Filed Pursuant to Rule 424(b)(3)
File No. 333-89848
Prospectus
BestNet Communications Corp.
Up to 2,707,960 Shares of Our Common Stock
This prospectus relates to the resale of up to 2,707,960 shares of our
common stock being offered by the selling stockholders identified on pages 23
through 25. The shares of common stock that may be resold by the selling
stockholders constitute 15.1% of our issued and outstanding common stock on
September 30, 2002. The selling stockholders may sell the 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 may be
deemed to be underwriters of the shares of common stock, which they are
offering. Please see the "Selling Stockholders" section beginning on page 23 in
this prospectus for a complete description of all of the selling stockholders.
The selling stockholders will receive all of the amounts received upon any
sale by them of the common stock, less any brokerage commissions or other
expenses incurred by them. We will not receive any proceeds from the sale of the
common stock by the selling stockholders. We will receive up to an aggregate of
$91,250 if all of the warrants are exercised.
Our common stock is traded on the NASDAQ Over-the-Counter Bulletin Board
under the symbol BESC.OB. On September 30, 2002, the closing sale price of our
common stock was $1.45.
Investing in our common stock involves a high degree of risk. See Risk
Factors on page 8.
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 October 16, 2002.
TABLE OF CONTENTS
PAGE
----
WHERE YOU CAN FIND MORE INFORMATION....................................... 2
INCORPORATION OF DOCUMENTS BY REFERENCE................................... 2
SUMMARY................................................................... 3
THE OFFERING.............................................................. 6
RISK FACTORS.............................................................. 8
USE OF PROCEEDS........................................................... 22
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................. 22
SELLING STOCKHOLDERS...................................................... 23
PLAN OF DISTRIBUTION...................................................... 26
DETERMINATION OF OFFERING PRICE........................................... 27
DESCRIPTION OF SECURITIES................................................. 27
LEGAL MATTERS............................................................. 27
EXPERTS................................................................... 27
INFORMATION WITH RESPECT TO THE REGISTRANT................................ 27
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES......................................................... 27
i
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.
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 Securities Exchange Act of 1934,
as amended, 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;
* our Forms 10-KSB/A filed on August 30, 2002 and October 16, 2002,
amending our annual report on Form 10-KSB for the fiscal year ended
August 31, 2001;
* our quarterly reports on Form 10-QSB for the quarterly periods ended
February 28, 2002 and May 31, 2002;
* our Form 10-QSB/A filed on October 16, 2002, amending our quarterly
report on Form 10-QSB for the quarterly period ended May 31, 2002;
* our current report on Form 8-K dated October 11, 2001; and
* 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 8 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 and May 31, 2002, we had an accumulated deficit of
$17,020,532 and $20,767,269, respectively. We had net losses for the fiscal year
ended August 31, 2001, fiscal quarter ended May 31, 2002 and nine month period
ended May 31, 2002, of $4,014,810, $1,290,150 and $3,746,737, respectively. We
expect to continue to spend considerable financial and management resources on
the roll-out of our Bestnetcall service, which is described below. Further, we
have substantial future capital requirements with respect to the roll-out of our
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 communication service called
Bestnetcall, which is our only Internet-based telecommunications technology.
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 has performed substantially
all of our development activities.
Bestnetcall allows us to deliver communication solutions to our clients
using the Internet. Communication solutions available to our clients include:
long distance calling, conference calling, "Call Me" enabled e-mail links and
buttons, etc. 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.
We are offering our Bestnetcall service through both direct sales and
indirect sales channels. Our initial target markets include:
* Businesses and Industries
* Internet Service Providers
* Browser Based Services, such as Internet Explorer, Yahoo and
Amazon.com
* Affinity Groups
* Other organizations, including charities, religious organizations,
schools and alumni associations
* Governmental Agencies
* Consumers
3
Our 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
* Central and South America
* North America
* Asia Pacific
* Europe
* Middle East
Today's telecom industry is being shaped dramatically by globalization, new
competition, and use of technology. The telecommunications market is one of the
largest markets in the world, second only to the financial markets. The
International Telecommunications Union forecasts the telecommunications services
market to be $1.1 trillion by the end of calendar year 2002. Our goal is to
become a leading provider of Web-enabled communication services.
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 fiscal years ended August 31, 1996, 1997, 1998, 1999,
2000, and 2001 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 outstanding,
basic & diluted 1,866,734(1) 2,409,195(1) 2,663,257(1) 2,904,693 3,221,225 9,013,669
YEAR ENDED 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 of up to 2,707,960 shares of our
common stock to be sold by the selling stockholders identified on pages 23
through 25 of this prospectus. The number of shares subject to this prospectus
represents 15.1% of our issued and outstanding common stock as of September 30,
2002 and 13.1% after issuance of all currently unissued shares included in this
prospectus.
