As filed with the Securities and Exchange Commission on November 21, 2001
Registration No. 333-_______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM S-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
BESTNET COMMUNICATIONS CORPORATION
(formerly WAVETECH INTERNATIONAL, INC.)
(Exact name of registrant as specified in its charter)
Nevada 86-1006416
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
5075 East Cascade Road, Suite K, Grand Rapids, Michigan 49546
(616) 977-9933
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Copies to:
Gerald I. Quinn Gregory Sichenzia, Esq.
BestNet Communications Corp. Sichenzia, Ross, Friedman & Ference LLP
5075 East Cascade Road, Suite K, 135 West 50th St.
Grand Rapids, Michigan 49546 New York, NY 10020
(616) 977-9933 (212) 664-1200
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: As soon as practicable after
the effective date of this Registration Statement.
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, check the following box. [X]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
================================================================================================================
Proposed maximum Proposed
Title of each class of Amount to be offering price per maximum aggregate Amount of
securities to be registered registered (1) share unit offering price registration fee (4)
- ----------------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value 696,000(2) $2.035(5) $696,000(2) $174
Common Stock, $.01 par value 50,875(3) $2.035(5) $ 50,875(3) $ 13
- ----------------------------------------------------------------------------------------------------------------
Total: $746,875 $187
================================================================================================================
- ----------
(1) Pursuant to Rule 416(a), this registration statement also covers any
additional securities that may be offered or issued in connection with any
stock split, stock dividend or similar transaction.
(2) Represents the dollar amount of shares of common stock issuable upon
conversion of our series C 8% cumulative convertible preferred stock, $.001
par value per share, issued on October 17, 2001.
(3) Represents the dollar amount of shares of common stock issuable upon the
exercise of 25,000 warrants issued on October 17, 2001.
(4) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457(o) under the Securities Act of 1933, as amended.
(5) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) and 457(h) under the Securities Act of 1933, as
amended, on the basis of the average of the high and low prices for shares
of Common Stock as reported by the Nasdaq Over the Counter Bulletin Board
on October 26, 2001.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE
REGISTRANT WILL 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 SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED NOVEMBER 20, 2001
Prospectus
BestNet Communications Corp.
Up to $746,875 Worth Our Common Stock
This prospectus relates to the resale by the selling stockholders of up to
$746,875 worth of our common stock. The selling stockholders may sell common
stock from time to time in the principal market on which the stock is traded at
the prevailing market price or in negotiated transactions. The selling
stockholders are deemed to be underwriters of the shares of common stock, which
they are offering. Please see the "Selling Stockholders" section on page __ in
this prospectus for a complete description of all of the selling stockholders.
Our common stock is traded on the NASDAQ Over-the-Counter Bulletin Board
under the symbol BESC.OB. On October 26, 2001, the closing sale price of our
common stock was $2.10.
Investing in our common stock involves a high degree of risk. See Risk
Factors on page 7.
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 __________, 2001.
TABLE OF CONTENTS
Page
----
Where You Can Find More Information 1
Incorporation of Documents by Reference 2
Summary 3
The Offering 6
Risk Factors 7
Use of Proceeds 22
Market for Common Equity and Related Stockholder Matters 23
Selling Stockholder 24
Plan of Distribution 25
Determination of Offering Price 26
Description of Securities 27
Legal Matters 27
Experts 27
Information with Respect to the Registrant 28
Disclosure of Commission Position on Indemnification for
Securities Act Liabilities 28
WHERE YOU CAN FIND MORE INFORMATION
We file reports and other information with the U.S. Securities and Exchange
Commission. You may read and copy any document that we file at the SEC's public
reference facilities at 450 Fifth Street N.W., Room 1024, Washington, D.C.
20549. Please call the SEC at 1-800-732-0330 for more information about its
public reference facilities. Our SEC filings are also available to you free of
charge at the SEC's web site at http://www.sec.gov.
Copies of publicly available documents that we have filed with the SEC can
also be inspected and copied at the offices of the National Association of
Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006.
This prospectus is a part of the registration statement that we filed on
Form S-2 with the SEC. The registration statement contains more information
about us and our common stock than this prospectus, including exhibits and
schedules. You should refer to the registration statement for additional
information about us and the common stock being offered in this prospectus.
Statements that we make in this prospectus relating to any documents filed as an
exhibit to the registration statement or any document incorporated by reference
into the registration statement may not be complete and you should review the
referenced document itself for a complete understanding of its terms.
i
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to incorporate by reference the information we file with
them. This means that we can disclose information to you by referring you to
those documents. The documents that have been incorporated by reference are an
important part of the prospectus, and you should review that information in
order to understand the nature of any investment by you in the common stock.
Information contained in this prospectus automatically updates and supersedes
previously filed information. We are incorporating by reference the documents
listed below and all of our filings under the Exchange Act after the date of
filing the initial registration statement and prior to the effectiveness of the
registration statement.
* our annual report on Form 10-KSB for the fiscal year ended August 31,
2001;
* the description of our common stock included in our Registration
Statement on Form 8-A, filed March 11, 1987.
If you would like a copy of any of these documents, at no cost, please
write or call us at:
BestNet Communications Corp.
5075 East Cascade Road, Suite K, Grand Rapids, Michigan 49546
Attn: Corporate Secretary
Telephone: (616) 977-9933
You should only rely upon the information included in or incorporated by
reference into this prospectus or in any prospectus supplement that is delivered
to you. We have not authorized anyone to provide you with additional or
different information. You should not assume that the information included in or
incorporated by reference into this prospectus or any prospectus supplement is
accurate as of any date later than the date on the front of the prospectus or
prospectus supplement.
We have not authorized any person to provide you with information different
from that contained or incorporated by reference in this prospectus. The selling
shareholders are offering to sell, and seeking offers to buy, shares of our
common stock only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of common stock.
2
SUMMARY
The following summary should be read by you together with the more detailed
information in other sections of this prospectus. You should also carefully
consider the factors described under Risk Factors at page 7 of this prospectus.
Throughout this prospectus, we refer to BestNet Communications Corp. as BestNet,
we, our, ours, and us.
BESTNET COMMUNICATIONS CORP.
Founded on July 10, 1986, BestNet Communications Corp. is a Nevada
corporation that develops, markets and sells Internet-based telecommunications
technologies.
Although founded in 1986, we did not begin our operations until 1995. From
1995 until June 1999, we developed software for customized calling card services
and created an infrastructure to market and distribute our products and
services. During this period, our efforts were primarily focused on hiring
management and other key personnel, raising capital, procuring governmental
authorizations and space in central offices, acquiring equipment and facilities,
developing, acquiring and integrating billing and database systems. We marketed
these systems to the business traveler and to large organizations or companies
with a membership base. In the late 1990's, due to the wide scale deployment of
cellular telephones with messaging capability, the market for business related
calling card services greatly diminished. In June 1999, we discontinued our
calling card services.
At August 31, 2001, BestNet had an accumulated deficit of $17,020,532.
BestNet had net losses for the fiscal year ended August 31, 2001 of $4,014,810.
We expect to continue to spend considerable financial and management resources
on the roll-out of our Bestnetcall service which is described below. Further,
BestNet has substantial future capital requirements with respect to the roll-out
of its Bestnetcall service. Accordingly, we expect to continue to incur
significant additional losses and continued negative cash flow from operations
for the foreseeable future.
Since June 1999, substantially all of our business and financial resources
have been focused on developing a web-enabled long distance service called
Bestnetcall, which is the only Internet-based telecommunications technology we
offer. Bestnetcall was first made available to the public on April 17, 2000. We
are presently focusing substantially all of our resources on marketing
Bestnetcall to selected companies with international locations or clients. We
are licensing the technology that comprises our Bestnetcall service from
Softalk, Inc. Softalk is a technology company based in Ontario, Canada. Softalk
develops Internet-based telecommunication technologies, and performs
substantially all of our development activities.
Our Bestnetcall service allows people to initiate and complete long
distance telephone calls by using the Internet. Users of Bestnetcall may enroll,
place calls, pay for service and access customer service real-time on the
Internet by accessing our website at www.bestnetcall.com. Bestnetcall does not
require the purchase of special hardware or software by the customer and uses
their existing telephone equipment. Users only need access to the Internet and
an available phone line. Bestnetcall also offers real-time billing to all users
and accepts various payment methods, including pre-paid or post-paid credit card
payments and invoicing options.
3
We intend to offer our Bestnetcall service through both direct sales and
indirect sales channels. Our initial target markets will include:
* Governments
* Business and Industry
* Commercial Development Companies
* Telecommunication Companies
* Companies which provide access to the internet
* Browser Based Services, such as Internet Explorer, Yahoo and
Amazon.com
* Affinity Groups
* Other organizations, including charities, religious organizations,
schools and alumni associations
These marketing efforts will be targeted at international long distance
users in a number of key geographic areas in the world. Our priorities will be
focused primarily on the following geographic regions:
* Caribbean
* North America
* Asia Pacific
* Central & South America
* Europe
* Middle East
According to industry sources, telecommunication service providers' global
revenue is expected to reach US$975 billion in the year 2000. A number of
industry studies have mapped international telephone traffic patterns. Current
forecasts call for a total of 106 billion minutes of international telephone
traffic in the year 2000. Valued at a normal price of US$0.25 per minute, this
would represent a global market of approximately US$26.5 billion, although
BestNet believes the real market value will likely be two to three times that
number. Our goal is to become a leading provider of web-enabled long distance
service and related services. We have no prior experience in providing
telecommunication services such as that contemplated by our Bestnetcall service.
Our principal executive offices are located at 5075 East Cascade Road,
Suite K, Grand Rapids, Michigan 49546. Our telephone number is (616) 977-9933.
BestNet wholly owns its four subsidiaries, Interpretel, Inc., Interpretel
(Canada) Inc., Telplex International Communications, Inc. and Bestnet Travel,
Inc.
