As filed with the Securities and Exchange Commission on November 27, 2002
Registration No. 333-_______
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM S-2
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
BESTNET COMMUNICATIONS CORP.
(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:
Robert A. Blanchard Gregory R. Hall, Esq.
BestNet Communications Corp. Squire, Sanders & Dempsey L.L.P.
5075 East Cascade Road, Suite K Two Renaissance Square
Grand Rapids, Michigan 49546 40 North Central Avenue, Suite 2700
(616) 977-9933 Phoenix, Arizona 85004-4498
(602) 528-4000
(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. [ ]
================================================================================
CALCULATION OF REGISTRATION FEE
=======================================================================================================
NUMBER OF PROPOSED MAXIMUM PROPOSED
TITLE OF EACH CLASS OF SHARES TO BE OFFERING PRICE PER MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED (1) SHARE UNIT(2) OFFERING PRICE(2) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------
Common Stock, $.001 par value 1,662,050 $0.90 $1,495,845 $137.62
=======================================================================================================
(1) Represents (i) 665,000 shares of common stock issuable upon conversion of
$665,000 in aggregate principal amount of its 6% Convertible Promissory
Notes issued to note holders by BestNet pursuant to a Note and Warrant
Purchase Agreement, dated September 26, 2002, (ii) 332,500 shares of common
stock issuable upon exercise of warrants issued to the purchasers of our 6%
Convertible Promissory Notes, (iii) 400,000 shares of common stock issuable
upon exercise of warrants issued to Anthony Silverman, and (iv) 264,550
shares of common stock held by Anthony Sliverman and issued pursuant to a
Common Stock Purchase Agreement, dated August 30, 2002. Pursuant to Rule
416(a), this registration statement also covers an indeterminate number of
additional securities that may be offered or issued in connection with any
stock split, stock dividend or similar transaction.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) and (o) under the Securities Act of 1933, as
amended, on the basis of the closing price for shares of our common stock
as reported by the Nasdaq Over the Counter Bulletin Board on November 25,
2002.
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
SELLING STOCKHOLDER MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED NOVEMBER 27, 2002
Prospectus
BestNet Communications Corp.
1,662,050 Shares of Our Common Stock
This prospectus relates to the resale of an aggregate of 1,662,050 shares
of our common stock issuable upon exercise of outstanding warrants. The shares
of common stock covered in this prospectus are being offered by the selling
stockholders identified on pages 22 through 24. The shares of common stock that
may be resold by the selling stockholders constitute 8.7% of our issued and
outstanding common stock on November 7, 2002 and 8.1% of our issued and
outstanding common stock on such date after giving effect to the exercise of all
of the warrants described in this prospectus.
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
$1,248,750 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 November 25, 2002, the closing sale price of our
common stock was $0.90.
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 December ___, 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...................................................................7
USE OF PROCEEDS...............................................................21
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................21
SELLING STOCKHOLDERS..........................................................22
PLAN OF DISTRIBUTION..........................................................25
DETERMINATION OF OFFERING PRICE...............................................26
DESCRIPTION OF SECURITIES.....................................................26
LEGAL MATTERS.................................................................26
EXPERTS.......................................................................26
INFORMATION WITH RESPECT TO THE REGISTRANT....................................26
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES.................................................................26
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,
2002; 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 7 of this prospectus.
Throughout this prospectus, we refer to BestNet Communications Corp. as BestNet,
we, our, ours, and us.
BESTNET COMMUNICATIONS CORP.
We are a facilities-based, global communication solutions provider. Our
patented, proprietary technology uses widely available Internet access to
control, enable, and manage voice communications over the public switched
telecommunication network. We views our role is as a product development,
marketing, sales, sub-licensing, customer service and billing organization for
patented, packet-based Internet telephony software applications that control,
manage and enable global telecommunications services. We are presently focusing
substantially all of our financial and other resources on marketing and
development of Bestnetcall services to individual clients and selected companies
with international locations and/or clients worldwide. As of the date of this
prospectus, we have approximately 13,000 clients, making calls from 142
countries and calling to 198 countries.
We develop, market and sell patented Internet-based telecommunications
applications, technologies and services to corporate and residential clients
worldwide. Bestnetcall, the Company's flagship product, is the industry's first
patented, phone-to-phone, Internet-enabled long distance service, which combines
global internet access and the public switched telephone network via our
internet website at Bestnetcall.com. This service was first made available to
the public on April 17, 2000 and is marketed under the brand name Bestnetcall.
Although founded as a Nevada corporation on July 10, 1986, we did not
commence operations until 1995. From 1995 until 1999, we operated under the name
Wavetech International, Inc. and developed software for customized called card
services and created 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 1990s, 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 and commercializing our Bestnetcall
web-enabled long distance services. On September 27, 2000, we changed our name
to BestNet Communications Corp.
At August 31, 2002, we had an accumulated deficit of $23,488,980. We had
net losses for the fiscal year ended August 31, 2002 of $6,468,488. 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.
Users of our Bestnetcall services are able to do the following by accessing
our website at www.Bestnetcall.com:
* Register to use our Bestnetcall services
* Access and launch communication applications
* Access current rate tables and time zone charts
* Access a full suite of call management features
* Access customer service immediately via the Internet
* Maintain call account security
* Obtain real time billing detail
3
Our Bestnetcall service 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 (land line or cellular).
Bestnetcall also offers immediate real time billing detail to all users and
accepts various payment methods, including pre-paid or post-paid credit card
payments and invoicing options. The architecture of Bestnetcall allows for total
security regarding both the FROM and TO legs of each call. The FROM and TO
numbers are never displayed, thus it is impossible to determine from where a
call is being placed.
We offer our Bestnetcall service through both direct sales and indirect
sales channels. Our initial target markets include:
* Large Corporate / Enterprise Clients
* Internet Service Providers
* Mid-sized to SOHO Business (Small Office Home Office)
* Marketing and Channel Partners
* Reseller, VAR and Integrators
* Technology and Telecommunications Consultants
* Consumers
Our marketing efforts are targeted at international long distance and
conference calling clients in a number of key geographic areas in the world. Our
priorities are focused primarily on the following geographic regions:
* Central and South America
* North America
* Asia Pacific
* Europe
* Middle East
* Caribbean
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 application services. We hope to
capture a share of this large and growing market.
