CAPSULE COMMUNICATIONS INC DE
S-3/A, 2000-05-26
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
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<PAGE>

     As filed with the Securities and Exchange Commission on May 25, 2000

                                                    Registration No.333-96301-99
================================================================================
                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                ________________
                         PRE-EFFECTIVE AMENDMENT NO. 1
                                      TO
                                   FORM S-3

            REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

                               ________________
      CAPSULE COMMUNICATIONS, Inc. (as originally filed by US WATS, Inc.)

            (Exact name of registrant as specified in its charter)
                                ________________

                    Delaware                               22-3055962
   (State or Other Jurisdiction of Incorporation)      (I.R.S. Employer
                                                       Identification Number)


                              2 Greenwood Square
                          3331 Street Road, Suite 275
                         Bensalem, Pennsylvania 19020
                                (215) 633-9400
              (Address, including zip code, and telephone number,
       including area code, of registrant's principal executive offices)

                               ____________________

                               David B. Hurwitz
                     President and Chief Executive Officer
                              2 Greenwood Square
                          3331 Street Road, Suite 275
                         Bensalem, Pennsylvania 19020
                                (215) 244-3433
           (Name, address, including zip code, and telephone number,
                  including area code, of agent for service)

                                   Copy to:

                         Michael H. Friedman, Esquire
                              Pepper Hamilton LLP
                             3000 Two Logan Square
                              18th & Arch Streets
                            Philadelphia, PA 19103
                                (215) 981-4000

     Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.

    If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]

     If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [x]

     If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_]

     If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

     If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the box. [_]

The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment that specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
================================================================================
<PAGE>

                             SUBJECT TO COMPLETION
                              DATED May 25, 2000

PRELIMINARY PROSPECTUS


The information contained in this prospectus is not complete and may be changed.
The selling securityholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective or they
have an exemption from registration available.  This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.

                         Capsule Communications, Inc.
                        250,000 Shares of Common Stock
                            ______________________

Using this prospectus, the selling securityholders listed on page 10 may sell
shares of common stock from time to time. The selling securityholders will
determine the terms of the sale at the time of the sale.

None of the shares of common stock offered by this prospectus are being offered
by us. We will not receive any proceeds from the shares of common stock sold by
the selling securityholders. We are registering the resale of the shares covered
by this prospectus to satisfy our obligations under agreements with the selling
securityholders.

Consider carefully the risk factors beginning on page 5 of this prospectus.

On April 27, 2000, we reorganized as a Delaware company and our name changed
from US WATS, Inc. to Capsule Communications, Inc. Our common stock continues to
trade on the Nasdaq SmallCap Market under the ticker symbol "CAPS." The closing
price of our common stock on the Nasdaq SmallCap Market on May 22, 2000 was
$1.25 per share.

We urge you to carefully read this prospectus, which will describe the specific
terms of the offering, before you make your investment decision.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the securities or passed on the
adequacy or accuracy of the disclosure in the prospectus. Any representation to
the contrary is a criminal offense.

                          ____________________________



                               ___________, 2000
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
The Company................................................................  4
Forward-Looking Statements.................................................  4
Risk Factors...............................................................  5
Indemnification of Officers and Directors..................................  9
Use of Proceeds............................................................ 10
Selling Securityholders.................................................... 10
Plan of Distribution....................................................... 10
Where You Can Find More Information........................................ 12
Information Incorporated by Reference...................................... 12
Legal Matters.............................................................. 13
Experts.................................................................... 13
</TABLE>

                                      -2-
<PAGE>

                                  THE COMPANY

          We are a switch-based interexchange carrier providing long distance
telephone communication services primarily to small and medium-size business
customers. We also provide inbound-800 long distance services, as well as other
telecommunications services, such as travel cards (calling cards), cellular,
paging, internet services, dedicated access, data services, pre-paid calling
cards (debit cards), international callback and carrier termination services. We
use our own switches and facilities to originate, transport and terminate calls
for customers generally located between Boston, Massachusetts and Norfolk,
Virginia and California. During 1999, approximately 90% of the calls billed by
us were processed through our own switches. For calls originating or terminating
outside our own network, we utilize the services provided by other long distance
companies. Substantially all of our revenues are earned from our customers
located on the East Coast.

          Our revenues are derived primarily from the transport of outgoing and
incoming calls which are billed by us to end-users at specified rates. Transport
costs of these calls are billed to us by other carriers at contractual rates.
These carriers supply us with call detail information which enables us to bill
our customers depending upon our individual rates. The combination of the
efficiency of our network and facilities, and the purchase of long distance
services in bulk from other carriers allow us to offer competitive rates to
small and medium-sized businesses.

