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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended August 31, 2000.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from __________ to __________.
Commission File Number: 0-15482
BESTNET COMMUNICATIONS CORP.
(Name of small business issuer in its charter)
Nevada 86-1006416
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
5210 East Williams Circle, Suite 200
Tucson, Arizona 85711
(Address of principal executive offices)
(520) 750-9093
(Registrant's telephone number, including area code)
Securities registered under Section 12(g) of the Act:
Name of exchange on which registered Title of Each Class
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None None
Securities registered under Section 12(b) of the Act:
Common Stock $.001 Par Value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for the fiscal year ended August 31, 2000: $28,670.
The aggregate market value of the Common Stock of the registrant held by
non-affiliates as of November 28, 2000 was approximately $4,045,221 based on the
average bid and asked prices for such Common Stock as reported on the OTC
Bulletin Board.
The number of shares of Common Stock outstanding as of November 28, 2000
was 8,223,589.
Documents Incorporated by Reference - None.
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [X]
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ITEM 1. DESCRIPTION OF BUSINESS.
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS CERTAIN STATEMENTS WHICH WE
BELIEVE ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE SAFE HARBOR
PROVISIONS OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE STATEMENTS RELATE
TO FUTURE EVENTS AND THE FUTURE FINANCIAL PERFORMANCE OF BESTNET COMMUNICATIONS
CORP. (FORMERLY, WAVETECH INTERNATIONAL, INC.). IN SOME CASES, YOU CAN IDENTIFY
FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD,"
"EXPECTS," "PLANS," "ANTICIPATES," "BELIEVES," "ESTIMATES," "PREDICTS,"
"POTENTIAL," OR "CONTINUE" OR THE NEGATIVE OF SUCH TERMS AND OTHER COMPARABLE
TERMINOLOGY. THESE ONLY REFLECT MANAGEMENT'S EXPECTATIONS AND ESTIMATES ON THE
DATE OF THIS REPORT. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THESE
EXPECTATIONS. IN EVALUATING THOSE STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER
VARIOUS FACTORS, INCLUDING THE RISK INCLUDED IN THE REPORTS FILED BY BESTNET
WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE FACTORS MAY CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS. BESTNET IS NOT
UNDERTAKING ANY OBLIGATIONS TO UPDATE ANY FORWARD-LOOKING STATEMENTS CONTAINED
IN THIS REPORT.
BUSINESS DEVELOPMENT
Founded on July 10, 1986, BestNet Communications Corp., a Nevada
corporation (formerly Wavetech International, Inc.) ("BestNet" or the
"Company"), develops, markets and sells Internet-based telecom technologies.
Substantially all of our development activities are performed by a third party.
Although founded in 1986, we did not commence operations until 1995. From 1995
until June 1999, we developed software for customized calling card services and
created an infrastructure to market and distribute our product and services.
During this period, BestNet's efforts were primarily focused on hiring
management and other key personnel, raising capital, procuring governmental
authorizations and space in central offices, acquiring equipment and facilities,
developing, acquiring and integrating billing and database systems. We marketed
these systems to the business traveler and to large organizations or companies
with a membership base. In the late 1990's, due to the wide scale deployment of
cellular telephones with messaging capability, the market for business related
calling card services greatly diminished. In June 1999, we discontinued our
calling card services. Since then, we have focused substantially all of our
efforts and resources on developing our Bestnetcall web-enabled long distance
service. On September 27, 2000, we changed our name to BestNet Communications
Corp.
On April 23, 1999, we entered into a licensing agreement with Softalk,
Inc., a technology company based in Ontario, Canada ("Softalk"). Softalk
develops Internet-based telecommunication technologies that enable users to
initiate long distance calls from anywhere in the world by accessing a specific
Internet website. This technology enables users to, among other things, make
International telephone calls at substantially reduced rates from those offered
by traditional long distance carriers. This licensing agreement granted BestNet
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certain marketing and customer service rights. The licensing agreement was later
amended and restated on October 25, 1999, to grant us exclusive rights to:
* distribute
* market
* service
* sell, and
* sublicense
Softalk's services and products to commercial accounts and a worldwide
non-exclusive license for individual accounts. We also have the exclusive right
to provide billing and customer support services for all customer accounts. In
consideration for such licensing rights, the Company has paid Softalk an
aggregate of two hundred thousand dollars (US$200,000).
After entering into the licensing agreement, we began building
telecommunication facilities in Toronto, Canada, including installing
high-capacity switches and Internet servers. We also completed the development
of specialized software used for data management, billing and customer service
requirements.
The brand name for our web-enabled long distance service is Bestnetcall,
which was first made available to the public on April 17, 2000. We are presently
focusing our resources on marketing Bestnetcall to selected companies with
international locations and/or clients.
Users of our Bestnetcall service are able to do the following by accessing
our website at www.bestnetcall.com:
* enroll
* place calls
* pay for service
* access customer service immediately on the Internet
Bestnetcall does not require the purchase of special hardware or software
by the customer and uses their existing telephone equipment. Users only need
access to the Internet and an available phone line. Bestnetcall also offers
immediate billing to all users and accepts various payment methods, including
pre-paid or post-paid credit card payments and invoicing options.
Following completion of a telephone call, the total cost for that call may
be viewed on the caller's online account. Call detail records may be printed or
copied to Word or Excel applications. The Bestnetcall service also includes
convenient speed dialing, personalized directories, client billing codes,
world-time country/city code lookup and immediate access to customer service via
the website. Account administrators may add or delete users, view a user's
calling activity and create reports detailing call activity.
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MARKETING AND SALES STRATEGY
We intend to offer our Bestnetcall service through both direct sales and
indirect sales channels. Our initial target markets will include:
* Governmental agencies
* Business and Industry
* Commercial Development Companies
* Telecommunication Carriers
* Internet Service Providers
* Browser Based Services such as Internet Explorer, Yahoo and Amazon.com
* Affinity Groups
* Other organizations, including charities, religious organizations,
schools and alumni associations
These marketing efforts will be targeted at international long distance
users in a number of key geographic areas in the world. Our marketing priorities
will be focused primarily on the following geographic regions:
* Caribbean
* North America
* Asia Pacific
* Central & South America
* Europe
* Middle East
DIRECT SALES
We intend to utilize the following marketing and sales strategies to
generate revenue and obtain and increase customer usage:
* Direct Mail and E-mail Solicitations - We intend to send testimonial
advertisements to prequalified potential users. These advertisements
will refer or link the potential user to www.bestnetcall.com and offer
a subscription to our Bestnetcall service. Recipients will be invited
to use the service or request more information. These direct mail or
e-mail solicitations will be carried out on a continuous basis by an
in-house staff of direct marketing specialists located in our Tucson,
Arizona office.
* Telemarketing - Telemarketing operations will be initiated out of our
Tucson, Arizona office targeted at specific market segments. We
believe Tucson is an ideal center for customer service and
telemarketing due to its relatively low wages and inexpensive space.
There also is an abundance of experienced telemarketing personnel. The
40,000 student University of Arizona located in Tucson, gives us
access to individuals who speak many different languages and who can
place calls to areas outside the United States.
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* Media Advertising and Promotion - We intend to place advertisements in
key print and electronic media targeted at specific market segments.
These advertisements will be designed to elicit direct responses
and/or activations. Incentives will be included in the advertisements.
Testimonials by key customers representing different market segments
will be used to advocate the use of our service and encourage a visit
to our Bestnetcall web site.
* Public Relations Activities - We intend to hire an experienced
corporate communications and public relations specialist to work with
an international public relations firm and the media. The specialist
will be responsible for developing a comprehensive global
communications program. This communications program will likely
feature print articles in industry and trade specific publications,
local print media and feature editorial support.
INDIRECT SALES
Indirect sales efforts will be centered around the following four types of
organizations:
* Carriers - Our Bestnetcall services will be made available to other
telecommunication carriers for resale to their clients. These types of
indirect sales organizations will be solicited through direct mail,
e-mail, telemarketing initiatives, fax and direct sales calls by
BestNet personnel.
* Professional Service Firms - Accounting firms, consultants and legal
firms will be solicited to use our Bestnetcall service and to provide
this service to their clients as a means of saving money on
international long distance calls.
* Retailers - We intend to approach large retailers to offer our
services to their credit card holders as a value-added service. These
relationships are revenue sharing initiatives with the retail
organization receiving a negotiated percentage of gross revenue
generated by our services.
* Agent/Distributors - Organizations with large client or member bases
who may be a user of our services will also be encouraged to offer the
services to their clients or members, including the following
companies:
-- Computer companies
-- Commercial property development companies
-- Banks
-- Associations
-- Affinity groups
Such companies will be offered the ability to participate in a revenue
sharing program with us by offering Bestnetcall to their customers or members.
Revenue sharing is expected to be between 5% and 10% of our net revenue for a
particular program.
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PROJECT MANAGERS
We intend to hire four project managers to sell, maintain and service major
accounts. The managers will primarily focus their efforts on encouraging use and
sales by carrier groups, professional organization retailers and agent
distributors.
INDUSTRY BACKGROUND AND MARKET DEMAND
According to industry sources, global revenue for telecommunication service
providers is expected to reach $975 billion in the year 2000. A number of
industry studies have mapped international telephone traffic patterns. Current
forecasts project a total of 106 billion minutes of international telephone
traffic in the year 2000. Valued at a price of $0.25 per minute, this would
represent a global market of approximately $26.5 billion, although we believe
the real market value may be significantly higher.
We believe the primary reasons for the continued use of telephone company
lines versus the alternatives found in satellite, Internet and cable systems
include:
* Speed of communication
* Quality of communication
* Reliability of communication
* Ease of operation
The global telecommunications industry has been highly regulated. However,
over the past several years, North America has enjoyed significant deregulation,
which has resulted in a highly competitive long distance service industry. The
U.S. and Canada have among the lowest telephone rates in the world and the U.S.
has emerged as one of the lowest cost supplier of long distance rates. U.S.
deregulation has resulted in sizeable reductions in the wholesale cost of long
distance services available to long distance resellers.
Although declining rates have been symbolic in the U.S. and Canadian long
distance markets, we believe international rates from and to other countries
have been slow to decline for two major reasons:
* Management of foreign telephone companies have been reluctant to
reduce their rates given their monopoly-like status.
* Foreign governments appear to be reluctant to take on the strong
foreign telephone company unions.
In the long term, we believe it is unlikely that these high rates will be
maintained as new technologies render the foreign telephone company monopolies
ineffective.
Many new technologies have evolved around the emergence of the Internet as
a mass communications and commerce medium. As a result, the Internet has emerged
as an attractive medium for advertising and e-commerce. Jupiter Communications,
a provider of research on Internet commerce, estimates that Internet advertising
will grow from $1.9 billion in 1998 to $7.7 billion in 2002. Forrester Research,
Inc., an independent Internet research firm that analyzes the impact of the
Internet and emerging technologies on business strategy, projects that
business-to-business Internet advertising will expand from $290 million in 1998
to $2.6 billion in 2002.
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Business-to-business e-commerce is also growing rapidly. This growth is the
result of businesses utilizing the Internet's ability to reach targeted
audiences globally, deliver personalized content and open new distribution
channels. Forrester forecasts that business-to-business e-commerce will grow to
$17 billion in 2002.
Traditionally, companies have employed a variety of well-recognized media
in business-to-business advertising, information delivery and communications to
identify, qualify and facilitate commerce opportunities. A number of companies
have started Internet telephony operations in the last few years to serve the
business-to-business market segment. The intense competition in the
telecommunications market and the growth of e-commerce has contributed to the
movement to lower costs. Accordingly, we believe competition and e-commerce have
contributed to the creation of Internet telephony.
According to Frost & Sullivan, an international marketing and consulting
company that monitors information and telecommunications markets, the new
international standards are expected to result in significant growth in the
Internet telephony market in the near future. Frost & Sullivan projects that the
Pacific Rim, Europe and so-called rest-of-the-world markets will account for 73%
of the total Internet telephony market by 2002. We believe these projections
support BestNet's market strategy of targeting businesses outside of North
America or North American businesses with offices worldwide.
BESTNET'S SOLUTION
Under its licenses from Softalk, BestNet intends to provide commercial
voice quality Internet-based long distance services to corporate and residential
subscribers. Our Web-based solution offers subscribers access to low cost long
distance rates by-using the Internet as the means to launch calls and to view
billing within seconds after completing a call.
This technology blends the best of current telecommunication systems by
using commercial telephone networks for voice quality and the Internet for
control and access. Our Bestnetcall service provides a user anywhere in the
world access to the U.S. telecom infrastructure while not infringing upon
international telecom agreements.
For example, users making calls from the Caribbean to the U.S. would
operate over the same network as users from the U.S. making calls to the
Caribbean. As a result, middle retailers of telecommunication services are
eliminated. This ensures the lowest pricing structure on a long-term basis.
