-----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, EFpfaeXjOy9LIJN31wZFAJ42ecMh0R1VAWKGKkW1klxHiOYmguQzrgF3Wzrtmruu hHZwjU9ndDJjnxqia3GnCw== 0000950147-02-001545.txt : 20021127 0000950147-02-001545.hdr.sgml : 20021127 20021127163427 ACCESSION NUMBER: 0000950147-02-001545 CONFORMED SUBMISSION TYPE: S-2 PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20021127 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: 333-101561 FILM NUMBER: 02843984 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-9294.txt FORM S-2 OF BESTNET COMMUNICATIONS CORP. As filed with the Securities and Exchange Commission on November 27, 2002 Registration No. 333-_______ ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM S-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 BESTNET COMMUNICATIONS CORP. (formerly WAVETECH INTERNATIONAL, INC.) (Exact name of registrant as specified in its charter) Nevada 86-1006416 (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 5075 East Cascade Road, Suite K, Grand Rapids, Michigan 49546 (616) 977-9933 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) Copies to: Robert A. Blanchard Gregory R. Hall, Esq. BestNet Communications Corp. Squire, Sanders & Dempsey L.L.P. 5075 East Cascade Road, Suite K Two Renaissance Square Grand Rapids, Michigan 49546 40 North Central Avenue, Suite 2700 (616) 977-9933 Phoenix, Arizona 85004-4498 (602) 528-4000 (Name, address, including zip code, and telephone number, including area code, of agent for service) APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If the registrant elects to deliver its latest annual report to security holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1) of this Form, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If the delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ================================================================================ CALCULATION OF REGISTRATION FEE
======================================================================================================= NUMBER OF PROPOSED MAXIMUM PROPOSED TITLE OF EACH CLASS OF SHARES TO BE OFFERING PRICE PER MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED (1) SHARE UNIT(2) OFFERING PRICE(2) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------- Common Stock, $.001 par value 1,662,050 $0.90 $1,495,845 $137.62 =======================================================================================================
(1) Represents (i) 665,000 shares of common stock issuable upon conversion of $665,000 in aggregate principal amount of its 6% Convertible Promissory Notes issued to note holders by BestNet pursuant to a Note and Warrant Purchase Agreement, dated September 26, 2002, (ii) 332,500 shares of common stock issuable upon exercise of warrants issued to the purchasers of our 6% Convertible Promissory Notes, (iii) 400,000 shares of common stock issuable upon exercise of warrants issued to Anthony Silverman, and (iv) 264,550 shares of common stock held by Anthony Sliverman and issued pursuant to a Common Stock Purchase Agreement, dated August 30, 2002. Pursuant to Rule 416(a), this registration statement also covers an indeterminate number of additional securities that may be offered or issued in connection with any stock split, stock dividend or similar transaction. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) and (o) under the Securities Act of 1933, as amended, on the basis of the closing price for shares of our common stock as reported by the Nasdaq Over the Counter Bulletin Board on November 25, 2002. The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE SELLING STOCKHOLDER MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED NOVEMBER 27, 2002 Prospectus BestNet Communications Corp. 1,662,050 Shares of Our Common Stock This prospectus relates to the resale of an aggregate of 1,662,050 shares of our common stock issuable upon exercise of outstanding warrants. The shares of common stock covered in this prospectus are being offered by the selling stockholders identified on pages 22 through 24. The shares of common stock that may be resold by the selling stockholders constitute 8.7% of our issued and outstanding common stock on November 7, 2002 and 8.1% of our issued and outstanding common stock on such date after giving effect to the exercise of all of the warrants described in this prospectus. The selling stockholders may sell the common stock from time to time in the principal market on which the stock is traded at the prevailing market price or in negotiated transactions. The selling stockholders may be deemed to be underwriters of the shares of common stock, which they are offering. Please see the "Selling Stockholders" section beginning on page 23 in this prospectus for a complete description of all of the selling stockholders. The selling stockholders will receive all of the amounts received upon any sale by them of the common stock, less any brokerage commissions or other expenses incurred by them. We will not receive any proceeds from the sale of the common stock by the selling stockholders. We will receive up to an aggregate of $1,248,750 if all of the warrants are exercised. Our common stock is traded on the NASDAQ Over-the-Counter Bulletin Board under the symbol BESC.OB. On November 25, 2002, the closing sale price of our common stock was $0.90. Investing in our common stock involves a high degree of risk. See Risk Factors on page 7. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this prospectus is December ___, 2002. TABLE OF CONTENTS PAGE WHERE YOU CAN FIND MORE INFORMATION............................................2 INCORPORATION OF DOCUMENTS BY REFERENCE........................................2 SUMMARY........................................................................3 THE OFFERING...................................................................6 RISK FACTORS...................................................................7 USE OF PROCEEDS...............................................................21 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS......................21 SELLING STOCKHOLDERS..........................................................22 PLAN OF DISTRIBUTION..........................................................25 DETERMINATION OF OFFERING PRICE...............................................26 DESCRIPTION OF SECURITIES.....................................................26 LEGAL MATTERS.................................................................26 EXPERTS.......................................................................26 INFORMATION WITH RESPECT TO THE REGISTRANT....................................26 DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES.................................................................26 i WHERE YOU CAN FIND MORE INFORMATION We file reports and other information with the U.S. Securities and Exchange Commission. You may read and copy any document that we file at the SEC's public reference facilities at 450 Fifth Street N.W., Room 1024, Washington, D.C. 20549. Please call the SEC at 1-800-732-0330 for more information about its public reference facilities. Our SEC filings are also available to you free of charge at the SEC's web site at http://www.sec.gov. Copies of publicly available documents that we have filed with the SEC can also be inspected and copied at the offices of the National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006. This prospectus is a part of the registration statement that we filed on Form S-2 with the SEC. The registration statement contains more information about us and our common stock than this prospectus, including exhibits and schedules. You should refer to the registration statement for additional information about us and the common stock being offered in this prospectus. Statements that we make in this prospectus relating to any documents filed as an exhibit to the registration statement or any document incorporated by reference into the registration statement may not be complete and you should review the referenced document itself for a complete understanding of its terms. INCORPORATION OF DOCUMENTS BY REFERENCE The SEC allows us to incorporate by reference the information we file with them. This means that we can disclose information to you by referring you to those documents. The documents that have been incorporated by reference are an important part of the prospectus, and you should review that information in order to understand the nature of any investment by you in the common stock. Information contained in this prospectus automatically updates and supersedes previously filed information. We are incorporating by reference the documents listed below and all of our filings under the Securities Exchange Act of 1934, as amended, after the date of filing the initial registration statement and prior to the effectiveness of the registration statement. * our annual report on Form 10-KSB for the fiscal year ended August 31, 2002; and * the description of our common stock included in our Registration Statement on Form 8-A, filed March 11, 1987. If you would like a copy of any of these documents, at no cost, please write or call us at: BestNet Communications Corp. 5075 East Cascade Road, Suite K, Grand Rapids, Michigan 49546 Attn: Corporate Secretary Telephone: (616) 977-9933 You should only rely upon the information included in or incorporated by reference into this prospectus or in any prospectus supplement that is delivered to you. We have not authorized anyone to provide you with additional or different information. You should not assume that the information included in or incorporated by reference into this prospectus or any prospectus supplement is accurate as of any date later than the date on the front of the prospectus or prospectus supplement. We have not authorized any person to provide you with information different from that contained or incorporated by reference in this prospectus. The selling shareholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of common stock. 2 SUMMARY The following summary should be read by you together with the more detailed information in other sections of this prospectus. You should also carefully consider the factors described under Risk Factors at page 7 of this prospectus. Throughout this prospectus, we refer to BestNet Communications Corp. as BestNet, we, our, ours, and us. BESTNET COMMUNICATIONS CORP. We are a facilities-based, global communication solutions provider. Our patented, proprietary technology uses widely available Internet access to control, enable, and manage voice communications over the public switched telecommunication network. We views our role is as a product development, marketing, sales, sub-licensing, customer service and billing organization for patented, packet-based Internet telephony software applications that control, manage and enable global telecommunications services. We are presently focusing substantially all of our financial and other resources on marketing and development of Bestnetcall services to individual clients and selected companies with international locations and/or clients worldwide. As of the date of this prospectus, we have approximately 13,000 clients, making calls from 142 countries and calling to 198 countries. We develop, market and sell patented Internet-based telecommunications applications, technologies and services to corporate and residential clients worldwide. Bestnetcall, the Company's flagship product, is the industry's first patented, phone-to-phone, Internet-enabled long distance service, which combines global internet access and the public switched telephone network via our internet website at Bestnetcall.com. This service was first made available to the public on April 17, 2000 and is marketed under the brand name Bestnetcall. Although founded as a Nevada corporation on July 10, 1986, we did not commence operations until 1995. From 1995 until 1999, we operated under the name Wavetech International, Inc. and developed software for customized called card services and created