4
SELECTED AND SUMMARY CONSOLIDATED FINANCIAL DATA
The following selected and summary consolidated financial data should be
read in conjunction with Management's Discussion and Analysis of Financial
Condition and Results of Operations and our financial statements and the related
notes included elsewhere in this prospectus. The selected consolidated statement
of operations data for the years ended August 31, 1996, 1997, 1998, 1999, and
2000 are derived from our audited financial statements not included elsewhere in
this prospectus.
Year Ended August 31,
--------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2001
----------- ----------- ----------- ----------- ----------- -----------
Statement of Operations
Data:
Revenue $ 19,895 $ 719,142 $ 157,838 $ 13,580 $ 28,670 $ 493,260
Cost of revenue 179,068 679,930 85,082 9,468 51,722 497,663
Development 297,935 0 0 0 0 0
Selling, general and administration 1,287,386 1,584,747 794,004 691,479 1,188,032 2,044,720
Depreciation & Amortization 136,902 211,786 156,965 146,977 1,545,636 1,979,975
----------- ----------- ----------- ----------- ----------- -----------
Total cost and expenses 1,901,291 2,476,463 1,036,051 847,924 2,785,390 4,522,358
Loss from operations (1,881,396) (1,757,321) (878,213) (834,344) (2,756,720) (4,029,098)
Other Income and Expenses:
Interest income 32,777 8,500 6,565 70,519 76,129 227,691
Rental income 0 0 8,833 36,000 22,500 300
Misc income 0 0 0 0 4,014 43
Interest expense (11,585) (26,893) (45,182) (8,995) (60,512) (36)
License agreement termination income 0 0 236,906 0 0 0
Loss on sale of investment in Switch 0 0 (216,165) 0 0 0
Debt conversion expense 0 0 (92,894) 0 0 0
Proposed merger costs 0 0 (236,737) (118,450) 0 0
Write-off of intangibles & other assets 0 0 0 (36,125) 0 0
Income tax expense 0 0 0 0 0 (50)
Preferred stock conversion penalty 0 0 0 (144,000) (221,226) 0
Exchange (loss) gain 0 0 0 0 0 (1,647)
Other misc expenses 0 0 0 (15,000) 0 0
----------- ----------- ----------- ----------- ----------- -----------
Total Other Income and Expenses 21,192 (18,393) (338,674) (216,051) (179,095) 226,301
----------- ----------- ----------- ----------- ----------- -----------
Net loss before preferred dividends $(1,860,204) $(1,775,714) $(1,216,887) $(1,050,395) $(2,935,815) (3,802,797)
Cumulative preferred dividends
declared and preferred stock
conversion benefit 0 0 135,994 36,500 2,602,046 212,013
----------- ----------- ----------- ----------- ----------- -----------
Net loss available to common shareholders $(1,860,204) $(1,775,714) $(1,352,881) $(1,086,895) $(5,537,861) $(4,014,810)
Net loss per share, basic & diluted $ (1.00) $ (.74) $ (0.51) $ (0.37) $ (1.72) $ (0.45)
Weighted average shares of outstanding,
basic & diluted 1,866,734(1) 2,409,195(1) 2,663,257(1) 2,904,693 3,221,225 9,013,669
At August 31,
--------------------------------------------------------------------------------------
1996 1997 1998 1999 2000 2001
----------- ----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
Cash & Cash Equivalents $ 857,488 $ 13,329 $ 2,202,573 $ 889,620 $ 2,581,492 $ 285,518
Working Capital 665,483 (650,761) 1,863,442 618,440 2,394,852 197,796
Total Assets 4,580,239 2,840,796 2,542,171 1,574,395 13,862,867 11,264,956
Total Liabilities 1,070,529 828,981 389,219 281,288 210,542 164,196
Accumulated Deficit (3,252,371) (5,028,085) (6,380,966) (7,467,861) (13,005,722) (17,020,532)
Stockholders' Equity 3,509,710 2,011,815 2,152,952 1,293,107 13,652,325 11,100,760
- ----------
(1) As restated to reflect a one-for-six reverse stock split effective December
18, 1998.
5
THE OFFERING
This prospectus relates to the resale by the selling stockholder of (i) up
to $696,000 worth of our common stock issuable upon conversion of our series C
8% cumulative convertible preferred stock, $.001 par value per share, issued on
October 17, 2001 and 25,000 shares of our common stock issuable upon exercise of
warrants.
As of November 7, 2001, we had 14,981,241 shares of common stock, $.01 par
value, issued and outstanding.
RECENT FINANCINGS
In this prospectus, we are registering $696,000 worth of our common stock
underlying 5,000 shares of series C 8% cumulative convertible preferred stock,
$.001 par value per share, issued to an accredited investor pursuant to a
subscription agreements dated October 17, 2001. The number of shares of common
stock issuable upon conversion of the outstanding series C 8% cumulative
convertible preferred stock, $.001 par value per share, is 342,015 assuming a
conversion price of $2.035 per share. In addition, 25,000 shares underlying
warrants are being registered in connection with these financings. These
warrants have an exercise price of $2.90 per share.
The series C 8% cumulative convertible preferred shares are entitled to a
liquidation preference amount of $100 per share and an 8% annual cumulative
dividend, calculated on the liquidation preference amount, payable quarterly and
are convertible into our common stock determined by the following formula:
$500,000 plus any accrued and unpaid dividends divided by the lessor of:
a)$2.40; or
b) 80% of the average of the three lowest closing prices of our common
stock for the thirty days immediately prior to the conversion.
The common share purchase warrants have an exercise price of $2.90 per
common share and expire on October 17, 2007. To date the purchase warrants
remain unexercised.
See "Description of Securities" for a complete description of our series C
8% cumulative convertible preferred stock.
6
RISK FACTORS
BEFORE BUYING ANY OF THE SHARES OF COMMON STOCK BEING OFFERED BY THIS
PROSPECTUS, YOU SHOULD CAREFULLY READ AND CONSIDER EACH OF THE RISK FACTORS WE
HAVE DESCRIBED IN THIS SECTION.
RISKS RELATED TO OUR BUSINESS
IF BESTNET'S BESTNETCALL SERVICE IS NOT ACCEPTED BY TARGETED CUSTOMERS, OUR
FUTURE OPERATING RESULTS WILL BE MATERIALLY ADVERSELY AFFECTED.
BestNet has operated at a loss for the last six years. The Bestnetcall
service is a new product for BestNet and therefore has no operating history upon
which an evaluation of BestNet and its prospects can be based. Further, BestNet
has no meaningful prior operating history in the telecommunications industry,
which could negatively impact BestNet's ability to successfully market its
Bestnetcall service. Our Bestnetcall service may never achieve commercial
acceptance by Internet users. The failure to achieve market acceptance could
negatively impact BestNet's ability to generate income in the future.
AN INCREASE IN THE PRICE FOR MAINTAINING PHONE AND DATA LINES MAY REDUCE
BESTNET'S REVENUES.
BestNet's business strategy depends on the availability of the Internet to
transmit data packets for voice and fax calls. BestNet also relies on third
parties who provide traditional phone lines. Some of these third parties are
national telephone carriers. If any of these carriers increase their charges for
using these lines at any time, which they may do in response to increased
regulation or other external factors that increase their cost of doing business,
BestNet's costs may increase and its revenues may decrease. BestNet may be
unable to continue purchasing such services from these third parties on
acceptable terms, if at all. If BestNet is unable to purchase the necessary
services to maintain and expand its network as currently configured, BestNet's
revenues may decline.
BESTNET DEPENDS ON ITS STRATEGIC RELATIONSHIP WITH SOFTALK, WHICH, IF
TERMINATED, WOULD HAVE A MATERIAL ADVERSE EFFECT ON BESTNET'S BUSINESS.
BestNet depends in large part on its joint product development efforts with
Softalk. Softalk may choose not to renew existing arrangements on commercially
acceptable terms, if at all. BestNet's loss of this key strategic relationship,
or the failure to develop new relationships in the future, would likely
adversely impact BestNet's future revenues.
THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO DOMESTIC GOVERNMENTAL REGULATION
AND LEGAL UNCERTAINTIES WHICH, IF INCREASED OR CHANGED, COULD REDUCE BESTNET'S
REVENUES.
While the Federal Communications Commission has tentatively decided that
information service providers, including Internet telephony providers, are not
telecommunications carriers for regulatory purposes, various companies have
challenged that decision. Congress continues to review the conclusions of the
FCC, and the FCC could impose greater or lesser regulation on BestNet's
industry. The FCC is currently considering, for example, whether to impose
surcharges or other regulations upon certain providers of Internet telephony,
primarily those which provide Internet telephone services to end-users located
within the United States. The imposition of such surcharges or the regulation of
Internet telephony providers could increase the cost of doing business over the
Internet and decrease BestNet's revenue.
Aspects of BestNet's operations may be, or become, subject to state or
federal regulations governing universal service funding, disclosure of
confidential communications, copyright and excise taxes. Government agencies may
in the future increase regulation of Internet related services. Increased
regulation of the Internet may slow its growth. Such regulation may also
negatively impact the cost of doing business over the Internet and, therefore,
increase BestNet's expenses and decrease its revenues.
THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO INTERNATIONAL GOVERNMENTAL
REGULATION AND LEGAL UNCERTAINTIES WHICH COULD MATERIALLY ADVERSELY AFFECT
BESTNET'S BUSINESS.
BestNet intends on marketing its service to international long distance
callers. Because it will be conducting business internationally, BestNet will be
7
subject to certain direct or indirect risks. These risks would include
unexpected changes in regulatory requirements for the Internet and/or Internet
telephony; foreign currency fluctuations, which could increase or decrease
operating expenses and increase or decrease revenue; foreign taxation; and the
burdens of complying with a variety of foreign laws, trade standards, tariffs
and trade barriers.
RISKS RELATED TO OUR CURRENT FINANCING AGREEMENT
THERE ARE A LARGE NUMBER OF SHARES UNDERLYING OUR SERIES C PREFERRED STOCK,
CONVERTIBLE NOTE, AND WARRANTS THAT MAY BE AVAILABLE FOR FUTURE SALE AND THE
SALE OF THESE SHARES MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK.