BestNet provides customers access to its network through its switches
located in Toronto, Canada and New York, NY. Additional switch locations are
planned for deployment in major cities in North America, Asia and Europe. Our
next switch will be deployed in Los Angeles, California in the first quarter of
2001. Other switches will follow as demand dictates and capital resources become
available.
BESTNETCALL
Our Bestnetcall service allows users to initiate telephone calls over the
Internet. This service, which provides users with toll quality long distance and
call management service, is targeted primarily to businesses. Using a Web
browser, subscribers may place calls by entering their location telephone number
and the destination telephone number on a Web page. This information is
transmitted over the Internet to our Web server, which in turn communicates with
a switching matrix. The switching matrix launches a call through the public
switch telephone network back to the subscriber's telephone and then launches a
call to the destination number. Both calls are then bridged and the two calls
are connected.
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By using our Bestnetcall service, North American subscribers can save an
average of 50 - 75% over traditional international long distance costs.
Subscribers outside North America can save an average of 75 - 90% over
traditional long distance costs charged by their local carriers. Set forth below
is a diagram which illustates how Bestnetcall works.
BESTNETCALL.COM
Toronto POP
Web Server Switch Matrix
(UUNet) --------------------- (Leased Line)
| |
| |
Internet PSTN
(Data) (Voice)
| / \
| / \
www.bestnetcall.com Origination Call Destination Call
(US) (UK)
BESTNETCALL - CALL INFRASTRUCTURE
Bestnetcall - Version 1.5
The current version of Bestnetcall was specifically designed for corporate
users to make and manage international and long-distance calls. Bestnetcall
provides a comprehensive array of call management features. These features
reside on a user's personal computer. Current active features include:
* Custom directories - Users are given two directories, one for storing
origination numbers and the second for storing destination numbers.
There is no limit to the number of telephone numbers that can be
created and stored in the two directories. BestNet is currently
developing a customized directory that can be automatically created by
linking to company/department-wide directories, such as from Lotus
Notes, Microsoft Outlook and other contact management applications.
* Personal speed dial - To simplify dialing frequently called numbers,
the subscriber may create a speed dial which provides one click
dialing.
* Billing codes - Each telephone call may be charged to specific client
or accounting codes defined by the subscriber. This allows easy
segregation of calls by business, department, client or personal use.
All billing codes are tagged to call detail that is viewable in
real-time statements from the Bestnetcall web site.
* Real-time statements - The subscriber may, at any time, view online,
and up-to-the-second call detail record for the current day, current
month and previous month. Each call detail record includes time, date,
duration, rate, total cost, destination number and origination number
of the calls. Call records may be viewed by billing codes. Statements
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may be printed or exported to standard office applications including
Word and Excel. Account administrators can view, print and export call
detail records for all users tied to their account.
* World time - The subscriber may view, on demand, the current local
time for cities worldwide.
* Worldwide city and country codes - To aid dialing international
telephone numbers, the subscriber may check for a list of city and
country codes worldwide.
* Rates - The subscriber may, at anytime, look-up Bestnetcall's current
rates on a worldwide basis.
* Account editing - Subscribers may edit their account online, including
changing credit card number or adding additional users.
BESTNETCALL - ENHANCEMENTS
* We are currently developing enhancements to our Bestnetcall service
which will be offered to subscribers on a scheduled basis. These
include enhancements to both our website and product features. Product
enhancements under development include the following:
* Conference calling - This feature will give users the ability to
connect up to 64 parties on a single call, using their personal
computer to initiate the calls. Conference calls may be launched
immediately time and date. All conference calls will display their
status to the conference administrator via the Bestnetcall website and
offer substantial rate reductions compared to conventional conference
call services provided by the major long distance providers.
* An improved graphical user interface - This feature will give the user
access to more information, as well as provide much quicker load
times, which is critical where Internet connections are slow.
* A desktop application - This feature is designed for networked office
users without a dedicated Internet connection, or where Internet
connections are very slow. The desktop application resides on the
user's personal computer and uses small-packet transmission to quickly
initiate calls. This feature further saves time by not requiring
launch of a browser, website navigation or log-in.
BESTNETCALL - FUTURE PRODUCT STRATEGY
According to industry sources, approximately 22 million personal computers
are in use in North America for Internet access. These sources predict that by
2002, an additional 23 million non-personal computer devices will be used to
access the Internet. Recognizing this trend, the Company has contracted with
Softalk to customize and develop variations of Bestnetcall that use alternative
methods for accessing our service, including the following:
* Two Way Paging - We are developing applications for two-way paging to
launch calls transmitting packets from paging networks to our web
server and switching matrix.
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* Wireless Personal Digital Assistant - Designed for micro-web browsers,
such as employed by the Palm VII, we are developing applications where
users can launch Bestnetcall telephone calls or conference calls at
any time using their wireless device.
* Internet Devices - Bestnetcall services will be designed for
non-personal computer Internet devices, such as the following:
- Set-top boxes, such as WebTV
- Smart phones, such as iPhone
- Appliances, such as I-Opener
Any device that can access the Internet can be enabled by BestNet to
provide access to Bestnetcall services. No assurance can be given that we will
be able to successfully develop or, if developed, commercially exploit any of
the above- referenced devices.
NETWORK STRUCTURE
PHASE I - INITIAL DEPLOYMENT
BestNet's network equipment is currently located in a central office
facility located in Toronto, Canada and New York, NY. The system is designed to
initially support 20 million minutes of voice traffic per month. The system can
be increased as support needs increase. Full network monitoring and diagnostics
are employed on a 24 x 7 basis.
BestNet's web server is hosted by UUNet. UUNet has one of the largest
telecommunications infrastructures in North America. Our current network
configuration will support 25,000 simultaneous hits and may be easily expanded.
UUNet provides support on a 24 x 7 basis and backup power is supplied by on-site
battery and off-site generators to ensure system survivability.
BestNet's switching matrix is located in its central office facility with
direct T-1 connectivity to the wholesale public switch telephone network. The
initial deployment of 1,000 ports is configured for rapid expansion capability
of up to 10,000 ports. We work closely with the Softalk telecom and network
engineers and their software development team to monitor and maintain the system
in Toronto, Canada and New York, NY.
PHASE II - EXPANDING POINTS OF PRESENCE
We are planning on expanding our network worldwide. Additional locations of
network equipment will be deployed in key strategic locations to facilitate web,
voice and data traffic. These additional locations will provide network
redundancy and least cost routing for voice traffic.
Our second location is deployed in New York at 60 Hudson Street, as the
East Coast's principal gateway for international telecommunication traffic. Our
New York location contains a switching matrix similar to the one deployed in
Toronto that can be expanded up to 10,000 ports. The New York switching matrix
will be inter-connected to several international public switch telephone network
carriers, where BestNet will offer least cost routing for all voice calls
originating in North America. The cost of deploying additional points of
presence is approximately $80,000.
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Following New York, we intend to expand to Los Angeles at 1 Wilshire
Boulevard, as the West Coast's gateway for international telecommunication
traffic. The equipment and facility will also be similar to that of our Toronto
and New York offices.
We are currently working deploy another web host server in Asia to provide
website access redundancy.
PHASE III - VIRTUAL PRIVATE NETWORK
As voice traffic increases, we plan on deploying gateway servers to better
facilitate growing international traffic between certain locations. This
strategy will allow us to install a virtual private network along these
high-traffic routes to reduce costs for voice traffic. Employing dedicated data
circuits between these gateways, the voice calls will be compressed and
transmitted using data packets significantly reducing the cost of routing over
normal telephone network channels.
TRANSACTIONS WITH SOFTALK
Our current and future business activities are substantially dependent on
the continuation of our relationship with Softalk. As discussed more fully below
and elsewhere in this Report, our ability to offer the Bestnetcall service is
subject to a license agreement with Softalk, which may be unilaterally
terminated by Softalk upon the occurrence of certain events. We have also
contracted with Softalk to perform substantially all of our development and
engineering activities with respect to the rollout, enhancement and maintenance
of the Bestnetcall service, related product offerings and the deployment of our
telecommunication network. Accordingly, we believe any disruption or termination
in our relationship with Softalk would have a material adverse effect on our
business, prospects, financial condition and results of operations.
LICENSE AGREEMENT. On October 25, 1999, BestNet and Softalk amended their
license agreement to grant BestNet and its subsidiaries a worldwide exclusive
license to distribute, market, service, sell and sublicense Softalk's services
and products to commercial accounts. This agreement also grants BestNet a
worldwide nonexclusive license to distribute, market, service, sell and
sublicense Softalk's services and products to individual customer accounts. In
exchange for the license amendments, BestNet issued to Softalk five-year
warrants to purchase up to 5,246,753 shares of BestNet common stock; 3,246,753
of which have an exercise price of $3.25 per share, 1,000,000 have an exercise
price of $5.00 per share, and the remaining 1,000,000 have an exercise price of
$10.00 per share.
Under the terms of the amended license agreement (the "license agreement"),
we paid an initial license fee of $200,000 (US). We are also obligated to pay
Softalk an amount equal to the sum of (a) 100% of Softalk's actual direct
expenses incurred in connection with the sale, license and delivery of Softalk
products and (b) a five percent (5%) markup of the total traffic on the
wholesale long distance per minute lines costs on a monthly basis.
The amended license agreement may be terminated under the following
conditions:
* Either party has the right to terminate the license agreement upon
thirty (30) days written notice to the other party, if such other
party fails to comply in any material respect with any term or
condition of the license agreement and such failure to comply is not
corrected within such thirty (30) day notice period.
* Either party has the right to terminate the license agreement in the
event the other party becomes bankrupt or insolvent, suffers a
receiver to be appointed, or makes an assignment for the benefit of
its creditors.
* Softalk has the right to terminate the license agreement upon sixty
(60) days written notice following a change of control of BestNet.
Under the license agreement, a "change of control" is deemed to have
occurred:
-- When, after the date of the license agreement, any person (as
such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"))
is or becomes the beneficial owner (as defined in Rule l3d-3 of
the Exchange Act), directly or indirectly, of securities of
BestNet representing fifty-one percent (51%) or more of the
combined voting power of BestNet's then outstanding securities,
other than (i) an employee benefit plan established or maintained
by BestNet or a subsidiary of BestNet, or (ii) any person who
presently owns such quantity of securities as of the date hereof,
or
-- Upon the approval by BestNet's stockholders of (1) a merger or
consolidation of BestNet with or into another corporation (other
than a merger or consolidation the definitive agreement for which
provides that at least a majority of the directors of the
surviving or resulting corporation immediately after the
transaction are continuing directors, (ii) a sale or disposition
of all or substantially all of BestNet's assets, or (iii) a plan
of liquidation or dissolution of BestNet.
-- Individuals who, as of the date of the license agreement,
constitute the Board of Directors of BestNet (the "Incumbent
Board") cease for any reason to constitute at least 80% of the
Board; provided, however, that any person becoming a member of
the Board subsequent to the date hereof whose election, or
nomination for election by BestNet's stockholders, was approved
by a vote of at least 80% of the members then comprising the
Incumbent Board (other than an election or nomination of an
individual whose initial assumption of office is in connection
with an actual or threatened election contest relating to the
election of directors of BestNet, as such terms are used in Rule
14a-11 of Regulation 14A promulgated under the Exchange Act or
any successor provision thereto) shall be, for purposes of this
License Agreement, considered as though such person were a member
of the Incumbent Board.
Upon termination of the license agreement for any reason whatsoever, BestNet is
permitted to continue using Softalk's intellectual property in providing
services to all its existing (at the point of termination) clients.
PURCHASE AGREEMENT. On November 13, 1999, BestNet, through its subsidiary,
Interpretel (Canada) Inc., purchased all existing products and accounts of
Softalk in exchange for 4,329,004 shares of Class A non-voting preferred stock
of Interpretel (Canada). Under this agreement, Softalk granted BestNet a right
of first refusal with respect to purchasing Softalk, its intellectual property,
software and/or patents. The shares issued under this agreement are exchangeable
on a one-for-one basis for shares of BestNet's common stock at any time by the
holder thereof. The issuance of the shares of Interpretel (Canada) was valued at
$10,000,000, the value of BestNet's common shares into which the Interpretel
(Canada), shares can be converted. On November 10, 2000, Softalk excercised its
exchange rights under the purchase agreement, resulting in the issuance of
4,329,004 restricted shares of BestNet common stock in exchange for a like
number of shares of Class A Non-voting preferred stock of Interpretel (Canada).
At November 30, 2000, Softalk held approximately 53% of the issued and
outstanding shares of BestNet common stock.
CROSS CORPORATE CONTROL. Softalk has the right to designate up to two
directors to the Board of Directors of BestNet. As of the date of this 10-KSB,
Softalk has designated Alexander Christopher Lang to serve on BestNet's four
person Board of Directors. BestNet also has been granted the right to appoint
one director to the three person Board of Directors of Softalk. BestNet has
appointed Gerald I. Quinn, BestNet's Chief Executive Officer, to Softalk's
board.
