street
New York, NY 10165 50,000 * 50,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Bridges & Pipes, LLC
305 Madison Avenue, Suite 2544 50,000 50,000
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
New York, NY 10165 * -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Harry J. Blumenthal, Jr.
905 South Broad Avenue
New Orleans, LA 70125 50,000 * 50,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Sherleigh Associates Inc, Defined
Benefit Pension Plan
950 Fifth Avenue, #33
New York, NY 10021 322,580 3.50 322,580 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Pequot Navigator Onshore Fund, L.P.
C/O Pequot Capital Management, Inc.
500 Wyala Farm Road
Westport CT 068800 403,226 4.38 403,226 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Nathan Low (8)
641 Lexington Avenue, 25th Floor
New York, NY 10022 420,000 4.56 420,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Derek Caldwell (1)
641 Lexington Avenue, 25th Floor
New York, NY 10022 460,000 4.99 460,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Marcia Kucher (2)
641 Lexington Avenue, 25th Floor
New York, NY 10022 189,500 2.06 189.500 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Ruth Low
614 Trenton Drive
Beverly Hills, CA 90210 40,000 * 40,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
HUG Funding LLC (5)
145 Hugenot Street, Suite 404
New Rochelle, NY 10001 155,000 1.68 155,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Hevrat Pinto (4)
8 Morris Road Spring Valley
Spring Valley, NY 10977 85,000 * 85,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Sunrise Foundation Trust
641 Lexington Avenue, 25th Floor
New York, NY 10022 40,000 * 40,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Avi Dahan
641 Lexington Avenue, 25th Floor
New York, NY 10022 50,000 * 50,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Dov Weiner
1497 East Terrace Circle, Apt 4
Teaneck, NJ 07666 10,000 * 10,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Yad Avraham Institute of New York
1271 6th Avenue, 47th Floor
New York, NY 10022 50,000 * 50,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
American Friends of Shalva Inc.
315 Fifth Avenue, 6th floor
New York, NY 10016 50,000 * 50,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Amnon Mandlebaum (6)
641 Lexington Avenue, 25th Floor
New York, NY 10022 4,500 * 4,500 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Greg Sutyak (6)
1196 Vacation Drive
Lafayette, CA 94549 3,000 * 3,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Mukesh Shah (6)
#212, 1500 White Birch Ter
Fremont, CA 94536 3,000 * 3,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Radhe Shyam (6)
#205, 1500 White Birch Ter
Fremont, CA 94536 2,000 * 2,000 -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
Good Harbor Consulting, LLC 50,000
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
1902 N. Monroe Street
Arlington, VA 22207(6) 50,000 * -0- -0-
- ------------------------------------- ------------ ----------- ------------ ------ -----------
6,760,000
- ---------------------------------------------------------------------------------------------------
* indicates less than one percent (1%)
We will not receive any proceeds from the sale of the securities by the
selling securityholders.
(1) Includes 368,000 shares subject to outstanding warrants
(2) Includes 109,500 shares subject to outstanding warrants
(3) Includes 18,000 shares subject to outstanding warrants
(4) Includes 40,000 shares subject to outstanding warrants
(5) Includes 60,000 shares subject to outstanding warrants
(6) Issuable upon exercise of warrants
(7) Includes 112,000 shares subject to outstanding warrants
(8) Does not include 40,000 shares held by Sunrise Foundation Trust,
to which Mr. Low disclaims any beneficial interest.
PLAN OF DISTRIBUTION
We are registering the common shares offered hereby on behalf of the selling
shareholders. As used herein, "selling shareholders" includes donees, pledgees,
transferees or other successors-in-interest selling shares received after the
date of this prospectus from a named selling shareholder as a gift, pledge,
partnership distribution or other transfer. All costs, expenses and fees in
connection with the registration of the shares offered by this prospectus will
be borne by the Company, other than brokerage commissions and similar selling
expenses, if any, attributable to the sale of shares offered hereby which will
be borne by the selling shareholders. Sales of the shares offered hereby may be
effected by selling shareholders from time to time in one or more types of
transactions (which may include block transactions) on the Over the Counter
Bulletin Board at prevailing market prices, in the over-the-counter market, in
negotiated transactions, through publicly or privately negotiated put or call
options transactions relating to the shares offered hereby, through short sales
of the shares offered hereby (including the closing of any open short position),
or a combination of such methods of sale, at market prices prevailing at the
time of sale, or at negotiated prices. Such transactions may or may not involve
brokers or dealers. The selling shareholders have advised us that they have not
entered into any agreements, understandings or arrangements with any
underwriters or broker-dealers regarding the sale of their securities, nor is
there an underwriter or coordinating broker acting in connection with the
proposed sale of the shares offered hereby by the selling shareholders.