As of November 7, 2001, we had:
* 14,981,241 shares of common stock issued and outstanding
* an aggregate of 367,015 shares of common stock issuable upon
conversion and exercise of the following securities:
- 5,000 series C 8% cumulative convertible preferred stock that may
be converted into 342,015 shares of common stock, based on
current market prices;
- 25,000 warrants to purchase 25,000 shares of common stock at an
exercise price of $2.90; and
The amount of securities issuable upon outstanding preferred shares and
warrants represents 2.4% of our total outstanding common shares and that due to
the floating conversion rates, we do not know the exact number of shares we will
issue upon conversion. The number of shares of common stock issuable upon
conversion of the outstanding convertible note and series C preferred stock will
increase if the market price of our stock declines. All of the shares, including
all of the shares issuable upon conversion of the note and series C preferred
stock, and upon exercise of our warrants, may be sold without restriction. The
sale of these shares may depress the market price of our common stock.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SERIES C 8%
CUMULATIVE CONVERTIBLE PREFERRED STOCK COULD REQUIRE US TO ISSUE A SUBSTANTIALLY
GREATER NUMBER OF SHARES WHICH WILL CAUSE DILUTION TO OUR EXISTING STOCKHOLDERS.
Our obligation to issue shares upon conversion of our convertible
securities is essentially limitless.
The following is an example of the amount of shares of our common stock
that is issuable, upon conversion of our series C 8% cumulative convertible
preferred stock, based on market prices 25%, 50% and 75% below the market price,
as of October 26, 2001, of $2.10.
Number of Percentage of
% Below Market Price Per Share Discount of 20% Shares Issuable Outstanding Stock
- -------------- --------------- --------------- --------------- -----------------
25% $1.575 $1.26 552,380 3.6%
50% $ 1.05 $0.84 828,571 5.6%
75% $0.525 $0.42 1,637,142 9.9%
As illustrated, the number of shares of common stock issuable upon conversion of
the outstanding series C 8% cumulative convertible preferred stock will increase
if the market price of our stock declines, which will cause dilution to our
existing stockholders.
THE ISSUANCE OF SHARES UPON CONVERSION OF OUR SERIES C 8% CUMULATIVE CONVERTIBLE
PREFERRED STOCK, AND EXERCISE OF OUTSTANDING WARRANTS MAY CAUSE IMMEDIATE AND
SUBSTANTIAL DILUTION TO OUR EXISTING STOCKHOLDERS.
The issuance of shares upon conversion of the series C 8% cumulative
convertible preferred stock, and exercise of warrants may result in substantial
dilution to the interests of other stockholders since the selling stockholder
may ultimately convert and sell the full amount. Although the preferred
stockholders may not convert their securities and/or exercise their warrants
into more than 4.99%, respectively, of our outstanding common stock, this
restriction does not prevent the investors from converting and/or exercising
8
some of their holdings and then converting the rest of their holdings. In this
way, the investor could sell more than this limit while never holding more than
this limit. In addition, preferred stockholders may waive the 4.99% limitation
upon an event of default. If this limit is waived there is no upper limit on the
number of shares that may be issued which will have the effect of further
diluting the proportionate equity interest and voting power of holders of our
common stock and may result in a change of control of BestNet Communications.
THE CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR SERIES C 8%
CUMULATIVE CONVERTIBLE PREFERRED STOCK MAY ENCOURAGE THE INVESTORS TO MAKE SHORT
SALES OF OUR COMMON STOCK, WHICH COULD HAVE A DEPRESSIVE EFFECT ON THE PRICE OF
OUR COMMON STOCK.
The series C 8% cumulative convertible preferred stock are convertible into
shares of our common stock at a 20% discount to the trading price of the common
stock either prior to the issuance of the preferred or prior to the conversion,
whichever is lower. The significant downward pressure on the price of the common
stock as the selling stockholder converts and sells material amounts of common
stock could encourage short sales by the selling stockholder or others. This
could place further downward pressure on the price of the common stock. The
selling stockholder could sell common stock into the market in anticipation of
covering the short sale by converting their securities, which could cause the
further downward pressure on the stock price.
THE DIVIDENDS PAYABLE ON OUR SERIES C PREFERRED STOCK IS ALSO CONVERTIBLE INTO
SHARES OF OUR COMMON STOCK.
The dividends payable on the series C preferred stock is also convertible
into shares of our common stock. The preferred shares are entitled to an 8%
annual cumulative dividend payable quarterly. In this regard, the lower the
price of our common stock, the more shares of common stock the preferred
stockholder will receive in payment of dividends.
BESTNET HAS A HISTORY OF OPERATING LOSSES AND MAY NEVER GENERATE OPERATING
INCOME FROM THE SALE OF ITS BESTNETCALL SERVICE.
At August 31, 2001, BestNet had an accumulated deficit of $17,020,532.
BestNet believes that its future profitability and success will depend in
large part on its ability to generate sufficient revenue from Bestnetcall
revenues and websites to businesses. Revenues are also anticipated from the
licensing of its technology and business systems to partners setting up Internet
telephony services in partner-led foreign markets. The profitability and success
of BestNet will depend on:
* its ability to maintain existing relationships and enter into new
relationships with Post Telephone & Telegraph administrations and
other carriers for which it sells Internet telephony services
* to obtain or retain for BestNet the right to sell Internet telephony
services and related value-added telecom services online
* its ability to effectively maintain existing relationships with its
multinational partners
* its ability to successfully enter into new strategic relationships for
distribution and increased usage of the Bestnetcall and Internet
telephony services
* its ability to generate sufficient online traffic and sales volume
Accordingly, BestNet expects to expend significant financial and management
resources on the roll-out of the Internet telephony service, and on site and
content development on its Bestnetcall websites, integration of the Internet
telephony and Bestnetcall services, strategic relationships, technology and
operating infrastructure. As a result, BestNet expects to incur significant
additional losses and continued negative cash flow from operations for the
foreseeable future. If such losses continue to occur, BestNet's revenues may not
increase or even continue at their current levels. Further, BestNet may not
achieve or maintain profitability or generate cash from operations in future
periods. In view of the rapidly evolving nature of BestNet's business, the
limited operating history of both Internet telephony and Bestnetcall and the
9
risks associated with integrating these businesses, BestNet believes that
period-to-period comparisons of operating results are not meaningful and should
not be relied upon as an indication of future performance.
CONFLICTS OF INTEREST MAY ARISE WHICH MATERIALLY ADVERSELY AFFECT BESTNET'S
BUSINESS AND ITS REVENUE
Conflicts of interest may arise between BestNet and its affiliates,
including Softalk, in areas relating to past, ongoing and future relationships,
including:
* the Bestnetcall license agreement, corporate opportunities, indemnity
arrangements, tax and intellectual property matters
* potential acquisitions or financing transactions
* sales of other dispositions by BestNet principals
These conflicts also may include disagreements regarding the Bestnetcall
license agreement, including with respect to possible amendments to, or
modifications or waivers of provisions of such agreement. Such amendments,
modifications or waivers may adversely affect BestNet's business and its ability
to earn revenue from the sale of the Bestnetcall service. Ownership interests of
directors or officers in BestNet common stock, or serving as both a
director/officer of BestNet and a director/officer/employee of Softalk, could
create or appear to create potential conflicts of interest when directors and
officers are faced with decisions that could have different implications for
BestNet and Softalk. Two of the members of BestNet's Board of Directors are also
directors, officers or employees of Softalk.
OUR INABILITY TO BE COMPETITIVE INTERNATIONALLY OR TO SATISFY REGULATORY
REQUIREMENTS WHEN WE EXPAND GLOBALLY COULD MATERIALLY ADVERSELY AFFECT OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
A significant aspect of our growth strategy is to expand our business
internationally, through the Internet. Such expansion will place additional
burdens upon our management, personnel and financial resources and may cause us
to incur losses. We will also face different and additional competition in these
international markets with which we have no prior experience. These risks could
impair our ability to expand internationally as well as increase our costs and
decrease our revenues.
ON-LINE SECURITY BREACHES OR FAILURES MAY MATERIALLY ADVERSELY AFFECT BESTNET.
In order to successfully provide services over the Internet, it is
necessary that we be able to ensure the secure transmission of confidential
customer information over public telecommunications networks. We employ certain
technology in order to protect such information, including customer credit card
information. However, we may be unable to ensure that such information will not
be intercepted illegally. Advances in cryptography or other developments that
could compromise the security of confidential customer information could have a
direct negative impact upon our electronic commerce business. In addition, the
perception by consumers that communicating over the Internet is not secure, even
if unfounded, means that fewer consumers are likely to make communicate through
that medium. Finally, any breach in security, whether or not a result of our
acts or omissions, may cause us to be the subject of litigation, which could be
very time-consuming and expensive to defend.
OUR OUTSTANDING SHARES MAY BE DILUTED RESULTING IN LESS PERCENTAGE OF SHARES
HELD BY EACH SHAREHOLDER AND A LOWER MARKET PRICE PER SHARE OF OUR COMMON STOCK.
The market price of our common stock may decrease as more shares of common
stock become available for trading due to the exercise of outstanding warrants
to purchase our common stock. The participation of the shareholders in BestNet
also may be reduced through the issuance of new common stock.
10
THE FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS MAY NOT COME TRUE AND ACTUAL
RESULTS COULD MATERIALLY DIFFER FROM THE ANTICIPATED RESULTS.
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements may include BestNet's plans:
* to grow its Internet-based communications businesses
* to expand the range of services it offers
* to increase the number of customers and revenues using its services
and the minutes of use and price per minute of use of the traffic
booked through BestNet's websites and network
* to otherwise expand its business activities in new cities and foreign
countries
* to retain key personnel or otherwise to implement its strategy as well
as its beliefs regarding consumer acceptance of the Internet as a
means of commerce and the use of the Internet as a source of
advertising.