infrastructure to market and distribute our products and services. During this period, our efforts were primarily focused on hiring management and other key personnel, raising capital, procuring governmental authorizations and space in central offices, acquiring equipment and facilities, developing, acquiring and integrating billing and database systems. We marketed these systems to the business traveler and to large organizations or companies with a membership base. In the late 1990s, due to the wide scale deployment of cellular telephones with messaging capability, the market for business related calling card services greatly diminished. In June 1999, we discontinued our calling card services. Since then, we have focused substantially all of our efforts and resources on developing and commercializing our Bestnetcall web-enabled long distance services. On September 27, 2000, we changed our name to BestNet Communications Corp. At August 31, 2002, we had an accumulated deficit of $23,488,980. We had net losses for the fiscal year ended August 31, 2002 of $6,468,488. We expect to continue to spend considerable financial and management resources on the roll-out of our Bestnetcall service, which is described below. Further, we have substantial future capital requirements with respect to the roll-out of our Bestnetcall service. Accordingly, we expect to continue to incur significant additional losses and continued negative cash flow from operations for the foreseeable future. Users of our Bestnetcall services are able to do the following by accessing our website at www.Bestnetcall.com: * Register to use our Bestnetcall services * Access and launch communication applications * Access current rate tables and time zone charts * Access a full suite of call management features * Access customer service immediately via the Internet * Maintain call account security * Obtain real time billing detail 3 Our Bestnetcall service does not require the purchase of special hardware or software by the customer and uses existing telephone equipment. Users only need access to the Internet and an available phone line (land line or cellular). Bestnetcall also offers immediate real time billing detail to all users and accepts various payment methods, including pre-paid or post-paid credit card payments and invoicing options. The architecture of Bestnetcall allows for total security regarding both the FROM and TO legs of each call. The FROM and TO numbers are never displayed, thus it is impossible to determine from where a call is being placed. We offer our Bestnetcall service through both direct sales and indirect sales channels. Our initial target markets include: * Large Corporate / Enterprise Clients * Internet Service Providers * Mid-sized to SOHO Business (Small Office Home Office) * Marketing and Channel Partners * Reseller, VAR and Integrators * Technology and Telecommunications Consultants * Consumers Our marketing efforts are targeted at international long distance and conference calling clients in a number of key geographic areas in the world. Our priorities are focused primarily on the following geographic regions: * Central and South America * North America * Asia Pacific * Europe * Middle East * Caribbean Today's telecom industry is being shaped dramatically by globalization, new competition, and use of technology. The telecommunications market is one of the largest markets in the world, second only to the financial markets. The International Telecommunications Union forecasts the telecommunications services market to be $1.1 trillion by the end of calendar year 2002. Our goal is to become a leading provider of Web-enabled application services. We hope to capture a share of this large and growing market. Our principal executive offices are located at 5075 East Cascade Road, Suite K, Grand Rapids, Michigan 49546. Our telephone number is (616) 977-9933. We wholly own our four subsidiaries, Interpretel, Inc., Interpretel (Canada) Inc., Telplex International Communications, Inc. and International Environment Corporation. 4 SELECTED AND SUMMARY CONSOLIDATED FINANCIAL DATA The following selected and summary consolidated financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and our financial statements and the related notes included elsewhere in this prospectus. The selected consolidated statement of operations data for the fiscal years ended August 31, 1997, 1998, 1999, 2000, 2001 and 2002 are derived from our audited financial statements not included elsewhere in this prospectus.
YEAR ENDED AUGUST 31, -------------------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 2002 ------------ ------------ ------------ ------------ ------------ ------------ Statement of Operations Data: Revenue $ 719,142 $ 157,838 $ 13,580 $ 28,670 $ 493,260 $ 1,060,582 Cost of revenue 679,930 85,082 9,468 51,722 497,663 1,432,196 Development 0 0 0 0 0 0 Selling, general and administration 1,584,747 794,004 691,479 1,188,032 2,044,720 2,028,732 Depreciation & amortization 211,786 156,965 146,977 1,545,636 1,979,975 2,277,525 ------------ ------------ ------------ ------------ ------------ ------------ Total cost and expenses 2,476,463 1,036,051 847,924 2,785,390 4,522,358 4,306,257 Loss from operations (1,757,321) (878,213) (834,344) (2,756,720) (4,029,098) (4,677,871) Other Income and Expenses: Interest income 8,500 6,565 70,519 76,129 227,691 3,023 Rental income 0 8,833 36,000 22,500 300 0 Misc income 0 0 0 4,014 43 0 Interest expense (26,893) (45,182) (8,995) (60,512) (36) (764,688) License agreement termination income 0 236,906 0 0 0 0 Loss on sale of investment in Switch 0 (216,165) 0 0 0 0 Debt conversion expense 0 (92,894) 0 0 0 0 Proposed merger costs 0 (236,737) (118,450) 0 0 0 Write-off of intangibles & other assets 0 0 (36,125) 0 0 0 Income tax expense 0 0 0 0 (50) 0 Preferred stock conversion penalty 0 0 (144,000) (221,226) 0 0 Exchange (loss) gain 0 0 0 0 (1,647) 0 Other misc expenses 0 0 (15,000) 0 0 0 ------------ ------------ ------------ ------------ ------------ ------------ Total Other Income and Expenses (18,393) (338,674) (216,051) (179,095) 226,301 (831,854) ------------ ------------ ------------ ------------ ------------ ------------ Net loss before preferred dividends $ (1,775,714) $ (1,216,887) $ (1,050,395) $ (2,935,815) (3,802,797) $ (5,509,725) Cumulative preferred dividends Declared and preferred stock conversion benefit 0 135,994 36,500 2,602,046 212,013 958,723 ------------ ------------ ------------ ------------ ------------ ------------ Net loss available to common shareholders $ (1,775,714) $ (1,352,881) $ (1,086,895) $ (5,537,861) $ (4,014,810) $ (6,468,448) Net loss per share, basic & diluted $ (.74) $ (0.51) $ (0.37) $ (1.72) $ (0.45) $ (0.41) Weighted average shares outstanding, basic & diluted 2,409,195(1) 2,663,257(1) 2,904,693 3,221,225 9,013,669 15,933,908 YEAR ENDED AUGUST 31, -------------------------------------------------------------------------------------------- 1997 1998 1999 2000 2001 2002 ------------ ------------ ------------ ------------ ------------ ------------ Balance Sheet Data: Cash & Cash Equivalents $ 13,329 $ 2,202,573 $ 889,620 $ 2,581,492 $ 285,518 $ 351,784 Working Capital (650,761) 1,863,442 618,440 2,394,852 197,796 (526,923) Total Assets 2,840,796 2,542,171 1,574,395 13,862,867 11,264,956 519,202 Total Liabilities 828,981 389,219 281,288 210,542 164,196 1,046,125 Accumulated Deficit (5,028,085) (6,380,966) (7,467,861) (13,005,722) (17,020,532) (23,488,980) Stockholders' Equity 2,011,815 2,152,952 1,293,107 13,652,325 11,100,760 8,454,275
(1) As restated to reflect a one-for-six reverse stock split effective December 18, 1998. 5 THE OFFERING This prospectus relates to the resale of an aggregate of 1,662,050 shares of our common stock to be sold by the selling stockholders identified on pages 22 through 24 of this prospectus. The number of shares subject to this prospectus represents 8.7% of our issued and outstanding common stock as of November 7, 2002 and 8.1% after issuance of all currently unissued shares included in this prospectus. As of November 7, 2002, we had 19,059,839 shares of common stock issued and outstanding. SECURITIES BEING ISSUED Resale of Common Stock Underlying 6% Convertible Notes and Warrants In this prospectus, we are registering the resale of an aggregate of 665,000 shares of our common stock issuable upon conversion of $665,000 in aggregate principal amount of our 6% Convertible Promissory Notes and 332,500 shares of our common stock issuable upon exercise of warrants issued to the purchasers of our notes. These notes and warrants were issued pursuant to the terms of a Note and Warrant Purchase Agreement, dated September 26, 2002. The transactions set forth in the Note and Warrant Purchase Agreement were completed on October 30, 2002. The 6% Convertible Promissory Notes bear interest at rate of 6% per annum and are due and payable one year from the date of issuance. Each holder of 6% Convertible Promissory Notes have the option, on or prior to the maturity date, to convert the principal amount of the note, together with accrued and unpaid interest, into shares of common stock of the Company. The number of shares of common stock issuable upon conversion of each note is determined by dividing the conversion amount by $1.00. The warrants issued to the note holders have a per share exercise price of $1.50 and a term of two years from the issuance date. In the event we undertake certain corporate events, such as a stock dividend, stock-split, reverse stock split, reorganization, reclassification, merger or similar transactions, the number of shares of common stock and/or exercise price are subject to adjustment in accordance with the terms of the warrant. We granted demand registration rights to the purchasers of the notes and warrants pursuant to the terms of a registration rights agreement. Holders of the majority of the shares issuable upon conversion of the notes and underlying the warrants have requested that we file a registration statement to register the resale of the shares of common stock issuable upon conversion of the notes and upon exercise of the warrants. We must follow the procedures set forth in the registration rights agreement if we are asked to file a registration statement. We are only required to do this once. There are limitations on our obligation to comply with a demand to register shares of common stock underlying these securities. Common Stock Purchase Agreement In this prospectus, we are also registering the resale of an aggregate of 264,550 shares of our common stock issued to Mr. Anthony Silverman pursuant to a Common Stock Purchase Agreement dated August 30, 2002. We are also registering the resale of an aggregate of 400,000 shares of our common stock issued to Mr. Silverman in consideration for business and other related assistance he is providing. The warrants issued to Mr. Silverman have a per share exercise price of $1.25 for 200,000 of such shares and $2.50 for the remaining 200,000 shares. The warrants have a term of two years from the issuance date contain adjustment provisions similar to those provisions described generally above. 