Our principal executive offices are located at 5075 East Cascade Road,
Suite K, Grand Rapids, Michigan 49546. Our telephone number is (616) 977-9933.
We wholly own our four subsidiaries, Interpretel, Inc., Interpretel (Canada)
Inc., Telplex International Communications, Inc. and International Environment
Corporation.
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, 1997, 1998, 1999, 2000,
2001 and 2002 are derived from our audited financial statements not included
elsewhere in this prospectus.
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------ ------------
Statement of Operations
Data:
Revenue $ 719,142 $ 157,838 $ 13,580 $ 28,670 $ 493,260 $ 1,060,582
Cost of revenue 679,930 85,082 9,468 51,722 497,663 1,432,196
Development 0 0 0 0 0 0
Selling, general and administration 1,584,747 794,004 691,479 1,188,032 2,044,720 2,028,732
Depreciation & amortization 211,786 156,965 146,977 1,545,636 1,979,975 2,277,525
------------ ------------ ------------ ------------ ------------ ------------
Total cost and expenses 2,476,463 1,036,051 847,924 2,785,390 4,522,358 4,306,257
Loss from operations (1,757,321) (878,213) (834,344) (2,756,720) (4,029,098) (4,677,871)
Other Income and Expenses:
Interest income 8,500 6,565 70,519 76,129 227,691 3,023
Rental income 0 8,833 36,000 22,500 300 0
Misc income 0 0 0 4,014 43 0
Interest expense (26,893) (45,182) (8,995) (60,512) (36) (764,688)
License agreement termination income 0 236,906 0 0 0 0
Loss on sale of investment in Switch 0 (216,165) 0 0 0 0
Debt conversion expense 0 (92,894) 0 0 0 0
Proposed merger costs 0 (236,737) (118,450) 0 0 0
Write-off of intangibles & other
assets 0 0 (36,125) 0 0 0
Income tax expense 0 0 0 0 (50) 0
Preferred stock conversion penalty 0 0 (144,000) (221,226) 0 0
Exchange (loss) gain 0 0 0 0 (1,647) 0
Other misc expenses 0 0 (15,000) 0 0 0
------------ ------------ ------------ ------------ ------------ ------------
Total Other Income and Expenses (18,393) (338,674) (216,051) (179,095) 226,301 (831,854)
------------ ------------ ------------ ------------ ------------ ------------
Net loss before preferred dividends $ (1,775,714) $ (1,216,887) $ (1,050,395) $ (2,935,815) (3,802,797) $ (5,509,725)
Cumulative preferred dividends
Declared and preferred stock
conversion benefit 0 135,994 36,500 2,602,046 212,013 958,723
------------ ------------ ------------ ------------ ------------ ------------
Net loss available to common
shareholders $ (1,775,714) $ (1,352,881) $ (1,086,895) $ (5,537,861) $ (4,014,810) $ (6,468,448)
Net loss per share, basic & diluted $ (.74) $ (0.51) $ (0.37) $ (1.72) $ (0.45) $ (0.41)
Weighted average shares outstanding,
basic & diluted 2,409,195(1) 2,663,257(1) 2,904,693 3,221,225 9,013,669 15,933,908
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ ------------ ------------
Balance Sheet Data:
Cash & Cash Equivalents $ 13,329 $ 2,202,573 $ 889,620 $ 2,581,492 $ 285,518 $ 351,784
Working Capital (650,761) 1,863,442 618,440 2,394,852 197,796 (526,923)
Total Assets 2,840,796 2,542,171 1,574,395 13,862,867 11,264,956 519,202
Total Liabilities 828,981 389,219 281,288 210,542 164,196 1,046,125
Accumulated Deficit (5,028,085) (6,380,966) (7,467,861) (13,005,722) (17,020,532) (23,488,980)
Stockholders' Equity 2,011,815 2,152,952 1,293,107 13,652,325 11,100,760 8,454,275
(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 an aggregate of 1,662,050 shares
of our common stock to be sold by the selling stockholders identified on pages
22 through 24 of this prospectus. The number of shares subject to this
prospectus represents 8.7% of our issued and outstanding common stock as of
November 7, 2002 and 8.1% after issuance of all currently unissued shares
included in this prospectus.
As of November 7, 2002, we had 19,059,839 shares of common stock issued and
outstanding.
SECURITIES BEING ISSUED
Resale of Common Stock Underlying 6% Convertible Notes and Warrants
In this prospectus, we are registering the resale of an aggregate of
665,000 shares of our common stock issuable upon conversion of $665,000 in
aggregate principal amount of our 6% Convertible Promissory Notes and 332,500
shares of our common stock issuable upon exercise of warrants issued to the
purchasers of our notes. These notes and warrants were issued pursuant to the
terms of a Note and Warrant Purchase Agreement, dated September 26, 2002. The
transactions set forth in the Note and Warrant Purchase Agreement were completed
on October 30, 2002.
The 6% Convertible Promissory Notes bear interest at rate of 6% per annum
and are due and payable one year from the date of issuance. Each holder of 6%
Convertible Promissory Notes have the option, on or prior to the maturity date,
to convert the principal amount of the note, together with accrued and unpaid
interest, into shares of common stock of the Company. The number of shares of
common stock issuable upon conversion of each note is determined by dividing the
conversion amount by $1.00.
The warrants issued to the note holders have a per share exercise price of
$1.50 and a term of two years from the issuance date. In the event we undertake
certain corporate events, such as a stock dividend, stock-split, reverse stock
split, reorganization, reclassification, merger or similar transactions, the
number of shares of common stock and/or exercise price are subject to adjustment
in accordance with the terms of the warrant.
