-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NQXt4401hX5afbWd6Q1QE0qKpL/iAZ1OEt7B7fxWobu1QiKKDncjJRri/2gAHn59 2OQeHNdQXx5lvNQubDaHrQ== 0000950147-02-000315.txt : 20020414 0000950147-02-000315.hdr.sgml : 20020414 ACCESSION NUMBER: 0000950147-02-000315 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20020222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BESTNET COMMUNICATIONS CORP CENTRAL INDEX KEY: 0000799694 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 861006416 STATE OF INCORPORATION: NV FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: S-2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-83188 FILM NUMBER: 02555614 BUSINESS ADDRESS: STREET 1: 5210 E WILLIAMS CIRCLE STREET 2: STE 200 CITY: TUCSON STATE: AR ZIP: 85711 BUSINESS PHONE: 5207509093 MAIL ADDRESS: STREET 1: 5210 E WILLIAMS CIRCLE CITY: TUCSON STATE: AZ ZIP: 85711 FORMER COMPANY: FORMER CONFORMED NAME: WAVETECH INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WAVETECH INTERNATIONAL INC DATE OF NAME CHANGE: 19980225 S-2 1 e-8189.txt REGISTRATION STATEMENT OF BESTNET COMMUNICATIONS As filed with the Securities and Exchange Commission on February ___, 2001 Registration No. 333-_______ ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 BESTNET COMMUNICATIONS CORPORATION (formerly WAVETECH INTERNATIONAL, INC.) (Exact name of registrant as specified in its charter) Nevada 86-1006416 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5075 East Cascade Road, Suite K, Grand Rapids, Michigan 49546 (616) 977-9933 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Copies to: Robert A. Blanchard Gregory Hall, Esq. BestNet Communications Corp. Squire, Sanders & Dempsey, LLP 5075 East Cascade Road, Suite K, 40 North Central, Suite 2700 Grand Rapids, Michigan 49546 Phoenix, Arizona 85004 (616) 977-9933 (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 AMOUNT OF TITLE OF EACH CLASS OF SHARES TO BE OFFERING PRICE PER MAXIMUM AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED(1) SHARE UNIT(2) OFFERING PRICE(2) FEE(7) - -------------------------------------------------------------------------------------------------- Common Stock, $.001 par value 200,000(4) $0.74 $148,000 $13.62 Common Stock, $.001 par value 194,915(5) $0.74 $144,237 $13.27 Common Stock, $.001 par value 5,570(6) $0.74 $ 4,255 $ 0.39 Common Stock, $.001 par value 519,750(3) $0.74 $384,615 $35.38 ---------- -------- ------ Total: 920,235 $681,107 $62.66 ==================================================================================================
(1) 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 February 19, 2002. (3) Represents the estimated number of shares of our common stock issuable pursuant to the stock purchase agreement, by and between BestNet and Jay Greig, Ph.D., dated February 21, 2002. (4) Represents the number of shares of our common stock issuable upon the exercise of warrants issued to Network Twentyone International, Inc. on April 21, 2001. (5) Represents the estimated number of shares of our common stock issuable upon conversion of our Series C 8% cumulative convertible stock, $.001 par value per share, issued to Laurus Master Fund, Ltd. on January 30, 2002. (6) Represents the number of shares of our common stock issuable upon exercise of 5,750 warrants issued to Laurus Master Fund, Ltd. on January 30, 2002. (7) Previously paid. 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 FEBRUARY __, 2002 Prospectus BestNet Communications Corp. Up to 920,235 Shares of Our Common Stock This prospectus relates to the resale by the selling stockholders of up to 920,235 shares of our common stock consisting of (i) 200,000 shares of our common stock issuable upon exercise of warrants issued to Network Twentyone International, Inc. on April 23, 2001, (ii) 194,915 shares of our common stock issuable upon conversion of our series C 8% cumulative convertible preferred stock, $.001 par value per share, issued to Laurus Master Fund, Ltd. on January 30, 2002, (iii) 5,750 shares of our common stock issuable upon exercise of warrants issued to Laurus Master Fund, Ltd. on January 30, 2002, and (iv) up to 519,750 shares of our common stock issuable pursuant to the Stock Purchase Agreement by and between BestNet and Jay Greig, Ph.D., dated February 21, 2002. The selling stockholders may sell the common stock from time to time in the principal market on which the stock is traded at the prevailing market price or in negotiated transactions. The selling stockholders may be deemed to be underwriters of the shares of common stock, which they are offering. Please see the "Selling Stockholders" section on page 22 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. Our common stock is traded on the NASDAQ Over-the-Counter Bulletin Board under the symbol BESC.OB. On February 19, 2002, the closing sale price of our common stock was $0.74. Investing in our common stock involves a high degree of risk. See Risk Factors on page 6. 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 February __, 2002. TABLE OF CONTENTS Page ---- WHERE YOU CAN FIND MORE INFORMATION............................................1 INCORPORATION OF DOCUMENTS BY REFERENCE........................................1 SUMMARY........................................................................2 BESTNET COMMUNICATIONS CORP....................................................2 SELECTED AND SUMMARY CONSOLIDATED FINANCIAL DATA...............................4 THE OFFERING...................................................................5 SECURITIES BEING ISSUED........................................................5 RISK FACTORS...................................................................7 BESTNET COMMUNICATIONS CORP...................................................11 USE OF PROCEEDS...............................................................21 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................21 SELLING STOCKHOLDERS..........................................................22 PLAN OF DISTRIBUTION..........................................................23 DETERMINATION OF OFFERING PRICE...............................................25 DESCRIPTION OF SECURITIES.....................................................25 LEGAL MATTERS.................................................................25 EXPERTS.......................................................................25 INFORMATION WITH RESPECT TO THE REGISTRANT....................................25 DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES..................................................25 i WHERE YOU CAN FIND MORE INFORMATION We file reports and other information with the U.S. Securities and Exchange Commission. You may read and copy any document that we file at the SEC's public reference facilities at 450 Fifth Street N.W., Room 1024, Washington, D.C. 20549. Please call the SEC at 1-800-732-0330 for more information about its public reference facilities. Our SEC filings are also available to you free of charge at the SEC's web site at http://www.sec.gov. Copies of publicly available documents that we have filed with the SEC can also be inspected and copied at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. This prospectus is a part of the registration statement that we filed on Form S-2 with the SEC. The registration statement contains more information about us and our common stock than this prospectus, including exhibits and schedules. You should refer to the registration statement for additional information about us and the common stock being offered in this prospectus. Statements that we make in this prospectus relating to any documents filed as an exhibit to the registration statement or any document incorporated by reference into the registration statement may not be complete and you should review the referenced document itself for a complete understanding of its terms. INCORPORATION OF DOCUMENTS BY REFERENCE The SEC allows us to incorporate by reference the information we file with them. This means that we can disclose information to you by referring you to those documents. The documents that have been incorporated by reference are an important part of the prospectus, and you should review that information in order to understand the nature of any investment by you in the common stock. Information contained in this prospectus automatically updates and supersedes previously filed information. We are incorporating by reference the documents listed below and all of our filings under the Securities Exchange Act of 1934, as amended, after the date of filing the initial registration statement and prior to the effectiveness of the registration statement. * our annual report on Form 10-KSB for the fiscal year ended August 31, 2001; * our quarterly report on Form 10-QSB for the quarterly period ended November 30, 2001; * our current report on Form 8-K dated October 11, 2001; * the description of our common stock included in our Registration Statement on Form 8-A, filed March 11, 1987; and * the description of our series C 8% cumulative convertible preferred stock included in our Registration Statement on Form S-2, filed November 21, 2001. 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. 1 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 5 of this prospectus. Throughout this prospectus, we refer to BestNet Communications Corp. as BestNet, we, our, ours, and us. BESTNET COMMUNICATIONS CORP. Founded on July 10, 1986, BestNet Communications Corp. is a Nevada corporation that develops, markets and sells Internet-based telecommunications technologies. Although founded in 1986, we did not begin our operations until 1995. From 1995 until June 1999, we developed software for customized calling card services and created an infrastructure to market and distribute our products and services. During this period, our efforts were primarily focused on hiring management and other key personnel, raising capital, procuring governmental authorizations and space in central offices, acquiring equipment and facilities, developing, acquiring and integrating billing and database systems. We marketed these systems to the business traveler and to large organizations or companies with a membership base. In the late 1990's, due to the wide scale deployment of cellular telephones with messaging capability, the market for business related calling card services greatly diminished. In June 1999, we discontinued our calling card services. At August 31, 2001 and November 30, 2001, we had an accumulated deficit of $17,020,532 and $18,426,464, respectively. We had net losses for the fiscal year ended August 31, 2001 and fiscal quarter ended November 30, 2001, of $4,014,810 and $1,405,932, respectively. We expect to continue to spend considerable financial and management resources on the roll-out of our Bestnetcall service which is described below. Further, we have substantial future capital requirements with respect to the roll-out of our Bestnetcall service. Accordingly, we expect to continue to incur significant additional losses and continued negative cash flow from operations for the foreseeable future. Since June 1999, substantially all of our business and financial resources have been focused on developing a web-enabled long distance service called Bestnetcall, which is our only Internet-based telecommunications technology. Bestnetcall was first made available to the public on April 17, 2000. We are presently focusing substantially all of our resources on marketing Bestnetcall to selected companies with international locations or clients. We are licensing the technology that comprises our Bestnetcall service from Softalk, Inc. Softalk is a technology company based in Ontario, Canada. Softalk develops Internet-based telecommunication technologies, and has performed substantially all of our development activities. Our Bestnetcall service allows people to initiate and complete long distance telephone calls by using the Internet. Users of Bestnetcall may enroll, place calls, pay for service and access customer service real-time on the Internet by accessing our website at www.bestnetcall.com. Bestnetcall does not require the purchase of special hardware or software by the customer and uses their existing telephone equipment. Users only need access to the Internet and an available phone line. Bestnetcall also offers real-time billing to all users and accepts various payment methods, including pre-paid or post-paid credit card payments and invoicing options. We intend to offer our Bestnetcall service through both direct sales and indirect sales channels. Our initial target markets will include: * Governments * Business and Industry * Commercial Development Companies * Telecommunication Companies * Companies which provide access to the internet * Browser Based Services, such as Internet Explorer, Yahoo and Amazon.com * Affinity Groups * Other organizations, including charities, religious organizations, schools and alumni associations These marketing efforts will be targeted at international long distance users in a number of key geographic areas in the world. Our priorities will be focused primarily on the following geographic regions: 2 * Caribbean * North America * Asia Pacific * Central & South America * Europe * Middle East Today's telecom industry is being shaped dramatically by globalization, new competition, and use of technology. The telecommunications market is one of the largest markets in the world, second only to the financial markets. The International Telecommunications Union forecast 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 long distance and related services. Our principal executive offices are located at 5075 East Cascade Road, Suite K, Grand Rapids, Michigan 49546. Our telephone number is (616) 977-9933. BestNet wholly owns its four subsidiaries, Interpretel, Inc., Interpretel (Canada) Inc., Telplex International Communications, Inc. and Bestnet Travel, Inc. 3 SELECTED AND SUMMARY CONSOLIDATED FINANCIAL DATA The following selected and summary consolidated financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and our financial statements and the related notes included elsewhere in this prospectus. The selected consolidated statement of operations data for the years ended August 31, 1996, 1997, 1998, 1999, 2000, and 2001 are derived from our audited financial statements not included elsewhere in this prospectus.
YEAR ENDED AUGUST 31, ------------------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ----------- ----------- ----------- ----------- ------------ ------------ Statement of Operations Data: Revenue $ 19,895 $ 719,142 $ 157,838 $ 13,580 $ 28,670 $ 493,260 Cost of revenue 179,068 679,930 85,082 9,468 51,722 497,663 Development 297,935 0 0 0 0 0 Selling, general and administration 1,287,386 1,584,747 794,004 691,479 1,188,032 2,044,720 Depreciation & Amortization 136,902 211,786 156,965 146,977 1,545,636 1,979,975 ----------- ----------- ----------- ----------- ------------ ------------ Total cost and expenses 1,901,291 2,476,463 1,036,051 847,924 2,785,390 4,522,358 Loss from operations (1,881,396) (1,757,321) (878,213) (834,344) (2,756,720) (4,029,098) Other Income and Expenses: Interest income 32,777 8,500 6,565 70,519 76,129 227,691 Rental income 0 0 8,833 36,000 22,500 300 Misc income 0 0 0 0 4,014 43 Interest expense (11,585) (26,893) (45,182) (8,995) (60,512) (36) License agreement termination income 0 0 236,906 0 0 0 Loss on sale of investment in Switch 0 0 (216,165) 0 0 0 Debt conversion expense 0 0 (92,894) 0 0 0 Proposed merger costs 0 0 (236,737) (118,450) 0 0 Write-off of intangibles & other assets 0 0 0 (36,125) 0 0 Income tax expense 0 0 0 0 0 (50) Preferred stock conversion penalty 0 0 0 (144,000) (221,226) 0 Exchange (loss) gain 0 0 0 0 0 (1,647) Other misc expenses 0 0 0 (15,000) 0 0 ----------- ----------- ----------- ----------- ------------ ------------ Total Other Income and Expenses 21,192 (18,393) (338,674) (216,051) (179,095) 226,301 ----------- ----------- ----------- ----------- ------------ ------------ Net loss before preferred dividends $(1,860,204) $(1,775,714) $(1,216,887) $(1,050,395) $ (2,935,815) (3,802,797) Cumulative preferred dividends declared and preferred stock conversion benefit 0 0 135,994 36,500 2,602,046 212,013 ----------- ----------- ----------- ----------- ------------ ------------ Net loss available to common shareholders $(1,860,204) $(1,775,714) $(1,352,881) $(1,086,895) $ (5,537,861) $ (4,014,810) Net loss per share, basic & diluted $ (1.00) $ (.74) $ (0.51) $ (0.37) $ (1.72) $ (0.45) Weighted average shares of outstanding, basic & diluted 1,866,734(1) 2,409,195(1) 2,663,257(1) 2,904,693 3,221,225 9,013,669 YEAR ENDED AUGUST 31, ------------------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ----------- ----------- ----------- ----------- ------------ ------------ Balance Sheet Data: Cash & Cash Equivalents $ 857,488 $ 13,329 $ 2,202,573 $ 889,620 $ 2,581,492 $ 285,518 Working Capital 665,483 (650,761) 1,863,442 618,440 2,394,852 197,796 Total Assets 4,580,239 2,840,796 2,542,171 1,574,395 13,862,867 11,264,956 Total Liabilities 1,070,529 828,981 389,219 281,288 210,542 164,196 Accumulated Deficit (3,252,371) (5,028,085) (6,380,966) (7,467,861) (13,005,722) (17,020,532) Stockholders' Equity 3,509,710 2,011,815 2,152,952 1,293,107 13,652,325 11,100,760
- ---------- (1) As restated to reflect a one-for-six reverse stock split effective December 18, 1998. 4 THE OFFERING This prospectus relates to the resale by the selling stockholders of (i) 200,000 shares of our common stock issuable upon exercise of warrants issued to Network Twentyone International, Inc. on April 23, 2001(ii) 194,915 shares of our common stock issuable upon conversion of our series C 8% cumulative convertible preferred stock, $.001 par value per share, issued to Laurus Master Fund, Ltd. on January 30, 2002, (iii) 5,750 shares of our common stock issuable upon exercise of warrants issued to Laurus Master Fund, Ltd. on January 30, 2002, and (iv) up to an estimated 519,750 shares of our common stock issuable pursuant to the Stock Purchase Agreement by and between BestNet and Jay Greig, Ph.D., dated February 21, 2002. As of February 15, 2002, we had 15,325,755 shares of common stock, $.001 par value, issued and outstanding. SECURITIES BEING ISSUED WARRANT TO PURCHASE COMMON STOCK In this prospectus we are registering 200,000 shares of our common stock underlying warrants issued to Network Twentyone International, Inc. on April 23, 2001. These warrants have an exercise price of $1.00 per share for 100,000 of the shares and $3.00 per share for the other 100,000 shares. The warrants expire on April 23, 2007. To date the purchase warrants remain unexercised. SECURITIES PURCHASE AGREEMENT In this prospectus, we are registering 194,915 shares of our common stock underlying 1,150 shares of series C 8% cumulative convertible preferred stock, $.001 par value per share, issued to Laurus Master Fund, Ltd. on January 30, 2002, pursuant to a Securities Purchase Agreement between BestNet and Laurus Master Fund, Ltd. The number of shares of our common stock issuable upon conversion of 1,150 shares of series C 8% cumulative convertible preferred stock, $.001 par value per share, is 194,915 assuming a conversion price of $0.74 per share. In addition 5,570 shares of our common stock underlying warrants issued pursuant to this financing are being registered. The series C 8% cumulative convertible preferred shares are entitled to a liquidation preference amount of $100 per share and an 8% annual cumulative dividend, calculated on the liquidation preference amount, payable quarterly and each share is convertible into our common stock determined by the following formula: $100 plus at the election of the holder any accrued and unpaid dividends divided by the lessor of: (a) $2.40; or (b) 80% of the average of the three lowest closing prices of our common stock for the thirty days immediately prior to the conversion. The common stock purchase warrants issued pursuant have an exercise price of $1.19 per share and expire on January 30, 2007. To date the purchase warrants remain unexercised. STOCK PURCHASE AGREEMENT In this prospectus, we are registering 519,750 shares of our common stock to be issued to Jay Greig, Ph.D., an accredited investor, pursuant to a Stock Purchase Agreement, by and between BestNet and Jay Greig, Ph.D., dated February 21, 2002. The number and purchase price of shares of our common stock that will be issued pursuant to the Stock Purchase Agreement is determined as follows: 250,000 / (.65 x the average of the lowest bid price of our common stock at closing as reported by Bloomberg Financial for the NASD OTC Bulleting Board, for the ten (10) trading days preceding but not including the closing date under the Stock Purchase Agreement). 5 The purchaser under the Stock Purchase Agreement is obligated to purchase our common stock within five (5) days of the effective date of this registration statement as long as on the date of closing: * all representations and warranties made by BestNet in the stock purchase agreement are correct in all material respects and we have performed and satisfied in all material respects all agreements and covenants required of us in the Stock Purchase Agreement; * no suit, action or other proceeding (excluding any such matter initiated by or on behalf of the purchaser) shall be pending or threatened before any court or governmental agency seeking to restrain the purchaser or prohibit the closing or seeking damages against the purchaser or us as a result of the consummation of the Stock Purchase Agreement; and * we have provided the purchaser with a certified copy of all necessary corporate action required on our behalf approving the execution, delivery and performance of the Stock Purchase Agreement. 6 RISK FACTORS BEFORE BUYING ANY OF THE SHARES OF COMMON STOCK BEING OFFERED BY THIS PROSPECTUS, YOU SHOULD CAREFULLY READ AND CONSIDER EACH OF THE RISK FACTORS WE HAVE DESCRIBED IN THIS SECTION. RISKS RELATED TO OUR BUSINESS IF OUR BESTNETCALL SERVICE IS NOT ACCEPTED BY TARGETED CUSTOMERS, OUR FUTURE OPERATING RESULTS WILL BE MATERIALLY ADVERSELY AFFECTED. We have operated at a loss for the last eight (8) years. The Bestnetcall service is a new product for us and therefore has no operating history upon which an evaluation of us and our prospects can be based. Further, we have no meaningful prior operating history in the telecommunications industry, which could negatively impact our ability to successfully market our Bestnetcall service. Our Bestnetcall service may never achieve commercial acceptance by Internet users. The failure to achieve market acceptance is likely to negatively impact our ability to generate income in the future. AN INCREASE IN THE PRICE FOR MAINTAINING PHONE AND DATA LINES MAY REDUCE OUR REVENUES. Our business strategy depends on the availability of the Internet to transmit data packets for voice and fax calls. We also rely on third parties who provide traditional phone lines. Some of these third parties are national telephone carriers. If any of these carriers increase their charges for using these lines at any time, which they may do in response to increased regulation or other external factors that increase their cost of doing business, our costs may increase and our revenues may decrease. We may be unable to continue purchasing such services from these third parties on acceptable terms, if at all. If we are unable to purchase the necessary services to maintain and expand our network as currently configured, our revenues may decline. WE DEPEND ON OUR STRATEGIC RELATIONSHIP WITH SOFTALK, WHICH, IF TERMINATED, WOULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS. We depend in large part on our joint product development efforts with Softalk. Softalk may choose not to renew existing arrangements on commercially acceptable terms, if at all. Our loss of this key strategic relationship, or the failure to develop new relationships in the future, would likely adversely impact our future revenues. THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO DOMESTIC GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES WHICH, IF INCREASED OR CHANGED, COULD REDUCE OUR REVENUES. While the Federal Communications Commission has tentatively decided that information service providers, including Internet telephony providers, are not telecommunications carriers for regulatory purposes, various companies have challenged that decision. Congress continues to review the conclusions of the Federal Communications Commission, and the Federal Communications Commission could impose greater or lesser regulation on our industry. The Federal Communications Commission is currently considering, for example, whether to impose surcharges or other regulations upon certain providers of Internet telephony, primarily those which provide Internet telephone services to end-users located within the United States. The imposition of such surcharges or the regulation of Internet telephony providers could increase the cost of doing business over the Internet and decrease our revenue. Aspects of our operations may be, or become, subject to state or federal regulations governing universal service funding, disclosure of confidential communications, copyright and excise taxes. Government agencies may in the future increase regulation of Internet related services. Increased regulation of the Internet may slow its growth. Such regulation may also negatively impact the cost of doing business over the Internet and, therefore, increase our expenses and decrease its revenues. THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO INTERNATIONAL GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES WHICH COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS. 7 We intend on marketing our service to international long distance callers. Because we will be conducting business internationally, we will be subject to certain direct or indirect risks. These risks would include unexpected changes in regulatory requirements for the Internet and/or Internet telephony; foreign currency fluctuations, which could increase or decrease operating expenses and increase or decrease revenue; foreign taxation; and the burdens of complying with a variety of foreign laws, trade standards, tariffs and trade barriers. THE ISSUANCE OF SHARES UPON CONVERSION OF OUR CONVERTIBLE NOTE, SERIES C 8% CUMULATIVE CONVERTIBLE PREFERRED STOCK, AND THE EXERCISE OF OUTSTANDING OPTIONS AND WARRANTS MAY CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION TO OUR EXISTING STOCKHOLDERS. Our convertible notes and our series C 8% cumulative convertible preferred stock are convertible into common stock at floating rates, therefore we do not know the exact number of shares we will issue upon conversion of the securities. The number of shares of common stock issuable upon conversion of the outstanding convertible note and series C 8% preferred stock will increase if the market price of our stock declines. The issuance of shares upon conversion of the convertible notes, series C 8% cumulative convertible preferred stock, and exercise of outstanding options and warrants may result in substantial dilution to the interests of other stockholders. Although the preferred stockholders may not convert their securities and/or exercise their warrants into more than 4.99%, respectively, of our outstanding common stock, this restriction does not prevent the investors from converting and/or exercising some of their holdings and then converting the rest of their holdings. In this way, the investor could sell more than this limit while never holding more than this limit. In addition, preferred stockholders may waive the 4.99% limitation upon an event of default. If this limit is waived there is no upper limit on the number of shares that may be issued which will have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock and may result in a change of control of BestNet Communications. WE HAVE A HISTORY OF OPERATING LOSSES AND MAY NEVER GENERATE OPERATING INCOME FROM THE SALE OF OUR BESTNETCALL SERVICE. At August 31, 2001 and November 30, 2001, we had an accumulated deficit of $17,020,532 and $18,426,464, respectively. We believe that our future profitability and success will depend in large part on our ability to generate sufficient revenue from Bestnetcall revenues and websites to businesses. Revenues are also anticipated from the licensing of our technology and business systems to partners setting up Internet telephony services in partner-led foreign markets. Our profitability and success will depend on: * our ability to maintain existing relationships and enter into new relationships with Post Telephone & Telegraph administrations and other carriers for which we sell Internet telephony services * our ability to obtain or retain for BestNet the right to sell Internet telephony services and related value-added telecom services online * our ability to effectively maintain existing relationships with our multinational partners * our ability to successfully enter into new strategic relationships for distribution and increased usage of the Bestnetcall and Internet telephony services * our ability to generate sufficient online traffic and sales volume Accordingly, we expect to expend significant financial and management resources on the roll-out of the Internet telephony service, and on-site and content development on our Bestnetcall websites, integration of the Internet telephony and Bestnetcall services, strategic relationships, technology and operating infrastructure. As a result, we expect to incur significant additional losses and continued negative cash flow from operations for the foreseeable future. If such losses continue to occur, our revenues may not increase or even continue at their current levels. Further, we may not achieve or maintain profitability or generate cash from operations in future periods. In view of the rapidly evolving nature of our business, the limited operating history of both Internet telephony and Bestnetcall and the risks associated with integrating these businesses, we believe that period-to-period comparisons of operating results are not meaningful and should not be relied upon as an indication of future performance. 8 CONFLICTS OF INTEREST MAY ARISE WHICH MATERIALLY ADVERSELY AFFECT OUR BUSINESS AND OUR REVENUE Conflicts of interest may arise between us and our affiliates, including Softalk, in areas relating to past, ongoing and future relationships, including: * the Bestnetcall license agreement, corporate opportunities, indemnity arrangements, tax and intellectual property matters * potential acquisitions or financing transactions * sales or other dispositions by our principals These conflicts also may include substantial disagreements with Softalk regarding the Bestnetcall license agreement, including with respect to possible amendments to, or modifications or waivers of provisions of such agreement. Such amendments, modifications or waivers may adversely affect our business and our ability to earn revenue from the sale of the Bestnetcall service. The ownership interest of Softalk in our common stock, could create or appear to create, potential conflicts of interest when directors and officers are faced with decisions that could have different implications for us and Softalk. OUR INABILITY TO BE COMPETITIVE INTERNATIONALLY OR TO SATISFY REGULATORY REQUIREMENTS WHEN WE EXPAND GLOBALLY COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. A significant aspect of our growth strategy is to expand our business internationally, through the Internet. Such expansion will place additional burdens upon our management, personnel and financial resources and may cause us to incur losses. We will also face different and additional competition in these international markets with which we have no prior experience. These risks could impair our ability to expand internationally as well as increase our costs and decrease our revenues. ON-LINE SECURITY BREACHES OR FAILURES MAY MATERIALLY ADVERSELY AFFECT BESTNET. In order to successfully provide services over the Internet, it is necessary that we be able to ensure the secure transmission of confidential customer information over public telecommunications networks. We employ certain technology in order to protect such information, including customer credit card information. However, we may be unable to ensure that such information will not be intercepted illegally. Advances in cryptography or other developments that could compromise the security of confidential customer information could have a direct negative impact upon our electronic commerce business. In addition, the perception by consumers that communicating over the Internet is not secure, even if unfounded, means that fewer consumers are likely to make communicate through that medium. Finally, any breach in security, whether or not a result of our acts or omissions, may cause us to be the subject of litigation, which could be very time-consuming and expensive to defend. OUR OUTSTANDING SHARES MAY BE DILUTED RESULTING IN LESS PERCENTAGE OF SHARES HELD BY EACH SHAREHOLDER AND A LOWER MARKET PRICE PER SHARE OF OUR COMMON STOCK. The market price of our common stock may decrease as more shares of common stock become available for trading due to the exercise of outstanding warrants to purchase our common stock. The participation of the shareholders in BestNet also may be reduced through the issuance of new common stock. 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 9 * to increase the number of customers and revenues 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 our management and are necessarily 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. 