6 RISK FACTORS BEFORE BUYING ANY OF THE SHARES OF COMMON STOCK BEING OFFERED BY THIS PROSPECTUS, YOU SHOULD CAREFULLY READ AND CONSIDER EACH OF THE RISK FACTORS WE HAVE DESCRIBED IN THIS SECTION. SINCE WE ARE DEPENDENT ON COMPONENTS OF OUR LICENSE AGREEMENT WITH SOFTALK, ANY MATERIAL CHANGES IN THIS AGREEMENT COULD ADVERSELY IMPACT OUR BUSINESS AND FUTURE OPERATIONS. We are dependent on components of our license agreement with Softalk, which gives us a worldwide exclusive license to distribute, market, service, sell and sublicense current and future Softalk communication software to commercial accounts. This agreement also grants us a worldwide nonexclusive license to distribute, market, service, sell and sublicense current and future Softalk communication software to individual customer accounts. In September of 2002, we began legal proceedings against Softalk in Canada to address numerous breaches of its obligations under the various agreements in place between our companies. In September 2002, we obtained a court order/injunction requiring Softalk to monitor and maintain our communication network during a commercially reasonable transition period. Softalk failed to comply with this court order/injunction and has, instead, responded by making allegations of its own against us for alleged breaches of the Softalk license agreement. On making its allegations, Softalk has threatened to terminate the license agreement. We believe Softalk's allegations are without merit and are responding by asserting our rights under our agreements with Softalk and at law. We have moved under the contractual agreements to resolve matters in arbitration proceedings with Softalk. Although at this point unlikely, in the event such proceedings, or any other proceedings arising out of the context of these arbitration proceedings, result in material changes in the agreements, or the termination thereof, such an outcome could materially adversely impact our business and future operations. IF OUR BESTNETCALL SERVICE IS NOT ACCEPTED BY TARGETED CUSTOMERS, OUR FUTURE OPERATING RESULTS WILL BE MATERIALLY ADVERSELY AFFECTED. We have operated at a loss for the last ten years. Our Bestnetcall service is a unique value-generating product. Based on our marketing efforts to date it is still too early to determine if the Bestnetcall service will likely achieve broad commercial acceptance by Internet users. The failure to achieve broad market acceptance will have a material adverse effect on our business, financial condition and results of operations. Our risks include the following: * evolving and unpredictable business models; * management and funding of growth; * our ability to anticipate and adapt to developing international markets; * acceptance by Internet users; * our ability to establish relationships with additional strategic partners; and * the maintenance of our network at a high level of quality to support commercial acceptance of the Bestnetcall service. To address these risks we must, among other things: * attract and retain frequent users of its services in its target markets; * continue to provide value creating services for current and future customers; * grow usage by our existing customer base; * attract a significant number of new Internet telephony business customers in target markets; 7 * expand value-added services; * successfully respond to competitive developments; * continue to form and maintain relationships with strategic partners; * continue to attract, retain and motivate qualified personnel; * provide superior customer service; and * continue to develop and upgrade technologies and commercialize value creating Internet based services. A FAILURE BY PARTIES THAT MAINTAIN PHONE AND DATA LINES TO SERVICE SUCH LINES OR AN INCREASE IN THE PRICE FOR MAINTAINING PHONE AND DATA LINES MAY DISRUPT BESTNET'S BUSINESS. Our business strategy depends on the availability of the Internet to transmit data packets for voice and fax calls. We also rely on third parties who provide traditional phone lines. Some of these third parties are national telephone carriers. If any of these carriers increase their charges for using these lines, which has become increasingly likely in light of the deregulation, then our profitability will be materially adversely affected. They may also fail to properly maintain their lines and disrupt our ability to provide service to its customers. Any failure by these third parties to maintain these lines and networks that leads to a material disruption of our ability to complete calls over the Internet would have a material adverse affect on our business, financial condition and results of operations. We may be unable to continue purchasing such services from these third parties on acceptable terms, if at all. If we are unable to purchase the necessary services to maintain and expand its network as currently configured, then our business, financial condition and results of operations would be materially adversely affected. THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO DOMESTIC GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES, WHICH, IF INCREASED OR CHANGED, COULD MATERIALLY ADVERSELY AFFECT THE COMPANY'S BUSINESS. While the FCC has tentatively decided that information service providers, including Internet telephony providers, are not telecommunications carriers for regulatory purposes, various companies have challenged that decision. Congress continues to review the conclusions of the FCC, and the FCC could impose greater or lesser regulation on our industry. For Example, the FCC is currently considering, whether to impose surcharges or other regulations upon certain providers of Internet telephony, primarily those that provide Internet telephone services to end-users located within the U.S. To date this has not been done however, the imposition of such surcharges or the regulation of Internet telephony providers both in the U.S. and internationally could increase the cost of doing business over the Internet and materially adversely affect our business, financial condition and results of operations. Aspects of our operations may be, or become, subject to state or federal regulations governing universal service funding, disclosure of confidential communications, copyright and excise taxes. There can be no assurance that government agencies will not increasingly regulate Internet related services. Increased regulation of the Internet may slow its growth. Such regulation may also negatively impact the cost of doing business over the Internet and materially adversely affect our business, financial condition and results of operations. THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO INTERNATIONAL GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES, WHICH COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS. We are marketing our services to international long distance callers in over 140 countries around the world. Because we conduct business internationally, we are subject to certain direct or indirect risks. These risks could include: * unexpected changes in regulatory requirements for the Internet and/or Internet telephony; 8 * foreign currency fluctuations, which could increase or decrease operating expenses and increase or decrease revenue; * foreign taxation; and * the burdens of complying with a variety of foreign laws, trade standards, tariffs and trade barriers. * Changes in regulations and tax could have an adverse effect on our revenue and costs. BESTNET HAS A HISTORY OF OPERATING LOSSES AND MAY NEVER GENERATE OPERATING INCOME FROM THE SALE OF ITS BESTNETCALL SERVICE. As of August 31, 2002, we had an accumulated deficit of $23,488,980. Prior year's financial information has no particular bearing on future years' results because the focus of our business has changed from calling card services to Internet telephony. We believe that our future profitability and success will depend in large part on our ability to generate revenue from the sale of our Bestnetcall service to businesses. Revenues are also anticipated from the sub-licensing of proprietary technology and business systems to partners around the world. The profitability and success of BestNet will depend on: * our ability to maintain existing corporate relationships and our ability to enter into new relationships. * our ability to retain the right to sell value added Internet based services; * our ability to effectively create and maintain relationships with multinational partners; * our ability to successfully enter into new strategic relationships for distribution and increased usage of the Bestnetcall services; and * our ability to generate sufficient sales volume. Accordingly, we expect to continue to expend significant financial and management resources on the rollout of our Bestnetcall service, strategic relationships, sales and marketing along with operating improvements to meet specific client needs. As a result, we expect to incur significant additional losses and continued negative cash flow from operations for the foreseeable future. If such losses continue to occur, then our revenues may not increase or even continue at their current levels. Further, we may not achieve or maintain profitability or generate cash from operations in future periods. CONFLICTS OF INTEREST COULD CONTINUE TO ARISE WHICH MATERIALLY ADVERSELY AFFECT BESTNET, ITS BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Conflicts of interest could continue to arise between our affiliates, and us, including Softalk, in areas relating to past, ongoing and future relationships, including: * the Bestnetcall license agreement, corporate opportunities, indemnity arrangements, tax and intellectual property ownership matters; * potential acquisitions or financing transactions; and * sales or other dispositions by BestNet principals. These conflicts also may include disagreements regarding the Bestnetcall license agreement, including with respect to possible amendments to, or modifications or waivers of provisions of such agreement arising out of the active arbitration. Such amendments, modifications or waivers may adversely affect our business, financial condition and results of operations. Ownership interests of directors or officers in BestNet common stock, or serving as both a 9 director/officer of BestNet could create or appear to create potential conflicts of interest when directors and officers are faced with decisions that could have different implications for BestNet. OUR INABILITY TO BE COMPETITIVE INTERNATIONALLY OR TO SATISFY REGULATORY REQUIREMENTS WHEN WE EXPAND GLOBALLY COULD MATERIALLY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS. A significant aspect of our growth strategy is to expand our business internationally, through the Internet. Such expansion will place additional burdens upon our management, personnel and financial resources and may cause us to incur losses. We will also face different and additional competition in international markets. These risks could impair our ability to expand internationally as well as have a material adverse effect upon our overall business operations, growth and financial condition. In addition, international regulations continue to change and could effect adversely business that we currently have along with business that we will develop in the future. ON-LINE SECURITY BREACHES OR FAILURES MAY MATERIALLY ADVERSELY AFFECT BESTNET. In order to successfully provide services over the Internet, it is necessary that we are able to ensure the secure transmission of confidential customer information both voice and data. We employ certain technology in order to protect such information, including customer credit card information. However, we may be unable to ensure that such information will not be intercepted illegally. Advances in cryptography or other developments that could compromise the security of confidential customer information could have a direct negative impact upon our electronic commerce business. In addition, the perception by consumers that the Internet is not secure, even if unfounded, means that fewer consumers might use our services. Finally, any breach in security, whether or not a result of our acts or omissions, may cause us to be the subject of litigation, which could be very time-consuming and expensive to defend. OUR OUTSTANDING SHARES MAY BE DILUTED RESULTING IN LESS PERCENTAGE OF SHARES HELD BY EACH SHAREHOLDER AND A LOWER MARKET PRICE PER SHARE OF OUR COMMON STOCK. In our Articles of Incorporation, we are authorized to issue up to 50,000,000 million shares of common stock. The Board of Directors may authorize the issuance of shares of stock for such consideration, as it deems adequate. Additional shares of common stock may be issued to raise capital, to purchase property or rights, and upon exercise of warrants, options, or other derivative instruments. We are also authorized to issue up to 10,000,000 million shares of preferred stock, in one or more series, and to determine the price, rights, preferences and