The selling shareholders may enter into hedging transactions with regard to the
shares offered hereby. In connection with such transactions the counter parties
to such transactions may engage in short sales of the shares offered hereby or
of securities convertible into or exchangeable for such shares in the course of
hedging positions they assume with selling shareholders. The selling
shareholders may also enter into other transactions which require the delivery
of the shares offered by this prospectus, which shares such counter parties may
resell pursuant to this prospectus (as amended or supplemented, if necessary, to
reflect such transaction).
The selling shareholders may effect these transactions by selling the shares
offered hereby directly to purchasers or to or through broker-dealers, which may
act as agents or principals. Such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the selling shareholders
and/or the purchasers of the shares offered hereby for whom such broker-dealers
may act as agents or to whom they sell as principal, or both (which compensation
as to a particular broker-dealer might be in excess of customary brokerage
commissions).
The selling shareholders and any broker-dealers that act in connection with the
sale of the shares offered herein might may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, and any commissions
received by such broker-dealers and any profit on the resale of the shares
offered herein sold by them while acting as principals might be deemed to be
underwriting discounts or commissions under the Securities Act. We have agreed
to indemnify each selling shareholder against certain liabilities, including
liabilities arising under the Securities Act. The selling shareholders may agree
to indemnify any agent, dealer or broker-dealer that participates in
transactions involving sales of the shares offered hereby against certain
liabilities, including liabilities arising under the Securities Act.
Because selling shareholders may be deemed to be "underwriters" within the
meaning of Section 2(11) of the Securities Act, the selling shareholders will be
subject to the prospectus delivery requirements of the Securities Act. We have
informed the selling shareholders that the anti-manipulative provisions of
Regulation M promulgated under the Exchange Act may apply to their sales in the
market.
Selling shareholders also may resell all or a portion of the shares offered
hereby in open market transactions in reliance upon Rule 144 under the
Securities Act, provided they meet the criteria and conform to the requirements
of Rule 144 or another exemption under the Securities Act.
Upon our being notified by a selling shareholder that any material arrangement
has been entered into with a broker-dealer for the sale of shares offered hereby
through a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing:
- the name of each such selling shareholder and of the participating
broker-dealer(s);
- the number of shares involved;
- the initial price at which such shares were sold;
- the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable;
- that such broker-dealer(s) did not conduct any investigation to verify
the information set out or incorporated by reference in this
prospectus; and
- other facts material to the transaction.
We will pay all of the costs of qualifying these securities under federal and
state securities laws, including legal and accounting fees, as well as printing
and other related costs.
DESCRIPTION OF PRIVATE PLACEMENTS
2003 PRIVATE PLACEMENT
Issuance of 5,000,000 common shares for gross proceeds of U.S. $3,100,000. On
June 23, 2003, we completed a private placement of 5,000,000 common shares at a
price of U.S. $0.62 per common share for gross proceeds of U.S. $3,100,000. This
transaction was effected as a private placement in accordance with Rule 506 of
Regulation D promulgated under the Securities Act of 1933, as amended. We will
use the net proceeds of that private placement for ongoing sales operations,
working capital purposes, to continue our research and development activities
and for general corporate purposes.
Sunrise Securities Corp., as Placement Agent, exercised its option to receive
500,000 common shares in lieu of its U.S. $310,000 fee from the Private
Placement. Sunrise also received 40,000 common shares in lieu of its U.S.
S24,000 retainer fee to act as Placement Agent. Further compensation was issued
as a three-year broker warrant terminating on June 20, 2006 to purchase up to
500,000 common shares of the Corporation at U.S. $0.62 per share.
We agreed to file the registration statement to register the shares and the
shares underlying the warrants issued pursuant to this private placement within
30 days of the closing of the private placement.
PUBLIC RELATIONS RETAINER AGREEMENT
Issuance of 200,000 common shares and 100,000 common share purchase warrants
issuable upon the exercise of warrants.
On May 14, 2003, we entered into the agreement with Sunrise Financial Group,
Inc. to provide public relations services. In consideration for the services to
be rendered in accordance with the agreement, we issued a three-year warrant
terminating on May 12, 2006 to purchase up to 100,000 of our common shares at
U.S. $0.60 per share and 200,000 common shares, being 16,667 common shares per
month for 12 months in regards to the compensation payable by us for these
services.
BUSINESS DEVELOPMENT RETAINER AGREEMENT
Issuance of 250,000 common shares.
On May 14, 2003, we entered into a business development agreement with iSimplifi
LLC ("iSimplifi") to provide business development services. This agreement is
subject to certain milestones that if not met may allow us to terminate the
retainer portion of the agreement and /or the entire agreement. In consideration
for the services to be rendered by iSimplifi, we will pay to iSimplifi a
retainer equal to U.S. $25,000 per month, which at our discretion may be paid as
follows: (i) U.S. $25,000 per month in cash, or (ii) U.S. $25,000 per month by
the issuance of 41,667 common shares per month, or (iii) U.S. $20,000 per month
in cash and issuance of 8,333 common shares per month. We have elected to pay
iSimplifi the first six months by way of 250,000 common shares.