We granted demand registration rights to the purchasers of the notes and
warrants pursuant to the terms of a registration rights agreement. Holders of
the majority of the shares issuable upon conversion of the notes and underlying
the warrants have requested that we file a registration statement to register
the resale of the shares of common stock issuable upon conversion of the notes
and upon exercise of the warrants. We must follow the procedures set forth in
the registration rights agreement if we are asked to file a registration
statement. We are only required to do this once. There are limitations on our
obligation to comply with a demand to register shares of common stock underlying
these securities.
Common Stock Purchase Agreement
In this prospectus, we are also registering the resale of an aggregate of
264,550 shares of our common stock issued to Mr. Anthony Silverman pursuant to a
Common Stock Purchase Agreement dated August 30, 2002. We are also registering
the resale of an aggregate of 400,000 shares of our common stock issued to Mr.
Silverman in consideration for business and other related assistance he is
providing.
The warrants issued to Mr. Silverman have a per share exercise price of
$1.25 for 200,000 of such shares and $2.50 for the remaining 200,000 shares. The
warrants have a term of two years from the issuance date contain adjustment
provisions similar to those provisions described generally above.
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.
SINCE WE ARE DEPENDENT ON COMPONENTS OF OUR LICENSE AGREEMENT WITH SOFTALK, ANY
MATERIAL CHANGES IN THIS AGREEMENT COULD ADVERSELY IMPACT OUR BUSINESS AND
FUTURE OPERATIONS.
We are dependent on components of our license 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 September 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 2002, we obtained a court order/injunction requiring Softalk to
monitor and maintain our communication network during a commercially reasonable
transition period. Softalk failed to comply with this court order/injunction and
has, instead, responded by making allegations of its own against us for alleged
breaches of the Softalk license agreement. On making its allegations, Softalk
has threatened to terminate the license agreement. We believe Softalk's
allegations are without merit and are responding by asserting our rights under
our agreements with Softalk and at law. 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, or the termination thereof, such an outcome could
materially adversely impact our business and future operations.
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 ten years. Our Bestnetcall service
is a unique value-generating product. Based on our marketing efforts to date it
is still too early to determine if the Bestnetcall service will likely achieve
broad commercial acceptance by Internet users. The failure to achieve broad
market acceptance will have a material adverse effect on our business, financial
condition and results of operations. Our risks include the following:
* evolving and unpredictable business models;
* management and funding of growth;
* our ability to anticipate and adapt to developing international
markets;
* acceptance by Internet users;
* our ability to establish relationships with additional strategic
partners; and
* the maintenance of our network at a high level of quality to support
commercial acceptance of the Bestnetcall service.
To address these risks we must, among other things:
* attract and retain frequent users of its services in its target
markets;
* continue to provide value creating services for current and future
customers;
* grow usage by our existing customer base;
* attract a significant number of new Internet telephony business
customers in target markets;
7
* expand value-added services;
* successfully respond to competitive developments;
* continue to form and maintain relationships with strategic partners;
* continue to attract, retain and motivate qualified personnel;
* provide superior customer service; and
* continue to develop and upgrade technologies and commercialize value
creating Internet based services.
A FAILURE BY PARTIES THAT MAINTAIN PHONE AND DATA LINES TO SERVICE SUCH LINES OR
AN INCREASE IN THE PRICE FOR MAINTAINING PHONE AND DATA LINES MAY DISRUPT
BESTNET'S BUSINESS.
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, which has become increasingly likely in light of the deregulation,
then our profitability will be materially adversely affected. They may also fail
to properly maintain their lines and disrupt our ability to provide service to
its customers. Any failure by these third parties to maintain these lines and
networks that leads to a material disruption of our ability to complete calls
over the Internet would have a material adverse affect on our business,
financial condition and results of operations. 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
its network as currently configured, then our business, financial condition and
results of operations would be materially adversely affected.
THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO DOMESTIC GOVERNMENTAL REGULATION
AND LEGAL UNCERTAINTIES, WHICH, IF INCREASED OR CHANGED, COULD MATERIALLY
ADVERSELY AFFECT THE COMPANY'S BUSINESS.
While the FCC 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 our industry. For Example, the FCC is currently
considering, whether to impose surcharges or other regulations upon certain
providers of Internet telephony, primarily those that provide Internet telephone
services to end-users located within the U.S. To date this has not been done
however, the imposition of such surcharges or the regulation of Internet
telephony providers both in the U.S. and internationally could increase the cost
of doing business over the Internet and materially adversely affect our
business, financial condition and results of operations.
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. There can be no assurance that
government agencies will not increasingly regulate 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
materially adversely affect our business, financial condition and results of
operations.
THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO INTERNATIONAL GOVERNMENTAL
REGULATION AND LEGAL UNCERTAINTIES, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR
BUSINESS.
We are marketing our services to international long distance callers in
over 140 countries around the world. Because we conduct business
internationally, we are subject to certain direct or indirect risks. These risks
could include:
* unexpected changes in regulatory requirements for the Internet and/or
Internet telephony;
8
* 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.
* Changes in regulations and tax could have an adverse effect on our
revenue and costs.
BESTNET HAS A HISTORY OF OPERATING LOSSES AND MAY NEVER GENERATE OPERATING
INCOME FROM THE SALE OF ITS BESTNETCALL SERVICE.
As of August 31, 2002, we had an accumulated deficit of $23,488,980. Prior
year's financial information has no particular bearing on future years' results
because the focus of our business has changed from calling card services to
Internet telephony.
We believe that our future profitability and success will depend in large
part on our ability to generate revenue from the sale of our Bestnetcall service
to businesses. Revenues are also anticipated from the sub-licensing of
proprietary technology and business systems to partners around the world. The
profitability and success of BestNet will depend on:
* our ability to maintain existing corporate relationships and our
ability to enter into new relationships.
* our ability to retain the right to sell value added Internet based
services;
* our ability to effectively create and maintain relationships with
multinational partners;
* our ability to successfully enter into new strategic relationships for
distribution and increased usage of the Bestnetcall services; and
* our ability to generate sufficient sales volume.
Accordingly, we expect to continue to expend significant financial and
management resources on the rollout of our Bestnetcall service, strategic
relationships, sales and marketing along with operating improvements to meet
specific client needs. 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, then 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.