          Our outbound long distance services, inbound 800 services, cellular
services, as well as paging and Internet services are provided on one combined
bill that includes various management reports. We believe our consultative
approach to meeting our customers' needs distinguishes us from our larger
competitors.

          We are a Delaware corporation with our principal executive offices at
2 Greenwood Square, 3331 Street Road, Suite 275, Bensalem, PA 19020. Our
telephone number at that location is (215) 633-9400.

                          FORWARD-LOOKING STATEMENTS

          Some of the information included or incorporated by reference in this
prospectus contains forward-looking statements, including statements that are
not historical or factual. We intend these forward looking statements to be
covered by the safe harbor provisions for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995 and we are including
this paragraph for purposes of complying with these safe harbor provisions. The
forward-looking statements include statements regarding our intent, belief or
expectations. You can identify these statements by the use of terminology such
as "may," "will," "expect," "believe," "intend," "plan," "estimate," "should"
and other comparable terms. In addition, we, through our senior management, from
time to time make forward-looking oral and written public statements concerning
our expected future operations and other developments.

          Investors are cautioned that, while forward-looking statements reflect
our good faith beliefs and best judgment based upon current information, they
are not guarantees of future performance and are subject to known and unknown
risks and uncertainties. Actual results may differ materially from the
expectations contained in the forward looking statements as a result of various
factors. Such factors include, but are not limited to, the risks under the
caption "Risk Factors".

          UNLESS OTHERWISE INDICATED OR UNLESS THE CONTEXT OTHERWISE REQUIRES,
ALL REFERENCES IN THIS PROSPECTUS TO "WE," "US," "OUR" OR THE "COMPANY" MEANS
CAPSULE COMMUNICATIONS, INC.

                                      -3-
<PAGE>

                                  RISK FACTORS

We may not be able to continue as a going concern.

     Our financial statements as of December 31, 1999 and for the year then
ended notes a substantial doubt as to our ability to continue as a going
concern. Among the reasons cited as raising concern are the following:

          .    our net loss;

          .    our negative working capital; and

          .    our negative cash flows.

These circumstances raise substantial doubt about our ability to continue as a
going concern.

Our common stock may be delisted from the Nasdaq SmallCap Market.

     Our common stock is currently traded on the Nasdaq SmallCap Market, which
is governed by the Nasdaq Stock Market. The Nasdaq Stock Market has set forth
financial and other criteria that must be satisfied for a company to maintain
its listing. Should we be unable to continue satisfying these criteria our
common stock would be delisted and trading, if any, in our common stock would
thereafter be conducted on the Nasdaq Electronic Bulletin Board. Such a result
could substantially reduce the liquidity and the market for our common stock,
and consequently, could adversely affect the trading price of our common stock.

We have historically incurred losses, and our future profitability is uncertain.

          We reported net losses of approximately $1.8 million and $3.0 million
for the years ended December 31, 1998 and 1999, respectively. We may not achieve
our revenue or profit goals, and our ability to do so depends on the factors
specified elsewhere in this "Risk Factors" section of this prospectus, as well
as on other factors outside of our control, including the extent to which:

          .    our competitors announce and develop, or lower the prices of,
               competing services; and

          .    prices for our services decrease as a result of reduced demand or
               competitive pressures.

          As a result, we may not be able to increase revenue or achieve
          profitability.

We may not be able to obtain additional funds, which could prevent us from
implementing our business plan.

          .    We need additional financing for future capital expenditures and
               other purposes, including:

          .    construction of our network and our automated back office
               systems;

          .    building a direct sales force;

          .    acquisitions;

          .    paying scheduled principal and interest payments on our bank
               debt; and financing operating losses.

          There can be no assurance that any additional financing we may need
will be available to us on favorable terms or at all.

Your stock ownership could be diluted if we need to sell additional shares of
our common stock to finance future acquisitions.

          Part of our business strategy is to accelerate our market penetration,
cross-sell additional services, diversify our customer base, and improve our
operating profitability through the acquisition of other telecommunications
providers. In order to successfully complete targeted acquisitions, it may be
necessary for us to issue additional equity securities that could dilute your
stock ownership.

                                      -4-
<PAGE>

Our directors and officers own enough of our outstanding stock to control us
without participation by the other shareholders.

          A substantial portion (in excess of 71%) of our issued and outstanding
voting shares is presently held or controlled by the directors and officers.
There is no cumulative voting. Accordingly, as a group, our directors and
officers can exercise effective control over us and generally direct our affairs
without participation by our other shareholders.

We rely on independent sales agents and resellers to market our services.