ACQUISITION WARRANTS
Issuance of 120,000 common shares purchase warrants.
In January 2003, we 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.
ADVISORY BOARD CONSULTANT AGREEMENT
Issuance of 50,000 common share purchase warrants issuable upon the exercise of
warrants.
On July 1, 2003, we entered into the agreement with Good Harbor Consulting, LLC.
to provide advisory board consulting services. In consideration for the services
to be rendered in accordance with the agreement, we issued a three-year warrant
terminating on June 30, 2006 to purchase up to 50,000 of our common shares at
U.S. $0.62 per share in regards to the compensation payable by us for these
services.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a discussion of material United States Federal income tax
consequences generally applicable to a U.S. Holder (as defined below) of our
common shares. This discussion does not address all potentially relevant Federal
income tax matters and it does not address consequences peculiar to persons
subject to special provisions of Federal income tax law, such as, for example,
tax-exempt organizations, qualified retirement plans, persons subject to
alternative minimum tax, financial institutions, insurance companies, real
estate investment trusts, regulated investment companies, broker-dealers,
non-resident alien individuals or foreign corporations whose ownership of our
common shares is not effectively connected with the conduct of a trade or
business in the United States and shareholders who acquired their shares through
the exercise of employee share options or otherwise as compensation. In
addition, this discussion only applies to common shares held by U.S. Holders as
capital assets within the meaning of Section 1221 of the Internal Revenue Code
of 1986, as amended, and does not cover any state, local or foreign tax
consequences.
The following discussion is based upon the sections of the Internal Revenue
Code, Treasury Regulations, published Internal Revenue Service rulings,
published administrative positions of the Internal Revenue Service and court
decisions that are currently applicable, any or all of which could be materially
and adversely changed, possibly on a retroactive basis, at any time. The
following discussion is for general information only and is not intended to be,
nor should it be construed to be, legal or tax advice to any holder or
prospective holder of our common shares and no opinion or representation with
respect to the United States Federal income tax consequences to any such holder
or prospective holder is made. Accordingly, holders and prospective holders of
our common shares should consult their own tax advisors about the federal,
state, local, and foreign tax consequences of purchasing, owning and disposing
of our common shares.
U.S. HOLDERS
As used herein, a "U.S. Holder" includes any person, with the exception of those
subject to special provisions of Federal income tax law, who holds our common
shares who is a citizen or resident of the United States, a partnership or
corporation organized under the laws of the United States, an estate, the income
of which is subject to United States federal income tax without regard to its
source and a trust if a United States court is able to exercise primary
supervision over administration of the trust and one or more United States
persons have authority to control all substantial decisions of the trust or if
the trust was in existence on August 20, 1996 and has elected to continue to be
treated as a United States person, and any other person or entity whose
ownership of our common shares is effectively connected with the conduct of a
trade or business in the United States.
DISTRIBUTIONS ON OUR COMMON SHARES
U.S. Holders receiving dividend distributions (including constructive dividends)
with respect to our common shares are required to include in gross income for
United States Federal income tax purposes the gross amount of such distributions
to the extent that we have current or accumulated earnings and profits, without
reduction for any Canadian income tax withheld from such distributions. Such
Canadian tax withheld may be credited, subject to certain limitations, against
the U.S. Holder's United States Federal Income tax liability or, alternatively,
may be
deducted in computing the U.S. Holder's United States Federal taxable income by
those who itemize deductions (see more detailed discussion at "Foreign Tax
Credit" below). To the extent that distributions exceed our current or
accumulated earnings and profits, they will be treated first as a return of
capital up to the U.S. Holder's adjusted basis in the common shares and
thereafter as gain from the sale or exchange of the common shares. Preferential
tax rates for long-term capital gains are applicable to an U.S. Holder, which is
an individual, estate or trust. There are currently no preferential tax rates
for long-term capital gains for an U.S. Holder, which is a corporation.
Dividends paid in Canadian dollars will be included in income in an U.S. dollar
amount based on the exchange rate at the time of their receipt. U.S. Holders
should consult their own tax advisors regarding the treatment of any foreign
currency gain or loss on any Canadian dollars received as a dividend which are
converted into U.S. dollars on a date subsequent to receipt.
Dividends paid on our common shares will not generally be eligible for the
dividends received deduction provided to corporations receiving dividends from
certain United States corporations. A U.S. Holder which is a corporation may,
under certain circumstances, be entitled to a 70% deduction of the United States
source portion of dividends received from us (unless we qualify as a "foreign
personal holding company" or a "passive foreign investment company", as defined
below) if such U.S. Holder owns shares representing at least 10% of the voting
power and value of Diversinet. The availability of this deduction is subject to
several complex limitations, which are beyond the scope of this discussion.