CONFLICTS OF INTEREST COULD CONTINUE TO ARISE WHICH MATERIALLY ADVERSELY AFFECT
BESTNET, ITS BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Conflicts of interest could continue to arise between our affiliates, and
us, including Softalk, in areas relating to past, ongoing and future
relationships, including:
* the Bestnetcall license agreement, corporate opportunities, indemnity
arrangements, tax and intellectual property ownership matters;
* potential acquisitions or financing transactions; and
* sales or 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 arising out of the
active arbitration. Such amendments, modifications or waivers may adversely
affect our business, financial condition and results of operations. Ownership
interests of directors or officers in BestNet common stock, or serving as both a
9
director/officer of BestNet 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.
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
international markets. These risks could impair our ability to expand
internationally as well as have a material adverse effect upon our overall
business operations, growth and financial condition. In addition, international
regulations continue to change and could effect adversely business that we
currently have along with business that we will develop in the future.
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 are able to ensure the secure transmission of confidential
customer information both voice and data. 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 the Internet is not secure, even if unfounded,
means that fewer consumers might use our services. 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.
In our Articles of Incorporation, we are authorized to issue up to
50,000,000 million shares of common stock. The Board of Directors may authorize
the issuance of shares of stock for such consideration, as it deems adequate.
Additional shares of common stock may be issued to raise capital, to purchase
property or rights, and upon exercise of warrants, options, or other derivative
instruments. We are also authorized to issue up to 10,000,000 million shares of
preferred stock, in one or more series, and to determine the price, rights,
preferences and privileges of the shares of each such series without any further
vote or action by the stockholders. The rights of the holders of common stock
will be subject to, and may be adversely affected by, the rights of the holders
of any shares of preferred stock that may be issued in the future. Preferred
stock may be issued that is convertible into shares of common stock at
conversion prices that might not be related to the then current market price.
The market price of our common stock may decrease as more shares of common stock
become available for trading. The equity interest of the shareholders in BestNet
also may be reduced through the issuance of new common stock required to further
fund our company.
THE CURRENT CAPITALIZATION COULD DELAY, DEFER, OR PREVENT A CHANGE OF CONTROL.
We are authorized to issue up to 50,000,000 shares of common stock and up
to 10,000,000 shares of preferred stock, in one or more series, and to determine
the price, rights, preferences and privileges of the shares of each such series
without any further vote or action by the stockholders. The issuance of
preferred stock could have the effect of making it more difficult for a third
party to acquire a majority of the outstanding voting stock of the Company,
thereby delaying, deferring, or preventing a change of control of the Company.
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
10
* 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.
BUSINESS DEVELOPMENT
We are a facilities-based, global communication solutions provider. Our
patented, proprietary technology uses widely available Internet access to
control, enable, and manage voice communications over the public switched
telecommunication network. We our a product development, marketing, sales,
sub-licensing, customer service and billing organization for patented,
packet-based Internet telephony software applications that control, manage and
enable global telecommunications services. We are presently focusing
substantially all of our financial and other resources on marketing and
development of our Bestnetcall services to individual clients and selected
companies with international locations and/or clients worldwide. As of the date
of this Report, we have approximately 13,000 clients, making calls from 142
countries and calling to 198 countries.
We develop, market and sell patented Internet-based telecommunications
applications, technologies and services to corporate and residential clients
worldwide. Bestnetcall, our flagship product, is the industry's first patented,
phone-to-phone, Internet-enabled long distance service, which combines global
internet access and the public switched telephone network via our internet
website at Bestnetcall.com. This service was first made available to the public
on April 17, 2000 and is marketed under the brand name Bestnetcall.
Although founded as a Nevada corporation on July 10, 1986, we did not
commence operations until 1995. From 1995 until 1999, we operated under the name
Wavetech International, Inc. and developed software for customized called card
services and created 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 1990s, 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 and commercializing our Bestnetcall
web-enabled long distance services. On September 27, 2000, we changed our name
to BestNet Communications Corp.
BESTNET SOLUTIONS
Users of our Bestnetcall services are able to do the following by accessing
our website at www.Bestnetcall.com:
* Register to use our Bestnetcall services
* Access and launch communication applications
* Access current rate tables and time zone charts
* Access a full suite of call management features
* Access customer service immediately via the Internet
* Maintain call account security
* Obtain real time billing detail
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--either land line or cellular.
Bestnetcall also offers immediate real time billing detail to all users and
accepts various payment methods, including pre-paid or post-paid credit card
payments and invoicing options. The architecture of Bestnetcall allows for total
security regarding both the FROM and TO legs of each call. The FROM and TO
numbers are never displayed, thus it is impossible to determine from where a
call is being placed.
Following the completion of a telephone call, the total cost for that call
could be viewed on the caller's online account. Call detail records may be
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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 our website. Account administrators may add or delete
users, view a user's calling activity and create reports detailing call
activity.
We license the technology upon which our Bestnetcall service is based from
Softalk, Inc., an Ontario, Canada-based technology company. We entered into our
license agreement with Softalk in April 1999 and later amended and restated that
arrangement in October 1999. Under the terms of this license agreement, Softalk
granted to 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 own and operate facilities in Toronto, Canada and New York, New York
including high-capacity switches, web servers, data base servers, calling
servers and security systems. In addition, we make use of specialized software
for data management, billing and customer service requirements. For cost
optimization reasons, we shut down our facilities in Los Angeles in the third
quarter of fiscal 2002. The equipment remains ready for redeployment when
necessary.
PRODUCT SUITE
Our Bestnetcall service includes the following suite of communication
features:
BestNet WEBCALL - Long Distance Calling
Clients utilizing our Bestnetcall service can decrease the cost of their
long distance service while still retaining the toll quality for global
communication needs. 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, e-mail calling, billing
codes, country and city code look-up, time zone information and dialing
examples.
BestNet CONFERENCECALL - 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 compared the value of this conference-calling service to
similar services available in the marketplace and believe it highly competitive.