          Our independent sales representatives and resellers presently account
for approximately 57% of our revenues. Should the services of one or more of
these independent agents or resellers be interrupted or become unavailable to
us, our financial results could be adversely affected.

We are dependent on certain executive and technical personnel for the operation
of our network and systems.

          The loss or unavailability of one or more of certain executive or
technical personnel could have an adverse effect on our operations. Our future
success will also depend on our ability to attract and retain additional key
management and technical personnel. The competition to hire qualified employees
and personnel in the telecommunications and Internet industries is intense and
there are a limited number of persons with knowledge of and experience in
particular sectors of the telecommunications industry. Although we have not
experienced difficulties employing or retaining personnel to date, we cannot
guarantee that we will be successful in attracting and retaining such executives
and technical personnel in the future.

If changes are made to existing government regulations or additional government
regulations are put into effect, our financial conditions may be adversely
affected.

          We are subject to varying degrees of regulation in each of the
jurisdictions in which we provide our services. State regulatory requirements
vary from state to state. We have obtained certification in all of the
contiguous U.S. states that require certification in order to provide long
distance services, with the exception of Arizona, where certification is
presently pending. We are also authorized to provide competitive local exchange
telecommunications services in two (2) states and the District of Columbia. Some
states place statutory restrictions on the operations of telecommunications
service providers, including filing and operating in accordance with service and
rate "tariffs." Further, carriers are required to charge just and reasonable
rates and not discriminate among similarly situated customers. Some states and
the FCC also require the filing of periodic reports, the payment of various
regulatory fees and surcharges, and compliance with service standards and
consumer protection rules. Changes in existing regulations or their
interpretation in any state could subject us to increased regulation. Such
regulation could result in an increase in customers' usage charges and, in some
cases, could limit or eliminate our ability to service customers in that
jurisdiction. We would incur, among other expenses, certain administrative costs
and legal fees in contesting or complying with such regulatory changes, which
would increase our cost of doing business.

          Those companies who provide us local exchange telecommunications
services are also heavily regulated at the Federal level and in the states in
which they operate. Changes in existing regulations or their interpretation
affecting these companies could materially adversely affect their businesses or
even prevent them from offering telecommunications services to their customers,
including us, on favorable terms.

          In addition, certain services offered by us which are not presently
regulated in all states may become regulated. Such regulation could delay the
deployment of products and/or services and would increase certain administrative
costs and legal fees in contesting or complying with such regulation.

          The FCC has granted applications by companies seeking to provide
international callback (also known as "call reorigination" services) to those
countries where the practice is legal under local law. The FCC has taken the
view that call reorigination services create incentives to lower foreign
accounting rates to the benefit of U.S. ratepayers and serve the FCC's general
policies favoring resale and increased competition in the international
marketplace. The FCC, however, has stated that as a matter of international
comity, it will prohibit U.S. authorized

                                      -5-


<PAGE>

carriers from providing call reorigination in countries where it is expressly
prohibited. Despite the fact that the FCC has yet to take action to enforce
another country's ban, there can be no assurance that the FCC will not enforce
such a ban in the future.

We may not be able to compete effectively against other competitors that have
significantly greater resources than we do which could cause us to lose
customers.

          In addition to direct competition from resellers, we must compete with
large telecommunications concerns, such as AT&T, MCI Worldcom and Sprint, any of
which at any particular time may offer more desirable services than those that
we offer. These large telecommunication concerns typically have:

          .    substantially greater financial, technical and marketing
               resources;

          .    larger networks;

          .    a broader portfolio of services;

          .    controlled transmission lines;

          .    stronger name recognition and customer loyalty; and

          .    long-standing relationships with our target customers.

If our billing system is unable to meet the needs of our customers, we may lose
potential revenue.

          Our billing system is vital to our growth and our ability to achieve
operating efficiencies. We are dependent on Alternative Telephone Services, Inc.
for our billing system. We cannot assure you that their system will perform as
expected as we grow our customer base. The following could have a material
adverse effect on our operations:

          .    failure of third-party vendors to deliver call detail records in
               a timely manner; and

          .    our failure to identify key information and processing needs.

We are subject to attempts by outsiders to gain access to our telecommunications
network.

          Such attempts can take the form of the theft of calling cards and the
cloning of cellular phones. Breaches of security can also involve improper use
of 800 telephone numbers and customer PBX equipment. We monitor the use of our
network through certain fraud detection devices, which we believe provide
adequate protection. Due to the highly technical nature of our business,
however, complete assurance that sufficient controls are in place to prevent a
material loss is not possible.

A high level of customer attrition is inherent in the long distance telephone
industry, and our financial results are affected by this attrition.