FOREIGN TAX CREDIT
A U.S. Holder who pays (or has withheld from distributions) Canadian income tax
with respect to the ownership of our common shares may be entitled, at the
option of the U.S. Holder, to either a deduction or a tax credit for such
foreign tax paid or withheld. Generally, it will be more advantageous to claim a
credit because a credit reduces United States Federal income taxes on a
dollar-for-dollar basis, while a deduction merely reduces the taxpayer's income
subject to tax. This election is made on an annual basis and applies to all
foreign income taxes (or taxes in lieu of income tax) paid by (or withheld from)
the U.S. Holder during the year. There are significant and complex limitations
which apply to the credit, among which is the general limitation that the credit
cannot exceed the proportionate share of the U.S. Holders United States income
tax liability that the U.S. Holder's foreign source income bears to his/her or
its worldwide taxable income.
In the determination of the application of this limitation, the various items of
income and deduction must be classified into foreign and domestic sources.
Complex rules govern this classification process. There are further limitations
on the foreign tax credit for certain types of income such as "passive income",
"high withholding tax interest", "financial services income", "shipping income",
and certain other classifications of income. In certain circumstances, recently
enacted legislation and other guidance issued by the United States Treasury may
deny a United States holder foreign tax credits (and instead may allow
deductions) for foreign taxes imposed on a dividend if the United States holder
(i) has not held the common shares for at least 16 days in the 30-day period
beginning 15 days before the ex-dividend date, during which it is not protected
from risk of loss; (ii) is obligated to make payments related to the dividends;
or (iii) holds the common shares in arrangements in which the United States
holder's expected economic profit, after non-US taxes, is insubstantial.
The availability of the foreign tax credit and the application of the
limitations on the credit are fact specific and holders and prospective holders
of our common shares should consult their own tax advisors regarding their
individual circumstances.
DISPOSITION OF OUR COMMON SHARES
A U.S. Holder will recognize gain or loss upon the sale of our common shares
equal to the difference, if any, between (i) the amount of cash plus the fair
market value of any property received, and (ii) the shareholder's tax basis in
the our common shares. Any gain recognized on the sale or other disposition of
common shares will generally be U.S. source income. Any loss recognized on the
sale or other disposition of common shares will generally be U.S. source.
However, such loss will be foreign source to the extent certain dividends were
received by the U.S. Holder within the 24-month period proceeding the date on
which the loss was recognized. This gain or loss will be capital gain or loss if
the common shares are capital asset in the hands of the U.S. Holder, which will
be a short-term or long-term capital gain or loss depending upon the holding
period of the U.S. Holder. Gains and losses are netted and combined according to
special rules in arriving at the overall capital gain or loss for a particular
tax year. Deductions for net capital losses are subject to significant
limitations. For U.S. Holders who are individuals, a capital loss is deductible
only to the extent of capital gains, plus ordinary income of up to U.S. $3,000;
any unused portion of such net capital loss may be carried over to be used in
later tax years until such net capital loss is thereby exhausted. For U.S.
Holders which are corporations (other than corporations subject to Subchapter S
of the Internal Revenue Code), any unused net capital loss may be carried back
three years from the loss year and carried forward five years from the loss year
to be offset against capital gains until such net capital loss is thereby
exhausted. If the amount realized on a sale or exchange is not denominated in
U.S. dollars, the amount realized will be equal to the U.S. dollar value
thereof, determined at the spot rate on the date of the sale or exchange.
OTHER CONSIDERATIONS
In the following three circumstances, the above sections of the discussion may
not describe the United States Federal income tax consequences resulting from
the holding and disposition of our common shares. Based on (a) the number of
shareholders of our common shares, and (b) our shareholder profile, we do not
believe that we are either a "Foreign Personal Holding Company" or a "Controlled
Foreign Corporation". However, we do not believe that we are likely to be
treated as a "Passive Foreign Investment Company" for the taxable years 1999,
2000 and 2001.
FOREIGN PERSONAL HOLDING COMPANY
If, at any time during a taxable year, more than 50% of the total combined
voting power or the total value of our outstanding shares are owned, actually or
constructively, by five or fewer individuals who are citizens or residents of
the United States and 60% or more of our gross income for such year was derived
from certain passive sources (e.g. from dividends received from unrelated
persons), we would be treated as a "foreign personal holding company." In that
event, U.S. Holders that hold our common shares would be required to include in
gross income for such year their allowable portions of such foreign personal
holding company income to the extent that we do not actually distribute such
income.