10 BESTNET COMMUNICATIONS CORP. BUSINESS DEVELOPMENT Founded on July 10, 1986, BestNet Communications Corp., a Nevada corporation, develops, markets and sells Internet-based telecom technologies. Substantially all of our development activities are performed by Softalk, a private Ontario, Canada-based company. Although founded in 1986, we did not commence operations until 1995. From 1995 until June 1999, we developed software for customized calling card services and created an infrastructure to market and distribute our product and services. During this period, our efforts were primarily focused on hiring management and other key personnel, raising capital, procuring governmental authorizations and space in central offices, acquiring equipment and facilities, developing, acquiring and integrating billing and database systems. We marketed these systems to the business traveler and to large organizations or companies with a membership base. In the late 1990's, due to the wide scale deployment of cellular telephones with messaging capability, the market for business related calling card services greatly diminished. In June 1999, we discontinued our calling card services. Since then, we have focused substantially all of our efforts and resources on developing our Bestnetcall web-enabled long distance service. On September 27, 2000, we changed our name to BestNet Communications Corp. On April 23, 1999, we entered into a licensing agreement with Softalk. Softalk develops Internet-based telecommunication technologies that enable users to initiate long distance calls from anywhere in the world by accessing a specific Internet website. This technology enables users to, among other things, make international telephone calls at substantially reduced rates from those offered by traditional long distance carriers. This licensing agreement granted us certain marketing and customer service rights with respect to Softalk's technologies. The licensing agreement was later amended and restated on October 25, 1999, to grant us exclusive global rights to distribute, market, service, sell, and sublicense Softalk's services and products to commercial accounts and on a worldwide non-exclusive basis individual consumer accounts. We also have the exclusive right to provide billing and customer support services for all customer accounts. After entering into the Softalk licensing agreement, with Softalk's assistance we began building telecommunication facilities in Toronto, Canada, and in the U.S. in New York, New York and in Los Angeles, California including the installation of high-capacity switches and Internet servers. Softalk, under a separate contract with us, completed the development of specialized software used for data management, billing and customer service requirements. The brand name for our web-enabled long distance service is Bestnetcall. The service was first made available to the public on April 17, 2000. We are presently focusing our resources on marketing Bestnetcall to selected companies with international locations and/or clients. Users of our Bestnetcall service are able to do the following by accessing our website at www.bestnetcall.com: * enroll; * place calls; * pay for service; and * access customer service immediately on the Internet. Bestnetcall does not require the purchase of special hardware or software by the customer and uses their existing telephone equipment. Users only need access to the Internet and an available phone line. Bestnetcall also offers immediate billing to all users and accepts various payment methods, including pre-paid or post-paid credit card payments and invoicing options. Following the completion of a telephone call, the total cost for that call may be viewed on the caller's online account. Call detail records may be printed or copied to Word or Excel applications. The Bestnetcall service also includes features such as speed dialing, personalized directories, client billing codes, world-time country/city code lookup and immediate access to customer service via the website. Account administrators may add or delete users, view a user's calling activity and create reports detailing call activity. 11 During the fiscal year ended August 31, 2001, using Softalk's patented technology, we contracted with Softalk to create a wide range of telecommunications products and services. Any device that can access the Internet can be used by us to enable telephone calls. The Bestnetcall suite of products include the following services: LONG DISTANCE CALLING Organizations can decrease the cost of their long distance bill while still retaining the toll quality required to conduct business. Bestnetcall provides the core benefits of lower prices, quality service and on-line real-time billing. Other significant benefits include point and click FROM and TO directories, point and click dialing using directories from Microsoft Outlook, speed dialing, email calling, billing codes, country and city code look-up, time zone information and dialing examples. CONFERENCE CALLING Bestnetcall offers a conference-calling product that can be used to initiate immediate or scheduled conference calls. The chairperson can either launch successive legs for an immediate conference call or enter and save information for a conference call to be launched automatically at a future date. There are no set-up or administrative charges for the Bestnetcall conference calling facility. This service can reduce the cost of conference calls by up to 80% as compared to traditional conferencing services currently offered by carriers. CALL ME SERVICES Through our Bestnetcall service we are able to offer customers the following service: * Customer Service - Enable customers worldwide to contact us for product information, enrollment, company information and other assistance. * Click through banner - The banner advertising industry can voice-enable their banners to achieve far more effective sales results. Potential customers who access the banner are able to click on a banner to call through to the banner provider and obtain more information about the product being advertised - thereby increasing sales for the advertiser. * Web Chat - click to join - Through the Bestnetcall architecture, Web Chat providers enable users of their service to escalate from on-line chat to a live conversation. In this situation, numbers remain private and users do not have access to numbers of other users. * Anonymous calling - The architecture of Bestnetcall allows for total security regarding both the FROM and TO legs. The FROM and TO numbers are never displayed, thus it is not possible to determine from where a call is being placed. Certain website providers need both numbers to be anonymous or private, so the callers do not know the numbers they are dialing, nor should the person being called know which number is dialing them. * Call Shacks - Our Internet telephone system can be used to enable telephone calls in facilities that sell minutes to consumers for use on one of the telephones within the "call shack" or "telephone store". A web-enabled computer cannot only launch calls from any number of extension phones or phones connected to direct lines within the call shack, but can also monitor real-time use of the minutes and the actual cost of each call. Call shacks are used by migrant workers in the U.S. to call home and in many countries where consumers do not have any other access to a telephone. Our system also allows us to monitor real time activity that minimizes the occurrence of payment fraud by the call shack. SALES CALLS The Bestnetcall architecture provides the ability to supply sales organizations, such as real estate companies and automobile sales companies, a telecommunications infrastructure whereby customers can call in, review and purchase products. Enrollment and billing infrastructures are also provided. 12 SATELLITE CALLS Bestnetcall allows for terrestrial offices to call remote platforms such as ships, airplanes and oilrigs. Bestnetcall has a direct circuit to an international satellite uplink carrier for launching the Inmarsat satellite leg of calls. MOBILE CALLING Bestnetcall has developed a wireless application that operates on the Palm VII and other wireless enabled Palm devices to enable users to place calls while away from the office. Applications have also been developed for personal digital assistant's such as Compaq's iPAQ. Bestnetcall also enables calls to be launched via email devices such as the Blackberry manufactured by Research in Motion, and mobile phones that have text messaging. These capabilities expand the target customer-base for our services. We believe the increased availability created by mobile calling makes the product more attractive to users. We are currently investigating the opportunity to offer pager calling, where the customer uses a pager to initiate a phone call. All calls from these devices are billed in the same way as calls placed through our web product. MARKET STRATEGIES We offer our Bestnetcall service through both direct sales and indirect sales channels. Our target markets include: * Business and Industry; * Telecommunication Carriers; * Internet Service Providers; * Governmental agencies; * Browser Based Services such as AOL, Yahoo and Amazon.com; * Affinity Groups; * Other organizations, including charities, religious organizations, schools and alumni associations; and * Individual Consumers. Our marketing efforts are targeted at international long distance users in a number of key geographic areas in the world. Initially, our marketing strategy will focus primarily on the following geographic regions due to greatest savings potential: * Caribbean; * North America; * Asia Pacific; * Central & South America; * Europe; and * the Middle East. DIRECT SALES We utilize the following marketing and sales strategies to generate revenue and increase customer usage: * Direct Mail and e-mail Solicitations - We send solicitation materials to prequalified potential users. These materials refer or link the potential user to www.bestnetcall.com and offer a subscription to the Bestnetcall service. Recipients are invited to use the service or request more information. These direct mail or e-mail solicitations are launched on a continuous basis currently by an in-house staff. Future direct mail initiatives will be launched using a combination of in-house resources and external resources. 13 * Telemarketing - We currently market our services through special incentive offerings to our existing customer base. Telemarketing operations will be initiated through the customer service operations during the fiscal year ending August 31, 2002. * Media Advertising and Promotion - We have initiated limited advertising in key print and electronic media targeted at specific market segments in the form of national magazines. We will consider additional initiatives such as advertising in specific trade publications and Internet advertising during the coming year based on an analysis of the cost-effectiveness of these present activities; and * Public Relations Activities - An internal corporate communications and public relations specialist is responsible for developing a comprehensive global communications program. This communications program will include initiating appropriate news releases, feature print articles in industry and trade specific publications, local print media and feature editorial support. The Bestnetcom.com website is being redeveloped to include a frequently asked questions section to facilitate direct communication with shareholders, stakeholders, customers and the public-at-large. INDIRECT SALES Indirect sales efforts will be centered around the following four types of organizations: * Carriers - The Bestnetcall services are being made available to other telecommunication carriers, resellers and internet service providers for resale to their clients. These types of indirect sales organizations will be solicited through direct mail, e-mail, fax and direct sales calls by our personnel; * Professional Service Firms - Accounting firms, consultants and legal firms are being solicited to use our Bestnetcall service and to provide this service to their clients as a means of saving money on international long distance calls; * Retailers and Special Service Providers - We are approaching large retailers and special service providers such as dating services, Internet advertisers and hardware manufacturers to offer our services as a value-added service. These relationships are revenue sharing initiatives with the client organization receiving a negotiated percentage of gross revenue generated by our services; and * Agent/Distributors - We are establishing a global network of agents and distributors who will market our services to corporate organizations and consumers. PROJECT MANAGERS To date, we have hired two project managers to sell, maintain and service our major accounts. INDUSTRY BACKGROUND AND MARKET DEMAND The Internet is the significant interactive worldwide medium for communications, collaborative technologies, and the telecommunications market. Meanwhile, global deregulation, the proliferation of new technologies enabling convergence between computers, applications, Internet, and the telephone are significantly expanding the world's voice market. We believe there are key trends influencing the telecommunications industry and Internet deployment today. These trends are having 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 and business-to-business revenue will approach $1.3 trillion according to Forrester Research. 14 * Globalization of world's economies increase the international mobility of workforces and, according to Frost & Sullivan, the internet roaming market is expected to grow to $7.6 billion in revenues from $62.7 million in 1999. * New and improving technology: Telecommunications Magazine predicts that by the year 2003, U.S. cell-phone penetration will be 60%, with Japan approaching 70%, and Europe over 80%. As the technology improves, the demand will increase. * Worldwide, STRATEGY ANALYTICS expects cellular subscribers to increase from nearly 900 million at the end of 2001, to 1.9 billion by the end of 2006. * The global conferencing market, which is negligible today, will grow to $11 billion by 2005 according to multimedia consultancy Wainhouse Research. * Internet applications sales, which includes both devices that connect to the Internet via a television and Internet terminals are expected to grow at a rate of more than 40% per year and soar to $1.3 billion. * The changing regulatory environment: Deregulation is encouraging telecommunications companies to enter each other's markets. Increased competition stimulates globalization as companies move to add geography, customers, expertise, and technology to their business. * The Gartner Group predicts that business to consumer transactions will reach $380 billion by 2003, and business-to-business transactions will exceed $7 trillion by 2004. * Forrester Research predicted that 65% of corporate buyers planned to buy at least some telecommunications services on-line; several telecom-purchasing managers stated that, if their carriers are not Web-enabled in two years, they will switch suppliers. Market trends are strongly in our favor. Our ability to offer a cost effective, highly efficient and dynamic product in terms of features and capabilities is of key importance during poor economic periods as companies are forced to find ways to trim budgets. Companies also have a general reticence towards air travel during such poor economic periods. We can capture the promise of this sector. THE CHALLENGES Perhaps one of the biggest challenges facing the Internet telephony market is getting people to change their habits. Instead of using the keyboard on a phone to place calls, vendors in this space have to convince potential customers of the benefits of using the keyboard on a computer to place phone calls. The inducement to make the change presently is the significant cost savings in placing long distance calls via our Bestnetcall Service. Another perceived disadvantage of Internet telephony is the need to purchase or install new hardware and/or software to enable the user to make calls using the Internet. Voice-over IP requires a minimum of an internet connection, a microphone and sound card; Web-enhanced telephony requires a minimum of an internet connection and uses multiple combinations of audio and video hardware. Phone-to-phone via PC requires an Internet connection and a phone. Despite the challenges, however, the Internet telephony market is expected to grow substantially over the next five (5) 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. 15 PUBLIC SWITCH TELEPHONE NETWORK - TOLL QUALITY At the present time and for the foreseeable future, reliable, consistent toll quality voice calls are best facilitated using the public switch telephone network. For this reason, we believe business users will continue to use telephone lines as the primary carriers of long distance service while consumers will be the biggest users of voice-over IP. The public switch telephone network will continue to be used by business as opposed to alternatives found in the Internet and cable systems for the following reasons: * Speed of communication; * Quality of communication; * Reliability of communication; and * Ease of operation. LOW COST RATES The global telecommunications industry has been highly regulated. However, over the past several years, North America and parts of Europe have enjoyed significant deregulation, which has resulted in a highly competitive long distance service industry. The U.S. and Canada have among the lowest telephone rates in the world and the U.S. has emerged as the lowest cost supplier of long distance rates. U.S. deregulation has resulted in sizable reductions in the wholesale cost of long distance services available to long distance resellers. Although declining rates have been symbolic in the U.S., Canadian and some European long distance markets, we believe international rates to and from many other countries have been slow to decline for two major reasons: (1) Foreign telephone company management are reluctant to reduce their rates given their monopoly status; and (2) In some areas of the world, governments have been reluctant to antagonize strong foreign telephone company unions. In the long term, it is unlikely that these high rates can be maintained as new technologies render the foreign telephone company monopolies ineffective. We believe that such new technologies will evolve around the emergence of the Internet as a mass communications and commerce medium. A number of companies started Internet telephony operations in the last few years. The intense competition in the telecommunications market, in addition to the growth of e-commerce, has necessitated a drive towards exploring new levels of decreasing costs and resulted in the genesis of Internet telephony. We believe usage and competitive pressures will drive down telephony pricing on a global basis. Price, enhanced services and quality will become the only major differentiators in the market over the next 24 months. We are concentrating our efforts on the corporate and business markets. We use the Internet to enable, control and manage the public switch telephone network calls accessed from our central offices in New York, Los Angeles and Toronto. We are bringing the best wholesale long distance rates, which are in the U.S., to the entire world. We can offer access to global markets including direct access to North American business and consumer markets to any carrier worldwide wishing to connect to our switches in the U.S. and Canada. THE INMARSAT TELEPHONY MARKET One of the fastest growing telephony markets in the world is global satellite telephony communications. The Inmarsat communication system consists of four satellites circling the globe. These satellites provide telecommunication services through terrestrial uplink carriers to areas not covered by traditional telecommunication services. BESTNET'S SOLUTION Under our licenses from Softalk, we provide commercial voice quality Internet-enabled long distance services to corporate and residential subscribers. Our Web-based solution offers subscribers access to low cost long distance rates by using the Internet as the means to launch calls and to view billing within seconds after completing a call. 16 This technology blends the best of current telecommunication systems by using commercial telephone networks for voice quality and the Internet for control and access. Our Bestnetcall service provides a user anywhere in the world access to the U.S. telecom infrastructure while not infringing upon international telecom agreements. For example, users making calls from the Caribbean to the U.S. would operate over the same network as users from the U.S. making calls to the Caribbean. As a result, middle retailers of telecommunication services are eliminated. This ensures the lowest pricing structure on a long-term basis. We provide customers access to our network through our switches located in New York, Los Angeles and Toronto. Additional switch locations are planned for deployment in major cities in North America, Asia and Europe. The deployment of these additional switches will follow as demand dictates and capital resources become available. BESTNETCALL - ENHANCEMENTS During the past year, Bestnetcall service added a number of enhancements: * Conference Calling - This feature allows users to connect up to 64 parties on a single call, using their personal computer to initiate the calls. Conference calls may be launched immediately or prescheduled for a specific time and date. All conference calls will display the status to the conference administrator via the Bestnetcall website and offer substantial rate reductions compared to conventional conference call services provided by the major long distance providers; * An improved graphical user interface - This feature allows the user access to more information, as well as provides much quicker load times, which is critical where Internet connections are slow; * A desktop application - This feature was designed for networked office users without a dedicated Internet connection, or where Internet connections are very slow. The desktop application resides on the user's personal computer and uses small-packet transmission to quickly initiate calls. Furthermore, this feature saves time by not requiring a browser, website navigation or log-in; and * Wireless Personal Digital Assistant - Designed for micro-web browsers, such as employed by the Palm VII, users can launch Bestnetcall telephone calls or conference calls at any time using their wireless device. In August 2001, we introduced the availability of our long distance and conference calling services via e-mail. These services allow a user to initiate, on demand, a long distance telephone call by sending an e-mail. This service is available through cell phones and other hand-held devices that are equipped to send e-mail. Additionally, in August 2001, we introduced the availability of our conference calling services designed for handheld devices using the Palm Operating System. The free software that can be downloaded from our bestnetcall.com website, allows Palm users to initiate conference calls from any convenient telephone, such as their office, home or cellular phone. BESTNETCALL - FUTURE PRODUCT STRATEGY The Internet's reach is wider than imaged and its growth faster than expected. The Internet has become the world's largest distributed system. It was designed and engineered to have an abundance of routes, connections, and elasticity. The Internet growth rate indicates that there will be 1 billion Internet users by 2005. There is solid evidence that PC growth along with use of Internet appliances, wireless connectivity to the Internet and Internet service connections all will reach new record numbers in the coming years. Recognizing this trend, we have contracted with Softalk to customize and develop variations of Bestnetcall that use alternative methods for accessing our service, including the following: * Two Way Paging - We are developing applications for two-way paging to launch calls transmitting packets from paging networks to our web server and switching matrix; 17 * Internet Devices - Bestnetcall services will be designed for non-personal computer Internet devices, such as Set-top boxes, like as WebTV; Smart phones, like as iPhone; and Appliances, like I-Opener; and we can enable any device that can access the Internet to provide access to our Bestnetcall services. No assurance, however, can be given that we will be able to successfully develop or, if developed, commercially exploit any of the above-referenced devices. NETWORK STRUCTURE PHASE I - INITIAL DEPLOYMENT Our network equipment is currently located in a central office facility located in New York, Los Angeles and Toronto. Our system is designed to initially support 15 million minutes of voice traffic per month. Our system can be increased as support needs increase. Full network monitoring and diagnostics are employed on a 24 x 7 basis. Our Web server is hosted by Data Foundry located in Austin, Texas. Our current network configuration will support 25,000 simultaneous hits and may easily be expanded. Data Foundry provides support on a 24 x 7 basis and backup power is supplied by on-site battery and off-site generators to ensure system survivability. Our switching matrix is located in its central office facility with direct T-1 connectivity to the wholesale public switch telephone network. The initial deployment of 1,000 ports is configured for rapid expansion capability of up to 10,000 ports. We work closely with the Softalk telecom and network engineers and their software development team to monitor and maintain the system in New York, Los Angeles and Toronto. PHASE II - EXPANDING POINTS OF PRESENCE We intend to expand our network worldwide. Additional locations of network equipment will be deployed in key strategic locations to facilitate web, voice and data traffic. These additional locations will provide network redundancy and least inexpensive cost routing for voice traffic. The point-of-presence in New York, at 60 Hudson Street, is the East Coast's principal gateway for international telecommunication traffic. The New York location contains a switching matrix. Each of these points-of-presence contain telecommunications switches that can be expanded up to 10,000 ports. The New York switching matrix is connected to several international public switch telephone network carriers including the uplink carrier for Inmarsaat traffic. From these locations we offer inexpensive international long distance services to or from anywhere in the world using North American wholesale rates. During the past year, we also expanded our points-of-presence to Los Angeles at 1 Wilshire Boulevard, the West Coast's gateway for international telecommunication traffic. The equipment and facility is similar to that of our New York central offices. These three central offices provide complete redundancy for one another in the event of a failure by one or two locations. The cost of deploying a central office or point-of-presence is approximately $250,000. PHASE III - VIRTUAL PRIVATE NETWORK As voice traffic increases, we plan on deploying gateway servers to better facilitate growing international traffic between certain locations. This strategy will allow us to install a virtual private network along these high-traffic routes to reduce costs for voice traffic. Employing dedicated data circuits between these gateways will allow voice calls to be compressed and transmitted using data packets, which significantly reduces the cost of routing over normal telephone network channels. TRANSACTIONS WITH SOFTALK Our current and future business activities are substantially dependent on the continuation of our relationship with Softalk. As discussed more fully below and elsewhere in this prospectus, our ability to offer the Bestnetcall service is subject to a license agreement with Softalk, which may be unilaterally terminated by Softalk upon the occurrence of certain events. We have also contracted with Softalk to perform substantially all of our development and engineering activities with respect to the rollout, enhancement and maintenance 18 of the Bestnetcall service, related product offerings and the deployment of our telecommunication network. Accordingly, we believe any disruption or termination in our relationship with Softalk would have a material adverse effect on our business, prospects, financial condition and results of operations. LICENSE AGREEMENT. On October 25, 1999, we amended our license agreement with Softalk to grant us and our subsidiaries a worldwide, exclusive license to distribute, market, service, sell and sublicense Softalk's services and products to commercial accounts. This agreement also grants us a worldwide nonexclusive license to distribute, market, service, sell and sublicense Softalk's services and products to individual customer accounts. In exchange for the license amendments, we issued to Softalk five-year warrants to purchase up to 5,246,753 shares of our common stock; 3,246,753 of which have an exercise price of $3.25 per share, 1,000,000 have an exercise price of $5.00 per share, and the remaining 1,000,000 have an exercise price of $10.00 per share. Under the terms of the amended license agreement, we paid an initial license fee of $200,000. We are also obligated to pay Softalk an amount equal to the sum of (a) 100% of Softalk's actual direct expenses incurred in connection with the sale, license and delivery of Softalk products and (b) a five percent (5%) markup of the total traffic on the wholesale long distance per minute lines costs on a monthly basis. The amended license agreement may be terminated under the following conditions: * Either party has the right to terminate the license agreement upon 30 days written notice to the other party, if such other party fails to comply in any material respect with any term or condition of the license agreement and such failure to comply is not corrected within such 30 day notice period; * Either party has the right to terminate the license agreement in the event the other party becomes bankrupt or insolvent, suffers a receiver to be appointed, or makes an assignment for the benefit of its creditors; and * Softalk has the right to terminate the license agreement upon 60 days written notice following a change of control in our ownership structure. Under the license agreement, a change of control is deemed to have occurred: * when, after the date of the license agreement, any person (as such term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended, is or becomes the beneficial owner (as defined in Rule l3d-3 of the Securities Exchange Act of 1934, as amended), directly or indirectly, of our securities representing 51% or more of the combined voting power of our then outstanding securities, other than (i) an employee benefit plan established or maintained by us or one of our subsidiaries, or (ii) any person who presently owns such quantity of securities as of the date hereof; * upon the approval by our stockholders of (1) our merger or consolidation with or into another corporation other than a merger or consolidation the definitive agreement for which provides that at least a majority of the directors of the surviving or resulting corporation immediately after the transaction are continuing directors, (ii) a sale or disposition of all or substantially all of our assets, or (iii) a plan for our liquidation or dissolution; or * when individuals who, as of the date of the license agreement, constitute our Board of Directors, known as the Incumbent Board, cease for any reason to constitute at least 80% of our Board; provided, however, that any person becoming a member of the Board subsequent to the date hereof whose election, or nomination for election by our stockholders, was approved by a vote of at least 80% of the members then comprising the Incumbent Board (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or 19 threatened election contest relating to the election of our directors, as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, or any successor provision thereto), shall be, for purposes of the License Agreement, considered as though such person were a member of the Incumbent Board. Upon termination of the license agreement for any reason whatsoever, we are permitted to continue using Softalk's intellectual property in providing services to all our existing clients, at the point of termination. PURCHASE AGREEMENT. On November 13, 1999, we, through our subsidiary, Interpretel (Canada) Inc., purchased all existing products and accounts of Softalk in exchange for 4,329,004 shares of Class A non-voting preferred stock of Interpretel (Canada). Under this agreement, Softalk granted us a right of first refusal with respect to purchasing Softalk, its intellectual property, software and/or patents. The shares issued under this agreement were exchangeable on a one-for-one basis for shares of our common stock at any time by the holder thereof. The issuance of the Class A shares of Interpretel (Canada) was valued at $10,000,000, the value of our common shares into which the Interpretel (Canada) shares could be converted. On November 10, 2000, Softalk exercised its exchange rights, resulting in the issuance of 4,329,004 restricted shares of our common stock in exchange for a like number of shares of Class A Non-voting preferred stock of Interpretel (Canada). As of February 15, 2002, Softalk held approximately 28% of the issued and outstanding shares of our common stock. LOAN FACILITY. On August 6, 1999, we entered into a loan facility with Softalk pursuant to which we have agreed to loan Softalk up to $2 million at an interest rate of prime plus 1%. As of February 15, 2002, the outstanding balance of the loan was $1,384,000. Under the original terms of this loan, Softalk could pay back the loan principal plus interest on or before August 6, 2000, or convert any amounts outstanding, plus interest, on the loan into shares of Softalk common stock in full satisfaction of money owed to us under the loan. On September 8, 2000, the Board of Directors approved amending the loan to extend the term of the loan to August 6, 2001. As of the date of this registration statement, the loan remains outstanding and is due and payable upon our demand. COMPETITION The communications industry is highly competitive, and one of the primary purposes of the U.S. Telecommunications Act of 1996 is to foster further competition. In each of the markets we intend to operate, we will compete principally with the established telephone company serving such market. We currently do not have a significant market share in any of our markets. The established telephone companies have long-standing relationships with their clients, financial, technical and marketing resources substantially greater than ours and the potential to fund competitive services with cash flows from a variety of businesses, and currently benefit from existing regulations that favor the established telephone companies. Furthermore, one large group of established telephone companies, the regional Bell operating companies, have been granted, under particular conditions, pricing flexibility from federal regulators with regard to some services with which we compete. This may present established telephone companies with an opportunity to subsidize services that compete with portions of our services and offer competitive services at lower prices. We expect to experience declining prices and increasing price competition. We cannot assure that we will be able to achieve or maintain adequate market share or margins, or compete effectively, in any of our markets. Moreover, substantially all of our current and potential competitors have financial, technical, marketing, personnel and other resources, including brand name recognition, substantially greater than ours as well as other competitive advantages over our business, financial condition and results of operations. Any of the foregoing factors could have a material adverse effect on our business, financial condition, results of operation and prospects. REGULATION The following summary of regulatory developments and legislation describes the primary present and proposed federal, state, and local regulation and legislation that is related to the Internet service and telecommunications 20 industries and could have a material effect on our business. Existing federal and state regulations are currently subject to judicial proceedings, legislative hearings and administrative proposals that could change, in varying degrees, the manner in which our industries operate. We cannot predict the outcome of these proceedings or their impact upon the Internet service and telecommunications industries. OVERVIEW Telecommunications services are generally subject to federal, state and local regulation. The Federal Communications Commission 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 Internet service provider regulatory status continues to be uncertain. In an April 1998 report, the Federal Communication Commission concluded that while some Internet service providers should not be treated as telecommunications carriers, some services offered over the Internet, such as phone-to-phone telephony, may be functionally indistinguishable from traditional telecommunications service offerings, and that their non-regulated status may have to be re-examined. Despite the Federal Communication Commission's decision not to allow local telephone companies to impose per-minute access charges on Internet service providers, and that decision being upheld by the reviewing court, further regulatory and legislative consideration of this issue is likely. An imposition of an access charges would affect our costs of serving dial-up clients and could have a material adverse effect on our business, financial condition and results of operations. In addition, Congress and other federal entities have adopted or are considering other legislative and regulatory proposals that would further regulate the Internet. Various states have adopted and are considering Internet-related legislation. Increased U.S. regulation of the Internet may slow its growth or reduce potential revenues, particularly if other governments follow suit, which may in turn increase the cost of doing business over the Internet. EMPLOYEES As of February 15, 2002, we had eleven employees. We believe that our future success will depend on our ability to attract and retain highly skilled and qualified employees. None of our employees are currently represented by collective bargaining agreements. We believe that we enjoy good relationships with our employees. USE OF PROCEEDS We will not receive any proceeds from the resale of the common stock. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock was quoted on the Nasdaq SmallCap Market until May 4, 1999, and then on the OTC:BB from June 28, 1999 to the present. The high and low bid prices of BestNet's common stock as reported from September 1, 1997 through August 31, 2001 by fiscal quarters (i.e., 1st Quarter = September 1 through November 30) were as follows, as adjusted for a one-for-six reverse split effective December 18, 1998: 21 HIGH LOW ---- ----- FISCAL YEAR ENDED: August 31, 1999 First Quarter 3.5625 1.5 Second Quarter 3.5625 2.0 Third Quarter 2.9375 0.125 Fourth Quarter 2.625 0.5 FISCAL YEAR ENDED: August 31, 2000 First Quarter 4.25 1.46875 Second Quarter 10.25 4.125 Third Quarter 9.50 5.0 Fourth Quarter 7.25 3.81 FISCAL YEAR ENDED: August 31, 2001 First Quarter 6.125 .875 Second Quarter 3.375 .5625 Third Quarter 3.80 .55 Fourth Quarter 4.40 2.05 The bid and the ask price of our common stock on February 15, 2002, were $0.70 and $0.76, respectively. As of February 15, 2002, we had 122 shareholders of record of our common stock. We have never declared any cash dividends on common stock and currently plan to retain future earnings, if any, for its business operations. NASDAQ DELISTING. Our common stock was delisted from the NASDAQ Small Cap Market on May 4, 1999, due to the fact that we were not in compliance with Nasdaq's $1.00 minimum bid price requirement. Since June 28, 1999, our common stock has been traded on the OTC Bulletin Board under the symbol BESC. SELLING STOCKHOLDERS The table below sets forth information concerning the resale of the shares of common stock by the selling stockholders. We will not receive any proceeds from the resale of the common stock by the selling stockholders. Assuming all the shares registered below are sold by the selling stockholders, the selling stockholders will not own any shares of our common stock. 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 COMMON STOCK TOTAL ISSUABLE PERCENTAGE UPON OF COMMON PERCENTAGE CONVERSION STOCK, SHARES OF BENEFICIAL PERCENTAGE BENEFICIAL OF COMMON OF PREFERRED ASSUMING COMMON STOCK OWNERSHIP OF COMMON OWNERSHIP STOCK OWNED STOCK AND FULL INCLUDED IN BEFORE STOCK BEFORE AFTER AFTER WARRANTS(1) CONVERSION(2) PROSPECTUS OFFERING(2) OFFERING(2) OFFERING(4) OFFERING(4) ----------- ------------- ---------- ----------- ----------- ----------- ----------- Network 200,000 1.2% 200,000(1) 200,000 1.2% -0- -0- Twentyone International, Inc. Laurus Master 200,485 1.2% 200,485(1) 200,485 1.2% -0- -0- Fund, Ltd. Jay Greig, Ph.D. -- -- 519,750(4) 519,750 3.2% -0- -0-