LOAN FACILITY. On August 6, 1999, BestNet entered into a loan facility with
Softalk pursuant to which Softalk may borrow up to $2 million at an interest
rate of prime plus 1%. As of November 28, 2000, the outstanding balance of the
loan was $1,384,000. Under the terms of this loan, Softalk may pay back the loan
principal plus interest on or before August 6, 2000, or convert any amounts
outstanding, plus interest, on the loan into shares of Softalk common stock in
full satisfaction of money owed to BestNet under the loan. On September 8, 2000,
the Board of Directors approved amending the loan to extend the term of the loan
for an additional year.
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COMPETITION
The communications industry is highly competitive, and one of the primary
purposes of the Telecommunications Act of 1996 (the "Telecommunications Act") is
to foster further competition. In each of the markets we intend to operate, we
will compete principally with the established telephone company serving such
market. We currently do not have a significant market share in any of our
markets. The established telephone companies have long-standing relationships
with their clients, financial, technical and marketing resources substantially
greater than ours and the potential to fund competitive services with cash flows
from a variety of businesses, and currently benefit from existing regulations
that favor the established telephone companies. Furthermore, one large group of
established telephone companies, the regional Bell operating companies, recently
have been granted, under particular conditions, pricing flexibility from federal
regulators with regard to some services with which we compete. This may present
established telephone companies with an opportunity to subsidize services that
compete with portions of our services and offer competitive services at lower
prices.
We expect to experience declining prices and increasing price competition.
We cannot assure that we will be able to achieve or maintain adequate market
share or margins, or compete effectively, in any of our markets. Moreover,
substantially all of our current and potential competitors have financial,
technical, marketing, personnel and other resources, including brand name
recognition, substantially greater than ours as well as other competitive
advantages over our business, financial condition and results of operations. Any
of the foregoing factors could have a material adverse effect on our business,
financial condition, results of operation and prospects.
REGULATION
The following summary of regulatory developments and legislation describes
the primary present and proposed federal, state, and local regulation and
legislation that is related to the Internet service and telecommunications
industries and could have a material effect on our business. Existing federal
and state regulations are currently subject to judicial proceedings, legislative
hearings and administrative proposals that could change, in varying degrees, the
manner in which our industries operate. We cannot predict the outcome of these
proceedings or their impact upon the Internet service and telecommunications
industries.
OVERVIEW
Telecommunications services are generally subject to federal, state and
local regulation. The FCC exercises jurisdiction over all facilities and
services of telecommunications common carriers to the extent those facilities
are used to provide, originate, or terminate interstate or international
communications. State regulatory commissions exercise jurisdiction over
facilities and services to the extent those facilities are used to provide,
originate or terminate intrastate communications. In addition, as a result of
the passage of the Telecommunications Act, state and federal regulators share
responsibility for implementing and enforcing the domestic pro-competitive
policies of the Telecommunications Act. In particular, state regulatory
commissions have substantial oversight over the provision 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.
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FEDERAL REGULATION
Our Internet operations are not currently subject to direct regulation by
the FCC or any other telecommunications regulatory agency, although they are
subject to regulations applicable to businesses generally. However, the future
Internet service provider regulatory status continues to be uncertain. In an
April 1998 report, the FCC concluded that while some Internet service providers
should not be treated as telecommunications carriers, some services offered over
the Internet, such as phone-to-phone telephony, may be functionally
indistinguishable from traditional telecommunications service offerings, and
that their non-regulated status may have to be re-examined. Moreover, although
the FCC has decided not to allow local telephone companies to impose per-minute
access charges on Internet service providers, and that decision has been upheld
by the reviewing court, further regulatory and legislative consideration of this
issue is likely. The imposition of 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 increase the cost of
doing business over the Internet.
EMPLOYEES
As of November 28, 2000, we had approximately seven employees. We believe
that our future success will depend on our ability to attract and retain highly
skilled and qualified employees. None of our employees are currently represented
by collective bargaining agreements. We believe that we enjoy good relationships
with our employees.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases its office and administrative space at 5210 E. Williams
Circle, Suite 200, Tucson, Arizona 85711. The lease expires November 30, 2001,
and requires the Company to make payments of approximately $8,400 over the term
of the lease monthly. From May 13, 1998 to May 15, 2000, the Company sublet
approximately 2,000 square feet of its office space for $3,000 per month on a
month-to-month basis.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in legal actions in the ordinary course of its
business. Although the outcome of any such legal actions cannot be predicted, in
the opinion of management there is no legal proceeding pending or threatened
against or involving the Company, the outcome of which is likely to have a
material adverse effect upon the consolidated financial position or results of
operations of the Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 27, 2000, the Company held its annual meeting of shareholders
at which 3,090,508 shares, or 91.3% of the 3,385,127 shares outstanding were
represented by proxy or in person. The following proposals were approved as
follows:
Proposals Votes For Against Abstentions
--------- --------- ------- -----------
1. Election of Directors:
Gerald I. Quinn 3,075,563 14,945 0
Alexander Christopher Lang
Kelvin C. Wilbore
Kevin England
2. Amendment to the Company's Articles
of Incorporation to change its name
to BestNet Communications Corp. 3,068,528 2,497 19,483
3. Approval of 2000 Incentive Stock Plan 2,846,308 214,917 29,283
4. Ratification of Ernst & Young, LLP
as the Company's independent auditors. 3,059,709 3,341 27,458
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PART II
ITEM 5. 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, 1998 through August 31, 2000 by fiscal quarters (i.e., 1st Quarter =
September 1 through November 30) were as follows, as adjusted for a one-for-six
reverse split effective December 18, 1998.
High Low
---- ---
FISCAL YEAR ENDED:
August 31, 1998
First Quarter 3.625 2.25
Second Quarter 2.8125 2.4375
Third Quarter 4.125 3.375
Fourth Quarter 4.3125 1.3125
FISCAL YEAR ENDED:
August 31, 1999
First Quarter 3.5625 1.5
Second Quarter 3.5625 2.0
Third Quarter 2.9375 0.125
Fourth Quarter 2.625 0.5
FISCAL YEAR ENDED:
August 31, 2000
First Quarter 4.25 1.46875
Second Quarter 10.25 4.125
Third Quarter 9.50 5.00
Fourth Quarter 7.25 3.81
The bid and asked prices of the Company's common stock on November 28 2000,
were $1.0625 and $1.1875, respectively.
As of November 13, 2000, the Company had 87 shareholders of record of its
common stock. As of November 20 2000, the Company had 1,732 shareholders that
beneficially own the stock in the name of various brokers.
The Company has never declared any cash dividends on common stock and
currently plans to retain future earnings, if any, for its business operations.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATIONS OVERVIEW
COMPARISON OF FISCAL YEARS ENDED AUGUST 31, 2000 AND AUGUST 31, 1999
REVENUES. Revenues increased to $28,670 in fiscal 2000 from $13,580 in
1999. Current year revenues were derived from beta testing and customer usage of
the Bestnetcall services. Prior year revenues were from the sale of various
calling card services, such as long distance and voice and fax mail services.
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COST OF SALES. Costs of sales increased to $51,722 in fiscal 2000 from
$9,468 in fiscal 1999. These costs consisted of long distance fees from
carriers for the Bestnetcall service. Cost of sales for the previous period were
costs associated with the sale of various calling card services, such as long
distance and voice and fax mail services.
GENERAL AND ADMINISTRATIVE EXPENSES. Operating expenses increased to
$1,188,032 in fiscal 2000 from $691,479 in fiscal 1999. Marketing and
advertising fees increased to $258,355 in fiscal 2000 from $10,410 in the prior
year due to costs associated with creation of web pages and marketing efforts of
the Bestnetcall service. Insurance expense increased for Directors and Officer's
liability coverage by $38,125 in fiscal 2000 from zero in fiscal 1999 due to
adding such insurance. Travel expenses increased by $45,725 to $67,287 in fiscal
2000 from $21,562 in the prior fiscal year due to travel associated with the
negotiation of the Company's agreements with Softalk. Payroll expense increased
by $73,239 to $313,551 in fiscal 2000, from $240,312 in the prior fiscal year
due to the hiring of additional staff. Consulting fees increased to $48,558 in
fiscal 2000 from $7,198 in fiscal 1999 due to the hiring of consultants for the
Bestnetcall product. Accounting fees increased to $81,964 in fiscal 2000 from
$21,030 in fiscal 1999 due to the Company engaging a "Big 5" accounting firm.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased to $1,545,636 for fiscal year 2000 from $146,977 for fiscal
year 1999. This increase was due to amortization on the higher level of license
fees and depreciation for the additional purchases of equipment, software and
computer hardware.
INTEREST INCOME. Interest income increased to $76,129 in fiscal 2000 from
$70,519 in fiscal 1999 due to an increase in the average balance in the
Company's money market fund during fiscal 2000 as compared to fiscal 1999.
INTEREST EXPENSE. Interest expense increased to $60,512 for fiscal 2000
from $8,995 in fiscal 1999. The increase in interest expense was related to a
short-term $2,000,000 promissory note executed on December 21, 1999. The
principal and accrued interest on this note were repaid on May 4, 2000.
MERGER EXPENSES. The Company had zero costs related to merger expenses for
the current year as compared to $118,450 for fiscal 1999. The costs in 1999 were
the result of the proposed but terminated merger with DCI Telecommunications,
Inc.
RENTAL INCOME. From May 1998 until May 2000, the Company sublet
approximately 2,000 square feet of its office space to another company. This
sublease was on a month-to-month basis and earned the Company $3,000 per month.
PREFERRED STOCK CONVERSION PENALTY. The Company incurred monthly liquidated
damages to the holder of its Series A Convertible Preferred Stock (the "Series A
Preferred Stock") equal to 3% (or $18,000) of the purchase price of the
Preferred Stock ($600,000) for each month in the quarter. The issuance cost
increased to $221,226 in fiscal 2000 from $144,000 in fiscal year 1999. On May
9, 2000, the remaining shares of Series A Preferred Stock were converted into
common stock. All shares due for accrued penalties payable were issued on
November 15, 2000.
SETTLEMENT COSTS. On January 21, 1999, the Company paid Steven A. Ezell in
an out-of-court settlement $15,000 in settlement of all pending legal claims.
These costs represented a one-time expense, and therefore, there are no similar
expenses for the year ended August 31, 2000.
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PREFERRED DECLARED AND DEEMED DIVIDENDS. Preferred dividends increased to
$2,602,046 for fiscal 2000, from $36,500 for fiscal 1999. An increase of
$101,095 was due to dividends payable on the 1,000 outstanding shares of Series
B Preferred Stock. Dividends accumulate, with respect to the outstanding shares
of the Series B Preferred Stock, at a rate of six percent (6%) per annum, and
may be paid in cash or in shares of common stock of the Company, at the
Company's option. Dividends for the Series A Preferred Stock were $21,234 for
fiscal 2000. Dividends accumulate, with respect to the Series A Preferred Stock,
at a rate of six percent (6%) per annum, and are payable quarterly. The Company
has elected to pay the dividends by issuing shares of common stock equal to the
aggregate amount of dividends owed for such period. All remaining shares of
Series A Preferred Stock were converted into common stock on May 9, 2000. All
shares of common stock issuable in payment of dividends accrued under the terms
of the Series A Preferred Stock were issued on May 15, 2000. On May 1, 2000, the
Company completed a $5,000,000 private placement of Series B Preferred Stock and
common stock purchase warrants with an accredited investor. Assuming the
conversion of the Series B Preferred Stock on May 1, 2000, such shares would
have been convertible into an aggregate of 1,000,000 shares of common stock, and
result in a beneficial conversion deemed dividend of approximately $2.5 million
in May of 2000.
INCOME TAXES. At August 31, 2000, the Company had federal net operating
loss carryforwards totaling approximately $13,300,000 and state net operating
loss carryforwards of approximately $8,200,000. The federal and state net
operating loss carryforwards expire in various amounts beginning in 2011 for
federal purposes and 2000 for state purposes. Additionally, the Company has
capital loss carryforwards of approximately $216,000 which will expire in 2004
unless offset by capital gains. No tax benefit has been recorded in the
financial statements since realization of these loss carryforwards does not
appear likely.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 2000, the Company had working capital of $2,394,852, compared
to working capital of $618,440 at August 31, 1999.
We expect to incur operating losses for the foreseeable future until the
completion of our global network build-out. We believe we have sufficient funds
to meet our operating expenses for the next fiscal year.