These forward looking statements include statements regarding the belief or
current expectation of BestNet's management and are necessarily based on
management's current understanding of the markets and industries in which
BestNet operates. That understanding could change or could prove to be
inconsistent with actual developments. BestNet's actual results could differ
materially from the results discussed in this prospectus, including those
anticipated in or implied by any forward-looking statements. Factors that could
cause or contribute to such differences include those discussed below, as well
as those discussed elsewhere in this prospectus.
BESTNET COMMUNICATIONS CORP.
BUSINESS DEVELOPMENT
Founded on July 10, 1986, BestNet Communications Corp., a Nevada
corporation (formerly Wavetech International, Inc.) (BestNet or the Company),
develops, markets sells, and sub-licenses patented Internet-based
telecommunications technologies and services. Substantially all of our
development activities are performed by Softalk, Inc. (Softalk), an Ontario,
Canada-based technology company that is also a major shareholder of BestNet.
Although founded in 1986, we did not commence operations until 1995. From 1995
until June 1999, we developed software for customized calling card services and
created an infrastructure to market and distribute our products and services.
During this period, BestNet's efforts were primarily focused on hiring
management and other key personnel, raising capital, procuring governmental
authorizations and space in central offices, acquiring equipment and facilities,
developing, acquiring and integrating billing and database systems. We marketed
these systems to the business traveler and to large organizations or companies
with a membership base. In the late 1990's, due to the wide scale deployment of
cellular telephones with messaging capability, the market for business related
calling card services greatly diminished. In June 1999, we discontinued our
calling card services. Since then, we have focused substantially all of our
efforts and resources on developing our BestNetcall web-enabled long distance
service. On September 27, 2000, we changed our name to BestNet Communications
Corp.
On April 23, 1999, we entered into a licensing agreement with Softalk.
Softalk develops Internet-based telecommunication technologies that enable users
to initiate long distance calls from anywhere in the world by accessing a
specific Internet website. This technology enables users to, among other things,
make international telephone calls at substantially reduced rates from those
offered by traditional long distance carriers. This licensing agreement granted
BestNet certain marketing and customer service rights with respect to Softalk's
technologies. The licensing agreement was later amended and restated on October
25, 1999, to grant BestNet exclusive global rights to distribute, market,
service, sell, and sublicense Softalk's services and products to commercial
accounts and on a worldwide non-exclusive basis individual consumer accounts.
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BestNet also has the exclusive right to provide billing and customer support
services for all customer accounts. In consideration for such licensing rights,
the Company has paid Softalk an aggregate of $200,000 (All dollar amounts are
denominated in U.S. currency unless otherwise stated).
After entering into the Softalk licensing agreement, with Softalk's
assistance BestNet began building telecommunication facilities in Toronto,
Canada, and in the U.S.A. in New York, New York and in Los Angeles, California
including the installation of high-capacity switches and Internet servers.
Softalk, under a separate contract with BestNet, completed the development of
specialized software used for data management, billing and customer service
requirements.
The brand name for our web-enabled long distance service is Bestnetcall.
The service was first made available to the public on April 17, 2000. We are
presently focusing our resources on marketing Bestnetcall to selected companies
with international locations and/or clients. As of the date of this report, we
have 3,000 clients with an aggregate of 3,500 persons using our Bestnetcall
service.
Users of our Bestnetcall service are able to do the following by accessing
our website at www.bestnetcall.com:
* enroll;
* place calls;
* pay for service; and
* access customer service immediately on the Internet.
Bestnetcall does not require the purchase of special hardware or software
by the customer and uses their existing telephone equipment. Users only need
access to the Internet and an available phone line. Bestnetcall also offers
immediate billing to all users and accepts various payment methods, including
pre-paid or post-paid credit card payments and invoicing options.
Following a telephone calls completion, the total cost for that call may be
viewed on the caller's online account. Call detail records may be printed or
copied to Word or Excel applications. The Bestnetcall service also includes
features such as speed dialing, personalized directories, client billing codes,
world-time country/city code lookup and immediate access to customer service via
the website. Account administrators may add or delete users, view a user's
calling activity and create reports detailing call activity.
BESTNET SERVICES
During the fiscal year ended August 31, 2001 (Fiscal 2001), BestNet, using
Softalk's patented technology, has contracted Softalk to create a wide range of
telecommunications products and services. Internet devices that can access the
Internet can be used by BestNet to enable telephone calls. The Bestnetcall suite
of products include the following services:
LONG DISTANCE CALLING
Organizations can decrease the cost of their long distance bill while still
retaining the toll quality required to conduct business. Bestnetcall provides
the core benefits of lower prices, quality service and on-line real-time
billing. Other significant benefits include point and click FROM and TO
directories, point and click dialing using directories from Microsoft Outlook,
speed dialing, email calling, billing codes, country and city code look-up, time
zone information and dialing examples.
CONFERENCE CALLING
Bestnetcall offers a conference-calling product that can be used to
initiate immediate or scheduled conference calls. The chairperson can either
launch successive legs for an immediate conference call or enter and save
information for a conference call to be launched automatically at a future date.
There are no set-up or administrative charges for the Bestnetcall conference
calling facility. This service can reduce the cost of conference calls by up to
80% as compared to traditional conferencing services currently offered by
carriers.
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CALL ME SERVICES
Through our Bestnetcall service we are able to offer customers the
following services:
* Customer Service Centers
Our customer service centers can enable customers worldwide to call about
subjects of interest such as product information, enrollment issues and company
information.
* Click through banner
The banner advertising industry can voice-enable their banners to achieve far
more effective sales results. Potential customers who access the banner are able
to click on the banner to call through to the banner provider and obtain more
information about the product being advertised - thereby increasing the sales.
* Web Chat - click to join
Through the Bestnetcall architecture, Web Chat providers can enable users of
their service to escalate from on-line chat to a live conversation. In this
situation, numbers remain private and users do not have access to numbers of
other users.
* Anonymous calling
The architecture of Bestnetcall allows for total security regarding both the
FROM and TO legs. The FROM and TO numbers are never displayed, thus it is not
possible to determine from where a call is being placed. Certain website
providers need both numbers to be anonymous or private, so the callers do not
know the numbers they are dialing, nor should the person being called know which
number is dialing them.
* Call Shacks
The BestNet Internet telephony system can be used to enable telephone calls in
facilities that sell minutes to consumers for use on one of the telephones
within the call shack or telephone store. A web-enabled computer can not only
launch calls from any number of extension phones or phones connected to direct
lines within the call shack, but can also monitor real-time use of the minutes
and the actual cost of each call. Call shacks are used by migrant workers in the
U.S. to call home and in many countries where consumers do not have any other
access to a telephone. The BestNet system allows BestNet to also monitor real
time activity that minimizes the occurrence of payment fraud by the call shack.
SALES CALLS
The Bestnetcall architecture provides the ability to supply sales
organizations, such as real estate companies and automobile sales companies, a
telecommunications infrastructure whereby customers can call in, review and
purchase products. Enrollment and billing infrastructures are also provided.
SATELLITE CALLS
Bestnetcall allows for terrestrial offices to call remote platforms such as
ships, airplanes, oilrigs, etc. Bestnetcall has a direct circuit to an
international satellite uplink carrier for launching the Inmarsat satellite leg
of calls to the terminal at a remote location.
MOBILE CALLING
Bestnetcall has developed a wireless application that operates on the Palm
VII and other wireless enabled Palm devices to enable users to place calls while
away from the office. An application has also been developed for the Pocket PC
on Personal Digital Assistant's (PDA's) such as the Compaq iPAQ.
Bestnetcall also enables calls to be launched via email devices such as the
Blackberry manufactured by Research in Motion and mobile phones that have text
messaging. These capabilities expand the target customer-base for BestNet's
services. We believe the increased availability created by mobile calling makes
the product more attractive to users. BestNet is currently investigating the
opportunity to offer pager calling, where the customer uses a pager to initiate
a phone call.
All calls from these devices are billed in the same way as calls placed
through our web product.
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MARKET STRATEGIES
BestNet offers its Bestnetcall service through both direct sales and
indirect sales channels. Our target markets include:
* Business and Industry;
* Telecommunication Carriers;
* Internet Service Providers;
* Governmental agencies;
* Browser Based Services such as AOL, Yahoo and Amazon.com;
* Affinity Groups;
* Other organizations, including charities, religious organizations,
schools and alumni associations; and
* Individual Consumers.
Our marketing efforts are targeted at international long distance users in
a number of key geographic areas in the world. Initially, our marketing strategy
will focus primarily on the following geographic regions due to greatest savings
potential:
* Caribbean;
* North America;
* Asia Pacific;
* Central & South America;
* Europe; and
* Middle East.
DIRECT SALES
BestNet utilizes the following marketing and sales strategies to
generate revenue and increase customer usage:
* Direct Mail and e-mail Solicitations - BestNet sends solicitation materials to
prequalified potential users. These materials refer or link the potential user
to www.bestnetcall.com and offer a subscription to the Bestnetcall service.
Recipients are invited to use the service or request more information. These
direct mail or e-mail solicitations are launched on a continuous basis currently
by an in-house staff. Future direct mail initiatives will be launched using a
combination of in-house resources and external resources.
* Telemarketing - BestNet currently markets it services through special
incentive offerings to its existing customer base. Telemarketing operations will
be initiated through the customer service operations during the fiscal year
ending August 31, 2002 (Fiscal 2002).
* Media Advertising and Promotion - Limited advertising in key print and
electronic media targeted at specific market segments has been initiated in the
form of national magazines. Additional initiatives such as advertising in
specific trade publications and Internet advertising will be considered during
the coming year based on an analysis of the cost-effectiveness of these present
activities; and
* Public Relations Activities - A corporate communications and public relations
specialist within BestNet is responsible for developing a comprehensive global
communications program. This communications program will include initiating
appropriate news releases, feature print articles in industry and trade specific
publications, local print media and feature editorial support. The
Bestnetcom.com website is being redeveloped to include a frequently asked
questions section to facilitate direct communication with shareholders,
stakeholders, customers and the public-at-large.