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 which the selling stockholder has the right to acquire within 60 days. The actual number of shares of common stock issuable upon the conversion of the convertible preferred stock is subject to adjustment depending on, among other factors, the future market price of our common stock, and could be materially less or more than the number estimated in the table. (1) Because the number of shares of our common stock issuable upon conversion of the convertible preferred stock is dependent in part upon the market price of our common stock prior to a conversion, the actual number of shares of our common stock that will be issued upon conversion will fluctuate daily and cannot be determined at this time. However the selling stockholder has contractually agreed to restrict its ability to convert or exercise its warrants and receive shares of our common stock such that the number of shares of common stock held by it and its affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. As a result of the contractual agreement as defined in the Securities Exchange Act of 1934, as amended, or is required to file a Schedule 13D. (2) Amounts and percentages are based upon 15,325,755 shares of our common stock outstanding as of February 15, 2001 plus an estimated 519,750 shares to be issued pursuant to the stock purchase agreement by and between BestNet and Jay Greig, Ph.D., 200,485 shares to be issued to Laurus Master Fund, Ltd. upon conversion of the convertible preferred stock and exercise of the warrants, and 200,000 shares to be issued to Network Twentyone International, Inc. upon the exercise of its warrants. (3) Because the number of shares of common stock issuable upon the closing of the stock purchase agreement by and between BestNet and Jay Greig, Ph.D. is dependent in part upon the market price of the common stock for the ten days prior to the closing of the stock purchase agreement, the actual number of shares of common stock that will be issued upon closing of the stock purchase agreement and thus subject to registration hereunder cannot be determined at this time. (4) Assumes that all securities registered will be sold. 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: 23 * Ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers. * Block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction. * An exchange distribution following the rules of the applicable exchange * Privately negotiated transactions * Short sales or sales of shares not previously owned by the seller * A combination of any such methods of sale any other lawful method The selling stockholder may also engage in: * Short selling against the box, which is making a short sale when the seller already owns the shares. * Other transactions in our securities or in derivatives of our securities and the subsequent sale or delivery of shares by the stockholder. * Pledging shares to their brokers under the margin provisions of customer agreements. If a selling stockholder defaults on a margin loan, the broker may, from time to time, offer to sell the pledged shares. Broker-dealers engaged by the selling stockholder may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from selling stockholder in amounts to be negotiated. If any broker-dealer acts as agent for the purchaser of shares, the broker-dealer may receive commission from the purchaser in amounts to be negotiated. The selling stockholder 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. 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. 24 Because the selling shareholder is deemed an "underwriter" within the meaning of Section 2(11) of the Securities Act, it will be subject to the prospectus delivery requirements. We are required to pay all fees and expenses incident to the registration of the shares in this offering. However, we will not pay any commissions or any other fees in connection with the resale of the common stock in this offering. We have agreed to indemnify the selling shareholder and its officers, directors, employees and agents, and each person who controls any selling shareholder, in certain circumstances against liabilities, including liabilities arising under the Securities Act. The selling shareholder has agreed to indemnify us and our directors and officers in certain circumstances against certain liabilities, including liabilities arising under the Securities Act. If the selling stockholder notifies us that they have a material arrangement with a broker-dealer for the resale of the common stock, then we would be required to amend the registration statement of which this prospectus is a part, and file a prospectus supplement to describe the agreements between the selling stockholder and the broker-dealer. DETERMINATION OF OFFERING PRICE The price at which the common stock is sold may be based on market prices prevailing at the time of sale, at prices relating to such prevailing market prices, or at negotiated prices. DESCRIPTION OF SECURITIES COMMON STOCK For a description of our common stock see our Registration Statement on Form 8-A filed with the SEC on March 11, 1987. LEGAL MATTERS Certain legal matters have been passed upon for us by Squire, Sanders & Dempsey L.L.P., Phoenix, Arizona. EXPERTS Our consolidated financial statements included in our Annual Report (Form 10-KSB) for the years ended August 31, 2001 and 2000, have been audited by Semple & Cooper LLP, independent auditors, as set forth in their report thereon included therein and incorporated herein by reference. Such financial statements have been incorporated herein by reference, in reliance upon such reports given on the authority of such firm as experts in accounting and auditing. INFORMATION WITH RESPECT TO THE REGISTRANT This prospectus is being delivered with a copy of our Form 10-KSB for the fiscal year ended August 31, 2001 and our Form 10-QSB for the quarter ended November 30, 2001. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the small business issuer according to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable. 25 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 $ 63 Legal Fees and Expenses $15,000 Accounting Fees and Expenses $ 5,000 Printing and Engraving Expenses $ 1,000 Miscellaneous $10,000 ------- Total $31,063 ======= 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. 26 ITEM 16. EXHIBITS EXHIBIT PAGE NUMBER OR NUMBER DESCRIPTION METHOD OF FILING - ------ ----------- ---------------- 4.1 Form of Warrant Issued to Network Twentyone Filed herein International, Inc. 4.2 Form of Warrant Issued to Laurus Master Fund, Ltd. Filed herein 4.3 Series C 8% Cumulative Convertible Preferred Stock, Incorporated by $.001 par value per share Certificate of Designation Reference from File Number 333-73870 5.1 Opinion re: legality of the securities being registered Filed herein 10.1 Stock Purchase Agreement between BestNet and Jay Greig, Filed herein Ph.D. in the private placement 10.2 Securities Purchase Agreement between BestNet and Filed herein Laurus Master Fund, Ltd. in the private placement 23.1 Consent of Independent Auditors, Semple & Cooper LLP Filed herein 24 Powers of Attorney ** ** Filed as part of the Signature Page of this Form S-2. ITEM 17. UNDERTAKINGS 1. The undersigned registrant hereby undertakes to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (a) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933. (b) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; provided, however, that paragraphs (a) and (b) shall not apply if such information is contained in periodic reports filed by the registrant under Section 13 or Section 15(d) of the Securities Exchange Act of 1934, 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 which remain unsold at the termination of the offering. 4. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, as amended, each filing of the registrant's annual report under Section 13(a) or Section 15(d) of 27 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 Tucson, State of Arizona, on November 21, 2001. BESTNET COMMUNICATIONS CORP. By: /s/ Robert A. Blanchard ------------------------------------ Robert A. Blanchard, President and Chief Executive Officer By: /s/ 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 Corporation 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 Registration Statement has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Gerald I. Quinn Chairman of the Board February 18, 2002 - ------------------------- Gerald I. Quinn /s/ Robert A. Blanchard President, Chief Executive February 18, 2002 - ------------------------- Officer and Director Robert A. Blanchard /s/ Paul H. Jachim Chief Financial Officer and February 18, 2002 - ------------------------- Chief Operating Officer Paul H. Jachim (Principal Financial and Accounting Officer) /s/ Kelvin Wilbore Vice President of Technology February 18, 2002 - ------------------------- & Network and Director Kelvin Wilbore /s/ Herman Haenert Director February 18, 2002 - ------------------------- Herman Haenert 29 EX-4.1 4 ex4-1.txt WARRANT TO PURCHASE COMMON STOCK Exhibit 4.1 THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL IN A FORM REASONABLY SATISFACTORY TO THE ISSUER THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT. Warrant No. WCS-001 Date of Issuance: April 24, 2001 BESTNET COMMUNICATIONS CORP. WARRANT TO PURCHASE COMMON STOCK VOID AFTER APRIL 23, 2006 This certifies that, for value received, NETWORK TWENTYONE INTERNATIONAL, INC., a ____________ corporation or registered assigns ("Holder"), is entitled, subject to the terms set forth below, to purchase from BESTNET COMMUNICATIONS CORP., a Nevada corporation (the "Company"), ONE HUNDRED THOUSAND (100,000) shares of the Common Stock of the Company (the "Warrant Shares"), as constituted on the date hereof (the "Warrant Issue Date"), upon surrender hereof, at the principal office of the Company referred to below, with the Notice of Exercise form attached hereto as Annex A duly executed, and simultaneous payment therefor in lawful money of the United States or otherwise as hereinafter provided, at the Exercise Price as set forth in Section 2 below. The number, character and Exercise Price of such shares of Common Stock are subject to adjustment as provided below. The term "Warrant" as used herein shall include this Warrant, which is one of a series of warrants issued for the Common Stock of the Company, and any warrants delivered in substitution or exchange therefor as provided herein. 1. TERM OF WARRANT; VESTING. (a) TERM. Subject to the terms and conditions set forth herein, this Warrant shall be exercisable, in whole or in part, during the term commencing on the date of this Warrant and ending at 5:00 p.m., central time, on April 23, 2006 (the "Term"), and shall be void thereafter. (b) VESTING OF WARRANT ISSUE DATE. Of the 100,000 Warrant Shares of Common Stock represented by this Warrant, 50,000 shares shall immediately vest upon the execution of that certain BestNet Telecommunication Services Agreement by and between Company and Holder (the "Telecommunications Agreement"), and may be immediately exercised from and after such date in accordance with the terms hereof. (c) POST-WARRANT ISSUE DATE VESTING SCHEDULE. The remaining 50,000 shares of Common Stock represented by this Warrant shall immediately vest upon the date Holder begins to promote the Company's internet telephony products in Australia, Germany and South Africa in accordance with the terms of the Telecommunications Agreement, whereupon this Warrant may be immediately exercised from and after such date/occurrence in accordance with the terms hereof. 2. EXERCISE PRICE. The Exercise Price at which this Warrant may be exercised shall be $1.00 per share of Common Stock, as adjusted from time to time pursuant to Section 11 hereof. 3. EXERCISE OF WARRANT. (a) EXERCISE MECHANICS. The purchase rights represented by this Warrant are exercisable by the Holder in whole or in part, but not for less than Ten Thousand (10,000) shares at a time (or such lesser number of shares which may then constitute the maximum number purchasable; such number being subject to adjustment as provided in Section 11 below), at any time, or from time to time, during the term hereof as described in Section 1 above, by the surrender of this Warrant and the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company), upon payment (i) in cash, certified or bank funds or wire transfer of immediately available funds, (ii) by cancellation by the Holder of indebtedness of the Company to the Holder, or (iii) by a combination of (i) and (ii), of the Exercise Price of the shares to be purchased. (b) DATE OF EXERCISE. This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the shares of Common Stock issuable upon such exercise shall be treated for all purposes as the holder of record of such shares as of the close of business on such date. As promptly as practicable on or after such date and in any event within five (5) business days thereafter, the Company, at its expense, shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of shares issuable upon such exercise. In the event that this Warrant is exercised in part, the Company, at its expense, will execute and deliver a new Warrant of like tenor exercisable for the remaining number of shares for which this Warrant may then be exercised. (c) NET ISSUE EXERCISE. Notwithstanding any provisions herein to the contrary, if the fair market value of one share of Common Stock is greater than the Exercise Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Notice of Exercise and notice of such election in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: X = Y (A-B) ------- A Where X = The number of shares of Common Stock to be issued to the Holder the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being Y = canceled (at the date of such calculation) A = the fair market value of one share of the Company's Common Stock (at the date of such calculation) B = Exercise Price (as adjusted to the date of such calculation) 2 For purposes of the above calculation, fair market value of one share of Common Stock shall be determined by the Company's Board of Directors in good faith; PROVIDED, HOWEVER, that where there exists a public market for the Company's Common Stock at the time of such exercise, the fair market value per share shall be the average of the highest and lowest sale prices of the stock quoted on an established stock exchange or The Nasdaq National Market, if applicable, on the trading day immediately preceding the computation day or if the stock is not then listed on an established stock exchange or the Nasdaq National Market, the average of the closing bid and asked prices per share for the stock in the over-the-counter market or as quoted on The Nasdaq SmallCap Market on the trading day immediately preceding the computation day. 4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip representing shares shall be issued upon the exercise of this Warrant. In lieu of any fractional share to which the Holder would otherwise be entitled, the Company shall make a cash payment equal to the Exercise Price multiplied by such fraction. 5. REPLACEMENT OF WARRANT. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant, the Company shall execute and deliver, in lieu of this Warrant, a new warrant of like tenor and amount. At the request of the Company, the Holder shall provide the Company with an executed Lost Warrant Affidavit substantially in the form of Annex B attached hereto, each at the cost of the Holder, in order to provide reasonable protection to the Company concerning the replacement of this Warrant. 6. RIGHTS OF STOCKHOLDERS. Subject to Sections 9 and 11 of this Warrant, the Holder shall not be entitled to vote or receive dividends or be deemed the holder of Common Stock or any other securities of the Company that may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value, or change of stock to no par value, consolidation, merger, conveyance, or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until the Warrant shall have been exercised as provided herein. 7. TRANSFER OF WARRANT. (a) WARRANT REGISTER. The Company will maintain a register (the "Warrant Register") containing the names and addresses of the Holder or Holders. Any Holder of this Warrant or any portion thereof may change his, her or its address as shown on the Warrant Register by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the Holder may be delivered or given by mail to such Holder as shown on the Warrant Register as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. The initial Holder of this Warrant hereby consents to the use of the address set forth below his name on the signature page hereto for purposes of the Warrant Register. (b) WARRANT AGENT. The Company may, by written notice to the Holder, appoint an agent for the purpose of maintaining the Warrant Register referred to in Section 7(a) above, issuing the Warrant Shares, exchanging this Warrant, replacing this Warrant, or any or all of the foregoing. Thereafter, any such registration, issuance, exchange, or replacement, as the case may be, shall be made at the office of such agent. 3 (c) TRANSFERABILITY AND NON-NEGOTIABILITY OF WARRANT. This Warrant may not be transferred or assigned in whole or in part without compliance with all applicable federal and state securities laws by the transferor and the transferee (including the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company, if such are requested by the Company). Subject to the provisions of this Warrant with respect to compliance with the Securities Act of 1933, as amended (the "Securities Act"), title to this Warrant may be transferred by endorsement (by the Holder executing the Assignment Form annexed hereto as Annex C) and delivery in the same manner as a negotiable instrument transferable by endorsement and delivery; PROVIDED, HOWEVER, that this Warrant may not be transferred in part unless such transfer is to a transferee who, pursuant to such transfer, receives the right to purchase at least Ten Thousand (10,000) shares hereunder. (d) EXCHANGE OF WARRANT UPON A TRANSFER. On surrender of this Warrant for exchange, properly endorsed on the Assignment Form and subject to the provisions of this Warrant with respect to compliance with the Securities Act and with the limitations on assignments and transfers and contained in this Section 7, the Company at its expense shall issue to or on the order of the Holder a new warrant or warrants of like tenor, in the name of the Holder or as the Holder (on payment by the Holder of any applicable transfer taxes) may direct, for the number of shares issuable upon exercise hereof. (e) COMPLIANCE WITH SECURITIES LAWS. (i) The Holder of this Warrant, by acceptance hereof, acknowledges that this Warrant and the shares of Common Stock to be issued upon exercise hereof are being acquired solely for the Holder's own account and not as a nominee for any other party, and for investment, and that the Holder will not offer, sell or otherwise dispose of this Warrant or any Warrant Shares except under circumstances that will not result in a violation of the Securities Act or any applicable state securities laws. Upon exercise of this Warrant, the Holder shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the Warrant Shares are being acquired solely for the Holder's own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale. (ii) This Warrant and all Warrant Shares shall be stamped or imprinted with a legend in substantially the following form (in addition to any legend required by state securities laws): THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES AND ANY SECURITIES OR SHARES ISSUED HEREUNDER MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. 8. RESERVATION OF STOCK. The Company covenants that during the Term this Warrant is exercisable, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of Common Stock upon the exercise of this Warrant, PROVIDED, HOWEVER, the Company shall at all times reserve the right to issue treasury shares to the Holder upon the exercise hereof. The Company further covenants that all Warrant Shares, upon exercise of the rights represented by this Warrant and payment of the Exercise Price, all as set forth herein, will be free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously or otherwise specified herein or liens resulting from the Holder's actions). The Company agrees that its issuance of 4 this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of this Warrant. 9. NOTICES. (a) CERTIFICATE OF CHIEF FINANCIAL OFFICER. Whenever the Exercise Price or number of shares purchasable hereunder shall be adjusted pursuant to Section 11 hereof, the Company shall, within thirty (30) days of the occurrence of the event which triggered such adjustment, issue a certificate signed by its Chief Financial Officer setting forth, in reasonable detail, the event requiring the adjustment, the amount of the adjustment, the method by which such adjustment was calculated, and the Exercise Price and number of shares purchasable hereunder after giving effect to such adjustment, and shall cause a copy of such certificate to be mailed (by first-class mail, postage prepaid) to the Holder of this Warrant. The Company shall, upon the written request, at any time, of any such Holder, furnish or cause to be furnished to such Holder a like certificate setting forth: (i) such adjustments and readjustments; (ii) the Exercise Price at the time in effect; and (iii) the number of shares and the amount, if any, of other property that at the time would be received upon the exercise of the Warrant. (b) NOTICE OF CERTAIN FUNDAMENTAL TRANSACTIONS. In case: (i) the Company shall take a record of the holders of its Common Stock (or other stock or securities at the time receivable upon the exercise of this Warrant) for the purpose of entitling them to receive any dividend or other distribution, or any right to subscribe for or purchase any shares of stock of any class or any other securities, or (ii) of any capital reorganization of the Company, any reclassification of the capital stock of the Company, any consolidation or merger of the Company with or into another corporation, or any conveyance of all or substantially all of the assets of the Company to another corporation, or (iii) of any voluntary dissolution, liquidation or winding-up of the Company, then, and in each such case, the Company will mail or cause to be mailed to the Holder or Holders a notice specifying, as the case may be, (A) the date on which a record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, or (B) the date on which such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up is to take place, and the time, if any is to be fixed, as of which the holders of record of Common Stock (or such stock or securities at the time receivable upon the exercise of this Warrant) shall be entitled to exchange their shares of Common Stock (or such other stock or securities) for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, conveyance, dissolution, liquidation or winding-up. Such notice shall be mailed at least ten (10) days prior to the date therein specified. (c) DEEMED RECEIPT. All such notices, advices and communications shall be deemed to have been received (i) in the case of personal delivery, on the date of such delivery and (ii) in the case of mailing, on the third business day following the date of such mailing. 10. AMENDMENTS. (a) WITH THE CONSENT OF THE HOLDER. Any term of this Warrant may be amended with the written consent of the Company and the Holders of the Warrant. 5 (b) NO WAIVER. No waivers of, or exceptions to, any term, condition or provision of this Warrant, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. 11. ADJUSTMENTS. The Exercise Price and the number of shares purchasable hereunder are subject to adjustment from time to time as follows: (a) MERGER, SALE OF ASSETS, ETC. If at any time while this Warrant, or any portion thereof, is outstanding and unexpired there shall be (i) a reorganization (other than a combination, reclassification, exchange or subdivision of shares otherwise provided for herein), (ii) a merger or consolidation of the Company with or into another corporation in which the Company is not the surviving entity, or a reverse triangular merger in which the Company is the surviving entity but the shares of the Company's capital stock outstanding immediately prior to the merger are converted by virtue of the merger into other property, whether in the form of securities, cash, or otherwise, or (iii) a sale or transfer of the Company's properties and assets as, or substantially as, an entirety to any other person, then, as a part of such reorganization, merger, consolidation, sale or transfer, lawful provision shall be made so that the holder of this Warrant shall thereafter be entitled to receive upon exercise of this Warrant, during the period specified herein and upon payment of the Exercise Price then in effect, the number of shares of stock or other securities or property of the successor corporation resulting from such reorganization, merger, consolidation, sale or transfer that a holder of the shares deliverable upon exercise of this Warrant would have been entitled to receive in such reorganization, consolidation, merger, sale or transfer if this Warrant had been exercised immediately before such reorganization, merger, consolidation, sale or transfer, all subject to further adjustment as provided in this Section 11. The foregoing provisions of this Section 11(a) shall similarly apply to successive reorganizations, consolidations, mergers, sales and transfers and to the stock or securities of any other corporation that are at the time receivable upon the exercise of this Warrant. If the per-share consideration payable to the Holder hereof for shares in connection with any such transaction is in a form other than cash or marketable securities, then the value of such consideration shall be determined in good faith by the Company's Board of Directors. In all events, appropriate adjustment (as determined in good faith by the Company's Board of Directors) shall be made in the application of the provisions of this Warrant with respect to the rights and interests of the Holder after the transaction, to the end that the provisions of this Warrant shall be applicable after that event, as near as reasonably may be, in relation to any shares or other property deliverable after that event upon exercise of this Warrant. (b) RECLASSIFICATION, ETC. If the Company, at any time while this Warrant, or any portion thereof, remains outstanding and unexpired by reclassification of securities or otherwise, shall change any of the securities as to which purchase rights under this Warrant exist into the same or a different number of securities of any other class or classes, this Warrant shall thereafter represent the right to acquire such number and kind of securities as would have been issuable as the result of such change with respect to the securities that were subject to the purchase rights under this Warrant immediately prior to such reclassification or other change and the Exercise Price therefor shall be appropriately adjusted, all subject to further adjustment as provided in this Section 11. (c) SPLIT, SUBDIVISION OR COMBINATION OF SHARES. If the Company at any time while this Warrant, or any portion thereof, remains outstanding and unexpired shall split, subdivide or combine the securities as to which purchase rights under this Warrant exist, into a different number of securities of the same class, the Exercise Price for such securities shall be proportionately decreased in the case of a split or subdivision or proportionately increased in the case of a combination. 6 (d) ADJUSTMENTS FOR DIVIDENDS IN STOCK OR OTHER SECURITIES OR PROPERTY. If while this Warrant, or any portion hereof, remains outstanding and unexpired the holders of the securities as to which purchase rights under this Warrant exist at the time shall have received, or, on or after the record date fixed for the determination of eligible stockholders, shall have become entitled to receive, without payment therefor, other or additional stock or other securities or property (other than cash) of the Company by way of dividend, then and in each case, this Warrant shall represent the right to acquire, in addition to the number of shares of the security receivable upon exercise of this Warrant, and without payment of any additional consideration therefor, the amount of such other or additional stock or other securities or property (other than cash) of the Company that such holder would hold on the date of such exercise had it been the holder of record of the security receivable upon exercise of this Warrant on the date hereof and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and/or all other additional stock available by it as aforesaid during such period, giving effect to all adjustments called for during such period by the provisions of this Section 11. (e) NO IMPAIRMENT. The Company will not, by any voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Section 11 and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the Holders of this Warrant against impairment. 12. REGISTRATION RIGHTS. (a) DEFINITIONS. As used in this Warrant, the following terms shall have the following meanings: AFFILIATE: the meaning set forth in Rule 12b-2 under the Exchange Act. EXCHANGE ACT: the Securities Exchange Act of 1934, as amended. PROSPECTUS: the prospectus included in any Registration Statement (including, without limitation, a prospectus that includes any information previously omitted from a prospectus filed as part of an effective Registration Statement in reliance upon Rule 430A under the Securities Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Registrable Securities covered by such Registration Statement, and all other amendments and supplements to the Prospectus, including post-effective amendments, and all materials incorporated by reference or deemed to be incorporated by reference in such Prospectus. REGISTRABLE SECURITIES: the Warrant Shares (whether or not this Warrant is then exercised) and any other securities issued or issuable with respect to the Warrant Shares by way of a stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise, PROVIDED THAT any particular shares of such Registrable Securities shall cease to be Registrable Securities when (i) a Registration Statement with respect to the sale of such securities shall have become effective under the Securities Act and such securities shall have been disposed of in accordance with such Registration Statement, (ii) such shares shall have become eligible to be sold to the public by the Holder pursuant to Rule 144 under the Securities Act and such securities have been disposed of in accordance with such rule, (iii) subsequent disposition of such shares shall not require registration or qualification of them under the Securities Act or of any similar state law then in force; (iv) the Warrants shall have not been exercised as of the expiration date specified in the respective Warrant, or (v) such shares shall have ceased to be outstanding. 