As of September 30, 2002, we had 17,921,555 shares of common stock issued
and outstanding.
SECURITIES BEING ISSUED
Note and Warrant Purchase Agreement
In this prospectus, we are registering the resale of 2,000,000 shares of
our common stock issuable upon conversion of $800,000 in aggregate principal
amount of our 8% Senior Secured Convertible Promissory Notes issued pursuant to
a Note and Warrant Purchase Agreement dated as of April 23, 2002. The principal
amount outstanding under the notes is convertible into shares of our common
stock at a conversion rate of $0.40 per share. The Company must pay cash for any
fractional shares resulting from this calculation.
8% Subordinated Convertible Promissory Notes
In this prospectus, we are also registering the resale of 224,784 shares of
our common stock issuable upon conversion of two $50,000 8% Subordinated
Convertible Promissory Notes, which were issued to two investors on March 8,
2002. The two investors are Robert C. Caylor and an entity called 544493 Ontario
Ltd.
Each of these notes is convertible into common stock of the Company at a
conversion price equal to 70% of the closing bid price of our common stock on
March 8, 2002, or the closing bid price of our common stock as of the date a
conversion request is received from the holder of the note, whichever is less.
The conversion prices for Mr. Caylor and 544493 Ontario Limited are 0.4970 and
0.4100, respectively, based on the dates we received their conversion requests.
The Company must pay cash for any fractional shares resulting from this
calculation.
Securities Purchase Agreement
As of the date of this prospectus, we have registered an aggregate of
194,915 shares of our common stock underlying the 10,000 shares of our series C
8% cumulative convertible preferred stock previously issued to Laurus Master
Fund, Ltd. on January 30, 2002, pursuant to a Securities Purchase Agreement
between BestNet and Laurus. In this prospectus, we are registering the resale of
an additional 463,176 shares of our common stock underlying the remaining 268.97
shares of our series C 8% cumulative convertible preferred stock outstanding as
of the date of this prospectus. The number of shares of common stock being
included in this prospectus is based on a conversion price of $0.3147 per share,
with such number of shares being multiplied by a factor of three to account for
the floating conversion rate described below. We believe the registration of
463,176 shares included in this prospectus will fully satisfy the conversion of
the remaining outstanding shares of our series C preferred stock.
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 each share is convertible into our common stock determined by the following
formula:
$100 plus, at the election of the holder, any accrued and unpaid dividends
divided by the lessor of:
* $2.40; or
* 80% of the average of the three lowest closing prices of our common
stock for the thirty days immediately prior to the conversion.
6
The common stock purchase warrants issued as part of this transaction have
an exercise price of $1.19 per share and expire on January 30, 2007. To date the
purchase warrants remain unexercised. The resale of the shares underlying these
warrants were registered in a prior registration statement.
Warrant
In this prospectus, we are also registering 20,000 shares of our common
stock issuable upon exercise of a warrant issued to Berni Holdings, S.A. on
December 3, 1999. The warrants have a per share exercise price of $4.5625 and a
term expiring on December 3, 2002.
7
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 OUR BESTNETCALL SERVICE IS NOT ACCEPTED BY TARGETED CUSTOMERS, OUR FUTURE
OPERATING RESULTS WILL BE MATERIALLY ADVERSELY AFFECTED.
We have operated at a loss for the last eight years. Our Bestnetcall
service may not achieve commercial acceptance by Internet users at a level
required for us to overcome our costs and achieve profitability. Failure to
achieve market acceptance will negatively impact our ability to generate revenue
and profit in the future.
AN INCREASE IN THE PRICE FOR MAINTAINING PHONE AND DATA LINES MAY REDUCE OUR
REVENUES.
Our business strategy depends on the availability of the Internet to
transmit data packets for voice and fax calls. We also rely 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, our costs
may increase. We may be unable to continue purchasing such services from these
third parties on acceptable terms, if at all. If we are unable to purchase the
necessary services to maintain and expand our network as currently configured,
our revenue growth may be negatively affected.
WE ARE DEPENDENT ON COMPONENTS OF OUR LICENSE AGREEMENT WITH SOFTALK, WHICH, IF
MATERIAL CHANGES IN THIS AGREEMENT OCCURED, COULD ADVERSELY IMPACT OUR BUSINESS
AND FUTURE OPERATIONS.