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INDIRECT SALES
Indirect sales efforts will be centered around the following four types of
organizations:
* Carriers - The Bestnetcall services are being made available to other
telecommunication carriers, resellers and internet service providers for resale
to their clients. These types of indirect sales organizations will be solicited
through direct mail, e-mail, fax and direct sales calls by BestNet personnel;
* Professional Service Firms - Accounting firms, consultants and legal firms are
being solicited to use our Bestnetcall service and to provide this service to
their clients as a means of saving money on international long distance calls;
* Retailers and Special Service Providers - BestNet is approaching large
retailers and special service providers such as dating services, Internet
advertisers and hardware manufacturers to offer our services as a value-added
service. These relationships are revenue sharing initiatives with the client
organization receiving a negotiated percentage of gross revenue generated by our
services; and
* Agent/Distributors - BestNet is establishing a global network of agents and
distributors who will market our services to corporate organizations and
consumers.
PROJECT MANAGERS
To date, BestNet has hired two project managers and a sales coordinator.
The project managers sell, maintain and service major accounts while the sales
coordinator is responsible for selling to special service providers and affinity
groups.
INDUSTRY BACKGROUND AND MARKET DEMAND
The Internet is quickly emerging not only as a fast, reliable channel for
communication, but also as a means of telecommunication capable of replacing the
telephone network.
We believe there are five key trends impacting the telecommunications
industry today. These trends are:
* The rapid evolution of the Internet: Fortune Magazine predicts that by the
year 2003, 70% of the U.S. population will be using the Internet and
business-to-business (B2B) revenue will approach $1.3 trillion (Forrester).
* The demand for data: The demand for data is predicted to be two times that for
voice (Business Week, January 2000). Customers will demand high speed Internet
access.
* New and improving technology: Telecommunications Magazine predicts that by the
year 2003, U.S. cell-phone penetration will be 60%, with Japan approaching 70%,
and Europe over 80%. As the technology improves, the demand will increase.
* Demand for services: Business customers want to focus on their core business,
and procure outside services for non-strategic functions. Business and consumers
want to be empowered to have access to services and information when it is
convenient to them.
* The changing regulatory environment: Deregulation is encouraging
telecommunications companies to enter each other's markets. Increased
competition stimulates globalization as companies move to add geography,
customers, expertise, and technology to their business.
The Gartner Group predicts that Business to Consumer (B2C) transactions
will reach $380 billion by 2003, and B2B will exceed $7 trillion by 2004. In
July 2000, Forrester Research predicted that 65% of corporate buyers plan to buy
at least some telecommunications services on-line; several telecom-purchasing
managers stated that, if their carriers are not Web-enabled in two years, they
will switch suppliers.
15
The potential benefits offered by Voice-over-IP (VOIP) and other forms of
Web telephony have captured the interest of the media, investors and consumers.
The appeal of Internet telephony can be attributed to the fact that it offers a
cost-effective alternative to services provided by traditional telecom carriers
and provides the ability to make free phone calls using the Internet.
There are several forms of Internet telephony, including, PC-to-phone,
PC-to-PC, web-enhanced telephony and phone-to-phone via PC. PC-to-phone,
PC-to-PC, and web-enhanced telephony all require specific software or hardware
components. Meanwhile, phone-to-phone via PC uses an Internet connection and the
existing telephone public switch telephone network (PSTN) infrastructure. [All
these forms of communication offer significant cost savings when compared to
using a traditional carrier, however, phone-to-phone via PC provides higher
quality voice because it utilizes the PSTN infrastructure.
THE CHALLENGES
Historically, the Internet telephony market, has had its share of
obstacles. A major disadvantage has been inconsistent service and unpredictable
sound quality. For instance, some calls may be relatively clear, while others
contain background interference and a delay in voice transfers.
Another perceived disadvantage of Internet telephony is the need to
purchase or install new hardware and/or software to enable the user to make
calls using the Internet. VoIP requires a minimum of an internet connection, a
microphone and sound card; web-enhanced telephony requires a minimum of an
internet connection and uses multiple combinations of audio and video hardware.
Phone-to-phone via PC requires an Internet connection and a phone.
Perhaps one of the biggest challenges facing the Internet telephony market
is getting people to change their habits. Instead of using the keyboard on a
phone to place calls, vendors in this space have to convince potential customers
of the benefits of using the keyboard on a computer to place phone calls. The
inducement to make the change presently is the significant cost savings in
placing long distance calls via our Bestnetcall Service.
The inherent diversification of the Bestnetcall product suite addresses the
above challenges directly.
LOOKING AHEAD
Despite the challenges, however, the Internet telephony market is expected
to grow substantially over the next five years. Moreover, according to an IDC
report, a leading technology research firm, the world wide Internet telephony
market is estimated to grow from 310 million minutes of use in 1998 to 135
billion in 2004. Revenues for this service are projected to increase from $480
million in 1999 to $19 billion by 2004. The report also estimates that the
business market will implement extensive use of Internet telephony exceeding the
consumer market by 2004.
PSTN - TOLL QUALITY
At the present time and for the foreseeable future, reliable, consistent
toll quality voice calls are best facilitated using the PSTN. For this reason,
we believe business users will continue to use telephone lines as the primary
carriers of long distance service while consumers will be the biggest users of
VoIP. The PSTN will continue to be used by business as opposed to alternatives
found in the Internet and cable systems for the following reasons:
* Speed of communication;
* Quality of communication;
* Reliability of communication; and * Ease of operation.
LOW COST RATES
The global telecommunications industry has been highly regulated. However,
over the past several years, North America and parts of Europe have enjoyed
significant deregulation, which has resulted in a highly competitive long
distance service industry. The U.S. and Canada have among the lowest telephone
rates in the world and the U.S. has emerged as the lowest cost supplier of long
16
distance rates. U.S. deregulation has resulted in sizable reductions in the
wholesale cost of long distance services available to long distance resellers.
Although declining rates have been symbolic in the U.S., Canadian and some
European long distance markets, we believe international rates to and from many
other countries have been slow to decline for two major reasons:
(1) Foreign telephone company (Telco) management are reluctant to reduce
their rates given their monopoly status; and
(2) In some areas of the world, governments have been reluctant to
antagonize strong Telco unions.
In the long term, it is unlikely that these high rates can be maintained as
new technologies render the Telco monopolies ineffective. We believe that such
new technologies will evolve around the emergence of the Internet as a mass
communications and commerce medium.
A number of companies started Internet telephony operations in the last few
years. The intense competition in the telecommunications market, in addition to
the growth of e-commerce, has necessitated a drive towards exploring new levels
of decreasing costs and resulted in the genesis of Internet telephony.
We believe usage and competitive pressures will drive down telephony
pricing on a global basis. Price, enhanced services and quality will become the
only major differentiators in the market over the next 24 months.
BestNet is concentrating its efforts on the corporate and business markets.
BestNet uses the Internet to enable, control and manage PSTN calls accessed from
its central offices in New York, Los Angeles and Toronto. BestNet is bringing
the best wholesale long distance rates (which are in the U.S.) to the entire
world. The Company can offer access to global markets including direct access to
North American business and consumer markets to any carrier worldwide wishing to
connect to its switches in the U.S. and Canada.
THE INMARSAT TELEPHONY MARKET
One of the fastest growing telephony markets in the world is global
satellite telephony communications. The Inmarsat communication system consists
of four satellites circling the globe. These satellites provide
telecommunication services through terrestrial uplink carriers to areas not
covered by traditional telecommunication services.
BESTNET'S SOLUTION
Under its licenses from Softalk, BestNet provides commercial voice quality
Internet-enabled long distance services to corporate and residential
subscribers. Our Web-based solution offers subscribers access to low cost long
distance rates by using the Internet as the means to launch calls and to view
billing within seconds after completing a call.
This technology blends the best of current telecommunication systems by
using commercial telephone networks for voice quality and the Internet for
control and access. Our Bestnetcall service provides a user anywhere in the
world access to the U.S. telecom infrastructure while not infringing upon
international telecom agreements.
For example, users making calls from the Caribbean to the U.S. would
operate over the same network as users from the U.S. making calls to the
Caribbean. As a result, middle retailers of telecommunication services are
eliminated. This ensures the lowest pricing structure on a long-term basis.
BestNet provides customers access to its network through its switches
located in New York, Los Angeles and Toronto. Additional switch locations are
planned for deployment in major cities in North America, Asia and Europe. The
deployment of these additional switches will follow as demand dictates and
capital resources become available.
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BESTNETCALL - ENHANCEMENTS
During the past year, Bestnetcall service added a number of enhancements:
* Conference Calling - This feature allows users to connect up to 64 parties on
a single call, using their personal computer to initiate the calls. Conference
calls may be launched immediately or prescheduled for a specific time and date.
All conference calls will display the status to the conference administrator via
the Bestnetcall website and offer substantial rate reductions compared to
conventional conference call services provided by the major long distance
providers;
* An improved graphical user interface - This feature allows the user access to
more information, as well as provides much quicker load times, which is critical
where Internet connections are slow;
* A desktop application - This feature was designed for networked office users
without a dedicated Internet connection, or where Internet connections are very
slow. The desktop application resides on the user's personal computer and uses
small-packet transmission to quickly initiate calls. Furthermore, this feature
saves time by not requiring a browser, website navigation or log-in; and
* Wireless Personal Digital Assistant - Designed for micro-web browsers, such as
employed by the Palm VII, users can launch Bestnetcall telephone calls or
conference calls at any time using their wireless device.
In August 2001, we introduced the availability of our long distance and
conference calling services via e-mail. These services allow a user to initiate,
on demand, a long distance telephone call by sending an e-mail. This service is
available through cell phones and other hand-held devices that are equipped to
send e-mail.