privileges of the shares of each such series without any further vote or action by the stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any shares of preferred stock that may be issued in the future. Preferred stock may be issued that is convertible into shares of common stock at conversion prices that might not be related to the then current market price. The market price of our common stock may decrease as more shares of common stock become available for trading. The equity interest of the shareholders in BestNet also may be reduced through the issuance of new common stock required to further fund our company. THE CURRENT CAPITALIZATION COULD DELAY, DEFER, OR PREVENT A CHANGE OF CONTROL. We are authorized to issue up to 50,000,000 shares of common stock and up to 10,000,000 shares of preferred stock, in one or more series, and to determine the price, rights, preferences and privileges of the shares of each such series without any further vote or action by the stockholders. The issuance of preferred stock could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company, thereby delaying, deferring, or preventing a change of control of the Company. THE FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS MAY NOT COME TRUE AND ACTUAL RESULTS COULD MATERIALLY DIFFER FROM THE ANTICIPATED RESULTS. This prospectus contains forward-looking statements that involve risks and uncertainties. These statements may include our plans: * to grow our Internet-based communications businesses * to expand the range of services we offer 10 * to increase the number of customers using our services and the minutes of use and price per minute of use of the traffic booked through our websites and network * to otherwise expand our business activities in new cities and foreign countries * to retain key personnel or otherwise to implement our strategy as well as our beliefs regarding consumer acceptance of the Internet as a means of commerce and the use of the Internet as a source of advertising These forward looking statements include statements regarding the belief or current expectation of management and are based on management's current understanding of the markets and industries in which we operate. That understanding could change or could prove to be inconsistent with actual developments. Our actual results could differ materially from the results discussed in this prospectus, including those anticipated in or implied by any forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this prospectus. 11 BESTNET COMMUNICATIONS CORP. BUSINESS DEVELOPMENT We are a facilities-based, global communication solutions provider. Our patented, proprietary technology uses widely available Internet access to control, enable, and manage voice communications over the public switched telecommunication network. We our a product development, marketing, sales, sub-licensing, customer service and billing organization for patented, packet-based Internet telephony software applications that control, manage and enable global telecommunications services. We are presently focusing substantially all of our financial and other resources on marketing and development of our Bestnetcall services to individual clients and selected companies with international locations and/or clients worldwide. As of the date of this Report, we have approximately 13,000 clients, making calls from 142 countries and calling to 198 countries. We develop, market and sell patented Internet-based telecommunications applications, technologies and services to corporate and residential clients worldwide. Bestnetcall, our flagship product, is the industry's first patented, phone-to-phone, Internet-enabled long distance service, which combines global internet access and the public switched telephone network via our internet website at Bestnetcall.com. This service was first made available to the public on April 17, 2000 and is marketed under the brand name Bestnetcall. Although founded as a Nevada corporation on July 10, 1986, we did not commence operations until 1995. From 1995 until 1999, we operated under the name Wavetech International, Inc. and developed software for customized called card services and created infrastructure to market and distribute our products and services. During this period, our efforts were primarily focused on hiring management and other key personnel, raising capital, procuring governmental authorizations and space in central offices, acquiring equipment and facilities, developing, acquiring and integrating billing and database systems. We marketed these systems to the business traveler and to large organizations or companies with a membership base. In the late 1990s, due to the wide scale deployment of cellular telephones with messaging capability, the market for business related calling card services greatly diminished. In June 1999, we discontinued our calling card services. Since then, we have focused substantially all of our efforts and resources on developing and commercializing our Bestnetcall web-enabled long distance services. On September 27, 2000, we changed our name to BestNet Communications Corp. BESTNET SOLUTIONS Users of our Bestnetcall services are able to do the following by accessing our website at www.Bestnetcall.com: * Register to use our Bestnetcall services * Access and launch communication applications * Access current rate tables and time zone charts * Access a full suite of call management features * Access customer service immediately via the Internet * Maintain call account security * Obtain real time billing detail Bestnetcall does not require the purchase of special hardware or software by the customer and uses existing telephone equipment. Users only need access to the Internet and an available phone line--either land line or cellular. Bestnetcall also offers immediate real time billing detail to all users and accepts various payment methods, including pre-paid or post-paid credit card payments and invoicing options. The architecture of Bestnetcall allows for total security regarding both the FROM and TO legs of each call. The FROM and TO numbers are never displayed, thus it is impossible to determine from where a call is being placed. Following the completion of a telephone call, the total cost for that call could be viewed on the caller's online account. Call detail records may be 12 printed or copied to Word or Excel applications. The Bestnetcall service also includes features such as speed dialing, personalized directories, client billing codes, world-time country/city code lookup and immediate access to customer service via our website. Account administrators may add or delete users, view a user's calling activity and create reports detailing call activity. We license the technology upon which our Bestnetcall service is based from Softalk, Inc., an Ontario, Canada-based technology company. We entered into our license agreement with Softalk in April 1999 and later amended and restated that arrangement in October 1999. Under the terms of this license agreement, Softalk granted to us exclusive global rights to distribute, market, service, sell, and sublicense Softalk's services and products to commercial accounts and on a worldwide non-exclusive basis to individual consumer accounts. We own and operate facilities in Toronto, Canada and New York, New York including high-capacity switches, web servers, data base servers, calling servers and security systems. In addition, we make use of specialized software for data management, billing and customer service requirements. For cost optimization reasons, we shut down our facilities in Los Angeles in the third quarter of fiscal 2002. The equipment remains ready for redeployment when necessary. PRODUCT SUITE Our Bestnetcall service includes the following suite of communication features: BestNet WEBCALL - Long Distance Calling Clients utilizing our Bestnetcall service can decrease the cost of their long distance service while still retaining the toll quality for global communication needs. Bestnetcall provides the core benefits of lower prices, quality service and on-line real-time billing. Other significant benefits include point and click FROM and TO directories, point and click dialing using directories from Microsoft Outlook, speed dialing, e-mail calling, billing codes, country and city code look-up, time zone information and dialing examples. BestNet CONFERENCECALL - Conference Calling Bestnetcall offers a conference-calling product that can be used to initiate immediate or scheduled conference calls. The chairperson can either launch successive legs for an immediate conference call or enter and save information for a conference call to be launched automatically at a future date. There are no set-up or administrative charges for the Bestnetcall conference calling facility. This service can reduce the cost of conference calls by up to 80% as compared to traditional conferencing services currently offered by carriers. We have compared the value of this conference-calling service to similar services available in the marketplace and believe it highly competitive. BestNet DESKTOPCALL - Desktop Application Bestnetcall also has a desktop application that can be downloaded from our website. Calls can then be launched from the desktop application instead of from a web browser. This feature is particularly useful for clients with slow Internet connections. Calls are launched in a similar manner to our web product. All calls are still charged to the same account and on-line billing information may also be viewed. Calls can also be launched directly from Microsoft Outlook using a Bestnetcall Outlook add-in and the desktop. BestNet EMAILCALL - E-mail Application Bestnetcall e-mail application can be used from any e-mail device such as MS Outlook, Blackberry and cell phones to initiate calls. This patent-pending technology uses simple commands sent by e-mail to launch calls to any nearby phone, such as a pay phone, home phone or cell phone. Clients enter defined calling instructions to the destination of their choice. EmailCall has many convenience features, such as the ability to use a caller's personal webCall directories and billing codes. BestNet SATCALL - Satellite Calls Bestnetcall has a direct circuit to an international satellite uplink carrier for launching the Inmarsat satellite leg of calls. This circuit provides our Bestnetcall service with the capability to complete calls to remote platforms such as ships, airplanes and oilrigs via our web site at www.bestnetsat.com. 13 BestNet PDACALL - Mobile Calling Bestnetcall has developed a Palm OS application, which is ideal for wireless PDA devices, including devices offered by Palm, Handspring and Kyocera. Our software, which emulates our BestNet desktop service, gives the user the ability to launch low-cost long distance calls or conference calls using a PDA device to control the call. Applications also have been developed for micro-browser equipped PDA's such as Compaq's iPAQ. All calls from these devices are billed in the same way as calls placed through our web product. MARKETING STRATEGIES We offer our Bestnetcall service through both direct sales and indirect sales channels. Our initial target markets include: * Large Corporate / Enterprise Clients * Internet Service Providers * Mid-sized to Small Office Home Office * Marketing and Channel Partners * Reseller, VAR and Integrators * Technology and Telecommunications Consultants * Consumers Our marketing efforts are targeted at international long distance and conference calling clients in a number of key geographic areas in the world. Our priorities are focused primarily on the following geographic regions: * Central and South America * North America * Asia Pacific * Europe * Middle East * Caribbean DIRECT SALES Our direct sales activities are comprised of the following marketing and sales strategies designed to generate revenue and increase customer usage of our Bestnetcall service: * Web Channel - This method of marketing, which represents the majority of our revenue, consists of marketing all of our