7 REGISTRATION: a registration of securities (including Registrable Securities) under the Securities Act. REGISTRATION EXPENSES: any and all expenses incident to performance of or compliance with this Warrant by the Company and its subsidiaries, including, without limitation (i) all SEC, stock exchange, Nasdaq and other registration, listing and filing fees (other than fees and expenses incurred in connection with compliance with state securities or blue sky laws); (ii) all fees and expenses incurred in connection with compliance with the rules for trading securities on the Nasdaq or on any stock exchange on which the Common Stock is traded (including reasonable fees and disbursements of counsel to the underwriters in connection with such compliance and the preparation of a blue sky memorandum and legal investment survey), (iii) all expenses of printing, distributing, mailing and delivering, any Registration Statement, any Prospectus, any underwriting agreements, transmittal letters, securities sales agreements, securities certificates and other documents relating to the performance of or compliance with this Agreement, (iv) the fees and disbursements of counsel for the Company and of the independent public accountants of the Company, including the expenses of any "cold comfort" letters required by or incident to such performance and compliance, (v) the fees and expenses of any trustee, transfer agent, registrar, escrow agent or custodian, (vi) the expenses customarily borne by the issuer incurred in connection with making road show presentations, if any, to facilitate the distribution and sale of Registrable Securities, and (vii) all internal expenses of the Company (including all salaries and expenses of officers and employees performing legal or accounting duties). RULE 144: Rule 144 (or any successor provision) under the Securities Act. SEC: the Securities and Exchange Commission. UNDERWRITTEN REGISTRATION OR UNDERWRITTEN OFFERING: a Registration in which securities of the Company (including Registrable Securities) are sold to an underwriter for reoffering to the public. (b) INCIDENTAL REGISTRATION RIGHTS. If the Company proposes to register any of its equity securities (other than pursuant to a Registration Statement on Form S-4 or S-8 or any successor form) and the Registration form to be used may be used for Registration of the Registrable Securities, it will give prompt written notice to the Holder of its intention to effect such Registration (the "Incidental Registration"). Within five (5) business days of receiving such written notice of an Incidental Registration, the Holder may make a written request (the "Piggy-Back Request") that the Company include in the proposed Incidental Registration all, or a portion, of the Registrable Securities owned by the Holder (which Piggy-Back Request shall set forth the Registrable Securities intended to be disposed of by the Holder and the intended method of disposition thereof). The Company will use its best efforts to include in any Incidental Registration all Registrable Securities which the Company has been requested to register pursuant to any timely Piggy-Back Request to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities so to be registered; provided, however, that notwithstanding the preceding: (i) the Company shall not be obligated pursuant to this Section 12(b) to effect a Registration of Registrable Securities requested pursuant to a timely Piggy-Back Request if the Company discontinues the related Incidental Registration at any time prior to the effective date of any Registration Statement filed in connection therewith; and (ii) if a Registration pursuant to this Section 12(b) involves an underwritten offering, and the managing underwriter (or, in the case of an offering that is not underwritten, an investment banker) shall advise the Company that, in its opinion, the number of securities requested and 8 otherwise proposed to be included in such Registration exceeds the number which can be sold in such offering without adversely affecting the marketability of the offering, the Company will include in such Registration to the extent of the number which the Company is so advised can be sold in such offering, FIRST, the securities the Company proposes to sell for its own account in such Registration and SECOND, the Registrable Securities of the Holder requesting to be included in such Registration and all other securities requested to be included in such Registration on a PRO RATA basis. (c) UNDERWRITTEN OFFERS. The provisions of this Section 12(c) do not establish additional registration rights but instead set forth procedures applicable, in addition to those set forth in Sections 12(b) and (d), to any Registration which is an underwritten offering. (i) SELECTION OF UNDERWRITERS. If a Registration of Registrable Securities is being effected pursuant to Section 12(b) and such securities are to be distributed by or through one or more underwriters, the Company shall have the sole right to select one or more underwriters to administer the offering. (ii) PARTICIPATION IN UNDERWRITTEN REGISTRATIONS. The Holder may not participate in any underwritten Registrations hereunder unless the Holder agrees to sell the Holder's Registrable Securities on the basis provided in any underwriting arrangements approved by the Company. (iii) HOLDBACK AGREEMENT OF THE HOLDER. If and whenever the Company proposes to register any of its equity securities under the Securities Act for its own account (other than on Form S-4 or S-8 or any successor form) or is required to use reasonable efforts to effect the Registration of any Registrable Securities under the Securities Act pursuant to Section 12(b), the Holder agrees not to effect any public sale or distribution, including any sale pursuant to Rule 144, of any Registrable Securities, of any other equity securities of the Company, or any securities convertible into or exchangeable for any equity securities of the Company, within fifteen (15) days prior to and ninety (90) days (unless advised in writing by the managing underwriter that a longer period, not to exceed one-hundred eighty (180) days, is required) after the effective date of the Registration Statement relating to such Registration, except as part of such Registration or with the prior written consent of the Company and the managing underwriter, if any. (d) REGISTRATION PROCEDURES/OBLIGATIONS OF THE COMPANY. If and whenever the Company is required pursuant to Section 12(b) to effect a Registration of Registrable Securities, the Company shall, subject to the provisions of Section 12(b): (i) prepare and file with the SEC a Registration Statement covering such Registrable Securities and use commercially reasonable efforts to cause such Registration Statement to become effective and remain effective as provided herein; (ii) use commercially reasonable efforts to prepare and file with the SEC such amendments and supplements to such Registration Statement as may be necessary to keep such Registration Statement and Prospectus used in connection therewith effective at least until the earlier of (A) ninety (90) days after the effective date of such Registration Statement, or (B) the completion of the distribution by the Holder of all of the Registrable Securities covered by such Registration Statement (the "Effectiveness Period"); 9 (iii) use commercially reasonable efforts to register or qualify the Registrable Securities covered by such Registration Statement under the securities or blue sky laws of such states within the United States as the Company determines, PROVIDED that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any state wherein it is not so qualified, subject itself to taxation in any state wherein it is not so subject, or take any action which would subject it to general service of process in any state wherein it is not so subject; and (iv) notify the Holder of Registrable Securities covered by such Registration Statement (A) if, to its knowledge, such Registration Statement, at the time it or any amendment thereto became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and, as promptly as practicable, prepare and file with the SEC a post-effective amendment to such Registration Statement and use commercially reasonable efforts to cause such post-effective amendment to become effective such that such Registration Statement, as so amended, shall not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and (B) at any time when a Prospectus relating thereto is required to be delivered under the Securities Act, if, to its knowledge, the Prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, and, as promptly as practicable, prepare and furnish to such Holder a reasonable number of copies of a supplement to or an amendment of such Prospectus as may be necessary so that, as thereafter delivered to the purchasers of such securities, such Prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The Holder agrees that upon receipt of any notice from the Company pursuant to Section 12(d)(iv), the Holder will promptly discontinue the Holder's disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until the Holder shall have received notice from the Company that such Registration Statement has been amended and/or copies of the supplemented or amended Prospectus contemplated by Section 12(d)(iv) have been furnished. If so directed by the Company, the Holder of Registrable Securities will deliver to the Company all copies, other than permanent file copies, in the Holder's possession of the Prospectus covering such Registrable Securities at the time of receipt of such notice. (e) HOLDER INFORMATION. The Company may require the Holder of any Registrable Securities as to which any Registration is being effected to furnish to the Company such information regarding such Holder and the distribution of such Registrable Securities as the Company may from time to time reasonably request and as shall be required by law in connection therewith. The Holder agrees to furnish promptly to the Company all information required to be disclosed in order to make the information previously furnished to the Company by such Holder not materially false or misleading. (f) REGISTRATION EXPENSES. The Company shall pay all Registration Expenses arising from or incidental to the performance of, or compliance with, this Agreement, PROVIDED that the Holder requesting such Registration shall bear any transfer taxes applicable to its Registrable Securities registered thereunder, customary (both as to type and amount) commissions, discounts or other compensation payable to the underwriters (including fees and expenses of underwriters' counsel), selling brokers, managers or other similar persons 10 engaged in the distribution of any of the Registrable Securities, and the fees and expenses of the Holder's own counsel. (g) INDEMNIFICATION. (i) INDEMNIFICATION BY THE HOLDER OF REGISTRABLE SECURITIES. The Company may require, as a condition to including any Registrable Securities in any Registration Statement filed pursuant to this Agreement that the Company shall have received an undertaking satisfactory to it from the Holder to indemnify, defend and hold harmless, the Company, its directors and officers and each person, if any, who controls (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) the Company from and against any and all losses, claims, damages and liabilities, joint or several, to which any of the foregoing may become subject, under the Securities Act or otherwise, based upon or arising out of any untrue statement or alleged untrue statement of a material fact in a Registration Statement, any preliminary prospectus, final Prospectus or summary Prospectus, or any amendment or supplement thereto, or omission or alleged omission to state therein any material fact required to be stated therein or necessary to make the statements therein not misleading, if such statement or alleged statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company by such Holder expressly for use in the preparation of such Registration Statement, preliminary prospectus, final Prospectus, summary Prospectus, amendment or supplement. Such indemnity shall remain in full force and effect, regardless of any investigation made by or on behalf of the Company or any such director, officer or controlling person and shall survive the transfer of such Registrable Securities by such Holder. (ii) INDEMNIFICATION PAYMENTS. Any indemnification required to be made by an indemnifying party pursuant to this Section 12(g) shall be made by periodic payments to the indemnified party during the course of the action or proceeding, as and when bills are received by such indemnifying party with respect to an indemnifiable loss, claim, damage, liability or expense incurred by such indemnified party. (iii) OTHER REMEDIES. If for any reason the foregoing indemnity is unavailable, or is insufficient to hold harmless an indemnified party, other than by reason of the exceptions provided therein, then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such losses, claims, damages, liabilities, actions, proceedings or expenses in such proportion as is appropriate to reflect the relative benefits to and faults of the indemnifying party on the one hand and the indemnified party on the other in connection with the offering of Registrable Securities (taking into account the portion of the proceeds of the offering realized by each such party) and the statements or omissions or alleged statements or omissions which resulted in such loss, claim, damage, liability, action, proceeding or expense, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statements or omissions. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. No party shall be liable for contribution under this Section 12(g)(iii) except to the extent and under such circumstances as such party would have been liable to indemnify under this Section 12(g) if such indemnification were enforceable under applicable law. 11 13. MISCELLANEOUS. (a) NOTICES. All notices and other communications from the Company to the Holder shall be mailed by first class registered or certified mail, postage prepaid (unless specified otherwise herein), at the address contained in the Warrant Register. (b) GOVERNING LAW. This Warrant shall be construed and enforced in accordance with and governed by the internal laws of the State of Nevada, other than the conflicts of laws thereof. (c) HEADINGS. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. (d) SEVERABILITY AND CONFLICTS. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. To the extent any terms of this Warrant or the rights granted hereby conflict with any provision(s) of the Telecommunications Agreement, the terms of this Warrant shall control. (e) DISPUTE RESOLUTION. Any dispute or claim arising out of, or in connection with, this Warrant shall be finally settled by binding arbitration in Washoe County, Nevada, United States of America, in accordance with the then current rules and procedures of the American Arbitration Association by one (1) arbitrator appointed pursuant to such rules and procedures. The arbitrator shall apply the law of the State of Nevada, United States of America, without reference to rules of conflicts of laws, to the merits of any dispute or claim. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Notwithstanding the above, either party may seek injunctive relief or interim relief as necessary without breach of this provision of this Warrant. All actions or proceedings relating to the Warrant shall be maintained in a court located in Washoe County, Nevada, United States of America, and the parties hereto consent to the jurisdiction of said court and waive any objection to such venue. 14. REPRESENTATIONS OF HOLDER. The holder of this Warrant, by the acceptance hereof, represents that it is acquiring this Warrant and the Warrant Shares for its own account for investment only and not with a view towards, or for resale in connection with, the public sale or distribution of this Warrant or the Warrant Shares, except pursuant to sales registered or exempted under the Securities Act; provided, however, that by making the representations herein, the holder does not agree to hold this Warrant or any of the Warrant Shares for any minimum or other specific term and reserves the right to dispose of this Warrant and the Warrant Shares at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act. The holder of this Warrant further represents, by acceptance hereof, that, as of this date, such holder is an "accredited investor" as such term is defined in Rule 501(a)(1) of Regulation D promulgated by the Securities and Exchange Commission under the Securities Act (an "Accredited Investor"). [Signature Page Follows] 12 IN WITNESS WHEREOF, BestNet Communications Corp. has caused this Warrant to be executed by its officer thereunto duly authorized. Dated: ____________, 2001 NETWORK 21 INTERNATIONAL, INC. BESTNET COMMUNICATIONS CORP. By:_____________________________ By:_____________________________ Name:___________________________ Name:___________________________ Title:__________________________ Title:__________________________ Address: Suite 100 Address: 5210 East Williams Circle 4550 River Green Parkway Suite 200 Duluth, Georgia 30096 Tucson, Arizona 85711 (770) 622.2121 - Telephone (520) 750-9093 - Telephone (770) 622.1833 - Facsimile (520) 750-9194 - Facsimile Annexes - ------------------------------------ Annex A - Notice of Exercise Annex B - Assignment Form Annex C - Affidavit of Loss 13 ANNEX A NOTICE OF EXERCISE To: BESTNET COMMUNICATIONS CORP. (1) The undersigned hereby elects to purchase _________ shares of Common Stock of BESTNET COMMUNICATIONS CORP., pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price for such shares in full as follows: ___________________________________ ___________________________________ ___________________________________ (2) In exercising this Warrant, the undersigned hereby confirms and acknowledges that the shares of Common Stock to be issued upon conversion thereof are being acquired solely for the account of the undersigned and not as a nominee for any other party, and for investment, and that the undersigned will not offer, sell or otherwise dispose of any such shares of Common Stock, except under circumstances that will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. (3) Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below: ___________________________________ (Name) ___________________________________ (Name) (4) Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned or in such other name as is specified below: ___________________________________ (Name) ____________________ ___________________________________ (Date) (Signature) ANNEX C ASSIGNMENT FORM FOR VALUE RECEIVED, the undersigned registered owner of this Warrant hereby sells, assigns and transfers unto the Assignee named below all of the rights of the undersigned under the within Warrant, with respect to the number of shares of Common Stock set forth below: Name of Assignee Address No. of Shares - ---------------- ------- ------------- and does hereby irrevocably constitute and appoint Attorney ____________________ to make such transfer on the books of BestNet Communications Corp., maintained for the purpose, with full power of substitution in the premises. The undersigned also represents that, by assignment hereof, the Assignee acknowledges that this Warrant and the shares of stock to be issued upon exercise hereof are being acquired for investment and that the Assignee will not offer, sell or otherwise dispose of this Warrant or any shares of stock to be issued upon exercise hereof except under circumstances which will not result in a violation of the Securities Act of 1933, as amended, or any state securities laws. Further, the Assignee has acknowledged that upon exercise of this Warrant, the Assignee shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the shares of stock so purchased are being acquired for investment and not with a view toward distribution or resale. Dated:______________________________ _______________________________________ Signature of Holder ANNEX B FORM OF AFFIDAVIT OF LOSS STATE OF ) ) ss: COUNTY OF ) The undersigned (hereinafter "Deponent"), being duly sworn, deposes and says that: 1. Deponent is an adult whose mailing address is: ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ 2. Deponent is the recipient of a Warrant (the "Warrant") from BestNet Communications Corp. (the "Company"), dated ___________________________________ for the purchase of ___________________________________ shares of Common Stock, par value $.001 per share, of the Company, at an exercise price of $_________________________ per share. 3. The Warrant has been lost, stolen, destroyed or misplaced, under the following circumstances: 4. The Warrant was not endorsed. 5. Deponent has made a diligent search for the Warrant, and has been unable to find or recover same, and Deponent was the unconditional owner of the Warrant at the time of loss, and is entitled to the full and exclusive possession thereof; that neither the Warrant nor the rights of Deponent therein have, in whole or in part, been assigned, transferred, hypothecated, pledged or otherwise disposed of, in any manner whatsoever, and that no person, firm or corporation other than the Deponent has any right, title, claim, equity or interest in, to, or respecting the Warrant. 6. Deponent makes this Affidavit for the purpose of requesting and inducing the Company and its agents to issue a new warrant in substitution for the Warrant. 7. If the Warrant should ever come into the hands, custody or power of the Deponent or the Deponent's representatives, agents or assigns, the Deponent will immediately and without consideration surrender the Warrant to the Company, its representatives, agents or assigns, its transfer agents or subscription agents for cancellation. B-1 8. The Deponent hereby indemnifies and holds harmless the Company from any claim or demand for payment or reimbursement of any party arising in connection with the subject matter of this Affidavit. Signed, sealed and dated: _________________________ _______________________________________ Deponent Sworn to and subscribed before me this ____ day of _____________, _________ _______________________________________ Notary Public EX-4.2 5 ex4-2.txt COMMON STOCK PURCHASE WARRANT Exhibit 4.2 THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT UNDER SAID ACT OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO BESTNET COMMUNICATIONS CORP. THAT SUCH REGISTRATION IS NOT REQUIRED. Right to Purchase 5,750 Shares of Common Stock of BestNet Communications Corp. (subject to adjustment as provided herein) COMMON STOCK PURCHASE WARRANT No. 2002-1 Issue Date: January __, 2002 BESTNET COMMUNICATIONS CORP., a corporation organized under the laws of the State of Nevada (the "Company"), hereby certifies that, for value received, LAURUS MASTER FUND, LTD., or assigns (the "HOLDER"), is entitled, subject to the terms set forth below, to purchase from the Company from and after the Issue Date of this Warrant and at any time or from time to time before 5:00 p.m., New York time, through five (5) years after such date (the "EXPIRATION DATE"), up to 5,750 fully paid and nonassessable shares of Common Stock (as hereinafter defined), $.001 par value per share, of the Company, at a purchase price of $____ per share (such purchase price per share as adjusted from time to time as herein provided is referred to herein as the "PURCHASE PRICE"). The number and character of such shares of Common Stock and the Purchase Price are subject to adjustment as provided herein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term "Company" shall include BestNet Communications Corp. and any corporation which shall succeed or assume the obligations of BestNet Communications Corp. hereunder. (b) The term "Common Stock" includes (a) the Company's Common Stock, $.001 par value per share, as authorized on the date of the Securities Purchase Agreement referred to in Section 9 hereof, (b) any other capital stock of any class or classes (however designated) of the Company, authorized on or after such date, the holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even if the right so to vote has been suspended by the happening of such a contingency) and (c) any other securities into which or for which any of the securities described in (a) or (b) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (c) The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the holder of the Warrant at any time shall be entitled to receive, or shall have received, on the exercise of the Warrant, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 4 or otherwise. 1 1. EXERCISE OF WARRANT. 1.1. NUMBER OF SHARES ISSUABLE UPON EXERCISE. From and after the date hereof through and including the Expiration Date, the holder hereof shall be entitled to receive, upon exercise of this Warrant in whole in accordance with the terms of subsection 1.2 or upon exercise of this Warrant in part in accordance with subsection 1.3, shares of Common Stock of the Company, subject to adjustment pursuant to Section 4. 1.2. FULL EXERCISE. This Warrant may be exercised in full by the holder hereof by delivery of an original or fax copy of the form of subscription attached as Exhibit A hereto (the "SUBSCRIPTION FORM") duly executed by such Holder, to the Company at its principal office or at the office of its warrant agent (as provided hereinafter), accompanied by payment, in cash, wire transfer, or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock for which this Warrant is then exercisable by the Purchase Price (as hereinafter defined) then in effect. 1.3. PARTIAL EXERCISE. This Warrant may be exercised in part (but not for a fractional share) by surrender of this Warrant in the manner and at the place provided in subsection 1.2 except that the amount payable by the holder on such partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock designated by the holder in the Subscription Form by (b) the Purchase Price then in effect. On any such partial exercise, the Company, at its expense, will forthwith issue and deliver to or upon the order of the holder hereof a new Warrant of like tenor, in the name of the holder hereof or as such holder (upon payment by such holder of any applicable transfer taxes) may request, the number of shares of Common Stock for which such Warrant may still be exercised. 1.4. FAIR MARKET VALUE. Fair Market Value of a share of Common Stock as of a particular date (the "DETERMINATION DATE") shall mean the Fair Market Value of a share of the Company's Common Stock. Fair Market Value of a share of Common Stock as of a Determination Date shall mean: (a) If the Company's Common Stock is traded on an exchange or is quoted on the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") National Market System or the NASDAQ SmallCap Market, then the closing or last sale price, respectively, reported for the last business day immediately preceding the Determination Date. (b) If the Company's Common Stock is not traded on an exchange or on the NASDAQ National Market System or the NASDAQ SmallCap Market but is traded on the NASD OTC Bulletin Board, then the mean of the closing bid and asked prices reported for the last business day immediately preceding the Determination Date. (c) Except as provided in clause (d) below, if the Company's Common Stock is not publicly traded, then as the Holder and the Company agree or in the absence of agreement by arbitration in accordance with the rules then standing of the American Arbitration Association, before a single arbitrator to be chosen from a panel of persons qualified by education and training to pass on the matter to be decided. (d) If the Determination Date is the date of a liquidation, dissolution or winding up, or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company's charter, then all amounts to be payable per share to holders of the Common Stock pursuant to the charter in the event of such liquidation, dissolution or winding up, plus all other amounts to be payable per share in respect of the Common Stock in liquidation under the charter, assuming for the purposes of this clause (d) that all of the shares of Common Stock then issuable upon exercise of all of the Warrants are outstanding at the Determination Date. 1.5. COMPANY ACKNOWLEDGMENT. The Company will, at the time of the exercise of the Warrant, upon the request of the holder hereof acknowledge in 2 writing its continuing obligation to afford to such holder any rights to which such holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to such holder any such rights. 1.6. TRUSTEE FOR WARRANT HOLDERS. In the event that a bank or trust company shall have been appointed as trustee for the holders of the Warrants pursuant to Subsection 3.2, such bank or trust company shall have all the powers and duties of a warrant agent (as hereinafter described) and shall accept, in its own name for the account of the Company or such successor person as may be entitled thereto, all amounts otherwise payable to the Company or such successor, as the case may be, on exercise of this Warrant pursuant to this Section 1. 2.1 DELIVERY OF STOCK CERTIFICATES, ETC. ON EXERCISE. The Company agrees that the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares as aforesaid. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 7 days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the holder hereof, or as such holder (upon payment by such holder of any applicable transfer taxes) may direct in compliance with applicable Securities Laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Common Stock (or Other Securities) to which such holder shall be entitled on such exercise, plus, in lieu of any fractional share to which such holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such holder is entitled upon such exercise pursuant to Section 1 or otherwise. 2.2. CASHLESS EXERCISE. (a) Payment may be made either in (i) cash or by certified or official bank check payable to the order of the Company equal to the applicable aggregate Purchase Price, (ii) by delivery of Warrants, Common Stock and/or Common Stock receivable upon exercise of the Warrants in accordance with Section (b) below, or (iii) by a combination of any of the foregoing methods, for the number of Common Shares specified in such form (as such exercise number shall be adjusted to reflect any adjustment in the total number of shares of Common Stock issuable to the holder per the terms of this Warrant) and the holder shall thereupon be entitled to receive the number of duly authorized, validly issued, fully-paid and non-assessable shares of Common Stock (or Other Securities) determined as provided herein. (b) Notwithstanding any provisions herein to the contrary, if the Fair Market Value of one share of Common Stock is greater than the Purchase Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, upon consent of the Company, the holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being cancelled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Subscription Form in which event the Company shall issue to the holder a number of shares of Common Stock computed using the following formula: X= Y (A-B) ------- A Where X = the number of shares of Common Stock to be issued to the holder Y = the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation) 3 A = the Fair Market Value of one share of the Company's Common Stock (at the date of such calculation) B = Purchase Price (as adjusted to the date of such calculation) 3. ADJUSTMENT FOR REORGANIZATION, CONSOLIDATION, MERGER, ETC. 3.1. REORGANIZATION, CONSOLIDATION, MERGER, ETC. In case at any time or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the holder of this Warrant, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock (or Other Securities) issuable on such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Section 4. 3.2. DISSOLUTION. In the event of any dissolution of the Company following the transfer of all or substantially all of its properties or assets, the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the holders of the Warrants after the effective date of such dissolution pursuant to this Section 3 to a bank or trust company having its principal office in New York, NY, as trustee for the holder or holders of the Warrants. 3.3. CONTINUATION OF TERMS. Upon any reorganization, consolidation, merger or transfer (and any dissolution following any transfer) referred to in this Section 3, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant as provided in Section 4. In the event this Warrant does not continue in full force and effect after the consummation of the transaction described in this Section 3, then only in such event will the Company's securities and property (including cash, where applicable) receivable by the holders of the Warrants be delivered to the Trustee as contemplated by Section 3.2. 3.4. SHARE ISSUANCE. Except for the Excepted Issuances as described in Section 10 of the Purchase Agreement, if the Company at any time shall issue any shares of Common Stock prior to the complete exercise of this Warrant for a consideration less than the Purchase Price that would be in effect at the time of such issue, then, and thereafter successively upon each such issue, the Purchase Price shall be reduced as follows: (i) the number of shares of Common Stock outstanding immediately prior to such issue shall be multiplied by the Purchase Price in effect at the time of such issue and the product shall be added to the aggregate consideration, if any, received by the Company upon such issue of additional shares of Common Stock; and (ii) the sum so obtained shall 4 be divided by the number of shares of Common Stock outstanding immediately after such issue. The resulting quotient shall be the adjusted Purchase Price. For purposes of this adjustment, the issuance of any security of the Company carrying the right to convert such security into shares of Common Stock or of any warrant, right or option to purchase Common Stock shall result in an adjustment to the Purchase Price upon the issuance of shares of Common Stock upon exercise of such conversion or purchase rights. 4. EXTRAORDINARY EVENTS REGARDING COMMON STOCK. In the event that the Company shall (a) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (b) subdivide its outstanding shares of Common Stock, or (c) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Purchase Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 4. The number of shares of Common Stock that the holder of this Warrant shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be increased to a number determined by multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 4) be issuable on such exercise by a fraction of which (a) the numerator is the Purchase Price that would otherwise (but for the provisions of this Section 4) be in effect, and (b) the denominator is the Purchase Price in effect on the date of such exercise. 5. CERTIFICATE AS TO ADJUSTMENTS. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of the Warrants, the Company at its expense will promptly cause its Chief Financial Officer or other appropriate designee to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (a) the consideration received or receivable by the Company for any additional shares of Common Stock (or Other Securities) issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock (or Other Securities) outstanding or deemed to be outstanding, and (c) the Purchase Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the holder of the Warrant and any Warrant agent of the Company (appointed pursuant to Section 11 hereof). 6. RESERVATION OF STOCK, ETC. ISSUABLE ON EXERCISE OF WARRANT; FINANCIAL STATEMENTS. The Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of the Warrants, all shares of Common Stock (or Other Securities) from time to time issuable on the exercise of the Warrant. This Warrant entitles the holder hereof to receive copies of all financial and other information distributed or required to be distributed to the holders of the Company's Common Stock. 7. ASSIGNMENT; EXCHANGE OF WARRANT. Subject to compliance with applicable Securities laws, this Warrant, and the rights evidenced hereby, may be transferred by any registered holder hereof (a "TRANSFEROR") with respect to any or all of the Shares. On the surrender for exchange of this Warrant, with the Transferor's endorsement in the form of Exhibit B attached hereto (the "TRANSFEROR ENDORSEMENT FORM") and together with evidence reasonably satisfactory to the Company demonstrating compliance with applicable Securities Laws, the Company at its expense but with payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the order of the Transferor thereof a new Warrant or Warrants of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a "TRANSFEREE"), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor. 5 8. REPLACEMENT OF WARRANT. On receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. 