          The attrition of our customers is attributable to a variety of
factors, including our termination of customers for nonpayment and the
initiatives of existing and new competitors who, to attract new customers, may
implement national advertising campaigns, utilize telemarketing programs, and
provide cash payments and other forms of incentives. To retain our customer
base, we implement programs and enhancements, such as value-added services,
agent and association sales programs, improved customer service, competitive
price adjustments and an aggressive retention program. Some purchasers of our
long distance services are not obligated to purchase any minimum amount of our
services, and can stop using our service at any time and without penalty. Some
customers may not continue to buy their long distance telephone service through
us or through independent agents and resellers that purchase services from us.
If a significant portion of our customers were to decide to purchase long
distance service from other long distance service providers, we may not be able
to replace them.

                                      -6-
<PAGE>

The telecommunications industry is undergoing rapid technological changes, and
our failure to keep up with such changes could cause us to lose customers.

          The telecommunications industry is subject to rapid and significant
changes in technology, customer requirements and preferences. New technologies
could reduce the competitiveness of our network. We may be required to select
one technology over another, but at a time when it would be impossible to
predict with any certainty which technology will prove to be the most economic,
efficient or capable of attracting customer usage. Subsequent technological
developments may reduce the competitiveness of our network and require
unbudgeted upgrades or additional products that could be expensive and time
consuming. If we fail to adapt successfully to technological changes or
obsolescence or fail to obtain access to important technologies, our business
could be materially and adversely affected.

Many other companies are already engaged in the identical business as we are and
new competition is very likely.

          The Telecommunications Act of 1996, or Telecommunications Act,
provides for significant deregulation of the telecommunications industry,
including the local telecommunications and long distance industries. This
federal statute and the related regulations remain subject to judicial review
and additional rulemakings of the Federal Communications Commission, or FCC,
making it difficult to predict what effect the legislation will have on us, our
operations and our competitors.

          Several regulatory and judicial proceedings have recently concluded,
are underway, or may soon be commenced, that address issues affecting our
operations and those of our competitors, which may cause significant changes to
our industry. We cannot predict the outcome of these developments, nor can we
assure you that these changes will not have a material adverse effect on us. The
following is a non-exhaustive list of proceedings and regulatory developments
that could have a material impact on our business operations:

          REGIONAL BELL OPERATING COMPANY PROVISION OF TRADITIONAL LONG DISTANCE
SERVICES. On December 22, 1999, the FCC approved an application filed by Bell
Atlantic seeking authority to begin providing traditional long distance services
to customers located in the State of New York. The Telecommunications Act
provides relief from the current restriction on in-region Bell operating company
provision of long distance service so long as certain procompetitive criteria
are met. This approval is likely to strengthen Bell Atlantic's competitive
position in New York substantially, which could have a materially adverse effect
on our continued ability to attract and retain customers. We anticipate that
Bell Atlantic will soon submit similar applications to obtain traditional long
distance service authority in other states in its 14-state operating region. In
addition, on January 10, 1999, Southwestern Bell filed an application with the
FCC seeking permission to begin providing traditional long distance services to
customers in Texas, and we expect other regional Bell operating companies to
file applications soon. Not only will the regional Bell operating companies
provide additional competition for us in the services that we provide, but the
Bell operating companies can be expected to bundle their long distance service
with local, cellular and video services.  These package offerings may be more
attractive to consumers than offerings of stand-alone services.

          INTERCONNECTION: On August 8, 1996, the FCC released the
Interconnection Decision which established a framework of minimum, national
rules enabling state commissions and the FCC to begin implementing many of the
local competition provisions of the 1996 Act. Among other things, the
Interconnection Decision prescribed certain minimum points of interconnection;
adopted a minimum list of unbundled network elements that ILECs must make
available to competitors; and adopted a methodology for states to use when
setting prices for unbundled elements and for wholesale resale services. On
January 25, 1999, the Supreme Court overturned prior decisions of the United
States Court of Appeals for the Eighth Circuit that had vacated certain portions
of the Interconnection Decision. The Supreme Court's decision confirmed the
FCC's authority to issue regulations implementing the pricing and other
provisions of the 1996 Act and reinstated most of the challenged rules. The
Supreme Court decision, however, vacated a key FCC rule that identified the
network elements that ILECs must unbundle. The FCC has since adopted a new
standard for analyzing unbundled network elements, as required by the Supreme
Court. The FCC concluded that ILECs would no longer be required to provide
directory assistance and operator services as network elements, though they will
continue to be available pursuant to tariffed rates. The FCC declined, however,
except in limited circumstances, to require ILECs to unbundle certain facilities
used to provide high-speed Internet access and other data services. Uncertainty
remains surrounding the effect of the Eighth Circuit decisions, the decision of
the Supreme Court reversing portions of it, and subsequent proceedings.