BestNet DESKTOPCALL - Desktop Application
Bestnetcall also has a desktop application that can be downloaded from our
website. Calls can then be launched from the desktop application instead of from
a web browser. This feature is particularly useful for clients with slow
Internet connections. Calls are launched in a similar manner to our web product.
All calls are still charged to the same account and on-line billing information
may also be viewed. Calls can also be launched directly from Microsoft Outlook
using a Bestnetcall Outlook add-in and the desktop.
BestNet EMAILCALL - E-mail Application
Bestnetcall e-mail application can be used from any e-mail device such as
MS Outlook, Blackberry and cell phones to initiate calls. This patent-pending
technology uses simple commands sent by e-mail to launch calls to any nearby
phone, such as a pay phone, home phone or cell phone. Clients enter defined
calling instructions to the destination of their choice. EmailCall has many
convenience features, such as the ability to use a caller's personal webCall
directories and billing codes.
BestNet SATCALL - 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 via our web site at
www.bestnetsat.com.
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BestNet PDACALL - Mobile Calling
Bestnetcall has developed a Palm OS application, which is ideal for
wireless PDA devices, including devices offered by Palm, Handspring and Kyocera.
Our software, which emulates our BestNet desktop service, gives the user the
ability to launch low-cost long distance calls or conference calls using a PDA
device to control the call. Applications also have been developed for
micro-browser equipped PDA's such as Compaq's iPAQ.
All calls from these devices are billed in the same way as calls placed
through our web product.
MARKETING STRATEGIES
We offer our Bestnetcall service through both direct sales and indirect
sales channels. Our initial target markets include:
* Large Corporate / Enterprise Clients
* Internet Service Providers
* Mid-sized to Small Office Home Office
* Marketing and Channel Partners
* Reseller, VAR and Integrators
* Technology and Telecommunications Consultants
* Consumers
Our marketing efforts are targeted at international long distance and
conference calling clients in a number of key geographic areas in the world. Our
priorities are focused primarily on the following geographic regions:
* Central and South America
* North America
* Asia Pacific
* Europe
* Middle East
* Caribbean
DIRECT SALES
Our direct sales activities are comprised of the following marketing and
sales strategies designed to generate revenue and increase customer usage of our
Bestnetcall service:
* Web Channel - This method of marketing, which represents the majority
of our revenue, consists of marketing all of our branded service
offerings to individuals and business through a combination of
Internet-based marketing and third party sales relationships.
* Sales Calls - We call directly on potential clients whom we believe we
can create value for and where relationships are built to help
establish a user base that has synergy with Our product line.
14
* Direct Mail and E-mail Solicitations - We send solicitation materials
to pre-qualified potential users of our Bestnetcall service. These
materials refer or link the potential user to www.Bestnetcall.com to
facilitate activation of our 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 print and electronic media targeted at specific market
segments in the form of national or international publications. We
will consider additional initiatives such as advertising in specific
trade publications and Internet advertising during Fiscal 2003 based
on an analysis of the cost-effectiveness and results of these initial
activities.
* Public Relations Activities - We have a corporate communications and
public relations strategy is in place for developing a comprehensive
communications program. This communications program will include
initiating appropriate news releases, feature print articles in
industry and trade specific publications, local print media and
editorial support. Our Bestnetcom.com website is also being
redeveloped to include a frequently asked questions section to
facilitate direct communication with shareholders, customers and the
public-at-large. In Fiscal 2002 we retained an investor relation firm
to deal specifically with shareholders and the investment community.
INDIRECT SALES
Our indirect sales efforts are centered on 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 via private labeled Internet web sites.
* Telecom Providers - The Bestnetcall services are being made available
to other telecommunication providers, 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,
integrators 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.
* Licensed Services Channel - Seek to offer a sub-licensed program
through this sales channel in an effort to generate additional revenue
and to offer others in our industry the features and benefits our
intellectual property.
INDUSTRY BACKGROUND AND MARKET DEMAND
The Internet represents a significant interactive worldwide medium for
communications, collaborative technologies, and the telecommunications market.
Meanwhile, global deregulation, the proliferation of new technologies enabling
convergence between computers, software 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. We expect the following trends to have a direct
and positive effect on the communications market and demand for our
applications:
* 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.
Business-to-business revenue is projected to approach $1.3 trillion
according to Forrester Research.
* Globalization of the world's economies increase the international
mobility of workforces, and the opportunities that exist in the global
Internet roaming marketplace are vast. A recent report published by
Frost & Sullivan projected that the global roaming services market is
set to grow from $285 million in 2000 to $7.6 billion in 2006.
15
* 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 cell phone technology
improves, the demand for cell phones is likely to 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, is
projected to 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
by the end of 2002.
* 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 has 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.
We believe the above market trends and projections reflect a large and
growing market for potential users of internet telephony services. We believe
these market trends and projections will translate into increased demand for
providers of internet telephony services and that we are well positioned to
capture a portion of this market with our bestnetcall services.
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,
as well as following the events of September 11, 2001. We hope to capture the
promise of this sector.
THE OPPORTUNITY
We believe our most strategic business opportunity is in servicing the
telecommunications needs of the business and mobile markets, which still relay
on traditional carriers for supplying their international long distance and
conferencing services. There exists a notable price disparity between the costs
of long distance originating from the U.S., versus origination from most
international locations. The advantage of our service is three-fold. The first
advantage is our web-based interface, which provides universal access to our
network without the requirements for special software. The second advantage is
our patented methodology, which uses a two-leg call, origination and destination
leg, which works with any telephone or legacy phone system. The third advantage
is our long-distance transport. Our intelligent network is connected to multiple
tier-1 carriers where routes are chosen on the basis of price and quality. With
our network architecture, we can easily route calls over Voice over Internet
Protocol networks if there is an advantage for certain routes.
This hybrid approach to routing calls allows the universal access and cost
advantages associated with VoIP transport, without any of the disadvantages. For
this reason, business and mobile users in over 142 countries rely on BestNet to
provide a simple, viable alternative to their existing long distance provider.
BestNet provides its service without contracts or hidden charges. Our service
easily integrates within any existing legacy or PBX system.