As of November 28, 2000, the Company had, on a fully diluted basis,
17,765,566 shares outstanding in stock, options and warrants and is authorized
to issue 50,000,000 common shares. The Company has 1,000 Series B preferred
shares outstanding and is authorized to issue 10,000,000 preferred shares. The
Company believes it can finance its global build-out and growth by issuing
additional shares, either through private placements, a secondary public
offering or a combination of both. However, no assurance can be given that any
such financing options will be available, or if available, will be on terms
acceptable to the company.
INFLATION
Although the Company's operations are influenced by general economic trends
and, specifically, technology advances in the telecommunications industry, the
Company does not believe that inflation has had or will have a material impact
on its limited operations.
ADDITIONAL FACTORS THAT MAY AFFECT OUR FUTURE RESULTS
IF OUR BESTNETCALL SERVICE IS NOT ACCEPTED BY TARGETED CUSTOMERS, OUR FUTURE
OPERATING RESULTS WILL BE MATERIALLY ADVERSELY AFFECTED.
BestNet has operated at a loss for the last seven years. The Bestnetcall
service is a new product for BestNet and therefore has no operating history upon
which an evaluation of BestNet and its prospects can be based. Further, BestNet
has no meaningful prior operating history in the telecommunications industry.
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Our Bestnetcall service may never achieve commercial acceptance by Internet
users. The failure to achieve market acceptance would have a material adverse
effect on BestNet's business, financial condition and results of operations.
BestNet's risks include the following:
* evolving and unpredictable business models
* management and funding of growth
* BestNet's ability to anticipate and adapt to development markets
* acceptance by Internet users
* establishment of business to business user of BestNet's services
* the ability of BestNet to establish relationships with additional
strategic partners
* the maintenance of BestNet's relationship with Softalk
To address these risks BestNet must, among other things:
* attract and retain an audience of frequent users of its services in
its target markets
* maintain its business customer base
* attract a significant number of new Internet telephony business
customers in target markets
* expand its sales of voice, fax and value-added telecom services
through Bestnetcall
* respond to competitive developments
* continue to form and maintain relationships with telecom carrier
partners
* continue to attract and retain and motivate qualified personnel
* provide superior customer service
* continue to develop and upgrade its technologies and commercialize its
services incorporating such technologies.
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.
BestNet's business strategy depends on the availability of the Internet to
transmit data packets for voice and fax calls. BestNet also relies on third
parties who provide traditional phone lines. Some of these third parties are
national telephone carriers. If any of these carriers increase their charges for
using these lines at any time, which has become increasingly likely in light of
the deregulation in the telecommunications industry, BestNet's profitability
will be materially adversely affected. They may also fail to properly maintain
their lines and disrupt BestNet's 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 BestNet's ability to complete calls over the
Internet would have a material adverse affect on BestNet's business, financial
condition and results of operations. The Company may be unable to continue
18
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purchasing such services from these third parties on acceptable terms, if at
all. If BestNet is unable to purchase the necessary services to maintain and
expand its network as currently configured, BestNet's business, financial
condition and results of operations would be materially adversely affected.
BESTNET DEPENDS ON ITS STRATEGIC RELATIONSHIP WITH SOFTALK, WHICH, IF
TERMINATED, WOULD HAVE A MATERIAL ADVERSE EFFECT ON BESTNET'S BUSINESS.
BestNet depends in large part on its joint product development efforts and
contractual relationships with Softalk. See "Item 1 -- Transactions with
Softalk". Softalk may choose not to renew existing arrangements on commercially
acceptable terms, if at all. BestNet's loss of this key strategic relationship,
or the failure to develop new relationships in the future, would have a material
adverse effect on its business, prospects, financial condition and results of
operations.
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 Federal Communications Commission has tentatively decided that
information service providers, including Internet telephony providers, are not
telecommunications carriers for regulatory purposes, various companies have
challenged that decision. Congress continues to review the conclusions of the
FCC, and the FCC could impose greater or lesser regulation on BestNet's
industry. The FCC is currently considering, for example, whether to impose
surcharges or other regulations upon certain providers of Internet telephony,
primarily those which provide Internet telephone services to end-users located
within the United States. The imposition of such surcharges or the regulation of
Internet telephony providers could increase the cost of doing business over the
Internet and materially adversely affect on BestNet's business, financial
condition and results of operations.
Aspects of BestNet's operations may be, or become, subject to state or
federal regulations governing universal service funding, disclosure of
confidential communications, copyright and excise taxes. 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 BestNet's business, financial condition
and results of operations.
THE TELECOMMUNICATIONS INDUSTRY IS SUBJECT TO INTERNATIONAL GOVERNMENTAL
REGULATION AND LEGAL UNCERTAINTIES WHICH COULD MATERIALLY ADVERSELY AFFECT
BESTNET'S BUSINESS.
BestNet intends on marketing its service to international long distance
callers. Because it will be conducting business internationally, BestNet is
subject to certain direct or indirect risks. These risks would include
unexpected changes in regulatory requirements for the Internet and/or Internet
telephony; foreign currency fluctuations, which could increase or decrease
operating expenses and increase or decrease revenue; foreign taxation; and the
burdens of complying with a variety of foreign laws, trade standards, tariffs
and trade barriers.
BESTNET HAS A HISTORY OF OPERATING LOSSES AND MAY NEVER GENERATE OPERATING
INCOME FROM THE SALE OF ITS BESTNETCALL SERVICE.
At August 31, 2000, BestNet had an accumulated deficit of $13,005,722.
Prior years' financial information has no particular bearing on future years'
results because the focus of the Company's business has changed from calling
card services to Internet telephony.
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BestNet believes that its future profitability and success will depend in
large part on its ability to generate sufficient revenue from the sale of its
Bestnetcall service and websites to businesses. Revenues are also anticipated
from the sub-licensing of its internet telephony technology and business systems
to partners setting up Internet telephony services in partner-led foreign
markets. The profitability and success of BestNet will depend on:
* its ability to maintain existing relationships and enter into new
relationships with Post Telephone & Telegraph administrations and
other carriers for which it sells Internet telephony services
* its ability to obtain or retain the right to sell Internet telephony
services and related value-added telecom services online
* its ability to effectively maintain relationships if any, with its
multinational partners
* its ability to successfully enter into new strategic relationships for
distribution and increased usage of the Bestnetcall and Internet
telephony services
* its ability to generate sufficient online traffic and sales volume
Accordingly, BestNet expects to expend significant financial and management
resources on the roll-out of the Internet telephony service, and on-site and
content development on its Bestnetcall websites, integration of the Internet
telephony and Bestnetcall services, strategic relationships, technology and
operating infrastructure. As a result, BestNet expects to incur significant
additional losses and continued negative cash flow from operations for the
foreseeable future. If such losses continue to occur, BestNet's revenues may not
increase or even continue at their current levels. Further, BestNet may not
achieve or maintain profitability or generate cash from operations in future
periods. In view of the rapidly evolving nature of BestNet's business, the
limited operating history of both Internet telephony and Bestnetcall and the
risks associated with integrating these businesses, BestNet believes that
period-to-period comparisons of operating results are not meaningful and should
not be relied upon as an indication of future performance.
CONFLICTS OF INTEREST MAY ARISE WHICH MATERIALLY ADVERSELY AFFECT BESTNET, ITS
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Conflicts of interest may arise between BestNet and its affiliates,
including Softalk, in areas relating to past, ongoing and future relationships,
including:
* the Bestnetcall license agreement, corporate opportunities, indemnity
arrangements, tax and intellectual property matters
* potential acquisitions or financing transactions
* sales 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. Such amendments,
modifications or waivers may adversely affect BestNet's business, financial
condition and results of operations. Ownership interests of directors or
officers in BestNet common stock, or serving as both a director/officer of
BestNet and a director/officer/employee of Softalk, could create or appear to
create potential conflicts of interest when directors and officers are faced
with decisions that could have different implications for BestNet and Softalk.
One of the members of BestNet's Board of Directors is also a director, officer
and President of Softalk.
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OUR INABILITY TO BE COMPETITIVE INTERNATIONALLY OR TO SATISFY REGULATORY
REQUIREMENTS WHEN WE EXPAND GLOBALLY COULD MATERIALLY ADVERSELY AFFECT OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
A significant aspect of our growth strategy is to expand our business
internationally, through the Internet. Such expansion will place additional
burdens upon our management, personnel and financial resources and may cause us
to incur losses. We will also face different and additional competition in these
international markets with which we have no prior experience. These risks could
impair our ability to expand internationally as well as have a material adverse
effect upon our overall business operations, growth and financial condition.
ON-LINE SECURITY BREACHES OR FAILURES MAY MATERIALLY ADVERSELY AFFECT BESTNET.
In order to successfully provide services over the Internet, it is
necessary that we be able to ensure the secure transmission of confidential
customer information over public telecommunications networks. We employ certain
technology in order to protect such information, including customer credit card
information. However, we may be unable to ensure that such information will not
be intercepted illegally. Advances in cryptography or other developments that
could compromise the security of confidential customer information could have a
direct negative impact upon our electronic commerce business. In addition, the
perception by consumers that communicating over the Internet is not secure, even
if unfounded, means that fewer consumers are likely to make communicate through
that medium. Finally, any breach in security, whether or not a result of our
acts or omissions, may cause us to be the subject of litigation, which could be
very time-consuming and expensive to defend.
OUR OUTSTANDING SHARES MAY BE DILUTED RESULTING IN LESS PERCENTAGE OF SHARES
HELD BY EACH SHAREHOLDER AND A LOWER MARKET PRICE PER SHARE OF OUR COMMON STOCK.
The market price of our common stock may decrease as more shares of common
stock become available for trading due to the conversion of the Series B
convertible preferred stock into and the exercise of the warrants to purchase
common stock. The participation of the shareholders in BestNet also may be
reduced through the issuance of new common stock.
THE FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS MAY NOT COME TRUE AND ACTUAL
RESULTS COULD MATERIALLY DIFFER FROM THE ANTICIPATED RESULTS.
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements may include BestNet's plans:
* to grow its Internet-based communications businesses
* to expand the range of services it offers
* to increase the number of customers and revenues using its services
and the minutes of use and price per minute of use of the traffic
booked through BestNet's websites and network
* to otherwise expand its business activities in new cities and foreign
countries
* to retain key personnel or otherwise to implement its strategy as well
as its beliefs regarding consumer acceptance of the Internet as a
means of commerce and the use of the Internet as a source of
advertising.
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These forward looking statements reflect the belief or current expectation
of BestNet's management and are necessarily based on management's current
understanding of the markets and industries in which BestNet operates. That
understanding could change or could prove to be inconsistent with actual
developments. BestNet's actual results could differ materially from the results
discussed in this Form 10-KSB, including those anticipated in or implied by any
forward-looking statements. Factors that could cause or contribute to such
differences include those discussed above, as well as those discussed elsewhere
in this report.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
BestNet Communications Corp.
Audited Financial Statements
Year ended August 31, 2000
Contents
Report of Semple & Cooper, LLP, Independent Auditors F-1
Report of Ernst & Young, LLP, Independent Auditors F-2
Audited Financial Statements
Consolidated Balance Sheet F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Changes in Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-8
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REPORT OF INDEPENDENT AUDITORS
To The Stockholders and Board of Directors of
BestNet Communications Corp.
We have audited the accompanying consolidated balance sheet of BestNet
Communications Corp. as of August 31, 2000, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of BestNet
Communications Corp. for the year ended August 31, 1999 were audited by other
auditors whose report dated October 18, 1999, expressed an unqualified opinion
on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 2000 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of BestNet
Communications Corp. as of August 31, 2000, and the consolidated results of its
operations, changes in stockholders' equity, and its and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
/s/ Semple & Cooper, LLP
October 16, 2000
F-1
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REPORT OF ERNST & YOUNG, LLP INDEPENDENT AUDITORS
Board of Directors
Wavetech International, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' equity and cash flows of Wavetech International, Inc. for the year
ended August 31, 1999. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit. The financial statements of Wavetech
International, Inc. for the year ended August 31, 1998 were audited by other
auditors whose report dated November 6, 1998, expressed an unqualified opinion
on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the 1999 financial statements referred to above present
fairly, in all material respects, the consolidated results of Wavetech
International, Inc.'s operations and its cash flows for the year then ended, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Tucson, Arizona
October 18, 1999, except for Note 11,
as to which the date is November 13, 1999
F-2
<PAGE>
BestNet Communications Corp.