We are dependent on components of our licensing agreement with Softalk,
which gives us a worldwide exclusive license to distribute, market, service,
sell and sublicense current and future Softalk communication software to
commercial accounts. This agreement also grants us a worldwide nonexclusive
license to distribute, market, service, sell and sublicense current and future
Softalk communication software to individual customer accounts. In August of
2002, we began legal proceedings against Softalk in Canada to address numerous
breaches of its obligations under the various agreements in place between our
companies. In September 2000, we obtained a court order/injunction requiring
Softalk to monitor and maintain BestNet's communication network during a
commercially reasonable transition period. To date, Softalk has failed to comply
with this court order/injunction and has, instead, responded by making claims of
its own against BestNet. We believe Softalk's claims are without merit and
intend to vigorously defend such claims and assert our rights under the
agreements in place. We have moved under the contractual agreements to resolve
matters in arbitration proceedings with Softalk. Although at this point
unlikely, in the event such proceedings, or any other proceedings arising out of
the context of these arbitration proceedings, result in material changes in the
agreements, such an outcome could materially adversely impact our business and
future operations.
THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO DOMESTIC GOVERNMENTAL
REGULATION AND LEGAL UNCERTAINTIES WHICH, IF INCREASED OR CHANGED, COULD REDUCE
OUR 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
Federal Communications Commission, and the Federal Communications Commission
could impose greater or lesser regulation on our industry. The Federal
Communications Commission 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 our revenue.
8
Aspects of our 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 our expenses
and decrease our revenues.
THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO INTERNATIONAL GOVERNMENTAL
REGULATION AND LEGAL UNCERTAINTIES WHICH COULD MATERIALLY ADVERSELY AFFECT OUR
BUSINESS.
We intend on marketing our service to international long distance callers.
Because we will be conducting business internationally, we will be 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.
THE ISSUANCE OF SHARES UPON CONVERSION OF OUR CONVERTIBLE NOTE, SERIES C 8%
CUMULATIVE CONVERTIBLE PREFERRED STOCK, AND THE EXERCISE OF OUTSTANDING OPTIONS
AND WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR EXISTING
STOCKHOLDERS.
Our convertible notes and our series C 8% cumulative convertible preferred
stock are convertible into common stock at floating rates, therefore we do not
know the exact number of shares we will issue upon conversion of these
securities. The number of shares of common stock issuable upon conversion of the
outstanding convertible notes and series C 8% preferred stock will increase if
the market price of our stock declines.
The issuance of shares upon conversion of the convertible notes, series C
8% cumulative convertible preferred stock, and exercise of outstanding options
and warrants may result in substantial dilution to the interests of other
stockholders. Although our 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 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.
WE HAVE A HISTORY OF OPERATING LOSSES AND MAY NEVER GENERATE OPERATING INCOME
FROM THE SALE OF OUR BESTNETCALL SERVICE.
At August 31, 2001 and May 31, 2002, we had an accumulated deficit of
$17,020,532 and $20,767,269, respectively.
We believe that our future profitability and success will depend in large
part on our ability to generate revenue from Bestnetcall and related web-enabled
communication solutions. Revenues are also anticipated from the sub-licensing of
our technology and business systems around the globe. Our profitability and
success will depend on:
* our ability to maintain existing relationships and enter into new
relationships with Post Telephone & Telegraph administrations and
other carriers for which we sell Internet telephony services
* our ability to obtain or retain for BestNet the right to sell Internet
telephony services and related value-added telecom services online
* our ability to effectively maintain existing relationships with our
multinational partners
* our ability to successfully enter into new strategic relationships for
distribution and increased usage of the Bestnetcall and Internet
telephony services
* our ability to generate sufficient online traffic and sales volume
9
Accordingly, we expect to expend significant financial and management resources
on the roll-out of the Internet telephony service, content development on our
Bestnetcall websites, integration of the Internet telephony and Bestnetcall
services, strategic relationships, technology and operating infrastructure. As a
result, we expect to incur significant additional losses and continued negative
cash flow from operations for the foreseeable future. If such losses continue to
occur, our revenues may not increase or even continue at their current levels.
Further, we may not achieve or maintain profitability or generate cash from
operations in future periods. In view of the rapidly evolving nature of our
business, the limited operating history of both Internet telephony and
Bestnetcall and the risks associated with integrating these businesses, we
believe 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 OUR BUSINESS
AND OUR REVENUE
Conflicts of interest may arise between us and our 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 or other dispositions by our principals
These conflicts also may include substantial disagreements with Softalk
regarding the nature and scope of 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 our business and our ability to earn revenue from the sale of
the Bestnetcall service. The substantial ownership interest of Softalk in our
common stock could create, or appear to create, potential conflicts of interest
when directors and officers are faced with decisions that could have different
implications for us and Softalk.
OUR INABILITY TO COMPETE 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 operating
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
and options to purchase our common stock and the conversion of outstanding
10
convertible notes and series C cumulative convertible preferred stock. The
participation of the shareholders in BestNet also may be reduced through the
issuance of new common stock.