CONTROLLED FOREIGN CORPORATION
If more than 50% of the voting power of all classes of shares or the total value
of our shares is owned, directly or indirectly, by U.S. shareholders, each of
whom own 10% or more of our voting shares ("U.S. Shareholders"), we could be
treated as a "controlled foreign corporation" (a "CFC") under SubPart F of the
Internal Revenue Code. If we were classified as a CFC and as a PFIC, CFC
treatment would prevail with respect to U.S. Shareholders. CFC classification
would affect many complex results including the required inclusion by such
United States shareholders in income of their pro rata share: of "SubPart F
Income" (as specially defined by the Internal Revenue Code) of Diversinet; and
of our earnings invested in U.S. property. In addition, under Section 1248 of
the Internal Revenue Code, gain from the sale or exchange of our common shares
by a U.S. person who is or was a United States shareholder (as defined in the
Internal Revenue Code) at any time during the five years period ending with the
sale or exchange is generally treated as ordinary dividend income to the extent
of our earnings and profits attributable to the shares sold or exchanged.
Because of the complexity of SubPart F, and because it is not clear that we are
a controlled foreign corporation, a more detailed review of these rules is
outside of the scope of this discussion.
PASSIVE FOREIGN INVESTMENT COMPANY
As stated above, we believe that we will not be treated as a passive foreign
investment company ("PFIC"), as defined in Section 1297 of the Internal Revenue
Code, for our fiscal years 2002 or 2003.
United States income tax legislation contains rules governing PFIC's, that can
have significant tax effects on U.S. Holders of foreign corporations. These
rules do not apply to non-U.S. Holders. Section 1297 of the Internal Revenue
Code defines a PFIC as a corporation that is not formed in the United States
and, for any taxable year, either (i) 75% or more of its gross income is
"passive income", which includes interest, dividends and some types of rents and
royalties or (ii) the average percentage, by fair market value (or, if the
company is a controlled foreign corporation or makes an election, by adjusted
tax basis), of its assets that produce or are held for the production of
"passive income" is 50% or more. Based on these tests we do not meet the
definition of a PFIC in 1999, 2000 or 2001.
An U.S. Holder who holds shares in a foreign corporation during any year in
which such corporation qualifies as a PFIC is subject to U.S. Federal income
taxation under alternative tax regimes, depending upon whether such U.S. Holder
makes elections. The following is a discussion of these alternative tax regimes
as applicable to our U.S. Holders.
A U.S. Holder of a PFIC who does not make either of the elections described
below (a "Non-electing U.S. Holder") is subject to special taxation rules under
Section 1291 of the Internal Revenue Code with respect to (i) gains realized on
the disposition (or deemed to be realized by reason of a pledge) of his/her
common shares and (ii) excess
distributions by us, defined as any distribution received by a U.S. Holder from
a PFIC in a taxable year that is greater than 125% of the average distributions
received by the U.S. Holder in the three preceding taxable years, or, if
shorter, the U.S. Holder's holding period for the shares.
A Non-electing U.S. Holder generally would be required to include in income pro
rata all gains realized on the disposition of his/her common shares and all
excess distributions over the entire holding period for the PFIC common shares.
All gains or excess distributions allocated to prior years of the U.S. Holder
(other than years prior to the first taxable year of the company during such
U.S. Holder's holding period and beginning after January 1, 1987 for which it
was a PFIC) would be taxed at the highest tax rate for each such prior year
applicable to ordinary income. The Non-electing U.S. Holder also would be liable
for interest on the foregoing tax liability for each such prior year calculated
as if such liability had been due with respect to each such prior year. A
Non-electing U.S. Holder that is not a corporation must treat this interest
charge as "personal interest" which, as discussed above, is partially or wholly
non-deductible. The balance of the gain or the excess distribution will be
treated as ordinary income in the year of the disposition or distribution, and
no interest charge will be incurred with respect to such balance.
If we are a PFIC for any taxable year during which a Non-electing U.S. Holder
holds common shares, then we will continue to be treated as a PFIC with respect
to such common shares, even if we are no longer a PFIC as defined above. A
Non-electing U.S. Holder may terminate this deemed PFIC status by electing to
recognize a gain (which will be taxed under the rules discussed above for
Non-electing U.S. Holders) as if such common shares had been sold on the last
day of the last taxable year for which it was a PFIC.
Under Section 1291(f) of the Internal Revenue Code, the Department of the
Treasury has issued proposed regulations that would treat as taxable transfers
of PFIC shares by Non-electing U.S. Holders that are generally not otherwise
taxed, such as gifts, exchanges pursuant to corporate reorganizations, and
transfers at death. Special, generally adverse, rules will apply with respect to
the common shares while the company is a PFIC. For example under Section
1298(b)(6) of the Internal Revenue Code, a U.S. Holder who uses PFIC shares as
security for a loan (including a margin loan) will, except as may be provided in
regulations, be treated as having made a taxable disposition of such shares.