Consolidated Balance Sheet
August 31, 2000
ASSETS
Current assets:
Cash and cash equivalents $ 2,581,492
Prepaid expenses and other assets 23,902
------------
Total current assets 2,605,394
Property and equipment, net accumulated
depreciation $ 1,032,886 1,208,025
License fee, net of amortization of $1,166,046 8,508,722
Note receivable from affiliate 1,384,000
Note receivable from related party 32,000
Deposits and other assets 124,726
------------
Total assets $ 13,862,867
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 208,949
Capital lease obligations, current portion 1,593
------------
Total current liabilities 210,542
Stockholders' equity:
Series B preferred stock, 6% cumulative, par value
$.001 per share; 10,000,000 shares authorized,
1,000 shares issued and outstanding (liquidation
value $5,000,000) 5
Common stock, par value $.001 per share; 50,000,000
shares authorized, 3,403,713 shares issued and
outstanding 3,404
Additional paid-in capital 26,654,638
Accumulated deficit (13,005,722)
------------
Total stockholders' equity 13,652,325
------------
Total liabilities and stockholders' equity $ 13,862,867
============
See notes to consolidated financial statements.
F-3
<PAGE>
BestNet Communications Corp.
Consolidated Statements of Operations
For the years ended August 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Revenues $ 28,670 $ 13,580
Expenses:
Cost of sales (exclusive of depreciation and
amortization shown separately below) 51,722 9,468
General and administrative 1,188,032 691,479
Depreciation and amortization expense 1,545,636 146,977
----------- -----------
Total expenses 2,785,390 847,924
----------- -----------
Net loss from operations (2,756,720) (834,344)
Other income (expense):
Interest income 76,129 70,519
Rental income 22,500 36,000
Miscellaneous income 4,014 --
Interest expense (60,512) (8,995)
Costs incurred in connection with unconsummated merger -- (118,450)
Write-off of intangible and other assets -- (36,125)
Preferred stock conversion penalty (221,226) (144,000)
Other expenses -- (15,000)
----------- -----------
Total other income (expense) (179,095) (216,051)
Net loss before preferred dividends (2,935,815) (1,050,395)
Cumulative preferred dividends declared and
preferred stock conversion benefit 2,602,046 36,500
----------- -----------
Net loss available to common shareholders $(5,537,861) $(1,086,895)
=========== ===========
Net loss per common share, basic and diluted $ (1.72) $ (0.37)
Weighted average number of shares
outstanding, basic and diluted 3,221,225 2,904,693
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
BestNet Communications Corp.
Consolidated Statements of Changes in Stockholders' Equity
For the years ended August 31, 2000 and 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------------- --------------------
SERIES A SERIES B ADDITIONAL
-------------- --------------- PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ------ ------ ------ ------ ------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, September 1, 1998 600 $ 1 -- $ -- 16,994,887 $ 16,995 $ 8,516,922 $ (6,380,966) 2,152,952
Net loss -- -- -- -- -- -- -- (1,050,395) (1,050,395)
Conversion of debt into
common stock -- -- -- -- 156,250 156 49,844 -- 50,000
Reverse 1-for-6 stock split -- -- -- -- (14,292,473) (14,292) 14,292 -- --
Preferred stock dividends -- -- -- -- 27,798 28 24,272 (36,500) (12,200)
Preferred stock conversion
penalty -- -- -- -- 128,993 129 143,871 -- 144,000
Stock options exercised -- -- -- -- 5,833 5 8,745 -- 8,750
----- ----- ------ ----- ----------- -------- ----------- ------------ -----------
Balances, August 31, 1999 600 1 -- -- 3,021,288 3,021 8,757,946 (7,467,861) 1,293,107
Net loss (2,935,815) (2,935,815)
Conversion of Series A
preferred stock (600) (1) -- -- 150,993 151 (150) -- --
Issuance of Series B
preferred stock -- -- 1,000 5 -- -- 4,446,147 -- 4,446,152
Preferred stock dividends -- -- -- -- 27,897 28 122,301 (122,329) --
Preferred stock conversion
penalty -- -- -- -- 19,869 20 99,464 -- 99,484
Preferred stock conversion
benefit -- -- -- -- -- -- 2,479,717 (2,479,717) --
Common stock issued for
services -- -- -- -- 4,000 4 7,496 -- 7,500
Warrants issued -- -- -- -- -- -- 154,000 -- 154,000
Softalk purchase agreement -- -- -- -- -- -- 10,000,000 -- 10,000,000
Stock options excercised -- -- -- -- 179,666 180 587,717 -- 587,897
----- ----- ------ ----- ----------- -------- ----------- ------------ -----------
Balance, August 31, 2000 -- $ -- 1,000 $ 5 3,403,713 $ 3,404 $26,654,638 $(13,005,722) $13,652,325
===== ===== ====== ===== =========== ======== =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
BestNet Communications Corp.
Consolidated Statements of Cash Flows
For the years ended August 31, 2000 and 1999
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Operating activities:
Net loss $(2,935,815) $(1,050,395)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,545,636 146,977
Common stock issued for services 7,500 --
Bad debt provision -- 18,276
Write-off of intangible and other assets -- 36,125
Preferred stock conversion penalty 99,484 144,000
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses and other current assets (15,372) (1,983)
(Increase) decrease in deposits and other assets (102,515) 7,872
(Decrease) increase in accounts payable and accrued expenses (34,080) (12,216)
----------- -----------
Net cash used in operating activities (1,435,162) (711,344)
Investing activities:
Purchase of property and equipment (554,348) (252,445)
Issuance of notes receivable from affiliate (1,284,000) (100,000)
Issuance of notes receivable from related party (32,000) --
Purchase of licensing agreements -- (200,000)
----------- -----------
Net cash used in investing activities (1,870,348) (552,445)
Financing activities:
Payments on notes payable (13,000) --
Payments on capital lease obligations (23,667) (45,714)
Proceeds from common stock issued 587,897 8,750
Proceeds from preferred stock issued 4,446,152 --
Dividends paid in cash on preferred stock -- (12,200)
----------- -----------
Net cash provided by (used in) financing activities 4,997,381 (49,164)
Net increase(decrease) in cash and cash equivalents 1,691,872 (1,312,953)
Cash and cash equivalents, beginning of year 889,620 2,202,573
----------- -----------
Cash and cash equivalents, end of year $ 2,581,492 $ 889,620
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
BestNet Communications Corp.
Consolidated Statements of Cash Flows (Continued)
For the years ended August 31, 2000 and 1999
2000 1999
------- -------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $65,142 $13,035
Taxes $ 50 $ 50
F-7
<PAGE>
BestNet Communications Corp.
Notes to Consolidated Financial Statements
1. ORGANIZATION
BestNet Communications Corp. (the Company), formerly Wavetech
International, Inc., is currently conducting minimal operations while actively
pursuing to implement its business strategy of providing Internet telephony
services. The Company has recorded net operating losses in each of the previous
seven years and does not anticipate realization of full operations until its
strategy is fully implemented.
Effective September 27, 2000, the Company's shareholders approved changing
its name to BestNet Communications Corp.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Interpretel, Inc. (Interpretel), Interpretel
Canada Inc., Telplex International Communications, Inc. and BestNet Travel, Inc.
All significant intercompany accounts and transactions have been eliminated.
On March 8, 1995, the Company entered into an agreement with Interpretel
pursuant to which the Company agreed to issue 6,000,000 (pre-split) shares of
its common stock in exchange for 100% of the outstanding 1,532,140 shares of
common stock of Interpretel. The transaction resulted in the former shareholders
of Interpretel owning approximately 80% of the outstanding shares of the
Company. In accordance with Accounting Principles Board Opinion No. 16 "Business
Combinations," the acquisition was accounted for as a reverse acquisition with
Interpretel deemed to be the acquiring entity of the Company. The common shares
issued in connection with the acquisition were assigned no value because the
Company had no assets or liabilities at the date of the acquisition.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments with a maturity of
three months or less when purchased (money market accounts and certificates of
deposit) to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is provided for on
the straight-line and accelerated methods over the estimated useful lives of the
related assets as follows:
Furniture and fixtures 7 years
Computer equipment 5 years
Software 3 years
F-8
<PAGE>
BestNet Communications Corp.
Notes to Consolidated Financial Statements (Continued)
The costs of maintenance, repairs and minor renewals are charged to expense
in the year incurred. Expenditures that increase the useful lives of the asset
are capitalized. When items are retired or disposed of, the cost and accumulated
depreciation are removed from the accounts and any gain or loss is included in
income.
LICENSE FEES
Fees to license certain communications software are recorded at cost and
amortized over the seven year life of the underlying agreement.
INCOME TAXES
Income taxes are determined using the asset and liability method. This
method gives consideration to the future tax consequences associated with
temporary differences between the carrying amounts of assets and liabilities for
financial statement purposes and the amounts used for income tax purposes.
CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company maintained the majority of its cash balances in bank accounts
at various financial institutions. Deposits not to exceed $100,000 at the
financial institutions are insured by the Federal Deposit Insurance Corporation.
As of August 31,2000, the Company had approximately $2,500,000 of uninsured
cash.
The carrying amounts for cash and cash equivalents, notes receivable,
accounts payable and notes payable approximate fair value because of the short
maturity of these instruments. The Company does not hold or issue financial
instruments for trading purposes. The Company has a note receivable with a
related party bearing an interest rate equal to prime plus 1% which management
believes approximates the current rate.
REVENUE RECOGNITION
Revenue from the sale of licensing agreements is recognized over the term
of the agreement. Revenue from the installation of equipment is recognized when
delivered. Revenue from the resale of minutes is recorded when the minutes are
used by the customer. Cost of sales includes expenses directly related to the
operation and maintenance of the telephony platform. Depreciation and
amortization expense is separately stated.
ADVERTISING COSTS
Advertising costs are charged to operations when incurred. During 2000 and
1999, total advertising cost equaled $110,855 and $10,410, respectively.
F-9
<PAGE>
BestNet Communications Corp.
Notes to Consolidated Financial Statements (Continued)
STOCK-BASED COMPENSATION
The Company accounts for its employee stock-based compensation arrangements
under the provisions of APB No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
Stock Options are granted to employees and directors under its Stock Option Plan
with an exercise price equal to fair value at the date of grant and accordingly
recognizes no compensation expense in connection with such grants.
NET LOSS PER COMMON SHARE
Diluted loss per share is equal to basic loss per share for all periods
presented as the effect of all applicable securities (preferred stock, stock
options and warrants; see Note 5) is anti-dilutive (decrease the loss per share
amount). References to share and per share amounts have been restated to reflect
a one-for-six stock split effective December 18, 1998 unless otherwise noted.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT
Property and equipment is composed of the following at August 31, 2000:
Furniture and fixtures $ 120,177
Computer equipment 719,634
Software 303,334
Equipment 1,097,766
-----------
Total property and equipment, at cost 2,240,911
Less: accumulated depreciation and amortization (1,032,886)
-----------
$ 1,208,025
===========
For the years ended August 31, 2000 and 1999, depreciation expense related
to property and equipment equaled $388,938 and $113,606, respectively.
Amortization expense related to assets held under capital leases was $176 and
$23,847 in 2000 and 1999 respectively.
4. COMMITMENTS
LEASES:
The Company has entered into capital lease arrangements for equipment and
operating lease arrangements for office space and a corporate apartment.
F-10
<PAGE>
BestNet Communications Corp.
Notes to Consolidated Financial Statements (Continued)
Future lease commitments at August 31, 2000 are as follows:
Capital Operating
Leases Leases
-------- --------
2000 $ 1,629 $146,859
2001 -- 29,494
-------- --------
1,629 $176,353
Less amounts representing interest 36 ========
--------
Present value of net minimum lease payments 1,593
Less current portion (1,593)
--------
$ --
========
Total rent expense under operating leases in 2000 and 1999 was $148,125 and
$128,270, respectively.
5. STOCKHOLDERS' EQUITY
PREFERRED STOCK:
SERIES A PREFERRED STOCK: The Company issued 600 shares of Series A
Convertible Preferred Stock in 1998 at $1,000 per share. The 6% Preferred
stockholders are entitled to receive annual cumulative dividends of $60 per
share per annum, accrued daily and payable quarterly in arrears on March 31,
June 30, September 30, and December 31 of each year, in preference and priority
to any payment to any other class or series of stock of the Company. In 1999 and
2000, a portion of these dividends were settled by the issuance of common stock.
Series A Preferred stockholders do not have any voting rights.
The Series A Preferred Stock is convertible at the option of the Company at
any time on at least ten days advance notice once the shares issuable upon
conversion are registered for resale by an effective registration statement. The
conversion price is the lesser of five dollars and twenty-five cents ($5.25) or
eighty-three percent (83%) of the average closing bid prices of the common stock
as reported by NASDAQ during the five (5) consecutive trading days preceding the
conversion date (but not including such date).
The Holder of Series A Preferred Stock may elect to convert such shares
into common stock at the conversion price described above upon written notice to
the Company. Should the Company fail to file an effective registration statement
covering such common shares to allow for conversion as noted above, the Company
is required to pay monthly liquidated damages to the Preferred Stockholder. In
2000 and 1999, the Company expensed $221,226 and $144,000 and issued 19,869 and
128,933 shares of common stock for liquidating damages, respectively.
On May 9, 2000, all outstanding Series A Preferred Stock were converted to
shares of common stock of the Company.