9. REGISTRATION RIGHTS. The Holder of this Warrant has been granted certain registration rights by the Company. These registration rights are set forth in a Securities Purchase Agreement entered into by the Company and Purchaser of the Company's Series C Convertible Preferred Stock (the "PREFERRED STOCK") at or prior to the issue date of this Warrant. The terms of the Securities Purchase Agreement are incorporated herein by reference. Upon the occurrence of a Non-Registration Event as described in the Securities Purchase Agreement, in the event the Company is unable to issue Common Stock upon exercise of this Warrant that has been registered in the Registration Statement described in Section 9.1(d) of the Securities Purchase Agreement, within the time periods described in the Securities Purchase Agreement, which Registration Statement must be effective throughout the exercise period of this Warrant, then upon written demand made by the Holder, the Company will pay to the Holder of this Warrant, in lieu of delivering Common Stock, a sum equal to the closing ask price of the Company's Common Stock on the Principal Market (as defined in the Securities Purchase Agreement) or such other principal trading market for the Company's Common Stock on the trading date immediately preceding the date notice is given by the Holder, less the Purchase Price, for each share of Common Stock designated in such notice from the Holder. 10. MAXIMUM EXERCISE. The Holder shall not be entitled to exercise this Warrant on an exercise date, in connection with that number of shares of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Holder and its affiliates on an exercise date, and (ii) the number of shares of Common Stock issuable upon the exercise of this Warrant with respect to which the determination of this proviso is being made on an exercise date, which would result in beneficial ownership by the Holder and its affiliates of more than 4.99% of the outstanding shares of Common Stock of the Company on such date. For the purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13d-3 thereunder. Subject to the foregoing, the Holder shall not be limited to aggregate exercises which would result in the issuance of more than 4.99%. The restriction described in this paragraph may be revoked upon 75 days prior notice from the Holder to the Company or upon an Event of Default under the Preferred Stock. The Holder may allocate which of the equity of the Company deemed beneficially owned by the Subscriber shall be included in the 4.99% amount described above and which shall be allocated to the excess above 4.99%. 11. WARRANT AGENT. The Company may, by written notice to the each holder of the Warrant, appoint an agent for the purpose of issuing Common Stock (or Other Securities) on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 7, and replacing this Warrant pursuant to Section 8, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. 12. TRANSFER ON THE COMPANY'S BOOKS. Until this Warrant is transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. 13. NOTICES, ETC. All notices and other communications from the Company to the holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to 6 the Company in writing by such holder or, until any such holder furnishes to the Company an address, then to, and at the address of, the last holder of this Warrant who has so furnished an address to the Company. 14. VOLUNTARY ADJUSTMENT BY THE COMPANY. The company may at any time during the term of this Warrant reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company. 15. MISCELLANEOUS. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be governed by and construed in accordance with the laws of State of New York without regard to principles of conflicts of laws. Any action brought concerning the transactions contemplated by this Warrant shall be brought only in the state courts of New York or in the federal courts located in the state of New York. The individuals executing this Warrant on behalf of the Company agree to submit to the jurisdiction of such courts and waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Warrant is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of this Warrant. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. The Company acknowledges that legal counsel participated in the preparation of this Warrant and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Warrant to favor any party against the other party. [THIS SPACE INTENTIONALLY LEFT BLANK] 7 IN WITNESS WHEREOF, the Company has executed this Warrant under seal as of the date first written above. BESTNET COMMUNICATIONS CORP. By:_________________________________ Witness: _________________________________ 8 Exhibit A FORM OF SUBSCRIPTION (To be signed only on exercise of Warrant) TO: BestNet Communications Corp. The undersigned, pursuant to the provisions set forth in the attached Warrant (No.____), hereby irrevocably elects to purchase (check applicable box): ___ ________ shares of the Common Stock covered by such Warrant; or ___ the maximum number of shares of Common Stock covered by such Warrant pursuant to the cashless exercise procedure set forth in Section 2. The undersigned herewith makes payment of the full purchase price for such shares at the price per share provided for in such Warrant, which is $___________. Such payment takes the form of (check applicable box or boxes): ___ $__________ in lawful money of the United States; and/or ___ the cancellation of such portion of the attached Warrant as is exercisable for a total of _______ shares of Common Stock (using a Fair Market Value of $_______ per share for purposes of this calculation); and/or ___ the cancellation of such number of shares of Common Stock as is necessary, in accordance with the formula set forth in Section 2, to exercise this Warrant with respect to the maximum number of shares of Common Stock purchaseable pursuant to the cashless exercise procedure set forth in Section 2. The undersigned requests that the certificates for such shares be issued in the name of, and delivered to ____________________ whose address is _______________________________________________________________________________. The undersigned represents and warrants that all offers and sales by the undersigned of the securities issuable upon exercise of the within Warrant shall be made pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the "Securities Act") or pursuant to an exemption from registration under the Securities Act. Dated:___________________ _________________________________________ (Signature must conform to name of holder as specified on the face of the Warrant) _________________________________________ (Address) 9 Exhibit B FORM OF TRANSFEROR ENDORSEMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading "Transferees" the right represented by the within Warrant to purchase the percentage and number of shares of Common Stock of BestNet Communications Corp. to which the within Warrant relates specified under the headings "Percentage Transferred" and "Number Transferred," respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of BestNet Communications Corp. with full power of substitution in the premises. - -------------------------------------------------------------------------------- PERCENTAGE NUMBER TRANSFEREES TRANSFERRED TRANSFERRED - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dated: ________________, __ ___ _________________________________________ (Signature must conform to name of holder as specified on the face of the warrant) Signed in the presence of: _______________________________ _________________________________________ (Name) (address) _________________________________________ ACCEPTED AND AGREED: (address) [TRANSFEREE] _______________________________ (Name) 10 EX-5.1 6 ex5-1.txt OPINION OF SQUIRE, SANDERS & DEMPSEY Exhibit 5.1 Squire, Sanders & Dempsey L.L.P. Two Renaissance Square 40 North Central Avenue, Suite 2700 Phoenix, Arizona 85004 Telephone: (602) 528-4000 Facsimile: (602) 253-8129 February 21, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-1004 Ladies and Gentlemen: This firm is counsel for BestNet Communications Corp., a Nevada corporation (the "Company"). As such, we are familiar with the Certificate of Incorporation, as amended, and the Bylaws, as amended, of the Company, as well as resolutions adopted by its Board of Directors authorizing the issuance and sale of an estimated $681,107 worth of the Company's common stock, par value $.001 (the "Common Stock"), which are the subject of a Registration Statement on Form S-2 (the "Registration Statement") under the Securities Act of 1933, as amended (the "1933 Act"). We also have examined all instruments, documents, and records which we deemed relevant and necessary for the basis of our opinion hereinafter expressed. In such an examination, we have assumed the genuineness and authority of all signatures and the authenticity of all documents submitted to us as originals and the conformity to the originals of all documents submitted to us as copies. Based on such examination, we are of the opinion that the shares of the Common Stock being sold pursuant to the Registration Statement are duly authorized, and will be, when issued and paid for in the manner described in the Registration Statement, validly issued, fully paid and non-assessable. We acknowledge that we are referred to under the heading "Legal Matters" in the Prospectus which is part of the Registration Statement and we hereby consent Securities and Exchange Commission February 21, 2002 Page 2 to the use of our name in such Registration Statement. We further consent to the filing of this opinion as Exhibit 5.1 to the Registration Statement and with the state regulatory agencies in such states as may require such filing in connection with the registration of the Common Stock for offer and sale in such states. Respectfully Submitted, /s/ Squire, Sanders & Dempsey L.L.P. SQUIRE, SANDERS & DEMPSEY L.L.P. EX-10.1 7 ex10-1.txt STOCK PURCHASE AGREEMENT Exhibit 10.1 BESTNET COMMUNICATIONS CORP. STOCK PURCHASE AGREEMENT FEBRUARY 21, 2002 TABLE OF CONTENTS PAGE ARTICLE I SALE AND PURCHASE OF SHARES.................................. 1 1.1. Sale and Purchase of Shares.................................. 1 ARTICLE II CLOSING, DELIVERY AND PAYMENT................................ 1 2.1. Closing...................................................... 1 2.2. Deliveries by the Company.................................... 2 2.3. Deliveries by Buyer.......................................... 2 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY................ 2 3.1. Organization, Good Standing and Qualification................ 2 3.2. Subsidiaries................................................. 2 3.3. Capitalization; Voting Rights................................ 2 3.4. Authorization; Binding Obligations........................... 3 3.5. Liabilities.................................................. 3 3.6. Agreements; Action........................................... 3 3.7. Obligations to Related Parties............................... 4 3.8. Changes...................................................... 5 3.9. Title to Properties and Assets; Liens, Etc. ................. 6 3.10. Intellectual Property........................................ 6 3.11. Compliance with Other Instruments............................ 6 3.12. Litigation................................................... 7 3.13. Tax Returns and Payments..................................... 7 3.14. Employees.................................................... 7 3.15. Registration Rights and Voting Rights........................ 8 3.16. Compliance with Laws; Permits................................ 8 3.17. Environmental and Safety Laws................................ 8 3.18. Full Disclosure.............................................. 8 3.19. Insurance.................................................... 9 3.20. SEC Reports.................................................. 9 3.21. No Market Manipulation....................................... 9 3.22. Listing...................................................... 9 -i- TABLE OF CONTENTS (continued) PAGE ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.............. 9 4.1. Requisite Power and Authority................................ 9 4.2. Investment Representations................................... 10 4.3. Purchaser Bears Economic Risk................................ 10 4.4. Purchaser Can Protect Its Interest........................... 10 4.5. Accredited Investor.......................................... 10 4.6. Legends...................................................... 10 ARTICLE V CONDITIONS TO THE COMPANY'S AND PURCHASER'S OBLIGATIONS...... 10 5.1. Conditions to Obligations of the Company..................... 10 5.2. Conditions to Obligations of the Purchaser................... 11 ARTICLE VI MISCELLANEOUS................................................ 11 6.1. Governing Law................................................ 11 6.2. Survival..................................................... 12 6.3. Assignment................................................... 12 6.4. Entire Agreement............................................. 12 6.5. Severability................................................. 12 6.6. Amendment and Waiver......................................... 12 6.7. Delays or Omissions.......................................... 12 6.8. Notices...................................................... 12 6.9. Costs and Expenses........................................... 13 6.10. Titles and Subtitles......................................... 13 6.11. Counterparts/Fax Signatures.................................. 13 6.12. Broker's Fees................................................ 14 6.13. Construction................................................. 14 6.14. Further Assurances........................................... 14 -ii- STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (the "Agreement") is made and entered into as of February 21, 2002, by and among BestNet Communications Corp., a Nevada corporation (the "Company"), and Jay Greig, Ph.D. (the "Purchaser"). RECITALS WHEREAS, the Company has authorized the sale of shares of its common stock, par value $0.001 per share ("Common Stock"); WHEREAS, Purchaser desires to purchase Common Stock on the terms and conditions set forth herein; and WHEREAS, the Company desires to issue and sell Common Stock to Purchaser on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises, representations, warranties and covenants hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I SALE AND PURCHASE OF SHARES 1.1. SALE AND PURCHASE OF SHARES. Pursuant to the terms and conditions set forth in this Agreement, on the Closing Date (as defined in Section 2.1), the Company agrees to sell to the Purchaser, and the Purchaser hereby agrees to purchase from the Company $250,000 (the "Purchase Price") of Common Stock priced at a 35% discount from the average of the lowest bid price of the Common Stock at closing as reported by Bloomberg Financial for the NASD OTC Bulletin Board, for the ten (10) trading days preceding but not including the Closing Date (the "Purchased Securities"). ARTICLE II CLOSING, DELIVERY AND PAYMENT. 2.1. CLOSING. Subject to the conditions stated in Article 5 of this Agreement, the closing of the transactions contemplated hereby (the "Closing") shall be held on such date and at such time as the parties may agree, provided however, that such Closing shall not occur later than the fifth (5th) business day after the condition set forth in Section 5.2(a) has been satisfied, at the offices of Squire, Sanders & Dempsey L.L.P. Two Renaissance Square, Suite 2700, 40 North Central Avenue, Phoenix, Arizona 85004-4498. The date upon which the Closing occurs is hereinafter referred to as the "Closing Date." The Closing shall be deemed completed as of 12:01 a.m. New York time on the morning of the Closing Date. 2.2. DELIVERIES BY THE COMPANY. At the Closing, the Company shall deliver to Purchaser: (a) certificates representing the Purchased Securities; (b) a certificate executed by the Company to the effect that the conditions set forth in Section 5.2(a) have been satisfied; and (c) the Company's Officer's Certificate. 2.3. DELIVERIES BY BUYER. At the Closing, Buyer shall deliver to Seller: (a) the Purchase Price in the form of certified funds or by wire transfer; (b) a certificate executed by an authorized officer of the Buyer, on behalf of the Buyer, to the effect that the conditions set forth in SECTION 6.1(b) have been satisfied; and (c) the Purchaser's Officer's Certificate. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to the Purchaser as of the date of this Agreement as set forth below. 3.1. ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada. The Company has all requisite corporate power and authority to own and operate its properties and assets, to execute and deliver this Agreement, to issue and sell the Purchased Securities to carry out the provisions of this Agreement and to carry on its business as presently conducted and as presently proposed to be conducted. The Company is duly qualified and is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so would not have a material adverse effect on the Company or its business. 3.2. SUBSIDIARIES. Except as disclosed on Schedule 3.2, the Company does not own or control any equity security or other interest of any other corporation, limited partnership or other business entity. If any entity is listed on Schedule 3.2 and the Company owns a controlling interest in such entity, each of the representations and warranties set forth in this Article 3 are being hereby restated with respect to such entity (modified as appropriate to the nature of such entity.) 3.3. CAPITALIZATION; VOTING RIGHTS. (a) As of February 15, 2002, the authorized capital stock of the Company consists of (i) 50,000,000 shares of Common Stock, par value $0.001 per share, 15,325,755 shares of which are issued and outstanding, and (ii) 2 10,000,000 shares of Preferred Stock, par value $0.001 per share, 3,202.14 shares of which are issued and outstanding. (b) Except as disclosed on Schedule 3.3 hereto, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), proxy or stockholder agreements, or arrangements or agreements of any kind for the purchase or acquisition from the Company of any of its securities. Neither the offer, issuance or sale of any of the Purchased Securities, nor the consummation of any transaction contemplated hereby will result in a change in the price or number of any securities of the Company outstanding, under anti-dilution or other similar provisions contained in or affecting any such securities. (c) All issued and outstanding shares of the Company's Common Stock (i) have been duly authorized and validly issued and are fully paid and nonassessable and (ii) were, to the Company's knowledge, issued in compliance with all applicable state and federal laws concerning the issuance of securities. (d) The Purchased Securities have been duly and validly reserved for issuance. When issued and paid for in compliance with the provisions of this Agreement, the Purchased Securities will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances, except for liens or encumbrances placed on such securities by the Purchaser; PROVIDED, HOWEVER, that the Purchased Securities may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed. 3.4. AUTHORIZATION; BINDING OBLIGATIONS. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization of this Agreement, the performance of all obligations of the Company hereunder at the Closing and the authorization, sale, issuance and delivery of the Purchased Securities pursuant hereto has been taken or will be taken prior to the Closing. The Agreement, when executed and delivered, will be a valid and binding obligation of the Company enforceable in accordance with its terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, and (b) general principles of equity that restrict the availability of equitable remedies. The sale of the Purchased Securities are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. 3.5. LIABILITIES. Except as set forth in the SEC Reports (as defined in Section 3.20), the Company has no material liabilities and, to its knowledge, knows of no material contingent liabilities, except current liabilities incurred in the ordinary course of business which have not been, either in any individual case or in the aggregate, materially adverse. 3.6. AGREEMENTS; ACTION. (a) Except as set forth in the SEC Reports, there are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party, or to its knowledge, by which it is bound which may involve (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of $50,000 (other than obligations of, 3 or payments to, the Company arising from purchase or sale agreements entered into in the ordinary course of business), or (ii) the transfer or license of any patent, copyright, trade secret or other proprietary right to or from the Company (other than licenses arising from the purchase of "off the shelf" or other standard products), or (iii) provisions restricting the development, manufacture or distribution of the Company's products or services, other than those with respect to the Softalk license, or (iv) indemnification by the Company with respect to infringements of proprietary rights. (b) Except as set forth on SCHEDULE 3.6(b) hereto, since the date of the Company's most recent Form 10-QSB the Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or any other liabilities individually in excess of $50,000 or, in the case of indebtedness and/or liabilities individually less than $50,000, in excess of $100,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (c) For the purposes of subsections (a) and (b) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. (d) The Company has not engaged in the past two years in any discussion (i) with any representative of any corporation or corporations regarding the consolidation or merger of the Company with or into any such corporation or corporations, (ii) with any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company, or a transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of or (iii) regarding any other form of acquisition, liquidation, dissolution or winding up of the Company. 3.7. OBLIGATIONS TO RELATED PARTIES. There are no obligations of the Company to officers, directors, stockholders or employees of the Company other than (a) for payment of salary for services rendered, (b) reimbursement for reasonable expenses incurred on behalf of the Company and (c) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by the Board of Directors of the Company). None of the officers, directors or stockholders of the Company, or any members of their immediate families, are indebted to the Company. None of the officers, directors or, to the Company's knowledge, key employees or stockholders of the Company or any members of their immediate families, are indebted to the Company or have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, other than with respect to Softalk, or any firm or corporation which competes with the Company, other than passive investments in publicly traded companies (representing less than 1% of such company) which may compete with the Company. No officer, director or stockholder, or any member of their immediate families, is, directly or indirectly, interested in any material contract with the Company and no 4 agreements, understandings or proposed transactions are contemplated between the Company and any such person. The Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 3.8. CHANGES. Since November 30, 2001, there has not been: (a) Any change in the assets, liabilities, financial condition, or operations of the Company, other than changes in the ordinary course of business, none of which individually or in the aggregate has had or is reasonably expected to have a material adverse effect on such assets, liabilities, financial condition, or operations of the Company; (b) Any resignation or termination of any officer, key employee or group of employees of the Company; (c) Any material change, except in the ordinary course of business, in the contingent obligations of the Company by way of guaranty, endorsement, indemnity, warranty or otherwise; (d) Any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the properties, business or prospects or financial condition of the Company; (e) Any waiver by the Company of a valuable right or of a material debt owed to it; (f) Any direct or indirect loans made by the Company to any stockholder, employee, officer or director of the Company, other than advances made in the ordinary course of business; (g) Any material change in any compensation arrangement or agreement with any employee, officer, director or stockholder; (h) Any declaration or payment of any dividend or other distribution of the assets of the Company; (i) Any labor organization activity related to the Company; (j) Any debt, obligation or liability incurred, assumed or guaranteed by the Company, except those for immaterial amounts and for current liabilities incurred in the ordinary course of business; (k) Any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets; (l) Any change in any material agreement to which the Company is a party or by which it is bound which may materially and adversely affect the business, assets, liabilities, financial condition, or operations of the Company; 5 (m) Any other event or condition of any character that, either individually or cumulatively, has or may materially and adversely affect the business, assets, liabilities, financial condition, prospects or operations of the Company; or (n) Any arrangement or commitment by the Company to do any of the acts described in subsection (a) through (m) above. 3.9. TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. The Company has good and marketable title to its properties and assets, and good title to its leasehold estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (a) those resulting from taxes which have not yet become delinquent, (b) minor liens and encumbrances which do not materially detract from the value of the property subject thereto or materially impair the operations of the Company, and (c) those that have otherwise arisen in the ordinary course of business. All facilities, machinery, equipment, fixtures, vehicles and other properties owned, leased or used by the Company are in good operating condition and repair, ordinary wear and tear excepted, and are reasonably fit and usable for the purposes for which they are being used. The Company is in compliance with all material terms of each lease to which it is a party or is otherwise bound. 3.10. INTELLECTUAL PROPERTY. (a) The Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes necessary for its business as now conducted and to the Company's knowledge as presently proposed to be conducted (the "Intellectual Property"), without any known infringement of the rights of others. Other than with respect to Softalk, there are no outstanding options, licenses or agreements of any kind relating to the foregoing proprietary rights, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes of any other person or entity other than such licenses or agreements arising from the purchase of "off the shelf" or standard products. (b) The Company has not received any communications alleging that the Company has violated any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity, nor is the Company aware of any basis therefor. (c) The Company does not believe it is or will be necessary to utilize any inventions, trade secrets or proprietary information of any of its employees made prior to their employment by the Company, except for inventions, trade secrets or proprietary information that have been rightfully assigned to the Company. 3.11. COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in material violation or default of any term of its Charter or Bylaws, or of any provision of any material mortgage, indenture, contract, agreement, instrument or contract to which it is party or by which it is bound or of any judgment, decree, order or writ. The execution, delivery and performance of and compliance with this 6 Agreement, and the issuance and sale of the Purchased Securities pursuant hereto, will not, with or without the passage of time or giving of notice, result in any material violation, or be in conflict with or constitute a default under any term or provision, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties. 3.12. LITIGATION. There is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company that questions the validity of this Agreement or the right of the Company to enter into any of such agreements, or to consummate the transactions contemplated hereby or thereby, or which might result, either individually or in the aggregate, in any material adverse change in the assets, condition, or affairs of the Company, financially or otherwise, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for any of the foregoing. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. Other than an action filed by the Company against Joseph Vasquez III, and entities affiliated with Mr. Vasquez, there is no action, suit, proceeding or investigation by the Company currently pending or which the Company intends to initiate. 3.13. TAX RETURNS AND PAYMENTS. The Company has timely filed all tax returns (federal, state and local) required to be filed by it. All taxes shown to be due and payable on such returns, any assessments imposed, and to the Company's knowledge all other taxes due and payable by the Company on or before the Closing, have been paid or will be paid prior to the time they become delinquent. The Company has not been advised (a) that any of its returns, federal, state or other, have been or are being audited as of the date hereof, or (b) of any deficiency in assessment or proposed judgment to its federal, state or other taxes. The Company has no knowledge of any liability of any tax to be imposed upon its properties or assets as of the date of this Agreement that is not adequately provided for. 3.14. EMPLOYEES. The Company has no collective bargaining agreements with any of its employees. There is no labor union organizing activity pending or, to the Company's knowledge, threatened with respect to the Company. Except as disclosed on Schedule 3.14 hereto, the Company is not a party to or bound by any currently effective employment contract, deferred compensation arrangement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation plan or agreement. To the Company's knowledge, no employee of the Company, nor any consultant with whom the Company has contracted, is in violation of any term of any employment contract, proprietary information agreement or any other agreement relating to the right of any such individual to be employed by, or to contract with, the Company because of the nature of the business to be conducted by the Company; and to the Company's knowledge the continued employment by the Company of its present employees, and the performance of the Company's contracts with its independent contractors, will not result in any such violation. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with their duties to the Company. The Company has not received any notice alleging 7 that any such violation has occurred. No employee of the Company has been granted the right to continued employment by the Company or to any material compensation following termination of employment with the Company. The Company is not aware that any officer, key employee or group of employees intends to terminate his, her or their employment with the Company, nor does the Company have a present intention to terminate the employment of any officer, key employee or group of employees. 3.15. REGISTRATION RIGHTS AND VOTING RIGHTS. Except as set forth on Schedule 3.15 hereto, the Company is presently not under any obligation, and has not granted any rights, to register any of the Company's presently outstanding securities or any of its securities that may hereafter be issued. To the Company's knowledge, no stockholder of the Company has entered into any agreement with respect to the voting of equity securities of the Company. 3.16. COMPLIANCE WITH LAWS; PERMITS. To its knowledge, the Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties which violation would materially and adversely affect the business, assets, liabilities, financial condition, or operations of the Company. No governmental orders, permissions, consents, approvals or authorizations are required to be obtained and no registrations or declarations are required to be filed in connection with the execution and delivery of this Agreement and the issuance of any of the Purchased Securities, except such as has been duly and validly obtained or filed, or with respect to any filings that must be made after the Closing, as will be filed in a timely manner. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects or financial condition of the Company. 3.17. ENVIRONMENTAL AND SAFETY LAWS. The Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. No Hazardous Materials (as defined below) are used or have been used, stored, or disposed of by the Company or, to the Company's knowledge, by any other person or entity on any property owned, leased or used by the Company. For the purposes of the preceding sentence, "Hazardous Materials" shall mean (a) materials which are listed or otherwise defined as "hazardous" or "toxic" under any applicable local, state, federal and/or foreign laws and regulations that govern the existence and/or remedy of contamination on property, the protection of the environment from contamination, the control of hazardous wastes, or other activities involving hazardous substances, including building materials, or (b) any petroleum products or nuclear materials. 3.18. FULL DISCLOSURE. The Company has provided the Purchaser with all information requested by the Purchaser in connection with its decision to purchase the Purchased Securities. Neither this Agreement, the exhibits and schedules hereto, nor any other document delivered by the Company to Purchaser or its attorneys or agents in connection herewith or therewith or with the transactions contemplated hereby or thereby, contain any untrue statement of a material fact nor omit to state a material fact necessary in order to make the statements contained herein or therein not misleading. To the Company's knowledge, there are no facts which (individually or in the aggregate) 8 materially adversely affect the business, assets, liabilities, financial condition, or operations of the Company that have not been set forth in the Agreement, the exhibits and schedules hereto, or in other documents delivered to Purchaser or its attorneys or agents in connection herewith. 3.19. INSURANCE. The Company has general commercial, product liability, fire and casualty insurance policies with coverage customary for companies similarly situated to the Company. 