Alternatively, if we are a PFIC, an U.S. Holder (an "Electing U.S. Holder") who
owns common shares is permitted generally to elect out of the tax treatment
discussed above, if an U.S. Holder makes a mark-to-market election with respect
to common shares. Under such election, an Electing U.S. Holder would generally
recognize as ordinary income for each taxable year an amount equal to the
excess, if any, of the fair market value of common shares as of the close of the
taxable year over the Electing U.S. Holder's adjusted tax basis in such shares.
An Electing U.S. Holder would generally be allowed an ordinary deduction (to the
extent of any net mark-to-market gains recognized for prior taxable years) for
the excess, if any, of the adjusted tax basis of the common shares over their
fair market value as of the close of the taxable year. An Electing U.S. Holder's
adjusted tax basis of the common shares would generally be adjusted to reflect
the amounts included or deducted under the mark-to-market election.
Additionally, any gain on the actual sale or other disposition of the common
shares generally will be treated as ordinary income. Ordinary loss treatment
also would generally apply to any loss realized on the actual sale or other
disposition of the common shares to the extent that the amount of such loss did
not exceed the net mark-to-market gains previously included with respect to such
shares. An election to mark to market would generally apply to the taxable year
made and all subsequent taxable years. A mark-to-market election is subject to
complex and specific rules and requirements, and U.S. Holders are strongly urged
to consult their tax advisors concerning such election if the company is
classified as a PFIC.
Finally, an U.S. Holder who elects in a timely manner to treat us as a
"qualified electing fund" (a "QEF") as defined in the Internal Revenue Code
would be subject to another set of special rules different from those described
above. Although a QEF election may be beneficial to some U.S. Holders depending
upon their particular tax situations, it requires us to make information
available to such holders, and we do not intend to make such information
available even if it is classified as a PFIC. Accordingly, the QEF election will
not be available to U.S. Holders.
The foregoing discussion is based on existing provisions of the Internal Revenue
Code, existing and proposed regulations thereunder, and current administrative
ruling and court decisions, all of which are subject to change. Any such change
could affect the validity of this discussion. In addition, the implementation of
aspects of the PFIC rules requires the issuance of regulations which in many
instances have not been promulgated and which may have retroactive effect. There
can be no certainty that any of these proposed regulations will be enacted or
promulgated
and if so, the form they will take or the effect that they may have on this
discussion. Accordingly, and due to the complexity of the PFIC rules, U.S.
Holders who are shareholders of Diversinet are strongly urged to consult their
own tax advisors concerning the impact of these rules on their investment in us.
EXPERTS
Our consolidated financial statements as of October 31, 2001 and 2002 and for
each of the years in the three-year period ended October 31, 2002, have been
incorporated by reference herein and in the Registration Statement in reliance
on the report of KPMG LLP, independent accountants, also incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing. The audit report of KPMG LLP concerning the October 31, 2002
consolidated financial statements included additional comments for U.S. readers
that states that conditions and events exist that cast substantial doubt on our
ability to continue as a going concern. The consolidated financial statements do
not include any adjustments that might result from the outcome of that
uncertainty.
Certain legal matters in connection with the registration of the common shares
hereunder with respect to Canadian law will be passed upon for us by Lang
Michener of Toronto, Ontario, our Canadian counsel.
WHERE YOU CAN FIND MORE INFORMATION AND INCORPORATION OF CERTAIN INFORMATION BY
REFERENCE
This prospectus is a part of a registration statement on Form F-3, which we
filed with the Securities and Exchange Commission under the Securities Act of
1933. As permitted by the rules and regulations of the SEC, this prospectus does
not contain all of the information contained in the registration statement and
the exhibits and schedules thereto. As such we make reference in this prospectus
to the registration statement and to the exhibits and schedules thereto. For
further information about us and about the securities we hereby offer, you
should consult the registration statement and the exhibits and schedules
thereto. You should be aware that statements contained in this prospectus
concerning the provisions of any documents filed as an exhibit to the
registration statement or otherwise filed with the SEC are not necessarily
complete, and in each instance reference is made to the copy of such document so
filed. Each such statement is qualified in its entirety by such reference.
We file annual and special reports and other information with the Securities and
Exchange Commission (Commission File Number 0000918387). These filings contain
important information which does not appear in this prospectus. For further
information about us, you may read and copy these filings at the SEC's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the public reference room by calling the SEC at
1-800-SEC-0330, and may obtain copies of our filings from the public reference
room by calling (202) 942-8090.
The SEC allows us to "incorporate by reference" information into this
prospectus, which means that we can disclose important information to you by
referring you to other documents which we have filed or will file with the SEC.
We are incorporating by reference in this prospectus the documents listed below:
(a) Our Annual Report on Form 20-F dated April 29, 2003;
(b) Our Report on Form 6-K dated July 21, 2003;
(c) Our Report on Form 6-K dated June 24, 2003;
(d) Our Report on Form 6-K dated March 14, 2003;
(e) Our Report on Form S-8 dated February 20, 2003;
(f) Our Report on Form 6-K dated December 31, 2002;
(g) Our Report on Form 6-K dated December 20, 2002; and,
(h) The description of our securities contained in our Registration
Statement under Section 12 of the Securities Exchange Act of 1934, as
amended, of which this prospectus is a part and any and all amendments
and reports filed for the purpose of updating such description.