F-11
<PAGE>
BestNet Communications Corp.
Notes to Consolidated Financial Statements (Continued)
SERIES B PREFERRED STOCK: On May 1, 2000, the Company completed a
$5,000,000 private placement of Series B Preferred Stock and common stock
purchase warrants (the "Warrant") with an accredited investor. The financing
consisted of 1,000 shares of Series B Preferred Stock and a Warrant to purchase
160,000 shares of common stock. The Series B Preferred Stock carries a dividend
of 6%. The Preferred Stock is convertible by the holder at anytime following the
issuance date based on a conversion price equal to the lesser of eight dollars
and seven cents ($8.07) or 80% of the average closing bid prices of the
Company's common stock as reported by Bloomberg LP for the three lowest trading
days of the 10 consecutive trading days immediately preceding the conversion
date. However, all outstanding shares of Preferred Stock shall be automatically
converted into common stock in May 2002 at the conversion price set forward in
the subscriptions agreement. A beneficial conversion feature of approximately
$2,500,000 resulted in a charge to retained earnings in 2000.
The Series B Preferred stockholders are entitled to receive annual
cumulative dividends of $300 per share per annum, accrued daily and payable in
preference and priority to any payment to any other class or series of stock of
the Corporation, excluding the Series A Preferred Stock. In fiscal 2000, a
portion of these dividends were settled by the issuance of common shares. Series
B Preferred stockholders do not have any voting rights.
The Series B Preferred Stock is redeemable at the option of the Company
prior to the conversion date and after the date on which a registration
statement under the Securities Act of 1933, as amended, has been declared
effective; provided the Company has given at least 5 days written notice. Based
on the conversion formats in the purchase agreements in the private placement,
if all the Preferred Stock and Warrants were converted on the day before the
registration statement was filed, the Company would be required to issue an
aggregate of 1,790,673 shares of common stock. The Company is required to
prepare and file within 45 days after the issuance date of the registration
statement to be effective within 120 days from the issuance date. The
Registration Statement was declared effective by the Securities and Exchange
Commission on August 31, 2000.
The Company incurred issuance costs associated with the completion of the
Series B Preferred Stock private placement for commission, escrow fees and legal
fees totaling $500,000, $30,000, and $23,848, respectively.
The Warrants held by the Series B Preferred stockholders has a term of
three years and is exercisable at a price of $0.01 for all 160,000 shares of
common stock of the Company. The Holder may designate a cashless exercise of the
Warrant and surrender a portion of the Warrant having an aggregate current
market value equal to the aggregate exercise price at the exercise date.
The Company also issued a warrant to purchase 43,371 shares of common stock to
the placement agent in the private placement (the "Agent Warrant"). The Agent
Warrant has a term of three years and a per share exercise price of $8.07.
COMMON STOCK: On October 12, 1998, a note payable for $50,000, plus accrued
interest, to an unrelated entity was converted into 156,250 (pre-split) share of
common stock. The conversion price was based on the average of the high and low
price on the date of the letter agreement for repayment for this note payable.
F-12
<PAGE>
BestNet Communications Corp.
Notes to Consolidated Financial Statements (Continued)
During 2000, the Company issued 4,000 shares of common stock in
satisfaction of services valued at $7,500. The value of the service was charged
to expense during the period incurred.
The following summarizes warrant activity in 2000 and 1999:
Number Exercise Price
---------- ---------------
Outstanding, September 1, 1998 382,500 $ 2.64 - $10.50
Expired (34,167) $ 2.64 - $10.50
---------- ---------------
Outstanding, September 1, 1999 348,333 $ 2.76 - $ 9.00
Expired (344,999) $ 2.76 - $ 9.00
Issued 5,540,124 $ .01 - $10.00
---------- ---------------
Outstanding, August 31, 2000 5,543,458 $ .01 - $10.00
========== ===============
STOCK INCENTIVE PLAN: The Company is authorized to issue up to 766,667
shares of common stock under its 1997 Stock Incentive Plan. Shares may be issued
as incentive stock options, non-statutory stock options, deferred shares or
restricted shares. Options are granted at the fair market value of the common
stock on the date of the grant; options have terms of up to ten years.
Effective May 9, 2000, Company's Board of Directors approved the 2000
Incentive Stock Plan subject to shareholder approval. The plan authorized the
Company to issue up to 5,000,000 shares of common stock. Awards of shares under
the plan may be issued as incentive stock option, non-statutory stock options or
restricted stock. Options under the plan may not be granted at less than the
fair market of the common stock on the date of grant. The Company's shareholders
approved the 2000 Incentive plan on September 27, 2000, effective date as of May
9, 2000.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions: risk-free interest rate of 5.60%, dividend yield of 0%, volatility
factor of the expected market price of the Company's common stock of 2.682, and
a weighted-average expected life of the options of 2 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
SFAS No. 123 requires the Company to present pro forma disclosure for
options granted subsequent to 1995. These disclosures are not indicative of
future amounts, as options granted prior to 1995 have not been included as
provided by SFAS No. 123. For purposes of pro forma disclosure, the estimated
fair value of stock options was amortized to expense over the vesting period.
F-13
<PAGE>
BestNet Communications Corp.
Notes to Consolidated Financial Statements (Continued)
Pro forma net loss and loss per share are as follows:
<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Net loss available to common stockholders, as reported $(5,537,861) $(1,086,895)
Pro forma compensation expense for stock options (1,065,708) (249,557)
----------- -----------
Pro forma net loss available to common stockholders (6,603,569) (1,336,452)
----------- -----------
Pro forma loss per share available to common stockholders $ (2.05) $ (.46)
=========== ===========
</TABLE>
A summary of the Company's stock option activity (including Non-Statutory
options) is as follows:
Number of Weighted
Options Option Price Exercise Price
Granted Per Share Per Share
----------- ------------- -------
Outstanding, September 1, 1998 286,667 $ 2.25 - 6.00 $ 4.17
Granted 1,896,667 1.00 - 3.00 1.06
Exercised (5,833) 1.50 1.50
Canceled (133,333) 1.00 - 3.96 2.14
----------- ------------- -------
Outstanding, August 31, 1999 2,044,168 $ 1.00 - 6.00 1.43
Granted 313,664 2.94 - 8.00 5.14
Exercised (179,665) 1.00 - 6.00 2.45
Canceled (237,833) 1.00 - 4.56 2.39
----------- ------------- -------
Outstanding, August 31, 2000 1,940,334 $ 1.00 - 8.00 $ 1.38
=========== ============= =======
The remaining contractual life of options outstanding at August 31, 2000
was 8.6 years. Options for the purchase of 1,801,667 and 266,667 shares were
immediately exercisable at August 31, 2000 and 1999 with a weighted-average
price of $1.38 and $3.33 per share.
The weighted average fair values of stock options granted during 2000 and
1999 for which the exercise price was equal to the fair market value of the
stock were $4.59 and $.96 per share, respectively.
6. INCOME TAXES
At August 31, 2000, the Company has federal net operating loss
carryforwards totaling approximately $13,300,000 and state net operating loss
carryforwards of approximately $8,200,000. The federal and state net operating
loss carryforwards expire in various amounts beginning in 2011 for federal
purposes and 2000 for state purposes. Certain of the Company's net operating
loss carryforwards may be subject to annual restrictions limiting their
utilization in accordance with Internal Revenue Code Section 382, which include
limitations based on changes in control. In addition, approximately $3,200,000
of net operating loss carryforwards are further limited to activities in a trade
or business in which the Company is not presently involved. Additionally, the
Company has capital loss carryforwards of approximately $216,000 which will
expire in 2004 unless offset by capital gains. No tax benefit has been recorded
in the financial statements since realization of these loss carryforwards does
not appear likely.
F-14
<PAGE>
BestNet Communications Corp.
Notes to Consolidated Financial Statements (Continued)
The income tax benefit for the years ended August 31 is comprised of the
following amounts:
2000 1999
----------- -----------
Current $ -- $ --
Deferred:
Federal (1,285,000) (359,000)
State (140,000) (55,000)
----------- -----------
(1,425,000) (414,000)
Valuation allowance 1,425,000 414,000
----------- -----------
$ -- $ --
=========== ===========
The Company's tax benefit differs from the benefit calculated using the
federal statutory income tax rate for the following reasons:
2000 1999
----------- -----------
Statutory tax rate 34.0% 34.0%
State income taxes 5.3% 5.3%
Change in valuation allowance (39.3)% (39.3)%
----------- -----------
Effective tax rate 0.0% 0.0%
=========== ===========
The components of the net deferred tax asset are as follows:
2000 1999
----------- -----------
Deferred tax asset:
Amortization of Intangibles $ 267,000 $ 33,000
Net Capital Loss 85,000 85,000
Other 2,000 --
Net operating loss carryforward 4,945,000 3,756,000
----------- -----------
5,299,000 3,874,000
Valuation allowance (5,299,000) (3,874,000)
----------- -----------
$ -- $ --
=========== ===========
Income taxes of $50 were paid in both 2000 and 1999, respectively.
Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES, requires a valuation allowance to reduce the deferred tax assets if,
based on the weight of the evidence, it is more likely than not that some or all
of the deferred tax assets will not be realized. After consideration of all the
evidence, both positive and negative, management has determined that a
$5,299,000 valuation allowance at August 31, 2000 is necessary to reduce the
deferred tax assets to the amount that will more likely than not be realized.
The change in the valuation allowance for the current year is $1,425,000.
F-15
<PAGE>
BestNet Communications Corp.
Notes to Consolidated Financial Statements (Continued)
7. RELATED PARTY TRANSACTIONS AND SIGNIFICANT CONCENTRATIONS:
TRANSACTIONS WITH SOFTALK:
During 1999 and 2000, the Company entered various license and purchase
agreements with Softalk, Inc., a private Ontario, Canada corporation
("Softalk"). Softalk is a developer of various internet telephony software and
technology. Softalk provides approximately 100% of the service and software used
by Company in its internet telephony operations. A termination of the Softalk
agreements would cause a delay in the Company's operations, which would
ultimately affect operating results.
ORIGINAL AND RESTATED LICENSE AGREEMENT. On April 23, 1999, the Company and
Softalk entered into a license agreement granting the Company and its
subsidiaries a non-exclusive right to distribute, market, service and sublicense
Softalk's services and products to commercial and individual customer accounts.
On July 31, 1999, the original license agreement was restated to define the term
of the license agreement to seven years with an automatic renewal. Total
consideration given for the non-exclusive license agreement was $200,000.
Additionally, the Company agreed to pay Softalk and amount equal to 100% of
Softalk's actual direct expenses incurred in connection with the sale, license
and delivery of Softalk products plus a five percent (5%) markup of the total
traffic on the wholesale long distance per minute line costs on a monthly basis.
AMENDMENT NO. 1 TO RESTATED LICENSE AGREEMENT: On October 25, 1999, the
Company and Softalk amended their restated license agreement to grant the
Company and its subsidiaries a worldwide exclusive license to distribute,
market, service, sell and sublicense Softalk's services and products to
commercial accounts. This agreement also grants the Company a worldwide
nonexclusive license to distribute, market, service, sell and sublicense
Softalk's services and products to individual customer accounts. In exchange for
the license amendments, the Company issued to Softalk five-year warrants to
purchase up to 5,246,753 shares of the Company's common stock; 3,246,753 of
which have an exercise price of $3.25 per share, 1,000,000 have an exercise
price of $5.00 per share, and the remaining 1,000,000 have an exercise price of
$10.00 per share. In 2000, the fair value of the warrants issued were
capitalized to the license agreement equaling $154,000.
For the years ended August 31, 2000 and 1999, amortization expense to the
license agreement was $46,901 and $9,524, respectively.
Under the license agreement, Softalk has the right to designate up to two
directors to the Board of Directors of the Company. At August 31, 2000, Softalk
has designated two individuals to serve on the Company's five person Board of
Directors. Ms. Atan resigned as a Director of the Company effective September
27, 2000. Softalk also has been granted the Company the right to appoint one
director to the three person Board of Directors of Softalk. BestNet has
appointed Gerald I. Quinn, BestNet's Chief Executive Officer, to Softalk's
board.
PURCHASE AGREEMENT. On November 13, 1999, the Company, through its
subsidiary Interpretel (Canada) Inc., purchased all existing products and
accounts of Softalk in exchange for 4,329,004 shares of Class A non-voting
preferred stock of Interpretel (Canada). Under this agreement, Softalk granted
the Company a right of first refusal with respect to purchasing Softalk, its
intellectual property, software and/or patents.
F-16
<PAGE>
BestNet Communications Corp.
Notes to Consolidated Financial Statements (Continued)
At August 31, 2000, the total consideration given under the purchase
agreement was capitalized to the license agreement and equipment in amounts
equal to $9,320,768 and $679,232, respectively. Amortization expense relating to
the license agreement equaled $1,109,621 at August 31, 2000.