3.20. SEC REPORTS. To the best of the Company's knowledge, the Company has filed all proxy statements, reports and other documents required to be filed by it under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company has furnished the Purchaser with copies of (i) its Annual Report on Form 10-KSB for the fiscal year ended August 31, 2001, (ii) its Quarterly Report on Form 10-QSB for the fiscal quarter ended November 30, 2001 and (iii) its Proxy Statement dated August 8, 2000 (collectively, the "SEC Reports"). Each SEC Report was in substantial compliance with the requirements of its respective form and none of the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, as of their respective dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 3.21. NO MARKET MANIPULATION. The Company has not taken, and will not take, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of the Common Stock of the Company to facilitate the sale or resale of any of the Purchased Securities being offered hereby or affect the price at which any of the Purchased Securities being offered hereby may be issued. 3.22. LISTING. The Company's Common Stock is listed for trading on the NASD OTC Bulletin Board and satisfies all requirements for the continuation of such listing. The Company has not received any notice that its Common Stock will be delisted from the NASD OTC Bulletin Board or that the Common Stock does not meet all requirements for the continuation of such listing. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby represents and warrants to the Company with respect to itself or himself as follows: 4.1. REQUISITE POWER AND AUTHORITY. Purchaser has all necessary power and authority under all applicable provisions of law to execute and deliver this Agreement and to carry out their provisions. All action on Purchaser's part required for the lawful execution and delivery of this Agreement have been or will be effectively taken prior to the Closing. Upon its execution and delivery, this Agreement will be valid and binding obligations of Purchaser, enforceable in accordance with its terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application 9 affecting enforcement of creditors' rights, and (b) as limited by general principles of equity that restrict the availability of equitable remedies. 4.2. INVESTMENT REPRESENTATIONS. Purchaser understands that the Purchased Securities are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon Purchaser's representations contained in the Agreement. 4.3. PURCHASER BEARS ECONOMIC RISK. Purchaser has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Company so that it is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests. Purchaser must bear the economic risk of this investment until the Purchased Securities are registered pursuant to the Securities Act, or an exemption from registration is available. 4.4. PURCHASER CAN PROTECT ITS INTEREST. Purchaser represents that by reason of its, or of its management's, business or financial experience, Purchaser has the capacity to protect its own interests in connection with the transactions contemplated in this Agreement. Further, Purchaser is aware of no publication of any advertisement in connection with the transactions contemplated in the Agreement. 4.5. ACCREDITED INVESTOR. Purchaser represents that it is an accredited investor within the meaning of Regulation D under the Securities Act. 4.6. LEGENDS. The Purchased Securities shall bear the following legend until the Purchased Securities are covered by an effective registration statement filed with the SEC: "THESE SHARES OF COMMON STOCK HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR, IF APPLICABLE, STATE SECURITIES LAWS. THESE SHARES OF COMMON STOCK MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO BESTNET COMMUNICATIONS CORP. THAT SUCH REGISTRATION IS NOT REQUIRED." ARTICLE V CONDITIONS TO THE COMPANY'S AND PURCHASER'S OBLIGATIONS 5.1. CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligations of the Company to carry out the transactions contemplated by this Agreement are subject, at the option of the Company, to the satisfaction or waiver of the following conditions: (a) The Purchaser shall have furnished the Company with a certified copy of all necessary corporate action on its behalf approving its execution, delivery and performance of this Agreement (the "Purchaser's Officer's Certificate"). 10 (b) All representations and warranties of the Purchaser contained in this Agreement shall be true and correct in all material respects at and as of the Closing, and the Purchaser shall have performed and satisfied in all material respects all covenants and agreements required by this Agreement to be performed and satisfied by the Purchaser at or prior to the Closing. (c) As of the Closing Date, no suit, action or other proceeding (excluding any such matter initiated by or on behalf of the Company) shall be pending or threatened before any Governmental Authority seeking to restrain the Company or prohibit the Closing or seeking damages against the Company as a result of the consummation of this Agreement. 5.2. CONDITIONS TO OBLIGATIONS OF THE PURCHASER. The obligations of the Purchaser to carry out the transactions contemplated by this Agreement are subject, at the option of the Purchaser, to the satisfaction, or waiver by the Purchaser, of the following conditions: (a) The Company shall have prepared and filed with the SEC a registration statement under the Securities Act covering the Purchased Securities and such registration statement shall be effective (the "Registration Requirement"). (b) All representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects at and as of the Closing, and the Company shall have performed and satisfied in all material respects all agreements and covenants required by this Agreement to be performed and satisfied by them at or prior to the Closing. (c) As of the Closing Date, no suit, action or other proceeding (excluding any such matter initiated by or on behalf of the Purchaser) shall be pending or threatened before any court or governmental agency seeking to restrain the Purchaser or prohibit the Closing or seeking damages against the Purchaser or the Company as a result of the consummation of this Agreement. (d) The Company shall have furnished the Purchaser with a certified copy of all necessary corporate action on its behalf approving the Company's execution, delivery and performance of this Agreement (the "Company's Officer's Certificate"). ARTICLE VI MISCELLANEOUS. 6.1. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada, without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of Nevada or in the federal courts located in the state of Nevada. Both parties and the individuals executing this Agreement and other agreements on behalf of the Company agree to submit to the jurisdiction of such courts and waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Agreement or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or 11 rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. 6.2. SURVIVAL. The representations, warranties, covenants and agreements made herein shall survive any investigation made by the Purchaser and the Closing. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument. 6.3. ASSIGNMENT. This Agreement is not assignable by either party. 6.4. ENTIRE AGREEMENT. This Agreement, the exhibits and schedules hereto, and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 6.5. SEVERABILITY. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 6.6. AMENDMENT AND WAIVER. (a) This Agreement may be amended or modified only upon the written consent of the Company and the Purchaser. (b) The obligations of the Company and the rights of the holders of the Purchased Securities under the Agreement may be waived only with the written consent of such holders of Purchased Securities. 6.7. DELAYS OR OMISSIONS. It is agreed that no delay or omission to exercise any right, power or remedy accruing to any party, upon any breach, default or noncompliance by another party under this Agreement, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of or in any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on the Purchaser's part of any breach, default or noncompliance under this Agreement, or any waiver on such party's part of any provisions or conditions of the Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies under this Agreement by law or otherwise afforded to any party, shall be cumulative and not alternative. 6.8. NOTICES. Any notice, request, instruction, correspondence or other document to be given hereunder by any party hereto to another (herein collectively called "Notice") shall be in writing and delivered personally or mailed by registered or certified mail, postage prepaid and return receipt requested, or by telecopier, as follows: 12 IF TO PURCHASER: Jay Greig, Ph.D. 814 Lakeway Drive #262 Bellingham, WA 98226 Telecopy No. (360) 647-7590 IF TO THE COMPANY: BestNet Communications Corp. 5075 E. Cascade Road Suite K Grand Rapids, Michigan 49546 Telecopy No. (616) 977-9955 With a copy to: Squire, Sanders & Dempsey Two Renaissance Square 40 North Central Avenue Suite 2700 Attention: Gregory Hall Telecopy No. (602) 253-8129 Each of the above addresses for notice purposes may be changed by providing appropriate notice hereunder. Notice given by personal delivery or registered mail shall be effective upon actual receipt. Notice given by telecopier shall be effective upon actual receipt if received during the recipient's normal business hours, or at the beginning of the recipient's next normal business day after receipt if not received during the recipient's normal business hours. All Notices by telecopier shall be confirmed by the sender thereof promptly after transmission in writing by registered mail or personal delivery. Anything to the contrary contained herein notwithstanding, notices to any party hereto shall not be deemed effective with respect to such party until such Notice would, but for this sentence, be effective both as to such party and as to all other persons to whom copies are provided above to be given. 6.9. COSTS AND EXPENSES. Each of the parties to this Agreement shall bear his or its own expenses incurred in connection with the negotiation, preparation, execution and closing of this Agreement and the transactions contemplated hereby. 6.10. TITLES AND SUBTITLES. The titles of the sections and subsections of the Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 6.11. COUNTERPARTS/FAX SIGNATURES. This Agreement and any other document or instrument relating hereto may be executed simultaneously in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement and any other document or instrument relating hereto may be executed by a party's signature transmitted by facsimile ("fax"), and copies of this Agreement and any such document or instrument executed and delivered by means of faxed signatures shall have the same force and effect as copies hereof executed and delivered 13 with original signatures. All parties hereto may rely upon faxed signatures as if such signatures were originals. Any party executing and delivering this Agreement and any such document or instrument by fax shall promptly thereafter deliver a counterpart signature page of this Agreement and the fully executed original or counterpart original of any such document or instrument containing said party's original signature. All parties hereto agree that a faxed signature may be introduced into evidence in any proceeding arising out of or related to this Agreement or any such document or instrument as if it were an original signature. 6.12. BROKER'S FEES. Each party hereto represents and warrants that no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party hereto is or will be entitled to any broker's or finder's fee or any other commission directly or indirectly in connection with the transactions contemplated herein, except as specified herein with respect to the Purchaser. Each party hereto further agrees to indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation in this Section 6.12 being untrue. 6.13. CONSTRUCTION. Each party acknowledges that its legal counsel participated in the preparation of this Agreement and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Agreement to favor any party against the other. 6.14. FURTHER ASSURANCES. Following the Closing, the Company and the Purchaser shall execute and deliver such documents, and take such other action, as shall be reasonably requested by any other party hereto to carryout the transaction contemplated by this Agreement. 14 IN WITNESS WHEREOF, the parties hereto have executed this STOCK PURCHASE AGREEMENT as of the date set forth in the first paragraph hereof. COMPANY: PURCHASER: BESTNET COMMUNICATIONS CORP. JAY GREIG, PH.D. By: By: ----------------------------------- --------------------------------- Name: Name: -------------------------------- ------------------------------- Title: Title: ------------------------------- ------------------------------ Address: 5075 E. Cascade Road, Suite K Address: 814 Lakeway Drive #262 Grand Rapids, Michigan 49546 Bellingham, WA 98226 15 SCHEDULE 3.2 SUBSIDIARIES 1. Interpretel, Inc. 2. Interpretel (Canada), Inc. 3. Teleplex International Communications, Inc. 4. Bestnet Travel, Inc. SCHEDULE 3.3 CAPITALIZATION 5,000,000 shares of common stock are reserved for issuance under the Company's Stock Option Plan. There are currently options and warrants outstanding to purchase an aggregate of 9,559,543 shares of Company common stock. SCHEDULE 3.6(B) AGREEMENTS, ACTION The Company paid Laurus Master Fund, Ltd. a dividend on its preferred shares of 6,241 shares of Common Stock. SCHEDULE 3.14 EMPLOYEES The Company has employment agreements with the following: 1. Robert Blanchard - President and Chief Executive Officer. 2. Paul Jachim - Chief Operating Officer and Chief Financial Officer. SCHEDULE 3.15 REGISTRATION RIGHTS AND VOTING RIGHTS Demand and Piggy-Back registration rights were granted to Laurus Master Fund, Ltd. pursuant to that certain Securities Purchase Agreement, by and between the Company and Laurus Master Fund, Ltd., dated January 31, 2002. Piggy-back registration rights were granted to Network Twentyone International, Inc. pursuant to a warrant to purchase common stock in April, 2001. EX-10.2 8 ex10-2.txt SECURITIES PURCHASE AGREEMENT Exhibit 10.2 BESTNET COMMUNICATIONS CORP. SECURITIES PURCHASE AGREEMENT JANUARY __, 2002 TABLE OF CONTENTS Page ---- 1. AGREEMENT TO SELL AND PURCHASE.............................................1 2. FEES AND WARRANTS..........................................................1 3. CLOSING, DELIVERY AND PAYMENT..............................................2 3.1 Closing...........................................................2 3.2 Delivery..........................................................2 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY..............................3 4.1 Organization, Good Standing and Qualification.....................3 4.2 Subsidiaries......................................................3 4.3 Capitalization; Voting Rights.....................................3 4.4 Authorization; Binding Obligations................................4 4.5 Liabilities.......................................................4 4.6 Agreements; Action................................................5 4.7 Obligations to Related Parties....................................5 4.8 Changes...........................................................6 4.9 Title to Properties and Assets; Liens, Etc........................7 4.10 Intellectual Property.............................................7 4.11 Compliance with Other Instruments.................................8 4.12 Litigation........................................................8 4.13 Tax Returns and Payments..........................................8 4.14 Employees.........................................................8 4.15 Registration Rights and Voting Rights.............................9 4.16 Compliance with Laws; Permits.....................................9 4.17 Environmental and Safety Laws.....................................9 4.18 Valid Offering...................................................10 4.19 Full Disclosure..................................................10 4.20 Insurance........................................................10 4.21 SEC Reports......................................................10 4.22 No Market Manipulation...........................................10 4.23 Listing..........................................................10 4.24 No Integrated Offering...........................................11 -i- 4.25 Stop Transfer....................................................11 4.26 Dilution.........................................................11 5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS..........................11 5.1 Requisite Power and Authority....................................11 5.2 Investment Representations.......................................12 5.3 Purchaser Bears Economic Risk....................................12 5.4 Acquisition for Own Account......................................12 5.5 Purchaser Can Protect Its Interest...............................12 5.6 Accredited Investor..............................................12 5.7 Legends..........................................................12 6. COVENANTS OF THE COMPANY..................................................13 6.1 Stop-Orders......................................................13 6.2 Listing..........................................................13 6.3 Market Regulations...............................................14 6.4 Reporting Requirements..........................................14 6.5 Use of Funds.....................................................14 6.6 Access to Facilities.............................................14 6.7 Taxes............................................................15 6.8 Insurance........................................................15 6.9 Books and Records................................................15 6.10 Intellectual Property............................................15 6.11 Confidentiality..................................................15 6.12 Required Approvals...............................................15 6.13 Reissuance of Securities.........................................16 6.14 Opinion..........................................................16 7. COVENANTS OF THE COMPANY AND PURCHASERS REGARDING INDEMNIFICATION.........17 7.1 Company Indemnification..........................................17 7.2 Purchaser's Indemnification......................................17 7.3 Procedures.......................................................17 8. CONVERSION OF CONVERTIBLE PREFERRED STOCK.................................17 8.1 Mechanics of Conversion..........................................17 8.2 Mandatory Redemption.............................................18 -ii- 8.3 Maximum Conversion...............................................18 8.4 Injunction - Posting of Bond.....................................19 8.5 Buy-In...........................................................19 9. REGISTRATION RIGHTS.......................................................19 9.1 Registration Rights Granted......................................19 9.2 Registration Procedures..........................................21 9.3 Provision of Documents...........................................22 9.4 Non-Registration Events..........................................22 9.5 Expenses.........................................................23 9.6 Indemnification and Contribution.................................23 10. INTENTIONALLY OMITTED.....................................................25 11. SECURITY INTEREST.........................................................27 12. MISCELLANEOUS.............................................................25 12.1 Governing Law....................................................25 12.2 Survival.........................................................26 12.3 Successors and Assigns...........................................26 12.4 Entire Agreement.................................................26 12.5 Severability.....................................................26 12.6 Amendment and Waiver.............................................26 12.7 Delays or Omissions..............................................26 12.8 Notices..........................................................27 12.9 Attorneys' Fees..................................................27 12.10 Titles and Subtitles.............................................27 12.11 Counterparts.....................................................27 12.12 Broker's Fees....................................................27 12.13 Indemnification..................................................27 12.14 Construction.....................................................28 -iii- BESTNET COMMUNICATIONS CORP. SECURITIES PURCHASE AGREEMENT THIS SECURITIES PURCHASE AGREEMENT (the "AGREEMENT") is made and entered into as of January __, 2002, by and among BESTNET COMMUNICATIONS CORP., a Nevada corporation (the "COMPANY"), and the Purchaser listed on Exhibit A hereto (the "PURCHASER"). RECITALS WHEREAS, the Company has authorized the sale of Series C 8% Cumulative Convertible Preferred Stock, $0.001 par value (the "PREFERRED STOCK") for the aggregate purchase price of $115,000, convertible into shares of the Company's common stock, $0.001 par value per share (the "COMMON STOCK"); WHEREAS, the Company wishes to issue warrants (the "WARRANTS") to the Purchaser to purchase shares of the Company's Common Stock in connection with Purchaser's purchase of the Preferred Stock; WHEREAS, Purchaser desires to purchase the Preferred Stock and Warrants on the terms and conditions set forth herein; and WHEREAS, the Company desires to issue and sell the Preferred Stock and Warrants to Purchaser on the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises, representations, warranties and covenants hereinafter set forth and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. AGREEMENT TO SELL AND PURCHASE. Pursuant to the terms and conditions set forth in this Agreement, on the Closing Date (as defined in Section 3), the Company agrees to sell to the Purchaser, and the Purchaser hereby agrees to purchase from the Company Preferred Stock in the amount set forth next to the Purchaser's name on Exhibit A under the column heading "Closing Date Preferred Stock," convertible in accordance with the terms thereof into shares of the Company's Common Stock, which amount shall be equal to $115,000. The Preferred Stock purchased on the Closing Date shall be known as the "OFFERING." The Certificate of Designations for the Preferred Stock (the "CERTIFICATE OF DESIGNATIONS") is annexed hereto as Exhibit B. The Preferred Stock will have a Mandatory Conversion Date (as defined in the Preferred Stock) two years from the date of issuance. Collectively, the Preferred Stock and Warrants (as defined above) and Common Stock issuable upon conversion of the Preferred Stock and exercise of the Warrants are referred to as the "SECURITIES." 2. FEES AND WARRANTS. (a) The Company will issue and deliver to the persons listed on Exhibit A under the column heading "Warrant Holders", or to such other persons as the Purchaser shall otherwise designate (such named persons, as they may be so otherwise designated, being referred to as the "WARRANT RECIPIENTS"), Warrants to purchase shares of Common Stock in the amounts designated on Exhibit A hereto in connection with the Offering (the "WARRANTS") pursuant to Section 1 hereof. The Warrants must be delivered on the Closing Date. The aggregate number of shares of Common Stock purchasable upon exercise of the Warrants granted on the Closing Date is set forth on Exhibit A hereto. A form of Warrant is annexed hereto as Exhibit C. The per share "PURCHASE PRICE" of Common Stock as defined in the Warrants shall be equal to 120% of the average of the three lowest closing prices of the Common Stock as reported by Bloomberg Financial for the Pink Sheets, the NASD OTC Bulletin Board, NASDAQ SmallCap Market, NASDAQ National Market, American Stock Exchange, or New York Stock Exchange (each of the foregoing the "PRINCIPAL MARKET"), or such other principal market or exchange where the Common Stock is listed or traded, for the ten (10) trading days preceding but not including the Closing Date. All the representations, covenants, warranties, undertakings, and indemnification, and other rights made or granted to or for the benefit of Purchaser are hereby also made and granted to the holders of the Warrants in respect of the Warrants and shares of the Company's Common Stock issuable upon exercise of the Warrants (the "WARRANT SHARES"). (b) The Company shall reimburse Purchaser for its reasonable legal fees of $2,500 for services rendered to Purchaser in preparation of this Agreement and the Related Agreements. Amounts required to be paid hereunder will be paid at the Closing. (c) The Company will pay a cash fee in the amount of ten percent (10%) of the aggregate gross purchase price to be paid to the Company from the sale of Preferred Stock in the Offering (the "FUND MANAGER'S FEE") to the persons listed on Exhibit A under the column heading "Fund Manager's Fee Recipient." The Fund Manager's Fee must be paid on the Closing Date. The aforementioned Fund Manager's Fee and legal fees will be payable at the Closing out of funds held pursuant to a Funds Escrow Agreement to be entered into by the Company, Purchaser and an Escrow Agent. Failure to timely deliver the Fund Manager's Fee or the Warrants shall be deemed an Event of Default as defined in Section 9 of the Preferred Stock. 3. CLOSING, DELIVERY AND PAYMENT. 3.1 CLOSING. Subject to the terms and conditions herein, the closing of the transactions contemplated hereby (the "CLOSING"), which closing is comprised of Purchaser's purchase of Preferred Stock in the aggregate principal amount of $115,000, shall take place on the date hereof, at the offices of Daniel M. Laifer, Esq., 152 West 57th Street, 4th Floor, New York, New York 10019, or at such other time or place as the Company and Purchaser may mutually agree (such date is hereinafter referred to as the "CLOSING DATE"). 3.2 DELIVERY. At the Closing, subject to the terms and conditions hereof, the Company will deliver to the Purchaser shares of Preferred Stock representing the aggregate principal amount received by the Company at the Closing from the Purchaser and a warrant certificate registered in the Purchaser's name representing the number of Warrant Shares as to which the Warrant is exercisable pursuant to this Agreement, against payment of the -2- purchase price therefor by certified funds or wire transfer made payable to the order of the Company, cancellation of indebtedness or any combination of the foregoing. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to the Purchaser as of the date of this Agreement as set forth below. 4.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Nevada. The Company has all requisite corporate power and authority to own and operate its properties and assets, to execute and deliver this Agreement, the Warrants to be issued in connection with this Agreement, the Funds Escrow Agreement, the Security Agreement and all other agreements referred to herein (collectively, the "RELATED AGREEMENTS"), to issue and sell the Preferred Stock and the shares of Common Stock issuable upon conversion of the Preferred Stock (the "CONVERSION SHARES"), to issue and sell the Warrants and the Warrant Shares, and to carry out the provisions of this Agreement and the Related Agreements and to carry on its business as presently conducted and as presently proposed to be conducted. The Company is duly qualified and is authorized to do business and is in good standing as a foreign corporation in all jurisdictions in which the nature of its activities and of its properties (both owned and leased) makes such qualification necessary, except for those jurisdictions in which failure to do so would not have a material adverse effect on the Company or its business. 4.2 SUBSIDIARIES. Except as disclosed on Schedule 4.2, the Company does not own or control any equity security or other interest of any other corporation, limited partnership or other business entity. If any entity is listed on Schedule 4.2. and the Company owns a controlling interest in such entity, each of the representations and warranties set forth in this Section 4 are being hereby restated with respect to such entity (modified as appropriate to the nature of such entity.) 4.3 CAPITALIZATION; VOTING RIGHTS. (a) The authorized capital stock of the Company, immediately prior to the Closing, consists of (i) 50,000,000 shares of Common Stock, par value $0.001 per share, 15,057,141 shares of which are issued and outstanding, and (ii) 10,000,000 shares of Preferred Stock, par value $0.001 per share, 5,532 shares of which are issued and outstanding. (b) Other than (i) the shares reserved for issuance under the Company's Stock Option Plan; (ii) shares which may be granted pursuant to this Agreement and the Related Agreements; and (iii) warrants issued to Cedar Ave. and the placement agents, there are no outstanding options, warrants, rights (including conversion or preemptive rights and rights of first refusal), proxy or stockholder agreements, or arrangements or agreements of any kind for the purchase or acquisition from the Company of any of its securities. Neither the offer, issuance or sale of any of the Preferred Stock or Warrants, or the issuance of any of the Conversion Shares or Warrant Shares, nor the consummation of any transaction contemplated hereby will result in a change in the price or number of any securities of the Company outstanding, under anti-dilution or other similar provisions contained in or affecting any such securities. -3- (c) All issued and outstanding shares of the Company's Common Stock (i) have been duly authorized and validly issued and are fully paid and nonassessable and (ii) were, to the Company's knowledge, issued in compliance with all applicable state and federal laws concerning the issuance of securities. (d) The rights, preferences, privileges and restrictions of the shares of the Common Stock are as stated in the Articles of Incorporation (the "CHARTER"). The Conversion Shares and Warrant Shares have been duly and validly reserved for issuance. When issued and paid for in compliance with the provisions of this Agreement and the Company's Charter, the Preferred Stock, Warrants, Conversion Shares and Warrant Shares (sometimes collectively referred to herein as the "SECURITIES") will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances, except for liens or encumbrances placed on such securities by the Purchaser; PROVIDED, HOWEVER, that the Securities may be subject to restrictions on transfer under state and/or federal securities laws as set forth herein or as otherwise required by such laws at the time a transfer is proposed. (e) No stock plan, stock purchase, stock option or other agreement or understanding between the Company and any holder of any equity securities or rights to purchase equity securities provides for acceleration or other changes in the vesting provisions or other terms of such agreement or understanding as the result of any merger, consolidated sale of stock or assets, change in control or any other transaction(s) by the Company, including the transactions contemplated hereunder. 4.4 AUTHORIZATION; BINDING OBLIGATIONS. All corporate action on the part of the Company, its officers, directors and stockholders necessary for the authorization of this Agreement and the Related Agreements, the performance of all obligations of the Company hereunder at the Closing and the authorization, sale, issuance and delivery of the Securities pursuant hereto and the Related Agreements has been taken or will be taken prior to the Closing. The Agreement and the Related Agreements, when executed and delivered, will be valid and binding obligations of the Company enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, and (b) general principles of equity that restrict the availability of equitable remedies. The sale of the Preferred Stock and the subsequent conversion of the Preferred Stock into Conversion Shares are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. The sale of the Warrants and the subsequent exercise of the Warrants for Warrant Shares are not and will not be subject to any preemptive rights or rights of first refusal that have not been properly waived or complied with. The Certificate of Designations and the Warrants, when executed and delivered in accordance with the terms of this Agreement, will be valid and binding obligations of the Company, enforceable in accordance with their respective terms. 4.5 LIABILITIES. Except as set forth in the SEC Reports (as defined in Section 4.21), the Company has no material liabilities and, to its knowledge, knows of no material contingent liabilities, except current liabilities incurred in the ordinary course of business which have not been, either in any individual case or in the aggregate, materially adverse. -4- 4.6 AGREEMENTS; ACTION. (a) Except as set forth in the SEC Reports, there are no agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party, or to its knowledge, by which it is bound which may involve (i) obligations (contingent or otherwise) of, or payments to, the Company in excess of $50,000 (other than obligations of, or payments to, the Company arising from purchase or sale agreements entered into in the ordinary course of business), or (ii) the transfer or license of any patent, copyright, trade secret or other proprietary right to or from the Company (other than licenses arising from the purchase of "off the shelf" or other standard products), or (iii) provisions restricting the development, manufacture or distribution of the Company's products or services, other than those with respect to the Softtalk licence, or (iv) indemnification by the Company with respect to infringements of proprietary rights. (b) Since the date of the Company's most recent Form 10-QSB and since the payment in September of the quarterly dividend to Cedar Ave., the Company has not (i) declared or paid any dividends, or authorized or made any distribution upon or with respect to any class or series of its capital stock, (ii) incurred any indebtedness for money borrowed or any other liabilities individually in excess of $50,000 or, in the case of indebtedness and/or liabilities individually less than $50,000, in excess of $100,000 in the aggregate, (iii) made any loans or advances to any person, other than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business. (c) For the purposes of subsections (a) and (b) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities the Company has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections. (d) The Company has not engaged in the past two years in any discussion (i) with any representative of any corporation or corporations regarding the consolidation or merger of the Company with or into any such corporation or corporations, (ii) with any corporation, partnership, association or other business entity or any individual regarding the sale, conveyance or disposition of all or substantially all of the assets of the Company, or a transaction or series of related transactions in which more than 50% of the voting power of the Company is disposed of or (iii) regarding any other form of acquisition, liquidation, dissolution or winding up of the Company. 