Additionally, in August 2001, we introduced the availability of our
conference calling services designed for handheld devices using Palm OS. The
free software that can be downloaded from the bestnetcall.com website, allows
Palm users to initiate conference calls from any convenient telephone, such as
their office, home or cellular phone.
BESTNETCALL - FUTURE PRODUCT STRATEGY
According to industry sources, approximately 22 million personal computers
are connected to the Internet in North America. These sources, furthermore,
predict that by 2002, an additional 23 million non-personal computer devices
will be used to access the Internet. Recognizing this trend, the Company has
contracted with Softalk to customize and develop variations of Bestnetcall that
use alternative methods for accessing our service, including the following:
* Two Way Paging - We are developing applications for two-way paging to launch
calls transmitting packets from paging networks to our web server and switching
matrix;
* Internet Devices - Bestnetcall services will be designed for non-personal
computer Internet devices, such as Set-top boxes, like as WebTV; Smart phones,
like as iPhone; and Appliances, like I-Opener;
and any device that can access the Internet can be enabled by BestNet to provide
access to Bestnetcall services. No assurance, however, can be given that we will
be able to successfully develop or, if developed, commercially exploit any of
the above-referenced devices.
NETWORK STRUCTURE
PHASE I - INITIAL DEPLOYMENT
BestNet's network equipment is currently located in a central office
facility located in New York, Los Angeles and Toronto. Our system is designed to
initially support 20 million minutes of voice traffic per month. Our system can
be increased as support needs increase. Full network monitoring and diagnostics
are employed on a 24 x 7 basis.
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BestNet's web server is hosted by UUNet. UUNet has one of the largest
telecommunications infrastructures in North America. Our current network
configuration will support 25,000 simultaneous hits and may easily be expanded.
UUNet provides support on a 24 x 7 basis and backup power is supplied by on-site
battery and off-site generators to ensure system survivability.
BestNet's switching matrix is located in its central office facility with
direct T-1 connectivity to the wholesale PSTN. The initial deployment of 1,000
ports is configured for rapid expansion capability of up to 10,000 ports. We
work closely with the Softalk telecom and network engineers and their software
development team to monitor and maintain the system in New York, Los Angeles and
Toronto.
PHASE II - EXPANDING POINTS OF PRESENCE
BestNet intends to expand its network worldwide. Additional locations of
network equipment will be deployed in key strategic locations to facilitate web,
voice and data traffic. These additional locations will provide network
redundancy and least inexpensive cost routing for voice traffic.
The point-of-presence in New York, at 60 Hudson Street, is the East Coast's
principal gateway for international telecommunication traffic. The New York
location contains a switching matrix. Each of these points-of-presence contain
telecommunications switches that can be expanded up to 10,000 ports. The New
York switching matrix is connected to several international public switch
telephone network carriers including the uplink carrier for Inmarsaat traffic.
From these locations BestNet offers inexpensive international long distance
services to or from anywhere in the world using North American wholesale rates.
During the past year, BestNet also expanded its points-of-presence to Los
Angeles at 1 Wilshire Boulevard, the West Coast's gateway for international
telecommunication traffic. The equipment and facility is similar to that of our
New York central offices. These three central offices provide complete
redundancy for one another in the event of a failure by one or two locations.
The cost of deploying a central office or point-of-presence is approximately
$250,000.
BestNet has also deployed two additional web host servers in Texas to
provide complete redundancy for website access.
PHASE III - VIRTUAL PRIVATE NETWORK
As voice traffic increases, BestNet plans on deploying gateway servers to
better facilitate growing international traffic between certain locations. This
strategy will allow the Company to install a virtual private network along these
high-traffic routes to reduce costs for voice traffic. Employing dedicated data
circuits between these gateways will allow voice calls to be compressed and
transmitted using data packets, which significantly reduces the cost of routing
over normal telephone network channels.
TRANSACTIONS WITH SOFTALK
Our current and future business activities are substantially dependent on
the continuation of our relationship with Softalk. As discussed more fully below
and elsewhere in this Report, our ability to offer the Bestnetcall service is
subject to a license agreement with Softalk, which may be unilaterally
terminated by Softalk upon the occurrence of certain events. We have also
contracted with Softalk to perform substantially all of our development and
engineering activities with respect to the rollout, enhancement and maintenance
of the Bestnetcall service, related product offerings and the deployment of our
telecommunication network. Accordingly, we believe any disruption or termination
in our relationship with Softalk would have a material adverse effect on our
business, prospects, financial condition and results of operations.
LICENSE AGREEMENT.
On October 25, 1999, BestNet and Softalk amended their license agreement to
grant BestNet and its subsidiaries a worldwide, exclusive license to distribute,
market, service, sell and sublicense Softalk's services and products to
commercial accounts. This agreement also grants BestNet a worldwide nonexclusive
19
license to distribute, market, service, sell and sublicense Softalk's services
and products to individual customer accounts. In exchange for the license
amendments, BestNet issued to Softalk five-year warrants to purchase up to
5,246,753 shares of BestNet common stock; 3,246,753 of which have an exercise
price of $3.25 per share, 1,000,000 have an exercise price of $5.00 per share,
and the remaining 1,000,000 have an exercise price of $10.00 per share.
Under the terms of the amended license agreement (the license agreement),
we paid an initial license fee of $200,000. We are also obligated to pay Softalk
an amount equal to the sum of (a) 100% of Softalk's actual direct expenses
incurred in connection with the sale, license and delivery of Softalk products
and (b) a five percent (5%) markup of the total traffic on the wholesale long
distance per minute lines costs on a monthly basis.
The amended license agreement may be terminated under the following
conditions:
* Either party has the right to terminate the license agreement upon thirty (30)
days written notice to the other party, if such other party fails to comply in
any material respect with any term or condition of the license agreement and
such failure to comply is not corrected within such thirty (30) day notice
period;
* Either party has the right to terminate the license agreement in the event the
other party becomes bankrupt or insolvent, suffers a receiver to be appointed,
or makes an assignment for the benefit of its creditors; and
* Softalk has the right to terminate the license agreement upon sixty (60) days
written notice following a change of control of BestNet. Under the license
agreement, a change of control is deemed to have occurred:
When, after the date of the license agreement, any person (as such term is
used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the Exchange Act)) is or becomes the beneficial owner (as defined in
Rule l3d-3 of the Exchange Act), directly or indirectly, of securities of
BestNet representing fifty-one percent (51%) or more of the combined voting
power of BestNet's then outstanding securities, other than (i) an employee
benefit plan established or maintained by BestNet or a subsidiary of BestNet, or
(ii) any person who presently owns such quantity of securities as of the date
hereof,
or
upon the approval by BestNet's stockholders of (1) a merger or consolidation of
BestNet with or into another corporation (other than a merger or consolidation
the definitive agreement for which provides that at least a majority of the
directors of the surviving or resulting corporation immediately after the
transaction are continuing directors, (ii) a sale or disposition of all or
substantially all of BestNet's assets, or (iii) a plan of liquidation or
dissolution of BestNet.
Individuals who, as of the date of the license agreement, constitute the
Board of Directors of BestNet (the Incumbent Board) cease for any reason to
constitute at least 80% of the Board; provided, however, that any person
becoming a member of the Board subsequent to the date hereof whose election, or
nomination for election by BestNet's stockholders, was approved by a vote of at
least 80% of the members then comprising the Incumbent Board (other than an
election or nomination of an individual whose initial assumption of office is in
connection with an actual or threatened election contest relating to the
election of directors of BestNet, as such terms are used in Rule 14a-11 of
Regulation 14A promulgated under the Exchange Act or any successor provision
thereto) shall be, for purposes of this License Agreement, considered as though
such person were a member of the Incumbent Board.
Upon termination of the license agreement for any reason whatsoever,
BestNet is permitted to continue using Softalk's intellectual property in
providing services to all its existing (at the point of termination) clients.
20
PURCHASE AGREEMENT.
On November 13, 1999, BestNet, through its subsidiary, Interpretel (Canada)
Inc., purchased all existing products and accounts of Softalk in exchange for
4,329,004 shares of Class A non-voting preferred stock of Interpretel (Canada).
Under this agreement, Softalk granted BestNet a right of first refusal with
respect to purchasing Softalk, its intellectual property, software and/or
patents. The shares issued under this agreement were exchangeable on a
one-for-one basis for shares of BestNet's common stock at any time by the holder
thereof. The issuance of the Class A shares of Interpretel (Canada) was valued
at $10,000,000, the value of BestNet's common shares into which the Interpretel
(Canada) shares could be converted. On November 10, 2000, Softalk exercised its
exchange rights, resulting in the issuance of 4,329,004 restricted shares of
BestNet common stock in exchange for a like number of shares of Class A
Non-voting preferred stock of Interpretel (Canada). As of November 7, 2001 and
November 30, 2000, Softalk held approximately 29% and 53%, respectively, of the
issued and outstanding shares of BestNet common stock.
CROSS CORPORATE CONTROL.
Softalk has the right to designate up to two directors to the Board of
Directors of BestNet. As of the date of this 10-KSB, Softalk has designated one
person to serve on BestNet's five person Board of Directors. BestNet also has
been granted the right to appoint one director to the three person Board of
Directors of Softalk. BestNet has appointed Gerald I. Quinn, BestNet's Chairman,
to Softalk's board.
LOAN FACILITY.
On August 6, 1999, BestNet entered into a loan facility with Softalk
pursuant to which BestNet agreed to loan Softalk up to $2 million at an interest
rate of prime plus 1%. As of November 7, 2001, the outstanding balance of the
loan was $1,384,000. Under the original terms of this loan, Softalk could pay
back the loan principal plus interest on or before August 6, 2000, or convert
any amounts outstanding, plus interest, on the loan into shares of Softalk
common stock in full satisfaction of money owed to BestNet under the loan. On
September 8, 2000, the Board of Directors approved amending the loan to extend
the term of the loan to August 6, 2001. As of the date of this Report, the loan
remains outstanding and is due and payable upon demand by BestNet.