          COLLOCATION: On March 31, 1999, the FCC released its Collocation Order
which requires ILECs incumbent carriers to permit CLECs to collocate any
equipment used for interconnection or access to unbundled network elements even
if that equipment includes switching or enhanced service functions. Among other
things, the Collocation Order also prohibits ILECs from placing any limits on
the use of switching or enhanced features for collocated equipment, and requires
ILECs to make cageless collocation available and permit CLECs to construct their
own cross-connect facilities. On March 17, 2000, the United States Court of
Appeals for the District of Columbia Circuit vacated limited portions of the
Collocation Order, holding certain definitions contained in FCC rules were
impermissibly broad. The court remanded the Collocation Order in part for
further FCC consideration of these issues. The FCC will be instituting
proceedings to comply with the court's remand.

          DEREGULATION OF TRADITIONAL TELEPHONE COMPANY ADVANCED DATA SERVICES.
A proceeding has recently been initiated at the FCC to determine, among other
things, whether traditional telephone companies will be able to avoid some of
their obligations under the Telecommunications Act by providing long distance
data services through separate affiliates, as well as be relieved of certain
pricing restrictions. A decision adverse to competitive telecommunications
providers could provide the traditional telephone companies with a significant
competitive advantage in the provision of data services in these areas.

          REGULATION OF ACCESS CHARGES. The FCC has asked for public comment on
whether it should begin to regulate the access charges imposed by competitive
telecommunications providers. A decision by the FCC to regulate access charges
assessed by competitive telecommunications providers like us could result in a
significant

                                      -7-

<PAGE>

reduction in the amount we can charge long distance carriers that use our
network to originate and terminate calls to and from our customers.

          UNIVERSAL SERVICE: In 1997, the FCC released an order establishing a
significantly expanded federal universal service subsidy regime. Specifically,
the FCC established new universal service funds to support telecommunications
and information services provided to qualifying schools, libraries and rural
health care providers, and expanded the federal subsidies for local telephone
services provided to low-income consumers. The FCC collects money to fund this
expanded regime from interstate carriers and certain other entities.
Contribution factors vary quarterly and are passed on by us to end users.
Recently the United States Court of Appeals for the Fifth Circuit rejected the
FCC's effort to base contributions in part on intrastate revenues. The FCC's
universal service program may be altered as a result of appeals, agency
reconsiderations of its actions, or future Congressional action.

          INTERSTATE DETARIFFING: On April 28, 2000, the United States Court of
Appeals affirmed an FCC order eliminating the requirement that nondominant
carriers like us maintain tariffs for domestic interstate services on file at
the FCC. If this FCC order becomes effective, nondominant interexchange carriers
will need to find new means of providing notice to customers of prices, terms
and conditions on which they offer their interstate services. The FCC released
an order specifying how carriers should inform customers of their rates if
detariffing occurs. Rate information is to be provided to customers by such
means as posting the rates on a carrier's World Wide Web site. Elimination of
tariffs will require that we secure with each of our customers contractual
agreements containing the terms of the services offered. To the extent that
disputes arise over such contracts, carriers, including us, may no longer resort
to the legal doctrine that the terms of a filed tariff supercede individual
contract language.


                   INDEMNIFICATION OF OFFICERS AND DIRECTORS

Certain Provisions of Delaware Law and our Charter Documents

          The General Corporation Law of Delaware permits a corporation to
provide in its certificate of incorporation a provision limiting the personal
liability of a director to the corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director, except with respect to:

          .    any breach of the director's duty of loyalty;

          .    acts or omissions not in good faith or which involve intentional
               misconduct or a knowing violation of law;

          .    the payment of certain unlawful dividend or distributions; or

          .    any transaction from which the director derived an improper
               personal benefit.

Our Certificate of Incorporation contains such a provision.

                                      -8-
<PAGE>

          Our Bylaws provide for indemnification of our directors and officers
to the maximum extent permitted by applicable law. The General Corporation Law
of Delaware allows for indemnification of directors and officers in connection
with derivative and non-derivative actions. However, the person to be
indemnified must have acted in good faith and in a manner that the person
reasonably believed to be consistent with the best interests of the corporation.
Also, with respect to derivative actions where the person is adjudged to be
liable to the corporation, indemnification is not permitted unless a court
determines that the person is fairly entitled to such indemnification.

          Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, we have been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.

                                USE OF PROCEEDS

          We will not receive any proceeds from the sale of the common stock
offered in this prospectus nor will any such proceeds be available for our use
or otherwise for our benefit.