branded service offerings to individuals and business through a combination of Internet-based marketing and third party sales relationships. * Sales Calls - We call directly on potential clients whom we believe we can create value for and where relationships are built to help establish a user base that has synergy with Our product line. 14 * Direct Mail and E-mail Solicitations - We send solicitation materials to pre-qualified potential users of our Bestnetcall service. These materials refer or link the potential user to www.Bestnetcall.com to facilitate activation of our Bestnetcall service. Recipients are invited to use the service or request more information. These direct mail or e-mail solicitations are launched on a continuous basis currently by an in-house staff. Future direct mail initiatives will be launched using a combination of in-house resources and external resources. * Media Advertising and Promotion - We have initiated limited advertising in print and electronic media targeted at specific market segments in the form of national or international publications. We will consider additional initiatives such as advertising in specific trade publications and Internet advertising during Fiscal 2003 based on an analysis of the cost-effectiveness and results of these initial activities. * Public Relations Activities - We have a corporate communications and public relations strategy is in place for developing a comprehensive communications program. This communications program will include initiating appropriate news releases, feature print articles in industry and trade specific publications, local print media and editorial support. Our Bestnetcom.com website is also being redeveloped to include a frequently asked questions section to facilitate direct communication with shareholders, customers and the public-at-large. In Fiscal 2002 we retained an investor relation firm to deal specifically with shareholders and the investment community. INDIRECT SALES Our indirect sales efforts are centered on the following four types of organizations: * Agent/Distributors - We are establishing a global network of agents and distributors who will market our services to corporate organizations and consumers via private labeled Internet web sites. * Telecom Providers - The Bestnetcall services are being made available to other telecommunication providers, resellers, and Internet service providers for resale to their clients. These types of indirect sales organizations solicit through direct mail, e-mail, fax, and direct sales calls by their personnel. * Professional Service Firms - Accounting firms, consultants, integrators and legal firms are being solicited to use our Bestnetcall service and to provide this service to their clients as a means of saving money. * Licensed Services Channel - Seek to offer a sub-licensed program through this sales channel in an effort to generate additional revenue and to offer others in our industry the features and benefits our intellectual property. INDUSTRY BACKGROUND AND MARKET DEMAND The Internet represents a significant interactive worldwide medium for communications, collaborative technologies, and the telecommunications market. Meanwhile, global deregulation, the proliferation of new technologies enabling convergence between computers, software applications, Internet, and the telephone are significantly expanding the world's voice market. We believe there are key trends influencing the telecommunications industry and Internet deployment today. We expect the following trends to have a direct and positive effect on the communications market and demand for our applications: * The rapid evolution of the Internet: Fortune Magazine predicts that by the year 2003, 70% of the U.S. population will be using the Internet. Business-to-business revenue is projected to approach $1.3 trillion according to Forrester Research. * Globalization of the world's economies increase the international mobility of workforces, and the opportunities that exist in the global Internet roaming marketplace are vast. A recent report published by Frost & Sullivan projected that the global roaming services market is set to grow from $285 million in 2000 to $7.6 billion in 2006. 15 * New and improving technology: Telecommunications Magazine predicts that by the year 2003, U.S. cell phone penetration will be 60%, with Japan approaching 70%, and Europe over 80%. As cell phone technology improves, the demand for cell phones is likely to increase. * Worldwide, STRATEGY ANALYTICS expects cellular subscribers to increase from nearly 900 million at the end of 2001, to 1.9 billion by the end of 2006. * The global conferencing market, which is negligible today, is projected to grow to $11 billion by 2005 according to multimedia consultancy Wainhouse Research. * Internet applications sales, which includes both devices that connect to the Internet via a television and Internet terminals, are expected to grow at a rate of more than 40% per year and soar to $1.3 billion by the end of 2002. * The changing regulatory environment: Deregulation is encouraging telecommunications companies to enter each other's markets. Increased competition stimulates globalization as companies move to add geography, customers, expertise, and technology to their business. * The Gartner Group predicts that business-to-consumer transactions will reach $380 billion by 2003, and business-to-business transactions will exceed $7 trillion by 2004. * Forrester Research has predicted that 65% of corporate buyers planned to buy at least some telecommunications services on-line; several telecom-purchasing managers stated that, if their carriers are not Web-enabled in two years, they will switch suppliers. We believe the above market trends and projections reflect a large and growing market for potential users of internet telephony services. We believe these market trends and projections will translate into increased demand for providers of internet telephony services and that we are well positioned to capture a portion of this market with our bestnetcall services. Our ability to offer a cost effective, highly efficient and dynamic product in terms of features and capabilities is of key importance during poor economic periods as companies are forced to find ways to trim budgets. Companies also have a general reticence towards air travel during such poor economic periods, as well as following the events of September 11, 2001. We hope to capture the promise of this sector. THE OPPORTUNITY We believe our most strategic business opportunity is in servicing the telecommunications needs of the business and mobile markets, which still relay on traditional carriers for supplying their international long distance and conferencing services. There exists a notable price disparity between the costs of long distance originating from the U.S., versus origination from most international locations. The advantage of our service is three-fold. The first advantage is our web-based interface, which provides universal access to our network without the requirements for special software. The second advantage is our patented methodology, which uses a two-leg call, origination and destination leg, which works with any telephone or legacy phone system. The third advantage is our long-distance transport. Our intelligent network is connected to multiple tier-1 carriers where routes are chosen on the basis of price and quality. With our network architecture, we can easily route calls over Voice over Internet Protocol networks if there is an advantage for certain routes. This hybrid approach to routing calls allows the universal access and cost advantages associated with VoIP transport, without any of the disadvantages. For this reason, business and mobile users in over 142 countries rely on BestNet to provide a simple, viable alternative to their existing long distance provider. BestNet provides its service without contracts or hidden charges. Our service easily integrates within any existing legacy or PBX system. We market our services by emphasizing the following key characteristics of bestnetcall: * Speed of communication - easy deployment within any environment * Quality of communication - interconnection with tier-1 carriers ensure highest standards 16 * Reliability of communication - carrier-class network with full redundancy * Ease of operation - user adoption is simple and straight forward * Interoperability - operation with legacy systems, fixed or mobile phones * Capital requirement - investment by users is not required We use the Internet to enable, control and manage the public switch telephone network calls accessed from our central offices in New York and Toronto. Accordingly, our technology allows us to bring the best wholesale long distance rates, which are in the U.S., to the entire world. We can offer access to global markets including direct access to North American business and consumer markets to any carrier worldwide wishing to connect to our switches in the U.S. and Canada. INTERNET AND TELEPHONY We believe Voice over Internet Protocol, which is commonly referred to as VoIP, has changed the face of global telephony, as such technology has provided millions of users worldwide a viable alternative to expensive long-distance services provided in highly regulated or closed markets. Use of the Internet to transport voice has many advantages, including global access and low cost per minute rates. Providers of VoIP services, more specifically PC-to-phone services, which terminate calls over the public switched network, have experience the greatest adoption by personal home users, versus business users. However, the disadvantages of PC-to-phone services are notable. VoIP is not available for cellular users and is difficult to use with legacy PBX systems. Other disadvantages include the requirement to buy software, configuration of hardware and reduction in voice quality - notably echoes and delay. The new VoIP technology has greatly improved the quality - however interoperability within legacy phone systems remains the biggest challenge. For this reason, the business market has been slower to adopt VoIP on any large scale. Despite the challenges, however, the Internet telephony market is expected to grow substantially over the next five years. Moreover, according to an IDC report, a leading technology research firm, the worldwide Internet telephony market is estimated to grow from 310 million minutes of use in 1998 to 135 billion in 2004. Revenues for this service are projected to increase from $480 million in 1999 to $19 billion by 2004. The report also estimates that the business market will implement extensive use of Internet telephony exceeding the consumer market by 2004. Our technology simply requires Internet access. No special hardware, software, or start up costs is required. The inherent diversification of our product suite addresses the above challenges directly. INMARSAT TELEPHONY MARKET One of the fastest growing telephony markets in the world is global satellite telephony communications. The Inmarsat communication system consists of five geostationary satellites circling the globe. These satellites provide voice and data services to remote locations through a global network of terrestrial uplink carriers. The major sectors for satellite communication include maritime, land and aeronautical markets, with oil and gas, mining and merchant marine industry the largest customers. According to Inmarsat, there are currently 240,000 Inmarsat terminals in use, distributed in 150 countries, generating an estimated $1.3 billion in long distance charges. In 2000, BestNet developed a site specifically for the Inmarsat market called BestNetSat.com In 2002, BestNet upgraded its service to interconnect directly with Stratos Global, a leading Land Earth Station operator and Inmarsat carrier. The direct connectivity to Stratos, and to the Inmarsat network, gives us a pricing advantage over other providers - particularly foreign telecoms. This pricing advantage, coupled with our patented call-initiation methodology, gives us a unique advantage in this market. We are actively developing new customer relationships and markets for the BestNetSat.com service, as the tangible cost benefits associated with our patented technology is easily quantified in a highly competitive and lucrative global market. FUTURE PRODUCT STRATEGY Communication around the globe is rapidly changing, as voice and data networks converge, and as mediums such as instant messaging and Internet delivery cross from the domain of desktop users to mobile devices. The Internet's reach is wider than imagined and its growth faster than expected. The Internet has become one of the world's largest distribution systems. It was designed and engineered to have an abundance of routes, connections, and elasticity. Recognizing this trend, we continue to look for new value added service applications for Bestnetcall to bring to our existing and future clients. 