COMPETITION
The communications industry is highly competitive, and one of the primary
purposes of the U.S. Telecommunications Act of 1996 (the Telecommunications Act)
is to foster further competition. In each of the markets we intend to operate,
we will compete principally with the established telephone company serving such
market. We currently do not have a significant market share in any of our
markets. The established telephone companies have long-standing relationships
with their clients, financial, technical and marketing resources substantially
greater than ours and the potential to fund competitive services with cash flows
from a variety of businesses, and currently benefit from existing regulations
that favor the established telephone companies. Furthermore, one large group of
established telephone companies, the regional Bell operating companies, have
been granted, under particular conditions, pricing flexibility from federal
regulators with regard to some services with which we compete. This may present
established telephone companies with an opportunity to subsidize services that
compete with portions of our services and offer competitive services at lower
prices.
We expect to experience declining prices and increasing price competition.
We cannot assure that we will be able to achieve or maintain adequate market
share or margins, or compete effectively, in any of our markets. Moreover,
substantially all of our current and potential competitors have financial,
technical, marketing, personnel and other resources, including brand name
recognition, substantially greater than ours as well as other competitive
advantages over our business, financial condition and results of operations. Any
of the foregoing factors could have a material adverse effect on our business,
financial condition, results of operation and prospects.
21
REGULATION
The following summary of regulatory developments and legislation describes
the primary present and proposed federal, state, and local regulation and
legislation that is related to the Internet service and telecommunications
industries and could have a material effect on our business. Existing federal
and state regulations are currently subject to judicial proceedings, legislative
hearings and administrative proposals that could change, in varying degrees, the
manner in which our industries operate. We cannot predict the outcome of these
proceedings or their impact upon the Internet service and telecommunications
industries.
OVERVIEW
Telecommunications services are generally subject to federal, state and
local regulation. The Federal Communications Commission (FCC) exercises
jurisdiction over all facilities and services of telecommunications common
carriers to the extent those facilities are used to provide, originate, or
terminate interstate or international communications. State regulatory
commissions exercise jurisdiction over facilities and services to the extent
those facilities are used to provide, originate or terminate intrastate
communications. In addition, as a result of the passage of the
Telecommunications Act, state and federal regulators share responsibility for
implementing and enforcing the domestic pro-competitive policies of the
Telecommunications Act. In particular, state regulatory commissions have
substantial oversight over the provisions of interconnection and
non-discriminatory network access to established telephone companies. Local
governments often regulate public rights-of-way necessary to install and operate
networks.
FEDERAL REGULATION
We do not believe our Internet operations are currently subject to direct
regulation by the FCC or any other telecommunications regulatory agency,
although they are subject to regulations applicable to businesses generally.
However, the future Internet service provider regulatory status continues to be
uncertain. In an April 1998 report, the FCC concluded that while some Internet
service providers should not be treated as telecommunications carriers, some
services offered over the Internet, such as phone-to-phone telephony, may be
functionally indistinguishable from traditional telecommunications service
offerings, and that their non-regulated status may have to be re-examined.
Despite the FCC's decision not to allow local telephone companies to impose
per-minute access charges on Internet service providers, and that decision being
upheld by the reviewing court, further regulatory and legislative consideration
of this issue is likely. An imposition of an access charges would affect our
costs of serving dial-up clients and could have a material adverse effect on our
business, financial condition and results of operations. In addition, Congress
and other federal entities have adopted or are considering other legislative and
regulatory proposals that would further regulate the Internet. Various states
have adopted and are considering Internet-related legislation. Increased U.S.
regulation of the Internet may slow its growth or reduce potential revenues,
particularly if other governments follow suit, which may in turn increase the
cost of doing business over the Internet.
EMPLOYEES
As of November 7, 2001, we had eleven employees. BestNet believes that our
future success will depend on our ability to attract and retain highly skilled
and qualified employees. None of our employees are currently represented by
collective bargaining agreements. BestNet believes that it enjoys good
relationships with the employees.
USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock. We may
receive up to $72,500 in proceeds from the exercise of the warrants. We will use
all of these proceeds for working capital for our operations.
22
MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
BestNet's common stock was quoted on the Nasdaq SmallCap Market until May
4, 1999, and then on the OTC:BB from June 28, 1999 to the present. The high and
low bid prices of BestNet's common stock as reported from September 1, 1997
through August 31, 2000 by fiscal quarters (i.e., 1st Quarter = September 1
through November 30) were as follows, as adjusted for a one-for-six reverse
split effective December 18, 1998:
HIGH LOW
---- ---
FISCAL YEAR ENDED:
August 31, 1999
First Quarter 3.5625 1.5
Second Quarter 3.5625 2.0
Third Quarter 2.9375 0.125
Fourth Quarter 2.625 0.5
FISCAL YEAR ENDED:
August 31, 2000
First Quarter 4.25 1.46875
Second Quarter 10.25 4.125
Third Quarter 9.50 5.0
Fourth Quarter 7.25 3.81
FISCAL YEAR ENDING:
August 31, 2001
First Quarter 6.125 .875
Second Quarter 3.375 .5625
Third Quarter 3.80 .55
Fourth Quarter 4.40 2.05
The bid and the ask price of BestNet's common stock on November 7, 2001, were
$2.00 and $2.20, respectively.
As of November 7, 2001, BestNet had 115 shareholders of record of its
common stock.
BestNet has never declared any cash dividends on common stock and currently
plans to retain future earnings, if any, for its business operations.
NASDAQ DELISTING. BestNet's common stock was delisted from the NASDAQ Small
Cap Market on May 4, 1999, due to the fact that BestNet was not in compliance
with Nasdaq's $1.00 minimum bid price requirement. Since June 28, 1999,
BestNet's common stock has been traded on the OTC Bulletin Board under the
symbol BESC.
23
SELLING STOCKHOLDER
The table below sets forth information concerning the resale of the shares
of common stock by the selling stockholders. We will not receive any proceeds
from the resale of the common stock by the selling stockholders. We will receive
proceeds from the exercise of the warrants. Assuming all the shares registered
below are sold by the selling stockholders, none of the selling stockholders
will continue to own any shares of our common stock.
The following table also sets forth the name of each person who is offering
the resale of shares of common stock by this prospectus, the number of shares of
common stock beneficially owned by each person, the number of shares of common
stock that may be sold in this offering and the number of shares of common stock
each person will own after the offering, assuming they sell all of the shares
offered.
Total Shares
of Common Stock Total
Issuable Upon Percentage Shares of Beneficial Percentage of Beneficial Percentage
Conversion of of Common Stock, Common Stock Ownership Common Stock Owner-ship of Common
Preferred stock Assuming Full Included in Before the Owned Before After the Stock Owned
Name and Warrants(2) Conversion(2) Prospectus(1) Offering Offering Offering(3) After Offering(3)
---- --------------- ------------- ------------- -------- -------- ----------- -----------------
Laurus Master 367,015 2.4% Up to 367,015 2.4% -- --
Fund, Ltd. $746,875
worth of
common stock
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, and the
information is not necessarily indicative of beneficial ownership for any other
purpose. Under such rule, beneficial ownership includes any shares as to which
the selling stockholder has sole or shared voting power or investment power and
also any shares which the selling stockholder has the right to acquire within 60
days. The actual number of shares of common stock issuable upon the conversion
of the convertible preferred stock is subject to adjustment depending on, among
other factors, the future market price of the common stock, and could be
materially less or more than the number estimated in the table.
(1) Because the number of shares of common stock issuable upon conversion
of the convertible preferred stock is dependent in part upon the
market price of the common stock prior to a conversion, the actual
number of shares of common stock that will be issued upon conversion
will fluctuate daily and cannot be determined at this time. However
the selling stockholder has contractually agreed to restrict its
ability to convert or exercise its warrants and receive shares of our
common stock such that the number of shares of common stock held by it
and its affiliates after such conversion or exercise does not exceed
4.99% of the then issued and outstanding shares of common stock. As a
result of the contractual agreement not to exceed 4.99% beneficial
ownership, the selling stockholder does not believe it is a control
person as defined in the Securities Exchange Act of 1934 or is
required to file a Schedule 13D.
(2) Assumes a conversion price of $2.035. Includes 25,000 shares
underlying warrants that are currently exercisable at an exercise
price of $2.90 per share. In accordance with rule 13d-3 under the
securities exchange act of 1934, Michael Finkelstein may be deemed a
control person of the shares owned by such entity.
(3) Assumes that all securities registered will be sold.
24
PLAN OF DISTRIBUTION
The selling stockholder may, from time to time, sell any or all of their
shares of common stock on any stock exchange, market, or trading facility on
which the shares are traded or in private transactions. These sales may be at
fixed or negotiated prices. There is no assurance that the selling stockholder
will sell any or all of the common stock in this offering. The selling
stockholder may use any one or more of the following methods when selling
shares:
* Ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers.
* Block trades in which the broker-dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction.
* An exchange distribution following the rules of the applicable
exchange
* Privately negotiated transactions
* Short sales or sales of shares not previously owned by the seller
* A combination of any such methods of sale any other lawful method
The selling stockholder may also engage in:
* Short selling against the box, which is making a short sale when the
seller already owns the shares.
* Other transactions in our securities or in derivatives of our
securities and the subsequent sale or delivery of shares by the
stockholder.
* Pledging shares to their brokers under the margin provisions of
customer agreements. If a selling stockholder defaults on a margin
loan, the broker may, from time to time, offer to sell the pledged
shares.
Broker-dealers engaged by the selling stockholder may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from selling stockholder in amounts to be negotiated. If any
broker-dealer acts as agent for the purchaser of shares, the broker-dealer may
receive commission from the purchaser in amounts to be negotiated. The selling
stockholder do not expect these commissions and discounts to exceed what is
customary in the types of transactions involved.