                            SELLING SECURITYHOLDERS

          The following table sets forth information with respect to the
beneficial ownership of the common stock by the selling securityholders as of
the date of this prospectus.

<TABLE>
<CAPTION>
                                  Number of                           Beneficial Ownership
                                   Shares                                After Offering
                                 Beneficially       Number of    -------------------------------
                               Owned Prior to        Shares      Number of   Percent of Class (if
Name                             Registration      Registered     Shares      Greater than 1%)
- ----                          ------------------   ------------  ---------   --------------------
<S>                           <C>                  <C>           <C>         <C>
Craig S. Shapiro                      125,000(1)     125,000(1)          -0-                   ---
Whale Securities Co., L.P.            125,000(2)     125,000(2)          -0-                   ---
</TABLE>

(1)       Consists of 125,000 shares of common stock issuable upon exercise of
stock options granted pursuant to a Stock Option Agreement dated July 19, 1995
between Craig S. Shapiro and us. Assumes all options are fully exercised in
accordance with the terms of said stock option agreement.
(2)       Consists of 125,000 shares of common stock issuable upon exercise of
stock options granted pursuant to a Stock Option Agreement dated July 19, 1995
between Whale Securities Co., L.P. and us. Assumes all options are fully
exercised in accordance with the terms of said stock option agreement.

                              PLAN OF DISTRIBUTION

          We are registering the common stock on behalf of the selling
securityholders. References in this section to the selling securityholders also
include any pledgees, donees or transferees who receive common stock from a
named selling securityholder after the date of this prospectus. To the extent
required, we will identify any additional selling securityholder in a supplement
to this prospectus.

          Any and all of the common stock offered in this prospectus may be sold
from time to time to purchasers directly by the selling securityholders, at
market prices prevailing at the time of sale or at negotiated prices, in one or
more of the following types of transactions (which may include crosses and block
transactions) on the Nasdaq SmallCap Market, or on any exchange on which the
common stock may then be listed:

                                      -9-
<PAGE>

          .    in the over-the-counter market;

          .    in negotiated transactions;

          .    by pledge to secure debts and other obligations;

          .    through put or call options transactions relating to the common
               stock (whether non-traded or exchange-traded);

          .    through short sales of common stock; or

          .    a combination of such methods of sale.

          Alternatively, the selling securityholders may from time to time offer
the common stock through brokers, underwriters, dealers or agents, who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the selling securityholders and/or the purchasers of common
stock for whom they may act as agent.

          The selling securityholders may also enter into hedging transactions
with broker-dealers or other financial institutions. In connection with these
transactions, broker-dealers or other financial institutions may engage in short
sales of the common stock in the course of hedging the positions they assume
with the selling securityholders. The selling securityholders may also enter
into options or other transactions with broker-dealers or other financial
institutions which require the delivery to that broker-dealer or other financial
institution of the common stock offered under this prospectus. The common stock
that broker-dealers or other financial institutions receives in those types of
transactions may be resold under this prospectus.

          The selling securityholders and any broker-dealers that participate in
the distribution of the common stock may be deemed to be "underwriters" within
the meaning of the Securities Act of 1933 and any profit on the sale of common
stock by them and any discounts, commissions or concessions received by any such
underwriters might be deemed to be underwriting compensation under the
Securities Act. We have agreed to indemnify each selling securityholder against
certain liabilities arising under the Securities Act.

          To comply with rules and regulations under the Securities Exchange Act
of 1934 persons engaged in a distribution of the common stock may be limited in
their ability to engage in market activities with respect to such common stock.
In addition and without limiting the foregoing, each selling securityholder will
be subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, which provisions may limit the timing of purchases and
sales of any of the common stock by the selling securityholders. All of these
things may affect the marketability of the common stock.

          Selling securityholders also may resell all or a portion of the common
stock in open market transactions in reliance upon Rule 144 under the Securities
Act, provided they meet the criteria and conform to the requirements of such
Rule.

          Upon a selling securityholder notifying us that he, she, or it has
entered into any material arrangement with a broker-dealer for the sale of
common stock through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, we will file a
supplement to this prospectus, if required, pursuant to Rule 424(b) under the
Securities Act, disclosing, where applicable, the following:

          .    the name of each such selling securityholder and of the
               participating broker-dealer(s);

          .    the amount of common stock involved;

          .    the price at which such common stock was sold;


                                      -10-
<PAGE>

          .    the commissions paid or discounts or concession allowed to such
               broker-dealer(s);

          .    that such broker-dealer(s) did not conduct any investigation to
               verify the information set out or incorporated by reference in
               this prospectus; and

          .    other facts material to the transaction.