17 The growth and universal acceptance of the Internet is creating new opportunities for BestNet, where its core technology can be leveraged in unique and creative ways. BestNet is a highly efficient interface, linking traditional circuit switched networks with the global access of the Internet. Our goal is to make access to its long distance and conference network as transparent as possible, using a variety of interfaces and devices. For enterprise markets, this could include integration into CRM applications, company Intranet's, websites, PBX systems and IP devices. For personal users, the BestNet application can be easily integrated into Internet appliances, PDA's, and mobile devices, using technology such as WAP, SMS or instant messaging as a conduit to Our network. BestNet intends to further develop its core network to be a universal interface, where intelligence and functionality can easily be added to the front-end, without having to modify its core database and call control functionality. As an example, this universal interface can be a platform where third parties using industry compliant standards, develop customized web-based services such as foreign currency billing and directories that are localized for specific customers, or foreign markets. In fiscal 2003, we plan to introduce a variety of new services and product enhancements - all based on its core technology platform. These new services and products include the following: * Call Button - Currently on the Bestnetcall website as a feature, the BestNet subscriber can configure a graphical button to be used as an alternative 1-800 service. The button can be sent via e-mail or included in an electronic document such as a Word document or PowerPoint presentation. Unlike conventional toll-free services, the subscriber will pay less per minute, can direct the incoming call to any phone, protect the privacy of their own phone number and provide access beyond the geographic limitations imposed by traditional services. * Call-enabled websites / banners - Similar in operation to the Call Button - the underlying technology can be used to enable a web visitor to click on an icon, or a banner to initiate a call. For example, a sales organization can have an icon on its website, inviting foreign customers to initiate a toll-free call to the sales organization's call center. We believe the market potential for this application is promising. According to Datamonitor, e-retailers will spend $460 million on e-service solutions. In addition, Forrester Research has reported that 67% of online transactions are aborted because of poor interactivity. Our technology is a ideal solution to poor interactivity and inefficient access to customer service. * Mobile Access--Recognizing the enormous growth in the mobile market and wide-scale adoption of data-communication, such as short messaging service and WAP. BestNet intends to introduce services specific to the needs of the mobile market. Short messaging service, which was introduced to allow simple user-to-user communication, can be an efficient communication medium to Our network. Text messaging has caught fire in Europe and Asia. The U.S market is lagging behind, but is poised to catch-up. According to Mobile Lifestreams, monthly SMS volume will reach 62.4 billion by the end of the year. * Conferencing--Over the last year, use of Our conferencing application has increased dramatically. Our conferencing service can connect up to 64 participants, which is easily controlled by a conference host using either the Desktop, Web or Palm (OS) application. BestNet can connect any phone, including home, office or mobile, to the conference. As a result of customer feedback, BestNet intends to enhance the functionality of its service. This may include the addition of dial-in capability, 800 or toll, call recording, operator services and collaborative white-boards. 18 NETWORK STRUCTURE Our network equipment is currently housed in central office facilities located in New York and Toronto. Our system is designed to support over 15 million minutes of voice traffic per month. Our system capacity can be easily increased as demand for our services increases. Currently we have substantial excess capacity. We are now performing our own network monitoring and maintenance functions, which were previously performed by Softalk. Texas Net, located in Austin, Texas, hosts our Web servers. Our configuration has redundant servers with load balancing for optimum performance. Texas Net provides web server monitoring on a 24 x 7 basis. Our switching matrix is located in our central office facilities and includes direct connectivity to tier-1 carriers. We have multiple carrier connections at each switch location, which provides excellent back-up coverage and the ability to reroute calls to obtain the highest quality connections available. Our carrier configuration also allows us to take advantage of the highest value, ie., highest quality/lowest price, service offered by our carriers to each country and region we service. For cost optimization reasons, we shut down our facilities in Los Angeles in the third quarter of our 2002 fiscal year, which ended August 31, 2002. As a result of the available capacity of our New York and Toronto facilities, together with accessibility to carriers at these locations, we determined that our Los Angeles facility was not needed at this time. Equipment has been stored for easy deployment when it is needed in the future. Currently all of our voice traffic is carried by our tier-1 carriers via their preferred traffic routes. As VoIP continues to evolve, we will continue to evaluate its application as a means of delivering quality service for our customers. SOFTALK LICENSE AGREEMENT Under the terms of our license agreement with Softalk, we are obligated to pay Softalk an amount equal to the sum of 100% of Softalk's actual direct expenses incurred in connection with the sale, license and delivery of Softalk products and a 5% markup of the total traffic on the wholesale long distance per minute line costs on a monthly basis. Both parties have the right to terminate the license agreement under certain conditions, including: * Upon 30 days written notice to the other party, if such other party fails to comply in any material respect with certain terms or conditions of the license agreement and such failure to comply is not corrected within such 30 day notice period; * In the event the other party becomes bankrupt or insolvent, suffers a receiver to be appointed, or makes an assignment for the benefit of its creditors. Softalk also has the right to terminate the license agreement upon 60 days written notice following a change of control of BestNet. Upon termination of the license agreement for any reason whatsoever, we are permitted to continue using Softalk's intellectual property in providing services to all our existing clients, upon the point of termination. We presently have several ongoing disputes with Softalk over matters involving the license agreement and related aspects of our contractual agreements with Softalk. These disputes include breach of contract allegations by Softalk and efforts to terminate the license agreement. We believe Softalk's allegations are without merit and intend to vigorously defend against Softalk's ongoing efforts to terminate the license agreement. See the disclosure under the caption "Item 13. Certain Relationships and Related Transactions" in our Form 10-KSB for the fiscal yearn ended August 31, 2002, for more information regarding the various agreements entered into between BestNet and Softalk. See also the disclosure under "Item 3. Legal Proceedings" in our Form 10-KSB for a discussion regarding our present legal issues with Softalk. 19 COMPETITION The communications industry is highly competitive, and one of the primary purposes of the U.S. Telecommunications Act of 1996 is to foster further competition. In the markets we currently and will compete in the future competition is intense. Competitors range from large well established telephone companies to upstart service providers. We currently do not have a significant market share in any of our markets. The established telephone companies have long-standing relationships with their clients, financial, technical and marketing resources substantially greater than ours and the potential to fund competitive services with cash flows from a variety of businesses, and currently benefit from existing regulations that favor the established telephone companies. Furthermore, one large group of established telephone companies, the regional Bell operating companies, have been granted, under particular conditions, pricing flexibility from federal regulators with regard to some services with which we compete. This flexibility may present established telephone companies with an opportunity to subsidize services that compete with segments of our services and offer competitive services at lower prices. To the extent such activities occur, they may have a material adverse affect on our business prospects and results of operations. We expect to experience declining prices and increasing price competition. We cannot assure that we will be able to achieve or maintain adequate market share or margins, or compete effectively, in any of our markets. Moreover, substantially all of our current and potential competitors have financial, technical, marketing, personnel and other resources, including brand name recognition, substantially greater than ours as well as other competitive advantages over our business, financial condition and results of operations. Any of the foregoing factors could have a material adverse effect on our business, financial condition, results of operation and prospects. However, recent competitor operating performance has been poor resulting in price increases for services like long distance and conference calling. We, in response, have held prices steady and therefore increased/improved our value proposition to current and potential clients. REGULATORY OVERVIEW The following summary of regulatory developments and legislation describes the primary present and proposed federal, state, and local regulation and legislation that is related to the Internet service and telecommunications industries and could have a material effect on our business. Existing federal and state regulations are currently subject to judicial proceedings, legislative hearings and administrative proposals that could change, in varying degrees, the manner in which our industries operate. We cannot predict the outcome of these proceedings or their impact upon the Internet service and telecommunications industries. APPLICABLE REGULATIONS Telecommunications services are generally subject to federal, state and local regulation. The Federal Communications Commission exercises jurisdiction over all facilities and services of telecommunications common carriers to the extent those facilities are used to provide, originate, or terminate interstate or international communications. State regulatory commissions exercise jurisdiction over facilities and services to the extent those facilities are used to