All documents which we file with the SEC pursuant to Section 13(a), 13(c) or
15(d) of the Securities Exchange Act after the date of this prospectus and
before the expiration or termination of this prospectus shall be deemed to be
incorporated by reference in this prospectus and to be a part of it from the
filing dates of such documents. Certain statements in and portions of this
prospectus update and replace information in the above listed documents
incorporated by reference. Likewise, statements in or portions of a future
document incorporated by reference in this prospectus may update and replace
statements in and portions of this prospectus or the above listed documents.
We shall provide you without charge, upon your written or oral request, a copy
of any of the documents incorporated by reference in this prospectus, other than
exhibits to such documents which are not specifically incorporated by reference
into such documents. Please direct your written or telephone requests to
Diversinet Corp., 2225 Sheppard Avenue East, Suite 1801, Toronto, Ontario, M2J
5C2 Canada, Attn: David Hackett, Chief Financial Officer, telephone number (416)
756-2324. You may also obtain information about us by visiting our website at
www.diversinet.com. Information contained in our website is not part of this
prospectus.
We are a Canadian company and are a "foreign private issuer" as defined in Rule
3b-4 under the Securities Exchange Act of 1934. As a result, (1) our proxy
solicitations are not subject to the disclosure and procedural requirements of
Regulation 14A under the Exchange Act, (2) transactions in our equity securities
by our officers and directors are exempt from Section 16 of the Exchange Act,
and (3) until November 4, 2002, we were not required to make, and did not make,
its SEC filings electronically, so that those filings are not available on the
SEC's Web site. However, since that date, we have been making all filings with
the SEC electronically, and these filings are available over the Internet at the
SEC's Web site at www.sec.gov.
ENFORCEABILITY OF CIVIL LIABILITIES
Service of process upon us and upon our directors and officers and the Canadian
experts named in this prospectus, most of whom reside outside the U.S., may be
difficult to obtain within the U.S. Furthermore, because substantially all of
our assets and substantially all of our directors and officers are located
outside the U.S., any judgment obtained in the U.S. against us or any of our
directors and officers may not be collectible within the U.S.
___________
You should rely only on the information contained in this prospectus or that to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This prospectus does not constitute an offer to
sell, or the solicitation of an offer to buy, any of the securities offered
hereby to any person in any jurisdiction in which such offer or solicitation
would be unlawful. Our business may change after the date of this prospectus.
Delivery of this document and any sale of securities made hereunder does not
mean otherwise.
TABLE OF CONTENTS
Page
----
FORWARD-LOOKING INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
INFORMATION SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SELLING SECURITYHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
PLAN OF DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
DESCRIPTION OF PRIVATE PLACEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . 29
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
WHERE YOU CAN FIND MORE INFORMATION AND INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
___________
DIVERSINET CORP.
6,760,000 COMMON SHARES
PROSPECTUS
================================================================================
References in this prospectus to "Diversinet" mean Diversinet Corp., and
references to "we", "us", and "our" refer to Diversinet Corp. unless the context
otherwise indicates.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses of this offering which will be borne by Diversinet are estimated,
in U.S. dollars, to be as follows:
SEC Registration Fee 1,242
Legal Services 40,000
Accounting 10,000
Placement commission *334,000
Miscellaneous 15,000
---------
Total $ 400,242
---------
* Paid in common shares of the Registrant
All of the above expenses except the registration fee and placement commission
are estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Business Corporations Act (Ontario) (the "Act"), Diversinet may
indemnify a present or former director or officer or a person who acts or acted
at Diversinet's request as a director or officer of another corporation of which
Diversinet is or was a shareholder or creditor and his heirs and legal
representatives against all costs, charges and expenses, including an amount
paid to settle an action or satisfy a judgment, reasonably incurred by him in
respect of any civil, criminal or administrative action or proceeding to which
he is made a party by reason of being or having been such a director or officer
if the director or officer acted honestly and in good faith with a view to the
best interests of Diversinet and, in the case of a criminal or administrative
action or proceeding that is enforced by a monetary penalty, had reasonable
grounds for believing that his conduct was lawful. Such indemnification may be
made in connection with an action by or on behalf of Diversinet or such other
corporation only with court approval. A director or officer is entitled to
indemnification from Diversinet as a matter of right in respects of all costs,
charges and expenses reasonably incurred by him in connection with the defense
of any civil, criminal or administrative proceeding to which he is a party by
reason of being or having been a director or officer of such corporation if he
was substantially successful on the merits and fulfilled the conditions set
forth above.