4.7 OBLIGATIONS TO RELATED PARTIES. There are no obligations of the Company to officers, directors, stockholders or employees of the Company other than (a) for payment of salary for services rendered, (b) reimbursement for reasonable expenses incurred on behalf of the Company and (c) for other standard employee benefits made generally available to all employees (including stock option agreements outstanding under any stock option plan approved by the Board of Directors of the Company). With the exception of a Canadian $14,000 loan to a vice president of the Company, with interest payable at prime plus 1%, none of the officers, directors or stockholders of the Company, or any members of their immediate families, are indebted to the Company. None of the officers, directors -5- or, to the Company's knowledge, key employees or stockholders of the Company or any members of their immediate families, are indebted to the Company or have any direct or indirect ownership interest in any firm or corporation with which the Company is affiliated or with which the Company has a business relationship, other than with respect to Softtalk, or any firm or corporation which competes with the Company, other than passive investments in publicly traded companies (representing less than 1% of such company) which may compete with the Company. No officer, director or stockholder, or any member of their immediate families, is, directly or indirectly, interested in any material contract with the Company and no agreements, understandings or proposed transactions are contemplated between the Company and any such person. The Company is not a guarantor or indemnitor of any indebtedness of any other person, firm or corporation. 4.8 CHANGES. Since November 30, 2001, there has not been: (a) Any change in the assets, liabilities, financial condition, or operations of the Company, other than changes in the ordinary course of business, none of which individually or in the aggregate has had or is reasonably expected to have a material adverse effect on such assets, liabilities, financial condition, or operations of the Company; (b) Any resignation or termination of any officer, key employee or group of employees of the Company; (c) Any material change, except in the ordinary course of business, in the contingent obligations of the Company by way of guaranty, endorsement, indemnity, warranty or otherwise; (d) Any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the properties, business or prospects or financial condition of the Company; (e) Any waiver by the Company of a valuable right or of a material debt owed to it; (f) Any direct or indirect loans made by the Company to any stockholder, employee, officer or director of the Company, other than advances made in the ordinary course of business; (g) Any material change in any compensation arrangement or agreement with any employee, officer, director or stockholder; (h) Any declaration or payment of any dividend or other distribution of the assets of the Company; (i) Any labor organization activity related to the Company; (j) Any debt, obligation or liability incurred, assumed or guaranteed by the Company, except those for immaterial amounts and for current liabilities incurred in the ordinary course of business; -6- (k) Any sale, assignment or transfer of any patents, trademarks, copyrights, trade secrets or other intangible assets; (l) Any change in any material agreement to which the Company is a party or by which it is bound which may materially and adversely affect the business, assets, liabilities, financial condition, or operations of the Company; (m) Any other event or condition of any character that, either individually or cumulatively, has or may materially and adversely affect the business, assets, liabilities, financial condition, prospects or operations of the Company; or (n) Any arrangement or commitment by the Company to do any of the acts described in subsection (a) through (m) above. 4.9 TITLE TO PROPERTIES AND ASSETS; LIENS, ETC. The Company has good and marketable title to its properties and assets, and good title to its leasehold estates, in each case subject to no mortgage, pledge, lien, lease, encumbrance or charge, other than (a) those resulting from taxes which have not yet become delinquent, (b) minor liens and encumbrances which do not materially detract from the value of the property subject thereto or materially impair the operations of the Company, and (c) those that have otherwise arisen in the ordinary course of business. All facilities, machinery, equipment, fixtures, vehicles and other properties owned, leased or used by the Company are in good operating condition and repair, ordinary wear and tear excepted, and are reasonably fit and usable for the purposes for which they are being used. The Company is in compliance with all material terms of each lease to which it is a party or is otherwise bound. 4.10 INTELLECTUAL PROPERTY. (a) The Company owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes necessary for its business as now conducted and to the Company's knowledge as presently proposed to be conducted (the "INTELLECTUAL PROPERTY"), without any known infringement of the rights of others. Other than with respect to Softtalk, there are no outstanding options, licenses or agreements of any kind relating to the foregoing proprietary rights, nor is the Company bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes of any other person or entity other than such licenses or agreements arising from the purchase of "off the shelf" or standard products. (b) The Company has not received any communications alleging that the Company has violated any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity, nor is the Company aware of any basis therefor. (c) The Company does not believe it is or will be necessary to utilize any inventions, trade secrets or proprietary information of any of its employees made prior to their employment by the Company, except for inventions, -7- trade secrets or proprietary information that have been rightfully assigned to the Company. 4.11 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in material violation or default of any term of its Charter or Bylaws, or of any provision of any material mortgage, indenture, contract, agreement, instrument or contract to which it is party or by which it is bound or of any judgment, decree, order or writ. The execution, delivery and performance of and compliance with this Agreement and the Related Agreements, and the issuance and sale of Securities pursuant hereto, will not, with or without the passage of time or giving of notice, result in any material violation, or be in conflict with or constitute a default under any term or provision, or result in the creation of any mortgage, pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or the suspension, revocation, impairment, forfeiture or nonrenewal of any permit, license, authorization or approval applicable to the Company, its business or operations or any of its assets or properties. 4.12 LITIGATION. There is no action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened against the Company that questions the validity of this Agreement or the Related Agreements or the right of the Company to enter into any of such agreements, or to consummate the transactions contemplated hereby or thereby, or which might result, either individually or in the aggregate, in any material adverse change in the assets, condition, or affairs of the Company, financially or otherwise, or any change in the current equity ownership of the Company, nor is the Company aware that there is any basis for any of the foregoing. The Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. Other than the action with respect to Joseph Vasquez III, there is no action, suit, proceeding or investigation by the Company currently pending or which the Company intends to initiate. 4.13 TAX RETURNS AND PAYMENTS. The Company has timely filed all tax returns (federal, state and local) required to be filed by it. All taxes shown to be due and payable on such returns, any assessments imposed, and to the Company's knowledge all other taxes due and payable by the Company on or before the Closing, have been paid or will be paid prior to the time they become delinquent. The Company has not been advised (a) that any of its returns, federal, state or other, have been or are being audited as of the date hereof, or (b) of any deficiency in assessment or proposed judgment to its federal, state or other taxes. The Company has no knowledge of any liability of any tax to be imposed upon its properties or assets as of the date of this Agreement that is not adequately provided for. 4.14 EMPLOYEES. The Company has no collective bargaining agreements with any of its employees. There is no labor union organizing activity pending or, to the Company's knowledge, threatened with respect to the Company. With the exception of the employment agreement of Robert Blanchard and the employment agreements and stock incentive plan stated in the SEC Reports, the Company is not a party to or bound by any currently effective employment contract, deferred compensation arrangement, bonus plan, incentive plan, profit sharing plan, retirement agreement or other employee compensation plan or agreement. To the Company's knowledge, no employee of the Company, nor any consultant with whom the Company has contracted, is in violation of any term of any employment contract, proprietary information agreement or any other agreement relating to the right of any such individual to be employed by, or to contract with, the -8- Company because of the nature of the business to be conducted by the Company; and to the Company's knowledge the continued employment by the Company of its present employees, and the performance of the Company's contracts with its independent contractors, will not result in any such violation. The Company is not aware that any of its employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with their duties to the Company. The Company has not received any notice alleging that any such violation has occurred. No employee of the Company has been granted the right to continued employment by the Company or to any material compensation following termination of employment with the Company. The Company is not aware that any officer, key employee or group of employees intends to terminate his, her or their employment with the Company, nor does the Company have a present intention to terminate the employment of any officer, key employee or group of employees. 4.15 REGISTRATION RIGHTS AND VOTING RIGHTS. The Company is presently not under any obligation, and has not granted any rights, to register any of the Company's presently outstanding securities or any of its securities that may hereafter be issued. To the Company's knowledge, no stockholder of the Company has entered into any agreement with respect to the voting of equity securities of the Company. 4.16 COMPLIANCE WITH LAWS; PERMITS. To its knowledge, the Company is not in violation of any applicable statute, rule, regulation, order or restriction of any domestic or foreign government or any instrumentality or agency thereof in respect of the conduct of its business or the ownership of its properties which violation would materially and adversely affect the business, assets, liabilities, financial condition, or operations of the Company. No governmental orders, permissions, consents, approvals or authorizations are required to be obtained and no registrations or declarations are required to be filed in connection with the execution and delivery of this Agreement and the issuance of any of the Securities, except such as has been duly and validly obtained or filed, or with respect to any filings that must be made after the Closing, as will be filed in a timely manner. The Company has all franchises, permits, licenses and any similar authority necessary for the conduct of its business as now being conducted by it, the lack of which could materially and adversely affect the business, properties, prospects or financial condition of the Company. 4.17 ENVIRONMENTAL AND SAFETY LAWS. The Company is not in violation of any applicable statute, law or regulation relating to the environment or occupational health and safety, and to its knowledge, no material expenditures are or will be required in order to comply with any such existing statute, law or regulation. No Hazardous Materials (as defined below) are used or have been used, stored, or disposed of by the Company or, to the Company's knowledge, by any other person or entity on any property owned, leased or used by the Company. For the purposes of the preceding sentence, "HAZARDOUS MATERIALS" shall mean (a) materials which are listed or otherwise defined as "HAZARDOUS" or "TOXIC" under any applicable local, state, federal and/or foreign laws and regulations that govern the existence and/or remedy of contamination on property, the protection of the environment from contamination, the control of hazardous wastes, or other activities involving hazardous substances, including building materials, or (b) any petroleum products or nuclear materials. -9- 4.18 VALID OFFERING. Assuming the accuracy of the representations and warranties of the Purchaser contained in this Agreement, the offer, sale and issuance of the Securities will be exempt from the registration requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT"), and will have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws. Neither the Company nor any agent on its behalf has solicited or will solicit any offers to sell or has offered to sell or will offer to sell all or any part of the Securities to any person or persons so as to bring the sale of such Securities by the Company within the registration provisions of the Securities Act or any state securities laws. 4.19 FULL DISCLOSURE. The Company has provided the Purchaser with all information requested by the Purchaser in connection with its decision to purchase the Preferred Stock and Warrants. Neither this Agreement, the exhibits and schedules hereto, the Related Agreements nor any other document delivered by the Company to Purchaser or its attorneys or agents in connection herewith or therewith or with the transactions contemplated hereby or thereby, contain any untrue statement of a material fact nor omit to state a material fact necessary in order to make the statements contained herein or therein not misleading. To the Company's knowledge, there are no facts which (individually or in the aggregate) materially adversely affect the business, assets, liabilities, financial condition, or operations of the Company that have not been set forth in the Agreement, the exhibits and schedules hereto, the Related Agreements or in other documents delivered to Purchaser or its attorneys or agents in connection herewith. 4.20 INSURANCE. The Company has general commercial, product liability, fire and casualty insurance policies with coverage customary for companies similarly situated to the Company. 4.21 SEC REPORTS. To the best of the Company's knowledge, the Company has filed all proxy statements, reports and other documents required to be filed by it under the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT"). The Company has furnished the Purchaser with copies of (i) its Annual Report on Form 10-KSB for the fiscal year ended August 31, 2001, (ii) its Quarterly Report on Form 10-QSB for the fiscal quarter ended November 30, 2001 and (iii) its Proxy Statement dated August 8, 2000 (collectively, the "SEC REPORTS"). Each SEC Report was in substantial compliance with the requirements of its respective form and none of the SEC Reports, nor the financial statements (and the notes thereto) included in the SEC Reports, as of their respective dates, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.22 NO MARKET MANIPULATION. The Company has not taken, and will not take, directly or indirectly, any action designed to, or that might reasonably be expected to, cause or result in stabilization or manipulation of the price of the Common Stock of the Company to facilitate the sale or resale of any of the Securities being offered hereby or affect the price at which any of the Securities being offered hereby may be issued. 4.23 LISTING. The Company's Common Stock is listed for trading on the NASD OTC Bulletin Board and satisfies all requirements for the continuation of such listing. The Company has not received any notice that its Common Stock will -10- be delisted from the NASD OTC Bulletin Board or that the Common Stock does not meet all requirements for the continuation of such listing. 4.24 NO INTEGRATED OFFERING. Neither the Company, nor to the Company's knowledge any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy any security under circumstances that would cause the offering of the Securities pursuant to this Agreement to be integrated with prior offerings by the Company for purposes of the 1933 Act which would prevent the Company from selling the Securities pursuant to Rule 506 under the 1933 Act, or any applicable exchange-related stockholder approval provisions. Nor will the Company or any of its affiliates or subsidiaries take any action or steps that would cause the offering of the Securities to be integrated with other offerings. 4.25 STOP TRANSFER. The Securities are restricted securities as of the date of this Agreement. The Company will not issue any stop transfer order or other order impeding the sale and delivery of any of the Securities at such time as the Securities are registered for public sale or an exemption from registration is available, except as required by federal securities laws. 4.26 DILUTION. The number of shares of Common Stock issuable upon conversion of the Preferred Stock and exercise of the Warrants may increase substantially in certain circumstances, including, but not necessarily limited to, the circumstance wherein the trading price of the Common Stock declines prior to conversion or exercise of such securities. The Company's directors have studied and fully understand the nature of the Securities being sold hereby and recognize that they have a potential dilutive effect. The directors of the Company have concluded, in its good faith business judgment, that such issuance is in the best interests of the Company. The Company specifically acknowledges that its obligation to issue the shares of Common Stock upon conversion of the Preferred Stock and exercise of the Warrants is binding upon the Company and enforceable regardless of the dilution such issuance may have on the ownership interests of other shareholders of the Company. 5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby represents and warrants to the Company with respect to itself or himself as follows (such representations and warranties do not lessen or obviate the representations and warranties of the Company set forth in this Agreement): 5.1 REQUISITE POWER AND AUTHORITY. Purchaser has all necessary power and authority under all applicable provisions of law to execute and deliver this Agreement and the Related Agreements and to carry out their provisions. All action on Purchaser's part required for the lawful execution and delivery of this Agreement and the Related Agreements have been or will be effectively taken prior to the Closing. Upon their execution and delivery, this Agreement and the Related Agreements will be valid and binding obligations of Purchaser, enforceable in accordance with their terms, except (a) as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application affecting enforcement of creditors' rights, and (b) as limited by general principles of equity that restrict the availability of equitable remedies. -11- 5.2 INVESTMENT REPRESENTATIONS. Purchaser understands that the Securities are being offered and sold pursuant to an exemption from registration contained in the Securities Act based in part upon Purchaser's representations contained in the Agreement. 5.3 PURCHASER BEARS ECONOMIC RISK. Purchaser has substantial experience in evaluating and investing in private placement transactions of securities in companies similar to the Company so that it is capable of evaluating the merits and risks of its investment in the Company and has the capacity to protect its own interests. Purchaser must bear the economic risk of this investment until the Securities are registered pursuant to the Securities Act, or an exemption from registration is available. 5.4 ACQUISITION FOR OWN ACCOUNT. Purchaser is acquiring the Preferred Stock for Purchaser's own account for investment only, and not with a view towards their distribution. 5.5 PURCHASER CAN PROTECT ITS INTEREST. Purchaser represents that by reason of its, or of its management's, business or financial experience, Purchaser has the capacity to protect its own interests in connection with the transactions contemplated in this Agreement, and the Related Agreements. Further, Purchaser is aware of no publication of any advertisement in connection with the transactions contemplated in the Agreement. 5.6 ACCREDITED INVESTOR. Purchaser represents that it is an accredited investor within the meaning of Regulation D under the Securities Act. 5.7 LEGENDS. (a) The Preferred Stock shall bear the following legend until the Preferred Stock and Conversion Shares are covered by an effective registration statement filed with the SEC: "THESE SHARES OF PREFERRED STOCK AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE PREFERRED STOCK HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR, IF APPLICABLE, STATE SECURITIES LAWS. THESE SHARES OF PREFERRED STOCK AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF THE PREFERRED STOCK MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE PREFERRED STOCK OR SUCH SHARES UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO BESTNET COMMUNICATIONS CORP. THAT SUCH REGISTRATION IS NOT REQUIRED." -12- (b) The Conversion Shares and the Warrant Shares shall bear a legend which shall be in substantially the following form until such shares are covered by an effective registration statement filed with the SEC: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR IF APPLICABLE, STATE SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH SECURITIES ACT AND APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO BESTNET COMMUNICATIONS CORP. THAT SUCH REGISTRATION IS NOT REQUIRED." (c) The Warrants shall bear the following legend: "THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO BESTNET COMMUNICATIONS CORP. THAT SUCH REGISTRATION IS NOT REQUIRED." 6. COVENANTS OF THE COMPANY. The Company covenants and agrees with the Purchaser as follows: 6.1 STOP-ORDERS. The Company will advise the Purchaser, promptly after it receives notice of issuance by the Securities and Exchange Commission (the "SEC"), any state securities commission or any other regulatory authority of any stop order or of any order preventing or suspending any offering of any securities of the Company, or of the suspension of the qualification of the Common Stock of the Company for offering or sale in any jurisdiction, or the initiation of any proceeding for any such purpose. 6.2 LISTING. The Company shall promptly secure the listing of the shares of Common Stock issuable upon conversion of the Preferred Stock and upon the exercise of the Warrants upon the Principal Market upon which shares of Common Stock are then listed (subject to official notice of issuance) and shall maintain such listing so long as any other shares of Common Stock shall be so listed. The Company will maintain the listing of its Common Stock on a Principal -13- Market, and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the National Association of Securities Dealers ("NASD") and such exchanges, as applicable. The Company will provide the Purchaser copies of all notices it receives notifying the Company of the threatened and actual delisting of the Common Stock from any Principal Market. 6.3 MARKET REGULATIONS. The Company shall notify the SEC, NASD and applicable state authorities, in accordance with their requirements, of the transactions contemplated by this Agreement, and shall take all other necessary action and proceedings as may be required and permitted by applicable law, rule and regulation, for the legal and valid issuance of the Securities to Purchaser and promptly provide copies thereof to Purchaser. 6.4 REPORTING REQUIREMENTS. (a) Until at least two (2) years after the effectiveness of the Registration Statement on Form SB-2 or such other Registration Statement described in Section 9.1(d) hereof, the Company will (i) cause its Common Stock to continue to be registered under Sections 12(b) or 12(g) of the Exchange Act, (ii) comply in all respects with its reporting and filing obligations under the Exchange Act, (iii) comply with all reporting requirements that is applicable to an issuer with a class of shares registered pursuant to Section 12(g) of the Exchange Act, and (iv) comply with all requirements related to any registration statement filed pursuant to this Agreement. The Company will not take any action or file any document (whether or not permitted by the Securities Act or the Exchange Act or the rules thereunder) to terminate or suspend such registration or to terminate or suspend its reporting and filing obligations under said Acts until the later of (y) two (2) years after the effective date of the Registration Statement on Form SB-2 or such other Registration Statement described in Section 9.1(d) hereof, or (z) the sale by the Purchaser of all the Securities issuable by the Company pursuant to this Agreement. Until at least two (2) years after the Warrants have been exercised, the Company will use its commercial best efforts to continue the listing of the Common Stock on the NASD OTC Bulletin Board and will comply in all respects with the Company's reporting, filing and other obligations under the bylaws or rules of the NASD and NASDAQ. 6.5 USE OF FUNDS. The Company undertakes to use the proceeds of the Purchaser's funds for the purposes set forth on SCHEDULE 6.5 attached hereto. A deviation from the use of proceeds set forth on SCHEDULE 6.5 of more than 10% per item or more than 20% in the aggregate shall be deemed a material breach of the Company's obligations hereunder. 6.6 ACCESS TO FACILITIES. The Company will permit any representatives designated by the Purchaser (or any transferee of the Purchaser) under a Confidentiality and Non-Disclosure Agreement, so long as such person holds any Securities upon reasonable notice and during normal business hours, at such person's expense and accompanied by a representative of the Company, to (a) visit and inspect any of the properties of the Company, (b) examine the corporate and financial records of the Company (unless such examination is not permitted by federal, state or local law or by contract) and make copies thereof or extracts therefrom and (c) discuss the affairs, finances and accounts of any such corporations with the directors, officers and independent accountants of the Company. -14- 6.7 TAXES. The Company will promptly pay and discharge, or cause to be paid and discharged, when due and payable, all lawful taxes, assessments and governmental charges or levies imposed upon the income, profits, property or business of the Company; provided, however, that any such tax, assessment, charge or levy need not be paid if the validity thereof shall currently be contested in good faith by appropriate proceedings and if the Company shall have set aside on its books adequate reserves with respect thereto, and provided, further, that the Company will pay all such taxes, assessments, charges or levies forthwith upon the commencement of proceedings to foreclose any lien which may have attached as security therefor. 6.8 INSURANCE. The Company will keep its assets which are of an insurable character insured by financially sound and reputable insurers against loss or damage by fire, explosion and other risks customarily insured against by companies in the Company's line of business, in amounts sufficient to prevent the Company from becoming a co-insurer and not in any event less than 100% of the insurable value of the property insured; and the Company will maintain, with financially sound and reputable insurers, insurance against other hazards and risks and liability to persons and property to the extent and in the manner customary for companies in similar businesses similarly situated and to the extent available on commercially reasonable terms. 6.9 BOOKS AND RECORDS. The Company will keep true records and books of account in which full, true and correct entries will be made of all dealings or transactions in relation to its business and affairs in accordance with generally accepted accounting principles applied on a consistent basis. 6.10 INTELLECTUAL PROPERTY. The Company shall maintain in full force and effect its corporate existence, rights and franchises and all licenses and other rights to use Intellectual Property owned or possessed by it and reasonably deemed to be necessary to the conduct of its business. 6.11 CONFIDENTIALITY. The Company agrees that it will not disclose, and will not include in any public announcement, the name of the Purchaser, unless expressly agreed to by the Purchaser or unless and until such disclosure is required by law or applicable regulation, and then only to the extent of such requirement. 6.12 REQUIRED APPROVALS. For so long as at least 500 shares of Preferred Stock are outstanding, the Company, without the prior written consent of the Purchaser, shall not: (a) authorize, create or issue any equity securities (or any rights or securities directly or indirectly convertible into or exercisable or exchangeable for securities) having rights, preferences or privileges superior to the Preferred Stock; (b) directly or indirectly declare or pay any dividends or make any distributions upon any of its capital stock or other equity securities (or any securities directly or indirectly convertible into or exercisable or exchangeable for equity securities); -15- (c) directly or indirectly redeem, purchase or otherwise acquire any of the Corporation's capital stock or other equity securities (including, without limitation, the Securities or any warrants, options and other rights to acquire such capital stock or other equity securities) or directly or indirectly redeem, purchase or make any payments with respect to any stock appreciation rights, phantom stock plans or similar rights or plans; (d) sell, lease or otherwise dispose of more than 10% of the assets of the Company (computed on the basis of book value, determined in accordance with GAAP consistently applied, or fair market value, determined by the Board of Directors in its reasonable good faith judgment) in any transaction or series of related transactions (other than sales of inventory in the ordinary course of business) or sell or permanently dispose of any of its intellectual property; (a) liquidate, dissolve or effect a recapitalization, reclassification or reorganization in any form of transaction (including, without limitation, any reorganization into a limited liability company, a partnership or any other non-corporate entity which is treated as a partnership for federal income tax purposes or a stock split or "reverse" stock split of the Common Stock); (f) become subject to (including, without limitation, by way of amendment to or modification of) any agreement or instrument which by its terms would (under any circumstances) restrict the Company's right to perform the provisions of this Agreement or any of the agreements contemplated thereby; (g) create, incur, assume or suffer to exist indebtedness exceeding an aggregate principal amount of $375,000 outstanding at any time; (h) amend, alter or repeal the Company's Bylaws or Restated Certificate as to increase the number of authorized shares of the Common Stock or any series of preferred stock, or materially affect the rights or other powers of the Conversion Shares, or otherwise take any action which is designed to, or could have the effect of, adversely affecting the rights or other powers of the Conversion Shares; or (i) materially alter or change the business of the Company. 6.13 REISSUANCE OF SECURITIES. The Company agrees to reissue certificates representing the Securities without the legends set forth in Section 5.7 above at such time as (a) the holder thereof is permitted to dispose of such Securities pursuant to Rule 144(k) under the Act, or (b) upon resale subject to an effective registration statement after such Securities are registered under the Act. The Company agrees to cooperate with the Purchaser in connection with all resales pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions necessary to allow such resales provided the Company and its counsel receive reasonably requested representations from the selling Purchaser and broker, if any. 6.14 OPINION. On the Closing Date, the Company will deliver to the Purchaser an opinion acceptable to the Purchaser from the Company's legal counsel in the form annexed hereto as Exhibit D. The Company will provide, at the Company's expense, such other legal opinions in the future as are reasonably -16- necessary for the conversion of the Preferred Stock and exercise of the Warrants. 7. COVENANTS OF THE COMPANY AND PURCHASER REGARDING INDEMNIFICATION. 7.1 COMPANY INDEMNIFICATION. The Company agrees to indemnify, hold harmless, reimburse and defend Purchaser, each of Purchaser's officers, directors, agents, affiliates, control persons, and principal shareholders, against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Purchaser which results, arises out of or is based upon (i) any misrepresentation by the Company or breach of any warranty by the Company in this Agreement or in any exhibits or schedules attached hereto or any Related Agreement, or (ii) any breach or default in performance by the Company of any covenant or undertaking to be performed by the Company hereunder, or any other agreement entered into by the Company and Purchaser relating hereto. 7.2 PURCHASER'S INDEMNIFICATION. Purchaser agrees to indemnify, hold harmless, reimburse and defend the Company, its officers, directors, agents, affiliates, control persons, and principal shareholders at all times against any claim, cost, expense, liability, obligation, loss or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the Company which results, arises out of or is based upon (a) any misrepresentation by Purchaser in this Agreement or in any exhibits or schedules attached hereto or any Related Agreement; or (b) any breach or default in performance by Purchaser of any covenant or undertaking to be performed by Purchaser hereunder, or any other agreement entered into by the Company and Purchaser relating hereto. 7.3 PROCEDURES. The procedures and limitations set forth in Section 9.6 shall apply to the indemnifications set forth in Sections 7.1 and 7.2 above. 8. CONVERSION OF PREFERRED STOCK. 