We market our services by emphasizing the following key characteristics of
bestnetcall:
* Speed of communication - easy deployment within any environment
* Quality of communication - interconnection with tier-1 carriers ensure
highest standards
16
* Reliability of communication - carrier-class network with full
redundancy
* Ease of operation - user adoption is simple and straight forward
* Interoperability - operation with legacy systems, fixed or mobile
phones
* Capital requirement - investment by users is not required
We use the Internet to enable, control and manage the public switch
telephone network calls accessed from our central offices in New York and
Toronto. Accordingly, our technology allows us to bring 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.
INTERNET AND TELEPHONY
We believe Voice over Internet Protocol, which is commonly referred to as
VoIP, has changed the face of global telephony, as such technology has provided
millions of users worldwide a viable alternative to expensive long-distance
services provided in highly regulated or closed markets. Use of the Internet to
transport voice has many advantages, including global access and low cost per
minute rates. Providers of VoIP services, more specifically PC-to-phone
services, which terminate calls over the public switched network, have
experience the greatest adoption by personal home users, versus business users.
However, the disadvantages of PC-to-phone services are notable. VoIP is not
available for cellular users and is difficult to use with legacy PBX systems.
Other disadvantages include the requirement to buy software, configuration of
hardware and reduction in voice quality - notably echoes and delay. The new VoIP
technology has greatly improved the quality - however interoperability within
legacy phone systems remains the biggest challenge. For this reason, the
business market has been slower to adopt VoIP on any large scale.
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.
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.
INMARSAT TELEPHONY MARKET
One of the fastest growing telephony markets in the world is global
satellite telephony communications. The Inmarsat communication system consists
of five geostationary satellites circling the globe. These satellites provide
voice and data services to remote locations through a global network of
terrestrial uplink carriers. The major sectors for satellite communication
include maritime, land and aeronautical markets, with oil and gas, mining and
merchant marine industry the largest customers. According to Inmarsat, there are
currently 240,000 Inmarsat terminals in use, distributed in 150 countries,
generating an estimated $1.3 billion in long distance charges.
In 2000, BestNet developed a site specifically for the Inmarsat market
called BestNetSat.com In 2002, BestNet upgraded its service to interconnect
directly with Stratos Global, a leading Land Earth Station operator and Inmarsat
carrier. The direct connectivity to Stratos, and to the Inmarsat network, gives
us a pricing advantage over other providers - particularly foreign telecoms.
This pricing advantage, coupled with our patented call-initiation methodology,
gives us a unique advantage in this market. We are actively developing new
customer relationships and markets for the BestNetSat.com service, as the
tangible cost benefits associated with our patented technology is easily
quantified in a highly competitive and lucrative global market.
FUTURE PRODUCT STRATEGY
Communication around the globe is rapidly changing, as voice and data
networks converge, and as mediums such as instant messaging and Internet
delivery cross from the domain of desktop users to mobile devices. The
Internet's reach is wider than imagined and its growth faster than expected. The
Internet has become one of the world's largest distribution systems. It was
designed and engineered to have an abundance of routes, connections, and
elasticity. Recognizing this trend, we continue to look for new value added
service applications for Bestnetcall to bring to our existing and future
clients.
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The growth and universal acceptance of the Internet is creating new
opportunities for BestNet, where its core technology can be leveraged in unique
and creative ways. BestNet is a highly efficient interface, linking traditional
circuit switched networks with the global access of the Internet. Our goal is to
make access to its long distance and conference network as transparent as
possible, using a variety of interfaces and devices. For enterprise markets,
this could include integration into CRM applications, company Intranet's,
websites, PBX systems and IP devices. For personal users, the BestNet
application can be easily integrated into Internet appliances, PDA's, and mobile
devices, using technology such as WAP, SMS or instant messaging as a conduit to
Our network.
BestNet intends to further develop its core network to be a universal
interface, where intelligence and functionality can easily be added to the
front-end, without having to modify its core database and call control
functionality. As an example, this universal interface can be a platform where
third parties using industry compliant standards, develop customized web-based
services such as foreign currency billing and directories that are localized for
specific customers, or foreign markets.
In fiscal 2003, we plan to introduce a variety of new services and product
enhancements - all based on its core technology platform. These new services and
products include the following:
* Call Button - Currently on the Bestnetcall website as a feature, the
BestNet subscriber can configure a graphical button to be used as an
alternative 1-800 service. The button can be sent via e-mail or
included in an electronic document such as a Word document or
PowerPoint presentation. Unlike conventional toll-free services, the
subscriber will pay less per minute, can direct the incoming call to
any phone, protect the privacy of their own phone number and provide
access beyond the geographic limitations imposed by traditional
services.
* Call-enabled websites / banners - Similar in operation to the Call
Button - the underlying technology can be used to enable a web visitor
to click on an icon, or a banner to initiate a call. For example, a
sales organization can have an icon on its website, inviting foreign
customers to initiate a toll-free call to the sales organization's
call center. We believe the market potential for this application is
promising. According to Datamonitor, e-retailers will spend $460
million on e-service solutions. In addition, Forrester Research has
reported that 67% of online transactions are aborted because of poor
interactivity. Our technology is a ideal solution to poor
interactivity and inefficient access to customer service.
* Mobile Access--Recognizing the enormous growth in the mobile market
and wide-scale adoption of data-communication, such as short messaging
service and WAP. BestNet intends to introduce services specific to the
needs of the mobile market. Short messaging service, which was
introduced to allow simple user-to-user communication, can be an
efficient communication medium to Our network. Text messaging has
caught fire in Europe and Asia. The U.S market is lagging behind, but
is poised to catch-up. According to Mobile Lifestreams, monthly SMS
volume will reach 62.4 billion by the end of the year.
* Conferencing--Over the last year, use of Our conferencing application
has increased dramatically. Our conferencing service can connect up to
64 participants, which is easily controlled by a conference host using
either the Desktop, Web or Palm (OS) application. BestNet can connect
any phone, including home, office or mobile, to the conference. As a
result of customer feedback, BestNet intends to enhance the
functionality of its service. This may include the addition of dial-in
capability, 800 or toll, call recording, operator services and
collaborative white-boards.