provide, originate or terminate intrastate communications. In addition, as a result of the passage of the Telecommunications Act of 1996, state and federal regulators share responsibility for implementing and enforcing the domestic pro-competitive policies of the Telecommunications Act of 1996. In particular, state regulatory commissions have substantial oversight over the provisions of interconnection and non-discriminatory network access to established telephone companies. Local governments often regulate public rights-of-way necessary to install and operate networks. FEDERAL REGULATION We do not believe our Internet operations are currently subject to direct regulation by the Federal Communication Commission or any other telecommunications regulatory agency, although they are subject to regulations applicable to businesses generally. However, the future of Internet Service Provider regulatory status continues to be uncertain. In an April 1998 report, the Federal Communication Commission concluded that while some Internet service providers should not be treated as telecommunications carriers, some services offered over the Internet, such as phone-to-phone telephony, may be functionally 20 indistinguishable from traditional telecommunications service offerings, and that their non-regulated status may have to be re-examined. Despite the Federal Communication Commission's decision not to allow local telephone companies to impose per-minute access charges on Internet service providers, and that decision being upheld by the reviewing court, further regulatory and legislative consideration of this issue is likely. An imposition of an access charges would affect our costs of serving dial-up clients and could have a material adverse effect on our business, financial condition and results of operations. In addition, Congress and other federal entities have adopted or are considering other legislative and regulatory proposals that would further regulate the Internet. Various states have adopted and are considering Internet-related legislation. Increased U.S. regulation of the Internet may slow its growth or reduce potential revenues, particularly if other governments follow suit, which may in turn increase our cost of doing business over the Internet. In preparation of this prospectus, we specifically sought any changes in regulations and or tax relative to services we provide in the United States. We found no changes. EMPLOYEES On November 7, 2002, we employed 10 full-time employees. We believe our future success will depend on our ability to attract and retain highly skilled and qualified employees. None of our employees are currently represented by collective bargaining agreements. We believe our relations with employees to be good. USE OF PROCEEDS We will not receive any proceeds from the resale of the common stock included in this prospectus. We will use the proceeds from the exercise of the warrants described in this prospectus for working capital purposes. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock was quoted on the Nasdaq SmallCap Market until May 4, 1999, and then on the OTC Bulletin Board from June 28, 1999 to the present. The high and low bid prices of the Company's common stock as reported from September 1, 2000 through August 31, 2002 by fiscal quarters (i.e., 1st Quarter = September 1 through November 30) were as follows. HIGH LOW ------- ------- FISCAL YEAR ENDED: August 31, 2000 First Quarter 4.25 1.46875 Second Quarter 10.25 4.125 Third Quarter 9.5 5.00 Fourth Quarter 7.25 3.81 FISCAL YEAR ENDED: August 31, 2001 First Quarter 6.125 .875 Second Quarter 3.375 .5625 Third Quarter 3.60 .55 Fourth Quarter 4.40 2.05 FISCAL YEAR ENDED: August 31, 2002 First Quarter 3.00 1.55 Second Quarter 1.56 .65 Third Quarter 1.58 .35 Fourth Quarter 2.50 .71 The bid and asked prices of our common stock on November 7, 2002, were $1.06 and $1.12, respectively. As of November 7, 2002, the Company had 148 shareholders of record of its common stock. As of November 7, 2002, the Company had 2,001 shareholders that beneficially own the stock in the name of various brokers. 21 The Company has never declared any cash dividends on common stock and currently plans to retain future earnings, if any, for business growth. Nasdaq Delisting. Our common stock was delisted from the NASDAQ Small Cap Market on May 4, 1999, due to the fact that we were not incompliance with Nasdaq's $1.00 minimum bid price requirements. Since June 28, 1999, our common stock has been traded on the OTC Bulletin Board under the symbol BESC. SELLING STOCKHOLDERS The table below sets forth information concerning the resale of the shares of common stock by the selling stockholders. We will not receive any proceeds from the resale of the common stock by the selling stockholders. We will receive up to an aggregate of $1,248,750 from the initial sale of the common stock upon exercise of the warrants included in this prospectus. Because the selling stockholder may sell all, a portion or none of their shares, no estimate can be made of the aggregate number of shares that may actually be sold by any selling stockholder or that may be subsequently owned by any selling stockholder. The following table also sets forth the name of each selling stockholder who is offering the resale of shares of common stock by this prospectus, the number of shares of common stock beneficially owned by such selling stockholder, the number of shares of common stock that may be sold in this offering and the number of shares of common stock each selling stockholder will own after the offering, assuming they sell all of the shares offered. 22
TOTAL SHARES OF PERCENTAGE COMMON STOCK TOTAL PERCENTAGE SHARES OF PERCENTAGE OF COMMON ISSUABLE UPON OF COMMON STOCK, COMMON BENEFICIAL OF COMMON BENEFICIAL STOCK EXERCISE OF ASSUMING FULL STOCK OWNERSHIP STOCK OWNERSHIP OWNED WARRANTS/CONVERSION EXERCISE/ INCLUDED IN BEFORE BEFORE AFTER AFTER OF NOTES CONVERSION(1) PROSPECTUS(1) OFFERING(1) OFFERING(1) OFFERING(2) OFFERING(2) -------- ------------- ------------- ----------- ----------- ----------- ----------- Lynette F. Moss 45,000(3) * 45,000 45,000 * -0- -0- Michael D. Mercer 60,000(4) * 60,000 60,000 * -0- -0- S & J Veal 75,000(5) * 75,000 75,000 * -0- -0- Sanders Family Limited Partnership 150,000(6) * 150,000 150,000 * -0- -0- Morgan Stanley, Custodian for Jerry Peterson IRA Rollover 300,000(7) 1.5% 300,000 300,000 1.5% -0- -0- Marlene Huls 37,500(8) * 37,500 37,500 * -0- -0- Hulzar 75,000(9) * 75,000 75,000 * -0- -0- Marlin Hull LLC 37,500(10) * 37,500 37,500 * -0- -0- Gary L. Boster IRA 75,000(11) * 75,000 75,000 * -0- -0- Thomas & Virginia Miller 105,000(12) * 105,000 105,000 * -0- -0- Gary L. Boster 37,500(13) * 37,500 37,500 * -0- -0- Anthony Silverman 664,550(14) 3.4% 664,550 2,164,550 11.4% 1,500,000 7.9%
- ---------- * Less than one percent (1%). The number and percentage of shares beneficially owned is determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934, as amended, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rule, beneficial ownership includes any shares as to which the selling stockholder has sole or shared voting power or investment power and also any shares that the selling stockholder has the right to acquire within 60 days. The actual number of shares of common stock purchasable upon exercise of the warrants is subject to adjustment based on certain corporation events that may or may not occur in the future, and could vary materially from the number set forth in the table. The beneficial ownership for each person listed in this table is provided to the Company's knowledge. 23 (1) Amounts and percentages are based upon 19,059,839 shares of our common stock outstanding as of November 7, 2002 plus, for each person or entity in this table, the shares to be issued upon exercise of the warrants, upon conversion of the notes, or both, as the case may be. (2) Assumes that all securities registered will be sold. (3) Consists of 30,000 shares of common stock issuable upon conversion of 6% convertible promissory notes and 15,000 shares issuable upon exercise of immediately exercisable warrants. (4) Consists of 40,000 shares of common stock issuable upon conversion of 6% convertible promissory notes and 20,000 shares issuable upon exercise of immediately exercisable warrants. (5) Consists of 50,000 shares of common stock issuable upon conversion of 6% convertible promissory notes and 25,000 shares issuable upon exercise of immediately exercisable warrants. (6) Consists of 100,000 shares of common stock issuable upon conversion of 6% convertible promissory notes and 50,000 shares issuable upon exercise of immediately exercisable warrants. (7) Consists of 200,000 shares of common stock issuable upon conversion of 6% convertible promissory notes and 100,000 shares issuable upon exercise of immediately exercisable warrants. (8) Consists of 25,000 shares of common stock issuable upon conversion of 6% convertible promissory notes and 12,500 shares issuable upon exercise of immediately exercisable warrants. (9) Consists of 50,000 shares of common stock issuable upon conversion of 6% convertible promissory notes and 25,000 shares issuable upon exercise of immediately exercisable warrants. (10) Consists of 25,000 shares of common stock issuable upon conversion of 6% convertible promissory notes and 12,500 shares issuable upon exercise of immediately exercisable warrants. (11) Consists of 50,000 shares of common stock issuable upon conversion of 6% convertible promissory notes and 25,000 shares issuable upon exercise of immediately exercisable warrants. (12) Consists of 70,000 shares of common stock issuable upon conversion of 6% convertible promissory notes and 35,000 shares issuable upon exercise of immediately exercisable warrants. (13) Consists of 25,000 shares of common stock issuable upon conversion of 6% convertible promissory notes and 12,500 shares issuable upon exercise of immediately exercisable warrants. (14) Consists of 1,764,550 shares of common stock and 400,000 shares of common stock issuable upon exercise of immediately exercisable warrants. Except for Mr. Silverman, the selling stockholders have not held any positions or offices or had material relationships with us or any of our affiliates within the past three years other than as a result of the ownership of our common stock. We have entered into a consulting agreement with Mr. Silverman pursuant to which he provides business advisory services to the Company. We may amend or supplement this prospectus, from time to time to update the disclosure. 