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 our plans:
* to grow our Internet-based communications businesses
* to expand the range of services we offer
* to increase the number of customers using our services and the minutes
of use and price per minute of use of the traffic booked through our
websites and network
* to otherwise expand our business activities in new cities and foreign
countries
* to retain key personnel or otherwise to implement our strategy as well
as our 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 management and are based on management's current
understanding of the markets and industries in which we operate. That
understanding could change or could prove to be inconsistent with actual
developments. Our 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.
11
BESTNET COMMUNICATIONS CORP.
OPERATIONS OVERVIEW
Communication service revenues during the third quarter again reached new
record highs. Compared to last quarter, revenues increased by 27%. Compared to
the same period last year revenues have increased by 190%. More impressively for
the first nine months of fiscal 2002 revenues have nearly tripled compared to
the first nine months of 2001. This is a direct result of increased usage by
existing clients and new customers. New Subscribers also continued to increase,
growing by 26% during the period.
Increased usage was seen across the board in both enterprise and individual
accounts. Existing and new channel partnerships also contributed to growth in
the Third Quarter. Efforts to further the Company's global expansion continued.
Several new channel partnerships were established to include Dove International.
Dove International will market BestNet services in South America and the
Caribbean. In support of this expansion, the addition of Spanish client service
under respuestarapida@bestnetcom.com was completed. Plans are currently being
formulated for the Company to provide client service in additional languages as
part of our continuing global growth strategy.
As part of the Company's intellectual property management strategy the
company continued work with Brown Raysman, et.al. a New York based law firm.
Brown Raysman is registering the Company's exclusive commercial account license
for patented Softalk technology in both the US and Canada.
The Company has entered an agreement with a new Investor and Public
Relations Firm. The Liolios Group, Inc. has come onboard as the company's
shareholder communication and media relations consultant. The Liolios Group is
based in Newport Beach, CA.
After an extensive review of potential candidates during the period, the
Company selected The Anvil Group Inc. to provide network management and security
services for its global communication network. The Anvil Group Inc. is an
integrated network and security risk management organization with offices in
Canada, England and Ireland. In addition to providing security, Anvil will
transition to monitor and manage, together with the Company's personnel, network
infrastructure on a 24/7 basis to ensure the highest level of operational
quality, security and availability.
BUSINESS OF ISSUER AND SUBSIDIARIES
Founded on July 10, 1986, BestNet Communications Corp., a Nevada
corporation, develops, markets and sells Internet-based telecom technologies.
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.
Under the terms of this licensing agreement BestNet was granted 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 us 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 to individual consumer accounts. We also have the
exclusive right to provide billing and customer support services for all
customer accounts.
On September 27, 2000, we changed our name to BestNet Communications Corp.
Since then, we have focused all of our efforts and resources on marketing our
bestnetcall web-enabled communication services.
BestNet owns and operates telecommunication facilities in Toronto, Canada
and New York City, including high-capacity switches and Internet servers. In
addition, BestNet makes use of specialized software for data management, billing
and customer service requirements.
The brand name for our web-enabled communication 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 multi-national
enterprise clients and consumers around the world.
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Users of our bestnetcall service are able to do the following by accessing
our website at www.bestnetcall.com:
* Enroll
* Place calls, including conference calling and other service features
* Pay for service
* Access customer service immediately on the Internet
* Access billing information in real time
Bestnetcall does not require the purchase of special hardware or software
by the customer and uses 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 the completion of a telephone call, 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 communication services include:
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. We have benchmarked the value of this conference-calling service to
similar services available in the marketplace and believe it to be the "best
value in its class."
Call Me Services
Through our bestnetcall service we are also able to offer customers the
following services:
* Call me service - The Call me service enables people worldwide to
contact a Company for product information, company information and
other assistance. The Call me service facilitates contact from a web
page to a live customer service representative.
* 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 a banner to call through to the banner providers customer service
and obtain more information about the product being advertised -
thereby increasing sales for the advertiser.
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* Web Chat - click to join -- Through the bestnetcall architecture, Web
Chat providers 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 would the person being called know which number is
dialing them.
Satellite Calls
Bestnetcall has a direct circuit to an international satellite uplink
carrier for launching the Inmarsat satellite leg of calls. This circuit provides
our bestnetcall service with the capability to complete calls to remote
platforms such as ships, airplanes and oilrigs.
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. Applications have also been developed for Personal Digital
Assistant's such as Compaq's 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.
All calls from these devices are billed in the same way as calls placed
through our web product.
MARKET STRATEGIES
We offer our Bestnetcall service through both direct sales and indirect
sales channels. Our target markets include:
* Businesses and Industries
* Telecommunication Carriers
* Internet Service Providers
* Browser Based Services such as AOL, Yahoo and Amazon.com
* Affinity Groups
* Other organizations, including charities, religious organizations,
schools and alumni associations
* Governmental Agencies
* 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
* Central & South America
* North America
* Asia Pacific
* Europe
* the Middle East
DIRECT SALES
We utilize the following marketing and sales strategies to generate revenue
and increase customer usage:
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* Sales Calls - We call directly on potential enterprise clients whom we
believe can create value for and where we have relationships with key
decision makers.