          In order to comply with certain states' securities laws, if
applicable, the common stock will be sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain states the
common stock may not be sold unless the common stock has been registered or
qualified for sale in such state or an exemption from registration or
qualification is available and such sale is made in compliance with the
exemption.

                      WHERE YOU CAN FIND MORE INFORMATION

          We file annual, quarterly and special reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any document we file at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at Regional Offices of the Commission located at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and at 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of our reports, proxy
statements and other information can be obtained from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. You may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. In addition, our reports,
proxy statements and other information filed with the Commission through its
Electronic Data Gathering, Analysis and Retrieval system are publicly available
through the Commission's website on the Internet's World Wide Web, located at
http://www.sec.gov.

                     INFORMATION INCORPORATED BY REFERENCE

          The Commission allows us to "incorporate by reference" the information
we file with them, which means that we can disclose important information to you
by referring you to those documents. The information incorporated by reference
is considered to be a part of this prospectus, and information that we file
later with the Commission will automatically update and supersede this
information. We incorporate by reference the documents listed below and any
future filings we make with the Commission under Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act:

          (a)  Our Annual Report on Form 10-K and 10-K/A for the year ended
               December 31, 1999;

          (b)  Our Quarterly Report on Form 10-Q for the quarter ended March 31,
               2000;

          (c)  Our Current Reports on Form 8-K 12g-3 filed May 3, 2000, and on
               May 24, 2000;

          (d)  The description of our common stock contained in our registration
               statement on Form S-8 (File No. 33-97558) filed October 7, 1993,
               including any amendments or reports filed for the purposes of
               updating such description; and

          (e)  All documents filed by us pursuant to Section 13(a), 13(c), 14 or
               15(d) of the Exchange Act after the date of this prospectus shall
               be deemed to be incorporated by reference and to be a part of
               this prospectus from the respective dates of filing of those
               documents.

This registration statement, including its exhibits, has been filed with the
Commission through EDGAR. We will provide, without charge, to each person to
whom a copy of this prospectus is delivered, upon the written or oral request of
such person, a copy of any or all of the documents referred to above which have
been incorporated in this prospectus by reference, other than exhibits to those
documents (unless those exhibits are specifically incorporated by reference into
such documents). Written or telephone requests for such copies should be
directed to David B. Hurwitz, President and Chief Executive Officer, Capsule
Communications, Inc., 2 Greenwood Square, Suite 275, 3331 Street Road, Bensalem,
PA 19020; Mr. Hurwitz's telephone number is (215) 244-3433. We maintain a
website at http://www.capsulecom.com.

                                      -11-
<PAGE>

                                 LEGAL MATTERS

          The validity of the common stock being offered has been passed upon
for us by Pepper Hamilton LLP, Philadelphia, Pennsylvania.

                                    EXPERTS

          The financial statements, the related financial statement and schedule
incorporated by reference in this prospectus by reference from the Company's
Annual Report on Form 10-K and 10K/A for the year ended December 31, 1999 have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports which are incorporated herein by reference (which reports express an
unqualified opinion and include an explanatory paragraph expressing substantial
doubt about our ability to continue as a going concern), and have been so
incorporated in reliance upon the reports such firm has given upon its authority
as an expert in accounting and auditing.

                                      -12-
<PAGE>

     No dealer, salesperson or other individual has been authorized to give any
information or to make any representations not contained in this prospectus in
connection with the offering covered by this prospectus. If given or made, such
information or representations must not be relied upon as having been authorized
by us or the selling securityholders. This prospectus does not constitute an
offer to sell, or a solicitation of an offer to buy, the common stock, in any
jurisdiction where, or to any person to whom, it is unlawful to make any such
offer or solicitation. Neither the delivery of this prospectus nor any offer or
sale made hereunder shall, under any circumstances, create an implication that
there has not been any change in the facts set forth in this prospectus or in
our affairs since the date hereof.

                         CAPSULE COMMUNICATIONS, INC.

                        250,000 Shares of Common Stock


                           -------------------------

                                   PROSPECTUS

                           -------------------------


                           _____________, 2000
<PAGE>

                                    PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 14.  Other Expenses of Issuance and Distribution.
          -------------------------------------------

          The estimated expenses of the issuance and distribution, all of which
are payable by Capsule Communications are as follows:

     SEC Registration Fee             $    133.02
     Legal Fees and Expenses               15,000
     Accounting Fees and Expenses           8,500
     Printing Expenses                          0
     Miscellaneous Expenses                 7,000
                                      -----------
            Total                     $30, 633.02
                                      -----------

Item 15.  Indemnification of Directors and Officers.
          -----------------------------------------

          The General Corporation Law of Delaware ("DGCL") permits a corporation
to provide in its certificate of incorporation a provision limiting the personal
liability of a director to the corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director, except with respect to (i)
any breach of the director's duty of loyalty; (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law;
(iii) the payment of certain unlawful dividend or distributions; or (iv) any
transaction from which the director derived an improper personal benefit.
Capsule Communications, Inc.'s ("Capsule") Certificate of Incorporation contains
such a provision.