8.1 MECHANICS OF CONVERSION. (a) The Preferred Stock and accrued dividends will be convertible according to the procedure set forth in the Certificate of Designation. (b) The Company understands that a delay in the delivery of the Conversion Shares after Conversion, and delivery of Preferred Stock certificates representing the unconverted balance of a Preferred Stock certificate tendered for conversion beyond the date described for such delivery set forth in the Certificate of Designation, or late delivery of a Mandatory Redemption Payment (as defined herein), as the case may be, (each of the foregoing a "DELIVERY DATE") could result in economic loss to the Purchaser. As compensation to the Purchaseer for such loss, the Company agrees to pay late payments to the Purchaser for late delivery of Shares upon Conversion and late delivery of a Preferred Stock certificate for the unconverted portion of Preferred Stock or late delivery of a Mandatory Redemption Payment, in the amount of $100 per business day after the Delivery Date for each $10,000 of Stated Value of Preferred Stock being converted and Preferred Stock certificate remaining undelivered or Mandatory Redemption Payment not paid. The Company shall pay any -17- payments incurred under this Section in immediately available funds or equivalent shares based upon the applicable Conversion Price upon demand. Furthermore, in addition to any other remedies which may be available to the Purchaser, in the event that the Company fails for any reason to effect delivery of the Shares within five business days after the Delivery Date, the Purchaser will be entitled to revoke the relevant Notice of Conversion by delivery of a notice of revocation to the Company whereupon the Company and the Purchaser shall each be restored to their respective positions immediately prior to the delivery of such notice of revocation, except that late payment charges described above shall be payable through the date notice of revocation is given to the Company. (c) Nothing contained herein or in any document referred to herein or delivered in connection herewith shall be deemed to establish or require the payment of a rate of interest or other charges in excess of the maximum permitted by applicable law. In the event that the rate of interest or dividends required to be paid or other charges hereunder exceed the maximum amount permitted by such law, any payments in excess of such maximum shall be credited against amounts owed by the Company to a Purchaser and thus refunded to the Company. 8.2 MANDATORY REDEMPTION. In the event the Company is unable to issue Conversion Shares on a Delivery Date or at any time when the Preferred Stock is convertible, for any reason, then at the Purchaser's election, the Company must pay to the Purchaser five (5) business days after request by the Purchaser or on the Delivery Date (if requested by the Purchaser) a sum of money determined by multiplying the Stated Value of the Preferred Stock not converted (or otherwise not convertible, as applicable) by 130%, together with accrued but unpaid dividends thereon ("MANDATORY REDEMPTION PAYMENT"). The Mandatory Redemption Payment must be received by the Purchaser on the same date as the Conversion Shares are otherwise deliverable or within five (5) business days after request, whichever is sooner ("MANDATORY REDEMPTION PAYMENT DATE"). Upon receipt of the Mandatory Redemption Payment, the corresponding Preferred Stock will be cancelled and no longer outstanding, and if the Holder is in possession of the corresponding Preferred Stock, the certificate will be returned to the Company. 8.3 MAXIMUM CONVERSION. The Purchaser shall not be entitled to convert on a Conversion Date that amount of the Preferred Stock in connection with that number of shares of Common Stock which would be in excess of the sum of (i) the number of shares of Common Stock beneficially owned by the Purchaser on a Conversion Date, and (ii) the number of shares of Common Stock issuable upon the conversion of the Preferred Stock with respect to which the determination of this proviso is being made on a Conversion Date, which would result in beneficial ownership by the Purchaser of more than 4.99% of the outstanding shares of Common Stock of the Company on such Conversion Date. For the purposes of the proviso to the immediately preceding sentence, beneficial ownership shall be determined in accordance with Section 13(d) of the Exchange Act and Regulation 13d-3 thereunder. Subject to the foregoing, a Purchaser shall not be limited to aggregate conversions of only 4.99%. A Purchaser may void the conversion limitation described in this Section 8.3 upon 75 days prior notice to the Company or upon an Event of Default under the Preferred Stock. A Purchaser may allocate which of the equity of the Company deemed beneficially owned by such Purchaser shall be included in the 4.99% amount described above and which shall be allocated to the excess above 4.99%. -18- 8.4 INJUNCTION - POSTING OF BOND. In the event a Purchaser shall elect to convert Preferred Stock, the Company may not refuse conversion for any reason, unless an injunction from a court, on notice, restraining and or enjoining conversion of all or part of said Preferred Stock shall have been sought and obtained and the Company posts a surety bond for the benefit of such Purchaser in the amount of 130% of the amount of the Stated Value of the Preferred Stock, which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the dispute and the proceeds of which shall be payable to such Purchaser to the extent it obtains judgment. 8.5 BUY-IN. In addition to any other rights available to the Purchaser, if the Company fails to deliver to the Purchaser Conversion Shares by the Delivery Date and if after the Delivery Date the Purchaser purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by such Purchaser of the Common Stock which the Purchaser anticipated receiving upon such conversion (a "BUY-IN"), then the Company shall pay in cash to the Purchaser (in addition to any remedies available to or elected by such Purchaser) the amount by which (A) the Purchaser's total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (B) the aggregate Stated Value of the Preferred Stock, for which such conversion was not timely honored, together with dividends thereon at a rate of 15% per annum, accruing until such amount and any accrued dividends thereon is paid in full (which amount shall be paid as liquidated damages and not as a penalty). For example, if the Purchaser purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of $10,000 of the Stated Value of the Preferred Stock, the Company shall be required to pay the Purchaser $1,000, plus interest. The Purchaser shall provide the Company written notice indicating the amounts payable to the Purchaser in respect of the Buy-In. 9. REGISTRATION RIGHTS. 9.1 REGISTRATION RIGHTS GRANTED. The Company hereby grants the following registration rights to holders of the securities purchased hereby. (a) On two occasions, for a period commencing 90 days after the Closing Date, but not later than two (2) years after the Closing Date (the "REQUEST DATE"), the Company, upon a written request therefor from holders of more than 50% of the aggregate of the Company's Securities then outstanding, on an as converted basis (the Conversion Shares and Warrant Shares issued or issuable with respect to all Preferred Stock or Warrants issued or to be issued hereunder, being, the "REGISTRABLE SECURITIES"), shall prepare and file with the SEC a registration statement under the Securities Act covering the Registrable Securities which are the subject of such request, unless such Registrable Securities are the subject of an effective registration statement or can otherwise be sold pursuant to Rule 144(k). In addition, upon the receipt of such request, the Company shall promptly give written notice to all other record holders of the Registrable Securities that such registration statement is to be filed and shall include in such registration statement Registrable Securities for which it has received written requests within 10 days after the Company gives such written notice. Such other requesting record holders shall be deemed -19- to have exercised their demand registration right under this Section 9.1. As a condition precedent to the inclusion of Registrable Securities, the holder thereof shall provide the Company with such information as the Company reasonably requests. The obligation of the Company under this Section 9.1 shall be limited to two registration statements. (b) If the Company at any time proposes to register any of its securities under the Act for sale to the public, whether for its own account or for the account of other security holders or both, except with respect to registration statements on Forms S-4, S-8 or another form not available for registering the Registrable Securities for sale to the public, provided the Registrable Securities are not otherwise registered for resale by the Purchaser or subsequent holder pursuant to an effective registration statement, each such time it will give at least 30 days' prior written notice to the record holder of any Securities of its intention so to do. Upon the written request of the holder, received by the Company within 30 days after the giving of any such notice by the Company, to register any of the Registrable Securities, the Company will cause such Registrable Securities as to which registration shall have been so requested to be included with the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent required to permit the sale or other disposition of the Registrable Securities so registered by the holder of such Registrable Securities (the "SELLER"). In the event that any registration pursuant to this Section 9.1(b) shall be, in whole or in part, an underwritten public offering of Common Stock of the Company, the number of shares of Registrable Securities to be included in such an underwriting may be reduced by the managing underwriter if and to the extent that the Company and the underwriter shall reasonably be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein; provided, however, that the Company shall notify the Seller in writing of any such reduction. Notwithstanding the forgoing provisions, or Section 9.1(a) hereof, the Company may withdraw or delay or suffer a delay of any registration statement referred to in this Section 9.1(b) without thereby incurring any liability to the Seller. (c) If, at the time any written request for registration is received by the Company pursuant to Section 9.1(a), the Company has determined to proceed with the actual preparation and filing of a registration statement under the Securities Act in connection with the proposed offer and sale for cash of any of its securities for the Company's own account, such written request shall be deemed to have been given pursuant to Section 9.1(b) rather than Section 9.1(a), and the rights of the holders of Registrable Securities covered by such written request shall be governed by Section 9.1(b) except that the Company or underwriter, if any, may not withdraw such registration or limit the amount of Registrable Securities included in such registration. (d) The Company shall file with the SEC within 20 days of the Company receiving a written request from the Purchaser (the "FILING DATE"), and use its reasonable commercial efforts to cause to be declared effective a Form SB-2 registration statement (or such other form that it is eligible to use) within 60 days of the Filing Date in order to register the Registrable Securities for resale and distribution under the Securities Act. The registration statement described in this paragraph must be declared effective by the SEC within 60 days of the Filing Date (as defined herein) ("EFFECTIVE DATE"). The Company will register not less than a number of shares of Common Stock in the aforedescribed registration statement that is equal to 300% of the Warrant Shares and Conversion Shares issuable at the Conversion Prices set forth in the Warrants and Preferred Stock, respectively, that would be in effect on the Closing Date or the date of filing of such registration statement (employing the conversion price which would result in the greater number of Shares), assuming the conversion of 100% of the Preferred Stock which are then outstanding or issuable hereunder, and at least one share of common stock for each common share issuable upon exercise of the Warrants which are then outstanding or issuable hereunder (employing the Conversion Price that would -20- result in the greater number of shares). The Registrable Securities shall be reserved and set aside exclusively for the benefit of the Purchaser and the holders of the Warrants, as the case may be, and not issued, employed or reserved for anyone other than the Purchaser and the holders of the Warrants. Such registration statement will be promptly amended or additional registration statements will be promptly filed by the Company as necessary to register additional Company Shares to allow the public resale of all Common Stock included in and issuable by virtue of the Registrable Securities. No securities of the Company other than the Registrable Securities will be included in the registration statement described in this Section 9.1(d). 9.2 REGISTRATION PROCEDURES. If and whenever the Company is required by the provisions hereof to effect the registration of any shares of Registrable Securities under the Act, the Company will, as expeditiously as possible: (a) prepare and file with the SEC a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (determined as herein provided), and promptly provide to the holders of Registrable Securities copies of all filings and SEC letters of comment; (b) prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective until the later of: (i) six months after the latest exercise period of the Warrants; or (ii) four years after the Closing Date, and comply with the provisions of the Securities Act with respect to the disposition of all of the Registrable Securities covered by such registration statement in accordance with the Seller's intended method of disposition set forth in such registration statement for such period; (c) furnish to the Seller, and to each underwriter if any, such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as such persons reasonably may request to facilitate the public sale or their disposition of the securities covered by such registration statement; (d) use its best efforts to register or qualify the Seller's Registrable Securities covered by such registration statement under the securities or "blue sky" laws of such jurisdictions as the Seller and in the case of an underwritten public offering, the managing underwriter shall reasonably request, provided, however, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction; (e) list the Registrable Securities covered by such registration statement with any securities exchange on which the Common Stock of the Company is then listed; -21- (f) immediately notify the Seller and each underwriter under such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event of which the Company has knowledge as a result of which the prospectus contained in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; and (g) make available for inspection by the Seller, any underwriter participating in any distribution pursuant to such registration statement, and any attorney, accountant or other agent retained by the Seller or underwriter, all publicly available, non-confidential financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all publicly available, non-confidential information reasonably requested by the seller, underwriter, attorney, accountant or agent in connection with such registration statement. 9.3 PROVISION OF DOCUMENTS. (a) At the request of the Seller, provided a demand for registration has been made pursuant to Section 9.1(a) or a request for registration has been made pursuant to Section 9.1(b), the Registrable Securities will be included in a registration statement filed pursuant to this Section 9. (b) In connection with each registration hereunder, the Seller will furnish to the Company in writing such information and representation letters with respect to itself and the proposed distribution by it as reasonably shall be necessary in order to assure compliance with federal and applicable state securities laws. In connection with each registration pursuant to Section 9 covering an underwritten public offering, the Company and the Seller agree to enter into a written agreement with the managing underwriter in such form and containing such provisions as are customary in the securities business for such an arrangement between such underwriter and companies of the Company's size and investment stature. 9.4 NON-REGISTRATION EVENTS. The Company and the Purchaser agree that the Seller will suffer damages if any registration statement required under Section 9.1(a) above is not filed within 30 days after written request by the holder and not declared effective by the SEC within 90 days after such request, and maintained in the manner and within the time periods contemplated by Section 9 hereof, and it would not be feasible to ascertain the extent of such damages with precision. Accordingly, if (i) the Registration Statement described in Section 9.1(a) is not filed within 30 days of such written request, or is not declared effective by the SEC on or prior to the date that is 90 days after such request, or (ii) the registration statement on Form SB-2 or such other form as described in Section 9.1(d) is not filed on or before the Filing Date or not declared effective on or before the sooner of the Effective Date, or within five days of receipt by the Company of a communication from the SEC that the registration statement described in Section 9.1(d) will not be reviewed, or (iii) any registration statement described in Section 9.1(a) or (d) is filed and declared effective but shall thereafter cease to be effective (without being succeeded immediately by an additional registration statement filed and declared effective) for a period of time which shall exceed 30 days in the aggregate per year but not more than 20 consecutive calendar days (defined as a period of 365 -22- days commencing on the date the Registration Statement is declared effective) (each such event referred to in this Section 9.4 is referred to herein as a "NON-REGISTRATION EVENT"), then, for so long as such Non-Registration Event shall continue, (i) the Company shall pay in cash as Liquidated Damages to each holder of any Registrable Securities an amount equal to two percent (2%) per month or part thereof during the pendency of such Non-Registration Event of the Stated Value of the Preferred Stock issued in connection with the Offering, whether or not converted, then owned of record by such holder or issuable as of or subsequent to the occurrence of such Non-Registration Event and (ii) the Conversion Price as defined in Section 5 of the Certificate of Designations shall be reduced by 10% for each 30-day period following the Effective Date that the Registration Statement is not declared effective by the SEC. Payments to be made pursuant to this Section shall be due and payable immediately upon demand in immediately available funds. In the event a Mandatory Redemption Payment is demanded from the Company by the holder pursuant to Section 8.2 of this Agreement, then the Liquidated Damages described in this Section 9.4 shall no longer accrue on the portion of the purchase price underlying the Mandatory Redemption Payment, from and after the date the holder receives the Mandatory Redemption Payment. It shall be deemed a Non-Registration Event to the extent that all the Common Stock included in the Registrable Securities and underlying the Securities is not included in an effective registration statement as of and after the Effective Date at the conversion prices in effect from and after the Effective Date. 9.5 EXPENSES. All expenses incurred by the Company in complying with Section 9, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including reasonable counsel fees) incurred in connection with complying with state securities or "blue sky" laws, fees of the NASD, transfer taxes, fees of transfer agents and registrars, fees of, and disbursements incurred by, one counsel for the Seller, and costs of insurance are called "REGISTRATION EXPENSES". All underwriting discounts and selling commissions applicable to the sale of Registrable Securities, including any fees and disbursements of any special counsel to the Seller beyond those included in Registration Expenses, are called "SELLING EXPENSES." The Company will pay all Registration Expenses in connection with the registration statement under Section 9. All Selling Expenses in connection with each registration statement under Section 9 shall be borne by the Seller and may be apportioned among the Sellers in proportion to the number of shares sold by the Seller relative to the number of shares sold under such registration statement or as all Sellers thereunder may agree. 9.6 INDEMNIFICATION AND CONTRIBUTION. (a) In the event of a registration of any Registrable Securities under the Securities Act pursuant to Section 9, the Company will indemnify and hold harmless each Seller, each officer of each Seller, each director of each Seller, each underwriter of such Registrable Securities thereunder and each other person, if any, who controls any such Seller or underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which the Seller, or such underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under -23- which such Registrable Securities was registered under the Act pursuant to Section 9, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Seller, each such underwriter and each such controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by any such Seller, the underwriter or any such controlling person in writing specifically for use in such registration statement or prospectus. (b) In the event of a registration of any of the Registrable Securities under the Act pursuant to Section 9, the Seller will indemnify and hold harmless the Company, and each person, if any, who controls the Company within the meaning of the Securities Act, each officer of the Company who signs the registration statement and each director of the Company, against all losses, claims, damages or liabilities, joint or several, to which the Company or such officer or director may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which such Registrable Securities were registered under the Securities Act pursuant to Section 9, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such officer or director for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that the Seller will be liable hereunder in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to such Seller, as such, furnished in writing to the Company by such Seller specifically for use in such registration statement or prospectus, and provided, further, however, that the liability of the Seller hereunder shall be limited to the proportion of any such loss, claim, damage, liability or expense which is equal to the proportion that the public offering price of the Registrable Securities sold by the Seller under such registration statement bears to the total public offering price of all securities sold thereunder, but not in any event to exceed the net proceeds received by the Seller from the sale of Registrable Securities covered by such registration statement. (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party other than under this Section 9.6(c) and shall only relieve it from any liability which it may have to such indemnified party under this Section 9.6(c) if and to the extent the indemnifying party is prejudiced by -24- such omission. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 9.6(c) for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected, provided, however, that, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified parties shall have the right to select one separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the reasonable expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. (d) In order to provide for just and equitable contribution in the event of joint liability under the Act in any case in which either (i) the Seller, or any controlling person of the Seller, makes a claim for indemnification pursuant to this Section 9.6 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 9.6 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of the Seller or controlling person of the Seller in circumstances for which indemnification is provided under this Section 9.6; then, and in each such case, the Company and the Seller will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Seller is responsible only for the portion represented by the percentage that the public offering price of its securities offered by the registration statement bears to the public offering price of all securities offered by such registration statement, provided, however, that, in any such case, (A) the Seller will not be required to contribute any amount in excess of the public offering price of all such securities offered by it pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. 10. INTENTIONALLY OMITTED. 11. INTENTIONALLY OMITTED. 12. MISCELLANEOUS. 12.1 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of laws. Any action brought by either party against the other concerning the transactions contemplated by this Agreement shall be brought only in the state courts of New York or in the federal courts located in -25- the state of New York. Both parties and the individuals executing this Agreement and other agreements on behalf of the Company agree to submit to the jurisdiction of such courts and waive trial by jury. The prevailing party shall be entitled to recover from the other party its reasonable attorney's fees and costs. In the event that any provision of this Agreement or any other agreement delivered in connection herewith is invalid or unenforceable under any applicable statute or rule of law, then such provision shall be deemed inoperative to the extent that it may conflict therewith and shall be deemed modified to conform with such statute or rule of law. Any such provision which may prove invalid or unenforceable under any law shall not affect the validity or enforceability of any other provision of any agreement. 12.2 SURVIVAL. The representations, warranties, covenants and agreements made herein shall survive any investigation made by the Purchaser and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument. 12.3 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a holder of the Securities from time to time. 12.4 ENTIRE AGREEMENT. This Agreement, the exhibits and schedules hereto, the Related Agreements and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and no party shall be liable or bound to any other in any manner by any representations, warranties, covenants and agreements except as specifically set forth herein and therein. 12.5 SEVERABILITY. In case any provision of the Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 12.6 AMENDMENT AND WAIVER. (a) This Agreement may be amended or modified only upon the written consent of the Company and the Purchaser. (b) The obligations of the Company and the rights of the holders of the Securities under the Agreement may be waived only with the written consent of such holders of Securities. The rights of the holder of Preferred Stock may be waived only with the written consent of such holder. 12.7 DELAYS OR OMISSIONS. It is agreed that no delay or omission to exercise any right, power or remedy accruing to any party, upon any breach, default or noncompliance by another party under this Agreement or the Related Agreements, shall impair any such right, power or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of or in any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent or approval of any kind or character on the Purchaser's part of any breach, default or noncompliance under this Agreement, the Preferred Stock or the Related Agreements or any waiver on such party's part of any provisions or conditions of the Agreement, the Certificate of Designations or the Related Agreements must be -26- in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, the Preferred Stock or the Related Agreements, by law or otherwise afforded to any party, shall be cumulative and not alternative. 12.8 NOTICES. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient, if not, then on the next business day, (c) five days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the Company at the address as set forth on the signature page hereof and to the Purchaser at the address set forth on the signature page hereto for such Purchaser, with a copy in the case of the Purchaser to Daniel M. Laifer, Esq., 152 West 57th Street, 4th Floor, New York, NY 10019, facsimile number (212) 541-4434, or at such other address as the Company or the Purchaser may designate by ten days advance written notice to the other parties hereto. 12.9 ATTORNEYS' FEES. In the event that any suit or action is instituted to enforce any provision in this Agreement, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including, without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 12.10 TITLES AND SUBTITLES. The titles of the sections and subsections of the Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 12.11 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. 12.12 BROKER'S FEES. Each party hereto represents and warrants that no agent, broker, investment banker, person or firm acting on behalf of or under the authority of such party hereto is or will be entitled to any broker's or finder's fee or any other commission directly or indirectly in connection with the transactions contemplated herein, except as specified herein with respect to the Purchaser. Each party hereto further agrees to indemnify each other party for any claims, losses or expenses incurred by such other party as a result of the representation in this Section 12.12 being untrue. 12.13 INDEMNIFICATION. The Company shall indemnify the Purchaser for any losses or expenses incurred by the Purchaser in connection with any claims brought against the Purchaser by any third party (including any other -27- stockholder of the Company) as a result of the transactions contemplated by this Agreement, other than for a breach of representation or warranty made by the Purchaser herein. 12.14 CONSTRUCTION. Each party acknowledges that its legal counsel participated in the preparation of this Agreement and, therefore, stipulates that the rule of construction that ambiguities are to be resolved against the drafting party shall not be applied in the interpretation of this Agreement to favor any party against the other. -28- IN WITNESS WHEREOF, the parties hereto have executed the SECURITIES PURCHASE AGREEMENT as of the date set forth in the first paragraph hereof. COMPANY: PURCHASER: BESTNET COMMUNICATIONS CORP. LAURUS MASTER FUND, LTD. By: By: -------------------------------- ------------------------------------- Name: Name: Title: Address: LAURUS MASTER FUND, LTD. Address: 5075 E. Cascade Road, Suite K c/o Onshore Corporate Grand Rapids, Michigan 49546 Services Ltd. P.O. Box 1234 G.T., Queensgate House, South Church Street Grand Cayman, Cayman Islands LIST OF EXHIBITS Schedule of Purchasers Exhibit A Form of Offering Certificate of Designations Exhibit B Form of Warrant Exhibit C Form of Opinion Exhibit D EXHIBIT A SCHEDULE OF PURCHASERS PURCHASER CLOSING DATE PREFERRED STOCK --------- ---------------------------- LAURUS MASTER FUND, LTD. $115,000 TOTAL $115,000 SCHEDULE OF WARRANT HOLDERS NAME OF WARRANT HOLDER NUMBER OF WARRANT SHARES - ---------------------- ------------------------ LAURUS MASTER FUND, LTD. 5,750 SCHEDULE OF FUND MANAGER'S FEE RECIPIENTS FUND MANAGER CLOSING DATE FINDER'S FEES - ------------ -------------------------- LAURUS CAPITAL MANAGEMENT, L.L.C. $11,500 TOTAL $11,500 (10% OF CLOSING) A-1 EXHIBIT B FORM OF CONVERTIBLE PREFERRED STOCK B-1 EXHIBIT C FORM OF WARRANT C-1 EXHIBIT D FORM OF OPINION 1. The Company is a corporation validly existing and in good standing under the laws of the State of Nevada and has all requisite corporate power and authority to own, operate and lease its properties and to carry on its business as it is now being conducted. 2. The Company has the requisite corporate power and authority to execute, deliver and perform its obligations under the Agreement and Related Agreements. All corporate action on the part of the Company, its officers, directors and stockholders necessary for (i) the authorization of the Agreement and Related Agreements, and the performance of all obligations of the Company thereunder at each Closing, and (ii) the authorization, sale, issuance and delivery of the Securities pursuant to the Agreement and the Related Agreements has been taken. The Conversion Shares and the Warrant Shares, when issued pursuant to and in accordance with the terms of the Agreement and upon delivery, shall be validly issued and outstanding, fully paid and non assessable. 3. The execution, delivery and performance of the Agreement, the Preferred Stock or the Related Agreements by the Company and the consummation of the transactions contemplated by any thereof, will not, with or without the giving of notice or the passage of time or both: (a) Violate the provisions of the Restated Articles or bylaws of the Company; or (b) To the best of such counsel's knowledge, violate any judgment, decree, order or award of any court binding upon the Company. 4. The Agreement and Related Agreements constitute and the Preferred Stock, upon their issuance will constitute, valid and legally binding obligations of the Company, and are enforceable against the Company in accordance with their respective terms. 5. The sale of the Preferred Stock and the subsequent conversion of the Preferred Stock into Conversion Shares are not and will not be subject to any preemptive rights or, to such counsel's knowledge, rights of first refusal that have not been properly waived or complied with. The sale of the Warrants and the subsequent exercise of the Warrants for Warrant Shares are not and will not be subject to any preemptive rights or, to such counsel's knowledge, rights of first refusal that have not been properly waived or complied with. 6. Assuming the accuracy of the representations and warranties of the Purchasers contained in the Agreement, the offer, sale and issuance of the Securities will be exempt from the registration requirements of the Securities Act, and will have been registered or qualified (or are exempt from registration and qualification) under the registration, permit or qualification requirements of all applicable state securities laws. To the best of such counsel's knowledge, neither the Company, nor any of its affiliates, nor any person acting on its or their behalf, has directly or indirectly made any offers or sales of any security or solicited any offers to buy and security under circumstances D-1 that would cause the offering of the Securities pursuant to this Agreement to be integrated with prior offerings by the Company for purposes of the Securities Act which would prevent the Company from selling the Securities pursuant to Rule 506 under the Securities Act, or any applicable exchange-related stockholder approval provisions. 7. There is no action, suit, proceeding or investigation pending or, to the best of such counsel's knowledge, currently threatened against the Company that questions the validity of the Agreement or the Related Agreements or the right of the Company to enter into any of such agreements, or to consummate the transactions contemplated thereby, or which might result, either individually or in the aggregate, in any material adverse change in the assets, condition, affairs or prospects of the Company, financially or otherwise, or any change in the current equity ownership of the Company. To the best of such counsel's knowledge, the Company is not a party or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality; nor is there any action, suit, proceeding or investigation by the Company currently pending or which the Company intends to initiate. D-2 EX-23.1 9 ex23-1.txt CONSENT OF SEMPLE & COOPER, LLP Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Bestnet Communications, Inc. Green Valley, Arizona As independent public accountants, we hereby consent to the incorporation by reference in this S-2 registration statement of our report dated October 19, 2001, included in the Company's Form 10-KSB for the year ended August 31, 2001, and to all references to our firm included in this registration statement. /s/ SEMPLE & COOPER, LLP Phoenix, Arizona February 20, 2002 -----END PRIVACY-ENHANCED MESSAGE-----