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NETWORK STRUCTURE
Our network equipment is currently housed in central office facilities
located in New York and Toronto. Our system is designed to support over 15
million minutes of voice traffic per month. Our system capacity can be easily
increased as demand for our services increases. Currently we have substantial
excess capacity. We are now performing our own network monitoring and
maintenance functions, which were previously performed by Softalk.
Texas Net, located in Austin, Texas, hosts our Web servers. Our
configuration has redundant servers with load balancing for optimum performance.
Texas Net provides web server monitoring on a 24 x 7 basis.
Our switching matrix is located in our central office facilities and
includes direct connectivity to tier-1 carriers. We have multiple carrier
connections at each switch location, which provides excellent back-up coverage
and the ability to reroute calls to obtain the highest quality connections
available. Our carrier configuration also allows us to take advantage of the
highest value, ie., highest quality/lowest price, service offered by our
carriers to each country and region we service.
For cost optimization reasons, we shut down our facilities in Los Angeles
in the third quarter of our 2002 fiscal year, which ended August 31, 2002. As a
result of the available capacity of our New York and Toronto facilities,
together with accessibility to carriers at these locations, we determined that
our Los Angeles facility was not needed at this time. Equipment has been stored
for easy deployment when it is needed in the future.
Currently all of our voice traffic is carried by our tier-1 carriers via
their preferred traffic routes. As VoIP continues to evolve, we will continue to
evaluate its application as a means of delivering quality service for our
customers.
SOFTALK LICENSE AGREEMENT
Under the terms of our license agreement with Softalk, we are obligated to
pay Softalk an amount equal to the sum of 100% of Softalk's actual direct
expenses incurred in connection with the sale, license and delivery of Softalk
products and a 5% markup of the total traffic on the wholesale long distance per
minute line costs on a monthly basis.
Both parties have the right to terminate the license agreement under
certain conditions, including:
* Upon 30 days written notice to the other party, if such other party
fails to comply in any material respect with certain terms or
conditions of the license agreement and such failure to comply is not
corrected within such 30 day notice period;
* 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.
Softalk also has the right to terminate the license agreement upon 60 days
written notice following a change of control of BestNet.
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, upon the point of termination.
We presently have several ongoing disputes with Softalk over matters
involving the license agreement and related aspects of our contractual
agreements with Softalk. These disputes include breach of contract allegations
by Softalk and efforts to terminate the license agreement. We believe Softalk's
allegations are without merit and intend to vigorously defend against Softalk's
ongoing efforts to terminate the license agreement. See the disclosure under the
caption "Item 13. Certain Relationships and Related Transactions" in our Form
10-KSB for the fiscal yearn ended August 31, 2002, for more information
regarding the various agreements entered into between BestNet and Softalk. See
also the disclosure under "Item 3. Legal Proceedings" in our Form 10-KSB for a
discussion regarding our present legal issues with Softalk.
19
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.
APPLICABLE REGULATIONS
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
20
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. In
preparation of this prospectus, we specifically sought any changes in
regulations and or tax relative to services we provide in the United States. We
found no changes.
EMPLOYEES
On November 7, 2002, we employed 10 full-time employees. We believe 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 our relations with employees to be
good.
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
The Company's common stock was quoted on the Nasdaq SmallCap Market until
May 4, 1999, and then on the OTC Bulletin Board from June 28, 1999 to the
present. The high and low bid prices of the Company's common stock as reported
from September 1, 2000 through August 31, 2002 by fiscal quarters (i.e., 1st
Quarter = September 1 through November 30) were as follows.
HIGH LOW
------- -------
FISCAL YEAR ENDED:
August 31, 2000
First Quarter 4.25 1.46875
Second Quarter 10.25 4.125
Third Quarter 9.5 5.00
Fourth Quarter 7.25 3.81
FISCAL YEAR ENDED:
August 31, 2001
First Quarter 6.125 .875
Second Quarter 3.375 .5625
Third Quarter 3.60 .55
Fourth Quarter 4.40 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
The bid and asked prices of our common stock on November 7, 2002, were
$1.06 and $1.12, respectively.
As of November 7, 2002, the Company had 148 shareholders of record of its
common stock. As of November 7, 2002, the Company had 2,001 shareholders that
beneficially own the stock in the name of various brokers.
21
The Company has never declared any cash dividends on common stock and
currently plans to retain future earnings, if any, for business growth.
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 incompliance with
Nasdaq's $1.00 minimum bid price requirements. 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 $1,248,750 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.
22
TOTAL SHARES OF PERCENTAGE
COMMON STOCK TOTAL PERCENTAGE SHARES OF PERCENTAGE OF COMMON
ISSUABLE UPON OF COMMON STOCK, COMMON BENEFICIAL OF COMMON BENEFICIAL STOCK
EXERCISE OF ASSUMING FULL STOCK OWNERSHIP STOCK OWNERSHIP OWNED
WARRANTS/CONVERSION EXERCISE/ INCLUDED IN BEFORE BEFORE AFTER AFTER
OF NOTES CONVERSION(1) PROSPECTUS(1) OFFERING(1) OFFERING(1) OFFERING(2) OFFERING(2)
-------- ------------- ------------- ----------- ----------- ----------- -----------
Lynette F. Moss 45,000(3) * 45,000 45,000 * -0- -0-
Michael D. Mercer 60,000(4) * 60,000 60,000 * -0- -0-
S & J Veal 75,000(5) * 75,000 75,000 * -0- -0-
Sanders Family
Limited Partnership 150,000(6) * 150,000 150,000 * -0- -0-
Morgan Stanley,
Custodian for
Jerry Peterson
IRA Rollover 300,000(7) 1.5% 300,000 300,000 1.5% -0- -0-
Marlene Huls 37,500(8) * 37,500 37,500 * -0- -0-
Hulzar 75,000(9) * 75,000 75,000 * -0- -0-
Marlin Hull LLC 37,500(10) * 37,500 37,500 * -0- -0-
Gary L. Boster IRA 75,000(11) * 75,000 75,000 * -0- -0-
Thomas & Virginia Miller 105,000(12) * 105,000 105,000 * -0- -0-
Gary L. Boster 37,500(13) * 37,500 37,500 * -0- -0-
Anthony Silverman 664,550(14) 3.4% 664,550 2,164,550 11.4% 1,500,000 7.9%
- ----------
* 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 purchasable upon
exercise of the warrants is subject to adjustment based on certain corporation
events that may or may not occur in the future, and could vary materially from
the number set forth in the table. The beneficial ownership for each person
listed in this table is provided to the Company's knowledge.