* Direct Mail and e-mail Solicitations - We send 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.
* Media Advertising and Promotion - We have initiated limited
advertising in key print and electronic media targeted at specific
market segments in the form of national magazines. We will consider
additional initiatives such as advertising in specific trade
publications and Internet advertising 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 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 also being
redeveloped to include a frequently asked questions section to
facilitate direct communication with shareholders, stakeholders,
customers and the public-at-large.
INDIRECT SALES
Indirect sales efforts are centered around the following four types of
organizations:
* Agent/Distributors - We are establishing a global network of agents
and distributors who will market our services to corporate
organizations and consumers.
* 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 solicit through direct mail, e-mail, fax and direct
sales calls by their 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;
* Retailers and Special Service Providers - We are approaching large
retailers and special service providers such as Internet advertisers
and hardware manufacturers offering our services as 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
PROJECT MANAGERS
To date, we have hired two project managers to sell, maintain and service
major accounts. In addition, four customer service representatives handle daily
client contact currently in English and Spanish.
INDUSTRY BACKGROUND AND MARKET DEMAND
The Internet is the significant interactive worldwide medium for
communications, collaborative technologies, and the telecommunications market.
Meanwhile, global deregulation, the proliferation of new technologies enabling
convergence between computers, applications, Internet, and the telephone are
significantly expanding the world's voice market.
We believe there are key trends influencing the telecommunications industry
and Internet deployment today. The following trends are having a direct and
positive effect on the communications market and demand for our applications:
15
* 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 revenue will approach $1.3 trillion according
to Forrester Research.
* Globalization of the world's economies increase the international
mobility of workforces and, according to Frost & Sullivan, the
internet roaming market is expected to grow to $7.6 billion in
revenues from $62.7 million in 1999.
* 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.
* Worldwide, STRATEGY ANALYTICS expects cellular subscribers to increase
from nearly 900 million at the end of 2001, to 1.9 billion by the end
of 2006.
* The global conferencing market, which is negligible today, will grow
to $11 billion by 2005 according to multimedia consultancy Wainhouse
Research.
* Internet applications sales, which includes both devices that connect
to the Internet via a television and Internet terminals are expected
to grow at a rate of more than 40% per year and soar to $1.3 billion.
* 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 transactions will
reach $380 billion by 2003, and business-to-business transactions will
exceed $7 trillion by 2004.
* Forrester Research predicted that 65% of corporate buyers planned 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.
Market trends are strongly in our favor. Our ability to offer a cost
effective, highly efficient and dynamic product in terms of features and
capabilities is of key importance during poor economic periods as companies are
forced to find ways to trim budgets. Companies also have a general reticence
towards air travel during such poor economic periods. We can capture the promise
of this sector.
THE CHALLENGES
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.
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. Voice-over IP 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.
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 worldwide 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.
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Our technology simply requires Internet access. No special hardware,
software, or start up costs is required. The inherent diversification of our
product suite addresses the above challenges directly.
PUBLIC SWITCH TELEPHONE NETWORK - TOLL QUALITY
At the present time and for the foreseeable future, reliable, consistent
toll quality voice calls are best facilitated using the public switch telephone
network. 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 voice-over IP. The public switch telephone network
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
* 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
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:
* Foreign telephone company management are reluctant to reduce their
rates given their monopoly status; and
* In some areas of the world, governments have been reluctant to
antagonize strong foreign telephone company unions.
In the long term, we believe that it is unlikely that these high rates can
be maintained as new technologies render the foreign telephone company
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 telecommunications market over the next 24
months.
We are concentrating our efforts on the corporate and business markets. We
use the Internet to enable, control and manage the public switch telephone
network calls accessed from our central offices in New York, Los Angeles and
Toronto. We are bringing the best wholesale long distance rates, which are in
the U.S., to the entire world. We can offer access to global markets including
direct access to North American business and consumer markets to any carrier
worldwide wishing to connect to our 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.
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BESTNET'S SOLUTION
Under our licenses from Softalk, we provide commercial voice quality
Internet-enabled communication 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 endeavors to blend 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.
We provide customers access to our network through our switches located in
New York and Toronto. Additional switch locations are planned for deployment.
The deployment of these additional switches will follow as demand dictates and
capital resources become available.
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 "best in class value" 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 also introduced the availability of our conference
calling services designed for handheld devices using the Palm Operating System.
The free software that can be downloaded from our bestnetcall.com website,
allows Palm users to initiate conference calls from any convenient telephone,
such as their office, home or cellular phone.