Penny Stock Rules
Our common shares are subject to the "penny stock" rules that impose
additional sales practice requirements because our common shares are below $5.00
per share. For transactions covered by these rules, the broker-dealer must make
a special suitability determination for the purchase of the common shares and
must have received the purchaser's written consent to the transaction prior to
the purchase. The "penny stock" rules also require the delivery, prior to the
transaction, of a risk disclosure document mandated by the Securities and
Exchange Commission relating to the penny stock market. The broker-dealer must
also disclose:
* the commission payable to both the broker-dealer and the registered
representative,
* current quotations for the securities, and
* if the broker-dealer is the sole market maker, the broker-dealer must
disclose this fact and the broker-dealer's presumed control over the
market.
Finally, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks.
25
These rules apply to sales by broker-dealers to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together
with their spouse), unless our common shares trade above $5.00 per share.
Consequently, the "penny stock" rules may restrict the ability of broker-dealers
to sell our common shares, and may affect the ability to sell the common shares
in the secondary market as well as the price at which such sales can be made.
Also, some brokerage firms will decide not to effect transactions in "penny
stocks" and it is unlikely that any bank or financial institution will accept
"penny stock" as collateral.
Underwriter Status
The selling stockholder and any broker-dealers or agents that are involved
in selling the shares may be considered to be "underwriters" within the meaning
of the Securities Act for such sales. An underwriter is a person who has
purchased shares from an issuer with a view towards distributing the shares to
the public. In such event, any commissions received by such broker-dealers or
agents and any profit on the resale of the shares purchased by them may be
considered to be underwriting commissions or discounts under the Securities Act.
Because the selling shareholders are deemed "underwriters" within the
meaning of Section 2(11) of the Securities Act, they will be subject to the
prospectus delivery requirements.
We are required to pay all fees and expenses incident to the registration
of the shares in this offering. However, we will not pay any commissions or any
other fees in connection with the resale of the common stock in this offering.
We have agreed to indemnify the selling shareholders and their officers,
directors, employees and agents, and each person who controls any selling
shareholder, in certain circumstances against liabilities, including liabilities
arising under the Securities Act. Each selling shareholder has agreed to
indemnify us and our directors and officers in certain circumstances against
certain liabilities, including liabilities arising under the Securities Act.
If the selling stockholder notifies us that they have a material
arrangement with a broker-dealer for the resale of the common stock, then we
would be required to amend the registration statement of which this prospectus
is a part, and file a prospectus supplement to describe the agreements between
the selling stockholder and the broker-dealer.
We have agreed with the selling stockholder to keep this registration
statement continuously effective under the Securities Act of 1933 until such
date as is the earlier of (x) the date when all of the securities covered by
such Registration Statement have been sold or (y) the date on which the
securities may be sold without any restriction pursuant to Rule 144(k) as
determined by our counsel.
DETERMINATION OF OFFERING PRICE
The price at which the common stock is sold may be based on market prices
prevailing at the time of sale, at prices relating to such prevailing market
prices, or at negotiated prices.
26
DESCRIPTION OF SECURITIES
COMMON STOCK
For a description of our common stock see our Registration Statement on
Form 8-A filed with the SEC on March 11, 1987.
SERIES C CONVERTIBLE PREFERRED STOCK
On October 17, 2001, we completed a $500,000 private placement of Series c
preferred stock and common stock purchase warrants with an accredited investor.
The financing consisted of 5,000 shares of Series C preferred stock and a
Warrant to purchase 25,000 shares of common stock. The Series C preferred stock
carries a dividend of 8%. The number of shares of Common Stock issuable upon
conversion of each share of Series C Preferred Stock shall equal (i) the sum of
(A) the Stated Value per share and (B) at the Holder's election accrued and
unpaid dividends on such share, divided by (ii) the Conversion Price. The
Conversion Price shall be (i) until 45 days from the date hereof, $2.40, and
(ii) on and after 45 days from the date hereof, the lower of (x) $2.40; or (y)
eighty percent (80%) of the average of the three lowest closing prices for the
common stock on the NASD OTC Bulletin Board, NASDAQ SmallCap Market, NASDAQ
National Market System, American Stock Exchange, or New York Stock Exchange
(whichever of the foregoing is at the time the principal trading exchange or
market for the Common Stock, the "Principal Market"), or on any securities
exchange or other securities market on which the Common Stock is then being
listed or traded, for the thirty (30) trading days prior to but not including
the Conversion Date. The shares of Series C preferred stock and dividends may
not be converted without the consent of the Holder.
The Warrants held by the Series C preferred stockholders have a term of
five years and are exercisable at a price of $2.90 per share. The Holder may
designate a cashless exercise of the Warrant and surrender a portion of the
Warrant having an aggregate current market value equal to the aggregate exercise
price at the exercise date.
LEGAL MATTERS
Certain legal matters have been passed upon for us by Sichenzia, Ross,
Friedman & Ference LLP, New York, NY.
EXPERTS
The consolidated financial statements of BestNet Communications Corp.
included in BestNet Communications Corp.'s Annual Report (Form 10-KSB) for the
years ended August 31, 2001 and 2000, have been audited by Semple & Cooper LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such financial statements have been
incorporated herein by reference, in reliance upon such reports given on the
authority of such firm as experts in accounting and auditing.
27
INFORMATION WITH RESPECT TO THE REGISTRANT
This prospectus is being delivered with a copy of our Form 10-KSB for the
fiscal year ended August 31, 2001.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
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 small business issuer according to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933, as amended, and is, therefore,
unenforceable.
28
PART II TO FORM S-2
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth our estimated costs and expenses in
connection with the offering other than commissions and discounts, if any.
SEC Registration Fee $ 187.00
Legal Fees and Expenses 30,000.00
Accounting Fees and Expenses 5,000.00
Printing and Engraving Expenses 1,000.00
Miscellaneous 10,000.00
----------
Total $46,187.00
==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Articles 11 and 12 of our Articles of Incorporation provide as follows:
1. To the fullest extent permitted by the laws of the State of Nevada, as
the same exist or may hereinafter be amended, no director or officer of the
Corporation shall be personally liable to the Corporation or its shareholders
for monetary damages for breach of fiduciary duty as a director or officer,
provided, however, that nothing contained herein shall eliminate or limit the
liability of a director or officer of the Corporation to the extent provided by
applicable laws (i) for acts or omissions which involve intentional misconduct,
fraud or knowing violation of law or (ii) for authorizing the payment of
dividends in violation of Nevada Revised Statutes Section 78.300. The limitation
of liability provided herein shall continue after a director or officer has
ceased to occupy such position as to acts or omissions occurring during such
director's or officer's term or terms of office. No repeal, amendment or
modification of this Article, whether direct or indirect, shall eliminate or
reduce its effect with respect to any act or omission of a director or officer
of the Corporation occurring prior to such repeal, amendment or modification.
2. The Corporation shall indemnify, defend and hold harmless any person who
incurs expenses, claims, damages or liability by reason of the fact that he or
she is, or was, an officer, director, employee or agent of the Corporation, to
the fullest extent allowed under Nevada law.
II-1
ITEM 16. EXHIBITS
Exhibit Page Number or
Number Description Method of Filing
- ------ ----------- ----------------
4.1 Form of Warrant issued to investor in private Filed herein
placement
4.2 Series C Preferred Stock Certificate of designation Filed herein
5 Opinion re: legality of the securities being Filed herein
registered
10.1 Securities Purchase Agreement between BestNet Filed herein
and the investor in the private placement
23.1 Consent of Independent Auditors, Semple & Cooper LLP Filed herein
23.3 Consent of Counsel See Exhibit 5
24 Powers of Attorney **
- ----------
** Filed as part of the Signature Page of this Form S-2.
ITEM 17. UNDERTAKINGS
1. The undersigned Registrant hereby undertakes to file, during any period
in which offers or sales are being made, a post-effective amendment to this
registration statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(b) 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;
provided, however, that paragraphs (a) and (b) shall not apply if such
information is contained in periodic reports filed by the Registrant under
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference into this Registration Statement.
(c) 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. The undersigned Registrant hereby undertakes that, for the purpose of
determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
3. The undersigned Registrant hereby undertakes 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. The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report under Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report under Section 15(d) of the Securities
II-2
Exchange Act of 1934) that is incorporated by reference into this registration
statement 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.
5. The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished under and meeting the requirements of
Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934; and, where
interim financial information required to be presented by Article 3 of
Regulation S-X are not set forth in the prospectus, to deliver, or cause to be
delivered to each person to whom the prospectus is sent or given, the latest
quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
6. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the undersigned Registrant according the foregoing provisions, or otherwise, the
undersigned Registrant has been advised that in the opinion of the SEC 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 expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
II-3
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tucson, State of Arizona, on November 21, 2001.
BESTNET COMMUNICATIONS CORP.
By: /s/ Robert A. Blanchard
-------------------------------------
Robert A. Blanchard
President and Chief Executive Officer
By: /s/ Robert A. Blanchard
-------------------------------------
Robert A. Blanchard
Chief Financial Officer
(Principal Accounting Officer)
The officers and directors of BestNet Communications Corporation whose
signatures appear below, hereby constitute and appoint Gerald I. Quinn as their
true and lawful attorney-in-fact and agent, with full power of substitution,
with power to act alone, to sign and execute on behalf of the undersigned any
amendment or amendments to this registration statement on Form S-2, and each of
the undersigned does hereby ratify and confirm all that said attorney-in-fact
and agent, or his substitutes, shall do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
Amendment to Registration Statement has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ Gerald I. Quinn Chairman of the Board, November 21, 2001
- -------------------------- President, Chief Executive
Gerald I. Quinn Officer
/s/ Robert A. Blanchard Chief Financial Officer November 21, 2001
- -------------------------- (Principal Financial
Robert A. Blanchard and Accounting Officer)
/s/ Kevin C. Wilbore Vice President, Product November 21, 2001
- -------------------------- Development
Kevin C. Wilbore
/s/ Kevin England Director November 21, 2001
- --------------------------
Kevin England
/s/ Herbert Haenert Director November 21, 2001
- --------------------------
Herbert Haenert
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