23
(1) Amounts and percentages are based upon 19,059,839 shares of our common
stock outstanding as of November 7, 2002 plus, for each person or entity in this
table, the shares to be issued upon exercise of the warrants, upon conversion of
the notes, or both, as the case may be.
(2) Assumes that all securities registered will be sold.
(3) Consists of 30,000 shares of common stock issuable upon conversion of
6% convertible promissory notes and 15,000 shares issuable upon exercise of
immediately exercisable warrants.
(4) Consists of 40,000 shares of common stock issuable upon conversion of
6% convertible promissory notes and 20,000 shares issuable upon exercise of
immediately exercisable warrants.
(5) Consists of 50,000 shares of common stock issuable upon conversion of
6% convertible promissory notes and 25,000 shares issuable upon exercise of
immediately exercisable warrants.
(6) Consists of 100,000 shares of common stock issuable upon conversion of
6% convertible promissory notes and 50,000 shares issuable upon exercise of
immediately exercisable warrants.
(7) Consists of 200,000 shares of common stock issuable upon conversion of
6% convertible promissory notes and 100,000 shares issuable upon exercise of
immediately exercisable warrants.
(8) Consists of 25,000 shares of common stock issuable upon conversion of
6% convertible promissory notes and 12,500 shares issuable upon exercise of
immediately exercisable warrants.
(9) Consists of 50,000 shares of common stock issuable upon conversion of
6% convertible promissory notes and 25,000 shares issuable upon exercise of
immediately exercisable warrants.
(10) Consists of 25,000 shares of common stock issuable upon conversion of
6% convertible promissory notes and 12,500 shares issuable upon exercise of
immediately exercisable warrants.
(11) Consists of 50,000 shares of common stock issuable upon conversion of
6% convertible promissory notes and 25,000 shares issuable upon exercise of
immediately exercisable warrants.
(12) Consists of 70,000 shares of common stock issuable upon conversion of
6% convertible promissory notes and 35,000 shares issuable upon exercise of
immediately exercisable warrants.
(13) Consists of 25,000 shares of common stock issuable upon conversion of
6% convertible promissory notes and 12,500 shares issuable upon exercise of
immediately exercisable warrants.
(14) Consists of 1,764,550 shares of common stock and 400,000 shares of
common stock issuable upon exercise of immediately exercisable warrants.
Except for Mr. Silverman, 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 have entered into a consulting agreement with Mr.
Silverman pursuant to which he provides business advisory services to the
Company.
We may amend or supplement this prospectus, from time to time to update the
disclosure.
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
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.
25
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 on Form
10-KSB for the fiscal years ended August 31, 2002 and 2001, 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, 2002.
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.
26
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 $ 138
Legal Fees and Expenses $ 5,000
Accounting Fees and Expenses $ 5,000
Printing and Engraving Expenses $ 1,000
Miscellaneous $ 5,000
-------
Total $16,138
=======
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.
27
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, as amended,
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, as amended, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
3. The undersigned registrant hereby undertakes to remove from registration
by means of a post-effective amendment any of the securities being registered
that 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, as amended, each
filing of the registrant's annual report under Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934, as amended (and, where applicable, each
filing of an employee benefit plan's annual report under Section 15(d) of the
Securities Exchange Act of 1934, as amended) 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, as amended;
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, as amended, 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 Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of 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
Securities Act of 1933, as amended, and will be governed by the final
adjudication of such issue.
28
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 Grand Rapids, State of Michigan, on November 27,
2002.
BESTNET COMMUNICATIONS CORP.
By: /s/ Robert A. Blanchard
------------------------------------
Robert A. Blanchard, President and
Chief Executive Officer
By: /s/ Paul H. Jachim
------------------------------------
Paul H. Jachim, Chief Financial
Officer and Chief Operating Officer
(Principal Financial and Accounting
Officer)
The officers and directors of BestNet Communications Corp. whose signatures
appear below, hereby constitute and appoint Robert A. Blanchard and Paul H.
Jachim as their true and lawful attorneys-in-fact and agents, 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
attorneys-in-fact and agents, or their substitutes, shall do or cause to be done
by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, as
amended, this amended 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/ Robert A. Blanchard President, Chief Executive November 27, 2002
- ------------------------ Officer, Acting Chairman
Robert A. Blanchard and Director
/s/ Paul H. Jachim Chief Financial Officer, November 27, 2002
- ------------------------ Chief Operating Officer
Paul H. Jachim and Director (Principal
Financial and Accounting
Officer)
/s/ Herman Haenert Director November 27, 2002
- ------------------------
Herman Haenert
29
EXHIBIT INDEX
EXHIBIT PAGE NUMBER OR
NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------- ----------------
4.1 Form of Warrant Issued to Anthony Silverman *
4.2 Form of Warrant Issued to the Purchasers of BestNet's
6% Convertible Promissory Notes in October 2002 *
10.1 Common Stock Purchase Agreement, dated as of August
30, 2002, between BestNet and Anthony Silverman *
10.2 Form of Note and Warrant Purchase Agreement, dated
as of October 30, 2002, between BestNet and the
Investors Signatory thereto (including form of note) *
10.3 Form of Registration Rights Agreement, dated as of
October 30, 2002, between BestNet and the Investors
Signatory thereto *
5.1 Opinion re: legality of the securities being registered (1)
23 Consent of Independent Auditors, Semple & Cooper LLP *
24 Powers of Attorney Included in
Signature Page
- ----------
* To be filed by amendment.
(1) Filed herein.
30