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BESTNETCALL - FUTURE PRODUCT STRATEGY
The Internet's reach is wider than imaged and its growth faster than
expected. The Internet has become the world's largest distributed system. It was
designed and engineered to have an abundance of routes, connections, and
elasticity. The Internet growth rate indicates that there will be one billion
Internet users by 2005. There is solid evidence that PC growth along with use of
Internet appliances, wireless connectivity to the Internet and Internet service
connections all will reach new record numbers in the coming years. Recognizing
this trend, we continue to look for new value added service applications for
Bestnetcall to bring to our existing and future clients.
NETWORK STRUCTURE
PHASE I - INITIAL DEPLOYMENT
Our network equipment is currently located in a central office facility
located in New York and Toronto. Our system is designed to initially support 15
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.
Our Web server is hosted by Texas Net located in Austin, Texas. Our current
network configuration will support 25,000 simultaneous hits and may easily be
expanded. Texas Net 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.
Our switching matrix is located in our central office facilities with
direct T-1 connectivity to the wholesale public switch telephone network. 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 and Toronto.
PHASE II - EXPANDING POINTS OF PRESENCE
We intend to expand our 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. The New York switching matrix is connected
to several tier one international public switch telephone network carriers
including the uplink carrier for Inmarsat traffic. From our facility in Toronto
we have switching and call control redundancy along with additional tier one
carrier connectivity.
Our two central offices provide complete redundancy for one another in the
event of a failure by the other location. The cost of deploying a central office
or point-of-presence is approximately $250,000.
PHASE III - VIRTUAL PRIVATE NETWORK
As voice traffic increases, we plan on deploying gateway servers to better
facilitate growing international traffic between certain locations. This
strategy will allow us 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.
LICENSE AGREEMENT
On October 25, 1999, our license agreement with Softalk was amended,
granting us and our subsidiaries a worldwide, exclusive license to distribute,
market, service, sell and sublicense Softalk's services and products to
commercial accounts. This agreement also grants us a worldwide nonexclusive
license to distribute, market, service, sell and sublicense Softalk's services
and products to individual customer accounts. In exchange for the license
amendments, we issued five-year warrants to purchase up to 5,246,753 shares of
our common stock to Softalk, 3,246,753 of which have an exercise price of $3.25
19
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, 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 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 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 60 days
written notice following a change of control in our ownership
structure. 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, is or becomes the
beneficial owner (as defined in Rule l3d-3 of the Securities
Exchange Act of 1934, as amended), directly or indirectly, of our
securities representing 51% or more of the combined voting power
of our then outstanding securities, other than (i) an employee
benefit plan established or maintained by us or one of our
subsidiaries, or (ii) any person who presently owns such quantity
of securities as of the date hereof;
* upon the approval by our stockholders of (i) our merger or
consolidation 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 our assets, or (iii) a plan for
our liquidation or dissolution; or
* when individuals who, as of the date of the license agreement,
constitute our Board of Directors, known as the Incumbent Board,
cease for any reason to constitute at least 80% of our Board;
provided, however, that any person becoming a member of the Board
subsequent to the date hereof whose election, or nomination for
election by our 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 our
directors, as such terms are used in Rule 14a-11 of Regulation
14A promulgated under the Securities Exchange Act of 1934, as
amended, or any successor provision thereto), shall be, for
purposes of the License Agreement, considered as though such
person were a member of the Incumbent Board.
Upon termination of the license agreement for any reason whatsoever, we are
permitted to continue using Softalk's intellectual property in providing
services to all our existing clients, at the point of termination.
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PURCHASE AGREEMENT
On November 13, 1999, we, through our 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 us 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 our common stock at any time by Softalk. The issuance of the Class A
shares of Interpretel (Canada) was valued at $10,000,000, the value of our
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 our common stock in exchange for a
like number of shares of Class A Non-voting preferred stock of Interpretel
(Canada). As of September 30, 2002, Softalk held approximately 22.3% of the
issued and outstanding shares of our common stock.
LOAN FACILITY
On August 6, 1999, we entered into a loan facility with Softalk under which
we agreed to loan Softalk up to $2 million at an interest rate of prime plus 1%.
As of February 28, 2002, the outstanding balance of the loan was $1,465,060.
Under the original terms of this loan, Softalk could pay back the loan principal
plus interest on or before August 6, 2000, or elect to convert any amounts
outstanding, plus interest, on the loan into shares of Softalk common stock in
full satisfaction of money owed to us under the loan. On September 8, 2000, our
Board of Directors approved amending the loan to extend the term of the loan to
August 6, 2001. As of the date of this registration statement, the loan remains
outstanding and is due and payable upon our demand.