The by-laws of Diversinet provide that each director, each officer, each former
director, each former officer and each person who acts or acted at Diversinet's
request as a director or officer of a body corporate of which Diversinet is or
was a shareholder or creditor, and his heirs and legal representatives shall be
indemnified and saved harmless by Diversinet from and against all costs, charges
and expenses, including without limitation, each amount paid to settle an action
or satisfy a judgment, reasonably incurred by him in respect of any civil,
criminal or administrative action or proceeding to which his is made a party by
reason or being or having been a director or officer of Diversinet or such body
corporation, if he acted honestly and in good faith with a view to Diversinet's
best interests and in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty he had reasonable grounds for
believing his conduct was lawful. In certain circumstances Diversinet has
provided its Directors or its subsidiaries' Directors with a written
indemnification confirming the indemnification available under its by-laws.
Diversinet currently maintains directors' and officers' liability insurance,
which, subject to the provisions contained in the policy, protects the directors
and officers, as such, against all claims during the term of their office
provided they acted honestly and in good faith with a view to the best interests
of Diversinet. Such insurance provides for an aggregate of U.S. $5,000,000
annual protection against liability for and reimbursement of amounts paid.
Insofar as indemnification for liabilities arising under the Securities Act of
1933, as amended may be permitted to directors, officers or persons controlling
the registrant pursuant to the foregoing provisions, the registrant has been
informed that, in the opinion of the U.S. Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
of 1933, as amended and is therefore unenforceable.
ITEM 16. EXHIBITS
EXHIBIT
NO. EXHIBITS
--- --------
4.1 Form of Stock Purchase Agreement for the June 23, 2003 private placement.
4.2 Form of Warrant for purchase of shares for the April 4, 2002 private placement.
4.3 Form of Warrant for purchase of shares for the June 23, 2003 private placement.
5.1 Opinion of Lang Michener.
23.1 Consent of KPMG LLP for Diversinet Corp.
23.2 Consent of KPMG LLP for DSS Software Technologies
23.3 Consent of Lang Michener (filed as part of Exhibit 5).
ITEM 17. UNDERTAKINGS
Paragraph designations correspond to designations in Regulation S-K, Item 512.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement; and;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof;
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering;
(4) To file a post-effective amendment to the registration statement to
include any financial statements required by Rule 3-19 of Regulation
S-X at the start of any delayed offering or throughout a continuous
offering. Financial statements and information otherwise required by
Section 10(a)(3) of the Act need not be furnished, provided, that the
registrant includes in the prospectus, by means of a post-effective
amendment, financial statements required pursuant to this paragraph
(a)(4) and other information necessary to ensure that all other
information in the prospectus is at least as current as the date of
those financial statements. Notwithstanding the foregoing, with
respect to registration statements on Form F-3, a post-effective
amendment need not be filed to include financial statements and
information required by Section 10(a)(3) of the Act or Rule 3-19 of
Regulation S-X if such financial statements and information are
contained in periodic reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934, as amended that are
incorporated by reference in the Form F-3.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, as amended,
each filing of the registrant's annual report pursuant to section 13(a) of
section 15(d) of the Securities Exchange Act of 1934, as amended (and where
applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934, as
amended) that is incorporated by reference in the registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended may be permitted to directors, officers and controlling
persons of the registrant, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expense incurred
or paid by a director, officer, or controlling person of the registrant in
the successful defense of any such action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form F-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Toronto, Province of Ontario, Canada on July 22,
2003.
DIVERSINET CORP.
By: /s/ David Hackett
-------------------
David Hackett, Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
- ------------------------------------ ---------------------------------- -------------
/s/ Stanley Beck Director July 22, 2003
- ----------------
Stanley Beck
/s/ Keith Powell Director July 22, 2003
- ----------------
Keith Powell
/s/ Nagy Moustafa President, Chief Executive Officer July 22, 2003
- ----------------- and Director
Nagy Moustafa
/s/ Charles Shiu Director July 22, 2003
- ----------------
Charles Shiu
/s/ Mark Steinman Director July 22, 2003
- -----------------
Mark Steinman
/s/ Nagy Moustafa Authorized United States July 22, 2003
- ----------------- Representative, CEO of Diversinet
Nagy Moustafa Corporation of America, a Delaware
corporation and wholly owned
subsidiary of the Registrant
ITEM 16. EXHIBITS
EXHIBIT
NO. EXHIBITS
--- --------
4.1 Form of Stock Purchase Agreement for the June 23, 2003 private placement.
4.2 Form of Warrant for purchase of shares for the April 4, 2002 private placement.
4.3 Form of Warrant for purchase of shares for the June 23, 2003 private placement.
5.1 Opinion of Lang Michener.
23.1 Consent of KPMG LLP for Diversinet Corp.
23.2 Consent of KPMG LLP for DSS Software Technologies
23.3 Consent of Lang Michener (filed as part of Exhibit 5).