On May 1, 2000, as part of the private placement of Series B Convertible
Preferred Stock, Softalk agreed not to sell, offer, transfer or exchange the
Interpretel (Canada) shares until May 1, 2001, unless Softalk is given consent
to do so by the investor involved in the private placement. Such consent was
obtained in connection with Softalk's exchange of Interpretel shares for BestNet
common stock.
PRODUCT DEVELOPMENT AGREEMENT. Effective June 14, 2000, the Company and
Softalk entered into a product development agreement. The agreement engages
Softalk to customize the software it develops for the Company, enhance the
performance and features of the Bestnetcall services and to provide installation
and maintenance of certain hardware and software. The term of the agreement is
for a period of one year. Total consideration given for the agreement is
$500,000, which was paid in advance in the form of a retainer. In addition, if
the work performed under the agreement exceeds the retainer as calculated at the
rate of $70 per person per hour, the Company has agreed to compensate Softalk at
the rate of $85 per person per hour for the work performed beyond the amount
covered by the retainer. Additional services provided outside the scope of the
agreement will be compensated at the rate of $100 per person per hour. At August
31, 2000, the Company has paid Softalk $100,000 under the agreement. The Company
estimates project costs to approximately equal $1,260,000 upon completion and
delivery of the customized software.
LOAN FACILITY. On August 6, 1999, the Company entered into a loan facility
agreement with Softalk, Inc. Under the facility, the Company agreed to loan
Softalk up to $2 million at an interest rate equal to prime plus 1%. Under the
terms of this loan, Softalk may pay back the loan principal plus interest on or
before August 6, 2000, or convert any amounts outstanding, plus interest, on the
loan into shares of Softalk common stock in full satisfaction of money owed
under the loan. The number of shares of Softalk common stock which may be issued
to the Company for repayment of the full $2 million would equal ten percent
(10%) of the value of Softalk at the time of repayment. In the event Softalk
does not require the full $2 million loan from the Company, any amounts advanced
to Softalk may be converted to Softalk shares on a pro rata basis. As of August
31, 2000, the outstanding balance of the loan was $1,384,000. On September 8,
2000 the Company's Board of Directors approved amending the loan to extend the
term of the loan for an additional year.
As of August 31, 2000, total amounts due to Softalk included in accounts
payable totaled $32,929.
NOTE RECEIVABLE RELATED PARTY:
On March 1, 2000, a director of the Company and officer, director and
shareholder of Softalk executed a promissory note payable in the original
principal amount of $32,000. Total outstanding principal and accrued interest is
due on March 1, 2002. The note bears interest at the rate of 7.75% per annum.
F-17
<PAGE>
BestNet Communications Corp.
Notes to Consolidated Financial Statements (Continued)
CONSULTING AGREEMENT WITH RELATED PARTY:
Effective June 22, 2000, the Company entered into a consulting agreement
with a director of the Company and officer, director and shareholder of Softalk.
The consulting agreement provides that all staff in the Company's Tucson,
Arizona office will report to the President of the Company directly through the
individual. Additionally, the individual is to make recommendations to Company
management on any matter relating to the Company's organization, operations,
finance and personnel. Total consideration for the consulting agreement equals
$30,000 per year. The consulting agreement terminates upon 30 day written notice
by either the Company or the individual for any reason.
8. LOSS ON ASSET IMPAIRMENT
The Company determined in the fourth quarter of fiscal 1999 that certain
fixed and intangible assets no longer were of value to the Company. Accordingly,
such assets and related accumulated depreciation and amortization (net book
value of $36,125) were written off.
9. STATEMENTS OF CASH FLOW
During the year ended August 31, 2000 and 1999, the Company recognized
investing and financing activities that affected assets and stockholders'
equity, but did not result in cash receipts or payments.
For the year ended August 31, 2000, these non-cash activities are as
follows:
During 2000, all the issued and outstanding shares of Series A Preferred
Stock were converted into 150,993 shares of the Company's common stock.
Additionally, the Company issued 4,400 and 19,869 shares of common stock in
payment of the Series A Preferred Stock dividend of $21,234 and liquidating
damages of $99,484, respectively.
The Company issued 23,497 shares of common stock in payment of its Series B
Preferred Stock dividend for $101,095. Additionally, a beneficial conversion
feature calculated on the Series B Preferred Stock resulted in a charge to
retained earnings totaling $2,479,717.
On October 25, 1999, the Company issued five-year warrants to purchase up
to 5,246,753 shares of the Company's common stock; 3,246,753 of which have an
exercise price of $3.25 per share, 1,000,000 have an exercise price of $5.00 per
share, and the remaining 1,000,000 have an exercise price of $10.00 per share in
association with the restated license agreement with Softalk, Inc. The fair
value of the warrants equaled $154,000 and were capitalized to the license
agreement.
The Company, through its subsidiary Interpretel (Canada) Inc., purchased
all existing products and accounts of Softalk in exchange for 4,329,004 shares
of Class A non-voting preferred stock of Interpretel (Canada). The shares issued
under the agreement are exchangeable on a one-for-one basis for shares of the
Company's common stock at any time by the holder thereof. The issuance of the
shares of Interpretel (Canada) was valued at $10,000,000, the value of the
Company's common shares into which the Interpretel (Canada), shares can be
converted. At August 31, 2000, the total consideration given under the purchase
agreement was capitalized to the license agreement and equipment in amounts
equaling $9,320,768 and $679,232, respectively.
F-18
<PAGE>
BestNet Communications Corp.
Notes to Consolidated Financial Statements (continued)
For the year ended August 31, 1999, these non-cash activities are as
follows:
During 1999, a note payable for $50,000, plus accrued interest, to an
unrelated entity was converted into 156,250 (pre-split) shares of Common Stock.
The conversion price was based on the average of the high and low price on the
date of the letter of agreement for repayment for this note payable.
The Company issued 27,798 and 128,993 shares of common stock for payment of
the Series A Preferred Stock dividend for $36,500 and conversion penalties for
$144,000, respectively.
10. SUBSEQUENT EVENTS
On September 8, 2000, the Board of Directors approved the Company's 401(k)
defined contribution plan for its employees.
On September 27, 2000, the Company's shareholders approved an amendment to
its Article of Incorporation to change the Company's name to BestNet
Communications Corp.
Effective November 10, 2000, Softalk, Inc. converted 4,329,004 Preferred A
shares in Interpretel (Canada) for shares of the Company's common stock. This
transaction resulted in Softalk acquiring approximately 53% of the Company's
outstanding capital stock.
Subsequent to August 31, 2000, the Company and Softalk, Inc. amended the
loan facility to secure the amounts due to the Company by the Company's common
stock held by Softalk, Inc.
F-19
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANT ON ACCOUNTING AND FINANCIAL
DISCLOSURES.
On September 27, 2000, the Company filed a Form 8-K reporting that the
Company, with the approval of the Company's board of directors, had dismissed
Ernst & Young LLP ("E&Y") as its independent accountants.
On October 13, 2000 the Company filed a Form 8-K reporting that the Company
engaged Semple & Cooper, LLP as its independent auditors for the fiscal year
ending August 31, 2000.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT
DIRECTORS AND OFFICERS
The current directors and executive officers of the Company are as follows:
NAME AGE POSITION HELD WITH COMPANY
---- --- --------------------------
Gerald I. Quinn 57 President, Chief Executive Officer and a
member of the Company's Board of Directors
Alexander C. Lang 47 Director
Kelvin C. Wilbore 46 Vice President and Director
Kevin England 48 Director
GERALD I. QUINN has been the President of Interpretel (Canada), a
subsidiary of the Company, since 1995. In May 1996, Mr. Quinn became the
President, Chief Executive Officer and a Director of the Company. From 1986 to
1994, Mr. Quinn was Vice President of University Affairs and Development at the
University of Guelph, which is one of Canada's leading teaching and research
universities. While at the University of Guelph, Mr. Quinn's responsibilities
included marketing, image development, constituent relations and media
relations, including systems development, telemarketing and the development of
affinity programs. From 1975 until 1986, Mr. Quinn held many senior
administrative positions with Canada's largest college of applied arts and
technology, including positions relating to the development and
commercialization of technology and multimedia-based interactive learning
programs. Since 1984, Mr. Quinn has served as a consultant to Cableshare
Interactive Technology, Inc., a Canadian TSE listed public company that operates
in the interactive television industry ("Cableshare"). Mr. Quinn has been a
director of Cableshare since 1993 and has chaired its board committee on mergers
and acquisitions. In 1997, Mr. Quinn negotiated a merger of Cableshare with
Source Media, (NASDAQ:SRCM) culminating in Source Media owning 100% of
Cableshare. Mr. Quinn is active in numerous civic and professional organizations
and has been recognized for his work in marketing, sales, promotion and public
relations by various trade organizations. Mr. Quinn has two arts degrees with
majors in English, Economics and Political Science.
ALEXANDER C. (CHRIS) LANG was appointed to the Company's Board of Directors
in July 1999. Mr. Lang has been in the telecommunications business for 22 years,
holding various technical positions related to marketing and product design.
From 1993 to the present, Mr. Lang has served as President of Softalk Inc., a
private telecommunications and web-based software development company, where he
introduced products which have worldwide reach through the use of the Internet
for control and management. Mr. Lang is also a principal shareholder of Softalk.
23
<PAGE>
From 1988 to 1993, Mr. Lang provided consulting services to the telecom
industry. He launched a long distance reselling company, participated in the
development of the Novell certification Program, and strategic partnerships
program for voice recognition. From 1985 to 1988, he worked for Rolm/IBM in the
development of telecommunication systems which included a posting at the
strategic presentation center in Santa Clara, CA. From 1981 to 1985, he was a
marketing manager with Rockwell International Switching Division. From 1978 to
1981, Mr. Lang worked for Bell Canada in many different technical capacities.
Mr. Lang received his BA in Economics in 1977.
KELVIN C. WILBORE has served as a director of the Company since September
2000. Mr. Wilbore began working with the Company as a project manager in January
2000. Mr. Wilbore is in charge of product commercialization for the Company. He
has 20 years experience in business requirements specification, application
development, project management, customer relationship management and management
consulting. Mr. Wilbore previously served as a Senior Manager in the telecom
sector at Arthur Andersen LLP from 1998 to 2000. From April 1997 to July 1998,
he was in charge of call center analysis for the Canadian subsidiary of
Technology Solutions Company (TSC). From 1994 to 1997, he worked for NCR
Corporation in Toronto as an implementation analyst for NCR self serving banking
systems. From 1987 to 1994, Mr. Wilbore worked in the financial sector, serving
as Vice President, Business Solutions at Amalgamated Banks of South Africa
(ABSA), the largest banking group in Africa. Mr. Wilbore holds a Bachelor of
Science degree in Mathematics and Mathematical Statistics from Rhodes University
and a Master of Business Administration degree from the University of Cape Town.
KEVIN ENGLAND has served as a director of the Company since September 2000.
Mr. England also is president and owner of The England Group, a real estate
acquisition and management company in Vancouver, Canada, which he started in
1987. Mr. England has been active in real estate acquisition, development,
securitization and management for over 18 years. He is also president of England
Securities Ltd. and holds a Partner and Director's License from the British
Columbia Securities Commission. Since founding The England Group, Mr. England
has acquired a U.S. and Canadian revenue property portfolio valued in excess of
$350,000,000 which generates gross annual income in excess of $47,000,000. From
1981 to 1986, Mr. England held senior management positions with two major
western Canadian development and syndication firms. From 1977 to 1981, Mr.
England worked in product development, marketing and management for IBM Canada.
Mr. England graduated from Carlton University in 1977 with a Bachelors of Arts
degree.
ITEM 10. EXECUTIVE COMPENSATION
The following table summarizes all compensation paid to the Company's Chief
Executive Officer (the "Named Executive Officer") for services rendered in all
capacities to the Company during each of the fiscal years ended August 31, 2000,
1999 and 1998. None of the Company's other employees received compensation in
excess of $100,000 during the last completed fiscal year. Share figures have
been adjusted to reflect the one-for-six split effected in December 1998.
24
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
----------------------------------- -------------------------------------
Name and Restricted Securities
Principal Fiscal Other Annual Stock Underlying All Other
Position Year Salary($) Bonus Compensation Awards($) Awards ($) Awards($)(#)
-------- ---- --------- ------ ------------ --------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gerald I. Quinn 2000 $85,000 $ -0- $ -0- $ -0- -0- -0-
President/CEO 1999 $85,000 $ -0- $ -0- $ -0- 500,000 -0-
1998 $85,000(1) $ -0- $ -0- $ -0- -0- -0-
</TABLE>
(1) Includes the fair market value of 3,316 shares of Common Stock, for which
Mr. Quinn elected to receive deferred shares pursuant to the Company's 1997
Stock Incentive Plan in lieu of a portion of his annual base salary for
services rendered. The aggregate fair market value of these shares at the
expiration of the respective deferral periods equaled $8,734.