COMPETITION
The communications industry is highly competitive, and one of the primary
purposes of the U.S. Telecommunications Act of 1996 is to foster further
competition. In the markets we currently and will compete in the future
competition is intense. Competitors range from large well established telephone
companies to upstart service providers. 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 flexibility may present established
telephone companies with an opportunity to subsidize services that compete with
segments of our services and offer competitive services at lower prices. To the
extent such activities occur, they may have a material adverse affect on our
business prospects and results of operations.
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.
However, recent competitor operating performance has been poor resulting in
price increases for services like long distance and conference calling. We, in
response, have held prices steady and therefore increased/improved our value
proposition to current and potential clients.
REGULATORY OVERVIEW
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.
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APPLICABLE REGULATION
Telecommunications services are generally subject to federal, state and
local regulation. The Federal Communications Commission 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 of 1996, state and
federal regulators share responsibility for implementing and enforcing the
domestic pro-competitive policies of the Telecommunications Act of 1996. 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 Federal Communication Commission or any other
telecommunications regulatory agency, although they are subject to regulations
applicable to businesses generally. However, the future of Internet Service
Provider regulatory status continues to be uncertain. In an April 1998 report,
the Federal Communication Commission 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 Federal
Communication Commission'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 our cost of doing business over the Internet.
EMPLOYEES
As of September 30, 2002, we had 11 employees. We believe 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. We believe that we enjoy good relationships
with our employees.
USE OF PROCEEDS
We will not receive any proceeds from the resale of the common stock
included in this prospectus. We will use the proceeds from the exercise of the
warrants described in this prospectus for working capital purposes.
MARKET FOR COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Our 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, 1998 through
May 31, 2002 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
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HIGH LOW
---- ---
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 ENDED:
August 31, 2001
First Quarter 6.125 .875
Second Quarter 3.1875 .5625
Third Quarter 3.75 .55
Fourth Quarter 4.50 2.05
FISCAL YEAR ENDED:
August 31, 2002
First Quarter 3.00 1.55
Second Quarter 1.56 .65
Third Quarter 1.58 .35
Fourth Quarter 2.50 .71
FISCAL YEAR ENDING:
August 31, 2003
First Quarter (through September 30) 1.59 1.22
The bid and the ask price of our common stock on September 30, 2002, were $1.40
and $1.47, respectively.
As of September 30, 2002, we had 139 shareholders of record of our common
stock.
We have never declared any cash dividends on common stock and currently
plan to retain future earnings, if any, for business operations.
NASDAQ DELISTING. Our common stock was delisted from the NASDAQ Small Cap
Market on May 4, 1999, due to the fact that we were not in compliance with
Nasdaq's $1.00 minimum bid price requirement. Since June 28, 1999, our common
stock has been traded on the OTC Bulletin Board under the symbol BESC.
SELLING STOCKHOLDERS
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
up to an aggregate of $91,250 from the initial sale of the common stock upon
exercise of the warrants included in this prospectus. Because the selling
stockholder may sell all, a portion or none of their shares, no estimate can be
made of the aggregate number of shares that may actually be sold by any selling
stockholder or that may be subsequently owned by any selling stockholder.
The following table also sets forth the name of each selling stockholder
who is offering the resale of shares of common stock by this prospectus, the
number of shares of common stock beneficially owned by such selling stockholder,
the number of shares of common stock that may be sold in this offering and the
number of shares of common stock each selling stockholder will own after the
offering, assuming they sell all of the shares offered.
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TOTAL
PERCENTAGE PERCENTAGE
OF COMMON PERCENTAGE OF COMMON
TOTAL SHARES OF STOCK, SHARES OF BENEFICIAL OF COMMON BENEFICIAL STOCK
COMMON STOCK ISSUABLE ASSUMING COMMON STOCK OWNERSHIP STOCK OWNERSHIP OWNED
UPON CONVERSION OF FULL INCLUDED IN BEFORE BEFORE AFTER AFTER
NOTES/PREFERRED/WARRANT CONVERSION(1) PROSPECTUS(1) OFFERING(1) OFFERING(1) OFFERING(2) OFFERING(2)
----------------------- ------------- ------------- ----------- ----------- ----------- -----------
Morgan E. North 250,000(3) 1.5% 250,000 250,000 1.5% -0- -0-
Bavispe Limited
Partner 250,000(3) 1.5% 250,000 250,000 1.5% -0- -0-
William Holdren 250,000(3) 1.5% 250,000 250,000 1.5% -0- -0-
Anthony Silverman 1,000,000(4) 6.1% 1,000,000 1,000,000 6.1% -0- -0-
Jeffrey Silverman 125,000(5) * 125,000 125,000 * -0- -0-
Ron Coccimigilo 125,000(5) * 125,000 125,000 * -0- -0-
Robert C. Caylor 102,378(6) * 102,378 102,378 * -0- -0-
544943 Ontario
Ltd. 122,406(7) * 122,406 122,406 * -0- -0-
Laurus Master
Fund, Ltd. 463,176(8) * 463,176 463,176 * -0- -0-
Berni Holdings,
S.A. 20,000(9) * 20,000 20,000 * -0- -0-
- -----------
* Less than one percent (1%).