24 PLAN OF DISTRIBUTION The selling stockholder may, from time to time, sell any or all of their shares of common stock on any stock exchange, market, or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. There is no assurance that the selling stockholder will sell any or all of the common stock in this offering. The selling stockholder may use any one or more of the following methods when selling shares: * Ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers. * Block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction. * An exchange distribution following the rules of the applicable exchange. * Privately negotiated transactions. * Short sales or sales of shares not previously owned by the seller. * A combination of any such methods of sale any other lawful method. The selling stockholder may also engage in: * Short selling against the box, which is making a short sale when the seller already owns the shares. * Other transactions in our securities or in derivatives of our securities and the subsequent sale or delivery of shares by the stockholder. * Pledging shares to their brokers under the margin provisions of customer agreements. If a selling stockholder defaults on a margin loan, the broker may, from time to time, offer to sell the pledged shares. Broker-dealers engaged by the selling stockholder may arrange for other broker-dealers to participate in sales. Broker-dealers may receive commissions or discounts from selling stockholder in amounts to be negotiated. If any broker-dealer acts as agent for the purchaser of shares, the broker-dealer may receive a commission from the purchaser in amounts to be negotiated. The selling stockholder does not expect these commissions and discounts to exceed what is customary in the types of transactions involved. Penny Stock Rules Our common shares are subject to the "penny stock" rules that impose additional sales practice requirements because our common shares are below $5.00 per share. For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of the common shares and must have received the purchaser's written consent to the transaction prior to the purchase. The "penny stock" rules also require the delivery, prior to the transaction, of a risk disclosure document mandated by the Securities and Exchange Commission relating to the penny stock market. The broker-dealer must also disclose: * the commission payable to both the broker-dealer and the registered representative, * current quotations for the securities, and * if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. These rules apply to sales by broker-dealers to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouse), unless our common shares trade above $5.00 per share. Consequently, the "penny stock" rules may restrict the ability of broker-dealers to sell our common shares, and may affect the ability to sell the common shares in the secondary market as well as the price at which such sales can be made. Also, some brokerage firms will decide not to effect transactions in "penny stocks" and it is unlikely that any bank or financial institution will accept "penny stock" as collateral. 25 Underwriter Status The selling stockholder and any broker-dealers or agents that are involved in selling the shares may be considered to be "underwriters" within the meaning of the Securities Act for such sales. An underwriter is a person who has purchased shares from an issuer with a view towards distributing the shares to the public. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be considered to be underwriting commissions or discounts under the Securities Act. Because the selling shareholder is deemed an "underwriter" within the meaning of Section 2(11) of the Securities Act, it will be subject to the prospectus delivery requirements. We are required to pay all fees and expenses incident to the registration of the shares in this offering. However, we will not pay any commissions or any other fees in connection with the resale of the common stock in this offering. We have agreed to indemnify the selling shareholder and its officers, directors, employees and agents, and each person who controls any selling shareholder, in certain circumstances against liabilities, including liabilities arising under the Securities Act. The selling shareholder has agreed to indemnify us and our directors and officers in certain circumstances against certain liabilities, including liabilities arising under the Securities Act. If the selling stockholder notifies us that they have a material arrangement with a broker-dealer for the resale of the common stock, then we would be required to amend the registration statement of which this prospectus is a part, and file a prospectus supplement to describe the agreements between the selling stockholder and the broker-dealer. DETERMINATION OF OFFERING PRICE The price at which the common stock is sold may be based on market prices prevailing at the time of sale, at prices relating to such prevailing market prices, or at negotiated prices. DESCRIPTION OF SECURITIES COMMON STOCK For a description of our common stock see our Registration Statement on Form 8-A filed with the SEC on March 11, 1987. LEGAL MATTERS Certain legal matters have been passed upon for us by Squire, Sanders & Dempsey L.L.P., Phoenix, Arizona. EXPERTS Our consolidated financial statements included in our Annual Report on Form 10-KSB for the fiscal years ended August 31, 2002 and 2001, have been audited by Semple & Cooper LLP, independent auditors, as set forth in their report thereon included therein and incorporated herein by reference. Such financial statements have been incorporated herein by reference, in reliance upon such reports given on the authority of such firm as experts in accounting and auditing. INFORMATION WITH RESPECT TO THE REGISTRANT This prospectus is being delivered with a copy of our Form 10-KSB for the fiscal year ended August 31, 2002. DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the small business issuer according to the foregoing provisions, or otherwise, the small business issuer has been advised that in the opinion of the Securities Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933, as amended, and is, therefore, unenforceable. 26 PART II TO FORM S-2 INFORMATION NOT REQUIRED IN THE PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth our estimated costs and expenses in connection with the offering other than commissions and discounts, if any. SEC Registration Fee $ 138 Legal Fees and Expenses $ 5,000 Accounting Fees and Expenses $ 5,000 Printing and Engraving Expenses $ 1,000 Miscellaneous $ 5,000 ------- Total $16,138 ======= ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Articles 11 and 12 of our Articles of Incorporation provide as follows: 1. To the fullest extent permitted by the laws of the State of Nevada, as the same exist or may hereinafter be amended, no director or officer of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a director or officer, provided, however, that nothing contained herein shall eliminate or limit the liability of a director or officer of the Corporation to the extent provided by applicable laws (i) for acts or omissions which involve intentional misconduct, fraud or knowing violation of law or (ii) for authorizing the payment of dividends in violation of Nevada Revised Statutes Section 78.300. The limitation of liability provided herein shall continue after a director or officer has ceased to occupy such position as to acts or omissions occurring during such director's or officer's term or terms of office. No repeal, amendment or modification of this Article, whether direct or indirect, shall eliminate or reduce its effect with respect to any act or omission of a director or officer of the Corporation occurring prior to such repeal, amendment or modification. 2. The Corporation shall indemnify, defend and hold harmless any person who incurs expenses, claims, damages or liability by reason of the fact that he or she is, or was, an officer, director, employee or agent of the Corporation, to the fullest extent allowed under Nevada law. 27 ITEM 17. UNDERTAKINGS 1. The undersigned registrant hereby undertakes to file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (a) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933. (b) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; provided, however, that paragraphs (a) and (b) shall not apply if such information is contained in periodic reports filed by the registrant under Section 13 or Section 15(d) of the Securities Exchange Act of 1934, as amended, that is incorporated by reference into this Registration Statement. (c) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. 2. The undersigned registrant hereby undertakes that, for the purpose of determining any liability under the Securities Act of 1933, as amended, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 3. The undersigned registrant hereby undertakes to remove from registration by means of a post-effective amendment any of the securities being registered that remain unsold at the termination of the offering. 4. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, as amended, each filing of the registrant's annual report under Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended (and, where applicable, each filing of an employee benefit plan's annual report under Section 15(d) of the Securities Exchange Act of 1934, as amended) that is incorporated by reference into this registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. 5. The undersigned registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report to security holders that is incorporated by reference in the prospectus and furnished under and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of 1934, as amended; and, where interim financial information required to be presented by Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. 6. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the undersigned registrant according the foregoing provisions, or otherwise, the undersigned registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933, as amended, and will be governed by the final adjudication of such issue. 28 SIGNATURES In accordance with the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-2 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Grand Rapids, State of Michigan, on November 27, 2002. BESTNET COMMUNICATIONS CORP. By: /s/ Robert A. Blanchard ------------------------------------ Robert A. Blanchard, President and Chief Executive Officer By: /s/ Paul H. Jachim ------------------------------------ Paul H. Jachim, Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer) The officers and directors of BestNet Communications Corp. whose signatures appear below, hereby constitute and appoint Robert A. Blanchard and Paul H. Jachim as their true and lawful attorneys-in-fact and agents, with full power of substitution, with power to act alone, to sign and execute on behalf of the undersigned any amendment or amendments to this registration statement on Form S-2, and each of the undersigned does hereby ratify and confirm all that said attorneys-in-fact and agents, or their substitutes, shall do or cause to be done by virtue hereof. In accordance with the requirements of the Securities Act of 1933, as amended, this amended Registration Statement has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Robert A. Blanchard President, Chief Executive November 27, 2002 - ------------------------ Officer, Acting Chairman Robert A. Blanchard and Director /s/ Paul H. Jachim Chief Financial Officer, November 27, 2002 - ------------------------ Chief Operating Officer Paul H. Jachim and Director (Principal Financial and Accounting Officer) /s/ Herman Haenert Director November 27, 2002 - ------------------------ Herman Haenert 29 EXHIBIT INDEX EXHIBIT PAGE NUMBER OR NUMBER DESCRIPTION METHOD OF FILING - ------ ----------- ---------------- 4.1 Form of Warrant Issued to Anthony Silverman * 4.2 Form of Warrant Issued to the Purchasers of BestNet's 6% Convertible Promissory Notes in October 2002 * 10.1 Common Stock Purchase Agreement, dated as of August 30, 2002, between BestNet and Anthony Silverman * 10.2 Form of Note and Warrant Purchase Agreement, dated as of October 30, 2002, between BestNet and the Investors Signatory thereto (including form of note) * 10.3 Form of Registration Rights Agreement, dated as of October 30, 2002, between BestNet and the Investors Signatory thereto * 5.1 Opinion re: legality of the securities being registered (1) 23 Consent of Independent Auditors, Semple & Cooper LLP * 24 Powers of Attorney Included in Signature Page - ---------- * To be filed by amendment. (1) Filed herein. 30 EX-5.1 3 ex5-1.txt OPINION RE: LEGALITY OF THE SECURITIES 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 November 27, 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 up to 1,662,050 shares 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. Of the 1,662,050 shares included in the Registration Statement, 665,000 shares are issuable upon conversion of the Company's 6% Convertible Promissory Notes, 732,500 shares are issuable upon exercise of outstanding warrants, and 264,550 shares are presently outstanding. We also have examined all instruments, documents, and records that 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 that are being registered for resale by certain selling securityholders 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 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. -----END PRIVACY-ENHANCED MESSAGE-----