On July 19, 1999, the Named Executive Officer was granted 500,000 stock
options at a per share exercise price of $1.00. All of these shares vested on
July 19, 2000. This grant represented 26.4% of all grants made in 1999.
The following table sets forth certain information concerning the
aggregated value of the unexercised options of the Named Executive Officer as of
August 31, 2000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Unexercised Options In-The-Money Options at
Shares at Fiscal Year End(#) Fiscal Year End($)
Acquired On Value --------------------------- ---------------------------
Name Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gerald I. Quinn -0- $ -0- 633,333(1) -0- $ $ -0-
</TABLE>
----------
(1) This total include 133,333 options exercisable at any time prior to January
2007 at a price of $3.96 per share, and 500,000 options exercisable at any
time prior to July 19, 2009 at a price of $1.00 per share.
25
<PAGE>
COMPENSATION PURSUANT TO PLANS
None.
EMPLOYMENT CONTRACTS
In May 2000, the Board of Directors approved a one-year employment
agreement with Gerald I. Quinn for services as President and Chief Executive
Officer. The agreement requires Mr. Quinn to devote his full time to the Company
and provides for a base salary of $85,000. Mr. Quinn is also entitled to receive
any fringe benefits generally extended to the employees of the Company,
including medical, disability and life insurance.
After the initial term, the above-described agreement continues at will,
terminable upon ninety days written notice by either party to the other. The
agreement terminates upon the occurrence of any of the following events: (i) if
the employee voluntarily terminates; (ii) if the employee dies; (iii) if the
employee is unable to properly discharge his obligations under his employment
agreement due to illness, disability or accident for three consecutive months or
for a period aggregating six months in any continuous twelve months; (iv) if the
employee is convicted of a crime of moral turpitude by a court of competent
jurisdiction; (v) if the employee is convicted of a felony, except to the extent
that the charge arises from an act taken at the board's direction; or (vi) if
the employee is grossly negligent or guilty of willful misconduct in connection
with the performance of his duties, which negligence or misconduct, if curable,
is not cured within fifteen days of a notice of cure by the Board or the
Chairman of the Board. The above-described agreement provides that the employee
shall not compete with the Company during the term of the agreement and for a
period of one year thereafter.
In the event of any Corporate Transaction or Change of Control of the
Company (each as defined in the Plan), the common stock at the time subject to
each outstanding option, but not otherwise vested, shall automatically vest in
full, so that each such option shall, immediately prior to the effective date of
such Corporate Transaction or Change of Control, become fully exercisable for
all of the common shares at the time subject to the option, and may be exercised
for all or any portion of those shares as fully vested common stock.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's executive
officers, directors, and persons who own more than 10% of the Company's
outstanding Common Stock to file initial reports of ownership and changes in
ownership with the Commission. Officers, directors, and greater than 10%
stockholders are required by Commission regulations to furnish the Company with
copies of all Section 16(a) forms they file. Based solely upon a review of
copies of such filings or written representations that no forms were required
that were furnished to the Company, the Company believes that all of the
Company's executive officers, directors, and greater than 10% stockholders
complied during the fiscal year ended August 31, 2000 with the reporting
requirements of Section 16(a).
26
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of November 28, 2000, certain information
with regard to the beneficial ownership of the Company's Common Stock by (i)
each shareholder known by the Company to beneficially own 5% or more of the
Company's outstanding Common Stock, (ii) each Director individually, (iii) the
Named Executive Officer and (iv) all Officers and Directors of the Company as a
group:
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT OF
BENEFICIAL OWNER(1) BENEFICIAL OWNER (2)(3) CLASS (3)
------------------- ----------------------- ----------
Gerald I. Quinn 722,872 8.16%
Richard P. Freeman 520,426 6.08%
Alexander Christopher Lang (4) 9,825,757 71.61%
Kelvin C. Wilbore (5) 50,000 .60%
All Directors and executive officers
as a group (3 persons)(6) 10,598,629 70.60%
----------
* Represents less than one percent of the outstanding Common Stock.
(1) Unless otherwise noted, the address of each holder is 5210 East Williams
Circle, Suite 200, Tucson, Arizona 85711.
(2) A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from November 28, 2000 through the exercise of any
option, warrant or other right. Shares of Common Stock subject to options,
warrants or rights which are currently exercisable or exercisable within 60
days are deemed outstanding solely for computing the percentage of the
person holding such options, warrants or rights, but are not deemed
outstanding for computing the percentage of any other person.
(3) The amounts and percentages in the table are based upon 8,223,589 shares of
Common Stock outstanding as of November 28, 2000.
(4) Includes 4,329,004 shares of common stock and shares underlying warrants to
purchase 5,246,753 shares of common stock held by Softalk. Mr. Lang has
sole voting and dispositive power over such shares. Under SEC rules and
regulations, Mr. Lang is deemed to beneficially own such shares.
(5) Includes 50,000 shares subject to options granted pursuant to the Company's
Plan which are currently exercisable or become exercisable within 60 days
after November 28, 2000.
(6) Includes 50,000 shares subject to options granted pursuant to the Company's
Plan which are currently exercisable or become exercisable within 60 days
after November 28, 2000.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999 and 2000, the Company has entered various license and purchase
agreements with Softalk, Inc., a private Ontario, Canada corporation
("Softalk"). Softalk is developer of various internet telephony software.
Softalk provides approximately 100% of the service and software used by Company
in its internet telephony operations. A termination of the agreements would
cause a delay in the Company's operations, which would ultimately affect
operating results. See "Item 1 - Transactions with Softalk."
ORIGINAL AND RESTATED LICENSE AGREEMENT. On April 23, 1999, the Company and
Softalk entered into a license agreement granting the Company and its
subsidiaries a non-exclusive right to distribute, market, service and sublicense
Softalk's services and products to commercial and individual customer accounts.
On July 31, 1999, the original license agreement was restated to define the term
of the license agreement to seven years with an automatic renewal. Total
consideration given for the non-exclusive license agreement was $200,000.
Additionally, the Company agreed to pay Softalk and amount equal to 100% of
Softalk's actual direct expenses incurred in connection with the sale, license
and delivery of Softalk products plus a five percent (5%) markup of the total
traffic on the wholesale long distance per minute line costs on a monthly basis.
27
<PAGE>
AMENDMENT NO. 1 TO RESTATED LICENSE AGREEMENT: On October 25, 1999, the
Company and Softalk amended their restated license agreement to grant the
Company and its subsidiaries a worldwide exclusive license to distribute,
market, service, sell and sublicense Softalk's services and products to
commercial accounts. This agreement also grants the Company a worldwide
nonexclusive license to distribute, market, service, sell and sublicense
Softalk's services and products to individual customer accounts. In exchange for
the license amendments, the Company issued to Softalk five-year warrants to
purchase up to 5,246,753 shares of the Company's common stock; 3,246,753 of
which have an exercise price of $3.25 per share, 1,000,000 have an exercise
price of $5.00 per share, and the remaining 1,000,000 have an exercise price of
$10.00 per share. In 2000, the fair value of the warrants issued were
capitalized to the license agreement equaling $154,000. Mr. Lang, a director of
the Company, is a principal shareholder, officer and director of Softalk.
Under the license agreement, Softalk has the right to designate up to two
directors to the Board of Directors of the Company. At August 31, 2000, Softalk
has designated Rosnani Atan and A. Christopher Lang individuals to serve on the
Company's five person Board of Directors. Ms. Atan resigned as a Director of the
Company effective September 27, 2000. Softalk also has been granted the Company
the right to appoint one director to the three person Board of Directors of
Softalk. Mr. Quinn, the President and Chief Executive Officer of BestNet, is
BestNet's designer to Softalk's board.
PURCHASE AGREEMENT. On November 13, 1999, the Company, through its
subsidiary Interpretel (Canada) Inc., purchased all existing products and
accounts of Softalk in exchange for 4,329,004 shares of Class A non-voting
preferred stock of Interpretel (Canada). Under this agreement, Softalk granted
the Company a right of first refusal with respect to purchasing Softalk, its
intellectual property, software and/or patents. On November 10, 2000, Softalk
excercised its right under the purchase agreement, resulting in the issuance of
4,329,004 restricted shares of BestNet common stock in exchange for a like
number of shares of Class A non-voting preferred stock of Interpretel (Canada).
As of the date of this Form 10-KSB, Softalk holds approximately 53% of the
issued and outstanding shares of BestNet common stock.
PRODUCT DEVELOPMENT AGREEMENT. Effective June 14, 2000, the Company and
Softalk entered into a product development agreement. The agreement engages
Softalk to customize the software it develops for the Company, enhance the
performance and features of the Bestnetcall services and to provide installation
and maintenance of certain hardware and software. The term of the agreement is
for a period of one year. Total consideration given for the agreement is
$500,000. In addition, if the work performed under the agreement exceeds the
retainer as calculated at the rate of $70 per person per hour, the Company will
compensate Softalk at the rate of $85 per person per hour for the work performed
beyond the amount covered by the retainer. Additional services provided outside
the scope of the agreement will be compensated at the rate of $100 per person
per hour. The Company estimates project costs to approximately equal $1,260,000
upon completion and delivery of the software.
LOAN FACILITY. On August 6, 1999, the Company entered into a loan agreement
with Softalk, Inc. Under the facility, the Company agreed to loan Softalk up to
$2 million at an interest rate equal to prime plus 1%. Under the terms of this
loan, Softalk may pay back the loan principal plus interest on or before August
6, 2000, or convert any amounts outstanding, plus interest, on the loan into
shares of Softalk common stock in full satisfaction of money owed under the
loan. The number of shares of Softalk common stock issuable to the Company in
repayment of the full $2 million would equal ten percent (10%) of the value of
Softalk at the time of repayment. In the event Softalk does not require the full
$2 million loan from the Company, any amounts advanced to Softalk may be
converted to Softalk shares on a pro rata basis. As of August
28
<PAGE>
31, 2000, the outstanding balance of the loan was $1,384,000. On September 8,
2000 the Company's Board of Directors approved amending the loan to extend the
term of the loan for an additional year.
NOTE RECEIVABLE: On March 1, 2000, Rosnani Atan, a director and shareholder
of the Company and an officer director, and shareholder of Softalk executed a
promissory note payable in the original principal amount of $32,000. Total
outstanding principal and accrued interest is due on March 1, 2002. The interest
rate on the note equals 7.75%. Ms. Atan resigned as a director of the Company
effective September 27, 2000. Ms. Atan is the spouse of Mr. Lang.
CONSULTING AGREEMENT WITH RELATED PARTY: Effective June 22, 2000, the
Company entered into a consulting agreement with Rosnani Atan, a director and
shareholder of the Company and officer, director, and shareholder of Softalk.
The consulting agreement indicates all staff in the Company's Tucson, Arizona
office will report to the President of the Company directly through the
individual. Additionally, the individual is to make recommendations to Company
management on any matter relating to the Company's organization, operations,
finance and personnel. Total consideration for the consulting agreement equals
$30,000 per year. The consulting agreement terminates upon a 30 day written
notice by either the Company or the individual.
PART IV
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.
(a)(1) the financial statements listed in the index set forth in Item 7
of this Form 10-KSB are filed as part of this report.
(a)(2) Exhibits
Number Description of Filing Method
------ --------------------- ------
10.1 Product Customization Agreement *
21 Subsidiaries of the Registrant *
27 Financial Data Schedule *
----------
* Filed herewith
(b) Reports on Form 8-K Filed During the Last Quarter of The Period
Covered by This Report are as Follows:
On September 27, 2000, the Company filed a Form 8-K reporting that the
Company, with the approval of the Company's board of directors, had dismissed
Ernst & Young LLP ("E&Y") as its independent accountants.
On October 13, 2000 the Company filed a Form 8-K reporting that the Company
engaged Semple & Cooper, LLP as its independent auditors for the fiscal year
ending August 31, 2000.
29
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BESTNET COMMUNICATIONS CORP.
Date: December 14, 2000 By: /s/ Gerald I. Quinn
------------------ ------------------------------------
Name: Gerald I. Quinn
Title: President & CEO
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Dated: December 14, 2000 By: /s/ Gerald I. Quinn
------------------ ------------------------------------
Gerald I. Quinn, President and Chief
Executive Officer, Director
(Principal Executive Officer)
Dated: December 14, 2000 By: /s/ Alexander C. Lang
------------------ ------------------------------------
Alexander C. Lang, Director
Dated: December 14, 2000 By: /s/ Kelvin C. Wilbore
------------------ ------------------------------------
Kelvin C. Wilbore, Director
Dated: December 14, 2000 By: /s/ Kevin England
------------------ ------------------------------------
Kevin England, Director
30