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended,
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 that 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 our common stock, and could
be materially less or more than the number estimated in the table.
(1) Amounts and percentages are based upon 16,530,005 shares of our common
stock outstanding as of May 28, 2002 plus, for each person or entity in this
table, the shares to be issued upon conversion of the notes, the preferred stock
or the warrants, as the case may be.
(2) Assumes that all securities registered will be sold.
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(3) Consists of 250,000 shares of common stock issuable upon conversion of
$100,000 in aggregate principal amount of our 8% Senior Secured Convertible
Promissory Notes.
(4) Consists of 1,000,000 shares of common stock issuable upon conversion
of $400,000 in aggregate principal amount of our 8% Senior Secured Convertible
Promissory Notes.
(5) Consists of 125,000 shares of common stock issuable upon conversion of
$50,000 in aggregate principal amount of our 8% Senior Secured Convertible
Promissory Notes.
(6) Consists of 102,378 shares of common stock issuable upon conversion of
a $50,000 8% Subordinated Convertible Promissory Note.
(7) Consists of 122,406 shares of common stock issuable upon conversion of
a $50,000 8% Subordinated Convertible Promissory Note.
(8) Assumes a conversion price of $0.3147. In accordance with Rule 13d-3
under the Securities Exchange Act of 1934, as amended, Michael Finkelstein may
be deemed to be a control person of the shares owned by such entity. Because the
number of shares of our common stock issuable upon conversion of the convertible
preferred stock is dependent in part upon the market price of our common stock
prior to a conversion, the actual number of shares of our 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.
(9) Consists of 20,000 shares of common stock issuable upon exercise of
immediately exercisable warrants.
The selling stockholders have not held any positions or offices or had
material relationships with us or any of our affiliates within the past three
years other than as a result of the ownership of our common stock. We may amend
or supplement this prospectus, from time to time to update the disclosure.
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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
broker-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 a commission from the purchaser in amounts to be negotiated. The selling
stockholder does 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.
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.
26
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 shareholder is deemed an "underwriter" within the
meaning of Section 2(11) of the Securities Act, it 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 shareholder and its 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. The 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.
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.
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.
LEGAL MATTERS
Certain legal matters have been passed upon for us by Squire, Sanders &
Dempsey L.L.P., Phoenix, Arizona.
EXPERTS
Our consolidated financial statements included in our 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.
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 and our Form 10-QSB for the fiscal quarter
ended May 31, 2002, each as amended as of the date of this prospectus.
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.
27
WE HAVE NOT AUTHORIZED ANY PERSON TO
MAKE A STATEMENT THAT DIFFERS FROM WHAT
IS IN THIS PROSPECTUS. IF ANY PERSON
DOES MAKE A STATEMENT THAT DIFFERS FROM
WHAT IS IN THIS PROSPECTUS, YOU SHOULD
NOT RELY ON IT. THIS PROSPECTUS IS NOT
AN OFFER TO SELL, NOR IS IT SEEKING AN
OFFER TO BUY, THESE SECURITIES IN ANY
STATE IN WHICH THE OFFER OR SALE IS NOT
PERMITTED. THE INFORMATION IN THIS
PROSPECTUS IS COMPLETE AND ACCURATE AS
OF ITS DATE, BUT THE INFORMATION MAY
CHANGE AFTER THAT DATE.
TABLE OF CONTENTS BESTNET COMMUNICATIONS CORP.
PAGE
----
WHERE YOU CAN FIND MORE
INFORMATION......................... 2 2,707,960 SHARES OF COMMON STOCK
INCORPORATION OF DOCUMENTS BY
REFERENCE........................... 2
SUMMARY............................. 3
BESTNET COMMUNICATIONS CORP......... 3
SELECTED AND SUMMARY CONSOLIDATED
FINANCIAL DATA...................... 5
THE OFFERING........................ 6
SECURITIES BEING ISSUED............. 6 OCTOBER 16, 2002
RISK FACTORS........................ 6
BESTNET COMMUNICATIONS CORP......... 12
USE OF PROCEEDS..................... 22
MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS......... 22
SELLING STOCKHOLDERS................ 23
PLAN OF DISTRIBUTION................ 26
DETERMINATION OF OFFERING PRICE..... 27
DESCRIPTION OF SECURITIES........... 27
LEGAL MATTERS....................... 27
EXPERTS............................. 27
INFORMATION WITH RESPECT TO
THE REGISTRANT...................... 27
DISCLOSURE OF COMMISSION POSITION
ON INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES..................... 27
28