          Capsule's Bylaws provide for indemnification of Capsule's directors
and officers to the maximum extent

                                      II-1
<PAGE>

permitted by applicable law. The DGCL allows for indemnification of directors
and officers in connection with derivative and non-derivative actions. However,
the person to be indemnified must have acted in good faith and in a manner that
the person reasonably believed to be consistent with the best interests of the
corporation. Also, with respect to derivative actions where the person is
adjudged to be liable to the corporation, indemnification is not permitted
unless a court determines that the person is fairly entitled to such
indemnification.

                                      II-2
<PAGE>

Item 16.  Exhibits
          --------

Exhibit No.                      Description
- -----------                      -----------

*4.1                Stock Option Agreement dated July 19, 1995 between Craig S.
                    Shapiro and US WATS, Inc.
*4.2                Stock Option Agreement dated July 19, 1995 between Whale
                    Securities Co., LP and US WATS, Inc.
*5                  Opinion of Pepper Hamilton LLP.
23.1                Consent of Deloitte & Touche LLP.
*23.2               Consent of Pepper Hamilton LLP (contained in Exhibit 5).
*24                 Power of Attorney (included on the signature page of this
                    registration statement).

_______________________
*    Previously filed as an exhibit to this Registration Statement.

Item 17.  Undertakings
          ------------

          (a)  The undersigned registrant hereby undertakes:

               (1)  To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement;

                    (i)   To include any prospectus required by Section 10(a)(3)
of the Securities Act;

                    (ii)  To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high and of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20 percent
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;

                    (iii) To include any material information with respect to
the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement;

provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
registrant pursuant to Section 13 or 15(d) of the Exchange Act that are
incorporated by reference in the registration statement.

               (2)  That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

               (3)  To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.

          (b)  The undersigned registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.

                                      II-3
<PAGE>

     (c)  Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

                                      II-4
<PAGE>

                                 SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing this registration statement on Form S-3 and has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the township of Bensalem,
Commonwealth of Pennsylvania, on May 24, 2000.

                                      CAPSULE COMMUNICATIONS, INC.


                                      By: /s/ David B. Hurwitz
                                          ---------------------
                                      David B. Hurwitz
                                      President and Chief Executive Officer

          Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on May 24, 2000.

Signature                                 Title
- ---------                                 -----

/s/ David B. Hurwitz                      President and Chief Executive Officer
- -----------------------------
David B. Hurwitz                          (Principal Executive Officer)

/s/ Artie Regan*                          Director and Secretary
- -----------------------------
Artie Regan

/s/ Walt Anderson*                        Director
- -----------------------------
Walt Anderson

/s/ Dominic J. Romano*                    Director
- -----------------------------
Dominic J. Romano

/s/ Michael McAnulty*                     Chief Financial Officer
- -----------------------------
Michael McAnulty                          (Principal Financial and Accounting
                                          Officer)

__________________
* By:  Attorney of fact pursuant to power of attorney filed as part of this
Registration Statement.

/s/ David B. Hurwitz
- -----------------------------
David B. Hurwitz

                                      II-5
<PAGE>

                               Index of Exhibits


Exhibit No.         Description
- ----------          -----------

23.1                Consent of Deloitte & Touche LLP.

                                      II-6

<PAGE>

                                                                    Exhibit 23.1

                        CONSENT OF INDEPENDENT AUDITORS

     We consent to the incorporation by reference in this Pre-Effective
Amendment No. 1 to the Registration Statement No. 333-96301 of Capsule
Communications, Inc. (formerly US WATS, Inc.) on Form S-3 of our report dated
March 27, 2000 (which report expresses an unqualified opinion and includes an
explanatory paragraph expressing substantial doubt about the Company's ability
to continue as a going concern), appearing in the annual report on Form 10-K and
10-K/A of US WATS, Inc. for the year ended December 31, 1999, and
to the reference to us under the heading "Experts" in the prospectus, which is
part of this Registration Statement.

 /s/ Deloitte & Touche LLP
- ------------------------------------
Deloitte & Touche LLP

Philadelphia, Pennsylvania
May 24, 2000



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